Acquisition of Allergan Generics
Teva Pharmaceutical’s (TEVA) acquisition of Allergan Generics, the generics arm of Allergan (AGN), was completed on August 3, 2016. It’s expected to become a key growth driver for Teva. The addition of Allergan’s leading generic products to Teva’s portfolio may boost the latter’s growth rate, profit margins, and overall return to shareholders in the future.
The above graph shows that after the Teva–Allergan Generics deal, the new Teva Pharmaceutical will be one of the top ten global pharmaceutical companies in the world. It will put it ahead of peers such as AbbVie (ABBV), Eli Lilly (LLY), and Novo Nordisk (NVO).
In addition to complementing its product portfolio and research pipeline, the deal will also enable Teva Pharmaceutical to exploit cross-selling opportunities due to enhanced access to a strong customer base.
The acquisition of Allergan Generics is thus expected to boost Teva Pharmaceutical’s share price as well as positively impact the VanEck Vectors Pharmaceutical ETF (PPH). Teva makes up about 4.3% of PPH’s total portfolio holdings.
The Teva–Allergan Generics deal is expected to enable the combined company to realize cost synergies and tax savings worth $1.4 billion by 2019. The deal will also be EPS (earnings per share) accretive, adding 17% to Teva’s EPS in 2017 and 19% in 2019.
Additionally, the deal is expected to result in ROIC (return on invested capital) of about 9.3% by 2019. Considering value generated by divestitures, the Teva–Allergan Generics deal is expected to generate free cash flow of more than $25 billion by the end of 2019.
In the next part of the series, we’ll see how Teva Pharmaceutical is financing the acquisition of Allergan Generics.