Deal would give Watson a presence in eastern and central Europe.
Watson Pharmaceuticals is reportedly in talks to acquire Actavis in a deal worth up to €5.5 billion (about $7.3 billion). While the companies have declined comment since the first stories were published yesterday afternoon, Reuters cited “three sources familiar with the matter” in reporting that Watson plans to pay between €5 billion ($6.6 billion) and €5.5 billion for Actavis, though Dow Jones reported the size at just €4.5 billion ($5.9 billion).
Whatever the number, the deal would give Watson the presence in eastern and central Europe that it has long sought for itself. The size of the deal is significantly larger than Watson’s M&A activity of recent years, which included its $562 million purchase of Specifar Pharmaceuticals last year, its $1.9 billion acquisition of Arrow Group in 2009, and its $1.75 billion acquisition of Andrx.
Then again, Watson CEO Paul Bisaro disclosed his company’s big-deal direction in January during the JPMorgan healthcare conference in San Francisco, saying Watson was looking to buy either a generic or brand-name drugmaker: “Our appetite for a larger transaction, it’s there.”
Two analysts quoted by Reuters said the deal made sense because Watson’s future lies in growing larger so it can compete better with generic drugmaking rivals Teva Pharmaceutical Industries, Mylan, and Novartis’ Sandoz unit. “If Watson wants to be competitive with those bigger players, it’s probably a move in the right direction,” Michael Waterhouse of Morningstar said. Agreed Gabelli & Co. analyst Kevin Kedra: “It’s a consolidating industry and it’s an industry that is basically winding down to just a few Goliaths and most of the Davids are getting scooped up.”
Bloomberg quoted analyst Chris Schott of JPMorgan as concluding that the Watson-Actavis combo would generate “significant synergies” in the U.S. as well as raise Watson’s profile in Europe. “While we need additional financial details of the potential transaction, we believe this combination has a strong strategic rationale and would give Watson the scale it needs to compete globally,” Schott wrote. An unnamed analyst offered Reuters a figure, predicting around €200 million ($263 million) in synergies in the deal’s second year.
If any of the companies involved can use savings, it is Actavis, whose chief backer Deutsche Bank posted an impairment of €407 million ($535 million) related to Actavis in Q4. That’s down from the €5 billion in debt that the bank was left with after Actavis’ billionaire owner Bjorgolfur Thor Bjorgolfsson lost money in the 2008–09 financial crisis, people familiar with the company told Bloomberg in 2009.
Actavis CEO Claudio Albrecht told Reuters late last year that sales for his privately held company were expected to grow to €2.1 billion (about $2.8 billion), compared with €1.75 billion ($2.3 billion) in 2010. In June, Albrecht told Bloomberg he was considering an IPO or merger for the company within three years, with the goal of growing Actavis to about three times its current size.
By contrast, publicly traded Watson expects GAAP net income in 2012 to range between $340 million and $380 million, up from $260.9 million last year. Also last year, Watson launched 189 generic products globally, including U.S. launches of generic versions of the ADHD medication Concerta, the birth control tablet Seasonique, the pain drug Kadian, and the cholesterol lowering Lipitor.
In its results for 2011, Watson said the May launch of generic Concerta and the November launch of Lipitor accounted for an 81% jump in fourth-quarter net revenue of the company’s global generics unit to $1.2 billion. The company filed 30 new ANDAs in the U.S. and more than 130 such applications globally.
All the talk about a Watson-Actavis deal has helped boost the price of Watson shares to their highest level since October 2008, up 8.8% to $63.69 at the close of trading yesterday, after rising just above 10%, and to $66.85 as of 10:25 a.m. today.