The Health Care M&A Monthly: Teva Stays on Top of Generics With $8 Billion Purchase of Ivax
Rapid consolidation among generic pharmaceutical companies is continuing through the sweltering days of the summer. Last month’s issue reported that Teva Pharmaceuticals (NASDAQ: TEVA) was on the prowl for an acquisition that would make it once again the largest generic pharmaceutical firm in the world, a position from which it was being deposed by Novartis (NYSE: NVS). We thought that after its large, $3.4 billion acquisition of Sicor in 2004, Teva would select a target of more modest size, such as Germany’s Stada Arzneimittel (DE: STAGn).
As it turns out, Teva had its sights set on bigger game. Bypassing Stada and the German market altogether, the company decided to reclaim its position as the world’s largest generic pharma company by acquiring Miami-based Ivax Corp. (AMEX: IVX) in a transaction valued at $8 billion.
Based in Petach Tikva, Israel, Teva rose from humble origins. What once consisted of three Jewish wholesalers selling imported medicines from the backs of donkeys and camels in Israel 40 years before it even became a state, has grown to become the world’s largest generic pharmaceutical company—until, that is, Novartis’ Sandoz generic unit knocked it out of first place by buying two generic companies earlier this year. Teva’s current products include a generic version of the ulcer drug Prilosec and a version of the narcotic painkiller OxyContin that it began selling after manufacturer Purdue Pharma lost the patent to that drug in litigation. Purdue continues to make the drug, but has licensed sales to none other than Ivax.
The world’s fourth-largest generic pharmaceutical company, Ivax develops and manufactures branded and brand-equivalent pharmaceuticals and veterinary products. It has a strong portfolio anchored in respiratory drugs, many of which use inhalation therapy. Also in its portfolio are generic versions of Pfizer’s (NYSE: PFE) Zoloft antidepressant and GlaxoSmithKline’s (NYSE: GSK) Zofran for nausea. Besides its geographic base in the U.S. market, IVX also has a solid presence in Latin America and Central and Eastern Europe. On a trailing 12-month basis, Ivax generated revenue of $1.9 billion, EBITDA of $324 million and net income of $189 million.
Under terms of the deal, each share of Ivax is to be exchanged for $26 in cash or 0.8471 TEVA ADRs; however, the cash and stock portions are to be split evenly. Also to be factored into the price is the assumption of IVX’s long-term debt, which is about $1.06 billion. This yields a grand total of $7.96 billion. This figure offers IVX shareholders a 14% premium over the stock’s prior-day price. On news of the announcement, IVX shares rose 11%, nearly nullifying the premium, while TEVA’s shares slipped only 1%. As an aside, Stada Arzneimittel’s shares fell 3% as the announcement of this deal scotched any remaining speculation that Stada was Teva’s primary target.
The resulting valuation is 4.2x revenue and 24.5x EBITDA. The combination of the two creates a generic company with 300 products in the U.S. market; and while it will generate $7 billion in global revenue from 50 countries, almost 60% of that will come from U.S. sales. It will have approximately 12% of the worldwide $58 billion generic market. This gives Teva a decisive lead over Sandoz, securing its role as the unquestioned leader in the generic space. And it will have pretty much cornered the market on generic OxyContin.
The deal will be initially financed with $1.5 billion of cash from Teva and Ivax and bank credit lines. Teva will then try to sell some kind of debt securities. Lehman Brothers and Credit Suisse First Boston acted as financial advisors to TEVA while UBS Investment Bank acted as financial advisor to IVX.
Generic pharma and PBMs
All this M&A activity among generic pharmaceutical companies has some people worried. Will industry consolidation lead to a smaller universe of generic pharma companies and, consequently, to a less competitive environment? If so, won’t this tend to raise the price of generic drugs? Following this train of thought, won’t higher prices negatively impact the pharmacy benefits managers, or PBMs, which are major customers of pharmaceutical companies?
Even with accelerating consolidation in this sector, we do not see the universe of generic pharma companies shrinking significantly, at least not in the short term. First, we are seeing new entrants into the field. Some may be de novo with venture backing, while others could come from contract manufacturers who decide to make drugs for themselves.
Second, since generics will continue to compete with branded pharma manufacturers, their raison d’être remains to provide lower-cost versions of pharmaceuticals. So as the Medicare, Part D prescription drug benefit comes into full swing, the generic companies will compete to gain market share from each other and the big pharma firms, even if that means keeping prices low.