The pharmaceutical industry is in full swing in a process of rebalancing its forces and portfolio – which could result in major deals in the coming months. The most recent initiative is from the French Sanofiwhich began a process of selling the Medleyits subsidiary in Brazil specializing in generics. The company hired a financial advisor to coordinate the process. And, according to sources heard by InvestNewsthe initial value expected by the French would be around US$ 1.5 billion.
The pharmaceutical market has been booming for some time now, with major players looking for good business opportunities. The best-known case occurred at the end of October. THE EMS made an unsolicited proposal to attempt a merger with Hyperwhich could create a sector leader with annual revenue of R$16 billion, but the initial offer was rejected.
Another example is the Cimedof João Adibewhich is looking for a partner willing to pay around R$1 billion for a minority stake in the company.
What is behind this movement is the need for large companies in the generic segment to diversify their portfolio and include other products, such as the so-called OTCs – Over The Counter; that is, those sold over the counter, which you buy in the pharmacy aisles (painkillers, antipyretics, vitamins, antacids…).
This would be a way to improve the recipe. The generic market is super competitive, and this forces pharmaceutical companies to sell at huge discounts.
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The government’s requirement is that generics cost at least 35% below the value of the reference medicine, but competition between laboratories leads to discounts of up to 80%, according to experts interviewed by the InvestNews. As a result, the generic gross margin is usually close to 30%. In the case of indebted companies, this margin may end up being consumed by interest payments. To give you an idea, OTCs and hygiene and beauty products can have much higher margins, close to 90%.
Reorganization at Medley
Sanofi had purchased Medley in 2009 – for R$1.5 billion, together with businessman Alexandre Negrão. The current reorganization, which involves the potential sale of the subsidiary, is the result of a global movement.
Paul Hudsonglobal CEO of the French pharmaceutical company, created in mid-2019 an arm for its OTC products, Opel Healthcare – responsible for brands worldwide Buscopan e Allegrafor example. In October this year, Sanofi sold a relevant stake in Opella to the investment fund private equity Clayton Dubilier & Rice (CD&R), in a business that valued the company at €16 billion and which is expected to be completed in mid-2025.
Sanofi installed Opella in Brazil in 2021 and, since 2023, has promoted the transfer of more than R$1 billion of Medley’s share capital to Opella, in an asset reorganization. According to documents accessed by InvestNewsthe first split occurred in April 2023, when Medley transferred R$858.7 million to Opella; in June this year, a new transfer: R$438.9 million. Currently, Medley’s share capital is R$855.5 million, while Opella Brasil’s is already R$1.3 billion.
Wanted by InvestNewsSanofi stated that it “does not comment on market speculation”. “Medley, Sanofi’s generics unit, remains fully committed to its mission of democratizing access to healthcare for Brazilians (…) and operations continue normally.”
One of the main attractions of the generics market for the industry is the low cost of research and development (so-called R&D). And also in promotional marketing. Large pharmaceutical companies that develop and manufacture reference medicines need to invest a lot in promoting these products in doctors’ offices, which involves visits to offices, distribution of free samples and other strategies that are heavy on the wallet.
But a lot of people were attracted to this market, which made the competition predatory.
In an interview with InvestNewsthe CEO of the Panvel pharmacy chain, Julio Mottin Neto, reported that the company holds auctions to choose its generic suppliers. And, of course, the lowest price wins. According to the executive, the Generics account for 12% of revenue from Panvel stores. And within the share of revenue coming from medicines, they account for 20%.
In a business environment like Brazil, where the cost of capital is increasingly high, attention to improving the profit margin of industries must be a priority. This is the only way to make the money invested worth it.
Sanchez e Adibe na rua
This is what the radar of EMS and Cimed, a duo that has a strong presence in generics, is aimed at in their recent moves.
Cimed almost closed the purchase of Jequiti, Silvio Santos Groupfor R$450 million, but impasses in the final leg of the negotiation stalled the purchase and João Adibe’s company returned to analyzing opportunities.
An alternative that is on the street, according to market professionals, is the search for a partner who can buy a stake above 10% of Cimed. This operation could generate something around R$1 billion to R$2 billion. And some investment funds have already evaluated the business. On another front, Cimed is investing in oral care – line of which the lip moisturizer Carmed is the flagship. Today, even though it is one of the largest sellers of generics in the country, only 38% of Cimed’s revenue comes from medicines.
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In the same vein, the EMS’s willingness to Carlos Sanchezto buy Hypera is not over, according to reports from sources close to the companies. This would be a “highly complex” negotiation, due to the size of the two companies’ portfolios. But also because of Sanchez’s complicated relationship with João Alves de Queiroz Filho (known as Júnior). In any case, the founder of Hypera would have defined an interlocutor to listen better the ideas of the EMS owner.
The proposal behind the merger, as Sanchez himself explained at the time of the proposalis portfolio complementarity.
Hypera, today one of the leaders in the segment with annual revenue of R$7.9 billion, has strong brands – Buscopan, Engov, Gelol, Neosaldina –, but is facing a period of deterioration in its balance sheet. EMS stands out in the production of generics and has a sufficiently organized capital structure to absorb its competitor – a way of dealing with the challenges of the transformation that the market is going through.
