Actavis Acquires Forest Labs For Brand-Name Drugs

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Large-cap drugmaker Actavis is looking to acquisitions to expand beyond the generics domain and into the branded prescription-drug realm on the heels of strong profit gains.

Actavis ' ( ACT ) first-quarter adjusted earnings soared 75% from a year earlier and topped analyst views with $3.49 per share as revenue rose 40% to $2.66 billion. And after a 58% EPS rise for 2013, the Dublin-based company is expected to see a 44% lift this year, followed by 22% in 2015, according to a Thomson Reuters poll of analysts.

Dealmaking, already an important component of Actavis' strategy amid shifts in the U.S. health care market that are encouraging drug companies to both gain heft and broaden their offerings, likely will continue to be a dominant theme and drive future earnings, analysts say.

"Our sense is that there could be more sizable transactions ahead and that management is actively vetting opportunities with no shortage of targets," analyst Randall Stanicky of RBC Capital Markets wrote in a report after meeting with Actavis in May.

Moves For Branded Drugs

Actavis has pursued deals to expand both generic and branded pipelines in recent years. Most notably, the company earlier this year agreed to acquire rivalForest Laboratories ( FRX ) in a deal valued at about $25 billion. The cash-and-stock acquisition is expected to close midyear.

Analysts say it will help Actavis, historically a maker of generic drugs -- including an equivalent to cholesterol-lowering medication Lipitor -- hasten expansion into the branded drugs. The deal would form a roughly $15 billion-a-year global pharmaceutical business.

Forest would add a range of branded drugs to Actavis' smaller but growing list of products. Forest has an established portfolio of gastrointestinal treatments as well as branded drugs for neurological conditions and hypertension.

The expansion is important at a time when the generics business, while still vital for Actavis, is braced for headwinds. Actavis advanced in recent quarters thanks in part to a burst of patent expirations for lucrative branded drugs that has boosted its generic operations.

But that surge in expirations is expected to slow over the next few years, said Michael Waterhouse, an analyst at Morningstar.

The looming "patent cliff" is expected to limit opportunities in generics, and it is forcing Actavis and competitors to move into the branded drug arena to ensure growth, Waterhouse says. And dealmaking, he adds, is the most efficient way to get there.

The Forest deal also is aimed at positioning the larger, combined company with the size needed to negotiate with increasingly formidable forces in the U.S. health care landscape.

With a market cap around $37 billion, Actavis is currently the second-largest company in IBD's Medical-Generic Drugs industry group, which is ranked No. 34 in performance among 197 groups that IBD tracks.Teva Pharmaceuticals ( TEVA ) is No. 1 in size, andMylan ( MYL ) No. 3. Actavis stock is up about 27% for the year to date and 72% over the last 12 months.

Squeeze On Generic Drugs

Under pressure to curb health care costs, American hospitals are partnering with doctors and insurers to form major organizations capable of bargaining directly on drug prices. The result is higher pricing pressure, particularly on generics, observers say.

"Generics are getting squeezed," said Jack Ablin, the chief investment officer for BMO Private Bank. "The trend that we're seeing is certainly one of moving more into branded and away from generics, and I think that continues."

The Forest acquisition would continue a "very rapid rise" on the branded front for Actavis, Waterhouse says. He noted Actavis inked a deal last year to acquire Warner Chilcott for about $5 billion.

That deal boosted Actavis' offerings of specialty pharmaceuticals -- including drugs for dermatology and gastroenterology -- and had the added benefit of lowering its tax burden, another driver of deals. The addition of Warner Chilcott, with its portfolio in the women's health arena, was the biggest driver of Actavis' Q1 earnings growth.

After closing the acquisition, Actavis -- previously based in the U.S. -- reincorporated in Ireland, where Warner Chilcott was based and where tax rates are lower. The more favorable tax climate and greater size gained via M&A also positions Actavis to compete with global companies for a larger share of growing sales in emerging and heavily populated markets such as China, analysts say.

Waterhouse says another transformational deal may have to wait until the Forest acquisition is fully digested -- perhaps in a year -- but he is confident that the Forest acquisition will prove successful. That thinking was bolstered in May when Actavis announced that, when the deal is closed, Forest CEO Brent Saunders will lead the combined company.

Saunders has experience in large-scale dealmaking. In 2013, he orchestrated the sale of Bausch & Lomb toValeant Pharmaceuticals ( VRX ). He also has years of experience running branded-product offerings, Waterhouse says.

Actavis' current CEO, Paul Bisaro, will become executive chairman of the combined company.

Waterhouse anticipates that Bisaro will remain involved in the company's strategic and business-development operations, providing depth at the top that should allow Actavis to develop its branded pipeline while continuing to pursue further, if smaller, deals in the near term. He says Actavis will actively look at smaller opportunities yet this year. "I really do think it continues," he said of M&A.

Ablin says drug companies are almost certain to continue pushing hard for acquisitions, as generic growth opportunities slow and searches for new branded drugs to fill future pipelines intensify. Those active on the deal front now, he says, have an important head start. "It's now all about the ideas, the patents, the intellectual property," he said.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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