VVUS: ZenPep Deal Demonstrates PERT Interest

By John Vandermosten, CFA


On January 27th, Nestlé announced its planned purchase of pancrelipase brands ZenPep and Viokace from Allergan for an undisclosed sum. The drugs are designated pancreatic enzyme replacement therapy (PERT) for patients with insufficient digestive enzymes to breakdown fats and other nutrients. The primary conditions that benefit from PERT include cystic fibrosis, chronic pancreatitis, pancreatic cancer, pancreatectomy and diabetes mellitus.

The deal will close concurrent with the completion of the AbbVie and Allergan merger. This transaction along with other divestitures was required as a condition of AbbVie’s bid to acquire Allergan for $63 billion. The pancrelipase space is made up of several brands including Creon, Zenpep, Pancreaze, Pertzye, Ultresa and Viokace, with the first two dominating the category. Sales for the top three products in 2019 are estimated to be about $1.3 billion with AbbVie’s Creon dominating the space. While the price paid for Allergan’s pancrelipase asset was not disclosed, we have heard estimates of $1 to $1.2 billion.

Margins for the asset are thought to be high with EBITDA making up about three quarters of revenues. ZenPep 2019 revenues according to Evaluate Pharma are forecast to be $273 million, which implies EBITDA of ~$200 million and a valuation of ~6x EBITDA and accretive based on Nestlé’s valuation.

Nestlé has dabbled in the drug and diagnostic space and previously owned Prometheus, an inflammatory bowel disease company which it bought it in 2011. The company had focused on Crohn’s disease and ulcerative colitis from a diagnostic standpoint. It was initially seen as a platform for future growth into the healthcare business; however, in July 2019, Nestlé sold the asset to Precision IBD. After the sale, Nestlé maintained the point-of-care diagnostic business and now it appears that the venture into digestive therapies via ZenPep will replace the previous focus on GI diagnostics.

We surmise that Nestlé’s strategy for this acquisition is to add a complementary brand to the current portfolio of nutrition products that support food ingestion, digestion and absorption. Current Nestlé products focus on health nutrition, such as Peptamin, Resource and Nutren Junior all of which are supplementary nutrition options for those with EPI.

Nestlé is not a pharmaceutical buyer and will likely have a different approach to commercialization, leveraging its own consumer staples logistics with the help of the dedicated ZenPep sales team that is expected to transfer with the asset.

Pancrelipase Revenues 2012 (Act.) – 2024 (Est.)1

We see the transaction as helpful for understanding valuations for Vivus’ (NASDAQ:VVUS) Pancreaze and other assets with exposure to the exocrine pancreatic insufficiency (EPI) market. The demand for the asset is also a positive as it confirms broad interest in the space. There is a favorable tailwind for pancrelipase as cystic fibrosis patients are living longer and the product is expanding into other areas where the pancreas produces insufficient digestive enzymes.

Vivus explored bidding for the asset; however, FTC concerns prevented its success. While a new buyer of a pancrelipase asset may increase competitive worries, we think there is less concern of this from Nestlé given their approach from the nutrition direction. Head to head completion is not expected. Nestlé has a global reach and knows its nutrition customer, which gives them the opportunity to expand the geography and penetration of ZenPep from a different trajectory from the pharmaceutical players.

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1. Source: Evaluate Pharma ®, accessed January 2020, Evaluate Ltd.