By Jonathan D. Rockoff
Two years ago, Actavis PLC was a relatively small seller of
generic medicines with an unpronounceable name. After it seals its
$66 billion deal for Allergan Inc., announced Monday, the company
would be one of the globe's largest drug makers by sales, led by
the antiwrinkle treatment Botox.
The rapid rise of Actavis was fueled by seismic changes
reshaping health care, and then turbocharged by Allergan's heated
efforts to slip from the grasp of a hostile suitor. To thwart
detection as they sealed the deal, executives said the two
companies held recent meetings in lawyers' offices far from
corporate headquarters, and with Allergan CEO David Pyott checking
into hotels under assumed names.
Mr. Pyott said he finally agreed to the deal this weekend during
a cellphone call, marred by poor reception. Actavis will pay $219 a
share, about 60% in cash and the rest in Actavis stock. The
companies expect a deal, which must be approved by shareholders and
regulators, would close in the second quarter next year and be
accretive within the first year.
The combined company would sell a range of eye, skin and stomach
drugs, led by the well known brand Botox. The company would have
$23 billion in sales next year, more than 30,000 employees and a
market capitalization of $128 billion, about 12 times Actavis's
equity value just two years ago.
"We will create a top-10 pharmaceutical company," Actavis Chief
Executive Brent Saunders said in a conference call.
But Actavis's entry into the ranks of Big Pharma will come at a
hefty price for the company, its many employees and U.S. tax
coffers. To reach its financial targets, Actavis plans to cut at
least $1.8 billion in costs, including $400 million in research
spending. That doesn't include $475 million in costs Allergan
already planned to cut since it came under pressure from
Valeant.
The Dublin-based company is expected to have a 15% corporate tax
rate. That could save the combined company hundreds of millions of
dollars in taxes that California-based Allergan would have paid at
a roughly 26% tax rate.
To put its hostile suitor Valeant Pharmaceuticals International
Inc. out of reach, Actavis's offer pays $85.08 a share more than
the value of Allergan stock before the company was put in play in
April.
Actavis shares rose 1.7% Monday to $247.94, and Allergan shares
were up 5.3% to $209.20. Valeant shares edged up 1.9% to
$136.73.
Valeant Chief Executive Michael Pearson, who had teamed up with
activist investor William Ackman and his hedge fund Pershing Square
Capital Management LP to buy Allergan, indicated he was walking
away, though they could always return should Actavis's share price
drop and make its offer easier to top.
"Valeant cannot justify to its own shareholders paying a price
of $219 or more per share for Allergan," Mr. Pearson said. "We will
remain focused on delivering strong organic results and evaluating
acquisition opportunities as we always have: prudently, in a
disciplined manner, and in the best interests of our
shareholders."
Mr. Saunders admitted Actavis paid up for Allergan. "But in the
midst of doing that, we got a company and a team that shouldn't
have been up for sale," he said during an interview. "This is a
once-in-a-lifetime, a unique opportunity to transform our
industry."
Actavis projects the combined company would achieve at least 10%
in revenue growth in each of the coming years.
An acquisition of Allergan would cap Actavis's steep ascent to
the ranks of Big Pharma in just a few years. The deal comes amid a
reordering of an industry buffeted by patent expirations for
blockbuster drugs, efforts to control health-care spending and low
interest rates that have driven considerable deal-making,
especially to cut corporate taxes.
Actavis (pronounced AK-tuh-vis) is a product of all of these
forces. Operating as Watson Pharmaceuticals, the company took
advantage of a wave of blockbuster patent expirations, selling
generic versions of drugs like attention-deficit and hyperactivity
disorder drug Concerta.
Yet Watson was so little known around the world that in late
2012 it took the name Actavis, after buying the Iceland generics
firm that was better recognized.
But that was around the peak of the patent cliff for top-selling
prescription drugs. Like its generic-drug rivals, Actavis searched
for new ways to increase revenue going forward. It was among the
first pharmaceutical companies to merge with a foreign company, in
its case Warner Chilcott last year, in a so-called inversion deal
to lower its tax rate.
Then this year, it paid $25 billion for Forest Laboratories and
its brand-name pharmaceuticals. The deal added higher-margin
brand-name drugs such as the Alzheimer's drug Namenda to its
portfolio. The broader range of products also offered a way to sell
baskets of drugs at different price points to hospital systems that
were consolidating and trying to control spending.
Allergan became an option for Actavis, slowly, after Valeant
made its bid and after Mr. Pyott's exploration of other escapes,
including a potential deal for Salix Pharmaceuticals, foundered,
people familiar with the matter have said. Meantime, Actavis had to
avoid the designs of Pfizer Inc., which approached it about a
deal.
Mr. Pyott said he read Actavis's securities filings and talked
with Mr. Saunders over the past several months to see if the
businesses would be a good match. Mr. Pyott said he was impressed
by Actavis's relatively lean management structure, its heavy
marketing to physicians, and success building sales for women's
health and other drugs.
Last week, teams of senior leaders from both companies huddled
at a law firm in Chicago to review the operations of each company,
looking for potential skeletons.
Mr. Pyott said he checked into hotels under assumed names during
the talks, and pulled a ski cap down over his head Sunday in New
York City to prevent being seen. Actavis board members flew
separately to Ireland and stayed at different hotels in the Dublin
countryside to avoid detection while giving their blessing for a
deal, according to Mr. Saunders.
The two chief executives reached a final deal during a cellphone
call over the weekend that was interrupted at least once by bad
service. "I said, Brent?" Mr. Pyott recalled. Then he called Mr.
Saunders back to agree.
Liz Hoffman and David Benoit contributed to this article.
Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com
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