The market would likely reward Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), and its investors will be far more pleased if the pharmaceutical giant follows through on the potential acquisition of Allergan's generics unit for $40-45 billion as reported earlier by the "Wall Street Journal" than on the difficult deal with Mylan, according to analysts who spoke to "Globes".
Bank of Jerusalem analyst Jonathan Kreizman explained the logic behind Teva's potential purchase: "This is exactly the same logic behind the Mylan acquisition and it touches on the trend wherein generic firms like Teva execute mergers as a counterweight to a drop in market share.
"The market share for generics has decreased significantly in recent years, from 43% in 2009 to 35% in 2013. The consolidation is intended to provide both a counterbalance and a better bargaining position with their customers.
"From what we know, Allergan's generics operation suits Teva better than Mylan's. At the start of the year, when Teva spoke about the need for consolidation, it noted that any merger between the four leading companies could lead to savings of $2 billion a year. It was referring to itself, Sandoz, Actavis, and Mylan.
"Actavis (now called Allergan after its merger with Watson Pharmaceuticals) was not for sale until six months ago; something happened there which helped bring about the right conditions."
Steven Tepper, a senior analyst at Migdal Capital Markets, also agreed that Teva's logic in pursuing Allergan was identical to its potential purchase of Mylan: "The idea is to assure Teva continues to be the number one generics firm in the world, particularly in the US. The second element of the deal after completing the acquisition, Teva could streamline Allergan's generics operation, which these days had been pushed a bit to the side."
What could Allergan add to Teva? The benefit, according to the analysts, is expected to be very similar to the advantage it would receive from its purchase of Mylan. Kreizman estimates the synergy to decrease costs by 2 billion dollars per year, similar to the figure discussed during the 'pursuit' of Teva after Mylan.
Tepper believes the figure to be substantially lower $1.5 billion but still significant.
Kreizman added that "Allergan is a firm that is not in direct competition with Teva with its leading products, as opposed to Mylan which is battling Teva on several fronts, like the generic version of Copaxone, which Mylan is trying to launch… it must be noted that here Teva is entering a friendly not hostile merger. It has implications for confidence over the short-term and in better integration in the long-run."
According to Tepper, "Allergan's generic operations netted sales of $6.7 billion in 2014 with nearly half in the US. It is a unit with a relatively good profit margin; non-GAAP profit was around $2.1 billion annually."
Teva's Double Dealing
What will Teva do with the $1.5 billion in Mylan shares it purchased to advance its planned hostile takeover?
Kreizman: "If the merger with Allergan is sealed, Teva will need to get rid of its Mylan stock. They already show a $200 million loss 'on paper' which could increase further. It is not pleasant but not awful because the market tends to overlook one-time events especially with such proactive mergers and acquisitions."
When Teva began its efforts to takeover Mylan, the Allergan option had not yet existed. Later, the analysts believe, Teva conducted simultaneous negotiations to keep its options open. According to Tepper, Teva's aggressive conduct with Mylan may have convinced Allergan executives to consider placing its generics unit on the market: "It is possible that Teva's very aggressive courtship of Mylan led Allergan to realize that here was a giant company which badly wanted a big generics outfit like theirs."
"It's like poker, with each player keeping his cards close to his vest, and so it wasn't dangerous for Teva to talk with two voices," said Kreizman.
Tepper added: "It's not that one day Vigodman said let's call Allergan's CEO and close a deal. Teva already said at the beginning of the year that it would be an important year. It worked simultaneously on two options because it was important for Teva to consolidate its position as the leading entity in generics. At the end of the day, Teva's only two options are Allergan or Mylan. There is no other alternative right now, and Teva wants to do this now; interest rates are very low and you can take on cheap debt."
How will the market react to the report tomorrow?
Kreizman: "I think that if it is approved and implemented, there will be a positive response."
Tepper: "I think this is a positive story, whatever happens. Teva is showing the leadership of Erez Vigodman and it is sending a signal to the market. This is the best timing to execute this deal. Now is the time to do it."
Published by Globes [online], Israel business news - www.globes-online.com - on July 26, 2015
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