Mylan's Pricey Generic Buy

The drugmaker snaps up the generics biz of Germany's Merck for $6.7 billion -- a price that causes Wall Street to blanch

The heated competition in the global generic drug sector has yielded yet another big deal: Mylan Laboratories (MYL) has agreed to pay an exceptionally rich price for the generics business of Germany's Merck KGaA (MRCG.F) for €4.9 billion ($6.7 billion). Merck plans to use the proceeds for a special dividend and to pay off debt.

In announcing the deal May 12, Pittsburgh-based Mylan stole a march on its rival Teva Pharmaceutical (TEVA), outbidding the Israel-based outfit for the Merck unit, which is world's third-largest generics business based on 2006 revenues of €1.8 billion ($2.45 billion). Merck Generics sells more than 400 products in more than 90 countries.

The acquisition will help make Mylan a top tier global generic player while expanding its reach in Europe and lessening its dependence on the U.S. market, according to analyst Herman Saftlas of Standard & Poor's Equity Research.

The deal brings together Mylan's strong position in the U.S. with Merck Generics' broad geographic portfolio, including significant operations in Australia, France, Japan, Portugal, Spain and the U.K. The new company will be have a diversified roster of about 560 products.

To keep things running smoothly at the acquired unit, Mylan is keeping the management team intact. Merck Generics CEO Hank Klakurka Hank Klakurka will stay at his post and Mylan has inked long-term employment agreements with members of its senior management team.

"The fit between our two companies is truly outstanding," said Mylan CEO Robert J. Coury in a press release. "Mylan is already a leader in the U.S., the world's largest market, and through Matrix Laboratories controls one of the broadest API platforms in the world."

Mylan has a robust generic pipeline consisting of some 60 abbreviated new drug applications (ANDAs) now before the FDA, of which 16 represent potential first-to-file opportunities (which offer 180-day generic marketing exclusivity), according to a Standard & Poor's report.

The deal represents a new phase in Mylan's global push. In January 2007, the company acquired about 72% of the voting shares of Indian drugmaker Matrix Laboratories for a net cash cost of $533 million (financed largely through debt).

But the Merck deal comes at a far higher cost. The company said it has fully committed debt financing from Merrill Lynch (MER), Citigroup (C), and Goldman Sachs (GS), and plans to issue $1.5 billion to $2.0 billion of equity and equity-linked securities to reduce debt incurred in the acquisition.

Mylan doesn't expect the acquisition to add to cash earnings per share until the third year. With the greater degree of leverage, Mylan is suspending its dividend.

The deal terms didn't sit well with Wall Street. Shares of Mylan slumped in NYSE trading May 14, falling 11% to $19.87 on nine times the stock's average daily trading volume. The shares are well below their 52-week high of $23.49 reached in August, 2006.

Merck shares fell 1.1% in Frankfurt trading to €97.05, below their 52-week high of €102.1 on Apr. 26.

Teva shares gained 0.4% to $40.11, just beneath their 52-week high of $40.58 reached during the May 14 session.

S&P's Saftlas cut his target price on Mylan to $22 from $24 and kept his hold rating on the shares after the news hit. In a May 14 research note, he said "we believe the deal is expensive vs. recent comparable deals."

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