GTCR Wins Buyouts Deal of The Year Award! Excerpt from: Buyouts Magazine 2010 Deal of The Year Yearbook

It took years of painstaking acquisitions, and a side trip to a goat farm, for GTCR Golder Rauner LLC to make Ovation Pharmaceuticals into the specialized drug powerhouse that the firm’s partners envisioned.

“We try to bring a lot of expertise and develop a lot of insight into the limited number of industries we follow,” said Constantine S. “Dean” Mihas, a principal in the firm. GTCR also looks for strong management to work with, and opportunities for both organic growth and acquisitions, Mihas said. “Ovation fit that management strategy, that management philosophy, very nicely.”

Health care is one of three focus areas for GTCR, founded in 1980, along with financial services and information technology. To build Ovation Pharmaceuticals, the firm partnered with Wilbur Gantz, a former president of Baxter International Inc. and the chairman and CEO of PathoGenesis Corp., a company he founded, built and successfully sold; and Jeff Aronin, who had been CEO of two successful venture-backed health care companies.

In 2002 the investors took their first steps to build Ovation Pharmaceuticals, acquiring the U.S. rights to drugs to treat ADHD and anxiety disorders. The company added more drugs to Ovation Pharmaceuticals’s development portfolio through a series of eight deals over the course of the next four years, concentrating primarily on specialized products for use in the disciplines of neurology and oncology.

The trick was to find assets that were small and underappreciated by big pharma companies, where Ovation Pharmaceuticals could boost sales by pursuing targeted marketing efforts using smaller sales forces focused on the relatively small universe of medical specialists who would use such drugs. GTCR and Ovation Pharmaceuticals identified target products by scouring specialized databases to get sales of the drugs, prescription counts, and other technical indicators, then approaching sellers, which included Abbott Laboratories, Sanofi and Merck.

The Ovation Pharmaceuticals products typically were selling less than $100 million annually, and often less than $10 million, especially in the company’s early years, Mihas said. “At some point those smaller products don’t really make sense in that larger system.”

GTCR and Ovation Pharmaceuticals proactively approached those pharma companies about selling these products in proprietary deals, Mihas said. “These were not active auctions.”

When it came to acquiring products to market, the question was purely one of execution. “There wasn’t a lot of drama there,” Mihas said. “There are always lots of ups and downs when you’re dealing with the FDA.”

For instance, GTCR and Ovation Pharmaceuticals had to deal with years of delay on a drug called Sabril, acquired in 2004 from Aventis, working through some of the FDA issues. Sabril is used to treat spasms in infants and children and certain seizures in adults.

Product acquisition slowed in 2007 and into 2008, until GTCR and Ovation Pharmaceuticals struck a deal in the summer of 2008 deal for Atryn, a drug to stop blood clots from blocking arteries, from GTC Biotherapeutics, a biotech company in Framingham, Mass. At the time, Atryn had not been approved by the Food and Drug Administration, and the decision required more than the usual due diligence, such as analysis of clinical trial results.

Because Atryn was harvested from genetically modified goats, GTCR and Ovation Pharmaceuticals decided they needed to visit the farm where the animals were raised, to make sure they were taken care of appropriately, said Sean L. Cunningham, a vice president at GTCR. “That was the first time we were diligencing sequestered, protected goats.”

Having earned a return on its investment, Mihas said, “We were about to sell the company, almost at the absolute bottom of the market, the height of the chaos,” when Ovation Pharmaceuticals’s management approached the firm in September to invest in the U.S. commercial rights to a drug called Xenazine, from Prestwick Pharmaceuticals.

The drug, which had been approved by the FDA for the treatment of Huntington’s chorea but not yet launched in the market, had potential sales in the hundreds of millions of dollars, but would require GTCR to put up another $50 million, more than it had invested in the nine previous transactions in total.

Still, the potential of the drug was clear, Mihas said. “It was the only product approved for this fairly devastating condition.”
After buying the rights to market the drug, GTCR received inquiries from several large pharmaceutical companies about buying Ovation Pharmaceuticals, and in December 2008, GTCR hired Goldman Sachs to conduct the sale. The winner, in February 2009, was the Danish pharmaceutical company H. Lundbeck A/S, which agreed to pay $600 million upon closing and another $300 million after the FDA approved Sabril, which occurred a few months later.

“There was a massive transformation of the business over six or seven years,” Mihas said. Cunningham added, “Plain vanilla buyouts didn’t yield a lot last year.”—S.B.