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Not so generic

21 Apr 2015 By Robert Cyran, Neil Unmack

Teva Pharmaceutical Industries’ $40 billion hostile bid is putting hope over reality. The Israeli drugmaker needs a deal to shore up falling sales. Smaller rival Mylan offers that and oodles of synergies. A tie-up, though, would face antitrust concerns, require high leverage and have to get around a powerful poison pill. No wonder the market is skeptical.

The fate of Teva’s branded multiple sclerosis drug Copaxone highlights the company’s internal challenge. It accounted for roughly 20 percent of its revenue last year. But last week the U.S. Food and Drugs Administration approved the first generic drug based off it. That could wipe out a third of Copaxone income by 2018, according to Citigroup, despite Teva’s success in switching patients onto a version with longer-lasting effects.

Owning smaller generic rival Mylan would offset these declining earnings. Teva could also rip out costs of up to $2 billion. Taxed at 20 percent and capitalized, those could be worth $16 billion, which more than covers the chunky $13 billion premium to Mylan’s price before deal rumors first surfaced last month.

Sealing a deal may be difficult, though. Mylan, which has made an unsolicited offer of its own for Perrigo, is playing hard to get. They argue the combination is “without sound industrial logic or cultural fit.”

A merger may trigger regulatory concern, too. Teva and Mylan have developed generic versions of each other’s largest and most profitable drugs, for example. The merged company would, in addition, hold a lot of debt in an industry where most steer clear of it. Teva reckons it could bring leverage down to less than three times EBITDA within two years, but that’s still high and would rise if it is forced to sweeten its offer.

Meanwhile, Mylan has a potentially powerful poison pill, thanks to shifting its headquarters to the Netherlands after its recent Abbott Laboratories deal. It has set up an independent foundation, or stichting, which consists of all stakeholders, not just shareholders, and which under Dutch law can delay or block a hostile offer – as KPN’s did to see off an offer by Carlos Slim’s America Movil in 2013.

Mylan’s shares are trading at a 9 percent discount to the offer. That suggests investors think Teva’s bid may go nowhere.


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