The $100 Billion Deal Is Still Out There for Pharma

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Inside Teva Pharmaceutical Industries Ltd.
An employee works with sterile products during the manufacture of pharmaceuticals inside Teva Pharmaceutical Industries Ltd.'s factory in Hungary. Photographer: Akos Stiller/Bloomberg

Why stop at $221 billion? Drug companies are entering another round of dealmaking, after plowing past the global record.

Teva Pharmaceutical Industries Ltd.’s $40.5 billion agreement Monday to purchase Allergan Plc’s generic-medicines business puts the mechanism in place to trigger more takeovers.

For starters, the remaining Allergan company -- with its prized branded drugs, including the lucrative Botox franchise -- may be a good target for Pfizer Inc. Buying Dublin-domiciled Allergan, currently valued at about $129 billion, may also be a way for Pfizer to lower its tax bill, a move it’s been dreaming of but hasn’t yet been able to pull off.

Alternatively, Allergan itself could go “elephant hunting,” says Ronny Gal, an analyst for Sanford C. Bernstein & Co. In that case, Amgen Inc. and AbbVie Inc. are the most likely candidates, each valued at more than $120 billion. Both stocks surged Monday.

Teva’s decision to drop its pursuit of Mylan NV in favor of the Allergan transaction also increases the likelihood that Mylan will get to consummate its purchase of Perrigo Co. While Perrigo’s board and management team are still resisting a sale, the stock is trading as if a deal will probably happen.

The spread between Perrigo’s share price and Mylan’s cash-and-stock bid reached its narrowest on Monday. Perrigo shareholders will vote on that $35 billion transaction in the coming weeks.

Teva’s Appetite

Even Teva is on the lookout for more deals. Erez Vigodman, the Israeli drugmaker’s chief executive officer, said in an interview Monday that Teva has the ability to keep making purchases for specialty pharmaceuticals this year and next.

“You cannot sit still,” he said, referring to the merger wave that has swept through the pharma industry.

On Monday, 2015 surpassed last year’s takeover frenzy for pharma and biotechnology companies, according to data compiled by Bloomberg. The deal between Teva and Allergan is the biggest this year -- so far.

There’s still reason to consider the possibility of an extra-large transaction in the $100 billion range. Pfizer did try to buy AstraZeneca Plc a year ago for about $120 billion, but AstraZeneca rebuffed the offer and remains independent.

Pfizer, like most big pharma companies that faced patent expirations on best-selling medicines, is up against the challenge of finding new growth avenues to maintain shareholder returns. With a $210 billion market value, it takes a large acquisition to move the needle. And the rules concerning tax-inversion deals limit the stable of targets available to Pfizer to help it dodge U.S. taxes.

The new Allergan may be the answer.

“A 30 percent slimmer all-brand, unlevered Allergan would be the perfect size for a Pfizer purchase,” Bernstein’s Gal wrote in a report.

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