Teva announced today that it has made a definitive offer to buy ratiopharm for an EV of €3,625m (€600m of debt repayment and the remainder equity). This represents 2.2x 2009 sales and approximately 11.6x 2009 EBITDA, once the losses at ratiopharm’s biogenerics business are factored in, although we suspect that ratio was doing everything that it could to boost its results due to the sale process, so the EV/EBITDA multiple based on a more sustainable earnings figure is probably more like 13x. In any event, the deal is not expected to close before year end, so by the time that Teva actually consolidates ratiopharm, profits should be on an upwards trend and Teva should be able to achieve its aim of earnings accretion from day one.
Strategically, the deal makes huge sense. Teva will finally fill the main gap in its European coverage by becoming number two in Germany (and at half the price paid by Sandoz when it bought Hexal, which must give Teva’s management considerable satisfaction), as well as strengthening its position in Spain and central Europe/CIS. There may well be come competition issues in Canada, where both companies have a strong presence, as well as in Germany, but these are not likely to prevent the deal going ahead. On the biologics side, Teva will gain full control of G-CSF, which it developed together with ratiopharm, and will also inherit ratio’s biologics manufacturing capacity (which could be something of a mixed blessing, since it is expensive and not very flexible) and its pipeline (which has one or two interesting products in it).
It is hardly a surprise that Teva emerged victorious from the auction. Actavis always looked an unlikely winner given its financial constraints and we are not convinced that the Pfizer bid really had the whole-hearted support of Prizer’s top management. If it had, the outcome of the sale process might well have been different. As things stand, we expect a very rapid integration once the deal closes, with ratiopharm’s operations outside Germany being rolled up into Teva’s and dramatic changes to ratio’s product sourcing and acquisition policy. While this may come as a shock to ratiopharm’s (remaining) employees, it will also be very tough on its suppliers. Ratiopharm was a huge buyer of both dossiers and finished products, since it in-licensed the bulk of its requirements, and we would expect its exsiting agreements to now be superceded by Teva-derived products where these are available. Similarly, API supply agreements are likely to be diverted to Teva’s captive production where possible.
Other obvious cost-saving measures include ‘streamlining’ R&D (ie, getting rid of most of ratiopharm’s, since there is no point in having the same products developed in two locations) and plant closures. Ratiopharm’s plant in Canada would seem an obvious target for this, but Teva may also look at consolidating all its German manufacturing within ratiopharm’s Ulm site and perhaps at site closures elsewhere within its own network, if the products could be moved to Ulm.
Overall, we see Teva’s target of €300m of cost synergies as highly conservative, wiht the real benefits of the deal likely to be much higher. Buying ratiopharm should also enable Teva to achieve its ambitious 2015 sales target for Europe, which was never likely to be reached without a major deal. Whether the company’s underlying growth in Europe actually accelerates from its current anaemic rate is less certain, as the increasingly tough pricing environment in Germany is likely prove more of a drag than a stimulant. Even so, this is a good deal for Teva.