Actavis, Valuation and Fairness Opinions

Transcription

1 Actavis, Valuation and Fairness Opinions Adopting the Rule of Reason Approach to Evaluate Brand/Generic Agreements Through Valuation and Fairness Opinions February 2015

2 FTC Reverse Payment Settlement Statistics Final Settlements Final Settlements Involving First Filers Potential Pay-for-Delay Potential Pay-for-Delay Involving First Filers Source: FTC FY 2013 Report on Branded Drug Firms Patent Settlements with Generic Competitors 2

3 Fairness Opinions A fairness opinion often takes the form of a letter prepared by an experienced appraiser, which states whether or not a transaction is fair from a financial point of view to a represented party as of a specific date and given a set of assumptions. 3

4 Typical Use Users of fairness opinions are primary decision makers responsible for recommending what is in the best interests of the represented party. Fairness opinions provide the judgment of an independent professional to assist in making a reasonable, economically fair business decision for the represented party. Fairness opinions do not address fairness from a legal point of view or recommend that the transaction be executed. 4

5 Reported WW Use of Fairness Opinions 1,200 1, to # of US Deals # of Non-US Deals Source: Thomson Reuters - Financial Advisors, Mergers & Acquisitions Review 5

6 WW Fairness Opinion Transaction Value $1,000,000 $900,000 $800,000 $700, to 2014 (Millions) $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ US Deals Total Value Non-US Deals Total Value Source: Thomson Reuters - Financial Advisors, Mergers & Acquisitions Review 6

7 Use by Corporate Boards Of Directors Never Infrequently Occasionally Frequently Material consideration paid by controlling party f or services in a private entity 26.8% 25.0% 33.9% 14.3% Consideration received by holders of differing classes of stock 19.6% 14.3% 35.7% 30.4% Material consideration paid by controlling party f or services in a public entity 21.4% 21.4% 30.4% 26.8% Transfer of assets between multi -party owned private entities managed by related party 17.9% 17.9% 30.4% 33.9% Transfer of assets between public entities managed by related party 21.4% 12.5% 33.9% 32.1% Sale or merger of assets or equity (sell -side opinion) 12.7% 16.4% 29.1% 41.8% Acquisition of assets or equity (buy -side opinion) 10.9% 20.0% 36.4% 32.7% Source: FTI Capital Advisors 2014 Survey 7

8 Fairness Opinions Appraisal Basics Market Approach The Market Approach values assets based on comparable transactions between unrelated parties. Income Approach The Income Approach provides a systematic framework for estimating an asset s price based on the value of the benefits derived from the use of that asset. Cost Approach The cost approach values assets based on the cost to create and develop the assets. 8

9 Fairness Opinions in Pharma Deals Courts have discussed the need to establish the value of non-monetary terms contained in the settlement. Evidence of a fair value exchange can explain a potential reverse payment settlement, and show that any payment is not for a delay. Established principles used in valuations and fairness opinions can help answer these difficult questions regarding reverse payment settlements. 9

10 Pharma Fair Value Assessment Valuation of any non-monetary consideration: Distribution rights, supply and marketing agreements, settlement of separate litigation, etc. Assessment of the relationship between monetary and non-monetary consideration Comparison of monetary consideration to expected litigation costs Assessment of the relevant market, the parties market power, industry licensing norms, and comparable transactions 10

11 Pharmaceutical X Case Study Generic first-filer agrees: That Brand s X patent is valid and infringed To refrain from selling a Generic version of X, until 1 year before the patent expires To assist Brand in marketing and detailing X until Generic s entry To manufacture and supply X to Brand until patent expires Brand agrees: To pay $50M to Generic To permit Generic to begin selling a Generic version of X, 1 year before the patent expires To pay Generic 1% above fully loaded cost of supplied X purchased from Generic To dismiss the appeal in an unrelated patent case 11

12 Pharmaceutical X Case At First Glance Brand paid $50M and Generic agreed not to enter the market for several years. Must be Pay-for-Delay Or is it? 12

13 Pharmaceutical X Case Calculation of Value $50 M Cash Marketing Agreement Supply Agreement + Dismissal of Litigation Payment for Delay 13

14 Pharmaceutical X Case Calculation of Value Consideration Cash Marketing Agreement Supply Agreement + Dismissal of Litigation Payment for Delay Low Value $50M $27M $20M + $1 $4M High Value $50M $25M $18M + $1 $8M 14

15 Likelihood of Anticompetitive Effects Potential payment for delay: $4M to $8M Scale in relation to litigation costs: $5M to $10M of avoided litigation costs per party The similarity of the potential payment for delay and the avoided litigation costs indicates that the remaining payment is intended to save litigation costs and comports with typical settlement considerations Payment in relation to other services exchanged: The majority of value exchanged by the parties was for the other agreements and services in the settlement 15

16 Likelihood of Inducing Later Generic Entry Potential payment for delay: $4M to $8M Profits expected by Generic had it prevailed in suit: Generic expected to generate $25M in profit if it had launched the generic prior to the expiration of patent X Payment compared to potential profits: Comparing the size of the potential payment for delay to the Generic s expected profits indicates that the payment did not induce Generic to accept a later entry date 16

17 Potential Fair Value Assessment Opinion Most or all of the payment from Brand to Generic is explained by factors other than payment for delay. Settlement was primarily accounted for by the exchange of other valuable consideration and avoidance of continued and costly litigation. Fair value was exchanged by Brand and Generic. 17

18 When Might An Opinion Be Considered? Hatch-Waxman to Settlement Antitrust Litigation CRAFTING THE DEAL Advise on deal terms that will meet scrutiny and satisfy fair value assessment Support the final settlement with a fair value assessment DEFENDING THE DEAL Opine on the fair value of various elements of deal consideration Opine on the economic feasibility of an at-risk-launch 18

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