Novartis, the Basle-based healthcare company, last month announced a definitive agreement to acquire for $1.525 billion in cash the New York-based generic drug manufacturer Fougera Pharmaceuticals.
The US company is a specialist in skin-care drugs and the deal fits a trend during the past 18 months for the world’s big pharma companies to hedge against the risk of their biggest-selling drugs going off patent by picking up smaller, specialist generic makers.
Away from the bulk end of the generics market, many specialist manufacturers have enjoyed good growth, strong margins and robust cash flows recently. Dermatology generics have shown strong double-digit sales growth in recent years.
The deal still requires regulatory approval but should close later this year. Novartis was pleased to pick up the company for 8.8 times 2011 earnings. "Fougera brings us valuable technical capabilities in the area of topical dermatological products, particularly in the development and manufacturing of semi-solid forms such as creams and ointments," says Jeff George, global head of Novartis’ subsidiary Sandoz.
In the M&A market, the deal caused a stir. Novartis did not use one of its traditional house bank advisers, Goldman Sachs and Credit Suisse. Rather, Jefferies, the US-based independent broker-dealer, acted as its sole financial adviser, negotiating the acquisition from Fougera’s owners, a consortium of private equity funds led by Nordic Capital, DLJ Merchant Banking and Avista Capital Partners.
Under the radar
"It was a deal that passed under the radar screen," admits the head of M&A at one of the leading firms in Europe. "That can happen with smaller cash-financed acquisitions where there is no public auction."
That’s an M&A banker putting on a brave face. With deal volumes so low this year, $1.5 billion deals are hardly to be sniffed at. This is bread-and-butter M&A. In the first quarter, there were only a handful of cross-border M&A deals worth more than $5 billion and in the first half just 15 deals with a European bidder or target of between $3 billion and $10 billion, according to Dealogic. Another banker says: "You can sometimes earn more fees as sole adviser on smaller deals of $200 million to $500 million than you can from sharing the fee with four other advisers on a $2 billion deal.
Jefferies was able to win the deal because it had previously worked with key decision-makers on the other side, such as Brian Markison, chief executive of Fougera, and senior figures at its private equity owners. Part of the value that advisers can bring on these smaller transactions involving private companies is simply to bring both sides to the table.
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| Tommy Erdei, managing director in healthcare investment banking in Europe at Jefferies |
"We have advised on 10 generic pharmaceutical transactions in the past 18 months including not just acquisitions but also one of the largest IPOs for a generics firm, for CFR in Chile last year. By being so active across the sector and globally, from Chile to Poland, to Australia, that gives us considerable credibility," says Tommy Erdei, managing director in healthcare investment banking in Europe who joined Jefferies from UBS two years ago. "We bank the entire space of healthcare companies and that means we bring a depth of relationships to the table. Some other large banks are reducing their coverage, particularly of smaller companies as they focus on only the top 50 companies in the sector." That may be a mistake, he suggests. "Companies with sales of $200 million to $1 billion and more are not being banked properly. That creates opportunities for us, given our model of banking the smaller high-growth companies and the largest companies in the sector and everyone in between." Investment bank
"We are an investment bank, a global full-service one. That’s where our earnings come from. In any period, investment banking will typically be 45% of our earnings and the rest comes from debt and equity sales and trading. At many of our large competitors, investment banking is less than 10% of earnings," says David Weaver, president of Jefferies International since 2007 and a veteran of Deutsche Bank. "Now, as big universal banks make the rational decisions to give up on certain of their investment banking ambitions and go back to being banks in their home markets, more opportunities arise for us."
At the start of the year, Jefferies picked up the old Hoare Govett corporate broking business and associated equity research, mid-market sales and trading teams from RBS for a token consideration. It is building its presence among FTSE 250 companies, betting that those clients will find a use for its global sector specialist and M&A capabilities.
"We had to novate all of the engagement letters for Hoare Govett’s UK client base from RBS to Jefferies and we were able to do so for all of the clients, demonstrating how they understood the value that Jefferies’ capabilities can add to corporate broking," says Dominic Lester, joint head of European investment banking at Jefferies. Lester joined two years ago from UBS where he ran the European technology investment banking practice.
He adds: "The model for some of the large investment banks has been to merge their sector specialist teams in Europe into a few larger industry "super groups", thereby diluting the depth of their sector specialization. Deep sector specialization is fundamental to the Jefferies model. We have some of the largest European sector teams in such areas as healthcare, metals & mining, oil & gas and technology. This gives us the ability to systematically cover both the largest companies, as well as the smaller, more dynamic companies that are very relevant to these sectors. Most of the bigger investment banks are increasingly focusing only on covering the largest companies."
