Teva Pharmaceutical (TEVA) on Monday proved that consolidation in the pharmaceuticals industry is getting so complicated that you need a scorecard to keep track of all the players.
On Monday alone, the market awoke to a pharma deal with implications for Teva, Allergan (AGN), Mylan (MYL) and Perrigo (PRGO).
Here’s a recap: Teva ended its hostile bid for Mylan — which is pursuing its own unsolicited takeover of Perrigo — because it struck a deal to buy Allergan’s generic drug business instead.
Meanwhile, Mylan is still after Perrigo, but Perrigo wants no part of Mylan and continues to make acquisitions of its own.
Teva — already the biggest maker of generic drugs in the world — said it will pay Allergan $40.5 billion to take over Allergan Generics. With Allergan Generics under its control, TEVA no longer needs Mylan, so it dropped its $40.1 billion hostile bid for the generic drug company.
Mylan, for its part, made a hostile bid of $31.2 billion for Perrigo in order to avoid being taken over by Teva. Mylan said it will continue to pursue Perrigo, despite Teva giving up on a Mylan acquisition.
M&A activity bodes well for the broader sector, but the impact of this latest round of dealmaking does mean different things for at least the short-term performance of TEVA, AGN, MYL and PRGO.
Let’s take a quick look:
TEVA
- Pharmaceutical companies need to get bigger because they need economies of scale to offset price pressures and the end of patent protection for blockbuster drugs.
- TEVA is a big winner because of its scale. Not only did it add an enormous generics company to it’s portfolio, it did so in clean fashion and for a defensible price.
- True, the Allergan price is about what Teva was offering for Mylan, but it actually saves TEVA both money and time. There was no way Teva was going to change Mylan’s mind without raising its bid. And as a hostile offer, there was no guarantee that TEVA would prevail — especially not with MYL adopting a poison pill defense.
- The market really does hate uncertainty, and the Mylan deal was oozing with it. That’s why TEVA stock rallied so sharply on the news. It needed this and it won.
AGN
- Allergan might be an even bigger winner than Teva in this deal. That’s why AGN stock likewise rallied sharply on the news.
- After all, Allergan is an M&A machine. It was involved in close to $100 billion worth of deals last year, as it pursues a strategy of selling low-margin businesses and buying more profitable ones.
- The sale of its generics business to Teva gives AGN a big chunk of change to pursue targets. Indeed, before the Teva news, Allergan announced a $560 million deal for privately-held Naurex.
- And let’s not forget that the Teva deal also makes AGN more attractive as a target for some other predator.
MYL
- MYL stock naturally plunged when Teva pulled its bid, but it’s not as bad as it looks. Hey, Mylan jumped 50% when TEVA made its offer, and even after Monday’s rout, the stock is still up a solid 10% in the past year.
- More importantly, MYL is still in play. Heck, the whole industry is, and now that Mylan is getting cheaper by the minute, it could find itself with another unwanted suitor in short order.
- Sure, MYL stock is the big loser in the immediate term, but if you’re looking to play the M&A frenzy in the healthcare sector, the price of entry just got more attractive.
- …that is, unless its hostile bid for Perrigo turns into something like a land war in Asia.
PRGO
- PRGO stock rallied because Mylan reassured the market that its $33 billion bid still stands.
- It also helps that Mylan can concentrate on its offer for Perrigo now that it doesn’t have to worry about Allergan.
- There are still plenty of risks in holding PRGO stock, however. Mylan has to convince its own shareholders that this offer is a good idea. And Perrigo is holding out.
- Regardless, if the Mylan offer falls through, Perrigo will still be a potential M&A target, and that alone helps support PRGO stock.
Either way, you can bet on lots more M&A in the pharma and biotechnology sectors in the months ahead. That, in turn, bodes well for share prices across the industry.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
