Teva's $40bn Allergan acquisition adds twist to merger drama

The merger merry-go-round continues to spin, although the three-way drama involving Teva Pharmaceutical Industries, Mylan and Perrigo has taken an unexpected turn, with the Israeli firm buying the generics unit of Allergan in a $40.5 billion deal.

Just as Teva's chief executive Erez Vigodman was expected to up his hostile bid for Mylan, observers were caught unawares by the deal which will see Allergan's generics unit snapped up for $33.75 billion in cash and the rest in Teva shares, giving the Ireland-domiciled company a 10 per cent stake in the latter. The new entity will have pro forma revenues of around $26 billion and earnings before tax of $9.5 billion in 2016, and Teva expects to achieve cost synergies and tax savings of about $1.4 billion annually, largely achievable by the third anniversary of closing.

The transaction pushes Teva into the top ten of global pharmaceutical companies and adds about 1,000 products to its portfolio. However, it will probably have to divest a number of assets to satisfy antitrust regulators.

As a result of the deal, Teva said that it would drop its long-running battle to acquire Mylan. The former made an $82 per share bid in April and has spent around $1.5 billion in building up a 4.6 per cent stake in Mylan after being repeatedly rejected and enduring criticism from the latter's chairman Robert Coury who had slammed Teva's business model, culture and management.

Mr Vigodman said he still believes that a combination of Teva and Mylan "would have made sense for our companies" and that "we ultimately would have succeeded". However, "we believe we have an even greater opportunity to create compelling, sustainable value for Teva's stockholders through our transaction with Allergan – and we acted quickly to seize the opportunity".

For its part, Mylan congratulated Teva and reaffirmed its desire to acquire another generics company - Perrigo - which so far has rebuffed a number of offers. Mylan investors seem to think the company has missed the boat and its shares sank 14.5 per cent to $56.37.

As for Allergan, which was itself acquired by Actavis for $66 billion in February, the move out of generics comes as it concentrates on its branded pharmaceutical and medical aesthetic businesses (notably through Botox), as well as biosimilars. To cement this shift in focus, the company has engaged in yet more M&A activity, paying $560 million in cash to buy the USA's Naurex.

With the Naurex deal, Allergan is getting hold of two investigational antidepressants, rapastinel and NRX-1074, which have shown efficacy and tolerability in phase 2 studies. It would surprise no-one if these deals trigger off more M&A for Allergan, given the comments of chief executive Brett Saunders. He said "we will have the potential to add scale in existing therapeutic areas, expand into new therapeutic areas and geographies and evaluate strategic transformational deals".