Commentary

Teva Buying Allergan Generics, Creating 'Market Behemoth'

Thwarted in its attempt to acquire the generic and specialty pharmaceuticals company Mylan, the Israeli–based Teva will purchase Ireland-based Allergan Generics for $40.5 billion in an acquisition that executive and investors at both companies — if not consumers — are applauding. 

“Teva’s deal with Allergan will create a market behemoth with considerable power. The combined business will command more than 20% of the global generics market, according to market intelligence firm Evaluate Ltd., cited by Reuters," writes S. Kumar for Fortune. “Even with an estimated $500 million in forced divestitures, according to Evercore ISI analyst Umer Raffat, Teva would still control one-fifth of generic drug volume, giving it greater clout in negotiating with governments and health insurers.”

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Which means that the deal for Allergan, whose best-known product is Botox, is not good news for consumers, according to Robert Weissman, president of Public Citizen, USA Today’s Roger Wu reports.  

“A working generic drug market requires robust competition,” Weissman said in a statement. “Teva’s acquisition of Allergan Generics will continue the trend of consolidation in the generics market — a trend that has led to skyrocketing prices for numerous generic products.”

And analysts feel that trend will continue, according to the Associated Press. Meanwhile, this deal “will further solidify Teva’s position at the top of the generic drug market, as Allergan was its second-largest rival after Novartis,” writesBarrons’ Teresa Rivas. “This will also help Teva cut costs.”

It also instantly cures the massive headache brought on by its attempt to acquire Mylan “whose management has been fighting Teva’s advances in an unusually acrimonious manner,” as Patricia Sabatini writes in the Pittsburgh Post-Gazette. Mylan’s management “issued a statement congratulating its former suitor on the Allergan deal” and  “said it would continue pressing ahead with its own unsolicited effort to buy over-the-counter drug specialist Perrigo.”

In a story that includes an anecdote about an expletive–laced meeting between Mylan and Teva executives in a Manhattan conference room in May, the Wall Street Journal’s Shayndi Raice and Liz Hoffman point out that “Mylan’s resistance to Teva’s proposal was aided by an acquisition that moved the company’s legal home in February from Pennsylvania to the Netherlands — part of the wave of tax-trimming ‘inversion’ transactions that swept American business last year. Mylan, whose senior management remain based in Pennsylvania, gained not just tax savings, but a Dutch corporate rule book that gives companies more levers to resist takeovers.”

Mylan’s stock dropped more than 14% yesterday after the deal was announced yesterday. 

“Not engaging with Teva — for what appears very little reason other than management overreach — is disappointing to us,” Cowen and Co. analyst Ken Cacciatore wrote in a note, the Post-Gazette’s Sabatini reports.

Meanwhile, back at the deal that actually happened, executives were patting themselves on the back.

“Teva, already the world’s largest generics manufacturer, estimates that the deal will put it in the top 10 of global pharmaceutical companies and wring out $1.4 billion in tax and cost savings in the second and third year after the deal closes,” reports Reuters’ Niv Elis in the Jerusalem Post. “For its part, Allergan termed the deal ‘financially compelling’ and said it plans to use the cash, in part, to pay down debt.”

“This acquisition will put Teva far in the lead in the slow-growth global copycat drug business. It will not address its problems in the branded drugs business, a lack of scale and the expiration of patents for its biggest drug, multiple sclerosis treatment Copaxone,” writes Reuters “Breaking Views” columnist Neil Unmack. “Acquisitions are the best way forward. A faster, cleaner deal with Allergan should let Teva deleverage more quickly, paving the way for more M&A.”

In an interview with Forbes’ Matthew Herper, Allergan CEO Brent Saunders says that besides trimming debt he’s ready to do a little M&A himself in the more lucrative, branded pharmaceuticals arena.

“Saunders wants to do what he says Allergan has been doing with all its big deals: ‘move up the innovation chain.’ In other words, don’t sell generics, which are commodities. Sell expensive branded drugs, like Allergan’s Botox or the antibiotics and antidepressants the company is now looking to develop,’ Herper writes. And the deal provides him the ability “to ante up again.” 

“[W]hat this does do is it accelerates our ability to think about the transformational deal,” Saunders tells Herper. We'll be there when it happens.

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