Leaderless Teva Seen Beckoning Mylan Merger: Real M&A
As Teva Pharmaceutical Industries Ltd. (TEVA) attempts to revitalize one of this year’s worst-performing drug stocks, a remedy may come in the form of a deal.
If the $32 billion company can’t restore value on its own and doesn’t find a new chief executive officer soon, a merger with fellow generic-drug makers Mylan Inc. (MYL) or Valeant Pharmaceuticals International Inc. (VRX) will become increasingly likely, Sanford C. Bernstein & Co. said. Petach Tikva, Israel-based Teva may even become vulnerable to an activist investor, said Matrix Asset Advisors Inc.
As peers such as Pfizer Inc. and Actavis Plc generated windfalls for shareholders with breakups and takeovers, Teva tumbled this month to its cheapest price-sales ratio, according to data compiled by Bloomberg. Teva hasn’t replaced the CEO who stepped down in October amid a dispute with the board, adding to uncertainty over how it will compensate for lost sales when generic rivals challenge its top-selling medicine. Analysts predict revenue this year will fall for the first time in at least two decades.
“People are looking for the company to do something,” Herman Saftlas, a New York-based equity analyst at Standard & Poor’s, said in a phone interview. “It’s going to take more than just business as usual to right-size this ship and get it back into growth mode. Teva probably realizes now that a little more drastic steps have to be taken. It is possible that they could unveil a deal with somebody.”
A representative for Teva declined to comment when asked if the company is weighing a merger or acquisition.
Copaxone, an injection to treat multiple sclerosis, generated about 20 percent of Teva’s $20 billion in revenue last year. Because of a U.S. court ruling in July, Teva may face generic competition to Copaxone beginning in May, a year earlier than expected. Last week, a U.S. Supreme Court justice rejected Teva’s request to put that ruling on hold while the court decides whether to take up the company’s appeal.
Preserving sales of Copaxone will fall to whoever replaces Jeremy Levin as CEO after he stepped down because of a dispute with Chairman Phillip Frost over how to restructure the company. Chief Financial Officer Eyal Desheh, who was appointed interim CEO, said on Teva’s Oct. 31 earnings call that the timing of selecting a permanent replacement is “completely at the hands of the board.”
Teva’s price-sales ratio plunged to a record low of 1.56 on Nov. 4, according to data compiled by Bloomberg. The American depositary receipts have lost 0.2 percent in the past 12 months to $38.20 yesterday, making it one of the worst performers among companies in the Bloomberg Industries Global Generics and Global Large Pharmaceuticals indexes. Both indexes have gained more than 25 percent.
Today, Teva’s ADRs rose 2 percent to $38.97.
The company is undervalued at these levels and may draw the attention of an activist investor, said David Katz, who oversees about $950 million as chief investment officer of New York-based Matrix Asset Advisors, a Teva shareholder. Activists typically take a stake in a company they view as undervalued and push for changes that will increase returns for investors.
“There is an opportunity for someone to pressure the board to enhance value for shareholders,” Katz said in a phone interview. “Unless the board does something sooner rather than later, they’re probably vulnerable to somebody trying to take advantage of a very discounted stock price.”
Teva’s next presentation is Dec. 5, when it plans to give an update on research and development. Investors are waiting to see if the company will have more to announce regarding its CEO search, drug pipeline or a potential deal, S&P’s Saftlas said.
While Teva’s $44 billion enterprise value makes it less likely to be a takeover target, a so-called merger-of-equals with generic-drug makers Mylan, Valeant or Actavis (ACT) is conceivable, according to Ronny Gal, a New York-based analyst at Bernstein. In such a merger, shareholders of both companies would receive stock.
“There is a bit of a ‘perfect storm’ brewing with low interest rates, lack of permanent management at Teva, and an unhappy shareholder base,” Gal wrote in a Nov. 13 report. “For those looking to grow, there are very few opportunities this size. There are substantial synergies to be achieved.”
The combined entity could be managed by the CEO of Teva’s merger partner, according to Gal. Israel may seek to block such a deal, he wrote.
In May, Actavis decided to acquire Warner Chilcott Plc, after spurning a $15 billion offer from Mylan and after merger talks with Valeant stalled over price, people familiar with the matter told Bloomberg News at the time.
Valeant, the most acquisitive drugmaker in North America over the last three years, said last month that it’s interested in a merger-of-equals with no deal premium. The Laval, Quebec-based company has an enterprise value of about $52 billion, compared with Mylan’s $22 billion and Actavis’s $34 billion.
Representatives for Canonsburg, Pennsylvania-based Mylan; Valeant; and Actavis, which is based in Parsippany, New Jersey, and incorporated in Ireland, declined to comment on whether the companies are interested in or are holding talks with Teva.
Teva could make its own acquisitions, though the recent surge in biotechnology valuations makes it difficult to find the right the target and not overpay, according to Jason Kolbert, a New York-based analyst at Maxim Group LLC.
Its sweet spot may be smaller companies with products in phase II studies, “where you have proof of concept but don’t yet know whether you’re going to have a commercial product,” Kolbert said in a phone interview. “I don’t think they have the resources to compete on more mature companies,” such as ViroPharma Inc., which Shire Plc agreed to buy last week for $4.2 billion.
“They have some real gems in their pipeline that the Street really isn’t paying attention to right now,” Maris said in a phone interview. “So there may be things with hidden upside there. They need to have more of them though.”
The pipeline includes experimental treatments for heart conditions and cancer.
If Teva can make up the revenue and profit loss from Copaxone with its pipeline, the stock is “incredibly cheap,” said Adam Strauss, Chicago-based co-manager of the $300 million Appleseed Fund (APPLX), which owns Teva shares. While the company should be focusing on its CEO search and execution, the low valuation could prompt takeover interest, he said.
“I’m sure that other companies are probably looking at Teva and thinking this might be a good company to consider acquiring,” Strauss said in a phone interview.
While breaking up or selling the company could make financial sense, the odds of that happening aren’t very high, according to Paulina Niewiadomska, manager of the $434 million Pictet Generics Fund, which holds Teva shares. Teva needs to first find a good CEO and give that person a seat on the board and more freedom to make operational decisions, Niewiadomska said in an interview in Paris.
“For a price, anything can happen,” she said. But, “I don’t think it’s a company that’s lost completely.”