A wave of deals for pharmaceutical companies are coming to market amid burgeoning appetite from investors who view the sector as primed for consolidation and divestitures. Credit Suisse First Boston and Deutsche Bank are each leading deals in the market for pharmaceutical companies. Those credits come hot on the heels of Bank of America's loan for Accredo Health, which proved a home run with the buyside last week.
In addition to the potential for welcome deal flow, investors are taking a shine to the specialty pharmaceutical sector because they see it playing a big role in the larger health care drama. "The issue with drugs is that they are costing society so much, hurting the government, employees and taxpayers, and the common thread is these companies are helping to better manage the costs," noted Bill Bowen, managing director and head of syndicated healthcare finance at Bank of America, explaining the popularity of the paper.
Deutsche Bank is leading a $152 million line for First Horizon Pharmaceutical, backing the company's acquisition of the antihypertensive drug Sular from AstraZeneca. CSFB is leading a $400 million debt refinancing for King Pharmaceuticals, with the bank meeting Feb. 22.
Arthur Wong, an associate director at Standard & Poor's, the specialty pharmaceuticals market is ripe for acquisitions and growth. "The unprecedented levels of new biotech drug launches will assist in the growth of the specialty pharmaceutical handlers, which is a very fragmented market. Specialty drug handlers, such as Accredo are doing roll up acquisitions in order to increase market coverage," he explained. "The bank market will see larger facilities as they get ready to pull the trigger on more and bigger-sized acquisitions," Wong added. Accredo, a specialized contract pharmacy that provides patient support services to administer biotech drugs, is using the $275 million credit to back the $415 million purchase of the specialty pharmaceutical division of Gentiva Health Services. The "B" blew out within days of launch, and according to Bowen, as more deals are done in the sector, the easier it will be for investors to hold the paper.
Another potential driver of acquisition activity is the divestiture of businesses by the pharmaceutical giants. "The large pharmaceutical companies that have merged are looking to divest smaller products line, generally ones that generate under $100-300 million a year," Wong said. "King is a typical example of a specialty pharmaceutical company buying these products." The King deal is expected to go very well, with J.P. Morgan, UBS Warburg and B of A already on board as co-syndication agents.
The Deutsche Bank loan for First Horizon is an interim line that will be taken out with either equity or a bond deal, said a banker familiar with the deal. Bowen believes First Horizon exemplifies the growing trend of companies buying orphan drugs from the mega-pharmaceutical companies as the patents expire. Over the next five years, drugs with annual sales of $40 billion are expected to go off patent. Deutsche Bank officials declined comment and First Horizon CFO Balaji Venkataraman did not return calls.