NEW YORK/TEL AVIV Teva Pharmaceutical Industries Ltd is in talks to acquire rival generic drug maker Barr Pharmaceuticals Inc BRL.N, sources familiar with the situation said on Thursday.
Few hurdles would impede a potential purchase of Barr, which saw its stock surge 22 percent as news emerged of the potential deal worth up to $7.5 billion.
Although the deal would increase Teva's leadership in the U.S. generics market, antitrust experts said such a deal would still likely win clearance after minor divestitures.
And although another suitor -- such as Novartis AG's (NOVN.VX) Sandoz unit or a large brand drug maker -- could emerge, analysts pegged the ever-acquisitive Teva TEVA.O (TEVA.TA) as the most logical buyer.
"Acquisitions are part of the way Teva operates and it also has done a very good job integrating them, so it would make sense," said Mike Krensavage, principal of Krensavage Asset Management LLC.
TheMarker and Globes financial newspapers reported that Israel-based Teva, the world's biggest maker of generic drugs, was in talks to buy New Jersey-based Barr in what would be a further consolidation of the generic drugs industry. Teva shares fell more than 3 percent in Nasdaq trading, closing at $41.05, down $1.36.
Spokespeople for both Teva and Barr said the companies do not comment on rumors. Teva also issued a brief statement to the Tel Aviv Stock Exchange in the wake of the reports saying "The company has no intention of reacting to rumors."
TheMarker put the price tag at $7.5 billion, citing capital market sources. That would make it Teva's biggest acquisition, surpassing the $7.4 billion purchase of U.S.-based Ivax two years ago. Globes cited a price of $7 billion to $7.5 billion.
Barr had a market value of $5.1 billion before Thursday's trading.
Valuations of recent large acquisitions of generic companies would imply a Teva-Barr deal worth roughly $8 billion, including about $1.5 billion in assumed net debt, according to analysts at Goldman Sachs.
However, if the $7.5 billion price tag cited in the Israeli reports excluded debt, it would put the price for Barr at about $69 per share.
Barr shares hit a high of $58.51 and closed at $57.17, up $10.35, or 22.1 percent, on the New York Stock Exchange.
A deal in the high $60-per-share range "would be more than fair to the Barr shareholders," Morningstar analyst Brian Laegeler said.
Recent events may be propelling this deal. Teva recently released study results showing a new dosage of its big-selling multiple sclerosis drug Copaxone was not more effective than the current version, endangering Teva's ability to extend the key franchise.
"It is possible that the acquisition is necessary and emphasizes concerns for the loss of income from Copaxone," said Gal Reiter, an analyst at Israel's Clal Finance brokerage.
Teva also would be swooping in after Barr reported disappointing quarterly results in May that sent Barr shares to their lowest point in more than three years. The stock had recovered somewhat, but were still far off the 52-week high of
Teva told analysts in February it was seeking to extend its market share in the U.S. to 30 percent of generic prescriptions by 2012, up from about 20 percent. Barr ranks as about the fifth-largest generic company by U.S. prescriptions.
Still, the Teva-Barr deal would likely be approved by the U.S. Federal Trade Commission with some requirement that certain drugs be sold off, said Seth Silber, an antitrust lawyer with Wilson Sonsini Goodrich and Rosati.
"There's been a number of major generic mergers, and they all do get approved," said Silber, who specializes in the generic drug industry.
Ira Loss, an analyst for Washington Analysis, said he did not see major antitrust hurdles for a Teva-Barr combination. "The generic industry is not very concentrated," Loss said.
An acquisition would also provide Teva with access to the oral contraceptive market, as Barr accounts for 21 percent of the total market, UBS analyst Ricky Goldwasser said.
Teva has been seeking to build its own generic oral contraceptive franchise but it would likely take more than three years to match Barr's portfolio, Laegeler said.
The deal would also enhance Teva's presence in Central and Eastern Europe, a region where analysts believe Teva needs to grow. A year ago, Teva balked at buying the generics business of Merck KGaA (MRCG.DE), which would have bolstered its European sales. Mylan paid $6.7 billion for Merck's generics and Teva later said the price was too steep.
UBS estimated 9.4 percent of Barr's revenue or $240 million and 4.5 percent of Teva's revenue or $450 million to $500 million is from this region. In 2006, Barr bought Croatia's Pliva, which gave it an international presence.
The deal would also boosts Teva's ability to hit its stated goal of reaching revenue of $19 billion to $21.5 billion by 2012, a goal some had deemed aggressive, Natixis Bleichroeder analyst Corey Davis said.
(Editing by Andre Grenon)