Teva's Allergan acquisition looking much more expensive

Erez Vigodman

Teva hurt by "Reuters" reports it will have to sell off $2 billion in assets it is acquiring in order to obtain antitrust approval.

It appears that the negative sentiment towards generic drug companies' shares and the challenges in pricing generic drugs in the US are liable to have a more substantial effect on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) than its competitors. Managed by CEO Erez Vigodman, Teva was already the world's largest generic drug company, but after the completion of its acquisition of Allergan generic division Actavis, Teva's generic division (managed by Sigurdur Olafsson, who is very well regarded in the market) will grow even larger.

The problem is that since the acquisition was reported in July 2015, the state of the market has changed, both in greater awareness in the US of the need to restrain drug prices (which was an issue in the presidential campaign) and in the multiples and prices of the shares, which have since fallen substantially.

The Teva share, which surged to a record of $72 (reflecting a $61 billion market cap) immediately following the announcement of the Actavis acquisition, is now traded at $50.30, a fall of 30% from its peak (reflected a $45.6 billion market cap). The $40.5 billion acquisition price, on the other hand, has not changed. Is it likely to change following possible discussions on the subject between Teva, the buyer, and Allergan, the seller? Teva did not respond in the matter today.

Will forecasts be lowered?

Teva will publish its first quarter reports tomorrow, and investors are hoping for a little more certainty and clarity about the huge deal on the agenda. Teva has already postponed the completion date for the deal twice, and its latest briefing spoke of completing the deal by this June. The delays were caused by the length of time taken in examining the deal by the US antitrust authorities.

As part of completing the deal, Teva will have to sell certain product lines in which its business overlaps that of the acquired division in order to prevent damage to competition. At the end of last week, Reuters quoted a source "familiar with the subject" as saying that Teva was likely to sell assets worth $2 billion - double the previous estimate. The same source predicted that the deal would be completed on time.

Bank of Jerusalem (TASE: JBNK)) today said that the a portfolio of products with $800 million in annual sales was involved. Analyst Jonathan Kreizman predicted that as a result, Teva was liable to downwardly revise its synergy forecast from the deal.

"The effect of the (poor, S.H.-V.) financial results of Endo (another drug company whose share plummeted, S.H.-V.) is not the story," Poalim IBI Underwriting and Investments Ltd. (TASE:PIU) pharma and biomed analyst Steven Tepper wrote today, noting that Endo's generic division was small and concentrated in the analgesic niche. "This should not affect companies like Teva, Mylan, and Sandoz, which have a broader range of products." He believes that there will be no surprises or drama in Teva's reports tomorrow.

On the other hand, the effect on Teva of selling assets worth $2 billion for the sake of the Allergan deal is more significant, he believes. "Assuming that this is true, in my calculations, it means the sale of 20% of Allergan's original generic division to third parties. The sales will be under pressure, at relatively low prices, in order to get rid of them as fast as possible in order obtain approval, meaning that the effective price of the acquisition is become more expensive. That is what is putting pressure on the share."

"Globes": What will this actually mean for completion of the deal?

Tepper: "Tomorrow's conference call will focus on this point, in order to try to understand how expensive it will be. It is true that this is an important deal with a strategic rationale, room for operating synergy, and importance for Teva's growth. Everything has a price, however, and when the price becomes more expensive, it is less attractive.

"In an extreme case, if Teva decides that the deal is far more expensive than it believed, there is an extremely unlikely possibility that the company will call the deal off and pay a $2.5 billion penalty to Allergan. That will be raised as on option only in order to put pressure on Allergan to lower the price. I think that Allergan, especially after Pfizer left the picture (Pzifer planned to acquire Allergan, except for the division acquired by Teva, but the deal was called off, S.H.-V.), really does not want to take back its generic division."

Assuming that the deal is eventually closed on the original conditions, is there reason for concern about Teva's leverage?

"It's hard to say without seeing the final numbers for the deal. Under the original terms, it appeared that Teva was stretching its leverage, and we wouldn't want to see it reach the same state of leverage we saw at companies like Valeant and Endo, although neither of those companies had the broad diversity that Teva has. All in all, there's a limit to how much a company can leverage itself. As it looks now, Teva can meet its debts, and something drastic will have to happen before it becomes necessary to worry about this."

Published by Globes [online], Israel business news - www.globes-online.com - on May 8, 2016

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

Erez Vigodman
Erez Vigodman
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