NEW YORK (Reuters) - Teva Pharmaceutical Industries TEVA.O (TEVA.TA), the world’s largest generic drug company, said on Friday it would buy rival Barr Pharmaceuticals Inc BRL.N for $7.46 billion to expand its leadership in the U.S. market and fortify its presence in Europe.
The deal, which began taking shape in talks outside a Florida hamburger restaurant, is the latest in a wave of consolidation in the generic-drug sector that some analysts suspect will result in a handful of major global players.
Teva would gain a prominent women’s health franchise, including Barr’s major portfolio in generic oral contraceptives. Barr also sells the brand-name contraceptive Seasonique, and the Plan B emergency contraceptive.
“Businesswise, the acquisition makes tons of sense for Teva,” said Yoav Burgan, pharmaceuticals analyst at Leader Capital Markets in Tel Aviv, adding that cost savings should be “very substantial.”
Israel-based Teva, the world’s largest generic drug company, plans to buy New Jersey-based Barr for $66.50 per share in cash and stock, making it the largest deal ever by an Israeli company.
The price represents a 42 percent premium to Barr’s closing price on Wednesday. Barr shares rose 22 percent on Thursday on reports of a Teva acquisition, and an additional 11 percent to $63.43 on Friday.
Morningstar analyst Brian Laegeler said Barr was trading below the offer price since the deal may take some time to close and there was a small antitrust risk. Teva shares rose 4.4 percent to $42.87.
UBS analyst Ricky Goldwasser said the deal value looked in line with other acquisitions in the area.
“Barr’s stock rose so much on the leaks that the premium looks smaller than it really is. On an historical basis, they aren’t paying a rich premium, but it’s still in line with industry metrics,” said one arbitrageur who declined be named.
The arbitrageur, who specializes in takeover stocks, said a rival bid was highly unlikely. Other possible suitors mentioned have been Novartis AG’s NOVN.VX Sandoz generics unit, or a large pharmaceutical company.
Teva had approached Barr three times over the past seven years about an acquisition, company executives said, while Barr Chief Executive Bruce Downey said this was the 12th attempt overall for an acquisition of his company during his 16 years at Barr.
Talks for this deal started at an industry conference in Palm Beach, Florida, in April, when Downey and Teva Chief Executive Shlomo Yanai waited to be seated for lunch on a park bench outside a hamburger restaurant.
“We declared then if it ever came to fruition, we’d buy the park bench,” Downey joked on a conference call with analysts. “I think that’s going to be a negative synergy for Teva as they have to spend the money to acquire that piece of furniture.”
The combined company would be a generic powerhouse employing about 37,000 people globally and operating directly in more than 60 countries. Together, Barr and Teva had revenue of about $11.9 billion in 2007.
“Our strategy ... is about growth, and it’s about market leadership,” Yanai, a former military general, said in an interview. “By doing this acquisition, we are separating ourselves from the pack of our competitors.”
By acquiring Barr, No. 5 in the United States in generic prescriptions, Teva would boost its U.S. market share to 24 percent of generic prescriptions, up from 18 percent. It said it would capture 16 percent of total prescriptions in the United States.
Still, a Teva-Barr tie-up appears to pose no major U.S. antitrust issues that would scuttle the deal, analysts said.
Buying Barr would also boost Teva’s generic franchise in Central and Eastern Europe. Barr jumped into the international market when it acquired Croatia’s Pliva in 2006.
Teva, which sells the Copaxone multiple sclerosis drug and Azilect Parkinson’s disease treatment, gains more opportunities for first-to-market generics that can have lucrative exclusivity periods and may allow Teva to bridge an expected earnings gap in the next few years.
Burgan said Teva’s management was under pressure to make a high-quality deal due to a number of recent setbacks, such as losing out to Mylan Inc MYL.N on buying Merck KGaA’s (MRCG.DE) generics business, as well as its disappointing results on its 40-mg Copaxone tests and the potential long-term generic competition for its 20-mg version of Copaxone.
“All these circumstances intensified the incentive of Teva management to show off a very substantial and high quality acquisition such as Barr,” Burgan said.
The total deal value is $7.46 billion plus about $1.5 billion of net debt, the companies said in a joint statement.
Under the agreement, each share of Barr common stock will be converted into $39.90 in cash and 0.6272 Teva ADRs. Teva expects the deal to close in late 2008 and boost earnings thereafter.
Teva sees at least $300 million in annual cost savings within three years and even more savings beyond 2011.
Aside from its $7.4 billion acquisition of Ivax two years ago, Teva earlier this year paid $400 million for CoGenesys and announced a deal to buy Bentley Pharmaceuticals BNT.N for about $350 million.
Lehman Brothers acted as financial adviser to Teva in the latest transaction, while Banc of America Securities advised Barr.
Additional reporting by Steven Scheer in Jerusalem and Jessica Hall in Philadelphia; Editing by Derek Caney, Steve Orlofsky, Dave Zimmerman, Toni Reinhold