(Bloomberg) — Executives at Teva Pharmaceutical Industries Ltd., the world’s biggest generic drugmaker, keep dropping hints that they’re ready to make a large acquisition.
Investors are taking them seriously.
After Chief Executive Officer Erez Vigodman said last month that Teva, which is Israel’s largest publicly traded company, would shift to an “inorganic growth” strategy, analysts churned out a flurry of research notes speculating on potential acquisition targets. As they did, investors bid up the stock price to a five-year high, part of what’s shaping up to be the biggest monthly rally in more than a year.
Teva shareholders are betting Vigodman will move forward with a deal soon to offset generic competition to its best-selling multiple-sclerosis drug Copaxone, which analysts estimate account for about half of profits. A U.S. Supreme Court decision delayed the introduction of generic rivals until September. Executives said during investor meetings in Israel recently that the company has narrowed down its preferred targets to 25 and would consider a “transformative” deal or a string of smaller branded deals, according to a March 26 report from Sanford C. Bernstein & Co.
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“The closer we get to September, the closer they’re going to get to to the finish line on completing a deal or at least announcing a deal,” Timothy Chiang, an analyst with CRT Capital Group LLC in Stamford, Connecticut, said by phone. “That’s what the markets are hoping for, and what I’m hoping for.”
Teva stock posted its best performance since 2007 last year after it forestalled cheaper versions of Copaxone while shifting more than 60 percent of patients from its daily injection to a three-times-weekly injection that won’t face generic competition until 2030.
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The shares have gained 8.7 percent this month, compared with a one percent return on the Bloomberg Israel-US Equity index. They slipped 0.2 percent last week to close at $61.98 after touching a five-year high of $62.65 on March 23. Teva’s Tel Aviv-listed shares dropped 0.1 percent to 247.60 shekels at the close of trading.
Vigodman, who took over last January after Teva’s previous CEO left in a dispute with the board, spent 2014 cutting costs and increasing cash flow. He told investors on a Feb. 5 earnings call he’s ready to focus on growth through acquisitions as well as Teva’s pipeline of specialty drugs.
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“Our strong focus during 2014 was on getting our house in order first, solidifying the foundation, developing the cylinder that will fire for us in years to come,” Vigodman said on the call.“We are reorienting the direction during 2015 towards inorganic moves as well.”
Teva has over $10 billion in debt capacity to spend on acquisitions and could go after Mylan Inc., which agreed to buy Abbott Laboratories’ generic drug unit last year, or St. Louis, Missouri-based Mallinckrodt Plc, according to a March 17 JPMorgan Chase & Co. report.
Denise Bradley, a spokeswoman for Petach Tikva, Israel-based Teva, and Rhonda Sciarra, a spokeswoman for Mallinckrodt, both said the companies don’t comment on market rumors. Mylan didn’t respond to a request for comment.
Teva has shunned large acquisitions after former CEO Shlomo Yanai spent more than $10 billion on two deals in 2010 and 2011 that loaded the Israeli drugmaker with debt while failing to wean it off its dependence on Copaxone. It didn’t make any purchases last year as peers like Actavis Plc and Mylan gobbled up companies in multibillion-dollar deals.
The company would be better served by going after smaller specialty drug companies or drugmakers in emerging markets, rather than buying another large generic drugmaker in a mature market to reduce costs, said David Maris, an analyst with BMO Capital Markets in New York.
“Teva needs to focus on growth and expansion into unique markets,” he said in a telephone interview. “Cost-cutting deals can be good for shareholders, but they’re limited in scope.”
Even with successful acquisitions under its belt, Teva isn’t an attractive growth stock because profits are destined to shrink over the next five to 10 years with the introduction of generic Copaxone, said Brian Friedman, who oversees a fund that buys Israeli stocks at Denver-based GHP Investment Advisors, which manages about $950 million in assets.
“They’re doing their best and there are some things that may work in an even longer time frame, or some merger transaction,” Friedman said in an interview in New York. “But competition with Copaxone will ultimately erode the profitability.”
The threat of generic Copaxone has kept Teva trading at a discount to peers that makes the shares attractive, said Chiang of CRT, who has a buy rating on the stock. Teva trades at 12 times 12-month future earnings, half the industry average, according to data compiled by Bloomberg. The shares have rallied 55 percent since 2013 and began trading above $60 this month.
“The bulk of the rise has been due to the delay of Copaxone competition and the new management team they put together,” said BMO’s Maris. “It’s natural when a stock goes from $40 to $60, people start to say, ’What are you going to do next?”
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