Here’s a quick recap of the biopharmaceutical story board: Mylan made an unsolicited offer to acquire Perrigo Company plc Ordinary Shares (NYSE:PRGO) in April. Perrigo first politely declined the offer and then firmly declined the offer as Mylan persisted. Teva then made an offer to acquire Mylan, as long as Mylan ceased efforts to acquire Perrigo. As the biopharmaceutical industry is facing challenges of increased costs of research, development, and authorization, many key players are coupling up to save costs and bolster their portfolios. As such, Teva’s move to acquire Mylan would leave the two companies with a leg up in the business.
Just as Teva was preparing to make Mylan one of the family, Mylan was kicked to the curb. On July 27, Teva announced plans to acquire Allergan PLC (NYSE:AGN) for $40.5 billion. As a result, Teva announced it had withdrawn its offer to acquire Mylan. Teva CEO Erez Vigodman commented, “In light of our strategic acquisition of Allergan Generics, which will transform the industry, our Board and management team has decided that withdrawing the proposal to acquire Mylan is in the best interests of Teva stockholders… We are confident our proposed transaction with Allergan best positions Teva to succeed in today’s industry landscape.”
Teva’s deal with Allergan will create significant leverage in the generics market. According to market research, the combined company will control more than 20% of the global generic drug market. Teva also estimates the acquisition will save about $1.4 billion annually thanks to cost synergies. The acquisition will transform Teva into a top 10 global pharmaceutical company.
Teva is optimistic that cost savings from the acquisition will help offset sales that Teva stands to lose as Copaxone, Teva’s multiple sclerosis drug, faces patent challenges in the courts. Copaxone is Teva’s highest grossing product, accounting for $1.054 billion in quarterly revenue as posted in Teva’s most recent earnings report. The fate of Copaxone has been pin-balling through the courts. In 2011, a New York state court upheld the validity of Copaxone’s patent, which expires in September 2015. With the patent protection, competitors such as Mylan and Novartis AG (ADR) (NYSE:NVS) were forbidden from entering the market.
However, in 2013 that patent protection was deemed invalid and overruled by a Federal Circuit court, which was upheld in 2014 by a federal judge in Washington D.C. The case went to the Supreme Court, which again ruled the patent invalid. Consequently, the future of Copaxone’s success may be limited. Teva is trying to mitigate the impact of this expiring patent by promoting use of a higher-dose variation of the drug, which is still under patent protection.
Despite Teva’s defeat in the courtroom, Bank of America/Merrill Lynch analyst Sumant Kulkarni is not worried, noting that this challenge does not come as a surprise. Sumant explains, “Recall that Copaxone, for multiple sclerosis, is Teva’s most important branded product and we model $2.2bn in 2016E sales of which $1.7bn is from 3TW. Teva has successfully switched patients to the 3x/week (40mg) from the once/daily (20mg).” Kulkarni notes that the new product exclusivity protection for Copaxone ends in 2017, which is when Kulkarni believes the generic version of the drug will hit the market, noting, “We note the entry of generics on this timeline is not a given as the product remains difficult to copy and any delay could present upside to our Teva model.” On August 28 Kulkarni reiterated a Buy rating on Teva with an $83 price target.
Sumant Kulkarni has a 60% success rate recommending stocks with a +16.5% average return per rating when measured over a one-year horizon and no benchmarks.
Courtroom shenanigans aside, analysts remain bullish on Teva. Out of 13 analysts polled by TipRanks in the last 3 months, 12 are bullish on Teva while 1 is neutral. The average 12-month price target on the stock is $79.75, marking a 26% potential upside from where shares last closed.
On the flip side, Jason Gerberry of Leerink Swann affirmed an Outperform rating on Mylan with a $60 price target on August 28, in light of Mylan’s move to continue its pursuit of Perrigo. The analyst notes that even though Mylan captured the vote of the majority of shareholders to back the deal, there are still “barriers to consummation of the deal” because Perrigo already rejected the bid at $205 per share, and Mylan’s recent stock pull back implies a $195 per share price for Perrigo. Gerberry also highlights two issues that could limit Mylan upside in the near-term: “failure to acquire >80% of PRGO shares could lead to a lengthy (8-12 months) battle to replace PRGO’s board and consolidate remaining PRGO shares,” and “risk of multiple compression if the deal” is completed due to “low visibility around MYL’s forecasted $800m synergy target and likely dilutive nature of transaction.”
Jason Gerberry has a 67% success rate recommending stocks with a +21% average return when measured over a one-year horizon and no benchmark.
According to the 6 analysts polled by TipRanks in the last 3 months, 4 are bullish on Mylan and 2 are neutral. The average 12-month price target on the stock is $71.33, marking a 41% potential upside from current levels.