UPDATE: Teva to buy Allergan's generic drug business for $40.5 billion

UPDATE: Teva agreed to acquire Allergan's global generic pharmaceuticals business under a cash and stock deal valued at $40.5 billion, Allergan announced Monday.

Previously, according to people familiar with the matter, Teva entered into negotiations to acquire Allergan's generic drug unit. The sources indicated that an agreement for the business, which is valued between $40 billion and $45 billion, could be reached as early as July 27.

Under the proposal, Allergan's generic drug business would be spun off and subsequently merged with Teva, the sources said. An earlier report indicated that Allergan was considering spinning off or selling all of its generic business following the completion of its merger with Actavis.

The news comes as Teva has been pursuing a potential takeover of Mylan. Earlier this week, an independent Dutch foundation set up by Mylan exercised an option to acquire preferred shares in the drugmaker. Meanwhile, the Dutch company has instead attempted to move forward with a takeover of Perrigo, a move that has been supported by Mylan's largest shareholder Abbott.

Bloomberg analyst Elizabeth Krutoholow suggested that the timing may be right for Allergan to consider a sale of its generics business, noting that "they may be able to command a significant premium given the recent interest in the sector." Citing profit margins on branded products of as much as 80 percent, compared with about 50 percent for generics, Krutoholow noted that "with [CEO Brent] Saunders in charge, the company may lean more" to branded drugs "since that is his area of expertise. It’s a more attractive growth area for the company."

Bank of Jerusalem analyst Jonathan Kreizman explained that "this is exactly the same logic behind the Mylan acquisition and it touches on the trend wherein generic firms like Teva execute mergers as a counterweight to a drop in market share" and provide both a counterbalance and a better bargaining position with their customers. He added that "from what we know, Allergan's generics operation suits Teva better than Mylan's. Allergan is a firm that is not in direct competition with Teva with its leading products, as opposed to Mylan which is battling Teva on several fronts, like the generic version of Copaxone, which Mylan is trying to launch." Further, he suggested that "it must be noted that here Teva is entering a friendly not hostile merger. It has implications for confidence over the short-term and in better integration in the long-run."

ISI Group analyst Umer Raffat agreed with Kreizman, noting that "theoretically, a Teva/Allergan generics business combo offers Teva the opportunity to get what it was looking for without having to go through Dutch courts." Migdal Capital Markets analyst Steven Tepper further noted that "the idea is to assure Teva continues to be the number one generics firm in the world, particularly in the US. The second element of the deal after completing the acquisition, Teva could streamline Allergan's generics operation, which these days had been pushed a bit to the side." He added that "I think this is a positive story, whatever happens. Teva is showing the leadership of Erez Vigodman and it is sending a signal to the market. This is the best timing to execute this deal. Now is the time to do it."

Meanwhile, it was announced Sunday that Allergan entered into a definitive agreement to acquire Naurex for $560 million, plus potential research and development and sales-based milestone payments. The acquisition will provide Allergan with access to Naurex’s therapies for disorders of the central nervous system, including rapastinel (GLYX-13), an intravenous drug that is moving into Phase III trials in depression and NRX-1074, an oral anti-depressant currently moving to Phase II trials.

For related analysis, see ViewPoints: Teva’s long-awaited tender offer for Mylan may be imminent – what are its odds of success? See also ViewPoints: Come to Papa – Perrigo encourages another Mylan bid.

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