Issue Date: February 24, 2014 | Web Date: February 21, 2014
Actavis Buys Forest Labs
The generic drug maker Actavis will shell out $25 billion in cash and stock to acquire Forest Laboratories. The deal will combine a leader in generics with a producer of specialty pharmaceuticals that has gone through a major revamping over the past year.
The combination creates “a new kind of specialty pharmaceutical company, and one that’s really grounded in something different—a generic DNA,” Actavis CEO Paul M. Bisaro says. About half of the combined company’s sales, which are expected to top $15 billion in 2015, will come from specialty, or niche, pharmaceuticals; previously, just 30% of Actavis’s revenues came from that segment. Generic drugs, over-the-counter medicines, and, eventually, biosimilars will make up the rest of the portfolio.
For Forest, the deal culminates a striking turnaround. Since 2009, activist investor Carl Icahn has been pushing the company to either make a big purchase or sell itself. For years, he accused Forest management of not being prepared for generic competition to the company’s top-selling drug, Lexapro. The antidepressant, which once had annual sales of more than $2.0 billion, lost patent protection in March 2012. Forest’s sales and earnings promptly went into free fall.
In September 2013, Brent L. Saunders, fresh off the sale of Bausch & Lomb to Valeant Pharmaceuticals, was brought in to run Forest. Saunders quickly made acquisitions and took cost-cutting measures to right the firm’s course. In the six months since his appointment, Forest’s share price has risen more than 70%, and sales and earnings have returned to growth.
Actavis itself is a transformation story. An Icelandic producer of generic drugs, Actavis was bought by U.S. rival Watson Pharmaceuticals in 2012. The merged company took the Actavis name and in October 2013 acquired Dublin-based specialty drug firm Warner Chilcott. That deal bolstered the women’s health and urology drug portfolios of Actavis while adding businesses in gastroenterology and dermatology treatments.
The Forest acquisition adds several new therapeutic franchises. The companies expect to find roughly $1 billion in annual savings on top of a $500 million cost-cutting program already under way at Forest.
Analysts are positive on the deal but caution that the combined firm needs work. “This transaction represents the beginning of a new line of strategic initiatives for Actavis,” Cowen & Co. stock analyst Ken Cacciatore said in a note to investors. Cacciatore argues that Actavis gains a company still in need of some elbow grease to be successful.
Randall S. Stanicky, a stock analyst at RBC Capital Markets, sees more deals in Actavis’s future. “Expect more mergers and acquisitions,” he told clients. In addition, Stanicky and other analysts say the combination foretells broader consolidation in the specialty pharmaceuticals sector.
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