Teva Takes the Offensive

The company will be the world's biggest generic drugmaker if it closes the Ivax buy.
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Teva Pharmaceutical Industries

(TEVA) - Get Report

said Monday that it would buy rival generic drugmaker

Ivax

(IVX)

in a deal worth $7.4 billion.

If its bid succeeds, Teva will reclaim the title of world's largest producer of generic drugs -- a designation it recently lost when

Novartis

(NVS) - Get Report

completed

an $8.3 billion acquisition of Germany's

Hexal AG

and the U.S. company

Eon Labs

.

The acquisitions by Switzerland's Novartis will give its Sandoz generics unit about $5.1 billion in sales. Israel's Teva had $4.8 billion in sales last year, while Miami-based Ivax had $1.84 billion. Their combined revenue could exceed $7 billion by the time the deal closes in late 2005 or early 2006.

The transaction must be approved by shareholders of both companies, as well as by U.S. and European regulators. There's a good chance the companies will have to shed some products to overcome antitrust concerns.

Ivax shareholders will receive either $26 in cash or 0.8471 Teva American depositary shares. The deal is structured so that no more than half the payout will be in cash and no more than half will be in Teva's stock. At the rate Teva's stock is moving, Ivax shareholders will do better with Teva's stock than with cash. At Teva's current stock price, Ivax shareholders would get $26.80 a share.

A Continuing Trend

The Novartis acquisitions and the Teva bid illustrate what analysts have been predicting for quite some time: The generic drug industry, with its cutthroat pricing, is ripe for consolidation. If there was any surprise, it was that Ivax decided to be acquired rather than try to grow via acquisitions.

If the Teva bid is endorsed by regulators, the generic drug industry will be characterized two giants and everybody else. The next tier of publicly held U.S. generic companies -- with market capitalizations between $3 billion and $5 billion -- includes

Mylan Laboratories

(MYL) - Get Report

,

Barr Pharmaceuticals

(BRL)

and

Watson Pharmaceuticals

(WPI)

. There are a handful of public companies with market caps ranging from $750 million to $1.6 billion along with several smaller U.S. generic drugmakers.

The initial Wall Street reaction to the Teva-Ivax deal was enthusiastic. Shares of Teva gained 48 cents, or 1.5%, to $31.64 Monday. The stock rose as high as $33.19. Shares of Ivax gained $2.55, or 11.2%, to $25.43, climbing as high as $26.98 and setting a new 52-week high.

"The deal would accelerate the ongoing consolidation of the generics industry -- a natural reaction to the deteriorating pricing environment," says Andrew Swanson, of Citigroup Smith Barney, in a Monday research note as he reiterated a buy rating on Ivax. He doesn't own shares, but his firm is a market maker and has had an investment-banking relationship with Ivax.

"We like it," says David Woodburn, of Prudential Equity Group, in a Monday report to clients as he maintained an overweight rating on Teva. "It brings Teva's management skill to Ivax's attractive assets. Financially, the deal appears attractive as Teva indicates that the deal will become accretive in the first year." Woodburn doesn't own shares, and his firm doesn't have an investment-banking relationship with the company.

What Stays, What Goes

Analysts expect the companies to unload some assets to get the deal past regulators. They predict Ivax will have to sell its generic version of the narcotic painkiller OxyContin because Teva sells a generic product, too.

A more difficult question, says Woodburn, is what happens to the multiple sclerosis products at both companies. Teva sells the brand-name injectable MS drug, Copaxone, and is testing a pill version. Teva also is working with Sweden's

Active Biotech

to develop an oral MS drug. Ivax and

Serono

(SRA)

are trying to develop an MS pill called Mylinax, which has just entered late-stage clinical trials.

The potential combination of Teva and Ivax illustrates another fact of life in the generics industry: Many generic companies also make and sell brand-name drugs. Brand-name products provide greater profit margins than do generic drugs, but they also require a heavy investment in R&D and a sales force.

Some generic companies have found that the brand-name route is too expensive. Mylan Laboratories, for example,

dropped its attempt to acquire brand-name drug company

King Pharmaceuticals

(KG)

, and

Andrx

(ADRX)

decided to

sell its brand-name drug assets so it could concentrate on its generic drugs.

Citigroup Smith Barney's Swanson suggests that one reason for Teva's courting of Ivax is the Miami-based company's franchise for brand-name medications for asthma and allergies.

The companies said their combination would create a strong geographical reach, capitalizing on Ivax's presence in Latin America and central and eastern Europe, Teva's European market clout and both companies' emphasis on North America.

Standard & Poor's placed its ratings for Teva, including its BBB corporate credit rating, on CreditWatch with negative implications. CreditWatch means the ratings firm is evaluating the news to determine if it will change its rating. The BBB rating is one step above the minimum investment-grade rating.

"While the current rating factors in an expectation of acquisitiveness, and management has established a solid track record of effectively integrating acquired operations and repaying debt, the acquisition of Ivax will be Teva's largest by far," S&P said. "Teva's ability to sustain its strong operating performance and improve credit protection measures will be key to preventing a potential rating downgrade."