Lose-lose for Teva at Rimsa

Shiri Habib-Valdhorn

Teva cannot come out of its Mexican misadventure looking good, and its share price reflects this.

The story of Teva's acquisition of Mexican company Rimsa has become an almost fictional scenario in the past few days, a real Mexican telenovela. If we accept Teva's version, the story is a about a pair of rogues, the brothers Fernando Espinosa Abdala and Leopoldo de Jesus Espinosa Abdala, sons of the company's Mexican founder, who ran it until its sale to Teva, and who for years systematically swindled the authorities and patients and fraudulently sold defective and illegal drugs. Teva claims that it too fell victim to the brothers' fraud, when Rimsa made false representations to it at the time of the due diligence, on the basis of which Teva paid $2.3 billion for the Mexican company. Teva believes it has been caused damage greater than the acquisition price (including, for example, damage to its reputation) and it is suing the brothers in New York.

On the other side stand the Espinosa brothers, who fired first by filing a lawsuit against Teva two weeks ago. Their version of events is diametrically opposed to Teva's. They claim that Teva simply changed its mind about the acquisition it had made, because it didn't understand what it had bought and didn't understand the Mexican market, and even stopped production of most of the company's products. The brothers say that Teva wrecked Rimsa's business and now wants its money back. They are asking the court to declare that Teva's claims are groundless and have no basis in law.

The two brothers say in their statement of claim that they decided to sell the company that their father founded because they were both over sixty and had worked at the company from more than 45 years. To that end they hired the services of investment bank Goldman Sachs. According to press reports they attracted great interest on the part of potential buyers and at least five major pharmaceuticals companies (among them Pfizer and Abbott) bid in the auction for the company. In the end, exactly a year ago, Teva won the auction. The interest in the company was reflected in the price paid, which was perceived as high by market.

In the middle are Teva's shareholders, two of whom zealously filed a derivative action against the company and its senior managers this week, claiming that Teva was negligent in the due diligence examination it carried out at Rimsa. They argue that irrespective of which side is right, it is clear that Teva and its senior management were negligent: if Teva is right, and discovered retrospectively that the figures at Rimsa were different, then the negligence was in the due diligence; and if the Espinosa brothers are right and Teva is trying to cancel an acquisition as a result of lack of understanding, then the negligence lay in the haste with which Rimsa was acquired.

Even if we accept (contrary to the Espinosa brothers' claim) the version according to which there was fraud, it is hard to understand how a company as experienced in acquisitions as Teva could fall into a trap in due diligence. Teva has bought many companies over the years (the Rimsa acquisition came at the same time as that of Actavis, the largest in Teva's history, and a few months after the acquisition of innovative company Auspex). A company like Teva has skilled teams to carry out due diligence examinations at companies being acquired, and to find any information that might put the acquisition at risk.

Even after completing the acquisition, Teva did not discover the fraud immediately, and only an anonymous e-mail message sent to it a week later led it to investigate and to discover the extensive deceit. "The head of Teva’s regulatory affairs due diligence team believes that the violations are so serious that, had Teva received true information during the site visit, he would have recommended against proceeding with the acquisition at any price," Teva's statement of claim says.

Meanwhile, Teva's share price has fallen below $50. Since Erez Vigodman became CEO in 2014, the share has posted a 20% positive return, higher than that of the New York Stock Exchange Pharmaceutical Index (8.7%), and similar to that of the S&P 500. Nevertheless, since the peak it reached in July 2015 (following the signing of the Actavis acquisition deal), the share price has fallen back 30%.

Published by Globes [online], Israel business news - www.globes-online.com - on September 29, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

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