Sun Pharmaceuticals to pay 2x revenues to acquire Chattem?

Sun Pharmaceuticals has acquired Chattem Chemicals Inc, a US-based pharmaceutical company, which makes $26mn in revenues from selling bulk drugs. Chattem had been acquired by Elcat Inc in 1995 from Chattem Inc, for $25mn. Sun has not disclosed the acquisition price but we will try to make some educated guesses.

Chattem makes and imports bulk drugs of controlled substances that are used in preparing certain drugs. Sun Pharma has been expanding its position, especially manufacturing capability, in the controlled substances segment. These are drugs that have medicinal uses but can also be misused for drug abuse. Drugs used in central nervous system related ailments are one such example. Sun has a strong presence in this segment.

In the US, there are strict rules governing the import and manufacturing of these drugs. The US company has permission to import methamphetamine, phenylacetone, raw opium and concentrate poppy straw. In addition, it has a license to make Schedule 1-5 controlled substances. By acquiring established facilities for such drugs, Sun is readying to make these drugs. Earlier, Sun Pharma had acquired a company in Hungary that made bulk drugs and another in USA, which has facilities for making the finished product.

Sun intends to compete in the US generic market for these products, after it gets regulatory approvals. The acquisition price has not been mentioned. Given its revenues of $26mn and the value of the drug import and manufacturing licenses that it holds, it would have commanded a reasonable valuation. In 2005, a Swiss company Siegfried Group ( acquired Penick Corporation, a US-based maker of controlled substances, for $30mn. It had basically paid for acquiring the products, related rights and technology for making these products.

In this case, though Penick’s sales were not disclosed, Siegfried mentioned in its annual report that the acquired company’s sales, prior to the acquisition, was not significant. This profile mentions a figure of $510,000 revenues for Penick. In contrast, Chattem has revenues of $26mn which is significant, but its profitability is not known. Still, based on revenues of $26mn, existing pharma valuations and considering its niche area of operation, Chattem would have been valued at least, at twice of revenues.

That yields an acquisition price of about $52mn and would be a conservative figure. Elcat itself had paid $25mn to acquire Chattem 13 years ago and would have bargained hard to get a better price. Even at $52mn, the return on its investment works out to a CAGR of only 5.8%.

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