Pharma M&A rumbles on as generic drug giant Teva poised for Mylan merger

Teva's potential offer for $33bn-valued Mylan, which Bloomberg reported was unsolicited would be the drug industry’s largest deal this year.

The newswire said Teva was still working on the finer points of the bid and, according to its source, it was possible an approach might not be made.

On Friday, Mylan, which has a UK base in Hertfordshire's Potters Bar, fired off a pre-emptive defence of a potential bid, stating publicly that a combination with Teva was "without sound industrial logic or cultural fit" and that a deal would be unlikely to obtain anti-trust regulatory clearances.

With Teva losing ground to lower cost rivals from India, industry analysts have been calling for an acquisition of a company such as Mylan, whose combination with the Israeli company would create a generic drug group producing annual sales of roughly $27bn.

Mylan is currently focused on concluding its own $29bn mega-deal with Irish pharma group Perrigo.

But it said: "Of course, should any party make an actual offer to acquire Mylan, the board would carefully consider it in exercising its fiduciary duties in the best interests of the company, our stockholders and other stakeholders."

Biotech buying binge

The fashion for M&A among pharmaceutical groups led to an unprecedented $273bn of deals last year, helping the sector's stocks outperformed the S&P 500 by over 600 basis points in the past 12 months.

A note from Morgan Stanley on Monday examined the role of M&A in shaping the industry and concluded that, having being punished by the market due to several disappointments in the past decade, such activity was currently being rewarded "and likely will continue to be rewarded for some time".

"Healthcare typically has an elevated level of M&A, and when M&A accelerates generally in a sector it typically stays high for a while in that sector. In addition, pharma M&A is benefiting from ample access to capital and a typically minimal time before a transaction becomes accretive – cyclical advantages that should support more 'roll-up' activity."

The bank believes that rewards for M&A will continue short-term due to the fragmentation of the industry and the likelihood that consolidation will boost shareholder returns.

However, M&A-driven returns could fall in coming years, it warned, as the number of targets diminishes, drug pricing faces greater scrutiny, and interest rates rise.

But while analyst perceive the M&A boom to be in its later stages, they we do not foresee an imminent M&A slowdown as the bull stock market "may continue to support positive M&A-driven returns" and "capital is readily available and we cannot predict the timing of a liquidity squeeze".