Shares of Barr Pharmaceuticals Inc surged more than 22 percent on Thursday on media reports that long-rumored talks with Teva Pharmaceutical Industries might finally lead to a deal.

TheMarker and Globes financial newspapers reported that Israel-based Teva, the world’s biggest maker of generic drugs, was in talks to buy New Jersey-based Barr, marking further consolidation in the generic drugs industry. A deal could be in the range of $7 billion to $7.5 billion, the media reports said. The companies declined to comment.

The deal would boost Teva’s market share in the United States, where it wants to expand its presence, and give it a formidable franchise in oral contraceptives.

Goldman Sachs analysts questioned the timing and need for Teva to make such a move:
“Our initial reaction from a Teva perspective (assuming credence behind the report) would be surprise on both timing and target. At the risk of getting ahead of ourselves given the lack of any corporate commentary, a combination here would bring attractive product and geography additions to Teva but it doesn’t initially strike us as a need to own asset…a deal here would also add significantly to Teva’s US exposure (albeit without meaningful product overlap) where we see slowing growth in the next 3-5 years relative to international markets.”

Still, Teva has the ability to easily finance a deal, Bank of America Securities analysts said. The company has a net debt of about $1.7 billion, but is expected to generate $2 billion in free cash flow in 2008, analysts said. With financing tough to come by for most mergers lately, Teva actually appears to be well-positioned if it moved ahead with a deal.

Plus, Teva could get Barr for a decent price. Before news of a possible deal triggered a jump in Barr’s stock price, the company had been trading at 14-times 2009 earnings forecasts, which was below their historical range, Bank of America said. Over the past 10 years, Barr’s price-to-earnings multiple has averaged 17-times, analysts said.

Shares of Barr hit a midday high of $58.33 and traded at $57.40, up 22 percent in afternoon trading on the New York Stock Exchange. Teva shed 2.1 percent on Nasdaq.

With speculation for a deal already raising Barr’s stock price, the question remains what type of premium could be paid for a deal that runs the risk of some antitrust scrutiny, competitive pricing pressure in the generic drug market, and exposure to the weak U.S. market?

(PHOTO: Barr Pharmaceuticals Inc website)