Can Nice Guy Teva Mate With Nasty Mylan?

The U.S. company’s response to the Israeli drug maker’s takeover bid was unusually harsh, but analyst says odds are Teva can prevail.

Reuven Kopitchinski

Even by the rough-and-tumble standards of hard-fought merger and acquisition deals, Mylan’s reaction to Teva Pharmaceuticals’ unsolicited bid to acquire the U.S. drug maker was unusually harsh. Teva’s response has so far been restrained. The fight isn’t going to be a contest between nasty and nice, but analysts say the odds are weighted in Teva’s favor.

Robert Coury, Mylan’s executive chairman, made known he opposed any Teva offer even before it was formally made. But he laid out his objections on Monday in a long, sharply-worded letter of more than 3,200 words. He not only attacked the idea of merging the two companies (“lacks industrial logic and is a terrible cultural fit”), but also took swipes at the company itself (“poorly performing, troubled”), its management (“dysfunctional culture”), its stock price (“low-quality and high-risk “) and even its CEO Erez Vigodman for being a neophyte who has no experience in pharma (Vigodman came on board just over a year ago after stints heading food and chemicals companies).

Sanford C. Bernstein analyst Ronny Gal told The Wall Street Journal he didn’t expect “as venomous a response” as it showed. “If Mylan believes it can offer its shareholders a better value than Teva’s offer, I think it has some explaining to do,” he said.

Vigodman, despite his being and born and bred Israeli, has so far held back. After Coury’s stinging criticism, he simply reiterated its offer on Monday: “While we are disappointed that Mylan has formally rejected our proposal, the Teva board and management team are fully committed to completing the combination of Teva and Mylan,” he said.

On the other hand, Chaim Hurvitz – a former Teva director and son of the late Eli Hurvitz, Teva’s legendary CEO – wasn’t sparing in his criticism of Coury. “This is Coury by the book – a very vitriolic person with a lot to lose. He would lose the private planes, cars and everything else. We all expected this part,” he told the financial daily Globes on Tuesday. “The Mylan board of directors is composed half of management, which is in effect subordinate to him. The shareholders have no real representation. The real war will be for the shareholders.”

Mylan has acted to head off the Teva bid by putting into place a poison-pill defense and mounting its own, unwelcome bid for a third generic drug maker, Perrigo, a U.S. company whose shares trade on the Tel Aviv Stock Exchange.

On top of that, Mylan on Monday issued four conditions for the Teva bid to be acceptable to the company. At face value, they seem to preclude any chance of Teva succeeding and, indeed, Teva’s share price has fallen about 4.5% since it announced its bid on April 21. But Ken Cacciatore, the Cowen & Company analyst who first predicted Teva would bid for Mylan, says the conditions are not insurmountable.

Mylan said its shares are worth “significantly in excess of $100 per share” and uses language suggesting it should be worth roughly $120 a share – 25 times earnings before interest, taxes, depreciation and amortization. That’s far in excess of Teva’s $82-a-share offer. But analysts believe Teva will likely sweeten the offer to roughly $90 a share. Cacciatore says Mylan shareholders realistically expect Teva to go up to $88-92, while five investors polled by Bloomberg News on Monday said a suitable takeout price would be $85 to $95 a share. At that point “Mylan shareholders will begin to assert pressure on management and the board to negotiate,” Cacciatore said in a note to investors.

Cacciatore said Coury has a legitimate gripe about Teva’s stock and it historic underperformance, but Teva can get around that by making an all-cash offer and later making a secondary offer of its shares to the public. An all-cash offer would make Coury’s other criticism of Teva irrelevant, since Mylan shareholders would not have a stake in the newly combined company.

The antitrust issues Coury raised are a more serious obstacle, Cacciatore and other observers said.

Globally, Teva holds 12% of the global generic market, while Novartis AG, Actavis and Mylan each account for about 9%, according to UK market intelligence firm Evaluate. Their U.S. market shares are less clear because generic drug company reporting on product sales varies, but Wells Fargo analyst Michael Faerm estimates a combined Teva-Mylan would account for 22% of U.S. prescriptions.

Teva has already looked at the competitive overlap between its portfolio and Mylan’s, and started discussions with the Federal Trade Commission about the possible merger, sources told Reuters last week. But divesting products won’t be that simple. Teva is working on a generic version of EpiPen, Mylan’s best-selling treatment for severe allergic reactions, and Mylan on a generic version of Teva’s top-seller, the multiple-sclerosis drug Copaxone.

“These are two pipeline products that both companies have highlighted over and over as important for them,” said BMO Capital Markets analyst David Maris.

Reuters contributed to this report.