Teva seeks cushion against loss of patent protection

Teva Pharmaceuticals' $40bn takeover offer for Mylan thrusts into the spotlight a company that has long been a pillar of the Israeli economy and a dominant player in the global market for low-cost generic drugs.

If successful, the deal would reinforce its leadership in generics - copycat versions of more expensive branded medicines - while cushioning it from the looming loss of patent protection on its own best-selling branded drug: Copaxone for multiple sclerosis.

Last week, the US Food and Drug Administration gave a green light to the first generic version of Copaxone, which accounted for a fifth of Teva's revenues and nearly half its profits last year, increasing pressure on the company to find fresh sources of growth.

Like Teva, Mylan combines strength in generic drugs with its own higher-margin proprietary product - the EpiPen emergency treatment for allergic reactions. It too is facing generic competition.

By joining forces with Mylan, Teva believes it can unlock $2bn in annual cost and tax savings that would help both businesses weather challenges ahead while developing new high-value products.

Investors have been urging Teva to be more aggressive with its strong balance sheet as rivals such as Actavis have gobbled up assets in a wave of pharmaceuticals mergers and acquisitions over the past year.

Teva signalled its readiness to join the deals rush last month when it agreed to pay $3.2bn for Auspex Pharmaceuticals, a US drug developer, in what Erez Vigodam, chief executive, described as a "first major step" towards boosting growth.

Israel's biggest company by sales has taken a cautious approach to M&A ever since its $6.8bn takeover of Cephalon in 2011 failed to deliver the promised returns and saddled the company with debt.

This marked the start of a turbulent period for Teva as it appointed its first non-Israeli chief executive - Jeremy Levin, poached from Bristol-Myers Squibb of the US - to lead a turnround.

However, Mr Levin departed in 2013 after clashing with the board over strategy and Phillip Frost, the US-based chairman who hired him, stepped down last year after a campaign by activist investors.

The Mylan offer is the first big move by the new leadership under Mr Vigodam and Yitzhak Peterburg, who succeeded Mr Frost.

The company, whose name means "nature" in Hebrew, has a history dating back to the early days of Zionism, when what was then Palestine was under Ottoman, and later British rule.

Today Teva is the world's largest generics producer by sales, which reached $20.3bn in 2014. With 45,000 employees around the world, mostly outside Israel, its strategy is still watched closely in its home country, not least at a time when anti-big business sentiment is running high in the Knesset and the Israeli media. Notwithstanding its global reach, Teva remains one of Israel's biggest employers.

The country was swept by mass social protests in 2011 fed by anger over high living costs. In the two most recent elections in 2013 and last month, politicians pitching for support from middle-class voters promised to do more to make companies pay their way in society, including by doing away with tax loopholes.

Recently the generous tax breaks granted to Teva in exchange for investing in its home country came under government scrutiny.

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Israel is in a political hiatus as Benjamin Netanyahu, whose Likud party won last month's election, holds talks on forming a new coalition with other rightwing and religious parties.

The acquisition, if successful, would be Israel's biggest cross-border merger. In 2013, the Israeli government used a blocking share in Israel Chemicals, the country's second-largest company, to halt a proposed megamerger with Potash Corp of Saskatchewan.

"I don't see why there would be any political opposition to Teva buying Mylan," said Gilad Alper, an analyst with Excellence Nessuah Brokerage in Tel Aviv. "If it was the other way around, there would be big issues - but Teva acquiring Mylan? Why not?"

Analysts said that Teva might seek to relocate some of its higher-cost manufacturing operations to India, where Mylan has production facilities that are lower-cost and are producing increasingly to FDA quality standards.

Aside from any immediate gains, Teva's move on Mylan can also been seen as a response to consolidation in the health services sector.

Both pharmacy benefits managers and pharmacy retailers have been active in striking deals in recent years, in an effort to exert pressure on generic and specialty pharma drugmakers.

Last month, UnitedHealth of the US acquired its smaller rival Catamaran for $12.8bn in the latest of those deals as it looks to take on larger rivals Express Scripts and CVS Health.

Additional reporting by Arash Massoudi in London

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