Teva Takes On Novartis
Matthew Herper, 07.25.05, 9:40 AM ET
NEW YORK - Teva Pharmaceutical Industries announced plans to buy Ivax for $7.4 billion in a deal that will return Teva to its previous place as the world's biggest generic drug firm, with annual sales of $7 billion.
On a conference call this morning, Teva Chief Executive Israel Makov said that although Teva (nasdaq: TEVA - news - people ) had considered many acquisitions over the years, Teva has a long-standing relationship with Ivax (amex: IVX - news - people ) and has always viewed Ivax as "one of the most attractive and one of the most compelling" strategic opportunities.
Novartis (nyse: NVS - news - people ), the Basel, Switzerland-based maker of branded prescription medicines, had recently usurped Teva's place at the top of the generic heap with the acquisitions of Hexal and Eon. Novartis is alone among big drugmakers in having a large operation to create knockoffs of cheap medicines–its generics arm make over-the-counter pills for many drugstore chains.
Novartis Chief Executive Daniel Vasella has argued that although branded prescription medicines are sold at much higher prices, a worldwide emphasis on cost-savings make copycat medicines a fast-growing market worth being in.
Even as Novartis has made a big push into the generic market, Teva and Ivax have made their own effort to move into the higher-margin market for prescription drugs. Generics are chemically identical copies of branded medicines that have lost patent protection, creating a level of competition that can drive prices down. In the United States, generics are dirt cheap, while the market for patent protected medicines is one of the most lucrative markets for any product.
Teva makes Copaxone, a treatment for multiple sclerosis that competes with the MS drugs made by Biogen Idec (nasdaq: BIIB - news - people ) and Serono. In 2004, Copaxone sales totaled $936 million, making Teva one of the few generic makers to launch a branded medicine that is reaching blockbuster status. Teva also has research projects in Parkinson's, Alzheimer's, lupus and cancer–including a research project focusing on umbilical cord stem cells.
One reason that Ivax makes sense as a merger partner is that it, too, sells branded medicines. In 2002, 44% of Ivax's $1.2 billion in sales was from branded products, including several asthma treatments. One drug to watch as the deal goes through is Mylinax, an oral therapy for multiple sclerosis that Ivax is developing with Teva's rival, Serono (nyse: SRA - news - people ). It is racing with Novartis to produce the first oral therapy for MS. Ivax is also developing a new epilepsy drug and an oral version of the cancer drug Taxol, which must usually be injected.
The combined company will produce more than 300 generic products, and Teva says its pipeline of generic drugs will be considerably bigger than any of its rivals.
Investors will have a choice whether to exchange their shares either for cash or shares of Teva. The deal still must be approved by regulators. If it goes through, Ivax will become a subsidiary of Teva. The companies expect the deal to add to earnings after the first year, and that synergies will amount of $150 million after two years. Ivax Chief Executive Phillip Frost and other management shareholders have pledged the 19% of Ivax shares they own to the acquisition.
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