What: Shares of the generic drugmaker Teva Pharmaceutical Industries Ltd. (TEVA 0.38%) rose by 11% in early morning trading after the company announced that it plans on buying Allergan's (AGN) generic drug business in a cash and stock deal worth a reported $40.5 billion. After striking this deal with Allergan, Teva also decided to drop its $40 billion hostile takeover bid for rival generic drug giant Mylan (MYL).
So what: This deal would make Teva one of the largest pharmaceutical companies in the world in terms of sales, and help to significantly diversify its revenue base away from the multiple sclerosis drug Copaxone that has historically composed over half of the company's revenues. Copaxone is now facing generic competition, which was expected to cut deeply into Teva's top and bottom-lines going forward.
Now what: The Street is applauding this agreement because it gives Teva more than 1,000 new products, and is estimated to result in cost savings of approximately $1.4 billion over the next three years. As a result, we should see Teva's diluted EPS growth rate soar into the high double digits once the deal closes. By contrast, Teva was on track to post essentially flat growth in terms of its earnings next year, and the years ahead were looking especially lean for the drugmaker given the threat of generics to its main revenue source. All told, this acquisition looks like a great move for Teva's shareholders, and should set the company up for a long period of sustainable growth.