Buyout Rumors Highlight Watson Pharmaceuticals
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Earlier this year whispers of a Watson Pharmaceuticals (NYSE: ACT) deal began surfacing and they don’t seem to be letting up. Watson is close to making the biggest buyout the company has ever seen.
The generic drug maker is close to announcing, according to reports, the $6 billion acquisition of Actavis, a Swiss drug maker, by the end of the month. Should the deal go through, the combination will result in one of the world’s largest drug makers.
Reuters recently reported that banks are lining up to back this transaction with Bank of America leading the pack. It is rumored that Watson is also being wooed by several other large money-center banks; however, officials at the company will neither confirm nor deny the scuttlebutt.
On March 21, 2012 the industry first caught wind of the deal causing Watson’s stock to jump by 8.8% that day followed by another jump of 3.8% the day after. The deal was immediately and largely embraced by investors even though the venture is a sizeable one for Watson.
Actavis is not the first buyout for the company. In 2006, Watson purchased Andrex for $1.9 billion and then in 2009 the company picked up Arrow Group for $1.75 billion. Neither of those buys was close to the scale of the current one on the table.
An analyst for JP Morgan, Chris Schott, stated in a report in March, “While we need additional financial details of the potential transaction, we believe this combination has strong strategic rationale. It would be meaningfully accretive to earnings and would give Watson the scale it needs to compete globally.”
There has been a certain curiosity for some time as to whether Watson would eventually make the move into a higher earnings bracket. After the fourth quarter earnings report issued in February, Watson’s CEO Paul Bisaro became very vocal about making acquisitions while indicating that Watson would be more than willing to issue equity for a “transformational deal.”
Buying out Actavis would certainly be considered a transformational deal. Actavis will be bringing some of the most widely used products in the U.S. including Oxycodone, Ambien CR, and Neurontin. Approximately 40% of Actavis’ business is generated in the U.S. with about 45% coming from European markets. Actavis has spent the last few years focusing on markets in Latin America and Asia in order to broaden the company’s market share.
One of the advantages that Watson would gain by completing this deal would be the ability to better compete with firms like Novartis’ (NYSE: NVS) Sandoz unit and Teva Pharmaceutical Industries (NYSE: TEVA). Teva is based in Israel and is the world’s largest generic drug maker showing $18.5 billion in sales last year. Sandoz is healthy in its own right reporting $9.5 billion in sales for 2011. Watson reported $4.6 billion in sales last year and is expected to hit $5.5 billion this year.
Investors are keeping a keen eye on how Watson handles this deal; meanwhile, the company itself is seeking to expand its revenue base in other ways.
Watson reported in early April that the Food and Drug Administration (FDA) had approved the company’s generic version of Vancocin, a branded antibiotic issued by ViroPharma (NASDAQ: VPHM). Watson has already begun shipping the drug despite ViroPharma’s efforts to temporarily block distribution.
Watson further announced the FDA approval of the company’s new drug application for a generic version of Boniva, a post-menopausal osteoporosis drug issued by Roche Holding (NASDAQOTH: RHHBY). On a side note, Boniva brand name sales reached $510 million for the fiscal year ending January 31, 2012.
Watson has confirmed that it recently filed an application for generic versions of Lumigan and Latisse of Allergan’s product line. Allegran in turn filed a lawsuit in the U.S District Court for the Eastern Division of Texas against Watson in an effort to stop the application and production of the generic drug.
Overall, Watson has been running strong and earnings have seen growth of around 23% over the last three quarters while revenue has risen roughly 22% over the same period. Watson earned $1.77 a share last quarter, an increase of 90% from the prior year. The company’s best quarterly earnings occurred this year topping investor’s views by 2 cents. Generic drug sales have shown an 81% increase to $1.17 billion while revenues across the board have grown by 62% to $1.54 billion.
During the quarter Watson also launched its generic version of Lipitor, a cholesterol control drug, which lost its U.S. patent protection last year. Watson and competitor Ranbaxy of India are the manufacturers selling generic versions of Lipitor at this time although it is expected that other drug makers will do the same by late June.
An analyst with Edelweiss Research, Manoj Garg, noted, “Watson has guided $250 million to $260 million gross profit from Lipitor exclusively, which translates into sales of $550 million to $600 million. We highlight that Watson had launched Lipitor a week prior to Ranbaxy and garnered significant market share.”
Among the many projects Watson has been handling, one of them is a small but growing branded drug business. This small division posted fourth quarter revenues of $121 million, an increase of 17% from the prior year.
Watson is expected to report their first quarter results on April, 24. Those results are expected to show a dramatic increase over the prior year.
If Watson succeeds in its endeavors to obtain a larger share of the global pharmaceutical market, we can expect to see tremendous growth and profits in the company’s near future. The steps Watson is choosing to take now will potentially set the company up to overtake Sandoz as the number two drug manufacturer in the world; certainly a favorable position to be in.
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