Teva Pharmaceuticals Hopes $40 Billion Mylan Deal Will Fuel Stock Rebound
In the red hot market for pharmaceutical deal-making it’s either eat or be eaten. That’s the case with Teva Pharmaceutical’s $82 a share cash and stock bid for generic competitor Mylan, a direct challenge to Mylan’s near $30 billion takeover bid for Perrigo, unveiled on April 8.
The question now is whether Mylan’s board of directors and its stockholders will cast their lot with Teva Pharmaceuticals, a company that’s seen its stock dramatically underperform the S&P 500 Index over the past five years, or whether they will continue to support a management team led by CEO Heather Bresch that’s driven a near 250% share price increase since the beginning of 2012, outperforming the S&P’s under 70% return.
The M&A battle also underscores that the sweepstakes for mid-tier drugmakers have never been higher.
Over the past 24-months, tax-advantaged firms have been buying up assets, particularly generic drugmakers and those with treatments not subject to a patent expiration, offering investors the promise of large synergies and a quick payback on deals. Valeant Pharmaceuticals set off the drugmaking arms race with a flurry of deals, and more recently firms such as Actavis, Mylan, Perrigo and Shire have all gone through their own bouts of dealmaking.
Bankers and investors stitching together the consolidation wave argue that mergers allow drugmakers to operate more efficiently and with fairer tax bills, helping them to meet an anticipated drop in overall healthcare costs, which have risen far faster than the inflation-rate for decades. In the U.S., healthcare costs as a percentage of gross domestic product exceeded 17% in 2014. However, some look at the deal-making with skepticism, arguing that mergers hinge on cuts to research and development, tax dodging maneuvers and M&A accounting gimmicks.
One thing is clear, the wave is accelerating, not slowing. “M&A is currently being rewarded after having been punished in the past, and likely will continue to be rewarded for some time,” Morgan Stanley analysts said on Tuesday. ”[P]harma M&A is benefiting from ample access to capital and a typically minimal time before a transaction becomes accretive – cyclical advantages that should support more “roll-up” activity,” the analysts added
Now, as Teva Pharmaceuticals takes on Mylan’s business strategy through a premium-priced takeover bid loaded with promised synergies, the consolidation of the pharmaceutical sector may be coming to a head. In making its about $40 billion cash and stock offer for Mylan, Teva Pharmaceuticals is saying its proposed combination has better prospects that Mylan’s recent bid for Perrigo.
Teva Pharmaceuticals characterized its bid as a “more attractive alternative for Mylan stockholders than mylan’s proposed acquisition of Perrigo.” The deal, Teva said, will transform the generic drug-making sector, leveraging large overlapping assets in both generics and specialty drugs.
Financials in the bid, meanwhile, promise significant synergy, earnings accretion and de-leveraging. Teva said it will be able to generate $2 billion in annual cost synergies and tax savings through the Mylan deal, and said a merger would be immediately accretive to non-GAAP earnings per share and approach 30% EPS accretion by the third year after its close.
Teva also said its $82 a share offer would be split evenly between cash and stock, giving Mylan shareholders the ability to participate in any upside achieved by the combined company. The combined company is expected to have over $30 billion in revenues, $10 billion in EBITDA and cash flow from operations (excluding restructuring costs) of $6 billion by 2016. That earnings profile, Teva said, will help it quickly pay back takeover financing, de-leveraging to 3-times gross debt-to-EBITDA within 24-months.
“Our proposal is compelling for both Teva and Mylan stockholders and other stakeholders,” Erez Vigodman, CEO of Teva, said in a statement. “We have long respected Mylan’s business, and we are confident that Mylan’s Board of Directors and stockholders will agree that our proposal represents a significantly more attractive alternative for Mylan and its stockholders than Mylan’s proposed acquisition of Perrigo,” Vigodman added.
When reports that Teva Pharmaceuticals bid first surfaced last week, Mylan indicated a deal would be a non-starter unless Teva agreed to significant anti-trust assurances. The company also indicated if feels its standalone business strategy, inclusive of the yet-to-be accepted Perrigo offer, outweighs a combination with Teva.
“We have studied the potential combination of Mylan and Teva for some time and we believe it is clear that such a combination is without sound industrial logic or cultural fit,” Mylan executive chairman Robert Coury said in a statement.
“Further, there would be significant overlap in the companies’ businesses and we believe that it is unlikely that any such combination could obtain anti-trust regulatory clearances,” he added in a Friday afternoon statement.
In making an unsolicited bid Tuesday, Teva offered no specific anti-trust assurances other than to say, “Teva has carefully studied the regulatory aspects of a combination of Teva and Mylan, in conjunction with its advisors. Teva is confident that it would be able to structure a transaction that would not contain material impediments to closing and that it can determine and promptly implement divestitures, as necessary, to gain regulatory clearances.”
Earlier in April, Mylan said it would pay $205 a share in cash and stock for Perrigo, without specifying an exact formula for its unsolicited takeover offer. With Perrigo in hand, Mylan said it would reach a critical mass in specialty brands, generics, over-the-counter (OTC) and nutritional products.
Chris Pultz, portfolio manager of Kellner Capital’s merger arbitrage fund said Mylan may be able to push its proposed Perrigo deal through without a shareholder vote.
“I would suspect that Mylan will look to figure out a way to structure the transaction to avoid a shareholder vote. In this situation, since Mylan is domiciled in the Netherlands, it makes if slightly more difficult for Teva to prevail as Dutch law is very deferential to the target’s board,” Pultz said by email.
Mylan shares were rising over 8% in early Tuesday trading. Teva shares were gaining nearly 2%, while Perrigo shares were falling over 1%.
Source: Forbes Health
