Teva to buy Allergan generic drug business for $40.5 billion, drops Mylan bid

TEL AVIV (Reuters) - Teva Pharmaceutical Industries has agreed to buy Allergan Plc's generic drugs business for $40.5 billion in a cash and stock deal that will turn the Israeli company into one of the world's largest pharmaceutical firms.

The deal, the largest in Israel's corporate history, prompted Teva to drop its $40 billion hostile bid for Mylan, which used a poison pill-style defense to fight the takeover.

It also will allow Dublin-based Allergan, which combined with generics maker Actavis earlier this year in a $66 billion deal, to focus on branded drugs and pay down its debt.

"Allergan's business is more high-end (than Mylan). It's a more interesting business ... a profitable business and it's well managed," said Gilad Alper, an analyst at brokerage Excellence Nessuah, noting a "friendly deal" is preferable to a hostile one.

Allergan is the third-largest generic drugmaker in the United States and is seen as a better fit than Mylan because it will improve Teva's distribution channels, access to profitable injectable drugs, and provide a presence in India.

Pressure has been growing on Teva, already the world's biggest generic drugmaker, to find new revenue sources to combat the start of competition this year for its multiple sclerosis drug Copaxone. Copaxone accounts for about half of Teva's profit.

Allergan CEO Brent Saunders, who led Actavis' purchase of Forest Laboratories and then Allergan, said the sale will result in net proceeds of $36 billion that the company will use to accelerate growth of its branded business.

The acquisition is the latest in an unprecedented wave of healthcare deals since the start of 2014, stretching from large drugmakers buying up smaller rivals, to consolidation among makers of generic medicines, and tie-ups between insurers.

Global healthcare M&A reached $398.5 billion as of July 23, up 80 percent on a year ago, according to Thomson Reuters data.

HIGHLY COMPETITIVE

Economies of scale are particularly important in generics, given the relatively low margins involved and the highly competitive market.

Teva shares, which had been weighed down by the Mylan uncertainty, were up 8.5 percent in New York trading. Allergan shares were up 7.5 percent and Mylan shares slid 14 percent.

"There is only one entity that would stand to lose (from Teva-Allergan), which is Mylan," said Cowen and Co analyst Ken Cacciatore, who believes Teva's shares will reach $100.

Mylan said it would continue its acquisition of Perrigo, whose shares were up 4.9 percent. Mylan Executive Chairman Robert Coury repeatedly rejected Teva's offer, saying the combination of Teva and Mylan was "without sound industrial logic or cultural fit."

Teva said that the company had identified asset sales needed for the deal to pass muster with antitrust regulators in the United States and the United Kingdom. It declined to identify the assets, but said they were fewer than had been anticipated in a combination with Mylan.

Teva said during its conference call Monday that it had approached Allergan a year ago but that it had not been interested. It then went after Mylan, that failed, and it went back to Allergan about 2-1/2 weeks ago.

In June 2014, just a few months after joining the company, Vigodman hired Sigurdur Olafsson, former head of Actavis's generic drug business, to fill a similar role at Teva.

"My sense always was that Mylan was Teva's Plan B," said Benny Landa, an industrialist who led an investor bid last year to shake up Teva's board, calling the deal "brilliant".

Teva will pay $33.75 billion in cash and $6.75 billion in shares, representing a 10 percent stake in the Israel-based company, Teva said in a statement. The deal is expected to close in the first quarter of 2016.

CULTURAL FIT

Vigodman said the combined companies will have proforma revenue of $26 billion and earnings before interest, tax, depreciation and amortization of $9.5 billion in 2016.

"Our respective portfolios of generic medicines and applications are highly complementary," he said. "This acquisition reinforces our strategy, accelerates growth and diversifies revenues both by product and geographically, supporting our new business model."

Teva, which will gain a portfolio of more than 1,000 products, forecast a double-digit boost to adjusted earnings per share in 2016 and a more than 20 percent benefit in years two and three after closing the deal.

It expects cost synergies and tax savings of $1.4 billion annually by the third anniversary from efficiencies in operations, manufacturing, and sales and marketing.

It also expects the acquisition to generate free cash flow of $6.5 billion in 2016 and increased free cash flow in subsequent years. This means it will be able to pursue acquisitions to expand its portfolio in both speciality pharmaceuticals and generics.

In preliminary second-quarter results, Teva raised its adjusted 2015 earnings per share estimate to $5.15-$5.40 from $5.05-$5.35.

(additional reporting by Caroline Humer in New York)