November 26, 2013 1:07 pm

Bayer / Algeta: the piper pays

German healthcare group may have to pay more to acquire its Norwegian target

In German, a $2.4bn takeover offer means: “We intend to buy you. Please sign here.” In Norwegian, it means: “Let’s talk price.” That is where Bayer and Algeta found themselves on Tuesday. The German healthcare group has made a preliminary offer to buy one of Norway’s finest to gain control of Xofigo, a prostate cancer treatment that was approved for use in the US and Europe this year. But Bayer will have to dig a little deeper: investors sent Algeta’s shares 3 per cent above its opening gambit.

Bayer is a buyer, looking to bulk up in its two core divisions – crop sciences and pharmaceuticals and healthcare. It began co-operating with Algeta on Xofigo in 2009; it was always likely to seek full control. The offer is NKr336 for each Algeta share, a 27 per cent premium to the undisturbed price. In assessing its next move, Bayer must weigh the upfront cost of buying Algeta against the long term returns it expects to get from Xofigo.

Sales are currently minimal – just $17m in the US in the third quarter, according to Bayer. By pouncing now, Bayer may be signalling that sales are running ahead of estimates; analysts say peak sales of Xofigo could be $1.7bn in 2018. Bayer and Algeta currently split profits 50/50 in the US and Bayer pays royalties elsewhere, currently 15 per cent. Removing the profit split in the US, the market with the highest profit margins, must be an attraction for Bayer. But the takeover premium looks low, especially in the white-hot cancer space. Amgen’s acquisition of Onyx Pharmaceuticals this year was done at closer to 50 per cent.

Bayer has a good record on acquisitions – it dropped an offer for Schiff Nutrition last year to avoid a bidding war. Moreover, Algeta offers no synergies and a counterbid is unlikely. The secret to doing the deal is for Bayer to get what it wants at the price it wants while leaving everybody else wanting more.

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