Swiss pharmaceutical giant, Novartis (NVS), recently inked a deal to acquire Melville, New York-based specialty dermatology generics company, Fougera Pharmaceuticals.
As per the terms of the agreement, Novartis will pay $1.525 billion cash for the acquisition, which is scheduled to complete in the second half of 2012.
This acquisition will add on to Novartis’ generic business division, Sandoz. According to the company, this acquisition will make it the market leader in both the U.S. and worldwide generic dermatology segment.
The dermatology generics market in the U.S. is worth $2.1 billion and is expected to witness double-digit growth in the near future. Fougera, with sales of $429 million in 2011, is one of the industry leaders.
Our Take
We believe this acquisition will place Sandoz in a better position to tap the lucrative dermatology generics market. Additionally, since both Fougera and Sandoz serve the same market, the acquisition will create cost synergies. The deal is expected to be accretive to core earnings.
The Sandoz division has been experiencing a slowdown in the U.S. due to lower enoxaparin sales. In the first quarter of 2012, revenues from the division declined 10% to $2.1 billion.
We are positive on the future prospects of Sandoz, as it enjoys a 50% share of the biosimilar market which is expected to grow significantly and reach $15 billion – $20 billion in 2020.
However, we note that the U.S. Food and Drug Administration (FDA), issued a warning letter for three of Sandoz’s manufacturing sites. Inspections are expected to be carried out later this year.
Novartis recorded free cash flow of $2.1 billion in the first quarter of 2012. The company will fund the acquisition using its existing cash resources.
We currently have a Neutral recommendation on Novartis. The company carries a Zacks #4 Rank (Sell rating) in the short run.
NOVARTIS AG-ADR (NVS): Free Stock Analysis Report
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