Teva, Mylan, Perrigo lose $87b value in 4 years

Shiri Habib-Valdhorn

Shareholders have reason to regret Mylan's rejection of Teva's $40 billion offer, Perrigo's rejection of Mylan's $26 billion offer, and Teva's $40 billion acquisition of Actavis.

The summer of 2015 was a hot and tumultuous time in the generic drugs industry. Things came to a head in July 2015 with two attempted hostile takeovers involving three companies - two of them listed on the Tel Aviv Stock Exchange (TASE) - and a great deal of emotion.

The companies were Teva Pharmaceutical Industries, Mylan, and Perrigo, which then had an aggregate market cap of $114 billion: Teva - $52 billion, Mylan - $35 billion, and Perrigo - $27 billion.

Four years later, following the failure of both takeover attempts, the aggregate market cap of the three drug companies is a mere $27 billion - 76% of the aggregate market cap has been lost. The three companies' current market caps are Teva - $8.7 billion; Mylan - $10.8 billion; and Perrigo - $7.3 billion. In other words, the shareholders of the three companies have lost $87 billion in four years.

How much is the merged company worth?

Mylan's share price received a shot in the arm this week. In a share swap deal signed with Pfizer, the generics business of Mylan and Pfizer will be merged into a new company. Mylan's existing shareholders will hold 43% of it. The new company is projected to have $19-20 billion revenue in 2020 and $5.8-7 billion EBITDA, both more than the respective figures for Teva.

Morgan Stanley estimated the enterprise value of the new company following the merger at $54 billion, meaning that the holdings of Mylan's shareholders in it are worth $23.2 billion - not bad for a company whose value was recently less than $10 billion, but much less than the $40 billion value at which Teva sought to acquire Mylan in 2015.

Still, Mylan is perceived as the winner in its current deal with Pfizer, with Mylan chairman Robert Coury, who will be appointed chairman of the merged company, having the last laugh. Coury, who contemptuously rejected Teva's offer of $82 per Mylan share, is now satisfied with a much poorer deal. Michael Goettler from Pfizer will be appointed CEO of the merged company, but it can be assumed that Coury will remain a dominant figure in it.

A deal that would have been regarded as an insult in 2015 is now a great success, especially because the circumstances have changed since then. Generic drug prices have declined, exposure to legal proceedings has increased, and debt has risen.

These circumstances have affected both Mylan and Teva, and also Perrigo to some extent. Each of the three companies has also acquired its own specific additional problems, such as Teva's enormous debt, the public pressure on Mylan because of the skyrocketing price of its Epipen original drug, and management changes at Perrigo. Teva and Mylan are two of the defendants in the proceedings concerning the fixing of generic drug prices in the US, and Teva is also mired in a legal proceeding involving the marketing of addictive opioid pain relievers.

Strong opposition to Teva's offer in 2015

The saga began in the spring of 2015, when Mylan, one of the world's largest generic drug companies, decided to try to take over Perrigo, the leading company in the private brand over-the-counter drug market. Perrigo's management strongly opposed the takeover, and Teva, then the world's largest generic drug company, spotted an opportunity.

Teva, then headed by Erez Vigodman, was looking for a giant acquisition to consolidate its status as the leader in the generics market. Vigodman later said that Teva had originally contacted Allergan in an effort to acquire Actavis, but was turned down. A similar attempt to acquire Sandoz from Novartis was also rejected. Mylan's attempt to take over Perrigo gave Teva a chance to put an offer to Mylan's shareholders on the table that would be preferable for them to a Perrigo adventure.

Mylan's management pulled out all the stops in its opposition to Teva's offer. Teva did not give up; it started buying shares in Mylan on the open market, spending a total of over $1.5 billion on this move. At the same time as its struggle against Teva, Mylan's management continued pushing its effort to take over Perrigo.

Teva never managed to make an official offer for Mylan. In July 2015, just before submitting a binding bid, Teva decided to check again whether Allergan had changed its mind about agreeing to sell Actavis. Allergan, fortunately for it in retrospect, agreed, and the $40 billion deal was signed, becoming the biggest acquisition in Teva's history.

The capital market welcomed the acquisition of Actavis with enthusiasm. Teva's share price soared to a new peak, pushing the company's market cap up to $61 billion. Even before the deal was completed, however, doubts began to surface about the high price, in view of the fall in generic drug prices that had already begun at the time.

Perrigo lost investors' confidence

While this was happening, Mylan was free to focus on the acquisition of Perrigo. As part of this attempt, which also included legal proceedings, the two companies' managements visited Israel to meet Perrigo's investors here, and Mylan also had its shares listed on the TASE. Perrigo's management eventually succeeded in persuading its shareholders to continue granting it their trust, thanks to the value created in previous years, and they voted against Mylan's offer.

It is highly likely that many of them now regret their votes. Mylan's final offer, a combination of shares and cash, valued Perrigo at $26 billion. After that offer was rejected, Perrigo went into a tailspin, repeatedly cutting its guidance, revising past financials, and frequently replacing its CEO, after Joseph Pappa, the CEO who led the opposition to Mylan's offer, unexpectedly resigned shortly afterwards.

Perrigo lost investors' confidence, and its share price plunged. The company had trouble recovering, among other things because of two large recent tax assessments in Ireland and the US.

Perrigo's current CEO is Murray Kessler, who led the strategy of switching from healthcare to selfcare - less emphasis on pharma and more on the consumer market (designed to achieve higher multiples).

What is the next stage for the three companies? Perrigo is concentrating on its new strategy, and investors are waiting to see actual results, while anticipating news about the expected sale of the company's prescription drug business. At Teva, people are waiting to see the extent of the company's exposure to the various legal proceedings in which it is involved, and how much this will affect its limited ability to reschedule debt in the market, as it will have to do next year.

Analysts predicted that the Pfizer-Mylan deal would lead to further developments in the generics industry, and Teva's share price responded positively in recent days. The market greeted the Mylan deal with approval.

Morgan Stanley analysts wrote that Mylan would benefit from advantages of scale, lower leverage, and a handsome dividend return, in addition to better corporate governance. At the same time, there are also risks, and UBS mentioned the new company's high exposure to the Chinese market, where prices are under downward pressure.

Published by Globes, Israel business news - en.globes.co.il - on August 1, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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