updated 7/25/2005 5:25:23 PM ET 2005-07-25T21:25:23

In a deal that will create the world’s largest generic drug company, Teva Pharmaceutical Industries Ltd. said Monday it is acquiring rival Ivax Corp. for about $7.4 billion in cash and stock. Ivax shares climbed 10 percent.

The acquisition comes as the generic drug industry has been benefiting from a drive to lower health care costs and a spate of patent expirations on major medicines. But competition among generic makers is intensifying and the deal may trigger further consolidation

“We are very excited about the deal because it directly expands our leadership position in the worldwide generics business,” said George Barrett, president and CEO of Teva North America Inc. “Health care systems all over the globe are struggling with health care costs.”

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 if it should be lowered because of the amount of debt it will 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.

Teva currently has $2.23 billion in debt while Ivax holds $1.1 billion.

Barrett said he was confident there would be no change in Teva’s BBB credit rating, and that the company’s debt to capitalization ratio won’t exceed the 50 percent threshold.

The acquisition was likely to pressure others in the generic industry because the two biggest players, Israel’s Teva and Novartis AG 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’s generic drug division acquired two generic companies this year and its pro forma revenues for 2004 totaled $5.1 billion.

“Smaller players are going to have to catch up to them, “ said Richard Watson, an analyst with William Blair & Co. in Chicago.

By contrast, rival generic drug maker Mylan Laboratories Inc. reported revenues of $1.3 billion for fiscal 2005 which ended March 31 while Watson Pharmaceuticals Inc. reported $1.64 billion in revenue in 2004.

Watson said he believes further consolidation is possible and notes that some of the smaller U.S. generic companies could team up with each other or European counterparts such as Pliva, a Croatian company.

But Ken Cacciatore, an analyst at SG Cowen & Co., said Watson and Mylan don’t have the financial strength for major acquisitions.

“I think they are going to be at a major disadvantage,” said Cacciatore. “Maybe they’ll specialize in certain products or do small strategic acquisitions.”

Size matters, analysts said, because drug distributors want to cut down on their own overhead by purchasing from companies with a full product lines, giving an edge to bigger players.

Teva said after the deal closes it will offer 300 medicines in the United States. It expects the deal will be boost earnings during the first year and save $150 million over two years.

Generic drugs account for 48 percent of the prescriptions dispensed in the United States, an amount that is expected to rise as those who pay for health care 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, according to Wong. Major expirations next year include cholesterol drugs Pravachol and Zocor as well as allergy medicine Zyrtec.

Next year, Medicare will begin providing a drug benefit to senior citizens which should boost the industry’s sales.

Yet, analysts say the generic drug industry is becoming more competitive. Low cost, India-based companies are gaining a bigger foothold in the United States while technological advances lower the barriers to entry in the field. And there’s debate over just how lucrative the Medicare drug benefit will be since those implementing it will try to extract the lowest possible prices.

Meanwhile, deals known as “authorized generics” may ultimately hurt the industry. Under current law, the first generic drug company to file for approval to make a medicine receives 180 days to sell the product exclusively. This allows the company to make a significant portion of money before competitors enter, driving down costs.

But recently, pharmaceutical companies have given permission to a generic company to make its drug right before the patent expired, effectively ending 180 days of exclusivity for the other company. While two providers means lower prices for consumers, it also means lower profits for generic makers that can ultimately harm their business.

Ivax reached several “authorized generic” deals but Teva eschewed the practice, claiming it was unfair. Indeed Teva fought legal battles to end authorized generics. Barrett said Teva “was adapting to the world as it is” but wouldn’t say that going forward it would enter more “authorized generic” deals.

Teva will pay either 0.8471 of an American Depositary Share or $26 in cash for each share of Miami-based Ivax. The price is about a 14 percent premium to Ivax’s closing price of $22.88 on Friday.

Teva is planning to fund the acquisition with both available cash on hand and its committed credit facilities. Directors at both Teva and Ivax have approved the transaction, Teva said.

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