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This article was originally published in The Tan Sheet

Executive Summary

HOECHST-CELANESE PURCHASES 51% OF COPLEY PHARMACEUTICALS FOR $ 546 MIL. under a $ 55 a share tender offer for 9.93 mil. of the generic drug manufacturer's common shares, in a deal announced on Oct. 9. The tender offer began Oct. 15. Copley will continue to operate as a separate public company and Jane Hirsh, the chairman/founder of Copley, will remain with the company for five years under a contractual agreement accompanying the deal. The high premium Hoechst is paying for Copley's current sales volume looks like an earnings multiple. The U.S. subsidiary of the West German chemical firm is offering close to seven times the probable sales in Copley's cur-rent fiscal year for just over half (51%) of Copley's stock. The full valuation for Copley at that price falls just short of $ 1 bil. The high multiples of the price reflect Hoechst's valuation of Copley's current manufacturing base of 93 SKUs and 50 approved ANDAs for 33 different chemical entities. Using a non-traditional benchmark, Hoechst may be viewed as paying almost $ 11 mil. per existing ANDA to take control of Copley. The price also values Copley's track record of clean FDA relations and an ability to get new products through the agency. Copley came through the generic investigations of 1988-1990 unscathed -- and, in fact, strengthened by the regulatory restrictions put on many of its generic competitors. The company's last recall, according to FDA's published tally of recalls, occurred almost a decade ago in mid-May 1984. The company has maintained a steady flow of ANDA approvals: eight in 1992 and eight through the first week of October of this year. The company says that it tries to maintain a backlog of about two dozen applications pending at FDA. The premium Hoechst is paying for Copley is less dramatic when compared to the generic firm's recent stock price. Because of a market run-up in generic drug manufacturing stocks, Hoechst's offer represents only a 10.5% premium above Copley's exalted $ 901 mil. market valuation on the day before the announcement of the proposed tender offer. Copley has shot up in stock price this year, gaining 10-3/8 points in September alone. The two companies' announcement of the deal does not mention Copley's growing business in the OTC private label area. In a March prospectus for a secondary offering of 2.1 mil. shares, Copley reported that private label OTCs accounted for 14% (about $ 7.3 mil.) of the firm's $ 52 mil. in fiscal 1993 sales. Copley received the first approval for OTC miconazole nitrate 2% vaginal cream, which it sells through Perrigo. While other recent purchases into the generic drug business -- such as Marion Merrell Dow's purchase of Rugby -- have focused on marketing prowess and existing networks for distribution, the Hoechst deal appears to be based on Copley's ability to produce generic products and to manage regulatory requirements. MMD's acquisition of Rugby, which was completed on Oct. 5 for about $ 275 mil. in cash, provides a large stable of about 70 products manufactured at two plants by Rugby's Chelsea Labs subsidiary. The status of that manufacturing part of the business has been clouded, however, by regulatory disagreements with FDA leading to large numbers of ANDA withdrawals and a drought in new ANDA approvals. The combination of Hoechst's bulk manufacturing skills with Copley's formulation business represents a significant vertical integration in the first stages of the generic drug business. Hoechst has not been an important supplier of bulk materials to Copley prior to the deal. Copley has had a relationship with Agvar Chemicals and its founder Agnes Varis, a board member at Copley. Recent efforts in Europe to prevent export of raw materials before patent expirations for ANDA testing have been affecting the generic drug industry in the U.S. That tactic for lengthening exclusive marketing periods has been causing U.S. generic manufacturers concern and is behind a renewed effort by generic companies to have the U.S. Trade Representative lobby for protection in overseas patent laws similar to that in the U.S. under the Bolar ruling, which once and for all settled that studying another company's patented product for future commercial use is not infringement. Increased U.S. inspections of foreign bulk sources are also making those sources more tenuous for generic formulators. FDA has recently reported that it almost doubled the number of foreign drug plant inspections in the recently ended fiscal year, with most of that increase coming as a result of a focus on bulk manufacturers ("The Tan Sheet" Oct. 11, p. 20). With Hoechst-Celanese, Copley will have a secure domestic source for its manufacturing operations and new product development. With both the bulk and final formulation processes related within the same corporate structure, Hoechst and Copley will have more control over the costs of production. The ability to test products from Hoechst-Celanese sources before the expiration of an innovator's patent also could give Copley a step up in the race for the lucrative short-term market following approval of the first generic before the entrance of other competitors. One example of Copley's ability to use the regulatory system to its advantage is its ongoing plant expansion project in Canton, Mass., where the firm hopes to add a facility double its current 83,500 square foot plant by the end of 1994. The firm has pointed out that adding the new space adjacent to an existing plant may avoid the need for supplemental ANDA approvals. The firm has claimed that the expansion "could provide a competitive advantage." One of the culture changes for Copley will be the demands for faster growth in more competitive drug classes. The company has grown with profitable niches in the generic market. Hoechst's big investment will probably force Copley to compete for the more popular large-ticket items. The firm has already taken steps in that direction and has an approved ANDA for prescription strength naproxen. The Copley board will be composed of three Copley directors, three Hoechst designees, and three "jointly chosen independent directors," the two companies reported. Alex. Brown acted as advisor to Copley in the merger talks. Bear Steams and Tucker Anthony handled Copley's secondary offering in March.

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