In a deal that would create the world's largest generic drug company, Teva Pharmaceutical Industries Ltd. said Monday that it was acquiring rival Ivax Corp. for about $7.4 billion in cash and stock.
The acquisition comes as the generic drug industry has been benefiting from a drive to lower healthcare costs and a spate of patent expirations on major medicines. But competition among generic makers is intensifying and the deal may trigger further consolidation.
Analysts largely applauded the move, saying the deal made strategic sense as it expanded Teva's operations into Latin America and Eastern Europe while giving it a portfolio of respiratory products.
Still, Standard & Poor's said it was reviewing Teva's credit rating to see whether it should be lowered because of the amount of debt it would use to finance the deal.
"Teva is financing half the deal with debt and this is a very big deal for them," said Arthur Wong, an S&P analyst.
The acquisition is likely to pressure others in the generic industry because the two biggest players, Israel's Teva and Novartis of Switzerland, are global behemoths that dwarf their competitors in what is expected to become an increasingly difficult business, analysts agreed.
After the deal closes, Teva will generate sales of about $7 billion a year, the company said.
Novartis' generic drug division acquired two generic companies this year, and its pro forma revenue for 2004 totaled $5.1 billion.
By contrast, rival generic drug maker Mylan Laboratories Inc. reported revenue of $1.3 billion for fiscal 2005, which ended March 31, and Watson Pharmaceuticals Inc. reported $1.64 billion in revenue in 2004.
Size matters, analysts said, because drug distributors want to cut down on their own overhead by purchasing from companies with full product lines, giving an edge to bigger players.
Teva said that after the deal closed it would offer 300 medicines. It expects the deal to boost earnings during the first year and save $150 million over two years.
Generic drugs account for 48% of the prescriptions dispensed in the United States, an amount that is expected to rise as those who pay for healthcare continue to push patients to take lower-cost medicines.
In addition, drugs that accounted for nearly $50 billion in 2004 sales are expected to lose patent protection from 2006 to 2009, Wong said. Major expirations next year include cholesterol drugs Pravachol and Zocor and allergy medicine Zyrtec.
Teva will pay either 0.8471 American depositary share or $26 in cash for each share of Miami-based Ivax. The price is about a 14% premium to Ivax's closing price of $22.88 on Friday.
Ivax shares jumped $2.29 on Monday to $25.17. Teva added 7 cents to $31.23.