Actavis to acquire Warner Chilcott for $8.5 billion

PARSIPPANY, N.J. and DUBLIN—Looking in part toexpand its portfolio and pipeline in the core areas of women's health and urologyand to add gastroenterology and dermatology franchises and infrastructure, ActavisInc. plans to acquire Warner Chilcott plc in a stock-for-stock transactionvalued at approximately $8.5 billion.

If the deal does indeed go through, thecombination of the two companies reportedly will create a global specialtypharmaceutical company with approximately $11 billion in combined annualrevenue—which the companies say will make it the third-largest U.S. specialtypharmaceutical company—and approximately $3 billion of that annual revenue willbe in the therapeutic categories Actavis is so interested in: women's health,gastroenterology, urology and dermatology.

For its part, Actavis itself is the product of a veryrecent merger, formed in fall 2012 through a $5.6 billion combination of NewJersey-based Watson Pharmaceuticals and Switzerland-based Actavis.

The proposed acquisition comes after reports from unnamedsources within Actavis and elsewhere that Actavis turned down takeover bidsfrom Mylan Inc. and Valeant Pharmaceuticals International Inc. recently. Rumorsalso circulated that Novartis AG was considering a bid. Some market-watchers havesuggested the merger deal might, at least in part, be a way to dissuade furthertakeover overtures.

In an investor note from Morningstar about the deal,Michael Waterhouse and Damien Conover wrote that they have a neutral take on amerger between Actavis and Warner because they saw limited cost synergies and hadconcerns about the pipeline.

"We plan to modestly raise our fair value estimatefor Actavis based on recent developments in the generic pipeline, but we don'texpect any changes to our fair value estimate for either firm based on thisannouncement," they wrote. "We'd probably maintain a narrow economic moat for apotential combined entity, but we'd have some concern about Warner's patentrisk and weak pipeline eroding Actavis' prospects. Since Warner already tradesabove our fair value estimate, we think Actavis runs the risk of overpaying atcurrent levels."

However, the Morningstar analysis admits thatdespite valuation concerns, there might be some positive aspects of acombination of the two companies, such as potential cost synergies between thetwo companies' respective women's health franchises and Warner's low tax rate.

The proposed transaction has been unanimouslyapproved by the boards of directors of both companies, and is reportedly supportedby the management teams of both companies as well.

"We have set as our strategic corporate objectiveto build a leading global specialty pharmaceutical company," said Paul Bisaro, presidentand CEO of Actavis. "The combination of Actavis and Warner Chilcott creates astrong specialty brand portfolio focused in therapeutic categories with stronggrowth potential, and is supported by a deep pipeline of development programs.The combination is commercially and financially compelling, and reshapes thespecialty pharmaceutical universe by creating a powerful globalcompetitor. It creates a company with anexceptionally strong balance sheet, coupled with a favorable tax structure tosupport future growth."

Bisaro considers that transaction "unique" in termsof the combination of complementary strengths. He predicts that combining thecompanies will enhance the value of each entity's portfolio and provide a "substantialfoundation" to support the successful launch of new products over the nextseveral years. Bisaro says this will be particularly true in the area of women'shealth, with such products as Minastrin 24 Fe, Esmya, metronidazole vaginal gel1.5%, the progestin-only contraceptive patch and other women's health productsin development from the recent acquisition of Uteron Pharma SA.

"It also provides an expanded portfolio ofspecialty products that have the potential to be commercialized in key marketsoutside of North America," he added. The merger is expected to be immediatelyaccretive with opportunities for substantial operational synergies and taxsavings.

"The Warner Chilcott team has built a powerfulspecialty brands business with a strong pipeline, and this compellingtransaction brings together two complementary organizations with the potentialto create even more value for shareholders," said Roger Boissonneault, presidentand CEO of Warner Chilcott. "Paul Bisaro and his team have been executing ontheir vision to build a global and diverse company at the forefront of thespecialty pharmaceutical industry, and the addition of Warner Chilcott shouldenhance the ability of the combined company to successfully execute thatvision, and accelerate Actavis' evolution."

At the close of the transaction, which is expected by theend of this year, Actavis and Warner Chilcott will be combined under a newcompany incorporated in Ireland, where Warner Chilcott is currentlyincorporated. The newly created company,which is expected to be called Actavis plc, or a variant thereof—New Actavis isone possibility mentioned in the news release about the deal—will be led by thecurrent Actavis leadership team.