"The acquisition of the generic division of Allergan is a game changer. It puts Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) in a position where it can once again change the rules of the generic game," Teva president and CEO Erez Vigodman said today in a talk with "Globes," after the company announced its acquisition of Allergan's generic division for $40.58 billion, Teva's largest acquisition to date and the biggest ever by an Israeli company. The deal will significantly strengthen Teva's standing as the leader in the global generic market by a wide margin over its competitors. According to Teva's announcement, it will also become one of the world's 10 leading pharma companies. The capital market responded to the acquisition with enthusiasm, with the Teva share leaping 8% today.
The bulk of the deal is in cash. Teva will pay $33.75 million in cash, and give Allergan Teva shares worth an estimated $6.75 billion, constituting less than 10% of Teva's share capital. The exact number of shares will be determined by the weighted average price of the Teva share during the 15 days preceding and the five days succeeding the announcement of the deal. The cash component of the deal will be a combination of Teva's available cash and an issue of debt and shares.
The Allergan deal comes in place of the deal forcefully promoted by Teva - a hostile takeover of Teva competitor Mylan Pharmaceuticals for $40 billion. In contrast to the Mylan deal, the Allergan deal was consensual, and was approved unanimously by the boards of directors of both companies. According to Teva chairman Prof. Yitzhak Peterburg, "This acquisition will lead to the creation of substantial value for our shareholders, reinforce our strategy, expedite the fulfillment of the new business model, support revenue growth, and develop a range of new possibilities for Teva."
Closing of the deal is slated for the first quarter of 2016. Teva was advised on the deal by Barclay's Bank, while legal advice was provided by Sullivan & Cromwell and Tulchinsky Stern Marciano Cohen Levitski & Co.
"We preferred Allergan"
Teva expects the acquisition of Allergan's division to contribute $2.7 billion to its earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2016, not including synergy. When the deal is completed, Teva expects pro forma revenue amounting to $26 billion and $9.5 billion in EBITDA in 2016, including $11 billion in sales outside the US. Teva anticipates a significant increase in non-GAAP (excluding various accounting expenses) net profit per share, amounting to over 20% in the second and third year after the deal is completed.
Teva expected savings in overlapping expenses and taxes amounting to $1.4 billion annually (compared with $2 billion in the Mylan deal, had it gone through) from the third year after the deal is completed. The savings will be achieved through cost cutting at the operational level, management and general expenses, and in production, marketing, and sales. Teva also expects the acquisition to generate $6.5 billion in free cash flow in 2016, and believes that the strong cash flow will enable it to rapidly reduce the increased in leverage undertaken to pay for the deal, and to move ahead with future acquisitions.
"No less important than all the numbers is the creation of value from synergy. It is very strategic for Teva," Vigodman said. "Beyond synergy, we're building infrastructure here with a unique platform. Allergan is a diamond in our sector. We're connecting the world's two best generic companies." The Allergan deal comes just four days after Mylan put its poison pill mechanism designed to make it difficult for Teva to acquire the company into operation. Nevertheless, it is obvious that a deal of more than $40 billion in not closed in two days, nor in four days.
"We always wanted to acquire the Allergan division," Vigodman explains. "I went to them before we started our process with Mylan, and they weren't willing to sell. Just before we officially submitted the offer to purchase for Mylan (which in the end was not submitted, S.H.V.), we contacted Allergan again, and process began two weeks ago. We turned to Allergan because part of our philosophy is that it is important to have a Plan B, so we were looking at Allergan all the time. As soon as we realized that it was possible, Allergan became Plan A."
In contrast to its previous opposition, Allergan expressed willingness to sell its generic division. It appears that Teva's maneuvers with Mylan led to the breakthrough with Allergan. As Vigodman puts it, "In our sector, one process can start and ignite another. Eventually, it ended in the most significant thing that Teva could have done. Allergan was our preferred option."
"Globes": There's a feeling of thrashing around - if not Mylan, then a different giant deal.
Vigodman: "Teva believes in its stand-alone strategy (Teva by itself, without acquisitions, S.H.V.), but our sector is undergoing processes of change that do not permit us to stay in one place; we have to move. The market expects a significant move from Teva, but this acquisition is not only because of the market's expectations. In 2014, we focused, presented a strong strategy, and at the same time did the spade work for a transformative acquisition. We promised we would play a bigger role in mergers and acquisitions, and we're doing it."
About financing for the deal, Vigodman said, "We wanted a deal mostly in cash, and we can do that." He said that up until yesterday, Teva had not spoken with the credit rating agencies. "We waited, because we were taking care that the deal wouldn't leak out. So we started talking to the lending banks only yesterday." The Wall Street Journal reported the impending deal between Teva and Allergan yesterday.
Option for more acquisitions
According to Vigodman, despite the large scale of the deal, it cannot be ruled out that the company will make additional acquisitions. "We're retaining the ability to make additional acquisitions, mainly in the specialty field," Vigodman declares. "We intend to take resources that will be created, and make more significant investments in our innovative activity. It's important for us to strengthen the category of branded drugs."
Following the acquisition, Teva will have 320 abbreviated new drug applications (ANDAs) in the US, including 110 requests in which Teva or the acquired division were the first to submit a request, so that when the approval is granted, the company will be entitled to a 180-day exclusivity period for marketing the generic version. As of now, the four largest generic companies in the US market are Teva, Sandoz (the generic arm of Novartis), Allergan (formerly Actavis), and Mylan. Teva's worldwide generic revenue totaled $9.8 billion in 2014, Sandoz had $9.6 billion in revenue, Allergan's generic division had $6.7 billion in revenue, and Mylan (before its acquisition of assets from Abbot Laboratories) $6.5 billion.
The acquisition is expected to expand Teva's global deployment, with a commercial presence in 100 markets, according to the company's announcement. Teva will be one of the three leading companies in 40 of those markets. As the former president of Actavis, the company that acquired Allergan, Teva Global Generic Medicines Group president and CEO Sigurdur (Siggi) Olafsson was responsible for its global generic and over-the-counter (OTC) business, and is therefore very familiar with Allergan's generic business.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2015
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