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Teva Pharmaceuticals to Buy Allergan’s Generics Business

An employee at Teva Pharmaceuticals in Hungary. Teva agreed to buy the generic drug unit of Allergan for $40.5 billion, and it dropped its pursuit of Mylan.Credit...Akos Stiller/Bloomberg, via Getty Images

SAN FRANCISCO — The mantra “bigger is better” continues to hold sway in the drug manufacturing industry, as two big pharmaceutical makers struck a $40.5 billion deal — and set the stage for potentially more mergers to come.

Teva Pharmaceuticals of Israel agreed on Monday to buy the generic drug business of Allergan, solidifying its lead as the biggest maker of off-brand treatments in the world.

And while the proposed takeover means that Teva will no longer seek to buy its rival Mylan, which had steadfastly rebuffed those advances, the deal will let both Mylan and Allergan focus on their own acquisition plans. Other pharmaceutical giants like Pfizer and AbbVie are also expected to pursue their own deal-making ambitions.

The drug industry has been gripped by a surge of acquisitions over the last several years as manufacturers have sought to plug holes in their product portfolios and gain even bigger scale.

Acquisitions have helped big drug companies gain access to new drugs in late-stage development, providing new treatments without their having to engage in the lengthy and often expensive process of research and development.

Pharmaceutical companies have another incentive to pursue deals: maintaining negotiating leverage with partners that are getting bigger. The five biggest American health insurers may shrink to three if two big mergers announced this month are approved. Hospital systems have been merging to create new giants as well.

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Brent Saunders, the chief executive of Allergan, explains why he sold the generic drug division to the Israeli-based Teva Pharmaceuticals.CreditCredit...CNBC

That means virtually all big drug makers with ample cash reserves are likely to pursue some kind of takeover, according to Ronny Gal, an analyst at Sanford C. Bernstein. Pfizer, which has made no secret of its desire to pursue a mammoth acquisition, is expected to eventually make a move.

AbbVie, which pursued a $54 billion deal for Shire last year before changes to tax rules forced an end to that transaction, could strike a big deal as well. And Allergan could look for a takeover target.

“The good times are going to stay for a good while longer,” Mr. Gal said.

Buying Allergan’s generic drug business is Teva’s entry into the deal arms race. The Allergan deal would cement the Israeli company’s position as the world’s biggest seller of off-brand medicines. Last year, it recorded revenue of $20.3 billion.

If completed, the transaction would create a company with estimated, pro forma revenue of $26 billion in 2016, including about $11 billion in sales outside the United States.

“We believe we have an even greater opportunity to create compelling, sustainable value for Teva’s stockholders through our transaction with Allergan — and we acted quickly to seize the opportunity,” Erez Vigodman, Teva’s chief executive, said in a statement.

Allergan plans to continue being a consolidator. The company has been a frequent buyer in recent years. On Sunday it announced a deal to buy Naurex, a developer of drugs for depression and other central nervous system disorders, for $560 million.

The drug maker once known as Actavis struck its biggest takeover last year when it agreed to buy Allergan, the maker of Botox, for $66 billion. Allergan has wanted to keep striking deals, but lacked the financial means to do so.

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Teva is the world’s biggest seller of off-brand medicines. It posted revenue of $20.3 billion in 2014.Credit...Lionel Bonaventure/Agence France-Presse — Getty Images

Monday’s deal will change that. Allergan would receive $33.75 billion in cash and about $6.75 billion in Teva shares, representing a stake of about 10 percent.

In selling its generic drug division, a profitable business but one facing more competitive pressure, Allergan intends to focus on building out its name-brand treatment operations. That effort is likely to include more takeovers.

“Clearly, it also reloads our balance sheet, and that gives us a tremendous amount of flexibility to think about transformational M.&A., as well as continue our pattern of tuck-in acquisitions,” Brent L. Saunders, Allergan’s chief executive, told analysts on a conference call.

Mylan will be relieved of a distraction by Teva’s decision to drop its takeover pursuit. Mylan has been pressing a roughly $34 billion acquisition of Perrigo, an Irish drug maker, but has been rebuffed by its target.

In a statement, Mylan applauded its onetime unwanted suitor and reiterated that it intended to keep pursuing Perrigo as part of its expansion efforts.

“Our offer to acquire Perrigo continues to be the next natural step in this strategy,” said Robert J. Coury, Mylan’s executive chairman.

Investors appeared largely supportive of the deal announced on Monday. Shares of Teva jumped 16.4 percent, to $72, while shares in Allergan rose 6.1 percent, to $326.98.

Shares in Mylan, however, remained flat at $65.94. The stock of Perrigo rose 3.8 percent, to $193.60.

Michael J. de la Merced reported from San Francisco, and Chad Bray from London.

A version of this article appears in print on  , Section B, Page 4 of the New York edition with the headline: Teva’s Deal With Allergan Expands Takeovers in Drug Sector. Order Reprints | Today’s Paper | Subscribe

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