Forget Mylan: Teva inks $40B-plus pact for Allergan's generics biz

Teva CEO Erez Vigodman

Forget everything you thought you knew last week about some of the generics industry's biggest players. Teva ($TEVA) is no longer enmeshed in a hostile pursuit of rival Mylan ($MYL), and Allergan ($AGN) is no longer touting its status as a hybrid brand-and-generics specialist. Instead, they're teaming up with one another.

The Israeli drugmaker will fork over $40.5 billion--$33.75 billion in cash, and shares valued at $6.75 billion, giving Allergan a 10% stake in Teva, it said Monday. And in return, it'll snag a business that churned out $6.6 billion in sales last year, solidifying its position at the top of the generics food chain and vaulting it into the ranks of the world's 10 largest drugmakers.

"What we are doing here will enable Teva to be one of the winners of the ever-changing pharmaceutical industry," CEO Erez Vigodman told The Wall Street Journal.

The way Teva sees it, the transaction will pad non-GAAP EPS by double digits next year, and by more than 20% in the second and third years following the deal close. It will also generate cost savings of about $1.4 billion annually, a target Teva thinks it can hit by the deal's third anniversary, it said in a statement.

Allergan CEO Brent Saunders

And as for combined revenue? That'll hit $26 billion, helped by Allergan's 1,000-product generics stable--featuring branded generics, OTC meds and copies of big guns like Purdue Pharma's OxyContin and Johnson & Johnson's ($JNJ) Concerta, the WSJ notes. Allergan--formerly known as Actavis, and before that Watson--built up that lineup with some deals of its own over the past few years. As Watson, it nabbed Actavis and its moniker before purchasing Warner Chilcott; later, it homed in on branded meds with buys of Forest Labs and Allergan.

All things considered, Vigodman told the paper, the deal provides an "even greater opportunity to create value for shareholders" than a Mylan tie-up would have, and at least some analysts seem to agree. Cowen & Co. analysts called it "potentially more attractive" than a takeover of Mylan--and the fact that it can be done on friendly terms makes it all the sweeter for the Israeli pharma.

Wringing out costs is the only "good and meaningful way" to maximize the value of large, mature generics franchises such as Teva's and Allergan's, they figure, and that's something companies can't do without joining hands. "In our view, Teva understands this. Mylan management--for whatever their reasons--either doesn't understand it, or simply doesn't want to do it," they wrote.

Meanwhile, Mylan--which last week rolled out takeover defenses to help block Teva's $40-billion-plus advances--congratulated Teva on the deal and reiterated its commitment to swallowing Perrigo, a target that so far has shown no interest in a buyout. Shares of the newly Dutch drugmaker dropped 14% in premarket trading, while Perrigo's ($PRGO) gained 4.6%.

- read Teva's release
- read Mylan's release
- get more from the WSJ (sub. req.)

Special Reports: Top 10 generics makers by 2012 revenue - Teva - Mylan - Actavis | Pharma's top 10 M&A deals of 2014 - Actavis/Allergan