Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of generic drug developer Mylan (NASDAQ:MYL) rocketed 10% higher during Tuesday's trading session after generic drug development rival Teva Pharmaceutical (NYSE:TEVA) offered to purchase Mylan.
So what: Before the opening bell Teva offered to purchase Mylan for $40 billion, or $82 per share, in a 50% cash and 50% stock deal. If Mylan were to accept the offer it would represent a 20% premium from yesterday's closing price.
According to Teva's press release, the combination would be accretive to adjusted EPS immediately, with a mid-teens bump up in EPS in year one and nearly a 30% increase in EPS by the third year. Additionally, the combination would be expected to result in cost synergies and tax savings approaching $2 billion, it would likely lead to a deleveraging of the two companies' combined debt, and it would greatly expand their generic drug offerings. Thus far Mylan's management does not seem interested in a combination with Teva.
What complicates matters is that Mylan made an unsolicited bid to purchase over-the-counter and generic drugmaker Perrigo (NYSE:PRGO) for $205 per share just two weeks ago. Pending a due diligence review, Mylan believes a combination with Perrigo would result in greater free cash flow, strong R&D possibilities, and cost savings of as much as $800 million per year.
Now what: Mylan is certainly sitting pretty following today's offer from Teva Pharmaceutical. Because Teva is set to lose its patent exclusivity on multiple sclerosis drug Copaxone -- a drug that accounts for nearly 20% of Teva's annual revenue -- it's in desperate need of new avenues of growth. A combination with Mylan, which is actually one of several companies developing a generic version of Copaxone, could be the perfect fit. However, Mylan's management understands this and isn't likely to even consider an offer from Teva unless the bid is significantly sweetened.
On the flipside, Mylan is also in the driver's seat with its Perrigo bid. Based on Irish takeover law, Mylan's bid isn't a binding offer, meaning Mylan can still walk away if its due diligence review doesn't yield the value it expects from Perrigo.
As an investor, I still believe Mylan is one of the smartest plays in the generic drug industry -- an area that promises to be particularly lucrative with life expectancies in the U.S. on the rise. I'm certainly not a fan of chasing rumors or betting on a buyout, but if you're an investor that's considering buying into Mylan for the long-term, I see no reason to be deterred by today's pop. Mylan's generic product portfolio is enormous, and macro trends in healthcare are certainly in favor of generic drug developers.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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