The saga of the sale of the generic business of Germany’s Merck KGaA (XETRA: MRK) ended yesterday with Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) losing out to Mylan Laboratories Inc. (NYSE: MYL). Bad news for Teva? Not necessarily.
Teva has not lost its lead position as the world’s largest generics company. However, a battle for second place has now developed between Novartis AG (NYSE: NVS; LSE: NOV; SWX: NOVZ) subsidiary Sandoz and the new Mylan-Merck generics company. Nor was Teva taken by surprise by the deal.
Analysts’ suppositions that Teva had participated in the Merck KGaA tender only to block its competitors seems logical at first glance. Expansion in Europe does not seem a natural move for Teva, given its recent acquisition of Ivax Corp. and the replacement of Teva’s CEO. Analysts who took this position said more than once that Europe’s generics market did not suit Teva. They said that this market was fundamentally different from the US generics market and would require Teva to change its way of doing business, which would greatly increase the merger costs of Merck KGaA’s generics business. The analysts contrasted this situation to Teva’s rapid absorption of US companies Ivax and Sicor.
Mylan now has the headache of dealing with the European market, where it never had a foothold before. Mylan’s task is made more difficult because of the price it agreed to pay for Merck KGaA’s generics business, which was well above the upper range of the initial price tag of $5.5-6.5 billion. The final $6.7 billion price tag was achieved in no small part because of Teva’s involvement in the tender right to the finish line. Teva caused a bidding war that may ultimately add to Mylan’s burdens over and above dealing with a new market.
Another point should be borne in mind. The thrust of the global generics market is towards Asia in general, and China in particular. China’s economic development and the rise in the purchasing power of its population will create large new markets for generics companies operating there.
Teva already has important activity in India, where it produces active pharmaceutical ingredients (APIs). This has reduced the company’s production costs, thereby boosting its profit margins. If it becomes necessary to gamble on mergers and acquisitions of generics companies in the coming years, these companies will Asian. It is not taking a great gamble to predict that Teva will expand its Asian business in the coming years. As far as Teva is concerned, the money it would have paid to clinch the acquisition of Merck KGaA’s generics business instead of Mylan will be much better spent in China and other Asian countries.
Published by Globes [online], Israel business news - www.globes.co.il - on May 14, 2007
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