GTCR Swallows Pharmaceutical Co. –

GTCR Golder Rauner continued its spree in the healthcare sector, acquiring Morton Grove Pharmaceuticals from William Blair Capital Partners for slightly less than $200 million. The acquisition closed Jan. 31.

The deal gives GTCR a fully integrated generic and specialty pharmaceutical company with a focus on oral liquid and topical liquid prescription drugs. Morton Grove owns, manufactures and markets over 120 drug products and posted top line growth of around 35% annually, according to GTCR Principal Ned Jannotta. The company also takes in about $75 million in revenues annually.

William Blair Capital and pharmaceutical veteran Brian Tambi originally teamed up to acquire Morton Grove at the end of 1995, and subsequently named Tambi as chairman and CEO of the company. In 2000, Allied Capital contributed an investment of $15 million of subordinated debt and $5 million of preferred stock.

GTCR, meanwhile, also partnered with Tambi for the deal. Both GTCR and Tambi contributed to the equity investment, while Harris Bank, Merrill Lynch and Wells Fargo supplied the senior debt. Midwest Mezzanine chipped in with some junior debt and GTCR also tapped its own mezzanine fund to round out the financing. There was a roughly one-to-one debt-to-equity ratio.

In targeting this deal, Jannotta cited Morton Grove’s “consistent revenues and profitability, excellent management team, and solid growth opportunities,” as the main draws. GTCR believes it will see continued growth from the company, “in the 25% to 30% range,” going forward, he added.

“The biggest trend in the sector right now is that there is a substantial volume of pharmaceutical drugs that will come off patents in the next three to five years particularly in the liquid drug segments,” Jannotta said. He added that Morton Grove will also pursue strategic acquisitions in order to help accelerate its growth.

A new trend?

PricewaterhouseCoopers, in its annual study of M&A in the pharmaceutical industry, said in its outlook for 2003 that “strategically the drivers for M&A in the pharmaceutical and biotechnology sectors remain as compelling as ever.” The report added, “2002 was a year of dramatic falls in company valuations (with public company values typically falling faster than private company values), which made it difficult to align acquirer and vendor perceptions of value.” PwC now believes that “much of this valuation mismatch has now been corrected, making it easier to do deals.”

GTCR’s recent activity would seem to support this. The firm has been very active in the healthcare space lately. In December, GTCR portfolio company Trans Healthcare agreed to acquire Integrated Health Services, and the firm is also fresh off a couple of profitable investments in space, with its exits of Dynacare and American Medical Laboratories, both occurring in 2002 – and both “very successful,” according to Jannotta. The firm focuses specifically on healthcare provider organizations and business-to-business service companies, and also counts American Medical Labs and CuraScript among its other healthcare investments.

GTCR used its $2 billion GTCR Fund VII for the acquisition, which Jannotta said will be one of the last deals from that fund. The firm less than three months ago began fund-raising for its eighth fund, also targeting $2 billion, and Jannotta expects that fund to close in the next 60 days.