Teva set to re­sume deals after in­vestors re­ward ri­vals

The Pak Banker - - COMPANIES/BOSS -

Teva Phar­ma­ceu­ti­cal In­dus­tries Ltd may need to jump on the takeover band­wagon soon. The $48 bil­lion company's top-sell­ing medicine will have to com­pete with cheaper generic copies be­gin­ning later this year, which will even­tu­ally eat into prof­its.

The prob­lem of patent ex­pi­ra­tions and slug­gish growth isn't unique to Teva, whose peers are opt­ing for big, ac­cre­tive ac­qui­si­tions -- bets that are pay­ing off and restor­ing en­thu­si­asm for their stocks.

Pe­tach Tikva, Is­rael-based Teva was one of few lead­ing drug­mak­ers that didn't make a siz­able pur­chase in 2014, while the in­dus­try spent an un­prece­dented $234 bil­lion on ac­qui­si­tions. One area where Teva plans to ex­pand is over-the-counter reme­dies and Per­rigo Co, a $24 bil­lion company, might be a good fit. Or in­ter­na­tional am­bi­tions may lead it to other tar­gets, such as Swe­den's Meda AB.

Ei­ther way, Teva share­hold­ers would prob­a­bly wel­come a trans­ac­tion that will boost earn­ings.

"In­vestors have seen what th­ese deals are do­ing to the share prices" of other ac­quir­ers, said Kevin Ke­dra, an an­a­lyst for Ga­belli & Co. in Rye, New York. "Teva has a healthy business, but in this en­vi­ron­ment if you're not do­ing deals, you're prob­a­bly not tak­ing ad­van­tage of the op­por­tu­ni­ties that are out there."

Peers such as Ac­tavis Plc (ACT) and Pfizer Inc. (PFE) have al­ready made moves to con­sol­i­date the in­dus­try. Ac­tavis trans­formed it­self from a lesser-known generic drug­maker to a top 10 phar­ma­ceu­ti­cal company through a se­ries of ac­qui­si­tions. It struck last year's two largest deals: Bo­tox maker Al­ler­gan Inc. for about $66 bil­lion and For­est Lab­o­ra­to­ries Inc. for about $25 bil­lion.

Had As­traZeneca Plc agreed to Pfizer's $117 bil­lion of­fer last year, it would have been the largest phar­ma­ceu­ti­cal takeover on record.

Oth­ers -- Merck & Co., Glax­oSmithK­line Plc (GSK), Ab­bVie Inc., Eli Lilly & Co. (LLY), Shire Plc and Valeant Phar­ma­ceu­ti­cals In­ter­na­tional Inc. -- have joined in the deal spree, which has lifted their shares. Once among the most ac­quis­i­tive drug­mak­ers, Teva hasn't done any large deals since 2011, when it bought Cephalon Inc. for $6.2 bil­lion. Through that trans­ac­tion Teva gained sleep-disorder medicine Provigil, which later lost patent pro­tec­tion and rev­enue, as well as some drug-de­vel­op­ment pro­grams that it de­cided to dis­con­tinue.

"Cephalon prob­a­bly was an ac­qui­si­tion that you'd like to take back," David Stein­berg, an an­a­lyst at Jef­feries, said at a con­fer­ence in June.

Erez Vigod­man, who was ap­pointed chief ex­ec­u­tive of­fi­cer one year ago, sig­naled that the company is ready to re­sume deal­mak­ing. He told an­a­lysts last month that Teva is "fully geared" for business de­vel­op­ment ac­tiv­i­ties such as ac­qui­si­tions "at all sizes." Denise Bradley, a spokes­woman for Teva, didn't re­spond to a re­quest for fur­ther com­ment.

Teva ex­pects that in Septem­ber it will be­gin fac­ing generic com­pe­ti­tion in the U.S. for Copax­one, the mul­ti­plescle­ro­sis treat­ment that gen­er­ated $4.3 bil­lion of sales in 2013 and most of Teva's profit and cash flow.

The company has been shift­ing pa­tients to a new ver­sion of the in­jec­tion to try to pre­serve its mar­ket share, which has buoyed Teva's Amer­i­can de­posi­tary re­ceipts.

The ADRs rose 43 per­cent in 2014, their best an­nual re­turn since 2007. They've fallen 1.4 per­cent so far this year even as health-care stocks lead the Stan­dard & Poor's 500 In­dex. Teva has also un­der­per­formed most peers since it bought Cephalon.

Teva has the fi­nan­cial ca­pac­ity to pur­sue a siz­able trans­ac­tion and the tim­ing is right, said Ga­belli's Ke­dra.

Teva's lever­age ra­tio is rel­a­tively low, with net debt equal to just 1.6 times earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion in the pe­riod ended Septem­ber. It also had $1.5 bil­lion of cash and equiv­a­lents.

A pur­chase of Dublin-based Per­rigo would boost Teva's growth rate and re­duce its ex­po­sure to Copax­one, Ran­dall Stan­icky, a New York-based an­a­lyst at Royal Bank of Canada, wrote in a re­port last month. He es­ti­mated that a deal fi­nanced 80 per­cent with cash and the rest in stock would drive a 30 per­cent gain in Teva's share price.

While Teva has said that it's in­ter­ested in OTC prod­ucts, it seems to be look­ing for a more in­ter­na­tional tar­get, Stan­icky said after meet­ing with man­age­ment last week.

Meda, val­ued at almost 43 bil­lion kro­nor ($5.3 bil­lion), makes both pre­scrip­tion and OTC drugs and gen­er­ates the bulk of its rev­enue in Europe, with some pres­ence in emerg­ing mar­kets.

My­lan Inc. (MYL), a $21 bil­lion generic drug­maker, has long been con­sid­ered a pos­si­ble merger part­ner for Teva as well.

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