This Move Caused Teva Pharmaceutical to Catapult Higher By 17% in July

Teva transforms its long-term outlook with the flip of a switch in July. See what move the Israeli-based branded and generic drug developer made that has investors so excited.

Sean Williams
Sean Williams
Aug 6, 2015 at 12:01PM
Health Care

TEVA Chart

Shares of Israeli-based generic and branded drug developer Teva Pharmaceutical (NYSE:TEVA) shot higher by 17% in July, based on data from S&P Capital IQ, after announcing a truly transformative acquisition that could put an end to near-term growth concerns.

Just this past week Teva announced plans to acquire Allergan (NYSE:AGN), a branded and generic hybrid company behind innovative drugs such as Botox and more than 1,000 generic products around the world. The agreed-upon deal is for $33.75 billion in cash and $6.75 billion in Teva's common stock for a grand total of $40.5 billion. Teva announced late last week that it had secured the $33.75 billion in needed financing, which includes $27 billion in unsecured senior bridge loans, and $6.75 billion in an equity bridge loan credit facility from a consortium of nearly a dozen financial institutions.

According to Teva Pharmaceutical, the deal will turn the company into a top 10 specialty drug developer, it'll provide $1.4 billion in cost synergies and tax savings on an annual basis (remember, Allergan is based in Ireland, which has a remarkably low tax rate), and it should lead to 20% EPS accretion in years two and three following the close of the deal (which is expected in Q1 2016).

Why the need for a deal? Teva Pharmaceutical is staring down the entrance of generic competitors to multiple sclerosis injectable Copaxone, which comprised about 20% of Teva's total revenue at one point. Teva has introduced a new formulation of Copaxone that allows less frequent dosing and could keep consumers and physicians tied to the Copaxone brand, but it had, nonetheless, been looking at a slow top- and bottom-line bleed if it did nothing.

Source: Teva Pharmaceutical.

The question worth asking here is whether or not Teva stock can actually head higher once its purchase of Allergan is complete.

Perhaps the biggest hurdle here isn't going to be the loss of Copaxone or even integration issues so much as the cash component of the deal, $33.75 billion. Teva knew it needed to sweeten the pot the lure in an accretive growth candidate that would enhance its business model, but the large cash component of this deal will stretch Teva's balance sheet into a heavily indebted position. Long story short, Teva has the ability to meet its debt obligations, but it's tied the company's hands for years to come.

On the flipside, this deal alleviates Teva's growth concerns from the loss of Copaxone and should further improve its pricing power with pharmacy-benefits managers and insurers as its generics portfolio grows ever larger. The tax savings from shifting its headquarters to Ireland should also prove to be a nice bonus for shareholders.

All in all, I view this as a good deal for Teva that could lead to additional upside over time. Teva's growth concerns appear to be a thing of the past, but its newly debt-laden balance sheet could hamper the stock from truly taking off. Translation: keep your stock appreciation expectations realistic.