Emerging markets M&A is risky, and Teva's Rimsa debacle shows it

Playing in emerging markets is risky business, as drugmakers well know. But even buying up local companies that know the markets well can be hazardous, as Teva just learned the hard way.

Last week, the former owners of Rimsa--a Mexican generics company Teva ($TEVA) agreed to buy last year--slapped the Israeli drugmaker with a lawsuit, claiming the company concocted false accusations of fraud as a way to extract itself from the now-unwanted deal. Teva, on the other side of the coin, says Rimsa’s owners concealed manufacturing differences and “violations,” meaning Teva didn’t know about problems until it was too late.

It’s a tale of he-said, she-said, but no matter which party you side with, it’s a cautionary one that “highlights risks with M&A in emerging markets,” Evercore ISI analyst Umer Raffat wrote to clients in a recent note.

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And while the Petah Tikva-based Teva says any issues with the manufacturing processes tied to Rimsa’s business won’t affect the rest of Teva’s portfolio, “we wonder if the messy situation could have been avoided,” Wells Fargo analyst David Maris wrote in his own recent research note.

If you take Rimsa’s word for it, it could have been. Teva “completely misunderstood what it was purchasing” and “did not understand the Rimsa companies or the Mexican market,” Rimsa’s former owners alleged in the suit.

If that’s the case, it certainly wouldn’t be the first time a local market problem delivered Big Pharma a nasty surprise. It’s tough to forget 2013's so-called “Brazil generics issue,” from Sanofi ($SNY), which bought up local company Medley in 2009. Thanks to a price-sensitive generics market, discounting by the French drugmaker's Brazilian management resulted in “inappropriately” high inventory levels, a mess that cost the pharma giant €212 million, €0.17 per share off of earnings, and a handful of jobs to clean up.

With those risks in mind, drugmakers may be thinking twice before swooping in for their next foreign buy--especially considering Q2’s paltry emerging markets growth numbers. Expansion tallied just 1.8% for the period--“the lowest we’ve seen it, and a clear dip” compared with the 4.4% the industry saw in Q2 2015, Bernstein analyst Tim Anderson--who regularly monitors emerging markets trends--wrote in late August. U.S. growth was more than twice that figure, coming in at 3.8% for the quarter.

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