Teva would have welcomed a merger with Pfizer

Eli Tsipori

Teva was not the right match for Pfizer, probably because Mylan's financial ratios were much better.

The Pfizer-Mylan deal, in which Pfizer merged its off-patent division with Mylan, one of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) competitors, is both good and bad news for Teva.

The good news is that the major pharma companies realize that the generics shares have been battered enough to make them a target for a merger with the pharma companies' generics operations - Pfizer's shareholders will hold 57% of the merged company. The intense competition in the generics market and the slide in generic drug prices, a result of many causes, have made the generics companies very small in terms of market cap.

The bad news is that Teva was not the right match for Pfizer. This may be because of the business relations between Mylan and Pfizer, but there may very well be another reason - Mylan's financial ratios are better than those of Teva.

I am convinced that Teva's board of directors would have jumped for joy at such a deal, saying "Thank goodness we've got Teva's debt off our backs. Goodbye to independent Teva and hello to a new company with a dowry of a pharmaceutical giant." I am also sure that Teva's board of directors would welcome a different match - this is definitely a lifeline for a company battling for survival.

All of this, however, is merely an entertaining theoretical discussion and nothing more. What is relevant is the state of Teva, which is becoming worse by the minute. Teva has to do something to stabilize itself financially. This "something" can be a deal like the one between Pfizer and Mylan, a capital injection that will substantially dilute Teva's shareholders, a merger with another independent generics company, the sale of activities in order to improve its balance sheet, or a debt settlement, rescheduling, or rolling over - anything that will avert the danger. It appears, however, that this "something" will not be another aggressive streamlining plan in Teva. That will probably not be enough.

Teva's main problem is its debt structure. The company will manage to repay its debt falling due this year, which consists mostly of bonds, but the debt will be very troublesome in the future, starting in 2020.

Teva will have to repay $8.3 billion within three years, and with a weak cash flow and a threadbare treasury, that is a difficult challenge. Teva's big advantage, as ridiculous as it may sound, is its reduced market cap of only $9 billion, which is an invitation to a takeover, despite the company's problematic debt structure, but this is poor comfort.

One thing is sure - anyone who dreamed of, wished for, or hoped for a quick turnaround in Teva has realized that healing the company in such difficult market conditions and so large a debt is not a matter for magicians, not even if they are paid huge salaries. Let's be realistic: Teva will never again be what it was - a $70 billion company at its peak.

All that remains is to cling to the memories and try to learn from them, because history rarely repeats itself.

Over four years ago, Teva offered to acquire Mylan for $40 billion and planned to pay half of the amount in cash and the rest in Teva shares. It was a kind of hostile takeover; Mylan refused, Teva improved its offer, Mylan still refused, and the companies parted with especially acrimonious mutual mudslinging.

Teva added insult to injury by buying Mylan shares on the market in order to promote the deal, on which it lost a lot of money. Following yesterday's leap in the wake of the Pfizer deal, Mylan's market cap is $10.7 billion, ahead of Teva with $9 billion. I well remember how confident Teva's management was in the results of this purchase, how it set a specific price that it would be able to reach, and how confident it was that the purchase would pay for itself quite quickly.

Euphoria is one of the biggest pitfalls for enterprises and managers, and euphoria accompanied by a sky-high share price is the worst of all.

Teva's share price jumped 5% yesterday, which some called "optimism" caused by the Pfizer deal - maybe a pharmaceutical giant will rescue Teva from its misery. This is a poor sort of optimism, but this is all that Teva has left to hope for - that it will be next in line after Mylan. This will officially seal the greatest destruction of value in Israeli corporate history.

Published by Globes, Israel business news - en.globes.co.il - on July 31, 2019

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

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