By Jonathan D. Rockoff And Joseph Walker
A few years ago, the drug companies dominating
mergers-and-acquisitions headlines were largely household names,
from Pfizer Inc. and Merck & Co. to Novartis AG.
These days, a new generation of deal makers is making news, with
names distinctly less familiar: Actavis PLC, Endo International PLC
and Valeant Pharmaceuticals International Inc. Within the past few
weeks, two other relatively under-the-radar companies, Mylan NV and
Teva Pharmaceutical Industries Ltd., also entered the fray.
Combined, these lesser-known players have signed or proposed
takeovers worth a combined $180 billion in recent months, causing
investors and bankers to sit up and take notice.
They've also become major revenue generators, racking up some
$52 billion in combined sales last year, up 86% from 2010. The
growth of Actavis and Valeant, the most aggressive corporate
acquirers, is even more remarkable. Through last Friday, Actavis
had a market value of more than $119 billion, a 22-fold increase
since 2010; Valeant's value soared 32 times over the same period to
$84.73 billion. But Actavis's and Valeant's debt has also risen
substantially, nearly doubling as a percentage of total assets
since 2010, according to FactSet.
Behind their rise are several factors. Low borrowing costs have
opened the door for new players to bulk up through deal-making.
Countries including Ireland have offered lower-tax havens for
companies that bought native firms and relocated. Once
reincorporated, these companies have an M&A advantage in that
companies they acquire can often benefit from their lower tax
rates. And investors have rewarded deal-making by driving up shares
of acquisitive companies, which, in turn, has made takeovers
involving stock more affordable.
Several of the new chief executives come from outside the
pharmaceutical industry, making them unsympathetic toward some of
the sector's traditions, such as heavy research spending.
"It's very difficult for people who've grown up in the industry
to be agents of change," Endo Chief Executive Rajiv De Silva, a
former McKinsey & Co. consultant, says. "The biggest question
mark is around the traditional large pharmaceutical companies and
whether those business structures will continue as they have."
Cost-cutting has been a major focus of the new pharmaceutical
barons' deals. Thousands of employees have lost their jobs,
including the researchers once considered the industry's lifeblood.
Some analysts and industry officials question the strategy, arguing
it undermines drug-development programs that could provide sizeable
sales down the road.
"You may have two or three years of improved earnings growth
just from cost cuts. But after that, there's nothing else to cut,"
said David Maris, a pharmaceuticals analyst at BMO Capital
Markets.
The pharmaceutical industry's more traditional names aren't
sitting out the M&A frenzy. Earlier this year, Merck bought
antibiotic maker Cubist for $8.4 billion, and Pfizer agreed to buy
Hospira Inc. and its injectable drugs for $16 billion.
Yet now they share the spotlight with companies like Mylan,
originally spelled Milan, after a founder who won a 1961 coin toss
with a partner over whose name the West Virginia drug distributor
would adopt. Milan Puskar and Don Panoz started out selling
medicines to doctors and pharmacists from a Pontiac Bonneville,
according to the company website.
In large part due to acquisitions, Mylan is now the
second-biggest seller of generic drugs in the U.S. after Teva,
according to IMS Health, with revenue of $7.8 billion last
year.
Executive Chairman Robert Coury has been an architect of the
company's ascent since he began advising Mylan in 1995. He joined
the board in 2002 and became CEO soon after. Since Heather Bresch
took over as CEO in 2012, Mylan's market capitalization has
quadrupled from around $9.2 billion to more than $36 billion.
In February, Mylan completed the $5.7 billion purchase of
Abbott's European generics business, which allowed it to lower its
tax rate by reincorporating in the Netherlands, from Pennsylvania.
Earlier this month, Mylan launched a bigger takeover bid, offering
$28.9 billion for Ireland-based Perrigo Co. PLC, a little-known
maker of cough-and-cold remedies and infant formula that retailers
such as Wal-Mart and Walgreens sell under their own names.
Within days, Teva swooped in and made an unsolicited $40 billion
bid for Mylan itself, fearing that if Mylan completed its Perrigo
takeover, the combined company would be too big for Teva to
swallow, according to a person familiar with the matter.
It was the biggest proposed health-care deal this year and an
aggressive move by Teva CEO Erez Vigodman as he looks for new
sources of sales growth to offset sales the company expects to lose
as its multiple sclerosis drug, Copaxone, faces generic
competition.
Mr. Vigodman had served on Teva's board since 2009, but was
otherwise a pharmaceutical industry outsider, having previously led
the world's largest maker of generic chemicals used in agriculture.
Israel-based Teva, founded in 1901 as a drug wholesaler that made
deliveries by donkey and camel, began making drug copies for
Israelis when the new country restricted imports. Sales in the U.S.
took off after Teva recognized the potential in a 1984 U.S. law
authorizing sales of generic drugs.
No drug company has gotten bigger faster in recent years than
Actavis, a once relatively small seller of generic drugs. The
company took off when Watson Pharmaceuticals bought
Switzerland-based Actavis in 2012 and adopted its name. It then
snapped up Ireland-based Warner-Chilcott in a tax-lowering
inversion deal.
Brent Saunders, a 45-year-old former PricewaterhouseCoopers
compliance expert, became Actavis CEO after the company's roughly
$25 billion takeover of Forest Laboratories last July. Less than a
year later Actavis completed a roughly $66 billion purchase of
Botox maker Allergan Inc.
In doing so it beat out Valeant and its ferociously acquisitive
CEO, Michael Pearson. Mr. Pearson was a McKinsey pharmaceuticals
consultant who hadn't heard of Valeant when the company's chairman
approached him to become CEO in 2007. Valeant, originally called
International Chemical & Nuclear Corp., was best known for its
founder Milan Panic, who took a leave from running the company at
one point to serve as prime minister of Yugoslavia.
Since becoming Valeant CEO in early 2008, Mr. Pearson has
overseen 56 publicly announced deals worth $34.6 billion, according
to Dealogic. Last month, Valeant agreed to buy stomach-drug maker
Salix Pharmaceuticals Ltd. for $11.1 billion, beating out a
surprise rival bid from Endo.
The jockeying pitted Mr. Pearson against Endo's Mr. De Silva,
who worked under Mr. Pearson at Valeant and McKinsey. Before
joining Endo as CEO in 2013, Mr. De Silva was president at Valeant,
where he helped execute Mr. Pearson's M&A strategy.
Mr. De Silva, 48, a native of Sri Lanka who came to the U.S. to
attend Princeton University on a scholarship, has pursued a bevy of
deals to remake Endo. The company reincorporated in Ireland last
year after acquiring Paladin Labs Inc., for $2.7 billion. Last
January, Endo completed a $2.6 billion purchase of Auxilium
Pharmaceuticals Inc., best known for its testosterone and erectile
dysfunction treatments.
"The fact that companies like ours have the ability and capital
to make bold moves, that is not a surprise," says Mr. De Silva. "We
have a lot of shareholders who are supportive of what we're doing
and debt markets that are very favorable at the moment."
Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com and
Joseph Walker at joseph.walker@wsj.com
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