Teva Snatches Ratiopharm From Pfizer for $5 billion

For the past nine months, the German generic-drug company Ratiopharm has been in process to sell itself. And in the past couple weeks, the leading bidders included Pfizer (PFE), Actavis and Teva Pharmaceutical (TEVA). Of course, investors and the media have speculated on the ultimate winner and price tag.

The winner turns out to be Teva, which has announced a $5 billion deal for Ratiopharm. It's the largest drug acquisition in two years, since Teva purchased Barr Pharmaceuticals for $7.4 billion.

All in all, investors like the deal for Ratiopharm: Teva's stock price rose 3.5% in Thursday's trading.

A Look at Ratiopharm

In 1967, Adolf Merckle inherited a small family business, which was a chemical wholesaler. It became a launchpad for building an empire that eventually included a major cement company and Ratiopharm. As a result, Merckle became one of the richest people in the world.

But as the financial crisis struck in 2008, that fortune evaporated because Merckle had too much debt. Unfortunately, he committed suicide by walking in front of a train.

Despite all the turmoil, Ratiopharm has remained a strong business. It sells more than 750 versions of branded drugs for things like respiratory, cardiovascular and metabolic problems. The company is the No. 2 generic-drug maker in Germany. Other rivals include Novartis's Hexal and Stada Arzneimittel.

Last year, Ratiopharm posted EBITDA of 307 million euros and revenues of 1.6 billion euros. Roughly half of the revenues come from Germany, with the remaining from 30 other countries.

Steep Price Tag

As pharma companies look to bulk up their pipelines, the valuations for companies like Ratiopharm have become robust. Of course, the buyout auction process also juiced up the price tag. In fact, it was even too much for Pfizer, which certainly needs to find ways to improve its pipeline as well as build its generics business.

Teva is willing to pay 2.3 times revenues and 17 times earnings, although it expects to realize savings of $400 million over the next three years.

No doubt, Teva is determined to be the dominant player in the generics business. And the deal for Ratiopharm will definitely help because it should bring the combined company's sales to over $16 billion. Actually, Teva has the stretch goal of reaching $31 billion in revenues and $6.8 billion in net income by 2015. So, expect it to remain aggressive with its dealmaking.