Deal making in the health care sector reached its pinnacle when Teva Pharmaceutical Industries LimitedTEVA made an offer to acquire Mylan MYL for $82 per share in a cash and stock transaction. While shares of Teva were up 1.4%, Mylan's shares jumped 8.9%.
We note that Mylan was looking to acquire Perrigo PRGO . However, Perrigo declined Mylan's takeover bid of $205 per share.
Teva's offer represents a 37.7% premium over Mylan's Apr 7 price - the day before Mylan made an unsolicited offer to buyout Perrigo and a 48.3% premium over its Mar 10 price - the day before rumors of Teva looking to acquire Mylan surfaced.
What's in It for Teva?
Teva and Mylan together would create the broadest portfolio in the industry with a combined pipeline of over 400 pending ANDAs including more than 80 first-to-files in the U.S. The acquisition would help Teva expand its offering of harder-to-produce medical products with the addition of Mylan's ophthalmic products such as soft gel caps, topical and inhalant technologies, "Wave 2" biosimilars, injectables and alternative dosage forms and antiretroviral products.
The combined $10 billion specialty pharmaceuticals company would hold strong positions in multiple sclerosis, respiratory, pain, migraine, movement disorders and allergy therapeutics.
Projected Financial Gains
Teva expects the combination to generate mid-single digit top-line and earnings growth. The acquisition is expected to be accretive to earnings with the deal achieving mid-teens accretion in the first year and approaching 30% by the third year.
The combined company would have pro forma 2014 revenues of approximately $30 billion and pro forma 2014 EBITDA of approximately $9 billion. The combined company is expected to cross revenues, EBITDA and cash flow from operations (excluding restructuring costs) of $30 billion, $10 billion and $6 billion, respectively, by 2016. In 2018, the combined company is expected to record cash flow from operations greater than $8.5 billion, revenues of approximately $33 billion and EBITDA of approximately $13 billion.
Teva estimates substantial cost synergies and tax savings of approximately $2 billion annually across operational, SG&A, manufacturing and R&D efficiencies including tax savings. Teva expects to achieve the majority of synergies and savings by year three of closing the deal.
Teva expects to close the deal by the end of 2015.
The Teva-Mylan combination looks good to us considering the attractiveness and extent of accretion. Teva and Mylan have highly complementary product portfolios and ample scope for generating cost synergies.
Teva's decision to acquire Mylan is in line with its strategy of boosting its generic portfolio. Teva needs to accelerate its growth through acquisitions particularly at a time when its largest selling drug, Copaxone (multiple sclerosis), generating sales of $3.1 billion in the U.S. in 2014 is going generic.
However, we are concerned about the significant overlap in the companies' portfolio, which would make regulatory clearance difficult to achieve. If the deal gets through regulatory hurdles, it would be the second-largest healthcare acquisition in the last year, following Actavis' ACT $66 billion purchase of Botox maker Allergan.
Currently, both Teva and Mylan carry a Zacks Rank #3 (Hold). A better-ranked stock in the health care sector is Actavis carrying a Zacks Rank #2 (Buy).