Merger Mania: Teva May Snap Up Allergan’s Generics Arm

26 Jul 2015 | Author: | No comments yet »

Analysts prefer Allergan deal over Mylan for Teva.

Israeli drugmaker Teva Pharmaceuticals Industries Ltd. is in advanced talks to buy the generic-drug business of Allergan Plc for $40 billion to $45 billion, according to two people familiar with the matter.The market would likely reward Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), and its investors will be far more pleased if the pharmaceutical giant follows through on the potential acquisition of Allergan’s generics unit for $40-45 billion as reported earlier by the “Wall Street Journal” than on the difficult deal with Mylan, according to analysts who spoke to “Globes”.

A successful deal with Allergan would give Teva, which has a market capitalization of $60 billion, a much bigger footprint in the generic drugs sector. Bank of Jerusalem analyst Jonathan Kreizman explained the logic behind Teva’s potential purchase: “This is exactly the same logic behind the Mylan acquisition and it touches on the trend wherein generic firms like Teva execute mergers as a counterweight to a drop in market share. “The market share for generics has decreased significantly in recent years, from 43% in 2009 to 35% in 2013. The consolidation is intended to provide both a counterbalance and a better bargaining position with their customers. “From what we know, Allergan’s generics operation suits Teva better than Mylan’s. At the start of the year, when Teva spoke about the need for consolidation, it noted that any merger between the four leading companies could lead to savings of $2 billion a year. A deal could be announced as early as next week, the person said, cautioning that negotiations had not yet been completed and asking not to be identified because the discussions are confidential.

It was referring to itself, Sandoz, Actavis, and Mylan. “Actavis (now called Allergan after its merger with Watson Pharmaceuticals) was not for sale until six months ago; something happened there which helped bring about the right conditions.” Steven Tepper, a senior analyst at Migdal Capital Markets, also agreed that Teva’s logic in pursuing Allergan was identical to its potential purchase of Mylan: “The idea is to assure Teva continues to be the number one generics firm in the world, particularly in the US. The timing may be right for Allergan to consider a sale of its generics business, said Elizabeth Krutoholow, an analyst at Bloomberg Intelligence in New York. “They may be able to command a significant premium given the recent interest in the sector,” Krutoholow said in an e-mail on Saturday before the talks were disclosed. Large drug makers are trying to realign their operations to focus on a small number of leading businesses, while smaller specialty and generic producers are seeking larger scale. With profit margins on branded products as much as 80 percent, compared with about 50 percent for generics, Allergan Chief Executive Officer Brent Saunders may favor focusing growth on premium drugs.

Among other things the company makes the blockbuster wrinkle treatment Botox. “With Saunders in charge, the company may lean more” to branded drugs “since that is his area of expertise,” Krutoholow said. “It’s a more attractive growth area for the company.” In that vein, Allergan said Sunday it would buy the biotech company Naurex Inc., which is developing a fast-acting antidepressant. Kreizman estimates the synergy to decrease costs by 2 billion dollars per year, similar to the figure discussed during the ‘pursuit’ of Teva after Mylan. The $560 million all-cash transaction is expected to close by year-end. “We expect Naurex will enhance Allergan’s mental health portfolio and build on our strategy to lead in this important therapeutic area,” Saunders said in a statement.

Kreizman added that “Allergan is a firm that is not in direct competition with Teva with its leading products, as opposed to Mylan which is battling Teva on several fronts, like the generic version of Copaxone, which Mylan is trying to launch… it must be noted that here Teva is entering a friendly not hostile merger. It is a unit with a relatively good profit margin; non-GAAP profit was around $2.1 billion annually.” Kreizman: “If the merger with Allergan is sealed, Teva will need to get rid of its Mylan stock. Actavis Plc agreed to buy Allergan for $66 billion in November 2014, after spending months locked in bitter conflict with Valeant Pharmaceuticals International Inc., a rival drugmaker that had started a hostile takeover effort that year. Teva’s bid for Mylan took a hit earlier this week when the latter’s independent Dutch foundation exercised a call option allowing it to buy 50% of Mylan’s total issued and outstanding capital, giving it temporary control of half the company.

The foundation, known as Stichting, opposes Teva’s bid, arguing that a Teva takeover would likely lead to job losses at Mylan and reduce access to cheap generic medicines in emerging markets. According to Tepper, Teva’s aggressive conduct with Mylan may have convinced Allergan executives to consider placing its generics unit on the market: “It is possible that Teva’s very aggressive courtship of Mylan led Allergan to realize that here was a giant company which badly wanted a big generics outfit like theirs.” Tepper added: “It’s not that one day Vigodman said let’s call Allergan’s CEO and close a deal.

There is no other alternative right now, and Teva wants to do this now; interest rates are very low and you can take on cheap debt.” Tepper: “I think this is a positive story, whatever happens.

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