Teva in Advanced Talks to Buy Allergan's Generic-drug Unit, Valued at About $45 Billion

If Teva clinches a deal with Allergan and drops its bid for Mylan, this would likely strengthen the hand of Mylan's management in its campaign to buy Perrigo.

Bloomberg

Teva Pharmaceutical Industries is in advanced talks to buy drug-maker Allergan’s generic drug business following a thus far unsuccessful effort by Teva to acquire another pharmaceutical company, Mylan, according to a person familiar with the matter.

Jerusalem-based Teva, which has offered to buy Mylan for $40 billion, is now close to an agreement to acquire Dublin-based Allergan’s generic drugs unit for between $40 billion and $45 billion, the person said on Saturday. Such a move could be a smoother ride that could bring bigger returns, faster.

News of the Allergan deal broke on Saturday, after Teva’s $40 billion bid for Mylan hit a snag when a Dutch foundation linked to Mylan bought temporary control of half the company in an attempt to block the takeover.

A Teva spokesman declined to comment on possible talks with Allergan.

Though the Teva-Mylan feud has hogged the industry spotlight since April, Allergan’ generics business may actually have been Teva’s first choice. Teva CEO Erez Vigodman is believed to have approached Allergan, which was called Actavis prior to a March merger, last year. In June 2014, just a few months after joining the company himself, Vigodman hired the former head of Actavis’ generic drug business, Sigurdur Olafsson, to fill a similar role at Teva.

“There was previously a preference for Actavis over Mylan but for some reason it didn’t materialize,” said Bank of Jerusalem analyst Jonathan Kreizman. Should the deal with Allergan now go through, there will be two big upsides for Teva, he said.

First, there is less overlap than with Mylan. Teva has been planning a generic version of Mylan’s EpiPen, a billion-dollar product, while Mylan has been working on a generic version of Teva’s best-selling multiple sclerosis drug Copaxone. Also, in the short term, Teva would benefit from removing the uncertainty over the outcome of the Mylan deal that has weighed on its stock.

Since hitting a year high of $68.74 in New York on April 9, just before speculation on a possible Mylan bid had surfaced, Teva shares are down more than 10%, closing on Friday at $61.85.

Teva’s attempt to carry off a bid for a major drug company is designed in part to compensate for the competition that it began facing this month from the generic equivalent of Copaxone, which accounted for $3.2 billion in sales and 46% of its annual profits over the past 12 months. Teva expects to maintain earnings of $5 per share even if it doesn’t buy Mylan and even if there are two generic versions of Copaxone on the market, but a growth in sales and earnings per share are not expected before 2017.

Kreizman said he assumes the Allergan deal would be similar in scope to Mylan, noting Allergan has about 8% of the U.S. drug market, compared with 9% for Mylan and 14% for Teva. “Assuming the entity is more or less the same size, valuation is less of an issue,” he said.

The Mylan deal is hard for the market to digest, he said, while “any friendly transaction ... would have better impact.”

Allergan’s generics operations has about $7 billion in sales, said Umer Raffat, an analyst with investment research firm ISI Group. “Theoretically, a Teva/Allergan generics business combo offers Teva the opportunity to get what it was looking for without having to go through Dutch courts,” he said.

With reporting by Yoram Gabison.