Teva investors fret over $41bn generic drugs deal

Teva, the world’s largest maker of copycat medicines, is racing to complete its $41bn acquisition of a rival generic drugmaker, but some shareholders and healthcare bankers argue the Israeli company is paying too much for the asset.

When Teva struck the cash and stock deal to buy Allergan’s generics business last July, investors cheered it as a neat solution.

The Israeli drugmaker, facing patent expiry on its top-selling drug, was seen as needing a deal to plug an impending gap in its sales and profits, and the company spent last year in hostile pursuit of Mylan, another generics company.

A friendly deal with Botox maker Allergan — which wants to exit generics to focus on more profitable branded medicines — seemed ideal.

Yet Teva struck its agreement with Allergan during different times: a political outcry over drug pricing has since led to fears of a crackdown on costs, sending share prices into a tailspin and wiping billions from the value of pharmaceuticals stocks. Teva’s own stock has fallen by a quarter since it announced the deal.

More recently, generic competitors such as Endo have warned that the price of copycat medicines is under significant pressure, as buyers demand a better deal and pit groups with factories in the US, Europe and Israel against Indian competitors with much lower manufacturing costs.

Two large shareholders told the Financial Times they believed Teva had spent too much to acquire Allergan’s generic unit.

“Teva massively overpaid in the neighbourhood of 25 per cent,” said one. “The question is not whether it’s the right deal, or a good deal — but whether they paid the right price.”

A third investor said they believed Teva was doubling down on generic drugs at exactly the wrong moment, and should have used its cash to push further into branded medicines that face less competition.

“Some people believed it wasn’t the best deal, that simple generics are not the right way to go because of Indian competition,” said one mergers and acquisitions lawyer.

“They should have concentrated on sophisticated generics, where they might have an advantage,” the person added, referring to medicines that are hard to make or delivered by injection rather than an oral pill.

Few people expect Teva to pull the plug however. The company recently insisted it was committed to the acquisition, while Brent Saunders, Allergan’s chief executive, has said he expects the deal to complete next month.

“They grossly overpaid, there’s no doubt about it, but those agreements are very difficult to extract yourself from,” said one healthcare banker who did not work on the deal.

The transaction has been delayed by the deliberations of the US Federal Trade Commission, which is examining whether the acquisition would harm competition in the market for generic drugs. Analysts expect Teva to dispose of some products to secure clearance.

Supporters of the deal say it would give Teva clout when negotiating with pharmacies and drug wholesalers, and that cost-cutting will enable the company to squeeze out higher profits. These people point out that Teva paid roughly 15 times earnings for Allergan’s generics unit, in line with other deals struck at the time.

They also say that upon completing the transaction, the company would have free cash flows of $6.5bn, allowing it to invest in more profitable branded drugs.

“Hindsight is 20/20,” said Ronny Gal, analyst at Bernstein. “Soon after they did the deal the entire stock market collapsed, but comparing it at this point it’s hard to argue that they wouldn’t have got it for a better price.”

Mr Gal said Teva’s management wanted to make a large acquisition because the company could lose patent protection on its top-selling drug, Copaxone, as early as next year. The medicine accounts for between 35 and 40 per cent of operating profit.

For Allergan, which recently saw plans to sell itself to Pfizer torpedoed by the US administration, the deal will result in roughly $36bn of net proceeds. The company has said it will use the funds to initiate a $10bn share buyback, pay down debt and pursue acquisitions.

Following years of dealmaking fuelled by borrowing, Allergan has more than $40bn of net debt.

May 29, 2016

http://www.ft.com/