CFR Makes Acquisition Offer For Adcock Ingram

Espicom View: CFR Pharmaceutical's bid to acquire Adcock Ingram would produce a multinational company focused on emerging markets. Whilst many large generic and branded pharmaceutical companies based in the regulated markets have often sought to acquire emerging market businesses or achieve business deals to tap into this area, CFR's acquisition would represent the first time that two significant emerging market-based companies have created an alliance in order to exploit opportunities across emerging markets in several continents. Neither company has expressed an interest through the proposal in expanding into the more traditional markets; although CFR does have a presence in North America and Europe, this is not a focus for the merger. If successful, the merger could thus create a new business model.

On July 2, Chilean firm, CFR Pharmaceuticals, submitted a non-binding offer to South Africa-based Adcock Ingram that could lead to CFR making a cash and shares offer to acquire 100% of Adcock's issued ordinary share capital for a price consideration of ZAR 73.51 for every Adcock Ingram share as well as making comparable offers to Adcock's Black Economic Empowerment partners, as holders of Adcock's A and B shares, and the participants in the company's employee and incentive schemes. CFR explained that the proposal was consistent with its strategy of strengthening its position as a significant emerging market pharmaceutical manufacturer. The company added that it believed that, combined with Adcock Ingram, it could become one of the most diversified and uniquely positioned emerging markets multinationals with exposure to patients across Latin America, South East Asia and India, and capitalising on emerging market opportunities.

Adcock Ingram confirmed that the offer had been made, noting that the company's Independent Board had entered into discussions with CFR. CFR had also indicated that it would seek a secondary listing on the Johannesburg Stock Exchange; as a result, the combined company would benefit from a broader global investor base with listing in both Johannesburg and Santiago, Chile. Adcock added that the offer was not yet firm and would be subject to the fulfilment of a number of pre-conditions, including satisfactory completion of confirmatory due diligence and Adcock and CFR reaching agreement on the terms of the offer. In order to satisfy these pre-conditions, a period of exclusivity has been granted by Adcock. In addition, the share price part of the offer is subject to the fluctuations of the stock exchange.

Adcock explained to its shareholders that since 1990, CFR has successfully expanded beyond Chile into other countries in Latin America and other emerging markets. The company currently employs over 7,000 people, including a sales force of nearly 2,000. CFR claims market leading operations in Chile, Peru and Colombia, as well as a presence in Venezuela, Argentina, Bolivia, Paraguay, Ecuador, Costa Rica, Panama, El Salvador, Nicaragua, Honduras and the Dominican Republic. The company also has operations in North America and Europe through its Canadian subsidiary, Uman Pharma, and its UK subsidiary, Allergy Therapeutics. A presence in South East Asia has also been established through a manufacturing hub and commercial affiliate in Vietnam. In 2012, CFR generated revenues of US$757 million, which included its recent acquisition of Lafrancol. Lafrancol is a Colombian pharmaceutical company with subsidiaries in Ecuador, Peru, the Dominican Republic and Guatemala. CFR reported it had acquired a 100% stake in the firm in December 2012.

CFR focuses on the development, manufacture and commercialisation of off-patent and locally unpatented branded specialty pharmaceuticals. The firm has a presence in a number of business segments, including neurology, psychiatry, cardiology, women's health, acute therapeutic areas, monoclonal antibodies and treatments related to transplants, dialysis, oncology and rheumatology. CFR also produces injectables used in anaesthesia, infectious diseases, cardiology and critical care. Adcock noted that in 2011, CFR successfully completed its initial public offering on the Santiago Stock Exchange; the move made the company the first publically traded pan-Latin American pharmaceutical company.

According to Adcock, a merger would create an emerging markets pharmaceuticals company with a presence in more than 23 countries and employing over 10,000 people. The combined company would have revenues of around US$1.3 billion and an asset base of some US$2.1 billion. The merger could produce potential savings for both companies. For CFR, the firm would seek to use excess manufacturing capacity available in the combined group to optimise utilisation and reduce costs. In this regard, the company plans to transfer the manufacture of certain products to South Africa and India. Through the combination, Adcock Ingram would seek to lower its cost of production by increasing volumes and utilisation rates. Both companies would seek to combine their active pharmaceutical ingredient sourcing and procurement. Adcock commented that CFR would seek to add to Adcock's existing product portfolio in sub-Saharan Africa. In addition, through its Complex Therapeutics Division, CFR would provide Adcock with access to new therapeutic areas. For its part, CFR would benefit from rolling out Adcock's portfolio in Latin America. In particular, CFR believes that significant opportunities exist in its home markets in the areas of antiretrovirals and OTC medicines. According to Adcock, the OTC market in Latin America is worth some US$12 billion and is growing at a compound annual growth rate of around 12%. This will represent an attractive market for Adcock's OTC portfolio. Adcock can also help CFR grow its presence in diabetes, dermatology and ophthalmology.

Adcock has been the target of other acquisition bids during 2013, but the company appears to be more enthusiastic about this one. In March, Bidvest announced an unsolicited offer to acquire 60% of Adcock's share capital; at the time, Bidvest owned around 2.54% of Adcock's total shares. Bidvest is a South African firm and describes itself as an international services, trading and distribution company that operates on four continents. Had it successfully completed its proposed Adcock share acquisition, this would have marked Bidvest's first foray into the pharmaceuticals sector.

Bidvest's move had been subject to a condition that it received a favourable undertaking from Adcock's Board of Directors by April 2nd. However, Adcock did not respond positively to the offer, citing fundamental legal and material prudential concerns. Bidvest did not renew its offer following the April 2nd deadline.

This article is tagged to:
Sector: Pharmaceuticals & Healthcare
Geography: South Africa, Chile

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