LONDON/MUMBAI Indian generics firm Lupin (LUPN.NS), some U.S. drugmakers looking for a tax-saving deal in Europe and private equity funds are planning to bid for a range of older drugs being auctioned by GlaxoSmithKline (GSK) (GSK.L), five sources familiar with the matter said.
GSK is looking to divest the mature products in a bid to improve its growth profile and wants to dispose of off-patent drugs marketed in North America and western Europe with annual sales of around 1 billion pounds ($1.7 billion).
Assuming a multiple of between two and three times those sales, the assets on the block could fetch between $3.5 billion and $5.0 billion, the sources said.
Chief Executive Andrew Witty said in April GSK was reviewing its portfolio of mature drugs, known as established products, and in May the group invited sector players and private equity firms to consider bidding.
Non-binding offers are expected before the end of the month, according to several sources who asked not to be named because the talks are private. GSK brands up for sale include antidepressant Paxil, migraine treatment Imitrex, Zantac for stomach acid and Zofran for nausea.
Officials at GSK, which is being advised on the auction by Lazard (LAZ.N), declined to comment. Britain's largest drugmaker will report second-quarter results on Wednesday.
One person with direct knowledge of the matter said on Tuesday India's Lupin was seriously looking at the GSK assets and was in talks with the British drugmaker.
Lupin Chief Executive Vinita Gupta has said for some months the company wanted to enhance its branded generics business in the United States and a company official confirmed it was looking for deals, while declining comment on specific targets.
"For these billion-dollar companies like GSK, such fringe products add flab. On the other hand, a smallish Indian player can do very focused promotion ... and gain scale with increased penetration," an analyst in Mumbai, who did not want to be named because the talks were not yet public, said. "This has been Lupin's strategy thus far with its U.S. branded business."
The GSK portfolio could also appeal to U.S. specialty pharma firms, which may be able to use the transaction to reduce their tax bill by moving their tax address outside the United States, a practice known as tax inversion.
Mylan (MYL.O) carried out a similar deal last week when it agreed to buy Abbott Laboratories' (ABT.N) branded specialty and generics business in developed markets outside the United States for $5.3 billion, or around 2.7 times sales.
Private equity firms are also looking at the GSK products, although GSK does not plan to sell the factories and sales forces needed to make and market the medicines, which may deter some, the sources said.
That means private equity would have to outsource manufacturing and distribution operations, or team up with an industry player, unless GSK is persuaded to compromise and offer infrastructure for some of the drugs, sources said.
An asset combination with a rival large drugmaker selling the same type of non-core assets, like France's Sanofi (SASY.PA), could also be explored if GSK failed to sell the assets in the current auction, one source said.
Sales of the 50 or so older medicines in GSK's established products portfolio totaled 814 million pounds ($1.4 billion) in the first quarter of 2014, down 11 percent on a year earlier, and revenues are expected to decline further this year due to increased competition from cheaper generic copies.
Furthermore, around half of GSK's established product sales are generated in emerging markets, where GSK is keen to retain its presence, and in Japan, another market where GSK is not selling up.
GSK's decision to carve out some of its low-growth, mature drug portfolio is part of a wider industry trend, with companies including Sanofi and Merck & Co (MRK.N) also looking to shed older drugs that face shrinking sales.
Although GSK's sales of established products are declining, they remain extremely profitable, with first-quarter operating margins at 59.6 percent against 27.3 percent for the group as a whole.
GSK has already disposed of some non-core products. Last September it agreed to sell thrombosis medicines Arixtra and Fraxiparine to South Africa's Aspen Pharmacare (APNJ.J) for 700 million pounds, or around two times annual sales.
Witty is also pushing ahead with a more radical reshaping of his company's business, after agreeing a $20 billion asset swap in April with Novartis NOVN.VX that will involve the two firms shoring up their best businesses and exiting weaker areas.
(Additional reporting by Ben Hirschler and Freya Berry in London, with Olivia Oran and Soyoung Kim in New York; Editing by David Holmes)