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The Teva-Shire Deal Worst-Case Scenario

The rumors that Teva might attempt to buy Shire are puzzling because such an acquisition would present a huge internal conflict to the combined company: What to do with Shire's Vyvanse and Adderall XR brands, which are in direct competition with Teva's generic Adderall pills?

In fact, one of the reasons Shire's shares were beaten down to under £9 until August is that Teva's generics stole 77 percent of Shire's Adderall sales in Q2 2009. Any attempt by a combined company to restrict supplies or limit competition between the three drugs would draw some interesting antitrust questions.

Like Shire, Teva faces its own generic problems. It markets a branded drug, Copaxone, that also faces generic competition. This chart offers some insight into why Teva may be interested in consuming a moderate-sized branded pharma company:

It shows how many dollars each company earns in revenues for every $1 it spends on sales, general and admin expenses -- a drug company's biggest quarterly expense. As you can see, although Teva's sales are growing by leaps and bounds (revenue was up 20% to $3.4 billion in Q2), it is spending more on marketing to earn each extra dollar in sales, and its productivity is thus in decline.

Shire, on the other hand, seems to be becoming a little more efficient as time goes by. Perhaps Teva is hoping that by combining an increasingly inefficient company with an increasingly efficient one, the result will be more influenced by the latter than the former?

That assumption requires some leaps. Teva's sales damage on Shire's Adderall and Vyvanse is likely to become worse, not better, over the next year or two. Yet Shire must continue spending on Vyvanse promotion, which is only just out of the launch phase. And its pipeline includes yet another ADHD drug, Intuniv, which will face some of the same problems faced by Adderall and Vyvanse.

Final thought: To acquire Shire, Teva must essentially admit that having destroyed Shire's richest franchise it now wants to own it -- a strange position to be in.

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