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

27 Jul 2015 | Author: | No comments yet »

Allergan May Turn Sights to Amgen or AbbVie With Teva Cash.

The deal with Teva Pharmaceutical Industries “gives us a tremendous amount of flexibility to think about transformational M&A as well as continue our pattern of tuck-in acquisitions,” Allergan Chief Executive Officer Brent Saunders said on a conference call Monday.

Allergan, a Dublin-based global pharmaceutical company, will acquire Evanston-based biopharmaceutical company Naurex for $560 million, the companies said. Naurex, which is developing a fast-acting molecule to treat major depressive disorder among other compounds to treat central nervous system disorders, raised an $80 million Series C round in early December to continue clinical development of its drugs. But agreeing to buy Allergan AGN 6.82 % ’s generics unit manages this for Teva, the Israeli company that had been chasing a similarly-sized purchase of rival Mylan. The transaction takes this year’s total of announced pharmaceutical and biotech deals to a record $220.72 billion, surpassing last year’s $220.66 billion, according to data compiled by Bloomberg.

The company’s lead molecule, GLYX-13, was on track to enter its final testing phase in 2015 and would be administered intravenously and alleviate symptoms of depression within hours, Naurex CEO Norbert Riedel told Blue Sky in December. It avoids a protracted and potentially fruitless legal battle in its hostile pursuit of Mylan and delivers consolidation in generics through what appears to be a better deal. The Teva transaction lets Allergan pay off debt from its $66 billion combination with Actavis, allowing it to build its brand-name medicine business with small deals or to pursue larger acquisitions such as Amgen Inc. or AbbVie, said Ken Cacciatore, an analyst with Cowen & Co. in New York. “If either transaction was pursued by Allergan, it would be well received by both sets of shareholders if the proper vision was articulated and a friendly agreement could be reached,” Cacciatore wrote in a report. Another Naurex molecule in development, NRX-1074, would potentially be a “first-line therapy” for newly diagnosed patients, the company said in December. “This is not a single-trick pony,” Riedel said at the time. “It’s a pipeline of molecules that all work in the same mechanism of modulating the NMDA reception and thereby makes for one of the strongest pipelines in the country — and probably globally.”

It will also help Teva compete in a consolidating market: 90% of the purchasing power in U.S. generics is controlled by five big buyers, noted Allergan on Monday. Even though the deal doesn’t include Allergan’s biosimilar operations, the purchase still boosts Teva’s presence in more complex generics like injectable medicines. Allergan’s generics business should have a margin of earnings before interest, tax, depreciation and amortization of about 38% next year, according to Teva. However, the synergies are more plausible, since Teva’s head of generics used to run the same business at Actavis, which took over Allergan in 2014 and kept its name. Valeant Pharmaceuticals Inc., which lost out to Actavis, may be interested in acquiring Allergan’s remaining branded-drug business, Finkelstein said. “We have really positioned ourselves to be focused, reloaded and ready to move,” Saunders said. “Our main focus is going to be on accretive bolt-on and accretive transformational deals.”

What’s more, the deal comes just four months after Allergan, then known as Actavis, assumed more than $20 billion in debt to purchase the branded-drug business that was Allergan. And, while the expected increase in earnings looks lower than the original Mylan bid, Teva could have been forced to pay more, and the deal might have dragged on well into 2016. The company referred to its balance sheet as “reloaded,” and said the deal “accelerates” the possibility of “transformative” mergers and acquisitions. With its large incoming cash pile and advantageous tax rate of 15%, Allergan is in position to swallow some major companies if it chooses, particularly those developing higher-margin branded drugs. Second quarter earnings, announced on Monday, were better than expected and the company raised its full-year guidance, a welcome reversal of recent form.

It will not address its problems in its brand-name drugs business, a lack of scale, and the expiration of patents for its biggest drug, its multiple sclerosis treatment Copaxone. For Allergan investors, this is a reminder the company is now most definitely following the hyper-acquisitive strategy of Actavis, which bought Allergan this year and assumed its name. Bull markets come and go, and borrowing money to finance big acquisitions can turn sour in a hurry if underlying economic conditions take a turn for the worse. Certainly, Allergan investors previously have gained from its deal-making ways-the company’s market value has grown more than 25-fold in the last five years to about $130 billion.

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