Actavis’ acquisition of Forest Laboratories may have left some in the market wondering about a rationale other than scale, but the $25bn move could be another example of a generic company trying to climb up the value chain to achieve status of ‘specialty pharma’ company in order to avoid the increased competition in the generics industry.
The move follows a similar one from Mylan, which paid $1.6bn for Agila Specialties, an injectables business. But the fact that Forest shares surged beyond the takeout price of $89.48 a share indicated that some in the market believed another suitor might come forward.
Forest has previously been linked to AstraZeneca; interestingly, many were touting a $15bn price tag for that deal only in December, showing just how much progress Forest has made since then, and the increasing competition for speciality assets.
This was most recently demonstrated by Mallinckrodt paying $1.3bn for one-drug company Cadence (Mallinckrodt pays through the nose for popularity, February 12, 2014). Like The Cadence/Mallinckrodt deal, there also the prospect of a tax break in the form of Actavis’ Irish domicile to sweeten the deal, if it does go through.
Actavis will be paying a mixture of cash and shares for Forest, with the cash element making up $26.04 and the remainder being 0.3306 Actavis shares for each Forest one.
Sales force carrot
As well as giving the already acquisitive Actavis a string of new products including Forests’ star IBS product, Linzess, and hypertension product Bystolic, what appears to be the biggest driver for the acquisition is Forest’s primary care sales force. Speaking on a conference call Paul Bisaro, Actavis’s chairman and prospective head of the new company said: “We know if we had access to a primary care sales force we could drive our own sales harder.”
The Forest sales force will be roped in to sell a portfolio that will after the acquisition be split evenly between branded products and generics. Mr Bisaro has also interestingly hinted that the ultimate prize could be the addition of biosimilar products to Actavis’s extended footprint.
Despite Actavis’ claims of having become a specialty company following its $8.5bn merger with Warner Chilcott, the group had been looking forward to stagnant growth in its newly expanded branded women’s healthcare and urology business, with low single digit growth coming from the generics business (Generics the key to growth from merged Actavis and Warner Chilcott, May 21, 2013).
So in the absence of a strong R&D base the only way to drive growth in the branded division was further M&A.
But while increasing growth in the branded division could be a motivation for Actavis, Forest’s decision to hand over its independence could be down to its own difficulties in finding growth opportunities. It looked as if Forest was attempting to remedy this with its recent decision to buy Aptalis Holdings for $2.9bn. Interesting, Actavis, which looked like a potential buyer, passed on the opportunity.
Another driver for Forest could have been activist investor Carl Icahn, who owns a 11.4% stake in the company and last year managed to successfully agitate to get one of his representatives on the Forest board following a series of bitter proxy battles.
Mr Icahn has made no secret of his desire to find a buyer for Forest and looks to have found one in the shape of Actavis.
While the Forest and Actavis tie-up does not look like the most exciting of mergers, it could ultimately be a useful marriage of convenience for two companies looking to get bigger. It might also play into the changing primary healthcare space where hospitals who themselves are uniting to flex their buying power look to companies who have the scale and range of products to serve their new needs.