In a new report Citi suggests that an acquisition of Shire Pharmaceuticals Group plc (LSE: SHP) would make strategic and financial sense for Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA). This is not the first time that the name of the Anglo-American drug company has come up as an acquisition target for Teva.
Citi, however, goes one step further, and gives numbers to argue its case. Citi analysts John Boris, Peter Verdult, Morten Marott, and Timothy Chou state that, assuming an acquisition is closed by the end of 2009, Teva's non-GAAP earning per share would decline by $0.03, or 0.7% in 2010, before synergies, but add $0.11 per share in 2011, and further grow to an additional non-GAAP earning per share of $0.50 by 2014.
As for the strategic rationale, an acquisition of Shire would also increase the proportion of Teva's brand drugs from the current 25% of sales to 36% in 2010, and reduce its dependence on Copaxone. The analysts write, "We believe Teva needs to lessen its dependence on Copaxone." They note that Copaxone faces a generic threat and that its patents expire in 2014. In addition, there are global generic pricing pressures. Therefore, they write, "We believe that Teva needs to add to its branded segment to stabilize/drive gross margin improvements and earnings per share growth."
Citi says, "Through the acquisition of Shire, Teva would add to its portfolio of marketed branded and pipeline products. Teva would cement its ADHD market position through full control of the Adderall XL market and Shire’s ADHD successor, Vyvance, as well as Shire's innovative TKT pipeline for treating rare diseases, including Gaucher disease, Fabry disease & Hunter disease."
For the purpose of the analysis, Citi assumed that Teva would use the same model for an acquisition of Shire that it used for the acquisition of Barr Pharmaceuticals in 2008: a 40% premium on the market cap in a 60% cash and 40% stock deal. They also assume that Shire would repay its $1.1 billion in bonds and that Teva would keep Shire's $1.5 billion in cash and finances. Shire's market cap is ₤5.7 billion (currently about $9.4 billion) and Teva has $2 billion in cash. The analysts say that Teva would issue bonds to pay for the deal.
Shire has 3,800 employees, and posted a net profit of $156 million on $3 billion revenue in 2008.
Citi reiterates its "Buy" recommendation for Teva and target price of $52. Teva's share closed at $51.77 on Nasdaq yesterday. The share rose 0.8% by mid-afternoon on the TASE today to NIS 199.80.
Published by Globes [online], Israel business news - www.globes-online.com - on August 13, 2009
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