The promise by Teva Pharmaceuticals CEO Erez Vigodman that 2015 would be a busy one for the world’s biggest maker of generic drugs may be coming true: Teva’s share price jumped 6.3% on Wednesday and Thursday last week, suggesting that a major merger may be just over the horizon.
The latest round of speculation was set off by a report last Tuesday by Cowen & Company analyst Ken Cacciatore, who said that the time had come for another big generic maker, Mylan, to sell itself. The industry is going through a wave of mergers and acquisitions, but Mylan is too small to be making acquisitions, Cacciatore said.
The best option would be for it to be acquired by a company like Teva, Cacciatore said, adding that the time for that to happen was now because low interest rates created a favorable environment. He suggested that Teva would be prepared to pay Myla shareholders $75 a share, a premium of more than 25% on its Friday closing price, and take on Mylan’s $7.5 billion in debt.
At the numbers mentioned by Cacciatore, it would be a giant deal — a $45 billion takeover by Teva, financed in the main by Teva issuing stock to Myland shareholders. The combined company would have an annual profit of $7.1 billion in 2016, compared with $4.7 billion for Teva as it is now. In 2017, profit would grow to $7.6 billion, instead of $4.9 billion.
By Wednesday, rumors were circulating that Mylan had retained an investment bank for a potential sale.
A takeover would suddenly enhance Teva’s near-term growth prospects. Until now, the company has been telling the markets that profits would not fall below $5 a share, but that they shouldn’t count on any growth — from closing factories and layoffs, while boosting sales — before 2017. But it also pointed to super-low interest rates as a driver for M&A – albeit small ones.
Were the Mylan acquisition to go through, it would be the biggest ever by Teva. The U.S. company trades at a market valuation of $22.6 billion. If Teva paid a 15% premium on Mylan’s share price it would work out to a $41 million deal, including assumption of debt.
By contrast, Teva executives have said in recent months that they are looking for small merger deals with companies that have an interesting pipeline of drugs in relatively late stages of development, companies with unique technology or ones that would give it entrée into new markets.
Mylan would restore Teva’s unquestioned leadership in the American generic drug business. It would control 25% of the U.S. generics market, compared with 14.2% today. It comes with a leading, low-cost maker of pharmaceutical ingredients in India, acquired through Mylan’s 2007 purchase of Matrix Laboratories.
It would also turn Teva into the leading generics maker in France and Italy, and restore its status as a market leader in Britain. Mylan would give Teva a strong market positon in India for AIDS treatments and in Brazil.
In fact, Teva shares pulled back a little on Friday and traded quietly on the Tel Aviv Stock Exchange on Sunday, where they closed up 0.25% to 241.30 shekels ($59.70,) after two analysts — Ronny Gal of Sanford C. Bernstein & Company and Liav Abraham of Citigroup — expressed reservations about a possible deal.
Owning Mylan would not give Teva any interesting new technology. Nor would it fit into Vigodman’s vison of Teva as the world’s most efficient generics maker, focused on the most sophisticated pharmaceuticals for treating diseases of the central nervous and pulmonary systems. It would mean Teva departing from its focus on profitability over market share.
Finally, there’s the internal contradiction a merger would bring. Teva is fighting to delay on onset of generic competition for its key proprietary drug, the multiple sclerosis treatment Copaxone. But Mylan is linked to Natco, an India company that has been selling a generic version of Copaoxone in its home country. Mylan is expecting to get U.S approval this year for a generic version of the drug.
In June, meanwhile, Teva is due to launch a generic version of Mylan’s biggest-selling product — the self-injected emergency treatment for allergic reactions EpiPen.
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