Teva Pharmaceutical Industries Ltd. (TEVA) recently announced its second major acquisition in a span of two years. The company announced its intention to acquire Germany’s second largest generics producer, ratiopharm, for an enterprise value of €3.625 billion or approximately $5 billion. 

Teva’s last major acquisition was that of Barr Pharmaceuticals, a US-based multinational generic pharmaceutical company with operations mainly in the US and Europe. This acquisition boosted Teva’s product portfolio which now includes several generic pharmaceutical products as well as women’s health products. 

Teva reportedly beat pharmaceutical giant, Pfizer, Inc. (PFE) and Actavis Group, to win the race for ratiopharm. Teva is no stranger to acquisitions. In addition to the Barr and ratiopharm acquisitions, other major acquisitions in Teva’s history include those of Ivax Corp. (Jan 2006) and Sicor Inc. (Jan 2004). 

We view the ratiopharm acquisition as a smart strategic move by Teva. This deal should help the company strengthen its position in key European markets, especially in Germany, the second largest generic market in the world, which is valued at approximately $8.8 billion. 

Teva should also gain a strong foothold in rapidly growing generic markets like Spain, Italy and France. The company expects this acquisition to increase sales from its European business from sales of $3.3 billion in 2009 to joint pro forma sales of $5.2 billion. 

In addition to possessing a solid portfolio of molecules, ratiopharm’s know-how in biosimilars should stand Teva in good stead given its interest in building its portfolio of biopharmaceutical and biogeneric products. 

The ratiopharm acquisition should help Teva attain its long-term goals of doubling its revenues by 2015 and achieving net income margins of 22%. Teva expects to deliver revenues of $31 billion and non-GAAP net income of $6.8 billion, or 22% of revenues, by 2015. 

About 70% of total revenues are expected to come from the generics business in 2015 and the ratiopharm deal should go a long way in helping the company achieve this goal. 

Moreover, this deal should help the company compensate for the loss of revenues that it would face once its lead branded product, Copaxone, is exposed to generic competition. Companies like Sandoz, Momenta Pharmaceuticals, and Mylan Labs (MYL) are all seeking to bring their generic versions of Copaxone to market.
The acquisition, which will be funded through a combination of cash and credit, is scheduled to close by year-end. Teva expects to achieve synergies of approximately $400 million within three years of closing. The acquisition is expected to be accretive to earnings within three quarters after closing. We currently have a Neutral recommendation on Teva.
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