Actavis Inc (NYSE:ACT), the largest generic drug company in the US, just got even bigger. In a deal valued at $8.5 billion, Actavis Inc (NYSE:ACT) has agreed to buy the Irish women’s healthcare company, Warner Chilcott Plc (NASDAQ:WCRX) to create what would be the third largest specialty pharmaceutical company in the US market.
The deal
For each share of Warner Chilcott Plc (NASDAQ:WCRX), shareholders of the company are to receive 0.16 shares of the new entity. The agreement places the value of the company at $20.08, which is 4% above the price at which the Warner Chilcott Plc (NASDAQ:WCRX) stock closed on Friday, May 17. This values the company at $5 billion. The total acquisition value however is $8.5 billion considering that Warner Chilcott has a debt of more than $3 billion.
What is interesting is that Actavis Inc (NYSE:ACT) itself was an acquisition target. Only recently, the company rejected offers from Mylan Inc. (NASDAQ:MYL) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The deal with Warner Chilcott is seen as an attempt by Actavis Inc (NYSE:ACT) to kill any chances of a hostile takeover as there was news that even Novartis AG (ADR) (NYSE:NVS) was considering making an offer.
Growth through acquisitions
Warner Chilcott is Actavis Inc (NYSE:ACT)’s second major acquisition this year. Earlier, in January 2013, the company acquired the Belgian firm, Uteron Pharma SA for $150 million in cash, plus $155 million in potential future pipeline payments. The present acquisition of Warner Chilcott highlights Actavis Inc (NYSE:ACT)’s strategy of expanding its specialty pharmaceuticals. Whereas purchase of Uteron expanded its pipeline of women’s health (contraception, infertility), the present acquisition marks its entry into the branded pharmaceutical market in gastroenterology, urology and dermatology.
Asacol, for treatment of ulcerative colitis, is Warner Chilcott’s top selling drug. This February, it got approval for Delzicol, its other candidate for the same disease. The company’s revenues were under pressure ever since generic versions of Actonel, its medicine for prevention of osteoporosis, appeared in the market.
Actavis is emulating its competitor, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), the world’s largest manufacturer of generic drugs, has recently turned to specialty branded pharmaceuticals in an effort to increase its profit margins.
Teva Pharmaceuticals reported dismal figures for the first quarter of 2013 with a 4% decline in net revenue, 6% in operating income and 27% in net income. However, much of it is explainable as the company made a $330 million one-time adjustment and suffered due to weakness of the Japanese and some Latin American currencies. However, Teva is a good investment opportunity as its growth story is intact. Despite having lost patent on its blockbuster sleep disorder drug, Provigil (modafinil), the company was able to maintain revenue of its specialty business.
Talking of competitors, Actavis’ other competitor, Mylan Inc. (NASDAQ:MYL), reported first quarter 2013 profit of $107 million on $1.63 billion revenue. Mylan operates at a 20% margin with a net profit margin at 9%. The company trades at 21.21 P/E with forward P/E ratio for December 2013 at 9.83, with all the implications of a long term healthy stock.
What the Warner Chilcott deal means for Actavis
The generic drug business is traditionally a low profit business with price being the only consideration. Actavis needed the deal very badly to boost its specialty branded medicines segment as it was under performing since long.
The acquisition marks the intrusion of Actavis into Teva’s gastroenterology and dermatology domain and strengthens its existing product line in women’s healthcare and urology. The company reported revenue of $5.91 billion for the year ended December 31, 2012. The combined entity after the merger will have total revenue of $11 billion.
Besides, the acquisition also gives Actavis the ability to explore opportunities in new product lines and allows it to expand its Anda Distribution segment that services independent pharmacies, physician’s offices, alternate care providers and large pharmacy chains in emerging markets.
In addition, since Warner Chilcott is an Irish company, it provides Actavis a $4 per share tax benefit. Besides bringing the tax rate down from 28% to 23%, the coming together of the two companies can potentially bring down the operating expenses of the new entity by $120 million.
Conclusion
Cost saving, and increased profitability potentially place the company in a better position to compete with larger drug makers. With improved cash flows, the company may even look at more acquisitions, overseas and/or domestic. From a long term investment point of view, Actavis is a good stock to have in your portfolio.
My only concern is that the stock has gone up by more than 80% in last one year and more than 40% since January this year. I would wait for some time and buy only when the price comes down to what Mylan offered: $120 a share.
The article Is Actavis a Buy at This Price? originally appeared on Fool.com.
Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Kanak is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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