$41B for Allergan's generics business? Investors now say Teva 'grossly' overpaid: FT

Teva
A Teva facility in Canada, picture courtesy of Wikipedia user Raysonho.

Is Teva Pharmaceuticals paying too much for Allergan’s generics business? Some shareholders and investment bankers think so, and they’re telling the Financial Times why.

“Teva massively overpaid in the neighborhood of 25%,” one investor told the newspaper. “The question is not whether it’s the right deal, or a good deal--but whether they paid the right price.”

And in the words of one investment banker, “They grossly overpaid, there’s no doubt about it.”

The $41 billion buyout is on track to close later this month, but that closure has been a long time coming. The Federal Trade Commission and European antitrust watchdogs have been scrutinizing the combo, which would be the world’s largest generics maker. That review, and the asset sales the agencies require, delayed the closing for months.

And therein lies the rub.

Teva and Allergan struck the deal last July, before politicians--and more crucially, payers--stepped up pressure on generics pricing, particularly when a slew of companies offer their own copies of a blockbuster branded med. That's happening more often lately, what with the FDA stepping up review of new generic applications and cutting into its sizable backlog, Bernstein analyst Ronny Gal said in a recent investor note.

Allergan’s generics portfolio, a legacy of its identity as Actavis, is weighted toward simpler generic formulations that tend to have more competition. Most generics makers--Teva included--have worked to expand their portfolios of more sophisticated meds, particularly injectables. They’re tougher to develop and manufacture, so fewer companies make the effort, but the payoff is bigger.

What all this means is that the long-term growth Teva might have expected from buying Allergan’s meds might be lower than it previously thought.

Proponents of Teva’s buyout say there are plenty of reasons why it’s still a good deal, however. In a word, synergies, in the form of cost cuts and negotiating power.

And few could have foreseen the downturn in biopharma stocks last year as the pricing controversy took hold. “Hindsight is 20/20,” Gal told the FT. “Soon after they did the deal the entire stock market collapsed, but comparing it at this point it’s hard to argue that they wouldn’t have got it for a better price.”

Teva and Allergan themselves have plenty of justifications on offer. Teva needs the extra revenue to pump up its lagging generics unit, whose Q1 sales fell short of street expectations--especially with generic Copaxone now preying on branded sales. And Allergan wants to get its hands on the $36 billion in cash proceeds, so it can fund its $10 billion buyback and make some more deals.

- see the FT story

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