Teva/Mylan: Brand management

Could a branded drug be the impetus for dealmaking among generics manufacturers? On Tuesday Israeli Teva Pharmaceutical, the largest generic drug company by revenue finally announced an unsolicited bid for rival Mylan NV, the fourth largest global generics producer. The offer price of $82/share values Mylan at about $50bn in aggregate, a figure that could rise, given initial hostile bids are usually rejected. While this deal would create the dominant global generics company, Teva's motivation may stem from its branded, speciality treatment for multiple sclerosis called Copaxone.

Copaxone accounts for $3.5bn in revenue, about a fifth of Teva's total sales, but half of Teva's profits (Copaxone's gross margins are near 90 per cent vs. just under 50 per cent for Teva's generic drugs). But unfortunately for Teva, another generic manufacturer, Momenta Pharmaceuticals, just received regulatory approval for its version of Copaxone. At the same time, Teva's core generic segment, about half the company's sales, is also slowing as not so many blockbuster drugs - such as Lipitor did - will come off patent. Teva has forecast its 2015 total sales falling slightly, to just under $20bn.

Teva has managed to eke out profit and cash flow growth by cutting overhead and marketing expenses. A Mylan deal could be seen as an extension of that strategy. Teva has estimated that there could be $2bn in cost and tax savings from a combination (Mylan's earnings before interest, taxes, depreciation and amortisation is $2bn). Mylan is cool towards Teva's overtures and happens to be in the midst of its own unsolicited bid, a $30bn offer for drugmaker Perrigo. Mylan may exploit Teva's desperation and ask for both a higher purchase price (the current Teva offer represents a 48 per cent premium) and a greater cash component. It may be an opportune time to be a pharma buyer. But that just means it is an even better time to be a seller.

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