Israeli based drug manufacturer Teva Pharmaceutical Industries Ltd. (TEVA, +8.86% TEVA, +0.03%) has found an excellent way out of its messy Mylan NV (MYL, -14.5%) overtures by announcing that it has agreed with Allergan PLC (AGN, +6.09%) to acquire its generics division for $40.5 billion.
Teva is the world leader in the sale of generics with a market value of about $60 billion and the new acquisition “reinforces” its strategy in the generic drugs industry, according to the company.
Teva had been investigating buying into rival generics manufacturer Mylan for several months and eventually seems to have run out of patience with the fierce resistance to the deal from Mylan executive chairman, Robert Coury. Mylan shares dropped 14% to $56.86 by midday in New York. Interestingly, the current price is 31% below the $82 per share offer that Teva had put on the table.
The Allergen generics business is very much similar to that of Mylan, while Teva needs to grow its generics market to cope with stagnating drug prices and a decrease in the number of drugs that will soon be losing their patent coverage, providing a lower potential for new generic products.
The Mylan deal would have resulted in annual cost savings of about $2 billion while the Allergan acquisition will result in a lower cost saving estimated to be around $1.2 billion. Teva is paying four times the 2015 sales, the same as it had offered Mylan, while the average for generic manufacturer deals is 3.3 times the sales figure.
There are however sufficient synergies to make the deal attractive for Teva
shareholders. The head of generics at Teva previously ran the same business at Actavis, which, after taking over Allergan in 2014, kept the name. The upside for Teva is that there should be far less problem with regulatory approval as there is less product overlap than would have been the case with Mylan.
While the Allergan business was not for sale earlier, the prospect of a Teva-Mylan merger seems to have forced Allergens hand. A downside for Teva is that it now owns $1.4 billion in Mylan stock which it will probably dispose of at a loss.