Global growth would be goal of Watson-Actavis tie-up

Watson Pharmaceuticals’ rumoured $7bn takeover of private Icelandic-now-Swiss Actavis would be a defensive move to stimulate growth. The transaction would not allow the world’s fourth biggest generics group by sales to challenge the likes of Teva or Novartis’ Sandoz division, but it would keep it ahead of the quickly expanding units of Sanofi and Daiichi Sankyo and help establish a stronger global presence (see table).

A big winner in 2011 with its authorised version of a copycat Lipitor, New York-based Watson has said it is on the hunt for growth through acquisition. If the word emerging yesterday turns out to be true, an Actavis acquisition would fit its stated aim to derive up to half of its generics revenue from outside the US, up from one-fifth today.

Buying growth

The rumour was well-received by investors, who pushed Watson shares up 9% to $63.69 yesterday, with another 4% rise to $66.02 in early trade today. Analysts described a takeout of Actavis as “transforming” for Watson if it comes to pass, saying it would help diversify revenue and boost its overseas presence.

Actavis was taken private in 2007, so little is disclosed about the company’s sales figures. However, it surely does not hurt that Actavis’ former chief executive, Sig Olafsson, now heads Watson’s generics business, giving the US group insight that other generic companies might not benefit from.

Watson's chief executive, Paul Bisaro, has been telling investors and analysts this year he intends to follow through on some M&A activity in a bid to spur growth. It made a small purchase in the form of the Australian generics division of Strides Arcolab, Ascent Pharmahealth, for A$375m ($388.2m) earlier this year, but a $7bn buyout is a much bigger statement about the company’s intentions.

In its last annual report to public investors, for 2006, Actavis reported annual generics sales of €1.34bn ($1.68bn). EvaluatePharma estimates put sales at $2.16bn this year, rising to $2.62bn in 2016 – not the double digit growth forecast for Indian generic manufacturer Sun Pharmaceutical Industries, but faster than the 1% annual growth rate being forecast for Watson.

But importantly for Watson, the annual report for 2006 reveals that more than two-thirds of Actavis’ business is outside North America, with the bulk in both Western and Eastern Europe, but also with a presence in Russia and Turkey.

Top 10 Generic Drug Makers 
WW generic sales ($m) Market Rank
2011 2016 CAGR 2011 2016
 Teva 12,273 17,633 +8% 1 1
 Novartis 8,574 10,736 +5% 2 2
 Mylan 5,637 7,268 +5% 3 3
 Watson-Actavis 5,516 6,025 +2% - -
 Watson Pharmaceuticals 3,298 3,402 +1% 4 4
 Sanofi 2,430 3,366 +7% 5 5
 Daiichi Sankyo 2,225 2,889 +5% 6 6
 Sun Pharmaceutical 1,570 2,793 +12% 12 7
 Actavis 2,219 2,623 +3% 7 8
 Hospira 2,207 2,595 +3% 8 9
 Aspen Pharmacare 1,775 2,506 +7% 10 10

Taking on debt

In January executives said they were comfortable with borrowing up to 3.5 times earnings in order to fund a transaction, an amount that would equal $4.6bn in 2012, according to analysts from UBS. The remainder would likely come from equity.

Another potential advantage of the deal would be that Actavis last year decamped from Iceland to Switzerland, giving Watson the potential to structure the deal to take advantage of a tax rate lower than its current 36%.

The world’s fourth-biggest generics group, Watson has acknowledged it is undersized on the international stage. Given the share price reaction it appears this deal would meet investors’ hopes for worldwide growth.

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