In a dramatic about-face, Teva Pharmaceuticals dropped its giant but hostile bid for U.S. drugmaker Mylan Monday and agreed instead to an even bigger acquisition of Allergan Plc’s generic drugs business.
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The deal, the largest in Israel’s corporate history and among the biggest in a wave of global drug mergers and acquisitions, immediately won favor with the financial markets and analysts. The acquisition will turn the Israeli company into one of the world’s largest pharmaceutical firms.
It also capped a stunning, though costly, victory for Teva CEO Erez Vigodman, 18 months after taking the helm at the giant but troubled Israeli drugmaker. Forbes magazine estimated Teva spent $300 million on the abortive Mylan bid.
For Mylan, which had fought off the Teva bid with an arsenal of poison pills and an attempted takeover of a third drugmaker, Perrigo, the news was greeted joyfully by the U.S. company’s executive chairman, Robert Coury.
But the stock market thought otherwise. Teva shares, which had been weighed down by doubts about whether the Mylan bid would succeed or be beneficial for Teva if it did, were up 12.4% at $69.56 in New York in mid-afternoon trading local time. Allergan shares were up 7% at $329.74. Mylan shares were down 15% to $56.07.
“Allergan’s business is more high-end [than Mylan]. It’s a more interesting business ... a profitable business and it’s well managed,” Gilad Alper, an analyst at brokerage Excellence Nessuah, told Reuters, noting a “friendly deal” is preferable to a hostile one.
“There is only one entity that would stand to lose [from Teva-Allergan], which is Mylan,” said Cowen & Company analyst Ken Cacciatore, who said Teva’s shares could reach $100.
Under the offer unveiled yesterday morning but already rumored over the weekend, Teva agreed to pay $40.5 billion in cash and shares for Allergan’s generics business. That made it a hare’s breadth larger than Teva’s $40 billion hostile bid for Mylan.
Teva has been under pressure to find new revenues to compensate for the start of generic competition this year for its best-selling multiple sclerosis drug Copaxone. The move will fortify Teva’s core generics business, already the world’s biggest, even as the company has been seeking to expand its portfolio of proprietary treatments.
Although no generic is likely to make up for Copaxone, which accounts for about half of Teva’s profit, economies of scale are important in generics – an industry that suffers relatively low profit margins and tough competition.
Allergan is the third-largest generic drugmaker in the United States and is seen by analysts as a better fit than Mylan because it will improve Teva’s distribution channels, access to profitable injectable drugs and give it a presence in India.
Monday, Mylan’s Coury expressed relief that the fight was over. “We congratulate Teva on their agreement to acquire Allergan’s generics business and welcome their continued, and potentially enhanced, commitment to the generics industry,” he said in a statement.
He said he remained committed to buying Perrigo, a U.S. company traded on the Tel Aviv Stock Exchange. “Combining Mylan and Perrigo will create a unique infrastructure that is able to maximize on evolving industry dynamics and capitalize on key trends,” Coury said.
The hostile offer for Perrigo was regarded by the market as one of the ways Mylan hoped to resist the Teva bid by making itself too big to buy. The latest obstacle Mylan had erected for Teva came last week, when a Dutch foundation said it would exercise an option to buy half of Mylan’s preferred stock.
Teva’s Allergan acquisition comes amid a wave of health-care mergers and acquisitions since the start of last year, with large drugmakers buying up smaller rivals, makers of generics buying one another and tie-ups between insurers. Global health-care M&A reached $398.5 billion as of July 23, up 80% on a year ago, according to Thomson Reuters data.
Vigodman said during a conference call Monday that when it approached Allergan a year ago, the British company wasn’t interested. Instead, Teva launched a bid for Mylan in April, but as the offer was running into stern opposition from Mylan, Teva went back to Allergan about two-and-a-half weeks ago, he said, before Mylan enacted its latest defense with the Dutch foundation.
In June 2014, Vigodman hired Sigurdur Olafsson, former head of Allergan’s Actavis generic drug business, to fill a similar role at Teva.
“My sense was always that Mylan was Teva’s Plan B,” said Benny Landa, an industrialist who led an investor bid last year to shake up Teva’s board, calling the deal “brilliant.”
Teva will pay $33.75 billion in cash and $6.75 billion in shares, representing a 10% stake in the Israel-based company, Teva said in a statement.
Vigodman said the combined companies will have pro-forma revenue of $26 billion and earnings before interest, tax, depreciation and amortization of $9.5 billion in 2016. It will gain a portfolio of more than 1,000 products.
“Our respective portfolios of generic medicines and applications are highly complementary,” he said. “This acquisition reinforces our strategy, accelerates growth and diversifies revenues both by product and geographically, supporting our new business model.”