Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Teva to buy Allergan generic drug business for $40.5 billion, drops Mylan bid

Published 27/07/2015, 17:06
© Reuters. A sign bearing the logo of Teva is seen in Jerusalem
TEVA
-
AMGN
-
AGN
-
LCO
-
VTRS
-
PRGO
-

By Tova Cohen and Steven Scheer

TEL AVIV (Reuters) - Teva Pharmaceutical (ARCA:TEVA) Industries (TA:TEVA) has agreed to buy Allergan Plc's (N:AGN) generic drugs business for $40.5 billion (£26 billion) in a cash and stock deal that will turn the Israeli company into one of the world's largest pharmaceutical firms.

The deal, the largest in Israel's corporate history, prompted Teva to drop its $40 billion hostile bid for Mylan (O:MYL), which used a poison pill-style defence to fight the takeover.

It also will allow Dublin-based Allergan, which combined with generics maker Actavis earlier this year in a $66 billion deal, to focus on branded drugs and pay down its debt.

"Allergan's business is more high-end (than Mylan). It's a more interesting business ... a profitable business and it's well managed," said Gilad Alper, an analyst at brokerage Excellence Nessuah, noting a "friendly deal" is preferable to a hostile one.

Allergan is the third-largest generic drugmaker in the United States and is seen as a better fit than Mylan because it will improve Teva's distribution channels, access to profitable injectable drugs, and provide a presence in India.

Pressure has been growing on Teva, already the world's biggest generic drugmaker, to find new revenue sources to combat the start of competition this year for its multiple sclerosis drug Copaxone. Copaxone accounts for about half of Teva's profit.

Allergan CEO Brent Saunders, who led Actavis' purchase of Forest Laboratories and then Allergan, said the sale will result in net proceeds of $36 billion that the company will use to accelerate growth of its branded business.

The acquisition is the latest in an unprecedented wave of healthcare deals since the start of 2014, stretching from large drugmakers buying up smaller rivals, to consolidation among makers of generic medicines, and tie-ups between insurers.

Global healthcare M&A reached $398.5 billion as of July 23, up 80 percent on a year ago, according to Thomson Reuters data.

HIGHLY COMPETITIVE

Economies of scale are particularly important in generics, given the relatively low margins involved and the highly competitive market.

Teva shares, which had been weighed down by the Mylan uncertainty, were up 8.5 percent in New York trading. Allergan shares were up 7.5 percent and Mylan shares slid 14 percent.

"There is only one entity that would stand to lose (from Teva-Allergan), which is Mylan," said Cowen and Co analyst Ken Cacciatore, who believes Teva's shares will reach $100.

Mylan said it would continue its acquisition of Perrigo (N:PRGO), whose shares were up 4.9 percent. Mylan Executive Chairman Robert Coury repeatedly rejected Teva's offer, saying the combination of Teva and Mylan was "without sound industrial logic or cultural fit."

Teva said that the company had identified asset sales needed for the deal to pass muster with antitrust regulators in the United States and the United Kingdom. It declined to identify the assets, but said they were fewer than had been anticipated in a combination with Mylan.

Teva said during its conference call Monday that it had approached Allergan a year ago but that it had not been interested. It then went after Mylan, that failed, and it went back to Allergan about 2-1/2 weeks ago.

In June 2014, just a few months after joining the company, Vigodman hired Sigurdur Olafsson, former head of Actavis's generic drug business, to fill a similar role at Teva.

"My sense always was that Mylan was Teva's Plan B," said Benny Landa, an industrialist who led an investor bid last year to shake up Teva's board, calling the deal "brilliant".

Teva will pay $33.75 billion in cash and $6.75 billion in shares, representing a 10 percent stake in the Israel-based company, Teva said in a statement. The deal is expected to close in the first quarter of 2016.

CULTURAL FIT

Vigodman said the combined companies will have proforma revenue of $26 billion and earnings before interest, tax, depreciation and amortisation of $9.5 billion in 2016.

"Our respective portfolios of generic medicines and applications are highly complementary," he said. "This acquisition reinforces our strategy, accelerates growth and diversifies revenues both by product and geographically, supporting our new business model."

Teva, which will gain a portfolio of more than 1,000 products, forecast a double-digit boost to adjusted earnings per share in 2016 and a more than 20 percent benefit in years two and three after closing the deal.

It expects cost synergies and tax savings of $1.4 billion annually by the third anniversary from efficiencies in operations, manufacturing, and sales and marketing.

It also expects the acquisition to generate free cash flow of $6.5 billion in 2016 and increased free cash flow in subsequent years. This means it will be able to pursue acquisitions to expand its portfolio in both speciality pharmaceuticals and generics.

© Reuters. A sign bearing the logo of Teva is seen in Jerusalem

In preliminary second-quarter results, Teva raised its adjusted 2015 earnings per share estimate to $5.15-$5.40 from $5.05-$5.35.

(additional reporting by Caroline Humer in New York; Editing by David Clarke, David Holmes and Nick Zieminski)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.