Industry Overview
During the past weeks we observed a lot of activity in the healthcare sector centering around three companies: Mylan, Perrigo and Teva.
Mylan is a Dutch pharmaceutical company headquartered in Amsterdam. It is among the largest generics and specialist pharmaceutical companies in the world, manufacturing and marketing approximately 1,400 pharmaceutical products. Mylan’s business model focuses on low-cost high-quality products. Its M&A history includes acquisitions of the generic businesses from Merck (2007) and Abbott Laboratories (2014).
On April 9, 2015, Mylan announced its intent to buy Dublin-based Perrigo, the world’s largest producer of OTC pharmaceuticals. Furthermore, Perrigo produces generic prescription pharmaceuticals, infant formulas, nutritional products, animal health and dietary supplements, active pharmaceutical ingredients (API), and medical diagnostic products.
Eight days later, Teva Pharmaceutical Industries announced a plan for a hostile takeover of Mylan. Israle-based Teva is one of the largest producers of generics and OTC products.
Timeline: Mylan/ Perrigo/ Teva
February 27: Mylan sealed a $5.3bn deal for Abbott Laboratories’ drug pipeline in overseas markets, a step that lets Mylan transfer its headquarter to the Netherlands through a so-called inversion deal. As part of the deal, Mylan granted Abbott a stake of about 22% of the company’s equity.
After the announcement of the transaction, Mylan’s CEO Heather Bresch flagged that Mylan plan was focused on pursuing more M&A activity in the wake of the high market momentum. In one of her declarations, she highlighted that “the deal would significantly enhance our ability to pursue additional highly strategic and financially accretive opportunities.”
March 2: After Mylan reported its fourth-quarter and full-year results, Ms. Bresch reiterated the company’s acquisition plans. ”You can continue to expect us to aggressively pursue additional acquisition opportunities that make financial and strategic sense for our company.”
March 11: Rumors say that Teva might be interested in acquiring Mylan. The notice drove Mylan shares’ price up.
March 17: J.P. Morgan Chase & Co. analyst Chris Schott anticipated that Mylan could eventually represent a target for other pharmaceutical firms and mentioned Teva as one of the firms possibly interested in acquiring Mylan.
April 6: Mylan announces to be willing to acquire all the outstanding shares of Perrigo with an unsolicited offer of $205 per share, in a deal expected to be worth $28.9bn.
April 8: Before the market opened, Morgan Stanley reported to clients defining Mylan a “prime beneficiary” of consolidation in the pharmaceutical industry and announced the “potential for Mylan as both a target and an acquirer is compelling.” In early trading, Mylan’s stock price rocketed and by 11:30 a.m., the company disclosed its intentions to acquire Perrigo, which made Mylan’s stock rise above $70 per share at close (up 13% from the previous day).
April 21: Teva made a proposal to buy Mylan for $82 per share in cash and stock deal worth about $40bn.
April 24: Mylan increased his bid offering $60 in cash and 2.2 shares for every Perrigo share, a move to push away the hostile takeover by Teva. It valued Perrigo at about $222 a share, totaling $32.8bn. However, the drug maker was again rejected.
April 27: Mylan refused Teva’s offer of $40bn.
April 29: Mylan offered $75 in cash and 2.3 shares for every share of Perrigo bringing up its offer to a total amount of $35.6bn in cash and stock. Perrigo claimed that the offer was still below Mylan’s original proposal of $205 per share, since the cash-and-stock bid relies on shares inflated by separate takeover interest in Mylan from Teva Pharmaceutical Industries Ltd. “Today’s announcement from Mylan continues to propose a price lower than the previously rejected proposal,” Perrigo announced in a statement.
May 5: Teva Pharmaceuticals Industries revealed its latest attempt to convince Mylan of the benefits of its proposed $82 per share takeover of the company. The Israeli company formalised in a statement its willingness to meet with Mylan and its advisors immediately. “Teva’s proposal is extremely attractive for Teva and Mylan stockholders and all other stakeholders […]”
May 6: John Paulson’s hedge fund increased its stake in Mylan, making it the firm’s second largest investment and signaling Paulson wants a bigger say in the fate of Mylan.
Deal Terms– Mylan’s takeover of Perrigo
At first, the deal has been structured as a 100% acquisition (public takeover) worth $28.9bn. As the offer has been rejected, Mylan came back two weeks later with another offer.
Mylan’s second bid on April 24 consists of $60 in cash and 2.2 shares for each share of Perrigo bringing Perrigo’s value to about $33bn. Prompt rejection followed from the target’s management, citing “lower than previously rejected proposal”, as Mylan became a target itself, inflating its share price.
Less than a week later, on April 29, it was announced that Mylan has increased its offer for Perrigo valuing it at $35.6bn. The offer comprised of $75 per share in cash and 2.3 Mylan shares for each Perrigo share held. More specifically, Mylan is willing to pay a premium of 47.07% over the target’s closing share price of $164.71 on April 7, when the rumors of the deal started, and a subsequent premium of 29.96% on the announcement date of April 28.
Later the same day, Perrigo announced that it has rejected the unsolicited increased offer by Mylan. According to Perrigo’s CEO “the Board believes the proposal substantially undervalues Perrigo and its growth prospects and that continued execution by the management team against our global growth strategy will deliver superior shareholder value“.
Teva’s bid for Mylan included an even split between cash and stock at $82 per Mylan’s share, representing a 48% premium before the rumors started on March 10 and value of $40bn. However, the Dutch company rejected the offer, claiming no interest unless the valuation comes closer to $100 per share.
Perrigo was advised by JP Morgan and Morgan Stanley, Mylan’s advisor is Goldman Sachs. Teva is advised by Barclays and Greenhill.
Deal drivers
Having successfully completed the acquisition in February of Abbott’s drug portfolio in developed overseas markets in an attempt to lower its tax rate by moving its tax domicile to the Netherlands, Mylan is now back on the scene trying to buy the competitor Perrigo for $35.6bn (initially $28.9bn).
A deal with Perrigo would help Mylan become a new heavyweight of the industry with a combined turnover of $15.3bn, 70 manufacturing sites around the world, a clear path to reach 7 billion customers. The acquisition would permit Mylan to expand the over-the-counter product segment, which has a high growth potential. With about 76 percent of Perrigo’s revenues stemming from the sale of OTC medicine, this segment would account for 30 percent of the combined company’s turnover. Mylan would, however, remain primarily focused on its generic medicine business, benefitting from the widening of its portfolio.
Financially, the deal was expected to generate at least $800m of annual pre-tax operational synergies within four years and Mylan’s revenues were expected to almost double, up from $7.7bn in 2014. The transaction was expected to be immediately accretive to EPS. Moreover, Perrigo’s high amount of cash in hand of $805.4m combined with its stable free cash flow would drive investments in growth opportunities.
Despite the clear potential benefits that the deal would bring, some say that this offer could be a defensive move in order to discourage Teva from trying to buy Mylan. Indeed, Israel’s Teva Pharmaceuticals made an unsolicited bid to buy Mylan for $40bn.
The acquisition of Mylan would help Teva become a leading company with a pipeline of over 400 generic drugs seeking approval. These generic drugs will replace the blockbuster drugs – of which patents are expiring – that have generated billions of dollars in sales for major pharmaceutical companies. The combined company would account for 25 percent of the US generic market, and would allow Teva to regain the market share lost in profit of Indian manufacturers.
The consolidation would help Teva become a leader in multiple sclerosis, respiratory, pain, migraine, movement disorders, and allergy therapeutics. Moreover, it would enhance global infrastructure and future commercialization with enhanced scale, production network, end-to-end product portfolio, commercialization capabilities, and geographic reach.
The deal was expected to create substantial cost synergies and tax savings within three years amounting to approximately $2bn annually. Cost synergies would predominantly come from manufacturing and R&D with an estimated gain of about $1.2bn. The combined company was expected to generate a turnover of more than $30bn by 2016 as well as cash flow from operations greater than $6bn. With Teva’s generics revenue falling 8 percent during the last quarter of 2014, the acquisition of Mylan would help the company boost its generic business.
To contact the authors:
Peter Valach peter.valach.mail@gmail.com
Alexandra Heidemann alexandra.heidemann@myebs.de
Riccardo Zanasi riccardozanasi@libero.it
Luca Papa luca.papa@studbocconi.it
Basile Zurcher basile.zurcher@studbocconi.it
Francesco Maria Fama francesco.fama@yahoo.it
Giorgia Caruso giorgia.caruso@studbocconi.it
To contact the editor responsible for this story:
Peter Valach peter.valach@gmail.com
Bocconi Students M&A Circle 
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