Can blood therapy bear one less firm? Talecris, Grifols on brink of merger

Talecris Biotherapeutics shareholders will spend Valentine’s Day voting whether to approve the $3.4 billion offer from Spanish company Grifols to buy the company. But the merger faces a more important test. The Federal Trade Commission could still block the deal on antitrust grounds as it did two years ago when CSL Limited tried to buy Research Triangle Park-based Talecris.

On a day when lovers and spouses profess their love, Talecris Biotherapeutics shareholders will vote whether to bless the $3.4 billion marriage of their company to Spanish suitor Grifols.

Talecris (NASDAQ:TLCR) shareholders are gathering near the company’s headquarters in North Carolina’s Research Triangle Park on Monday, Valentine’s Day. The vote is a formality and should easily win shareholder approval. Shareholders of Barcelona-based Grifols (MCE:GRF) have already given their blessing. What both companies anxiously await is the blessing of the Federal Trade Commission, which is expected to issue a decision about the merger by March.

Talecris has been down this this road before. Australian company CSL Limited (ASX:CSL) courted Talecris in 2008 with a proposed $3.1 billion acquisition. Talecris also knows what its like to be left at the altar. CSL walked away from that deal after the FTC blocked the meger on antitrust grounds. Talecris ultimately received a $75 million breakup fee from CSL. The Grifols marriage proposal also comes with a pre-nup: If this deal doesn’t go through, Grifols will pay Talecris a $100 million breakup fee. But Talecris isn’t looking to collect breakup fees. It’s looking to become a bigger player in the blood therapies market.

Talecris and Grifols develop drugs derived from blood plasma, a process called fractionation. Barcelona-based Grifols is Europe’s biggest maker of blood-plasma products but its $1.3 billion in revenue ranks a distant fourth among such companies worldwide. Baxter International (NYSE:BAX) is the clear market leader, with $12.8 billion in annual sales. CSL is second, with $3.9 billion in sales. Talecris’s annual revenue is about $1.5 billion.

Drugs made from blood are not cheap. Patients using plasma-derived protien therapies can face annual costs of $100,000 or more. There’s a reason these drugs cost so much. They’re hard to develop and expensive to make. That they’re made to treat rare diseases, such as hemophilia or immune system disorders, doesn’t help the pricing; the smaller patient pool means a smaller market for these drugs. These high barriers to entry keep the blood therapies market an exclusive club. In 1990, 13 companies produced plasma-derived products. In 2003, that number was whittled to nine. Now there are five.

Talecris isn’t saying much publicly about the merger. Since the proposed deal was announced last summer, the company has held no conference calls with analysts to discuss its quarterly financial results. For what it’s worth, those results have Talecris reporting $1.19 billion in sales in the nine months ending Sept. 30, a 4.1 percent increase over the same period in 2009. Profits are up too: $152.5 million for the first nine months of 2010, up 2.3 percent year over year.

The FTC is not going to tip its hand about what it thinks of the merger either. But the agency’s 2009 complaint opposing Talecris’ purchase by CSL gives indications about what FTC concerns could trip up Grifols’ proposal.

  • Competition – The number of players in the blood therapies space has only gotten smaller. CSL’s acqusition of Talecris would have taken that small market down to four players. The two smallest players, Grifols and Swiss company Octapharma, the FTC deems too small to mount serious competition to the top two. The barriers to entry to the blood therapies market are too high for new entrants to fill the gap.
  • Price – The FTC argued that players in the blood therapies space act in concert to keep prices and profits high. The agency said the companies “operate as a tight oligopolgy, with a high level of information sharing and interdependence among firms.” Even so, the FTC said Talecris acts as a counterweight to the top companies. Acquisition by CSL would remove that competitive price counterweight.
  • Patients – The high prices that the FTC believed would result from the merger would be borne by patients, who could experience less access to the drugs that they need. The FTC said, “firms in the plasma industry have used consolidation as a tool to eliminate excess capacity and reduce supply, rather than to produce benefits for consumers.”

Grifols is not CSL and here’s why the deal should win approval. A Grifols merger with Talecris would create a different company serving a different market than what would result from a marriage to CSL. While the proposed combination of number two CSL with number three Talecris would have created a duopoly, the marriage of number three Talecris with number four Grifols still keeps three players large in the market, it just means number three gets a little bigger.

Patients could conceivably benefit by getting better access to drugs. The merger gives Grifols a bigger presence in North America, where it is not as strong. Talecris gets the opportunity to build worldwide sales through Grifols’ footprint. Octapharma will be a distant fourth player in the space. The oligopoly as described by the FTC may continue. But with three main players serving the blood therapies market, the FTC’s desire for a competitive counterweight to CSL and Baxter is addressed. And that counterweight is the best way to keep pricing competitive for the patients who need these drugs.

Talecris might have to give up something to get the FTC’s blessing. The commission might require the company sell off some assets, perhaps its manufacturing facility in Melville, N.Y. But the outcome of a Grifols/Talecris union will keep the market more competitive than would a CSL acquisition of Talecris.

It’s now in the FTC’s hands whether a year from now, Talecris and Grifols spend Valentine’s Day looking forward to their first anniversary together or Talecris instead looks at what might have been, flush with a $100 million breakup fee paid by yet another jilted suitor.