Teva Acquires Close Competitor Yet Again, Bags Ratiopharm for US$4.95 bil.

Teva Makes its Big-Ticket Buy For 2010

Israeli firm Teva has confirmed market speculations that it has acquired German generics giant Ratiopharm. The transaction was valued at 3.625 billion euro (US$4.95 billion), with the transaction subject to relevant regulatory approvals. Teva's valuation is 2.3 times more than the German firm's 2009 sales, and exceeds earlier bids of 2.5 billion euro (source: Business Week). The transaction will be funded through a combination of cash and credit lines. The acquisition will be completed by the end of 2010.

After completion of the acquisition, Teva expects synergies of at least US$400 million to be realised within the following three years. In the meantime, Teva expects the development to add immediately to the adjusted earnings per share and thereby boost bottom lines in the forthcoming three-quarters of the year.

Ratiopharm To Boost Teva European Presence

Teva's acquisition of Ratiopharm will see the creation of a US$16.2-billion combined entity, with over 40,000 employees worldwide (including 18,000 in Europe). Teva's value additions from the acquisition are:

• Becoming the leading generics firm in Europe, increasing its sales in this region from US$3.3 billion to US$5.2 billion.
• Improving its ranking in the German generics market by becoming the second-leading generics firm.
• Becoming one of the top three generics firms in the Czech Republic, Poland, and France, and will have the leading position in 10 European markets, including the United Kingdom, Hungary, Italy, Spain, Portugal, and the Netherlands.
• The inclusion of over 500 drugs and 10,000 presentations from Ratiopharm's portfolio that are marketed in 26 countries.
• Ratiopharm's biosimilar pipeline, which consists of a number of products in advanced stages of development, and related marketing expertise.
• Doubling of sales in Canada.

Teva's press release on the acquisition can be found here.

Outlook and Implications

In line with market speculations that surfaced yesterday, Teva has won its bid to acquire Ratiopharm (see Germany - Israel - United States - Iceland: 18 March 2010: Speculation Mounts over Teva Winning Ratiopharm Bid). The firm beats rivals Actavis (Iceland) and Pfizer (U.S), in spite of reports that the Ratiopharm board was impressed with Pfizer's presentation. For each of these firms, winning the Ratiopharm bid represented a different value proposition. In the case of Pfizer, it was the pharma giant's increased efforts to penetrate the generics market, in which it has been engaging since the beginning of 2009; Ratiopharm would also have been Pfizer's first big-ticket generic acquisition. On the other hand, for debt-ridden Actavis, the acquisition represented its efforts to regain its "glory days". For Teva, which accrues a significant portion of revenues from North America and in comparison has struggled in Europe, Ratiopharm represents a stronger foothold in this region.

With the Ratiopharm acquisition, Teva is set to consolidate its position on the German market; however, many analysts are of the opinion that the Israeli firm may have overpaid for this benefit. Shlomo Yanai, the chief executive officer of the firm, denies this. Teva's valuation of Ratiopharm is lower than that of previous generic deals—Sanofi Aventis (France) paid 3.3 times the sales for Brazilian firm Medley, and Mylan (U.S.) paid 2.7 times sales for Merck KGaA's (Germany) generic business. The lower multiple is reflective of the pricing pressures all generic firms are facing in the German market.

Irrespective of the valuation of the deal, Teva's move is set to benefit the company in more ways than one. Importantly, the acquisition increases its lead in the global generic market—a lead that was cemented by its 2008 acquisition of Barr Labs (U.S). However, this does not mean that it does not face competition from Sandoz. Sandoz-owned Hexal is still the market leader in Germany, and Teva is now set to fight aggressively to gain the leading position in the second-largest global generics market.

In terms of the integration process, the acquisition may raise a few anti-trust issues, and may see Teva and Ratiopharm divest a few of their overlapping assets. However, Teva has much experience in integrations and has learnt several lessons, having engaged in three major acquisitions involving top-10 generic firms in the last five years. The integration of its largest acquisition to date—Barr Labs—largely followed timelines, and hopefully the same can be expected with Ratiopharm as well.