Nice and not easy

Teva's acquisition of Ratiopharm comes with risks.

After months of rumors, Teva appears to have finally sealed the acquisition of Germany s second biggest generic drugs maker, Ratiopharm GmbH. This is good news because it gives Teva a significant foothold in the worlds second largest pharmaceuticals market. It is good news because it weakens global competition. It is good news because it supports Tevas drive to expand into additional markets and product categories, in which it had limited exposure until now. It is bad news since Ratiopharm could prove the most complicated merger and integration Teva has taken on so far, in terms of finance, operations and the leveraging of synergies.

Ratiopharm ended 2009 with EBITDA of 307 million on 1.6 billion revenue. Meaning that the acquisition was agreed at a sales multiple of 2.2 and EBITDA multiple of 11, a touch expensive and apparently $700 million higher than the $4.08 billion offer from Pfizer.

The acquisition of Ratiopharm will catapult Teva to the top of the company rankings, making it the largest supplier of generics to the German market, and it may well have been its final opportunity to gain so significant a foothold there. Currently valued at 8 billion, the German market is the largest in Europe and the second largest worldwide and while it may have a cumbersome and problematic mechanism, its importance and formidable size make it a market that cannot be overlooked.

Ratiopharm, which has a 21% share of the German generics market, ended 2009 with revenue of 1.6 billion. Teva, by comparison, has an extremely small share of the market, and is currently ranked fifth, following the integration of its two largest acquisitions to date Barr and Ivax.

There are around 40-50 pharmaceutical companies in Germany, most of them family-owned businesses, which jointly control 50% of the market. It is believed that within five years, this will be reduced to just three or four companies holding, around 60-70% of the market between them. The rest will have been acquired by rivals, forced to focus on niche products, or gone out of business.

The acquisition of Ratiopharm will result in head-to-head competition between Teva and Sandoz, a positioning that could give Teva the upper hand in the bidding for tenders from German insurance companies, which set the level of reimbursement for healthcare costs, and, to a large extent, the balance of power on the market as well.

The acquisition will give Teva more than just market share in Germany. Ratiopharm has substantial sales outside of Germany, and these will undoubtedly bolster Tevas geographical spread. Teva could realize even more potential from the acquisition due to RatioPharms strong presence in emerging markets in Europe and in Russia, which together constitute 40% of the companys sales.

Ratiopharm also has a 20% share of the OTC market in Germany, which could be an important asset to its new owner, due to German regulation. Companies with OTC product lines have a marketing advantage in Germany, since they are allowed to offer pharmacies incentives to switch to OTC products, instead of incentives to choose generic prescription drugs over their branded counterparts, which have now been phased out.

Tevas victory in the battle for Ratiopharm has delayed Pfizers expansion in generics in Europe, as the latter will now be forced to look elsewhere. Teva will no doubt welcome this although we believe the reprieve could be short-lived, given that Pfizer has already launched a small in-house generics business through its subsidiary Greenstone.

While Teva deserves credit for its track record in successfully integrating acquired companies, we cannot overlook the many risks it has taken by spending $4.8 billion of its cash on this particular acquisition, given that the generics market in Germany could actually decrease in size, largely as a result of relentless pricing pressures. Furthermore, Ratiopharm is overstaffed and the manpower issue will delay its restructuring and effective integration in Teva. We believe there is extensive scope for cost efficiency measures at Ratiopharm but realize that in Germany this could be a more drawn-out process that Teva has been accustomed to in the past.

Natali Gotlieb is an analyst at IBI investment house.

Published by Globes [online], Israel business news - - on March 18, 2010

Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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