Teva to buy Allergan's generic drug business for $40.5 billion; drops Mylan bid

Teva agreed to acquire Allergan's global generic pharmaceuticals business under a cash and stock deal valued at $40.5 billion, the companies reported Monday. As part of the transaction, which is expected to close in the first quarter of 2016, Allergan will receive $33.75 billion in cash as well as shares of Teva valued at $6.75 billion, representing around 10 percent of the Israeli drugmaker.

Erez Vigodman, Teva's CEO, noted that the purchase "delivers on Teva's strategic objectives in both generics and specialty." The transaction has been unanimously approved by the boards of directors of Teva and Allergan. Shares in Teva rose as much as 11 percent on the news.

Teva also said Monday that it has withdrawn its cash and stock proposal to acquire all of the outstanding ordinary shares of Mylan for $82 per share, or around $40.1 billion. The Israeli drugmaker, whose advances had been rebuffed by Mylan, noted that it "does not intend to continue to pursue a transaction" with the company at this time. "In light of our strategic acquisition of Allergan Generics... our board and management team has decided that withdrawing the proposal to acquire Mylan is in the best interests of Teva stockholders," Vigodman remarked.

"We're looking at a fairly similar deal to the Mylan offer but without all the uncertainties attached to a hostile situation," commented Bank of Jerusalem analyst Jonathan Kreizman, adding "Teva and Allergan have less overlap than Teva and Mylan." Shares in Mylan dropped as much as 12 percent on the news.

According to Teva, following the addition of Allergan's generic drug business, the company will have approximately 320 pending ANDAs in the US, including around 110 first-to-file applications. Teva said that the combination will have a commercial presence across 100 markets, including a top three leadership position in over 40 markets. The Israeli drugmaker added that the deal "will help eliminate inefficiencies and duplications in the global generics space and will allow Teva to better focus resources and efforts in complex generics, biosimilars and specialty products in key therapeutic areas."

Under the deal, Teva will acquire Allergan's legacy Actavis global generics business, including the US and international generic commercial units, third-party supplier Medis, global generic manufacturing operations, the global generic R&D unit, the international over-the-counter commercial unit and some established international brands. Allergan noted that it will also retain 50 percent of Teva's future economics from a generic version of Celgene's Revlimid (lenalidomide).

Teva indicated that following the deal, it is expected to have annual sales of approximately $26 billion with earnings of around $9.5 billion in 2016, including estimated revenue of $11 billion outside of the US. Teva added that the deal will be "significantly" accretive to earnings, estimated at double digits next year and more than 20 percent in year two and year three following closing of the transaction.

Teva also suggested the purchase will lead to cost synergies and tax savings of approximately $1.4 billion annually, most of which should occur within three years of the deal's close. The company added that the savings will be achieved through efficiencies in operations, manufacturing, and sales and marketing.

Commenting on the divestment, Allergan CEO Brent Saunders said "this transaction will accelerate Allergan's evolution into a branded growth pharma leader, enable a sharpened focus on expanding and enhancing our global branded pharmaceutical business and strengthen our financial position." Saunders indicated that proceeds from the sale will be used "to further accelerate the robust growth prospects of our branded business," adding "we will have the potential to add scale in existing therapeutic areas, expand into new therapeutic areas and geographies and evaluate strategic transformational deals."

Meanwhile, Cowen and Co. analyst Ken Cacciatore said "while this is a potential rapid pivot from the pursuit of Mylan, we believe the strategic rationale is exactly the same," adding that "there is only one good and meaningful way to maximise the value of these large, mature generic franchises and that is to extract maximum cost synergies." John Park, co-portfolio manager at Jackson Park Capital, noted that "Teva's head of generics knows the business well, so he should be successful in integrating it."

However, Berenberg analyst Louise Pearson suggested it was "disappointing" that the acquisition did not include Allergan's biosimilar development programme "given the gap in Teva's portfolio." Still, Pearson said the deal has "obvious benefits," such as Allergan's generic injectables and expanded geographic reach, including in India.

Vigodman also indicated that Teva would be involved in more mergers and acquisitions, adding that the company could continue making purchases for specialty pharmaceuticals this year and next. The chief executive said "we look at opportunities to execute against our priorities in the generic space, especially in the growth markets." Last October, Teva stated it would stop conducting research outside its core focus of central nervous system and respiratory diseases.

Meanwhile, in regards to potential concerns over consolidation of the generic drug industry, a recent survey conducted by the National Community Pharmacists Association found that almost all pharmacists experienced a "large upswing" in the cost of buying generic drugs in the six months prior. However, Vigodman denied the price increases were indicative of an overall industry trend, saying "look at the last seven years, what you see is an erosion of generic drug prices by 50 percent…We believe given the inefficiencies, overcapacity in the generic space, the space calls for transformation."

In separate news Monday, Teva reported preliminary second-quarter results with revenue down 2 percent from the year-ago period to about $5 billion, slightly outpacing analyst expectations. However, the company raised its earnings per share outlook for the year to between $5.15 and $5.40, from a prior forecast of $5.05 per share to $5.35 per share.

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