Teva loses out on Germany's Merck

Teva was the front-runner in the race for the Merck KGaA division together with Mylan, but dropped out after the pricing got too high.

By SHARON WROBEL
May 14, 2007 07:22
2 minute read.
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teva logo 88. (photo credit: )

 
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Teva Pharmaceutical Industries Ltd. lost out on the bidding for Germany's Merck KGaA generic division to Mylan Laboratories, but analysts expect the world's largest generics company to make up for the loss in geographic reach with acquisitions of its own. "On the one hand, it is disappointing that Teva did not buy Merck KGaA's generics division, which could have been an opportunity given the enthusiasm for the German market, which is opening up for generics, but on the other hand the price tag was high if not exorbitant," said Yisca Erez of Clal Finance Batucha. "Teva will now need to identify other acquisitions at good prices." Teva, which confirmed its status as the biggest maker of generic drugs in the world by buying Ivax Corp last year, was the front-runner in the race for the Merck KGaA division together with Mylan, but dropped out after the pricing got too high. On Sunday, Mylan struck a deal with Merck, under which the US firm will buy the generics business for $6.7 billion and become the world's third-largest maker of copycat versions of drugs. "I believe the price Mylan paid is too high and Teva was sensible in dropping out," said Ori Hershkovits, a pharmaceutical analyst for the Sphera Fund in Tel Aviv. "Merck's division is not the only company on the market for Teva." The price Mylan is paying for Merck's generic division represents a 2.8 sales multiple, and 17 times operating income. "While Merck's generics business would have been a strategic fit for Teva, the terms of this opportunity did not fully meet our investment criteria," Teva said in a statement. "Teva's long-held practice is to only pursue transactions that fit our long-term strategy of delivering profitable growth and enhancing our global leadership position while meeting our stringent financial criteria." Mylan-Merck KGaA's consolidated sales are expected to reach $3.7b. compared with the $9b. for Teva. "The difference in size between the two companies will remain large and thus Mylan's acquisition of Merck KGaA won't impair Teva's global status," said Limor Gruber, an analyst at Psagot Ofek Investment House in a research note. The attractiveness of Merck KGaA, for both Teva and Mylan, was the opportunity to directly enter Germany whose market for generic drugs is expected to grow very fast because of substantial changes underway in legislation. "The only place the merger of the rivals could threaten Teva's competitive position is in Europe, where their consolidated sales will pass $1b. a year, compared with $2b. for Teva," said Psagot Ofek's Gruber. Similarly, Clal's Erez said Teva needed to strengthen its position in Europe. "Germany's Merck is an opportunity which most probably will not come around again in the near- term." Analysts said the fact that Mylan indicated that the transaction would only become profit accretive from the third year after the acquisition, was another reason it was the right move for Teva to abandon its pursuit. "This points to another reason for which Teva decided not to offer a higher price," said Gruber. Another positive, analysts said, was that with the deal done it will remove the uncertainty in the market during the bidding process, which had been weighing on Teva's shares. "The fact that Teva didn't buy Merck will eventually calm investors' concerns over the cost of the merger," said Gruber.

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