Teva turns back the clock

The company now called Allergan has been a deal banker’s dream. It had struck over $100bn of takeovers in the past year, only for these to be effectively unwound today as Teva moved in to buy for $41bn the generics business that had existed before Actavis, as it was known then, had begun to diversify.

Of course what has not been unwound is the transaction fees that were paid each time assets changed hands. With this latest iteration of the speciality M&A saga, at least we know that Allergan is back to being an innovator while Teva, in the wake of Copaxone, is putting its money on generics.

On that level, at least, today’s purchase of Allergan’s generics assets makes perfect sense. After all, ever since its 2013 acquisition of Warner Chilcott, Actavis had been diversifying into patent-protected medicines – moves that were cemented by the subsequent takeovers of Forest, Allergan and Kythera.

The Teva acquisition takes this strategy to its logical conclusion, diversifying Allergan (as the Actavis business is now known) out of generics entirely. One might well ask why Teva did not just cut out the middle man and buy a purely generics-focused Actavis a couple of years ago.

The Copaxone problem

The answer might be that two years ago Copaxone, Teva’s multiple sclerosis blockbuster, was only a near-term problem rather than an immediate one.

The first generic version of Copaxone, Novartis’s Glatopa, was launched last month. By buying Allergan’s generics Teva seems to be turning its back on the highly lucrative but ultimately short-lived world of patent-protected medicines like Copaxone, though it will still be left with a small pipeline of them.

Allergan also had a problem: its M&A binge had left it with a mountain of debt, which at the end of the first quarter stood at $44.3bn. Since $33.8bn of the acquisition price will come in cash this will clearly help tidy up the balance sheet.

For its part, Teva had $11bn of gross debt at the second quarter, and said it would secure the necessary financing for the takeover within a few weeks. This, it said, would comprise a mix of new equity and debt sufficient to maintain its credit rating at investment grade.

Desperate to acquire

For its money Teva gets what it calls one of the industry’s two best generics portfolios – the other being its own – though Allergan keeps biosimilars. Allergan generics employs some 16,000 staff, and has a US development portfolio focused on immediate and modified-release orals, injectables and topical/patch products.

Since the Copaxone problem hit the Israeli group has desperately needed to acquire, and had been pursuing a hostile bid for Mylan. Today that attempt was formally dropped, prompting a 14% fall in Mylan stock; Mylan’s own pursuit of Perrigo continues, meanwhile.

On a call today Teva said it would continue looking for acquisitions of the scale of its $3.5bn Auspex takeout. Even more interesting for investment bankers will be what speciality pharma targets Allergan might now pursue with what it calls its reloaded capital structure.

Teva is targeting $1.5bn of annual savings within three years, and the move basically allows it to boost EPS and trim jobs without formally announcing a job-cutting programme. At roughly 15 times 2016 Ebitda the Allergan deal seems only slightly expensive, and Teva stock opened up 10% this morning.

Allergan, meanwhile, was up 8%, and not without reason. The group had spent a combined $109bn on Warner Chilcott, Forest, Kythera and the old Allergan, accounting for the vast majority of its $120bn market cap. Yet it has now managed to sell the part that excludes those acquired branded businesses for $40.5bn.

Investors and bankers alike might well rejoice at this example of “value creation”.

Alchemy? Some of Allergan's biggest acquisitions
Target company Deal value ($m) Date announced EP Vantage comment
Actavis (bought by Watson, which became Actavis) 5,900 Apr 2012 Watson adds Actavis and now needs to deliver
Warner Chilcott 8,500 May 2013 Generics the key to growth from merged Actavis and Warner Chilcott
Forest Labs 28,000 Feb 2014 Actavis enters the Forest and comes out a specialty pharma company
Allergan (bought by Actavis, which became Allergan) 70,500 Nov 2014 Allergan gets its happyish ending
Kythera 2,100 Jun 2015 Allergan’s $2bn Kythera takeout is a short sharp shock

To contact the writer of this story email Jacob Plieth in London at [email protected] or follow @JacobPlieth on Twitter

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