Recipharm Makes Strategic Acquisitions in the US, Sweden and India

Recipharm AB has signed two separate agreements to acquire Kemwell’s pharmaceutical contract development and manufacturing (CDMO) businesses.

The first acquisition, comprising US and Swedish operations, is expected to close during the second quarter 2016, after review by the Swedish Competition Authority, while the second, comprising operations in India, is conditional on governmental approvals and expected to close before year end. The transactions will be financed by already available funds, existing credit facilities, a share issue in kind to the sellers and a proposed share issue of approximately SEK 850 million with preferential rights for existing shareholders.

Highlights

• The combined entity will have a significantly enhanced reach and scale. The businesses to be acquired had 2015 preliminary net sales of approximately SEK 745 million, corresponding to 22 per cent of Recipharm’s 2015 total net sales.
• The acquisitions are expected to be accretive to EBITDA margin already from 2016 and are well in line with Recipharm’s overall financial objectives.

• Adds US operational presence with strong development capabilities, enhanced technology base and broad customer portfolio, providing improved access to the world’s largest pharma market.
• Expands position in emerging markets significantly, taking sales in these markets to more than SEK 800 million, dominated by sales directly to the fast-growing pharma market in India.
• Major extension of Recipharm’s capabilities in India;
• Provides access to significant cost effective development operation working with customers with strong US ANDA project pipeline;
• Adds US FDA and EU approved cost effective manufacturing options;
• Expands manufacturing capabilities, complementary technology to Nitin Lifesciences.
• Further strengthens Recipharm’s synergistic business model by aligning US and Indian development and technology operations with the combined company’s manufacturing capabilities in India and Europe. In addition, there are potential commercial synergies from enhanced customer offering and cross selling.
• Well established API and dose form manufacturing facilities in Sweden with opportunities for substantial cost savings and operational synergies.

• Strong combined cash flow generation expected to maintain financial profile in-line with financial targets.

• A share issue in kind of class B shares in Recipharm corresponding to a value of USD 55 million (SEK 450 million), subject to approval by the Extra General Meeting, and a proposed share issue of approximately SEK 850 million with preferential rights for existing shareholders.

US and Sweden transaction

• The acquisition price for Kemwell’s operations in the US and Sweden amounts to approximately USD 85 million (SEK 693 million) on a cash and debt free basis, and will be paid to the sellers, Kemfin Holdings Private Ltd (“Kemfin”) and, as regards the Swedish operations a minor additional owner ("Minority owner), with approximately USD 30 million (SEK 243 million) in cash as well as through an issue in kind of class B shares in Recipharm corresponding to a value of USD 55 million (SEK 450 million).(6) All financial debt will be settled at closing of the acquisition. The number of shares in the issue in kind will be based on an agreed subscription price, calculated as the average of the volume weighted average share price for (i) 20 trading days prior to the day for signing of the acquisition agreement and (ii) 20 trading days prior to the date for the EGM, adjusted for non-occurring dividend for the financial year 2015. The share issue in kind requires that the Board of Directors receives the necessary authorization from Recipharm’s shareholders at an Extra General Meeting to be held on 10thMay 2016.

• Kemfin will become a meaningful shareholder in Recipharm. Kemfin and Minority owner have committed to a 12 month lock up period as well as undertaken to subscribe for their pro rata shares in the proposed rights issue.

• Recipharm will finance the cash portion of the purchase price through available funds and existing credit facilities.

• Closing of the transaction is expected to take place during the second quarter of 2016, subject to review by the Swedish Competition Authority. The transaction is also subject to confirmation from a third party regarding certain commitments.

India transaction

• The acquisition price for the operations in India amounts to USD 120 million (SEK 982 million) on a cash and debt free basis.6The consideration will be paid in cash to the sellers, the founding Bagaria family and parties related to the family, at closing of the acquisition, which is expected to take place before year end. The final price will be subject to adjustments for changes in currency exchange rates. All financial debt will be settled at closing of the acquisition.
• The purchase price will be financed through the proposed share issue of approximately SEK 850 million with preferential rights for existing shareholders expected to be completed by the end of the second quarter (the “proposed rights issue”) as well as through available funds and existing credit facilities.
• The agreement also includes a right of first negotiation to acquire Kemwell’s Indian biopharma business, which is not included in the transaction and will continue to be retained by the sellers
• The transaction is subject to governmental approvals, including approval from the Indian Foreign Investment Promotion Board (“FIPB”).

Thomas Eldered, CEO of Recipharm AB said “These transactions represent a significant step in both the consolidation of the CDMO industry and the transformation of Recipharm into a global leader. We now have a US footprint which we can use to further penetrate the world’s largest pharmaceutical market and the business in Sweden provides us with several opportunities for synergies. When we receive the approval in India, Recipharm’s customers will have access to very cost effective development and manufacturing capabilities able to serve international markets including the US. I am extremely excited about these acquisitions and the benefits they will bring. The current Managing Director, Anurag Bagaria, and VP Corporate Development, Karan Bagaria, will continue in their current positions post closing and I am very much looking forward to working with them”.  

Anurag Bagaria, Managing Director of Kemwell commented “I am delighted about the combination of Kemwell’s pharmaceutical business with Recipharm, both of which have many complementary capabilities. I am confident that together we will be even more successful and we look forward to building on our combined strengths”.

PerÅke Oldentoft, Chairman of Kemwell AB and Managing Director of Kemfin commented “I am really excited about the combination of the companies and I am sure that under the Recipharm umbrella the business will continue to grow and provide high quality products and services to its customers”.

Information on the acquired businesses

The US development business is located in Research Triangle Park, North Carolina and employs around 50 people. There are about 120 customers and services include development of inhalation, liquid, semi-solid, solid and parenteral products with emphasis on early formulation work as well as development of analytical methods and testing. Recently, the business has also commissioned a GMP suite allowing for expansion into manufacturing of clinical trial material. The services are provided either on a stand-alone basis or as a more comprehensive pharmaceutical product development program.

The Swedish business is located in Uppsala and employs around 210 people. It consists of two production units including a fully integrated primary and secondary manufacturing facility dedicated to a limited number of products, based on the same API and supplied essentially to one Big Pharma customer. There is also a small general pharmaceutical manufacturing unit. Manufacturing services offering include APIs, solids and semi-solid formulations. More than 95 per cent of the Swedish production is exported to over 60 countries including the US and Japan.

For the 12-month period ending on 31 December 2015, the US and Swedish businesses reported revenues of SEK 461 million and adjusted EBITDA of SEK 61 million. Cost savings and synergies are expected to yield more than SEK 25 million per annum when fully realized, expected in Q4 2017. These cost savings and synergies will be driven by asset rationalization and savings in general within administration activities. The non-recurring costs for implementation are expected to amount to approximately SEK 7 million.

Kemwell’s India business was founded by Subhash Bagaria. The acquired Indian business is expected to employ around 1,400 people at closing of the acquisition, and comprises both development services as well as commercial manufacturing of solid, semi-solid, liquid and topical dose products, with customer relations spanning decades. The solid dosage plant was commissioned in 2008 and has approvals from US FDA and EU amongst many other regulatory bodies. The oral liquids production plant was commissioned in 2011 and is specialized in automated high throughput large volume manufacturing, mainly for the Indian subcontinent. The development business is a rapidly growing business with a comprehensive service offering including formulation development, small scale manufacturing for clinical trials and a large analytical services business.

For the 12-month period ending on 31 December 2015, the Indian business generated revenues of approximately INR 2,160 million (SEK 284 million) and EBITDA of INR 358 million (SEK 47 million). The project pipeline and the development business are expected to generate significant growth and margin expansion in the coming years.

Transaction rationale

Improved market access

• US platform to penetrate the largest and most innovative pharmaceutical market
• Significant potential to capture lucrative development projects in the US and India
• Opportunity to convert development projects into manufacturing opportunities
• In combination with Nitin Lifesciences, an enhanced emerging market offering

Strong customer relationships

• Top tier customer base including Big Pharma and global generics
• Several high potential partnerships, especially in the US and India

High quality technology and capability base

• Competitive solids and oral liquids manufacture in India
• Adds Indian facilities with US FDA and EU approvals
• New inhalation, nasal and transdermal delivery development capability
• US development centre including clinical manufacture

Attractive financials

• Accretive to growth and EBITDA margin
• Strong combined cash flow generation
• Substantial opportunities for cost savings and synergies

Transaction costs

The total transaction costs affecting operating profit, excluding costs for the rights issue, are estimated to amount to approximately SEK 20 million of which SEK 7 million will be charged to the Q1 2016 result. Additional financial costs amount to SEK 6 million.