More Group Therapy From Generics

Go big or go home. That might have been what Teva Pharmaceutical (Nasdaq: TEVA  ) executives were thinking in their pursuit of rival generics company Barr Pharmaceuticals (NYSE: BRL  ) . The combination will give Teva a huge 16% share of the U.S. generics market, according to analysts -- or twice as much as closest rivals Mylan (NYSE: MYL  ) and Sandoz, a subsidiary of Novartis (NYSE: NVS  ) .

Teva is paying for the Motley Fool Stock Advisor recommendation with a combination of cash and stock. Each share of Barr will be converted into $39.90 in cash and 0.6272 of a Teva ADR. That's a hefty $7.5 billion, based on Teva's closing price on Wednesday -- the day before news leaked that a deal was likely. And it's three times annual revenue, slightly higher than the going rate in recent years and higher than what Barr paid when it acquired Pliva two years ago.

Acquirer

Target

Price-Revenue Multiple

Barr

Pliva

2.5

Mylan

Merck's generics

2.7

Stada

Hemofarm

2.7

Novartis

Hexel/Eon

3.9

Mylan

Matrix

2.8

But Barr has quite a few brand-name products that fetch higher margins, so perhaps Teva's attempted buyout of King Pharmaceuticals (NYSE: KG  ) --  which didn't pan out -- for around $4 billion, or 2.9 times revenue, is a better comparison.

The acquisition would also put Teva well ahead of the competition in the area of women's health, where Barr is a leader. And through Pliva, it would give Teva a foothold in Eastern Europe, which is seen as a growth market compared with the U.S. Although generics as a percentage of prescriptions sold in the U.S. increased to 63.7% last year from 59.7% the year before, the average price of generics fell by more than 3%, according to pharmacy benefits manager Express Scripts (Nasdaq: ESRX  ) . That's good for patients, but can pressure margins for generic-drug companies.

Teva's stock has rebounded today after investors had sent it down on the buyout rumors, but the company might feel pressure in the long term because these mega-mergers tend to weigh heavily on the acquirer. Before the buyout rumors, Barr's stock was off about 15% from when it bought Pliva, and Mylan is down 35% since its costly bid for Merck's generic business.

Yet according to industry researchers at IMS Health, products going off patent in 2008 are expected to total about $20 billion in sales, and that number is only going to grow the rest of the decade. In 2011, Pfizer's (NYSE: PFE  ) top-selling Lipitor will lose protection: It has sales of about $13 billion annually. Teva undoubtedly will get a good slice of the generics pie. The Teva-Barr combination could be an exciting development for investors in it for the long term, because it might take some time to pay off.

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Pfizer is a recommendation of both Income Investor and Inside Value. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of Barr, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool's disclosure policy is far from generic.


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