Dainippon Pharma to buy U.S. firm for $2.6 billion
Dainippon Sumitomo Pharma Co Ltd <4506.T> agreed on Thursday to buy U.S. drugmaker Sepracor Inc
The deal is the latest in a string of overseas acquisitions by Japanese drugmakers keen to grow outside a mature home market and build product pipelines before key drug patents expire.
Dainippon, Japan's No.7 drugmaker by revenues, will gain a 1,000-strong sales force familiar with central nervous disorders, as it looks to promote its experimental schizophrenia drug, lurasidone, which has performed well in late-stage trials.
It will also gain Sepracor's insomnia drug Lunesta, asthma drug Xopenex and an experimental epilepsy drug.
The deal is the fourth-largest overseas acquisition by a Japanese drugmaker and the second-biggest this year by any Japanese company.
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Dainippon's shares climbed 1.2 percent in a weaker Tokyo market <.N225>, with volume at six times the daily average this year. Some analysts said the purchase was the easiest route into the U.S. market; others said it looked pricey and risky.
Dainippon will pay $23 cash for each share, a premium of 27.6 percent to Tuesday's close before media reports of the deal sent Sepracor's stock surging to $22.8 on Wednesday. The acquisition cost is roughly equal to Dainippon's annual sales.
It's a very expensive deal for a company of Dainippon Sumitomo's size and also very risky, given the series of patent expirations on Sepracor's mainstay drugs in the next few years, said Credit Suisse analyst Fumiyoshi Sakai.
Dainippon must be extremely confident in lurasidone, although I have some doubts, he said, adding the deal would not have been possible without the backing of the Sumitomo Group, which includes Sumitomo Mitsui Financial Group <8316.T>, Japan's third-biggest bank. Dainippon is majority-owned by Sumitomo Chemical <4005.T>.
Aaron Gal, an analyst at Sanford Bernstein, said that based on projections for 2013, the deal values Sepracor at 3.5 times sales, compared with 3.1 times for the average of other specialty pharmaceutical and generic drug industry acquisitions.
It also values Sepracor at 19.4 times EBITDA (earnings before interest, taxes, depreciation and amortization) compared with an average of 15.1 times for other deals, he said.
Arguably, Dainippon is buying a U.S. sales force it can leverage to promote its current and pipeline products, said Gal.
We are unconvinced that this is the most sensible option for the company given the alternatives of building a sales team internally or acquiring a higher performing sales team at a more rational price.
Dainippon said it would raise 200 billion yen in bridge loans and use 50 billion yen in cash on hand for the acquisition.
NEW DRUG CLASS
Dainippon, which sells the hypertension drugs Amlodin and Prorenal, said last month that lurasidone worked significantly better than a placebo in a late-stage clinical trial. It will apply for U.S. approval early next year.
With annual sales of 264 billion yen ($2.9 billion), Dainippon has been overshadowed by bigger rivals such as Takeda Pharmaceutical Co <4502.T> and Daiichi Sankyo Co <4568.T> and a laggard overseas.
The deal will allow it to generate 40 percent of its revenues outside Japan, up from around 10 percent now.
Dainippon's four mainstay products have patents that have either expired or will expire shortly. But its shares gained 21 percent in the year to Wednesday, bolstered by hopes that lurasidone will do well overseas.
Top-selling schizophrenia drugs such as AstraZeneca's
Lurasidone belongs to a new generation of schizophrenia drugs, known as atypical antipsychotics.
Rival products are Fanapt from Vanda Pharmaceuticals
Sepracor has long been the subject of takeover speculation.
The company could face generic competition to Lunesta as early as 2012 if a generic drugmaker successfully challenges the company's patent, which expires in 2014. Xopenex is set to face generic competition in 2012.
Financial advisers to Dainippon Sumitomo were Nomura Securities and Thomas Weisel Partners LLC, while JP Morgan Securities Inc and Jeffries & Co advised Sepracor.
In the past two years, Takeda acquired U.S. biotech firm Millennium Pharmaceuticals for $8.9 billion, Daiichi Sankyo bought a majority stake in Indian generic drugmaker Ranbaxy Laboratories
Sepracor, based in Marlborough, Massachusetts, had 2008 sales of $1.3 billion.
($1=92.24 Yen)
(Additional reporting by Mayumi Negishi; Writing by Edwina Gibbs; Editing by Ian Geoghegan)
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