Rumors have been floating around for months that pickup-hungry Teva may be looking to buy generics competitor Mylan. Some analysts have dismissed the idea, pointing to reasons a buyout wouldn’t work. But with the deal talk persisting, at least one analyst says the underlying logic for a tie-up is sound–as long as it doesn’t happen right away.
As Bernstein’s Ronny Gal put it in a note to investors Wednesday, “combining the two companies is reasonable.” First off, there’s potential for substantial cost synergies in manufacturing and R&D–about $1.2 billion, he figures. Teva in particular has been working to cut down on manufacturing costs, and Mylan’s base in India “would certainly help that,” he noted.
Teva has also been hyping a return to its generic roots. Last quarter, the Israeli pharma’s generics revenue fell 8% to $2.47 billion, propelling a 4.8% overall sales drop. Total generics sales took a dip during full-year 2014, too. But adding Mylan, another top-5 copycat drugmaker, would give that business a boost.
A few factors could still make things complicated in the here-and-now, however. As Gal points out, Teva, which has said it could produce a knockoff of Mylan’s Epipen by late this year, would need to divest its ANDA file if an acquisition takes place. Mylan is also in the middle of its own deal for a large chunk of Abbott’s ($ABT) Netherlands-based generics portfolio, which could make valuing it difficult.
Beyond that, Mylan’s execs have tied their compensation to $6.00 in EPS and a share price of $72, meaning the board isn’t likely to accept less than $70 per share, Gal argues. And when he runs the math at that price, a deal looks like it would be 10% to 15% accretive for Teva after it’s completed.
“Is this good enough to take on a material deal which will limit flexibility to do other things?” he wrote. “Close call.”
Meanwhile, though, Mylan could have other suitors sizing it up. Some have listed on-the-prowl Pfizer ($PFE) as a potential buyer, though Bernstein’s Tim Anderson, for one, wrote in December that tax-advantaged Mylan would be too small to help pharma giant do its own inversion deal.
By Carly Helfand
