Actavis makes pharma deals look generic

February 18, 2014

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

 

Actavis makes pharmaceutical deals look generic. Its $25 billion acquisition of Forest Laboratories follows a familiar formula in the sector. Uppity investor? Check. Low-tax jurisdiction? Check. Buyer’s stock rises? Check. And over $8 billion of value created means financiers will keep busy with their own prescriptions for M&A success.

This is the third big purchase of late for the active company. In 2012, Watson Pharmaceuticals bought Actavis for $6 billion and took its name. Last year, it absorbed Warner Chilcott for $5 billion and acquired a low-rate Irish tax home in the process. Investors appreciated the cost savings from those transactions, and are doing so again. Counting today’s 7 percent pop, Actavis’ market value has tripled in just over two years.

The course of action is working. Actavis reckons there will be $1 billion of annual savings available from combining with Forest, and that most can be captured within the first year. Taxed at its low rate and put on a multiple of 10, the present value of the savings would be about $8 billion. That’s more than the $5 billion premium being paid to take control of Forest. If the union can generate more savings, and perhaps additional revenue – as Actavis hinted on its call on Tuesday – then the deal could be even more profitable.

Activist investors have been catalysts for the drug industry’s alchemy. Billionaire Carl Icahn, who owns 11 percent of Forest’s stock, played a role in this instance. His needling prompted the company to install a new chief executive last year, which presumably led to the sale.

Actavis, which is using a big slug of its own stock to pay for Forest, emphasized that its balance sheet isn’t stretched and that it plans to grow. That probably means more M&A. It isn’t alone either. Valeant Pharmaceuticals and Endo Health Solutions are among those that also have enhanced their market values by snatching up rivals, slashing costs and minimizing taxes. Throw in the renewed vim of agitators and the market rewarding sensible acquisitions, and the strategy may become somewhat standardized.

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