Fresenius Agrees to Buy APP for Up to $4.6 Billion

Fresenius Agrees to Buy APP for Up to $4.6 Billion

July 7 (Bloomberg) -- Fresenius SE, Europe's biggest maker of intravenous drugs, will buy APP Pharmaceuticals Inc. for as much as $4.6 billion to enter the faster-growing U.S. market for generic injectable medicines used in hospitals.

Fresenius fell the most in a decade in German trading after the Bad Homburg-based company agreed to pay $23 a share in cash for Schaumburg, Illinois-based APP. The offer is 29 percent more than APP's closing price of $17.82 on July 3, and analysts said the 11 percent drop in Fresenius reflects concern the company may sell stock to finance the purchase.

Fresenius Chief Executive Officer Ulf Schneider is making his first push into the U.S. market for IV cancer and blood thinning medicines, which is growing at 8 percent a year, faster than branded products. Fresenius joins Sanofi-Aventis SA and Daiichi-Sankyo Co. in adding copies of medicines as governments and insurers turn to generics to help cut health costs. Fresenius' share decline was the most since October 1998.

``The share reaction shows that the market no longer views such transactions in a positive light,'' said Tim Albrecht, a fund manager at DWS Investment GmbH in Frankfurt. Investors are concerned ``a capital increase may be necessary.''

Fresenius fell 5.43 euros, or 10 percent, to 49.09 euros at 12:03 p.m. in Frankfurt. The shares have declined 14 percent this year.

The offer includes an option, payable in 2011, linked to targets for the APP unit. If those are met, APP investors would get another $6 a share, the companies said. Fresenius, which will merge APP with its Fresenius Kabi unit, will assume $940 million in debt.

Financing

Fresenius expects the takeover to be earnings-neutral in the first year and add to profit in the second. APP has more than 100 products that are given through injections and intravenous drips in clinics. It is the only U.S. supplier of the blood-thinner heparin in vials after other makers pulled their versions because of concerns about safety of the product.

Fresenius will use mostly debt and some equity to fund the purchase, with financing commitments from Deutsche Bank, Credit Suisse and JPMorgan. Fresenius said it's trying to minimize the effect on its credit ratings.

``We believe we'll be able to present a very attractive financing plan,'' Schneider said in an interview today. ``We want to avoid any unnecessary watering down of the stock as well as any unnecessary deterioration of our credit rating.''

Generic Attraction

Fresenius is paying about 5.6 times APP's 12-month sales, according to Bloomberg data. That compares with about 2.4 times sales that Sanofi-Aventis is paying Zentiva's full-year sales, and the 4.6 times revenue that Daiichi Sankyo is paying for Ranbaxy.

``These multiples are clearly at the higher end of multiples paid in the past for the acquisition of generic businesses,'' said Ulrich Huwald, an analyst at M.M. Warburg, in a note to clients. ``This is explained by the high strategic importance of the acquisition for Fresenius Kabi, which is now able to enter the North American market.''

Generic-drug makers are becoming attractive to health-care providers as governments and insurers seek to reduce expenses and patent expirations mean more profitable branded pharmaceutical products are facing cheaper copies.

Daiichi Sankyo offered $4.6 billion for India's Ranbaxy Laboratories Inc. and Sanofi-Aventis SA bid $1.96 billion for control of Zentiva NV last month.

Drug Copies

APP makes injectable copies of Pfizer Inc.'s Camptosar to treat colon and rectum cancer and its antibiotic Zithromax as well as Novartis AG's Sandostatin drug to treat acromegaly, a bone enlargement. The complexity of the drugs drive APP's margin, Scheunemann said.

``These drugs aren't easy to make, they make high demands on sterility and safety because they are injected right into the bloodstream,'' he said.

APP is targeting sales of $730 million to $750 million this year and adjusted earnings before interest, tax, depreciation and amortization of $285 million to $300 million. The U.S. company was founded by Patrick Soon-Shiong.

``Strategically this really makes sense,'' Karl-Heinz Scheunemann, an analyst at Landesbank Baden-Wuerttemberg, said in an interview. ``Fresenius is relatively strong in Europe, and if they are establishing themselves globally, this deal will give them a chance to save money.''

CEO Holding

Soon-Shiong, who owns more than 80 percent of APP, agreed to sell his stake. APP's board has approved the transaction. Credit- default swaps on Fresenius rose 37 basis points to 179 as of 9:30 a.m. in London, according to CMA Datavision.

Goldman, Sachs & Co. and Lazard Freres & Co. were advisers to APP, while Fried, Frank, Harris, Shriver & Jacobson LLP were the U.S. company's legal adviser. Deutsche Bank advised Fresenius. Skadden, Arps, Slate, Meagher & Flom LLP served as legal adviser to Fresenius.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

A basis point on a credit-default swap contract protecting 10 million euros ($15.6 million) of debt from default for five years is equivalent to 1,000 euros a year.

BLOOMBERG