Teva has acquired the generics unit of US firm Allergan in a deal valued at USD40.5 billion in cash and shares. The acquisition elevates Teva into the tier of the top-10 pharmaceutical companies worldwide.
IHS Life Sciences perspective | |
Significance | Israel-headquartered Teva has acquired US firm Allergan's generics business. The deal is worth USD40.5 billion, including a cash payment of USD33.75 billion. |
Implications | The acquisition will position Teva as a top-10 pharmaceutical company in terms of revenue. The cost savings and manufacturing scales offered by the acquisition will assist Teva in seeing off competition in its traditional generics markets from manufacturers in low-cost manufacturing destinations such as India. |
Outlook | The deal underscores Teva's move away from novel drug development and back towards the company's roots as a generics producer. For Allergan, the divestment will allow it to focus on its novel drugs business, with its business model very different from that of its generics unti. |
Israeli Teva Pharmaceutical has announced that it has signed a definitive agreement to acquire the generics unit of Allergan (US). The transaction is subject to "customary closing conditions", but it does not require the approval of Teva or Allergan shareholders. A copy of Teva's press release detailing the acquisition can be accessed here.
The deal is valued at USD40.5 billion, including the payment of USD33.75 billion in cash to Allergan and shares in Teva worth USD6.75 billion. The shares will provide Allergan with a minority share in Teva, which Teva suggests would be under 10%. The conditions of the deal mean that Allergan will be unable to transfer its shares in Teva for 12 months after the deal closes.
Following the announcement that it had acquired Allergan's generics business, Teva announced that it had withdrawn its offer to acquire US firm Mylan. Teva had placed a bid to acquire Mylan in April for USD40.1 billion (see United States - Israel: 22 April 2015: Teva offers USD40.1 bil. for acquisition of Mylan, Perrigo rejects Mylan's takeover bid). In withdrawing its bid, Teva suggested that it felt it had "an even greater opportunity to create compelling, sustainable value for Teva's stockholders through our transaction with Allergan". Teva stated that it was considering options with regards to the 4.6% stake it currently holds in Mylan. A copy of Teva's press release detailing the withdrawal of the offer to acquire Mylan can be accessed here.
Outlook and implications
The acquisition will serve to position Teva among the 10 leading pharmaceutical companies worldwide. Indeed, Teva has stated that the transaction will provide it with sales valued at USD26 billion, placing the company firmly among the world's top-10 pharmaceutical firms. Looking to the future, the company would hold a combined 320 pending abbreviated new drug applications (ANDAs) with the US Food and Drug Administration (FDA), of which 110 hold first-to-file status.
The vast scale of operations, coupled with the cost savings valued at USD1.4 billion annually, may allow Teva to reduce its margins. This is essential if Teva is to compete in the price-focused generics space against manufacturers from low-cost manufacturing countries such as India. Indeed, although these manufacturers have been present in the United States and other regulated markets for some time, the increased technical capabilities and desire to invest in niche generics research and development (R&D) have intensified competition in Teva's traditional generics space. In an interview with Forbes about the deal, the CEO of Allergan, Brent Saunders, raised the interesting point that there has been significant consolidation in the US health insurance space. These larger insurance companies will ultimately wield greater bargaining power than ever, forcing generics companies to cut costs to maintain market share with insurers.
Consumer groups have already sought to challenge Teva's attempts to acquire Mylan over concerns it may lead to less competition in the US generics market and therefore increased prices (see United States: 16 July 2015: Eight US consumer groups petition US FTC over Teva's potential acquisition of Mylan). It remains unclear if consumer groups will attempt to challenge this acquisition. Even before the acquisition, Teva held a very strong position in the US market, especially considering that it has its own active pharmaceutical ingredient manufacturing facilities. Furthermore, as discussed, given that importers to the US are becoming increasingly sophisticated in their R&D activities, there may be a limited increase in generic drug prices following the deal.
Much of consumer concern may have been focused around the potentially hostile nature of Teva's proposed acquisition of Mylan. Indeed, Mylan appeared increasingly determined to block the acquisition, with its foundation acquiring a majority stake in the company to hinder the takeover bid, prompting legal action (see United States - Israel: 24 July 2015: Mylan attempts to block acquisition by Teva). The acquisition of Allergan's generics unit appears to be very different. In fact, Allergan was keen to offload its generics business in order to focus on its novel drugs business, which is unsurprising given the very different business models associated with the two different kinds of business.
Perhaps the most interesting factor of the deal is that it marks Teva's return to its roots as a generics manufacturer. Although Teva retains its novel drug portfolio and seemingly remains committed to the development of new chemical entities (NCEs), its activities in this space have been scaled back. Teva announced in October 2014 that it had ceased development of its oncology and women's health products, as part of a USD550-million cost-saving drive (see Israel: 8 October 2014: Teva ceases development of oncology and women's health products in USD550-mil. cost-saving drive). The company is facing impending generics competition to its flagship multiple sclerosis product Copaxone (glatiramer acetate), which in 2014 accounted for nearly 21% of Teva's total revenues (see United States: 17 April 2015: US FDA approves Sandoz and Momenta's generic Copaxone).
Although a return to the company's roots may be somewhat comforting for Teva, and the new larger company will be better positioned to realise the cost savings necessary to compete in the price-focused generics market, it is perhaps a little sad for some to witness the seeming slow demise of Teva's innovate pharma business.