The stakes were always highest for Teva, making the world’s biggest generics company the most likely winner in the bidding war over German generics maker Ratiopharm, concluding one of the most eagerly anticipated M&A deals in recent years (Vantage Exclusive - Four rush to table Ratiopharm offers before February 5 deadline, January 20, 2010).
Teva’s $5bn (€3.625bn) acquisition of Ratiopharm may be slightly higher than originally anticipated, but at just 2.2 times sales and with synergies of at least $400m, the deal instantly propels Teva to number one spot in European generics overall and importantly to number two in Germany, by far the biggest single European generics market. The deal has clearly pleased Teva’s shareholders. Shares in the group gained 5% in early trade today to a record high of $62.65, suggesting increasing investor confidence in the company meeting its ambitious and bullish 2015 sales target of $31bn.
Teva has always adopted a ‘biggest is best’ approach to business development and chief executive Shlomo Yanai reiterated as much on a conference call today: “We believe value and growth is best delivered by being the market leader”.
To this end, Teva listed a number of ranking statistics as rationale for the Ratiopharm acquisition: proforma European sales of $5.2bn last year, number one in Europe, second spot in Germany behind Sandoz and third place behind Mylan in France, the second biggest European generics market. Furthermore, Teva will be the market leader in ten European markets including the UK, Italy, Spain, Hungary and Portugal.
In terms of historical context, Ratiopharm is the biggest M&A deal in the generics sector since Teva acquired Barr Pharmaceuticals two years ago for $7.5bn, and valued at $5bn ranks as the fifth largest deal overall since 1995. Indeed of the top ten generic M&A deals over the last 15 years, Teva has executed the two biggest and four in total.
|Top 10 Biggest Generics M&A Deals since 1995|
|Rank||Acquiring Company||Target Company or Business Unit||Deal Value ($bn)||Financing Structure||Deal Type||Deal Year|
|1||Teva Pharmaceutical Industries||Barr Pharmaceuticals||7.5||Share Exchange + Cash||Company Acquisition||2008|
|2||Teva Pharmaceutical Industries||IVAX||7.4||Share Exchange + Cash||Company Acquisition||2006|
|4||Mylan||Merck Generics||6.8||Cash||Business Unit||2007|
|5||Teva Pharmaceutical Industries||ratiopharm||5.0||Cash||Company Acquisition||2010|
|6||Daiichi Sankyo||Ranbaxy Laboratories||4.0||Cash||Majority Stake||2008|
|7||Teva Pharmaceutical Industries||SICOR||3.4||Share Exchange + Cash||Company Acquisition||2004|
|8||Barr Pharmaceuticals||PLIVA||2.5||Cash||Company Acquisition||2006|
|9||Hospira||Mayne Pharma||2.0||Cash||Company Acquisition||2007|
|10||Watson Pharmaceuticals||Andrx||1.9||Cash||Company Acquisition||2006|
Aside from Teva’s enhanced presence in Europe, what is likely to have encouraged investors is the modest premium, 2.2 times sales, that Teva is paying despite fairly intense bidding competition from Pfizer and Actavis.
JP Morgan analysts estimate the historical sales multiple for generic M&A deals to be 3.2 times sales. The lower sales multiple paid for Ratiopharm is likely to reflect in part tough market conditions in Germany, particularly over the declining value of the government tender sector.
Another factor toward this cheap looking deal could be Ratiopharm’s weak looking sales performance last year. Ratiopharm revealed today it recorded group revenues last year of €1.6bn, a 16% decline from €1.9bn in 2008, which itself had gained 6% on sales in 2007 of €1.8bn.
Add to this the $400m in synergies that Teva hopes to extract from the deal by reducing operational overlaps and the deal is a steal. Teva will fund the acquisition with $3bn in cash currently on hand and $2bn from drawing on existing credit lines.
As previously discussed by EP Vantage, Teva simply had to land Ratiopharm, a deal on a scale large enough to make a meaningful impact overall as it sets out to deliver on ambitious growth targets (Teva's bullish forecast enhances generics outlook, January 8, 2010).
As further rationale for the Ratiopharm deal, Teva also highlighted the German company’s existing expertise in manufacturing, developing and commercialising biosimilars, another sector in which Teva is aiming to be top dog, having struck a significant collaboration with Lonza last year.
And what of the two remaining bidders involved in the final throws of the auction process, Actavis and Pfizer?
Press reports claim that Actavis was prepared to make the most concessions in retaining as many of Ratiopharm’s 5,500 employees as possible, while also offering the additional financial incentive of a potential IPO pay day within the next few years.
Meanwhile Pfizer, keenest of its US big pharma peers to diversify its business, is unlikely to be too disappointed at missing out on Ratiopharm and may yet use the experience to make a move on STADA Arzneimittel, if recent rumours are to be believed.
Ultimately, however, given what was at stake, Teva was always likely to trump any offer on the table.