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Copycat M&A

27 July 2015 By Neil Unmack

Teva has found a neat exit from its Mylan mess. The Israeli pharmaceutical firm has been locked in a bitter battle to take over the Dutch drugmaker. Now it has agreed to buy the generic business from Allergan for $40.5 billion. The swap makes sense.

Allergan’s generics business basically ticks the same box as Mylan. Teva wants to bulk up its core generics business to help cope with stagnating drug prices and a decline in the supply of its raw material, drugs worth copying that are losing patent protection. And while Mylan is fighting off Teva with insults and legal ploys, Allergan has signed on the dotted line.

The main downside is that the Allergan transaction may be less profitable. Teva is paying the same four times 2015 sales that it offered for Mylan. Jefferies calculates that the sector average for generic manufacturer deals is about 3.3 times. But Teva expects only $1.4 billion of annual cost savings from Allergan, against $2 billion pencilled in for Mylan.

However, the synergies are more plausible, since Teva’s head of generics used to run the same business at Actavis, which took over Allergan in 2014 and kept its name. Also, the lesser overlap should speed regulatory approval. And, while the expected boost in earnings looks lower than the original Mylan bid, Teva could have been forced to pay more, and the deal might have dragged on well into 2016.

The deal has a certain irony. The Allergan business was not for sale earlier, as the group was busy digesting and financing the Actavis merger. The prospect of a Teva-Mylan combination seems to have forced Allergan’s hand. For Teva, the irony may prove costly. It now owns a $1.4 billion Mylan stake, which it will probably sell at a loss.

This acquisition will put Teva far in the lead in the slow-growth global copycat drug business. It will not address its problems in the branded drugs business, a lack of scale and the expiration of patents for its biggest drug, multiple sclerosis treatment Copaxone. Acquisitions are the best way forward. A faster, cleaner deal with Allergan should let Teva deleverage more quickly, paving the way for more M&A.


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