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King of the generics, for now
No comparable mergers threaten supremacy of Teva-Ivax acquisition, analysts say.
July 25, 2005: 3:23 PM EDT
By Aaron Smith, CNN/Money staff writer

NEW YORK (CNN/Money) - Teva's acquisition of Ivax puts pressure on other generic drug makers to consolidate, but there are no potential deals of similar size and diversity that would threaten the company's No. 1 spot, analysts say.

"For the remaining players it's going to be tough," said Andrew Forman, analyst for WR Hambrecht. "It's tough already."

Analysts praised Teva's $7.4 billion acquisition for catapulting the company to the leadership position among generics companies and for providing global and market diversity with little overlap.

"There's going to be advantages of scale and if you can't compete on that, you're going to get left out of some areas," said Richard Watson, analyst for William Blair & Co., referring to Teva's competitors. "You could see some of these smaller guys get muscled out of some of the markets and actually lose market share."

Following its agreement Monday to acquire Miami-based generic drug maker Ivax Corp. (up $2.27 to $25.15, Research), Israeli company Teva Pharmaceuticals Industries (down $0.11 to $31.05, Research) will have a market capitalization of $20 billion, compared to $5.5 billion for Mylan Laboratories (up $0.08 to $17.60, Research) and $3.8 billion for Watson Pharmaceuticals (down $0.25 to $29.35, Research), according to Ken Cacciatore, analyst for SG Cowen & Co.

"Certainly now with this deal Teva has completely distanced itself from all the other competitors," said Cacciatore, noting that Teva has 140 experimental drugs in its pipeline. "Quite frankly, I don't think [the competitors] have the scale to compete with Teva on its business strategy."

This is not the first time Teva has bought a small company to bolster its own strength. In 2004, Teva purchased U.S. drug maker Sicor for $3.4 billion.

In order to survive, the smaller drug makers are going to have to find ways to bulk up, said Watson, the analyst for William Blair.

"Woe to the likes of Mylan who think that they can compete with Teva," said Watson. "The likes of Barr Laboratories (up $0.19 to $46.31, Research), Mylan, and Watson are going to have to get bigger. They're going to have to get critical mass."

Analysts said there are no other potential deals in the generics industry on the same size and scope as Teva-Ivax. The combined companies will generate annual sales of more than $7 billion, offering 300 products in more than 50 countries and operating from a "deepened" pipeline , said Teva chef executive officer Israel Makov in a conference call to analysts. Also, Makov said the merger adds 24 plants to Teva's operations.

"This acquisition means that Teva will be operating at another scale," said Makov. "We are thrilled at the prospect."

The combination of Teva and Ivax is a good match because, unlike their competitors, the two companies have very little geographical overlap, so they can dramatically expand the number of countries where they do business, analysts say.

"What makes Ivax uniquely attractive is that they're global," said Forman, the analyst for WR Hambrecht. "What makes Mylan and Watson uniquely unattractive is that they're not."

Feeding Frenzy

Since companies are always trolling for new products, small companies with "interesting pipelines" are at risk of being eaten by bigger fish, said Casey Alexander, analyst for Gilford Securities, Inc.

Alexander said that small companies Mylan and Watson might grab up smaller niche players, or might get bought out by European drug giants Novartis (down $0.14 to $48.62, Research) or Sanofi-Aventis (down $0.03 to $42.27, Research). But a Mylan-Watson merger is an unlikely scenario, said Alexander.

"It's very difficult in this world to do a marriage of equals," said Alexander. "I would find a Mylan and Watson deal very difficult to do."

Novartis, a Swiss giant with $28.2 billion in 2004 sales, has already demonstrated its interest in swallowing up smaller companies. Novartis in February agreed to an $8 billion purchase of two drug makers: Hexal of Germany and Eon Labs Inc. (up $0.10 to $30.99, Research) of Lake Success, N.Y. This deal propelled Novartis to the top position in the generics industry, until Teva shoved it off the peak.

Teva, which currently has three-fourths of its operations dedicated to generic drugs, will remain a generics-dominated company, said Makov. But Phillip Frost, the former chief executive officer of Ivax who is now serving as Teva's vice chairman, said the company is also prepared to compete in the industry for patented, or branded, drugs.

"I think it's a company that will expand not only in the generic area where it will be extremely dominant, but in the proprietary area, as well," said Frost during the conference call. "We have always tried to emphasize our efforts in places that we consider immature markets where growth prospects are greater. I think we're going to be very well positioned to have one of the fastest growth rates in the industry."

None of the analysts interviewed for this story own stock in the drug makers mentioned here, but their companies may do business with them.

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Teva Pharmaceutical Industries
Ivax Corporation
Mergers - Acquisitions - Takeovers
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