Understanding Teva’s genes
[an excerpt from Knowledge@Wharton: Changing the Prescription for Israel’s Teva]
The (generic drug) industry began to consolidate during the 1960s and 1970s, and Teva emerged as the largest and most dynamic firm in the sector, thanks primarily to Eli Hurvitz, who served as CEO from 1976 to 2002 and as chairman from 2002 to 2010.
Opportunity knocked on Teva’s door when the U.S. Congress passed the Hatch-Waxman Act in 1984. The legislation created incentives for generic drug companies to challenge other firms’ patents, even before they expired, with the goal of reducing the cost of drugs in the U.S. Hurvitz positioned Teva to use Hatch-Waxman as its springboard to becoming a major player in the generics sector.
“Teva succeeded in its strategy,” says Steven Tepper, an Israeli analyst who has been following Teva for many years. “It not only worked really hard at getting its production costs down, it also developed considerable expertise in the legal aspects of the generic drugs business — how to be the first to file for generic versions of patented drugs [the law awarded a period of exclusivity to the first generic version, during which time profit margins would be higher], and how to manage the testing and licensing process. Later, Teva became adept at acquiring other companies and integrating them into the group.”
The strategy worked so well that today, Teva is the largest generic drug company in the world. Achieving this designation was a conscious decision on the part of Teva’s leadership: It was achieved via a series of large acquisitions over a five-year period, beginning with IVAX, an American rival bought for US$7.4 billion in January 2006; Barr (also in the U.S.) for US$7.46 billion in December 2008; German company Ratiopharm in March 2010 for US$5 billion, and Cephalon in May 2011 for US$6.8 billion.
“Levin was instrumental in bringing Michael Hayden to Teva as head of R&D, and together they formulated a corporate strategy for Teva that distinguished it from its competitors and also explains why Teva had to acquire either Mylan or Allergan,”
“Levin and Hayden sought to marry Teva’s proven capabilities in the efficient production of generic drugs with the company’s in-house R&D capabilities, themselves enhanced by a series of acquisitions. The goal is to turn generic drugs into specialty products, for instance by giving them a special formulation or method of application — something that doesn’t change the essence of the drug, but de-commoditizes it and allows for a higher price, higher margins and hence greater profitability.”
– Steven Tepper, pharma and biomed analyst at Migdal Capital Markets and regarded as a top Israeli analyst in this sector
The environment for Teva in 2015
[Knowledge@Wharton: Why Teva Paid $40.5 Billion for Allergan’s Generic Business]
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- The number of ‘ethical’ or proprietary drugs coming off patents in the next few years is going to be much smaller than has been the case over the past decade or so
- The drug producers are facing a rapid process of concentration among their main buyers — especially in the critical U.S. market, where there are now three dominant companies. This, in turn, is forcing the manufacturers to consolidate their ranks, so as to better match the greater bargaining clout of their customers. The entire pharma industry is caught up in a whirlwind of enormous deals. Data from Thomson Reuters shows that as of July 23 — prior to Teva’s Allergan acquisition — M&A deals in the health care industry so far this year totaled almost $400 billion and were up some 80% over the equivalent period of 2014
- With Copaxone’s patents going to expire, Teva needs to find supports to drive the growth or to make-up the hole – manage the “patent cliff” and the stock price
There were three acquisition targets: Sandoz (Novartis), Mylan and Actavis (Allergan).
First proposal: Mylan
On April 21, 2015, Teva proposed to acquire mylan for $82.00 per share in cash and stock. ($40 billion acquisition, 50 percent cash and 50 percent stock)
Just two weeks before, Mylan made an offer to acquire Perrigo with a 25% premium, which failed later in November.
A timeline compiled by Reuters.
April 8, 2015: Mylan offers to buy Perrigo for about $29 billion in cash and stock in a move that some analysts suggested was an effort to help fend off a $40 billion acquisition by larger rival Teva Pharmaceuticals Industries
April 24, 2015: Mylan goes hostile with a sweetened bid of $60 plus 2.2 Mylan shares, valuing Perrigo at $31 billion; Perrigo rejects offer
April 27, 2015: Mylan rejects Teva’s offer
April 29, 2015: Perrigo rejects Mylan’s second raised bid of $75 and 2.3 Mylan shares for every Perrigo share, or $34.1 billion
April 29, 2015: Teva sends letter to Mylan’s Board
July 23, 2015: Dutch foundation linked to Mylan adopts poison pill in efforts to block takeover by Teva, citing potential job losses
July 27, 2015: Teva drops its hostile pursuit of Mylan, decides to buy Allergan Plc’s generic business in a deal worth $40.5 billion
Aug. 13, 2015: Mylan lowers the percentage of Perrigo shares it needs to control the company to just over 50 percent from its original plan of 80 percent
Sept. 14, 2015: Mylan launches a tender offer in a move to lure Perrigo investors to support its take-over efforts
Sept. 17, 2015: Perrigo recommends shareholders to reject Mylan’s tender offer, which was set to expire on Nov. 13, saying it substantially undervalued the company
Oct. 22, 2015: Perrigo announces its plans to lay off 6 percent of its global workforce and buy back shares worth $2 billion
Nov. 13, 2015: Mylan fails $26 billion bid in tender offer as it was unable to secure at least half of Perrigo’s shares
After Mylan’s acquisition of Perrigo failed, Mylan shares were up about 10 percent at $47.39 in premarket trading, while Perrigo’s were down 9.3 percent at $141.99.
Teva said its offer should be more attractive to Mylan shareholders than the proposed purchase of Perrigo, representing a 48 percent premium to the company’s share price before speculation of a deal surfaced on March 10. When Teva made the proposal, Mylan shares were up 8.9 percent at $74.12 in afternoon Nasdaq trading, while Teva rose 2.0 percent to $64.55 on the New York Stock Exchange. Perrigo fell 2.2 percent to $193.79. (Reuters)
Plan B: Allergen
On July 27, 2015, Teva made an offer to buy Allergan’s generics unit with $33.75 billion in cash and Teva shares valued at $6.75 billion (close to 10% stake in Teva).
- pro forma revenues of approximately $26 billion and combined EBITDA of approximately $9.5 billion anticipated in 2016.
- No shareholder vote required at Teva or Allergan
- Mylan shares fell nearly 14% to $57.03 Monday, while Perrigo gained 3.8% to $193.67.
- For Allergan, the Teva deal provides it with cash to pay down debt and allows the company to focus more on lucrative brand-name drugs.
[WSJ: Teva to Buy Allergan Generics for $40.5 Billion]
Teva Presentation of Actavis Acquisition
Question: how to finance the deal…
According to Teva’s Q2 2015 result, at June 30, 2015
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- cash and investments: $2.8 billion.
- short-term debt: $3.0 billion
- senior notes and loans: $9.5 billion