Teva Set to Resume Deals After Investors Reward Rivals: Real M&A

By Tara Lac

Teva Pharmaceutical Industries Ltd. (TEVA) may need to jump on the takeover bandwagon soon.
The $48 billion company’s top-selling medicine will have to compete with cheaper generic copies beginning later this year, which will eventually eat into profits. The problem of patent expirations and sluggish growth isn’t unique to Teva, whose peers are opting for big, accretive acquisitions -- bets that are paying off and restoring enthusiasm for their stocks.
Petach Tikva, Israel-based Teva was one of few leading drugmakers that didn’t make a sizable purchase in 2014, while the industry spent an unprecedented $234 billion on acquisitions. One area where Teva plans to expand is over-the-counter remedies and Perrigo Co. (PRGO), a $24 billion company, might be a good fit. Or international ambitions may lead it to other targets, such as Sweden’s Meda AB. (MEDAA) Either way, Teva shareholders would probably welcome a transaction that will boost earnings.
“Investors have seen what these deals are doing to the share prices” of other acquirers, said Kevin Kedra, an analyst for Gabelli & Co. in Rye, New York. “Teva has a healthy business, but
in this environment if you’re not doing deals, you’re probably not taking advantage of the opportunities that are out there.”

Photographer: Kiyoshi Ota/Bloomberg

Erez Vigodman, who was appointed chief executive officer of Teva Pharmaceutical... Read More

Active Industry

Peers such as Actavis Plc (ACT) and Pfizer Inc. (PFE) have already made moves to consolidate the industry. Actavis transformed itself from a lesser-known generic drugmaker to a top 10 pharmaceutical company through a series of acquisitions. It struck last year’s two largest deals: Botox maker Allergan Inc. for about $66 billion and Forest Laboratories Inc. for about $25 billion.
Had AstraZeneca Plc agreed to Pfizer’s $117 billion offer last year, it would have been the largest pharmaceutical takeover on record, according to data compiled by Bloomberg.
Others -- Merck & Co., GlaxoSmithKline Plc (GSK), AbbVie Inc., Eli Lilly & Co. (LLY), Shire Plc and Valeant Pharmaceuticals International Inc. -- have joined in the deal spree, which has lifted their shares.
Once among the most acquisitive drugmakers, Teva hasn’t done any large deals since 2011, when it bought Cephalon Inc. for $6.2 billion. Through that transaction Teva gained sleep-disorder medicine Provigil, which later lost patent protection and revenue, as well as some drug-development programs that it decided to discontinue.
“Cephalon probably was an acquisition that you’d like to take back,” David Steinberg, an analyst at Jefferies, said at a conference in June.

Deal Mode

Erez Vigodman, who was appointed chief executive officer one year ago, signaled that the company is ready to resume dealmaking. He told analysts last month that Teva is “fully geared” for business development activities such as acquisitions “at all sizes.” Denise Bradley, a spokeswoman for Teva, didn’t respond to a request for further comment.
Teva expects that in September it will begin facing generic competition in the U.S. for Copaxone, the multiple-sclerosis treatment that generated $4.3 billion of sales in 2013 and most of Teva’s profit and cash flow. The company has been shifting patients to a new version of the injection to try to preserve its market share, which has buoyed Teva’s American depositary receipts.
The ADRs rose 43 percent in 2014, their best annual return since 2007. They’ve fallen 1.4 percent so far this year even as health-care stocks lead the Standard & Poor’s 500 Index. Teva has also underperformed most peers since it bought Cephalon.

Right Time

Teva has the financial capacity to pursue a sizable transaction and the timing is right, said Gabelli’s Kedra.
Teva’s leverage ratio is relatively low, with net debt equal to just 1.6 times earnings before interest, taxes, depreciation and amortization in the period ended September. It also had $1.5 billion of cash and equivalents.
A purchase of Dublin-based Perrigo would boost Teva’s growth rate and reduce its exposure to Copaxone, Randall Stanicky, a New York-based analyst at Royal Bank of Canada, wrote in a report last month. He estimated that a deal financed 80 percent with cash and the rest in stock would drive a 30 percent gain in Teva’s share price.
While Teva has said that it’s interested in OTC products, it seems to be looking for a more international target, Stanicky said after meeting with management last week.
Meda, valued at almost 43 billion kronor ($5.3 billion), makes both prescription and OTC drugs and generates the bulk of its revenue in Europe, with some presence in emerging markets.

Mylan Speculation

Mylan Inc. (MYL), a $21 billion generic drugmaker, has long been considered a possible merger partner for Teva as well. While there is some logic to combining Teva and Mylan, they may have too much overlap and it would require large divestitures, according to Ronny Gal, an analyst for Sanford C. Bernstein & Co.
Representatives for Perrigo and Canonsburg, Pennsylvania-based Mylan declined to comment. A representative for Meda didn’t respond to an e-mailed request for comment.
“Teva needs to figure out what it wants to look like five years from now, 10 years from now, because we still don’t have a clear picture as to what direction they’re going to move on deals,” Kedra said, citing generics, respiratory and central-nervous-system treatments as possible areas.
“I think shareholders would probably reward Teva if they were to do a sizable, accretive transaction that made some strategic sense,” he said.