Teva negotiating $7.5 billion buyout of U.S. generic firm

Teva Pharmaceuticals is negotiating the purchase of U.S. generic drugmaker Barr Pharmaceuticals for $7.5 billion. If completed it would be the biggest deal ever by an Israeli company. The price is 44% above Barr's market value.

Teva refused to comment on the matter.

Teva CEO Shlomo Yannai declared six months ago that Teva would increase its U.S. market share from 20% to 30% by 2012.

The greatest advantage for Teva of the deal, which was first revealed on Wednesday on the Web site of TheMarker, would be in increasing its lead over Sandoz. Teva is the world's largest generic drug manufacturer. Sandoz, the generic subsidiary of Novartis, is number two.

Barr's product line of branded drugs would give Teva a much greater presence in Eastern and Central Europe. Its ethical drug lines from its Duramed subsidiary would also add to Teva's share of the birth control market. Barr has a big advantage over Teva there, with such drugs as its Seasonique contraceptive pill and the morning-after pill Plan B. Altogether Barr sells 25 different types of oral contraceptives.

Barr's Enjuvia hormonal treatment for menopause would also be a nice addition to the Teva medicine chest.

Another benefit for Teva is Barr's access to the Russian market as well as to Poland and to Croatia, where Barr has a 37% market share. Barr purchased its Croatian subsidiary, PLIVA, in October 2006 for $2.5 billion. That company operates throughout Eastern and Central Europe.

Barr's chairman and CEO is Bruce Downey. Barr Pharmaceuticals is actually a holding company, operating through subsidiaries such as Barr Laboratories, Duramed and PLIVA.

Barr's present market value is $5.2 billion. It sells in 30 countries and develops both ethical and generic drugs. It had net profits of $23 million on sales of $608 million in the first quarter of 2008, up from profits of $12 million and sales of $597 million in the previous quarter, the last of 2007.

Its EBITDA - earnings before interest, taxes, depreciation and amortization - for the first quarter of the year was $153 million. It has 8,900 employees around the globe. The headquarters of the holding company is in New York, and Barr Labs is located in New Jersey.

Despite its strength in Central and Eastern Europe, its sales are still concentrated in the U.S., with 71% of its sales there.

In terms of the product mix, birth control pills made up 31% of revenues, while anti-psychotic drugs brought in 11% of sales with an additional 11% coming from pharmaceutical therapies for cardiac disease.

Ethical drugs made up 19% of Barr's sales, though the gross profit margins on those drugs reached 68%.

Barr was trading at a price to earnings ratio of 16.9, which means the sale price would reflect a P/E ratio of 24.

Teva is expected to pay for the deal with a mixture of shares and cash, as it did in the Ivax merger in 2006.

Teva sells 331 generic drugs in the U.S. and Barr would add another 150, compared to a total of 200 sold by Sandoz. Number three is Mylan, with a list of 170 drugs, followed by Barr in fourth place.

As of the end of the first quarter of 2008, Barr was waiting for approval of an additional 70 generic drugs with a combined existing market worth $30 billion in sales a year.

An ongoing romance

All told, the purchase would make it much easier for Teva to meet its 2009 goals.

Barr also develops bio-generic drugs, a market that is expected to grow strongly in coming years as patents expire. Barr also manufacturers injected drugs, a field Teva moved into in 2003 with its purchase of Sicor.

Teva and Barr have been cooperating since September 2005, when they signed an agreement to market Fexofenaine, a generic version of Allegra-D for the treatment of seasonal allergies and chronic skin diseases. The two have also cooperated on other generic drugs.

The joint projects with Teva have given both companies a good chance to appreciate each other's strengths and opportunities and has made it natural for Teva to think about the next step.