Private Equity Shapes up for a Drugs Duel in Europe

(Bloomberg Gadfly) -- After losing out on one of the biggest leveraged buyouts in recent years, Advent International Corp. is getting its own back.

The private equity firm is in exclusive talks to buy Sanofi's European generic drugs business -- almost a year after trying to land German peer Stada Arzneimittel AG and being outbid by Bain and Cinven.

Generic drugs -- copycats of treatments that have lost patent protection -- are popular investments for private equity. They offer reasonably stable cash flows, making it easy to finance their purchase with debt.

Advent is talking about paying 1.9 billion euros ($2.4 billion) for the Sanofi business, the companies said on Tuesday. That's almost 13 times its estimated trailing Ebitda -- slightly less than in Stada's case.

That looks justified. The business has been under review since 2015 and sales of Sanofi's overall generics business have declined. Sanofi probably hasn't been focused on it, and competitors will have had the chance to target pharmacists aggressively and win market share.

Advent will now have to regain the upper hand. Renewed attention on marketing should help to pep up sales growth.

The good news is that Sanofi's generics business provides a pan-European distribution platform from which to expand -- something that's hard to build organically. The ambition must be to provide a counterpart to Stada, which enjoys three times the sales.

Suppose Advent can grow last year's 740 million euros of sales modestly in its first year of ownership and then by 4 percent over the following four years, to about 880 million euros. On a 20 percent margin that would imply Ebitda of, roughly, 175 million euros. Assume Advent can then sell the unit for 13.5 times that amount -- in line with Stada -- and it would fetch 2.4 billion euros.

If the starting equity check is about 40 percent of the purchase price, or 770 million euros, Advent would make about 1.6 times its money, just scraping a double-digit return.

Advent will want to do better than that. Stada had better start looking over its shoulder.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

1. Assuming debt is unchanged at exit.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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