Mova PharmaceuticalPatheon to acquire Mova Pharmaceutical
Patheon Inc (TSX:PTI)
Shares Issued 51,555,822
Last Close 11/22/2004 $7.65
Tuesday November 23 2004 - News Release
Mr. Robert Tedford reports
PATHEON TO ACQUIRE A LEADING U.S. CONTRACT MANUFACTURER: MOVA PHARMACEUTICAL; TRANSACTION ESTABLISHES PATHEON AS A GLOBAL LEADER IN PHARMACEUTICAL MANUFACTURING
Patheon Inc. has entered into a definitive agreement to acquire Mova Pharmaceutical Corp., a leading United States prescription pharmaceutical contract manufacturer located in Puerto Rico. All dollar amounts are stated in United States currency unless otherwise indicated.
The combined Patheon and Mova organization will clearly establish Patheon as a leader in pharmaceutical manufacturing with more than 5,400 employees and an extensive global network of 14 facilities -- 10 in North America and four in Europe.
The transaction is expected to be significantly accretive to EBITDA (earnings before interest, taxes, depreciation and amortization) margins and earnings per share beginning in fiscal 2005. It is expected to close in late December, 2004.
"This transaction will transform Patheon by substantially enhancing its presence in the United States, the world's largest and fastest-growing pharmaceutical market," said Robert Tedford, chief executive officer of Patheon Inc. "It provides us with significantly more prescription pharmaceutical manufacturing capacity with which to serve leading global pharmaceutical companies. Additionally, our presence in Puerto Rico will provide our clients with access to pharmaceutical contract manufacturing in a favourable fiscal environment."
Global pharmaceutical companies have an almost 40-year history of manufacturing in Puerto Rico, with the sector representing one of the island's largest industries, due in part to a long-standing strategy by the local government to provide favourable business incentives and tax rates. More than 60 pharmaceutical manufacturing facilities are located in Puerto Rico, the world's largest international pharmaceutical shipper in 2003, with almost 25 per cent of total shipments. Sixteen of the top 20 best-selling pharmaceuticals in the United States are produced in Puerto Rico.
A private company founded in 1986, Mova Pharmaceutical currently provides prescription pharmaceutical manufacturing services to 20 global pharmaceutical companies, including eight of the 20 largest in the world. Mova currently employs more than 1,600 people at its three FDA-approved (Food and Drug Administration) pharmaceutical manufacturing facilities located in Caguas, Carolina and Manati, Puerto Rico.
"Our agreement with Patheon represents a strategic opportunity to ensure Mova's continuity and future growth by capitalizing on our respective strengths and combined client portfolios," said Joaquin Viso, founder and chief executive officer of Mova Pharmaceutical Corp. "I sincerely believe that the combined entity will achieve its objective of global leadership because both companies share a common vision and a commitment to serving the best interests of their clients."
The transaction
The purchase price is based on an enterprise value for Mova at closing of $350-million. Patheon will issue 12,684,866 common shares, subject to increase in limited circumstances, to the shareholders of Mova in satisfaction of $81.5-million of the purchase price. Patheon will assume approximately $125-million in debt, redeem the non-voting and preferred shares of Mova and will pay the balance of approximately $144-million, less certain holdbacks, at closing.
Based on Mova's significant growth potential arising from recently secured contracts and higher volumes for existing products, the agreement also provides for two earn-out arrangements relating to Mova's operating results. Upon completion of Mova's fiscal year on Dec. 31, 2004, the purchase price will be adjusted to equal an 8.55-times multiple of Mova's 2004 adjusted EBITDA. If Mova achieves $48.5-million of adjusted EBITDA or greater in 2004, then Patheon will pay a maximum additional cash payment of $65-million. It is expected that Patheon will satisfy this earn-out payment in cash, but if any portion of the earn-out payment is not paid in cash, Patheon may satisfy its obligation to make the payment by issuing subordinated notes in a total principal amount equal to 120 per cent of the unpaid amount. To the extent that the full earn-out is not earned in 2004, January, 2005, EBITDA above a stipulated threshold will be taken into account for the purposes of determining the 2004 earn-out payment. In addition, Patheon will pay an amount equal to two times the amount by which Mova's adjusted EBITDA for the first six months of 2005 exceeds $32-million, up to a maximum additional payment of $26-million.
Patheon expects the transaction to be significantly accretive both in terms of EBITDA margin and earnings per share beginning in fiscal 2005. Patheon expects to benefit from the well-established favourable tax incentives for pharmaceutical manufacturers in Puerto Rico, through the continuation of existing long-term agreements between Mova and the Puerto Rican government. These agreements provide effective income tax rates of between 2 per cent to 7 per cent, and significant reductions in both property and excise taxes. Patheon expects that the Office of Industrial Tax Exemption of the Commonwealth of Puerto Rico will consent to the continuation of these agreements following the completion of the acquisition.
For the nine months ended Sept. 30, 2004, Mova reported $113.0-million in revenue, $16.1-million in net income and $25.5-million in EBITDA (a detailed reconciliation of EBITDA to net income is provided below). As at Sept. 30, 2004, Mova had orders of approximately $60-million in revenue for expected delivery in the fourth quarter ending Dec. 31, 2004, driven by new long-term pharmaceutical manufacturing contracts and higher volumes for existing products. Actual deliveries may be affected by a number of factors, including the availability of active ingredients and other supplies, changes in client demands and capacity constraints. Mova facilities have significant manufacturing capacity in place to allow for further growth, with limited project-related capital expenditures.
The completion of the transaction is subject to obtaining all required regulatory approvals, including approval under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1974, third party consents and other customary conditions.
Patheon has arranged committed credit facilities with Royal Bank of Canada and an increased credit facility with Westernbank Business Credit, a division of Westernbank of Puerto Rico, to pay the cash portion of the purchase price (and related transactions costs), refinance substantially all of Patheon's existing North American debt at closing of approximately $68-million and provide a $55-million revolving credit facility. Patheon expects that the initial average interest rate for this indebtedness will be approximately 6 per cent. Patheon intends to pursue an equity offering of approximately $150-million to reduce the amount of the indebtedness.
The transaction will be accounted for on a purchase accounting basis. The purchase equation for the transaction has not yet been finalized. Patheon currently expects, based on preliminary estimates, that the $350-million enterprise value will be allocated as follows: approximately 10 per cent to net working capital; approximately 75 per cent to tangible and intangible assets subject to depreciation and amortization; and approximately 15 per cent to non-depreciable intangible assets. As a result, Patheon currently expects that it will incur incremental depreciation and amortization expense in connection with the acquisition of approximately $20-million in fiscal 2005. To the extent that the purchase price is increased as a result of earn-out payments, the amount of non-depreciable intangible assets will increase. In addition, Patheon expects to incur transaction costs of approximately $21-million in connection with the transaction.
Mr. Viso has agreed to remain as chief executive officer of Mova Pharmaceutical during a transition period. He will be responsible for Mova operations and play a key role in developing strategic growth opportunities for the combined network, both in Puerto Rico and other parts of the United States, as well as in the rest of the world. Patheon has agreed to appoint Mr. Viso to fill a vacancy currently available on the board of directors of Patheon Inc. after the completion of the acquisition.
Upon closing, it is expected that Mr. Viso will become the largest shareholder of Patheon, holding (together with his spouse) shares representing approximately 16.8 per cent of the currently outstanding shares (after giving effect to the completion of the acquisition but not any equity offering). Mr. Viso has agreed to contractual restrictions on the resale of the Patheon shares to be issued to him as part payment of the purchase price for the acquisition and to a two-year standstill. The number of shares to be issued to the sellers in connection with the acquisition is subject to adjustment if, prior to closing, there is an announcement relating to, or a notice of hearing, summons or order issued in connection with, the previously disclosed Ontario Securities Commission investigation of trading by certain insiders of the company and the price of the Patheon shares declines. The number of shares will not be subject to adjustment in any other circumstances. If an adjustment event occurs, the number of shares to be issued will be adjusted to reflect the market price of the Patheon shares at the time of closing, provided that the number of shares issuable shall not exceed 25 per cent of the outstanding Patheon shares immediately prior to the completion of the acquisition. In these circumstances, the sellers have the right to terminate the acquisition agreement if the aggregate market value of the shares issuable to them in connection with the acquisition is less than $76.5-million.
Mr. Tedford concluded, "Moving forward, we will look to capitalize on the available prescription manufacturing capabilities and expertise that Mova Pharmaceutical provides, by combining it with Patheon's strength in pharmaceutical development services and new business development, sales and marketing capabilities in North America and Europe to create new and enhanced long-term client relationships for the benefit of our clients, employees and shareholders."
About Mova Pharmaceutical Corp.
Mova (www.movapharm.com) is a leading contract prescription pharmaceutical manufacturer based in Puerto Rico. Mova's manufacturing infrastructure includes three facilities, with over 900,000 square feet of FDA-approved manufacturing capacity, and solid, liquid, sterile liquid and solid oral cephalosporin capabilities, employing over 1,600 people. Mova, which has strategic relationships with some 20 leading global pharmaceutical companies (including eight of the 20 largest global pharmaceutical companies), produces approximately 40 products, including many top-selling branded and generic pharmaceuticals.
Webcast
Patheon Inc. will host a webcast conference call to discuss this announcement later today, Tuesday, Nov. 23, at 11 a.m. Eastern Standard Time. Representing Patheon on the call will be: Robert Tedford, chief executive officer; Ronald Mitchell, chief financial officer; Riccardo Trecroce, general counsel; and Joaquin Viso, founder and chief executive officer of Mova Pharmaceutical Corp. The call will begin with a brief presentation, followed by a question-and-answer period.
Interested parties are invited to access the call live, in listen-only mode, via telephone at the following toll-free number: 1-800-814-4861. (Please call between five and 15 minutes in advance.) A live audio webcast, with a slide presentation, will be available on www.patheon.com. (Please note that Windows Media Player or Real Player is required.)
A telephone replay of the conference call will be available from 1 p.m. today, until Tuesday, Dec. 7, 2004, by calling 416-640-1917 or the following toll-free number: 1-877-289-8525, and entering identification No. 21102624, followed by the pound key. An archived audio webcast will be available on www.patheon.com for three months.
© 2004 Canjex Publishing Ltd.
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The cost of their momentary lapse of reason: "... subject to increase in limited circumstances ..."
Good luck to all