Watson aims for global generic footprint with $1.75 billion Arrow Group acquisition
by Amy Swinderman  |  Email the author

CORONA, Calif.—Mergers and acquisitions continue to reshape the pharmaceutical research industry, but unlike some of the multi-billion dollar deals seen so far this year in Big Pharma, a deal announced last week will marry and expand the global footprint of two generics market players. On June 17, Watson Pharmaceuticals Inc., a drugmaker with a broad portfolio of generic products, announced that it will pay $1.75 billion to acquire privately-held Arrow Group, a privately-held generics drug manufacturer with operations in four continents.

Under the terms of the agreement, Watson will acquire Arrow for cash and stock consideration of $1.75 billion. The total consideration will include a cash payment of $1.05 billion, and the issuance of approximately 16.9 million shares of Watson common stock valued at $500 million, based on Watson's trailing five-day average stock price of $29.51, both paid at closing. The remaining $200 million will be paid in the form of zero-coupon preferred stock redeemable three years after closing of the transaction.

Watson will fund the cash portion of the consideration by using available cash and additional borrowings and is evaluating options for longer-term debt financing. Watson expects the transaction to close in the second half of 2009, and be accretive to cash earnings per share in 2010 before synergies.

According to Watson, the deal creates a global pharmaceutical company with more than $3 billion in revenue, commercial operations in more than 20 countries and a robust product portfolio and pipeline. Arrow generated $647 million in revenues in 2008, representing a 67 percent organic compound annual growth rate since 2001.

Since 2000, Arrow has launched more than 50 molecules developed internally. In addition, Arrow expects approval of 40 new molecules over the next three years as well as significant U.S. generic product launches over the next three years—most notably, exclusive U.S. rights to launch the authorized generic version of Lipitor in November 2011.

Arrow also owns approximately 36 percent of Eden Biodesign, a biopharmaceutical company that provides development and manufacturing services to early-stage biotechnology companies. Watson said Eden will provide the operational expertise and manufacturing capability to support its long term investment in generic biologics.

The companies currently have little geographic overlap, but the acquisition of Arrow brings a wide range of territory to the table. Arrow markets more than 100 molecules in over 20 different countries, operating as Arrow Generics in the United Kingdom, as Cobalt Pharmaceuticals in the United States and Canada and as Arrow Generiques in France. Arrow also manages strategically located production facilities in Brazil, Canada and Malta, and employs 250 at its Australia-based R&D facility.

Watson develops, manufactures, and sells generic and brand-name pharmaceutical products. The company's core focus is specialty products, nephrology, urology and generic products. Watson reported $2.54 billion in revenue last year, and expects about $2.65 billion this year. By comparison, the world's largest generic drugmaker, Teva Pharmaceutical Industries Ltd., reported $11.09 billion in revenue in 2008.

"The acquisition of Arrow will mark a significant milestone in realizing our strategic vision to expand our global footprint and leverage our assets across many developed and emerging markets around the world," said Watson President and CEO Paul Bisaro in a statement. "The combined company will have a global infrastructure and a strong product portfolio and pipeline which create significant opportunities for long-term growth."

Tony Tabatznik, founder and CEO of Arrow, is expected to join Watson's board of directors as a non-employee director.

"This is a brilliant move for both Watson and Arrow, and we are very excited about being part of this great combination," Tabatzik stated. "Together, we will have the resources, the skills and the capabilities to build one of the premier specialty pharmaceutical companies in the world."

Following the news, Watson's shares rose $1.59, or 5.5 percent, to $30.43.

Fitch Ratings affirmed Watson's issuer default rating at "BBB-," and said its outlook is stable.

"Fitch believes the acquisition will provide Watson with a platform from which to expand its global marketing presence both in markets where Arrow already has significant activities—such as Canada, France and Britain—and in other markets where Arrow has registered, but is not actively marketing products," the ratings firm said. "In addition to geographic expansion, Watson should benefit from Arrow's pipeline, which includes the rights to launch the authorized generic version of Lipitor in November 2011 (which will have a profit-sharing agreement with Arrow's shareholders) and exclusive rights to the generic version of Xopenex in August 2012, as well as 32 pending Abbreviated New Drug Applications (ANDA). Finally, the transaction enhances Watson's biopharmaceutical development capabilities as Watson will gain a minority interest in Eden Biodesign, which provides development services for early-stage biotech companies."

In a note to clients, Citi Investment Research analyst John Boris said the acquisition makes sense for Watson, which does almost all its business in the U.S.

"Watson needed to increase its ex-U.S. exposure to offset U.S. generics competition and price erosion," Boris said.