By Jonathan D. Rockoff, Dana Mattioli and Liz Hoffman
Teva Pharmaceutical Industries Ltd.'s bid to combine with the
generic-drug business of Allergan PLC would vault the Israeli
company into the top ranks of global drug makers and further a
remodeling of the industry by a few players that were relatively
unknown just a few years ago.
A deal, valued at more than $40 billion, could be announced as
early as Monday, according to people familiar with the matter. It
would combine Teva, the world's largest generic-drug company by
sales, with the third-largest competitor in the market.
Teva had a market value of $60 billion before The Wall Street
Journal reported on the possible sale Saturday. The company would
join other drug makers including Allergan and Valeant
Pharmaceuticals International Inc., which through voracious deal
making have come to wield outsize influence in the pharmaceutical
industry.
The tumult in the drug industry will likely continue. Teva is
now expected to drop its bid for rival Mylan NV, and Mylan is
expected to continue its pursuit of Perrigo Co. PLC, free of its
unwanted suitor.
Still, Perrigo has rebuffed Mylan's offer, and Perrigo Chief
Executive Joseph Papa reiterated that opposition in an interview on
Sunday. A deal with Mylan would undercut the company's growth rate
and earnings multiple, he said.
"We still believe the Mylan offer substantially undervalues
Perrigo," Mr. Papa said.
Such midsize companies have largely driven the breakneck pace of
consolidation in the drug industry in recent years--part of a
broader boom in mergers and acquisitions--as they take advantage of
cheap debt and in some cases low tax rates secured by relocating
overseas, while drawing on the approval of investors who have
driven their shares higher. Meanwhile, bigger, more-established
rivals have largely been on the sidelines of major deal making.
Other segments of the health-care industry also have been
hotbeds of merger activity lately, including insurers. Within the
past month, Anthem Inc. agreed to buy Cigna Corp., and Aetna Inc.
struck an agreement to acquire Humana Inc., in deals valued at a
combined $82 billion.
Last year Teva had $9.1 billion in generic-drug sales, according
to EvaluateSHYPharma, about 12% of the world market. The company
said it already accounts for one in six drug prescriptions in the
U.S. But much of its business is in no-name generic medicines sold
at lower prices. Nearly half of Teva's $20.3 billion in sales last
year were from the off-patent generic copies of drugs.
By adding Allergan's business, which reported $6.6 billion in
sales last year, Teva would have revenue significantly greater than
that of better-known, branded-drug companies such as Cialis maker
Eli Lilly & Co., which reported $19.6 billion in sales last
year. Teva also discussed including Allergan's drug-distribution
business in the sale, which would add another $2 billion in annual
revenue, but as of Sunday evening the unit wasn't part of the deal,
according to a person familiar with the talks.
The deal could give the combined company a market value
exceeding that of Lilly, which stood at $94 billion on Friday.
Meanwhile, Allergan plans to use proceeds from a deal with Teva
to continue its acquisition spree and to pay down debt it has built
up, according to a person familiar with the matter.
Allergan became one of the top 10 drug companies by sales this
year when Actavis bought the maker of wrinkle treatment Botox for
nearly $70 billion, and renamed itself.
In a sign of its continuing ambition, Dublin-based Allergan
announced a deal on Sunday, saying it will pay $560 million upfront
for Naurex Inc. and its antidepressant-drug candidate.
Allergan's 1,000 low-priced products include branded generic
drugs, over-the-counter medicines and generic versions of
well-known pharmaceuticals such as the OxyContin pain treatment and
Concerta, which treats
attention-deficit-hyperactivity-disorder.
To be sure, an agreement by Teva to buy Allergan's generic-drugs
business is expected to attract antitrust scrutiny from regulators.
Teva may need to sell off products with about $500 million in
yearly sales to win approval, Evercore ISI analyst Umer Raffat
estimates.
A deal with Allergan would largely give Teva what it has been
seeking from a Mylan deal: Increased scale in the hotly competitive
generic-drug market, and an opportunity to pursue further cost
reductions that could help it cope with the end of a wave of big
patent expirations.
Teva is under pressure because its top-selling product, a
brand-name multiple-sclerosis treatment called Copaxone, started
facing lower-priced competition in the U.S. last month.
The $70 billion-a-year generic-drugs business isn't growing like
it had been, now that most of the big patent expirations for
blockbuster brand-name drugs such as cholesterol fighter Lipitor
have passed. In addition, the big generic-drug companies are facing
new rivals from India and other countries that are competing on
price.
As a result, some generic-drug companies including Allergan have
been moving upmarket into lucrative brand-name drugs.
One factor that may help explain Teva's interest in the unit:
The chief executive of its global generic-medicines group, Sigurdur
Olafsson, knows the Allergan generics business since he had worked
in a senior role there until 2014.
Teva was considering a deal for Allergan's generics business
before it launched its pursuit of Mylan, according to a person
familiar with the matter.
A few months after Erez Vigodman took the helm of Teva in
February 2014, the company reached out to what was then Actavis
about a deal, the person said. But at that time, Actavis wasn't
interested in selling and dismissed the interest.
The Israeli company then shifted its interest to Mylan earlier
this year.
Teva built up a 4.6% stake in Mylan as part of the effort, but
Mylan's resistance has been fierce. On Thursday, a foundation set
up by Mylan triggered a kind of Dutch poison pill, designed to
thwart any combination.
By that time, Teva was already in serious discussions with
Allergan about their own deal. Teva had increased its earlier
offer, and Allergan was open to shedding its generics business this
time, the person said.
Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com, Dana
Mattioli at dana.mattioli@wsj.com and Liz Hoffman at
liz.hoffman@wsj.com
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