Teva’s Mexican Misadventure Stokes Fear of Deal Indigestion

  • Stock hit 2014 low after legal battle erupted over acquisition
  • Buyout of Allergan unit expected to boost earnings in 2017

Teva Pharmaceutical Industries Ltd.’s botched acquisition of a Mexican drugmaker is hurting investor confidence in its ability to grow through acquisitions.

A year after spending $2.3 billion on Representaciones e Investigaciones Medicas SA, known as Rimsa, Teva sued the sons of the company’s founder last week, alleging fraud and breach of contract. The scions, Fernando Espinosa Abdala and Leopoldo de Jesus Espinosa Abdala, argue Teva is just trying to get out of a deal it regrets. They filed a lawsuit against the Israeli drugmaker in New York state court Sept. 13.

Teva has tumbled more than 30 percent this year, swept up in a broader industry decline triggered by speculation U.S. presidential nominee Hillary Clinton will force drug companies to lower prices if elected. The Rimsa deal is a drop in the bucket compared with Teva’s $40.5 billion purchase of Allergan Plc’s generics unit, which closed in August after regulatory delays. But the legal battle raised doubts in investors’ minds that Teva has the ability to make savvy acquisitions and successfully integrate them, something Chief Executive Officer Erez Vigodman has stated will be key to future growth.

“They definitely need to do more M&A to build up their portfolio,” said Elizabeth Krutoholow, an analyst at Bloomberg Intelligence in New York. “The question is, ’How good are they?”’

Shares of Petach Tikva, Israel-based Teva plunged 11 percent last week to the lowest since February 2014. They fell 0.9 percent to $45.26 at the close in New York Tuesday.

Vigodman, Teva’s third CEO since 2012, helped the company reclaim its spot as the world’s biggest maker of generic medicines with the Allergan purchase. Integrating the deal is Vigodman’s No. 1 priority for Teva as he seeks to boost revenue by as much as 40 percent by 2019, he told Bloomberg News in an interview earlier this year.

Denise Bradley, a spokeswoman for Teva, didn’t respond to an e-mailed request for comment.

The industry dynamics underlying Vigodman’s rationale for the acquisition worsened after the accord was announced last year. U.S. regulators have sped up approvals for generic drugs, creating more competition and driving down costs, while forcing Teva to divest some assets to overcome antitrust concerns. Vigodman has argued Teva will benefit from speedier drug approvals because it’s among the first in line to have new medicines approved.

Teva trades at a discount to its competitors. Its price-to-earnings multiple is 7.8 times 12-month future earnings, compared with an average of 9.9 times among industry peers. That’s because of the high turnover in its top management position and a history of acquisition stumbles, said Tim Call, who manages $360 million, including Teva shares, as chief investment officer at Capital Management Corp. in Glen Allen, Virginia.

He argues the Rimsa debacle is cheapening up the stock and setting the table for a rally in 2017, if Teva can prove it’s integrating the Allergan purchase smoothly.

“The Allergan deal is transformative, they should get huge economies of scale,” Call said by phone. “If they pull it off and make it accretive next year as they plan, then sentiment should change on the stock.”

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