Combination of the two companies could generate revenue of R$16bn and capture a market share of approximately 17% in the laboratory industry
10/22/2024
Negotiations for a merger between EMS and Hypera could mark the start of a second wave of consolidation among Brazilian drugmakers.
There is an expectation that other groups may accelerate mergers and acquisitions following the announcement of the EMS-Hypera deal on Monday (21), given the potential for combining two companies that together generate revenue of R$16 billion and hold a market share of approximately 17%, while typically, pharmaceutical companies do not exceed a 10% market share.
The economies of scale are significant. The combined company, for example, would gain negotiating power with distributors and pharmacies, a factor that is likely to drive business growth.
However, industry sources remain skeptical about the feasibility of advancing the deal.
The view of experts consulted by Valor is that it is not straightforward to approve a transaction stemming from a hostile bid. In addition to the largest shareholder of Hypera, João Alves de Queiroz Filho, known as Júnior, having previously rejected merging the businesses because he does not want to become a minority stakeholder in the combined entity, he also holds a significant 21.38% share, which presents challenges for widespread acceptance, one person noted.
Another person familiar with the matter pointed out that it is rare for a hostile offer from a privately held company to succeed, as the board of directors of the target rival may require extensive due diligence on the numbers presented by the bidder to feel comfortable recommending the deal.
One source mentioned that EMS is attempting to mobilize Hypera’s investors by making a hostile offer, effectively pressuring them to accept the deal. However, a potential side effect could be attracting new interest in Hypera, as all players in this industry are eyeing potential M&A deals. If this occurs, the interested company could approach Mr. Queiroz Filho and attempt to negotiate amicably.
To illustrate the potential transaction between EMS and Hypera, they rank first and third, respectively, in the generic-drug market considering Neo Química, a division of Hypera. This segment generated approximately R$29.2 billion in the 12 months ending in September, according to industry association Sindusfarma, based on data from consulting firm IQVIA.
Hypera boasts a large portfolio of over-the-counter medications with well-known brands such as Neosaldina, Rinossoro, Lisador, and Coristina. The OTC segment reported revenue of R$21.3 billion.
For an industry expert, pharmaceutical companies that do not manage to merge are likely to drive prices down, opting to reduce margins rather than lose market share. The pharmaceutical industry generates approximately R$200 billion in revenue.
Rafael Freixo, director of LEK Consulting, said if completed, the deal would be the largest transaction in the sector in recent years. “This new company would dominate several product categories. Hypera has a very strong business in over-the-counter medications. It also has a significant presence in the pharmaceutical channel, while EMS is strong in generics and similar products.”
On Monday, shares of Hypera had an unusual trading day, with transactions reaching R$1.07 billion amid the volatility caused by two announcements that elicited opposite reactions from shareholders. A working capital optimization program negatively impacted market sentiment in the morning until a proposal for a business combination made by EMS shifted the mood in the late afternoon.
The Hypera’s stock closed the day up 1.9%, at R$26.16. The trading volume of R$1.07 billion was the second-highest on the B3 stock exchange, trailing only Vale, which had R$1.15 billion, and was roughly seven times the R$151 million traded by Hypera on Friday (18).
Ana Beatriz Bartolo and Felipe Laurence contributed reporting.
*By Beth Koike, Fernanda Guimarães, Ana Luiza Carvalho — São Paulo
Source: Valor Inaternational