Israeli drugmaker Teva Pharmaceuticals Industries Ltd. agreed to buy the generic-drug business of Allergan Plc for about $40.5 billion in cash and stock, and ended its hostile bid for Mylan NV.
Teva will pay $33.75 billion in cash and $6.75 billion worth of shares at today’s price, or about 10 percent of the enlarged company, the Petach Tikva, Israel-based company said in a statement. Teva’s American depositary receipts surged 16 percent to $72 at the close in New York. Mylan shares fell 15 percent to $56.37.
The deal bolsters Teva’s position as the world’s largest maker of generic drugs, and gives it greater negotiating power with governments and private-health insurers. It also allows the drugmaker to extricate itself from an increasingly antagonistic pursuit of Mylan, which is in the midst of trying to buy Perrigo Co.
“We’re looking at a fairly similar deal to the Mylan offer but without all the uncertainties attached to a hostile situation,” said Jonathan Kreizman, an analyst at Bank of Jerusalem. “Teva and Allergan have less overlap than Teva and Mylan.”
The acquisition extends a wave of mergers that has swept over the health-care industry. The Teva transaction takes this year’s total of announced pharmaceutical and biotech deals to a record $220.72 billion, surpassing last year’s $220.66 billion, according to data compiled by Bloomberg.
Teva says it manufactures more than 1,000 different generic drugs, and that one in seven generic prescriptions dispensed in the U.S. is with the company’s products. Allergan says it also produces more than 1,000 generic products, including drugs for anxiety and contraception.
Allergan, which makes the blockbuster wrinkle treatment Botox, said Sunday it would buy the biotech company Naurex Inc., which is developing a fast-acting antidepressant. The $560 million all-cash transaction is expected to close by year-end.
Teva expects its Allergan transaction, which both boards backed unanimously, to close in the first quarter of 2016 and boost earnings per share. Also today, the company raised its earnings per share estimate for 2015 to between $5.15 and $5.40, up from an earlier forecast of $5.05 to $5.35. Earnings per share were $1.43 in the second quarter, Teva said.
Teva’s purchase will get close scrutiny by the U.S. Federal Trade Commission. Some divestitures will probably be needed for Teva to win approval, but the sales won’t be too significant, said Jennifer Rie, a litigation analyst with Bloomberg Intelligence.
“Teva has FTC experience and knows what needs to be done and likely has a good grasp now on what needs to be sold,” she said.
Teva had been pursuing a $40.1 billion deal to buy Mylan since April, a merger rejected by Mylan management as culturally unfit. Last week, Mylan’s independent foundation exercised an option to acquire shares that let it control half of the company in a move that rendered Teva’s attempt to win over a majority of its shareholders much more difficult. Abbott Laboratories, Mylan’s top shareholder, in June said it backed Mylan’s plan to avoid being taken over by Teva.
Bloomberg reported on July 25 that Allergan was exploring a breakup of the company, including the possible sale of its generics business.
Mylan is pursuing Dublin-based Perrigo, a campaign that may now get fresh impetus as pressure mounts to become bigger. Perrigo, which makes prescription and over-the-counter drugs, has thus far rebuffed Mylan’s $33 billion offer.
Mylan will ask shareholders to vote Aug. 28 on the Perrigo offer, the company said Monday in a filing. Perrigo shares rose 3.8 percent to $193.60.
Teva, which had accumulated a 4.6 percent stake in Mylan ahead of a potential legal battle, said today it will “review its options” on the holding.
Teva may have a key advantage in integrating Allergan’s generic business because its own head of generics, Siggi Olafsson, formerly led that business at Allergan. Olafsson was brought in to Teva after leaving Actavis Plc, which switched its name to Allergan after agreeing to buy the maker of Botox in November 2014 for $66 billion.
“Teva’s head of generics knows the business well, so he should be successful in integrating it,” said John Park, co-portfolio manager at Jackson Park Capital LLC’s Oakseed Opportunity Fund, which owns Teva shares.
Actavis agreed to buy Allergan after spending months locked in bitter conflict with Valeant Pharmaceuticals International Inc., a rival drugmaker that had started a hostile takeover effort. The deal was completed in March. The generics business generated sales of $6.75 billion last year.
Teva is a “natural consolidator” in generic medicines, Allergan CEO Brent Saunders said in an interview on CNBC. The deal took three weeks to complete, from start to finish, he said.
Much as Teva had sought with the Mylan approach, Allergan’s generic division will allow it to immediately grow in size and have more negotiating power with U.S. payers, which have been consolidating in recent years. Teva said the combined entity will have pro-forma revenue of about $26 billion and achieve cost and tax savings of approximately $1.4 billion annually.
“While this is a potential rapid pivot from the pursuit of Mylan, we believe the strategic rationale is exactly the same,” said Ken Cacciatore, an analyst at Cowen & Co. in New York. “There is only one good and meaningful way to maximize the value of these large, mature generic franchises and that is to extract maximum cost synergies.”
The deal doesn’t include Allergan’s program to develop biosimilar drugs, which Louise Pearson, an analyst at Berenberg, said is “disappointing given the gap in Teva’s portfolio.” Even so, the deal has “obvious benefits” including Allergan’s generic injectables and an improved geographic reach, including in India, she said.
Allergan’s Saunders said the deal terms were “compelling” and that the company can now focus on higher-margin branded medicines and the aesthetics business that includes Botox.
Barclays Plc and Greenhill & Co. are serving as financial advisers to Teva, while Allergan got advice from JPMorgan Chase & Co. Sullivan & Cromwell LLP and Tulchinsky Stern Marciano Cohen Levitski & Co are its legal counsel. Latham & Watkins LLP gave legal advice to Allergan.
Teva said most of the cost and tax savings should take place by the third anniversary of the deal’s close. The savings will come from efficiencies in operations, manufacturing, and sales and marketing, it said.