Focus: Big pharma and private equity seek healthy returns in Europe's east

Zentiva SA

20/05/2021 07:00

* Private equity and big pharma involved in deal-making
    * Poland's upstart biotech firms draw interest
    * Region promises skilled workforce, rising healthcare spend

    By Agnieszka Barteczko, Anna Koper and Michael Kahn
    WARSAW/PRAGUE, May 20 (Reuters) - In the race to supply
vaccines to end the COVID-19 pandemic, U.S. drug developer
Novavax turned to emerging Europe to speed up production with a
pair of deals that endorsed a growing trend for consolidation in
the region.
    As part of a doubling in merger activity, buoyed by a
combination of private equity and big pharma, Novavax  NVAX.O 
bought the Praha Vaccines factory near Prague in a $167 million
transaction last May. It followed up by partnering with Polish
biotech company Mabion  MABP.WA  in March.  urn:newsml:reuters.com:*:nL4N2D92KI
 urn:newsml:reuters.com:*:nL8N2LT6VC
    Novavax decided the Praha Vaccines factory in Bohumil, Czech
Republic, was the best solution to expanding vaccine production
in Europe, spokeswoman Laura Keenan said, adding: "Talent in the
region was a key consideration."
    The pharmaceutical industry focused around Czech Republic,
Hungary and Poland is dwarfed by that of nearby Germany, but
industry insiders and analysts see scope for growth based on
moderate costs and an expectation of higher healthcare spending,
as well as a scientifically educated workforce.
    For private equity, there is the lure of high returns, while
big pharma can reduce costs by buying growing firms that have
carried out large amounts of research and the location in the
European Union means widely recognised standards are met.
    The total value of inbound deals with disclosed value in the
healthcare and pharmaceuticals industry in central and eastern
Europe doubled to 1.9 billion euros ($2.31 billion) in 2020 from
932 million euros a year earlier, a report from consultancy
Mergermarket and Mazars found.
    "Even without COVID-19, the region's demographic and
economic trends point towards activity in the sector," the
report said.
    "As the population ages and incomes rise, investors will
continue to see a clear upside in consolidating the industry to
cut cost and gain scale."
    
    MEDIEVAL PHARMACY MEETS THE MODERN AGE
    A focal point of the activity has been Zentiva  ROSCD.BX , a
Czech company that traces its roots back to a medieval Prague
pharmacy and last year acquired Alvogen's central European
business for undisclosed terms from private equity firm CVC
Capital Partners.  
    "For sure, consolidation in our region is inevitable," said
Krzysztof Krawczyk, a partner at CVC.
    For the drug companies, small innovators are of particular
appeal. 
    "It is easier for companies with strong shares in mainstream
market segments to buy an innovative biotechnology company and
thus skip the research and development phase and quickly expand
their product range," Krawczyk said. 
    Adam Pietruszkiewicz, a board member at Mabion, and also a
partner at private investment company Twiti Investments, took a
similar view.
    "Most likely, the more of these companies and start-ups that
appear, the more transactions there will be," Pietruszkiewicz
said.
    
    POLISH BIOTECH
    Upstart biotech companies in Poland – eastern Europe's
biggest economy – are attractive targets, investors and
companies say, and also ambitious to grow themselves.
    Selvita based in Krakow, southern Poland, completed its
first international acquisition in January with a $38 million
deal for Croatian Fidelta - owned by Belgium's Galapagos
 GLPG.AS  in January.
    Although Selvita has drawn investor interest, it plans to
remain a buyer rather than seller, executive vice president
Milosz Gruca said.
    He too predicted a combination of bigger drug companies and
private funds would step up the pace of acquisitions of emerging
companies.
    "We have many new, young and successful innovative
companies, which are shaping the new perspective for the CEE
region and the way it is seen by investors," Gruca told Reuters.
    "Big pharma companies are interested in the programmes these
smaller firms are bringing to the market. These companies will
also be subject to potential acquisitions or partnering deals."
    
    POTENTIAL TO GROW
    So far, Sanofi's  SASY.PA  1.9 billion euro sale of Zentiva
to U.S. private equity group Advent in 2018 is one of the
biggest deals in the region.
    Since then Zentiva has made two more acquisitions in
emerging Europe and is scouring the region for others as it
builds up its branded generics business, the director for the
company's CEE business Hacho Hatchikian told Reuters.
    He said Zentiva was targeting late-stage assets and openly
exploring all options in biosimilars, or cheaper versions of
biologic drugs made from living organisims.
    The value of drugs sold in the 38.5 billion-euro German
market is still more than three times that in the Czech,
Hungarian and Polish markets combined, figures from the European
Federation of Pharmaceutical Industries and Associations show.
    But the gap is expected to narrow as healthcare standards in
eastern Europe converge with those of the West.
    "The CEE markets provide a significant growth prospect as
they follow a clear convergence trajectory to the Western
European (and U.S.) standards both in treatment options and
healthcare spending," Zentiva's Hatchikian said.
    ($1 = 0.8228 euros)

 (Reporting by Agnieszka Barteczko and Anna Koper in Warsaw and
Michael Kahn in Prague; writing by Michael Kahn; editing by
Barbara Lewis)
 ((michael.kahn@thomsonreuters.com; +420 234 721 612; Reuters
Messaging: michael.kahn.thomsonreuters.com@reuters.net))