By Edvard Bruu and Hannah Ohlsson (Stockholm School of Economics), Isabelle Duerbeck and Tim Bamberger (King’s College London)
Photo: Jeff W (Unsplash)
Overview of the deal
Acquirer: Jazz Pharmaceuticals
Target: GW Pharmaceuticals
Implied Equity Value: X
Total Transaction Size: $7.2 billion
Closed date: Feb 3 2020
Target advisor: Goldman Sachs & Co. LLC and Centerview Partners LLC
Having agreed on a $7.2 billion acquisition of GW pharmaceuticals, Jazz attempts to diversify its product portfolio into cannabinoid-based medication. With this move, Jazz Pharmaceuticals is tapping into an expanding field of medical research gaining ownership of the first and only cannabis product that is FDA-approved, as well as the intellectual rights to several cannabis-based drugs in development. Both companies have a strong presence in the UK and are expected to be able to achieve substantial synergy effects in regards to both R&D as well as commercial distribution. Though the deal has many potential upsides, the high-debt level of the combined entity and the uncertainty relating to the legalization of cannabinoid pharmaceutical products, are clear, but manageable, risks with the transaction.
"We are joining two teams that share a passion for, and track record of, developing differentiated therapies that advance science and transform the lives of patients. This will help facilitate a successful integration and bring added capabilities to Jazz.” - Bruce Cozadd, Chairman and CEO of Jazz Pharmaceuticals
Company Details: (Acquirer - Jazz Pharmaceuticals)
Jazz Pharmaceuticals Public Limited Company is a specialty biopharmaceutical company focused on research on, and the development and commercialization of innovative products to address unmet medical needs. The Company has a diverse portfolio of products in the areas of narcolepsy, oncology, pain and psychiatry, to treat people with serious diseases—often with limited or no options.
Founded in 2003, headquartered in Dublin, Ireland
CEO: Bruce C. Cozadd
Number of employees: 1,700 +
Market Cap: $9,731B (as of 17/02/2021)
EV: $9.66B
LTM Revenue: $2.28
LTM EBITDA: $1B
LTM EV/Revenue: x4.24
LTM EV/EBITDA: x9.65
Company Details: (Target - GW Pharmaceuticals)
GW Pharmaceuticals became known for the first natural cannabis plant derivative to supplement multiple sclerosis treatment that gained market approval. The company has since focused on research and development of the therapeutic potential of cannabinoids, which the company claims “can bring valuable treatments to seriously ill patients”.
Founded in 1998, headquartered in Cambridge, England
CEO: Justin Gover
Number of employees: 901
Market Cap: $6,581bn (as of 20/02/2021)
EV: $6,25bn
LTM Revenue: $627m
LTM EBITDA: $-39m
LTM EV/Revenue: x9,97
LTM EV/EBITDA: x(-160)
Projections and Assumptions
Short-term consequences
The two companies are global leaders in complementary assets, Jazz Pharmaceuticals focusing on sleep disorders and oncology whilst GW Pharmaceuticals is a leader within Cannabinoid Science. The transaction brings together two companies with a significant presence in the UK, an operation expected to remain important for the combined enterprise. GW is owning one of the only two pharmaceutical cannabis products which are licensed in the country.
Adding GW Pharmaceuticals to Jazz Pharmaceuticals’ current operations will add on highly specialized manufacturing expertise with over two decades of experience in cannabinoid science. Together the two companies can use their complementary expertise across neuroscience and oncology in order to further address unmet patient needs within sleep disorders, oncology and epilepsies. Furthermore, the companies will be able to leverage their global infrastructure. GW will be able to augment Jazz’s growing EU neuroscience footprint. The combined company can thus create synergies by leveraging upon their existing R&D and commercial capabilities.
Currently, the combined company has 19 clinical development programs across neuroscience and oncology which implies huge potential upsides for the combined company if successful. However, in the combined company there will be more projects demanding expertise and commercial budgets, potentially creating problems for management in dividing resources between projects. On one side the company is more diversified than before, but in the meantime the broader focus reduces the special focus and might lead to inefficient resource allocation.
Long-term Upsides
The acquisition of GW constitutes part of Jazz’ long-term mission to invest in assets to expand its innovative neuroscience and oncology pipelines. As Bruce Cozadd said, chairman and CEO of Jazz Pharmaceuticals, the combination of GW's industry-leading cannabinoid platform and innovative pipeline, will add to a strengthened neuroscience portfolio of the merged firms, further diversifying revenue and in turn driving “sustainable, long-term value creation opportunities”. Additionally, the transaction has great prospects given that Cannabis stocks are the latest to experience the short lived high provided by Reddit exposure. According to Vanda Research, retail investors have poured more than $440m into cannabis stocks since the start of February, double the entire previous month. Although it seems as if investors move into one asset category and out of another extremely quickly, the positively-growing political climate towards the use of cannabis-based medicines provides true potential for long-term upsides for this transaction. Interest in this area is rapidly growing, prompted by some quite dramatic international developments in the ways in which some countries and jurisdictions are now regulating this substance. Whilst North America was the first region to introduce the medical use of cannabis, this operation has now been extended and approval is now given more rapidly. The future of the combined enterprises will certainly benefit from the potential for more rigorous testing, resulting in extended clinical research to establish the safety and efficacy of using cannabinoids or cannabis-based pharmaceuticals.
Risks and Uncertainties
Undoubtedly, the transaction has clear potential upsides for both companies, though it also entails some risks that should not be neglected. For instance, the valuation of GM Pharmaceuticals is partly driven by the assumption that legalization of cannabis for medical purposes will continue across the globe, with the current market size not being able to justify the price tag of GW. Any major disturbance in these legalization efforts, e.g. caused by a shift in public perception, would reduce the potential upsides of the deal. Furthermore, to finance the deal Jazz has increased its debt-level substantially, almost tripling its debt-levels compared to the end of 2020. Following the acquisition, Jazz will have approximately $6 billion in debt, which can be compared to its current market capitalization of $8.5 billion. However, it should be noted that the company is planning to de-lever rapidly, with the expected net leverage being less than 3.5x EBITDA by the end of next year. This is planned to be delivered upon through Jazz’s solid cash flows, meaning that any substantial disruption to the company’s core business in the coming years may put the pharmaceutical company in a difficult financial situation. With that said, the risk of such an outcome playing out in practice seems to be fairly limited at the moment.
Despite these potential downsides, Jazz’s acquisition of GM Pharmaceuticals looks to be a robust deal with a win-win outcome for both parties.
"We have a shared vision of developing and commercializing innovative medicines that address significant unmet needs in neuroscience and an approach of putting patients first. Together, we will have an opportunity to reach and impact more patients through a broader portfolio of neuroscience-focused therapies than ever before." - said Justin Gover, CEO of GW Pharmaceuticals