A NEW OUTBURST OF THE HEALTHCARE M&A FIRE – TEVA TO ACQUIRE ALLERGAN

Teva Pharmaceutical Industries will pay $40.5bn in cash and stock for Allergan’s generic drug business, sustaining Teva’s position as the world’s number one producer of generics.

Industry Overview

Teva Pharmaceutical Industries Ltd. is an international pharmaceutical company with its headquarters in Israel. Its main business is producing generic drugs, but it also has business in the areas of “active pharmaceutical ingredients” and “proprietary pharmaceuticals”. Teva is a specialist in treatments for the Central Nervous System, for respiratory diseases, for painkillers, oncology, women’s health and immunosuppressive treatments for transplant patients. It is the largest manufacturer of generic drugs in the world and one of the 15 largest pharmaceutical companies worldwide. It has production facilities in Israel, Europe, North and South America. Teva is listed on the New York Stock Exchange as well as on the Tel Aviv Stock Exchange.

In 2014, Teva reported revenues of $20,272m and net income of $3,055m. It is a very innovative firm with new product launches and patents every month, e.g. in 2014, they launched 19 new generics products in the US, 209 in Europe, and 87 in the rest of the world. Total shareholder return for 2014 was 47%.

Teva has a great and successful history of past acquisitions, e.g. the acquisition of Ikapharm in 1980, which helped Teva to grow to one of the world’s biggest healthcare companies. In the 2000s, several important acquisitions followed: US-based Ivax Corporation (2006), US-based Barr Pharmaceuticals (2007), and Germany-based Ratiopharm (2010) – to name a few. These acquisitions all opened up a huge global market for Teva.

In April 2015, Teva offered to acquire Mylan for $40bn only shortly after Mylan made an offer to Perrigo for $29bn. Teva’s offer for Mylan was contingent on Mylan not continuing with its acquisition of Perrigo. The deal failed due to a violation of US anti-trust laws and due to the announcement of Teva to acquire Allergan’s generic drug business instead.

Allergan Plc. (previously known as Actavis) is a global pharmaceutical company based in Dublin (Ireland). It produces branded pharmaceuticals, generic drugs and over-the-counter medicine. The key therapeutic categories are: Aesthetics/Dermatology/Plastic Surgery, Neuroscience, Eye Care, Women’s Heath, and Cardiovascular and Infectious Diseases. The product portfolio includes brands such as Botox, Namenda or Latisse. Allergan is listed on the New York Stock Exchange.

Timeline

On July 27, 2015, Teva announced to refrain from acquiring Mylan, but that instead it has made a $40.5bn offer to Allergan to acquire its generic drugs business unit.

The transaction was unanimously approved by the Boards of Directors of Teva and Allergan and is expected to close in the first quarter of 2016.

Deal terms

The value of the transaction is around $40.5bn; $33.75bn is paid in cash and $6.75bn in Teva shares for an estimated ownership of under 10%. The number of Teva shares has been determined on Teva’s volume weighted average trading prices during 15 days prior to the announcement and the five days following it.

After the announcement, the share price of Teva grew by 17%, whereas the one of Allergan increased by 6%.

The $33.75bn cash payment will be financed through a combination of new equity, debt financing and cash on hand. The company reassured its intention to maintain balance sheet and capital structure consistent with investment grade credit rating criteria.

The deal is expected to provide Teva with strong free cash flow of approximately $6.5bn in 2016, increasing in the subsequent years. This liquidity will be used to swiftly deleverage and to keep the company on the edge when it will come to seize new opportunities to expand its product portfolio.

According to Teva’s sources, the transaction should help to achieve about $1.4bn of cost synergies and tax savings (they would have amounted to $2bn with the Mylan acquisition) and an estimated Non-GAAP EPS accretion of more than 20% in year 2 and year 3 after the closing.

Teva expects the savings to be generated by improvements in operations, G&A, marketing, sales and manufacturing efficiencies, which will be achieved through the cuts of overlapping divisions, economies of scale and global scale integrations.

The financial profile will benefit from the high revenue diversification and the market share consolidation in the generics market characterized by low barriers to entry for brand new smaller companies.

The deal may have regulatory implications: according to sources deeply involved in pharma M&A transactions, Teva may need to sell some assets in order to satisfy antitrust authorities.

Deal Drivers

The acquisition of Allergan by Teva comes after Teva’s failed attempt to take over Mylan. The main motive of the acquisition of Allergan is the investor pressure in order to keep revenues growing in an extremely competitive and consolidating sector. The current M&A rush in the pharmaceutical industry is rooted in a narrowing window of opportunities and in the threatening of profit margins caused by the steep competition from smaller players, the expiration of patents protection on branded highly profitable drugs (Copaxone, in particular, which generates about 50% of Teva’s profits).

Pharma giants are thus in front of a cliff. In order to keep leadership in cutting-edge niches and to meet investor expectations about revenues, they are pushed to achieve cost synergies and market share growth. Acquisitions are far cheaper than in-house product development, especially considering the low cost of financing due to low interest rates.

This strategic acquisition brings together two leading companies in the generics business, creating an entity, which can rely on a leading overall product portfolio in terms of differentiation and durability. This constitutes a valuable insurance for the stability of future free cash flow and revenues.

Furthermore, this remarkable asset will be complimented by significantly expanded leadership positions and strengthening of operations. Erez Vigodaman, president and CEO of Teva, stated: “we will establish a strong foundation for long-term, sustainable growth, anchored by leading generics capabilities and a world-class late-stage pipeline. Our respective portfolios of generic medicines and applications are highly complementary, providing Teva with high quality growth and earnings visibility, and the scale and resources to expand upon our specialty capabilities.”

With pro forma revenues of approximately $26bn and combined EBITDA of approximately $9.5bn anticipated in 2016, this acquisition reinforces Teva’s strategy, accelerates growth and diversifies revenues both by product and geographically, supporting its new business model. Moreover, the strengthened financial profile helps Teva to be better positioned in the integrated, innovative specialty and generic research to support top-line growth and expand its portfolio.

Teva is being advised by Barclays and Greenhill&Co. Sullivan & Cromwell LLP and Tulchinsky Stern Marciano Cohen Levitski & Co are serving as legal counsel.


To contact the authors:

Francesco Maria Fama                       francesco.fama@yahoo.it

Alexandra Heidemann                        alexandra.heidemann@studbocconi.it