Teva's Latest Buyout Likely Will Be Followed By Plenty Of Others
Friday April 4, 6:09 pm ET
Vance Cariaga
Teva Pharmaceutical Industries has made no secret of its plans to grow bigger in a hurry, telling analysts not long ago that it intends to more than double annual revenue to $20 billion by 2012.
To get there, the Israeli drug maker will rely heavily on buyouts.
It took a step in that direction last week when it announced plans to acquire Bentley Pharmaceuticals (NYSE:BNT - News) for $360 million.
The deal was announced March 31. Teva (NasdaqGS:TEVA - News) will pay $15.02 a share for Bentley, an Exeter, N.H.-based generic drug firm that will spin off its drug delivery business to shareholders before the Teva closing, expected in the third quarter.
The purchase price represents a 9% premium to Bentley's March 28 closing price of $13.74. Its stock rose more than 18% on the news.
Teva also got a minor stock bump the day the deal was announced. Its shares continued to move higher later in the week.
A New Reign In Spain
Though Teva expects the buyout to add to earnings within 12 months, most analysts figure the deal won't contribute much to the bottom line anytime soon.
That's mainly because Teva can generate more sales in a few days than Bentley can in a full year.
"Bentley's sales are only a little over 1% of Teva's total top line," said Manoj Garg, senior analyst at American Technology Research. "Given the relatively modest impact to the top line, we're not looking for a significant impact to the bottom line."
While the deal might not bring a whole lot to the table financially, it does have at least one immediate benefit: greater geographic reach.
Though based in the U.S., most of Bentley's business is across the Atlantic. The firm sells about 130 branded and generic products, primarily in Spain. It also sells generics in other European Union countries.
Last year, Bentley posted $125 million in sales, with the vast majority of that -- 92% -- coming from its specialty generics business. More than 70% of revenue came from Spain.
There should be ample room for Teva to grow its business in Spain, analysts say.
"The combined Spanish businesses should make Teva a leading player in the market, which has only low-teen generic penetration," Banc of America Securities analyst Frank Pinkerton wrote in a report last week.
He noted that Spain "is transitioning from a physician preference branded generic market to a (payer-friendly) heavily generic penetrated market."
Pinkerton, whose employer has done business with Teva, said the company sees its Spanish market growing at least 15% a year.
Teva Chief Executive Shlomo Yanai said in a statement that Bentley will fit well with his firm's Teva Spain unit.
"Spain was identified as one of our target markets in the strategic review we conducted last year," Yanai said.
While Teva digests the Bentley buyout, company watchers will keep a close eye on future deals.
In a report last month, Citigroup analyst Andrew Swanson applauded the fact that Teva management is willing to "set bold goals" such as targeting $20 billion in sales by 2012.
But Swanson, whose employer does business with Teva, also said buyouts would have to play a big part in reaching that goal.
Others echo that view.
"For them to double their revenue base, straight organic growth will be difficult," Garg said. "So you'd expect them to pursue more buyouts."
Eyeing Emerging Markets
The challenge is finding decent buying opportunities in a rapidly consolidating industry.
"Although Teva has a long track record of M&A execution -- including valuation sensitivity -- it's worth noting that the list of attractive targets is getting shorter," noted Swanson, whose report came out before the Bentley buy.
Teva gets about 60% of its sales from North America. Western Europe provides around one-quarter of sales, with the rest spread among other markets.
BofA's Pinkerton says Teva's greatest opportunities are in Japan as well as emerging markets such as Brazil, Russia and Mexico.
"These markets have less internal competition and should yield greater returns on capital deployed as the markets develop," Pinkerton wrote. "Teva will likely continue tuck-in acquisitions (similar to Bentley) in established markets."
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