Billions of dollars are spent every year on over-the-counter medicines and generic versions of top-selling drugs, but there appears to be significantly disagreement among industry leaders exactly how much that growing market is worth.
In the past month, over-the-counter drugmaker Perrigo (NYSE:PRGO) has shunned an offer from generic-drug maker Mylan (NASDAQ:MYL), and Mylan has in turn rebuffed an offer from rival Teva Pharmaceuticals (NYSE:TEVA).
Although suitors offered prices far north of then-current market prices, both were spurned for offering too little. So, let's learn more about these deals and see if we can shed some light on just how much generic-drug makers are really worth.
Deal No. 1: Mylan bids for Perrigo
Mylan made its first pass at Perrigo on April 8, offering Perrigo shareholders $205 per share in a combination of cash and stock. That offer was 25% higher than Perrigo's closing price on April 3.
In a bid to convince Perrigo shareholders of the merits behind marrying Mylan, Mylan's CEO wrote a letter to Perrigo outlining a slate of potential reasons to say "I do," including "compelling synergies resulting in margin expansion and EPS accretion."
The use of the word "compelling" could be an understatement.
Both of these companies generate billions of dollars in annual revenue, and both operate global footprints that include overlap in manufacturing, sales, and R&D.
Regardless, on April 21, Perrigo issued a rebuttal that states that teaming up with Mylan isn't in shareholders' best interest. Why? Because Perrigo believes its estimated 5% to 7% compounded annual organic growth through 2017 is worth far more than $205.
Apparently, Mylan agrees. On April 29, the company bumped up its offer to $244 per share, including $75 in cash and 2.3 Mylan shares per share of Perrigo.
If Perrigo were to accept that offer, its shareholders would end up owning 39.3% of a combined company with $15.3 billion in revenue.
However, it doesn't appear that's going to happen. At least not yet.
Shortly after Mylan revised its bid, Perrigo issued a release saying that Mylan's offer still undervalues it.
Deal No 2: Teva bids for Mylan
If the back-and-forth between Mylan and Perrigo wasn't complicated enough, Teva Pharmaceuticals has decided to get into the mix, too.
In an attempt to avoid competing head-to-head with a Mylan-plus-Perrigo powerhouse, Teva has offered $82 per share to buy Mylan, or 18 times next year's earnings per share. Half of Teva's offer would be paid in cash, and the other half would be paid in Teva stock.
That offer was a whopping 37.7% higher than Mylan was trading at the day it made its bid for Perrigo, and Teva thinks combining with Mylan could free up $2 billion in spending annually.
However, despite the premium and the potential savings, Mylan still rebuffed Teva, saying the offer "grossly undervalues" the company. In addition to saying the offer was too small, Mylan's rejection letter chastised Teva for how it's handling its bid and called Teva out for its past operational missteps (you can view the letter here).
Negotiating any deal can be messy, especially when those negotiations are taking place in the public eye.
After reading through the various offers and rebuffs, I come away thinking Perrigo is more willing to team up with Mylan than Mylan is willing to pair up with Teva.
However, investors should remember that the boards of these companies have a fiduciary responsibility to act on behalf of their shareholders, and that means that they must consider the merits of any proposed deal.
Since that responsibility means a bigger offer could force each of these boards to acquiesce, both Teva and Mylan's accountants are probably hard at work crunching numbers.
Of the two suitors, it's Teva that probably has more wiggle room. Teva estimates that its current offer would be accretive to earnings by somewhere in the mid-teen percentage range at year one and by 30% by year three. For that reason, some industry watchers believe a revised offer could be between $85 and $88.
As for Mylan, how much more it would be willing to spend on Perrigo isn't clear. Mylan hasn't announced how accretive it believes the combination would be, but since Mylan is already offering nearly 28 times next year earnings, I'm not sure there's much room left to go higher.