Teva Pharmaceutical Industries ; Market Cap (as of 25/04/2015): $62,67bn
Mylan Pharmaceuticals ; Market Cap (as of 25/04/2015): $36,06bn
In the healthcare industry, the saying “eat or be eaten” no longer applies. Instead, the adage of “make a bid or wait for an offer” would be more appropriate to describe the current times. Indeed, at the beginning of this month, an offer was made by Mylan Inc. to acquire Perrigo Co. for $28.9bn. After two weeks, the offer by Mylan was rejected by Perrigo on April 21, 2014. However, on the same matter the tables turned; Mylan found itself not only as an attempted and failed buyer, but also as a possible target. Indeed, Teva, an Israeli company, made a bid for Mylan at $82 per share, for an overall stock and cash consideration of $40.1bn. The combination is seen by the bidder as a natural fit able to provide cost and tax savings of $2bn per year.
Founded in 1901, Teva is an Israeli pharmaceutical company specialising in developing, producing and marketing generic and affordable drugs with a presence in 60 countries worldwide and over 45,000 employees. Teva’s business is divided into three divisions (Generic, Branded, and Over-the-Counter (OTC)) and its most relevant products are Copaxone and Azilect. The Generic division is responsible for the production and sale of products such as tablets and capsules, while the Branded division develops products for more serious illness’ therapy such as, central nervous system (CNS), respiratory system and women’s health. The company also has an OTC division which develops different types of medicines for coughs, colds, allergies, digestive wellness and vitamins intake.
Mylan N.V. is a global pharmaceutical company founded in 1961. The company develops, licenses, manufactures, markets and distributes generic, branded generic and specialty pharmaceuticals in approximately 145 countries. Its business operations are divided into the Generics and Specialty divisions. Mylan offers products range from generic solutions to medicines for patients with respiratory diseases, severe allergic reactions and psychiatric disorders.
Teva is offering to buy Mylan for a total consideration of $40.1bn in a hostile takeover bid. Mylan shareholders would receive $82 per share, in the form of a 50% cash and 50% stock transaction. The offer represents a 48.3% premium relative to Mylan’s original trading price on March 10, 2015, the day before speculation of a transaction became public. The deal also represents a 37.7% premium relative to Mylan’s trading price on April 7, 2015 which is the day before Mylan released an official proposal to acquire Perrigo.
If successful, the acquisition would make Teva one of the world’s leading pharmaceutical companies. Indeed, according to a report released by Morgan Stanley, Teva would enjoy a 25% market share in the US generic pharmaceuticals market. Moreover, the combined company would have an expanded and more efficient global footprint, as well as improved operational, leadership, research and development capabilities. Given that both Teva and Mylan have complementary products, the combination would generate the largest portfolio of products in the industry. Finally, the combined entity would also have 400 pending abbreviated new drug applications and 80 first-to-files patents under its umbrella.
The consolidated company would also have a unique and differentiated business model. It would be the leading player in therapeutics for multiple sclerosis, respiratory diseases, bodily pains, migraines, movement disorders and allergies. It’s enhanced global infrastructure and technological capabilities would allow it to pursue commercialization opportunities as well as the capabilities to produce complex hard-to-produce durable products that neither company currently offers. These enhanced capabilities will be realized through the acquisition of ophthalmic products, soft gel caps, topical and inhalant technologies from Mylan.
Financially, the deal is expected to generate up to $2bn in annual synergies from improved operational, manufacturing, research and development efficiencies as well as tax savings. By 2016, the combined entity is expected to generate cash flow from operations in excess of $6bn, revenues greater than $30bn and EBITDA higher than $10bn. This will help Teva in its efforts to deleverage its currently heavy debt load and to achieve a 3.0x Debt to EBITDA ratio within two years. The combined entity would then be in a much stronger position to pursue additions to its portfolio in both specialty pharmaceutics and generics going forward.
Poison Pill Mechanism
Earlier this year, Mylan instituted a corporate governance change in order to have greater protection in the event of an unsolicited approach. It did so by moving its place of domicile to the Netherlands, and in doing so it finalized a new anti-takeover poison pill defense. A poison pill, also commonly known as a shareholder’s rights plan, is a defense mechanism that corporations employ in order to discourage hostile takeovers. Poison pills make it less attractive for acquirers to complete an unsolicited takeover from an economic perspective. Mylan’s new mechanism grants its board the right to issue preferred shares in the event of a hostile bid to a Dutch foundation. In this defense provision, an independent foundation would be formed in a process known as “stichting” whereby the foundation would also have the ability exercise call option agreements between it and the company. This would give the foundation the ability to essentially dilute the voting rights of shareholders if it deems appropriate. The implementation of this new poison pill mechanism makes the potential takeover by Teva extremely complicated and difficult.
Mylan’s Offer to Perrigo
On April 8th, 2015, just 15 days before Teva’s bid, Mylan had made an offer to Perrigo, a maker of over-the-counter healthcare products. The offer was for a total consideration of $29bn, in which Perrigo shareholders would have received a total of $205 per share in a cash and stock transaction. The offer represented a 25% premium to Perrigo’s share price on 3rd of April. According to Mylan, the deal would have created a global pharmaceutical leader with an unmatched commercial and operating platform.
However, on April 21st the deal collapsed as Perrigo rejected Mylan’s bid claiming that the offer clearly undervalued the company and its growth prospects since the offer valued the company at around 26x EV/EBITDA, while most of its peers were valued at around 30x EV/EBITDA. As a result, Mylan, on April 24th, made another bid to Perrigo thus increasing its offer to $33bn or $222 per share as a strategy to fend off Teva’s offer.
Recent M&A Trends in Pharmaceutical Industry
In the 1st quarter of 2015, the healthcare industry has been the most active sector in terms of M&A. Indeed, there has been $137bn in total deal volume coming from healthcare sector, which has accounted for 15% of total global deal volume. Year over year, healthcare activity in Q1 2015 has improved 125,7% compared to Q1 2014 which saw only $60,7bn in deals completed. But what are the main drivers behind this huge investment in Mergers & Acquisitions activity?
Compared to 2014, the missing trend in transactions is tax inversion. Basically, tax inversion is a strategy in which the acquirer moves its headquarter to a target company’s jurisdiction in order to benefit from lower corporate tax rates. Tax inversion has been a very favourable strategy for companies especially in U.S., considering the huge pile of cash they make overseas and consequent tax rates they have to pay when bringing their cash back into U.S. However, in order to end this tax inversion rush, the U.S Treasury Department on September 22, 2014, announced new rules that result in a reduction of the benefits for the acquirers as well as cancellation of the largest deals in 2014 such as Abbvie-Shire and Pfizer-Astrazeneca.
Rather than having diversified portfolios, pharmaceutical companies, nowadays, have focused their efforts on specializing in core businesses. Companies have been stripping off their non-core divisions and products in order to focus on their core activities. The intent is to reinforce their position, increase market share and employ efficiency from M&A activities. Last year has witnessed lots of transactions aiming at this strategy such as Novartis’ sale of its animal health business to Lilly, AstraZeneca’s acquisition of Almirall’s respiratory division and the asset swap agreement between GlaxoSmithKline and Novartis.
Pharmaceutical companies are putting on searching for new blockbuster products to replenish portfolios, as their older products face problems associated with near patent expiration dates. After a patent expires, revenue from the product decrease extremely as the market overflows with the generic drugs. To overcome this issue, companies have two options; investing further into research and development or engage in mergers and acquisitions activity. Because of the declining productivity and uncertain results of the final outcome, the former has not produced good results nowadays. As a result, pharmaceutical behemoths have started to chase Bio-Tech companies which are using living organisms and cutting-edge technology to develop drugs as well as offering a rich source of innovative products especially in the personalized medicine area.
Forecasting the Future
In the near future, pharmaceutical companies will most probably invest more in emerging markets, especially China and India. In fact, emerging markets represent strong opportunities because of higher disposable income, increase in population, policies implemented by the governments to increase citizens’ life standards and rapid increase of population older than 50. On the other hand, some of the largest companies have missed the tax inversion train because of the new U.S. laws and will probably invest in companies in their homeland to increase efficiency and scale to compete with the competitors benefiting from lower tax rates. Many of them have already been recently active in M&A activity. In the last few months, we saw Pfizer acquire the Hospira as well as Abbvie acquire Pharmacyclics. With all of this action packed activity as of late, let’s see what the future brings for the pharmaceutical industry…
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