Exactly one year ago, Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) completed the largest acquisition ever made by any Israeli corporation. It paid $7.8 billion (excluding debt), to the shareholders of Ivax Corp, recapturing the title of “The world’s largest generic company.” The thing that stands out most, one year on, is that while Teva continues to garner superlatives, its stock has lost 30%.
So how does the capital market feel about the Teva-Ivax deal one year on? The views on the deal are quite positive, and some analysts that “Globes” talked to were unstinting in their praise for Teva. One example is IBI Investment House Ltd. (TASE:IBI) research department manager Elah Alkalay, who feels that the acquisition of Ivax “has a fitting place in the pantheon of mergers and acquisitions.” Alkalay adds, “Thanks to two of its products, the timing of Ivax’s acquisition made it attractive almost immediately, and gave Teva’s management close to two years to integrate Ivax’s remaining assets, and achieve maximum synergy from the acquisition itself.”
Bank Hapoalim (LSE: BKHD; TASE: POLI) analyst Gilad Sarig sounds a similar note, and says that looking back over the year, “the acquisition has been a unprecedented success in terms of the speed of Ivax’s integration and its contribution to Teva.
“Ivax’s contribution centered overwhelmingly on the exclusivity of the drugs that were acquired together with it, but beyond this, the level of synergy that this acquisition produced was higher than expected. Ivax was already attractive during the first year and this is one of the criteria which is central to the success of the acquisition. Aside from this, Ivax gives Teva exposure to new growth fields (respirator products and others), as well as new regions to which Teva previously did not have significant exposure. All these factors are likely to continue to contribute to Teva in the future,” says Sarig.
Leader Capital Markets analyst Yoav Burgan is more cautious in his appraisal but he nevertheless feels that the move is already bearing fruit. “Looking back over the year, while any conclusions regarding the Teva-Ivax deal would perhaps be somewhat premature given the size and complexity of the acquisition, Teva is clearly beginning to benefit from the synergy arising from the move,” he says. “This synergy has manifested itself both in terms of costs, such as plant closures (four in the US and Canada, and the earlier-than-planned closure of Cidra, Ivax’s largest factory, based in Puerto Rico), integration of generic activities, innovation, API production, marketing and administration; and sales, such as the successful launch of generic versions of the blockbuster drugs Zocor, Zoloft, a stronger platform for Teva in the US, rapid penetration by Teva of emerging markets, and Ivax’s rapidly expanding innovation in the inhaler manufacturing industry (estimated sales of $400 million for 2006).”
Clal Finance Batucha analyst Yisca Erez describes the move more laconically, noting that the Ivax acquisition could be summed up as a successful move, just like Teva’s other acquisitions. “The advantages in terms of strategy are a stronger position in the US market, exclusivity over a number of bestseller drugs in 2006, penetration of additional markets, and a larger basket of products. Financially, this has been an extremely successful integration, with Ivax already making a positive contribution to earnings per share,” she says.
More acquisitions in the pipeline?
Aside from the debate about the synergy and benefit for Teva from the Ivax acquisition, question marks remain over the Israeli generics giant’s future mergers and acquisitions policy. The most significant and up-to-date indication as to what lies ahead came from company CFO Dan Suesskind during an analysts conference in May 2006. “We obviously need to take a rest at this point and not continue with further acquisitions, at least not ones of this size,” he said.
On the other hand, it should be remembered that throughout the past, Teva has been mentioned as a candidate for the acquisition of a number of companies. Teva did not make any comment on the rumors and speculations, but its name has been linked to a string of companies in markets from India to Germany and the US. At present, none of these appears to be serious, although the latest report concerning a possible acquisition of the generics division of German drug company Merck KgaA, seems slightly different from the previous rumors.
WR Hambrecht analyst Andrew Forman, who yesterday published an updated review of Teva ahead of next weeks Pharmaceutical Conference organized by JP Morgan, sounded quite optimistic and imaginative in his review of the company, especially with regard to mergers and acquisitions. In this regard, Forman has not only linked Teva with Merck but also with US company Impax, a mere addition of some $600 million to the $4-5 billion estimate for the German company’s generic division, without explaining exactly how Teva would finance all this.
By contrast, local analysts sound more practical in their assessments, and feel that while spending several billion dollars more in acquisitions would be possible financially, it may not be such a positive move economically for Teva. Yisca Erez says that from the point of view of resources and focus, Teva would be better off waiting a bit longer until it has completely integrated Ivax. Elah Alkalay also believes that, on the basis of its phenomenal positive cash flow in 2006, Teva has the financial wherewithal for another acquisition. “As we see it, the company currently has $4 billion to spend on another acquisition, while keeping its debt-to-equity ratio at a level that would leave its rating unchanged,” she says.
Gilad Sarig, on the other hand, gives more weight to Teva’s to strategy than its financial resources. “Teva’s expansion has been based traditionally on mergers and acquisitions, with emphasis on companies with complementary product lines, geographic regions, and synergetic activity. It should also be noted that size will be an increasing advantage with the onset of 2007, a year in which there will be fewer opportunities than in 2006.”
As to the future, Sarig says, “It looked like the acquisition of Sicor was the peak, and then we got the Ivax deal. We think that Teva is constantly looking at various acquisition options, but not at any price. It has clear criteria when it comes to acquisitions, and it won’t compromise when it comes to the quality of the target companies. It should be remembered that Teva makes one acquisition a year, on average, so we should not be surprised if it does acquire a company during 2007, with the focus this time on the European market.”
Yoav Burgan prefers to look at Teva’s current situation and believes that with this in mind, an acquisition would not be an optimal move for the company. “Firstly, we have the upcoming change in company CEO which, while looking at it objectively, is not likely to the best time for making such acquisitions, all the more so if one takes into account the uniqueness of the changeover of the head of the management pyramid at a company like Teva,” he explains.
In addition, Burgan also expects that Teva will continue to focus on the integration of Ivax during 2007. “We assume that Teva will continue to focus on Ivax’s integration in 2007, rather than look for new acquisitions, certainly not ones worth billions of dollars,” he says. “Moreover, having acquired Sicor’s syringe and Ivax’s inhaler activities, Teva will probably look for vertical acquisitions (generics and biogenerics), although if it does make any acquisitions at all, these will be small ones designed to provide localized solutions and strengthen the company’s activity in specific geographical regions, Brazil or Japan, for example.”
Published by Globes [online], Israel business news - www.globes.co.il - on January 8, 2007
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