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Par for course

18 May 2015 By Robert Cyran

The latest off-patent drug deal is far from generic. With the $8 billion sale of Par Pharmaceutical, buyout firm TPG will generate an outsized return on its investment in three years. Though it’s a rare development, the eagerness of buyers like Endo International means more sellers are bound to benefit.

The private equity shop led by David Bonderman took Par private in 2012 for $1.9 billion. That required an equity check of $739 million, and later another $110 million to help Par buy a smaller rival. TPG also subsequently paid itself a dividend of nearly $500 million. The Endo deal will bring another $5.8 billion. Add it all up, and TPG has reaped eight times what it put in.

A little luck always helps. Over the last two years, Endo has turned itself into an acquisition machine and thus added another voracious buyer for such assets to the mix. Like rivals Valeant Pharmaceuticals, Actavis and Mylan, Endo’s business is structured around consuming smaller companies, slashing costs and applying an ultra-low tax rate to the results. Endo reckons that merging with Par will generate $175 million in annual cost and tax savings. Along with cheap and easy debt, such synergies have set off a feeding frenzy for assets and driven prices higher.

Endo is paying about 16.5 times Par’s EBIDTA over the past year. Typically, generic drugmakers have sold on average for about 14 times, according to Wells Fargo. Endo justifies the premium by pointing to Par’s hard-to-copy products and productive R&D spending, meaning its cashflow may be more durable than rivals. And a lower corporate tax rate, if sustainable, means historical EBITDA multiples could be misleadingly low, since the same assets will generate more income after taxes.

The initial reaction by investors, however, suggests Endo overpaid. A 3 percent fall in its shares lopped $450 million from its market value. It’s a useful reminder as other bidding battles arise. Mylan, which itself is the subject of an approach from rival Teva Pharmaceutical Industries, is simultaneously offering about 20 times estimated EBITDA for Perrigo. In times like this, it can be smarter to follow private equity, and sell everything not nailed down.


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