Abbott Buys Solvay Pharma Unit But Is It Just A Short-Term Fix?

Abbott will buy the pharma business of its Belgian-based Tricor/TriLipix partner for $6.6 billion in cash; dependence on Humira, Tricor lingers.

Abbott Laboratories planned purchase of Solvay's pharmaceutical business will broaden the company's geographic footprint, pave its entry into vaccines and strengthen its ownership stake in the blockbuster TriCor / TriLipix cholesterol-fighting franchise. Abbott announced the $6.6 billion purchase Sept. 28.

The deal - which Abbott will fund using cash mostly from outside the U.S. -will add more than $3 billion to Abbott's annual sales and be accretive in the near-term. But Solvay won't be a complete salve. Buying its Belgian business partner increases Abbott's exposure to near-term generic competition, as TriCor loses patent protection in 2011. Nor will the deal eliminate Abbott's dependence on the anti-tumor necrosis factor Humira , a franchise that is facing increased competition from rival brands.

Humira represented about 15 percent of Abbott's total sales in 2008, and 27 percent of worldwide pharmaceutical sales.

"While a Solvay acquisition would likely be accretive to EPS, we would prefer to see Abbott pursue more strategic assets that would add better long-term growth," Credit Suisse analyst Catherine Arnold said in a Sept. 27 research note, ahead of the announcement. "Solvay does not add long-term growth or reduce Abbott's dependence of growth on Humira," she added.

The acquisition of Solvay gives Abbott sole ownership of one of its fastest growing franchises, the dyslipidemia drug TriCor (fenofibrate). With patent expiration looming, Abbott has been working to switch patients to a follow up, TriLipix (fenofibric acid) -the only fibrate approved for use in combination with a statin - ahead of a generic entry, but a low-cost generic version of TriCor would be a stiff competitor likely to be favored by payers.

Abbott reported TriCor/TriLipix sales of $1.34 billion in 2008 on the heels of the TriLipix launch in late 2008. Abbott currently owns the U.S. rights to the two drugs and pays royalties to Solvay.

The future growth driver within the cholesterol franchise may lie in a combination drug developed with AstraZeneca, Certriad , a fixed-dose combination of TriLipix and the statin Crestor (rosuvastatin). An NDA for Certriad was filed in June (Also see "AstraZeneca To Co-Promote Abbott’s TriLipix; NDA Is Filed For Crestor/TriLipix" - Pink Sheet, 4 Jun, 2009.). Abbott and Solvay also co-promote the cholesterol combination SimCor (niacin/simvastatin).

Abbott Plays Up Solvay's International, Branded Generics Businesses

On a conference call Monday, Abbott's management downplayed the importance of the cholesterol franchise, instead highlighting Solvay's international and branded generics businesses.

"We recognized many years ago that growth comes in different forms," CEO Miles White said. "It comes from strong branded franchises in developed economies, as well as from branded generics in fast-growing emerging markets."

The focus on high-growth areas such as emerging markets and branded generics is hardly surprising. It's a pattern that has been adopted across the pharmaceutical industry as the U.S. drug marketing landscape has become more challenging. In one recent example, GlaxoSmithKline partnered with the generics firm Dr. Reddy's to sell branded generics in emerging markets (Also see "GSK/Dr. Reddy’s Form Deal To Co-Promote Branded Generics In Emerging Markets" - Pink Sheet, 15 Jun, 2009.).

Seventy-five percent of Solvay's pharma sales come from outside the U.S., with the company having a "significant presence" in high-growth emerging markets, according to Abbott. Together, the combined company will generate about $4 billion in sales from emerging markets by 2013, White predicted.

About 70 percent of Solvay's pharma business is in branded generics, mostly marketed outside the U.S. For example, one of Solvay's largest sales generators is Creon (pancrelipase), a pancreatic enzyme product that generated around $300 million in 2008. Despite being an older drug Creon was approved by FDA in May, as FDA sought to bring the previously unregulated remedies under its umbrella (Also see "New Drug Approvals & Regulatory Updates, In Brief" - Pink Sheet, 4 May, 2009.).

White said Abbott will use its international infrastructure and distribution network to accelerate the growth of drugs like Creon.

Solvay also markets the testosterone replacement therapy Androgel , its second top-seller, which generated about $482 million in sales in 2008. Products sold by Solvay in Europe and ex-U.S. markets include Serc (betahistine) for symptoms of vertigo and the influenza vaccine Influvac .

"The acquisition establishes Abbott's initial presence in the growing global vaccines market," White said. Influvac generated $169.5 million in sales in 2008, according to Solvay's annual report. White said the company ranks fourth in the $2.4 billion global influenza vaccines market and noted, "Solvay's currently in the process of establishing cell culture production capabilities which can be used for the production of both seasonal and pandemic vaccines."

Deal Adds $500 Million To R&D, Abbott Says

Much of Solvay's late-stage pipeline is in cardiometabolics and neuroscience. In Phase III development is Duodopa , an L-dopa suspension system for advanced stage Parkinson's disease, and gabapentin GR, an extended release form of gabapentin (Pfizer's Neurontin and generics) for neuropathic pain and post-herpetic neuralgia.

The addition of Solvay will also give Abbott approximately $500 million in incremental research and development investment, White said. "This extra funding power also provides additional flexibility to access opportunities through licensing or external partnering agreements," he said.

Funding With Ex-U.S. Cash A Plus

The cash financing of the deal offers Abbott an opportunity to use cash that is held offshore, which could be a reason the deal was attractive to management. Repatriating cash held offshore - bringing it back home to the U.S. -is expensive, with companies facing a U.S. tax rate as high as 35 percent. Abbott had a total of roughly $6.8 billion in cash and securities as of June 30.

"We're happy that we could finance this with ex-U.S. cash," White said. "I think this is a great use for our assets and a heck of a good return."

Abbott said the deal will be about $0.10 accretive to earnings per share in 2010, accelerating to more than $0.20 accretive by 2012, before one-time transaction-related items. The transaction also includes payments of up to €300 million if certain sales milestones are met between 2011 and 2013.

Chief Financial Officer Thomas Freyman said during the call that Abbott will look to cut costs in SG&A spending, although Solvay, in a statement, said the transaction provides for the transfer of all employees of the pharmaceutical business with their current employment conditions. The business unit employs about 10,000.

The potential for synergies could be "meaningful," JP Morgan analyst Michael Weinstein wrote in a Sept. 25 research note ahead of the announcement. "Currently, Solvay's pharma unit has an operating margin of 18 percent. However, this includes the 20 percent royalty paid by Abbott on TriCor sales," he said. "Excluding this transfer from Abbott, Solvay's base business operating margin looks to be 11 percent...clearly providing room for improvement under Abbott's ownership."

For Solvay, the transaction means the company will continue as a chemicals and plastics specialist. Solvay's pharma unit is the parent company's smallest business division, accounting for about 28 percent of sales, compared to 39 percent for plastics and 33 percent for chemicals. Management announced earlier this year that it was pursuing strategic alternatives for the business (Also see "Solvay Analyzing “Various Options” For Its Pharma Unit" - Pink Sheet, 3 Apr, 2009.). The French drug maker Sanofi-Aventis and Swiss pharma Nycomed were reportedly interested in bidding for the unit as well.

-Jessica Merrill ([email protected])