German pharmaceuticals company Boehringer Ingelheim is aiming high, when it comes to its forays in the field of veterinary medicine.
A few days ago, the family-run firm got the go-ahead from the U.S. anti-trust authority to take over its European rival in the field, Merial, if it divested itself of several types of products that could harm competition there.
These were the conditions set by the Federal Trade Commission in the U.S. Similar conditions had already been set, and met, by the European Commission in November last year.
The acquisition of Merial, the veterinary subsidiary of French pharmaceutical company, Sanofi, makes the German company, commonly known as Boehringer, number two in the industry. But that, according to the company, is not enough.
“We intend to fight for market leadership,” Joachim Hasenmaier, the member of Boehringer’s board responsible for animal health, told Handelsblatt.
The animal health sector is attractive, offering relatively constant growth and considerable margins.
This is why Boehringer is setting its sights on Zoetis, the American leader in the animal health sector. It was created three years ago as a spin-off from U.S. pharmaceutical giant, Pfizer – and it still earns some 10 percent more in sales than the new number two. In the first nine months of 2016, Merial and Boehringer had combined revenues of an estimated €3.1 billion, around 7 percent more than the year before. Both firms did significantly better than the market.
The two companies announced the takeover deal a year ago, but only got permission from the U.S. anti-trust authority recently. Boehringer and Merial were required to transfer a few smaller business units, adding up to a total of nearly 6 percent of sales, to their rivals Lilly, Bayer and Ceva. For all of 2016, Boehringer most likely made pro-forma revenues of around €4 billion in veterinary medicine, including Merial’s income. That constitutes around one-quarter of overall sales for Germany’s second-largest drug manufacturer. In the future, veterinary medicine will continue to provide a larger share of the company’s profits.
On the basis of Merial’s data up until now, the division should account for around 25 percent of operational returns; that is 10 percentage points more than Boehringer made all up.
Merial has an enterprise value of €11.4 billion and this is the biggest acquisition in the company’s history. The most controversial aspect of the deal involves what is primarily an exchange: Boehringer is giving Sanofi its over-the-counter business - that is, medications that can be bought without a prescription - worth €6.7 billion.
Mr. Hasenmaier describes the transaction as part of a long term strategy. “Merial was actually the only company that had the critical size and that fit us,” he said.
Mr. Hasenmaier sees opportunities for growth in the field, with vaccines as well as with new antiparasitics for small animals - both areas where Boehringer and Merial are already market leaders.
The business is divided 50-50 between domestic animals - dogs, cats, horses - and livestock such as pigs, cattle and poultry. Mr. Hasenmaier believes there is particularly great potential in the pet market: “Today’s pet is a member of the family, one who is much cared for,” he noted.
With regard to livestock, Boehringer is pinning hopes on disease prevention, which means more vaccines.
For a long time, antibiotics were in widespread use in agriculture. But consumer advocates have been campaigning against such measures for a long time. “It is becoming increasingly clear that consumers no longer accept the use of large amounts of antibiotics,” says Mr. Hasenmaier. After the Merial takeover, Boehringer will hardly play any role in the antibiotics business and that is no problem in Mr. Hasenmaier’s opinion. He actually sees it as a strength and has no intention of being involved in that area.
In an interview with Handelsblatt, Mr. Hasenmaier did not indicate if the Merial takeover would bring about any savings. Some things could be integrated, such as distribution. But on the whole the focus would be on prioritizing commercial activities with the biggest potential.
“If that is successful, then I won’t be worrying that much about cost synergies and whether we have enhanced value through the acquisition,” he said.
Boehringer will be taking on board around 7,000 new staff via the Merial takeover and will also shift about 2,500 personnel to the other company, with the sale of the over-the-counter medications business.
The animal health sector is an attractive one. With a volume of around $30 billion, the market is far smaller than the human pharmaceuticals area, which is worth more than $800 billion. But it is less dependent on governmental buyers and offers relatively constant growth of 4 to 6 percent along with considerable margins. In 2015 Zoetis, the leader in the field had adjusted operational returns of about $1.3 billion, with an operational margin of almost 28 percent. Bayer and Sanofi most recently showed profits of around 25 percent before interest and taxes.
The value of this deal between the firms corresponds. Boehringer is essentially paying around four-and-a-half times Merial’s revenues. The Sanofi subsidiary was valued a good 50 percent higher than in 2011, when Sanofi and Merck & Co. wanted to merge their veterinary divisions. Merial was valued at $8 billion for that deal, which had to be rewound because of cartel issues. Zoetis is currently valued at almost $27 billion; that is five-and-a-half times its revenues and a good 30 times more than its profits.
By taking over Merial, Boehringer is playing the first round of the end game in the global consolidation of the veterinary medicine sector. More than half of the market is in the hands of just four firms: Zoetis, Boehringer, Merck & Co. and Eli Lilly. This concentration of business is already much higher than in the classic pharmaceutical sector, where even the 10 largest manufacturers make up less than 50 percent of the market.
Anti-trust measures mean that further mergers will be difficult. Smaller protagonists such as the French firms Virbac and Ceva, or the U.S. company Phibro, are considered potential takeover targets. But the range of their products is less interesting to the larger companies.
According to industry experts, the only big deal possible in veterinary medicine in the future is a merger of the veterinary divisions of Merck & Co. and Bayer. In recent years, Bayer repeatedly signaled interest in expanding that side of its business and made various offers at various times. But after its commitment to the $66-billion acquisition of agricultural giant Monsanto, Bayer’s ability to finance those steps seems limited.
It would make more sense for the company to sell its own veterinary medicine business, which is currently managed as a division within its agricultural chemicals division. Along with Merck & Co., financial investors would be potentially interested in Bayer’s veterinary medicine unit. “Bayer would certainly have no difficulty in letting go of the business,” says someone familiar with the market.
Judging by the current deal with Merial, Bayer’s veterinary medicine division, with around €1.5 billion in sales, would be valued at between €6 and €8 billion. Bayer could use this money to meet the costs of the Monsanto deal and reduce its debts.
Bayer’s chief executive Werner Baumann has said repeatedly that they do not plan any divisional sales in order to finance the Monsanto takeover. Having said that he is not closing the door on routine adjustments to the company’s portfolio.
His requirement: Every Bayer business must be a market leader, or have the potential to become one. If this isn’t the case, Mr. Baumann says, one should think about whether it makes sense for Bayer to keep that particular business. With the recent changes at Bayer, and considering those within the veterinary medicine sector, it seems that, sooner or later, someone must be asking that question.
Siegfried Hofmann writes about companies and markets for Handelsblatt. To contact the author: firstname.lastname@example.org