April 27, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
The unsolicited $40.1 billion bid for Pittsburgh, Penn.-based Mylan Pharmaceuticals, Inc. from Israeli company Teva Pharmaceutical Industries Ltd. has officially been rejected by Mylan, with the company’s increasingly testy official statements about the proposed merger appear to be a testimonial to just how acrimonious the process is becoming.
After months of rumors about the deal, Teva finally made its bid official last Tuesday in an $82 a share in cash and stock deal that would be the biggest takeover attempt so far this year. That bid is 23 percent above Mylan’s closing price April 16. But that price is far too low for Mylan, an ironic twist considering its bid for smaller company Perrigo Company was last week rejected by Perrigo for also being an undervaluation.
“After thorough consideration, Mylan‘s Board unanimously determined that Teva‘s proposal grossly undervalues Mylan, and would require Mylan‘s shareholders to accept what we believe are low-quality Teva shares in exchange for their high-quality Mylan shares in a transaction that lacks industrial logic and carries significant global antitrust risk,” said Mylan in a statement Monday.
“In addition, we also believe that the proposal does not address the serious challenges of integrating two fundamentally different and conflicting cultures under a Teva Board and leadership team with a poor record of delivering sustainable shareholder value. We believe that these challenges would make it very difficult to generate value from this combination for Mylan shareholders.”
In a letter to Teva’s management from Robert J. Coury, Mylan’s executive chairman, made public by Mylan on Monday, it is clear the company is becoming increasingly irritated by what it sees as an attempt to railroad it into accepting the proposal.
“Dear Erez,” wrote Coury. “First, let me say what a pleasure it was to meet you for the first time in New York last Friday. As we discussed, I was very disappointed by your decision to make your interest in Mylan public without first taking the time to speak to me or meet in person.”
“As those who know me will attest, I always am willing to discuss opportunities to create value for Mylan‘s shareholders and other stakeholders, and although it was after-the-fact, I was happy to grant you the opportunity to meet with me in person to hear your rationale outlined in your letter dated April 21, 2015. During our meeting, we touched on Teva‘s many struggles throughout the last several years, including the approval of the first generic version of your flagship product Copaxone (despite Teva‘s claims that an AB-rated generic would never be approved); the persistent turnover and turmoil amongst the Teva leadership and Board and the resulting strategic confusion; Teva‘s consistent underperformance in comparison to the market and our industry; and your increasing need to find new sources of future growth. As I am sure you are aware, Mylan‘s historical compound annual growth rates (CAGR) in terms of revenues and adjusted EBITDA from 2011-2014 are more than double Teva’s.
He continued:
“Erez, you told me in our meeting that Teva is different now and the challenges and cultural issues you have faced previously were now in the past. You assured me that Teva‘s new Board and management team had brought a new approach to the way it does business. Yet, this change was not evident in the way you approached your interest in Mylan. Through your leadership, you had the opportunity to set the right tone, and show the world that there is a new Teva. Instead, you chose to approach Mylan in a way that demonstrates that the old Teva is very much still alive, which only continues to beg questions about Teva‘s credibility. “
Teva did not have a responding statement Monday. Any eventual merger could mean more than $27 billion in revenue from the combined companies, although Mylan’s public rebuke of its suite April 17, in which it raised concerns about antitrust issues, continues to worry analysts.
Still, some parties have gained from the fractious potential marriage. News of the deal has pushed Mylan’s share price up more than 6 percent over the last two days, and Abbott Laboratories , who is now the largest stakeholder in the company after selling its generic drugs unit to Mylan last February.
Abbott sold its generic drugs unit in exchange for around 110 million shares of Mylan—which means it’s been reaping the gains of a major Mylan windfall.
Abbott’s equity position in Mylan increased “well north of $7 billion,” according to Abbott’s Chief Executive Miles White said on an earnings call yesterday that the company’s equity position in Mylan has ballooned from $5 billion at the time of the sale to “Well north of $7 billion” now.
“I am watching the great theater out there that is surrounding Mylan,” White told investors yesterday during a conference call. “I’m happy that we’ve been patient. It is clearly accruing value to us.”
Teva lost patent protection for multiple sclerosis drug Copaxone, for which Mylan makes a generic, last July after a U.S. Federal Appeals Court found the patent protecting the drug would expire in May 2014, not September 2015.
“The attraction for Teva is that this deal would immediately allow them to grow and reduce their exposure to the impending drop in Copaxone sales,” said Sam Fazeli, an analyst at Bloomberg Intelligence in London, told Bloomberg Tuesday. “We still would have to consider the ramifications of antitrust regulation.”
Rumors that Teva and Mylan are finally ready to merge have been roiling the market for months, but gained new urgency yesterday after people familiar with the matter told Bloomberg News they expect a formal bid from Teva for Mylan soon.
“Teva hasn’t made a formal approach yet, the people said, though Mylan is aware of the Israeli company’s interest,” said Bloomberg Monday. “Teva is evaluating the purchase internally and has also approached advisers about the potential bid and financing, the people said, asking not to be identified discussing private information.”
Earlier this month Mylan made an unsolicited $28.9 billion bid for Perrigo Co., a move which Wall Street has taken as a catalyst for Teva to pounce before Mylan becomes a larger, and much more expensive, target. But Perrigo Company (PRGO) rejected that offer late Tuesday, saying it “substantially undervalues” Perrigo and “its future growth prospects and “is not in the best interests of Perrigo’s shareholders.”
“Perrigo has a long history of driving above market shareholder value through consistent growth with a focus on profitability and operational excellence, which is reflected in our organic net sales CAGR goal of 5-10 percent for the next three years,” said Joseph C. Papa, chairman, president and chief executive, in a statement.
“We have studied the potential combination of Mylan and Teva for some time and we believe it is clear that such a combination is without sound industrial logic or cultural fit,” Robert J. Coury, Mylan’s executive chairman, said.
The deal would have been just the latest shopping trip for Mylan, which has been attempting to build out its brand via bolt-on acquisitions, including women’s health specialists Famy Care and a massive $5.3 billion tax inversion acquisition of Abbott Laboratories(ABT). On Feb. 2 Mylan acquired several women’s health care business units from Mumbai, India-based Famy Care Limited. The deal was handled through Mylan Laboratories Limited, Mylan’s Indian subsidiary.
Mylan does have a host of attractive assets that have been tempting to larger drugmaker, including recent clues from the U.S. Food and Drug Administration (FDA) that Mylan’s generic ANDA, which is a stand-in for Natco’s multiple sclerosis drug Copaxone. Umer Raffat, a biotech analyst at ISI Evercore, said Monday that Mylan is poised to receive approval for that drug, which would quickly be rushed to market.
“My base case continues to be that Mylan will get its Copaxone approved,” said Raffat, “and it intends to commercialize it at the time of market formation.”
Mylan is one of the largest generics and specialty pharmaceutical companies in the world, with about 1,400 different products it markets. Teva also focuses on generics, as well as specialty drugs and active pharmaceutical ingredients. It has a portfolio of more than 1,000 molecules, employs more than 45,000 people worldwide and sells in 60 countries.
Analysts have continued to dismiss the possible marriage, saying rumors the two might be merging aren’t credible and would do very little to solve Teva’s current growth problems even if the companies did blend, said Wells Fargo analyst Michael Faerm.
Calling it strategically unlikely, Faerm said continued buzz about a possible deal between the Israeli drugmaker and Mylan was overblown.
Faerm said acquiring a generic drugs company is probably not a top priority for Teva, while Mylan has not indicated it would even be a willing seller, even if it currently in the process of designing a generic for Copaxone.
Teva reported earlier this year that each month of delay in generic competition for Copaxone adds about $78 million to the company’s net revenue and $0.08 to its share price.
David Maris, analyst with BMO, said in a note in March that most of the rumors so far about the deal have been baseless and are likely from sources “just putting out fluff.”
Maris’s skepticism is related to Mylan recently acquiring some of Abbott Laboratories (ABT)’s sagging European generics as part of a tax inversion deal, pointing out that if Teva bought Mylan, the Israeli company would have two choices: Mylan to Israel, which has major tax disadvantages, or compete an inversion and change its domicile to the Netherlands, which would violate Teva’s bylaws.
Maris also believes the acquisition wouldn’t be very good strategically. “Mylan bought the Abbott products to focus in on Europe—particularly France—and that’s not an area Teva is interested in,” he wrote.
In addition, Maris thinks that Teva’s debt capacity is too small to pull off a Mylan deal. Mylan has a $22 billion-plus market cap, and with a premium and the company’s debt, the deal would be at about $30 billion. “They’re not going to go to junk status,” Maris said in a note, “just to finance this deal.”
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