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Teva and Allergan Generics Deal Displays Other Synergies

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Aug. 4 2015, Updated 9:07 a.m. ET

Cost synergies

The last article in this series focused on exploring the role Allergan Generics can play in strengthening Teva’s generics segment. Teva projects that this deal should help Teva realize annualized cost synergies and tax savings of approximately $1.4 billion. This synergy should materialize by the third year after the deal’s closure. The Teva–Allergan deal is expected to close by the first quarter of 2016.

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Projected financials

After completion of the deal, the new Teva is expected to earn revenues of about $28 billion in 2018. Earnings before interest, tax, depreciation, and amortization (or EBITDA) should reach $11.6 billion. Teva expects to earn high EBITDA margins of ~40%–42% in 2018, the result of a strong drug pipeline coupled with cost synergies.

Teva expects that the deal and the resulting increase in the company’s leverage should not change the investment-grade rating of its bonds. The low-interest environment should enable Teva to rapidly deleverage its balance sheet and utilize the cash flow from operations for funding future growth. Free cash flow is also projected to reach $8.5 billion in 2018, as the company can take advantage of capital expenditure synergies of approximately $50 million annually.

Geographic expansion

As a part of its business transformation strategy, Teva Pharmaceutical Industries (TEVA) is focused on expanding in select geographies in the European market. Similar to Teva, peers such as Perrigo (PRGO) and Mylan (MYL) have also adopted the strategy of inorganic growth in European markets.

Teva is also focusing on high-growth markets such as Brazil, Russia, India, and China. In 2014, the company launched 22 generics in the US, 209 in Europe, and 87 in the rest of the world.

In addition to the North American market, with $4 billion in revenues in 2014, Allergan has a strong international presence in Europe, Latin America, and Asia. The deal should enable the new Teva to implement its industry-leading sales and research and development (or R&D) infrastructure across the globe. Additionally, Teva should have a commercial presence in 100 markets, including the US, Canada, Germany, the UK, Russia, and Japan. The deal should also give Teva greater R&D capabilities in fields such as complex injectables and transdermals.

Investors can get exposure to the branded pharmaceuticals business of Allergan (AGN) while reducing company specific risks by investing in the Health Care Select Sector SPDR ETF (XLV). Allergan accounts for 4.82% of XLV’s total holdings.

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