Three Reasons Actavis Is Buying Warner Chilcott

Confirmation on Monday that Actavis is to acquire Warner Chilcott in a stock-for-stock deal worth $8.5 billion comes as little surprise given that it emerged the two companies were in preliminary discussions last week. Furthermore, while Actavis has been at the centre of recent M&A speculation – with Valeant Pharmaceuticals , Mylan and at one stage, Novartis and Teva, cited as interested parties – it was always a deal with Warner Chilcott that made most strategic sense.

Actavis has been pursuing continued diversification away from its core generic business for some time, and the acquisition of Warner Chilcott accelerates these objectives by allowing the company to expand its footprint in the woman's health and gastroenterology markets.

Furthermore, analysts appear confident that not only will an acquisition provide ample opportunity for operational synergies, but  Warner Chilcott's domiciliation in Ireland would allow Actavis to reduce its corporate tax rate – which at around 28 percent is currently the highest amongst its peers, note analysts at RBC Capital Markets (Warner Chilcott has an approximate 12 percent tax rate by comparison).

Despite the exposure of some key Warner Chilcott brands to generic competition over the next few years, the acquisition would notably enhance Actavis' non-generic business – a key win for the company, noted analysts at Jefferies last week, given the relatively limited progress that has been achieved here despite a long-standing strategy to bolster its branded offering. Furthermore, Actavis' moves in the branded space have had "an intense focus" on  women’s health segment where Warner Chilcott operates.

Simultaneously, the deal provides further insight into how  leading global generics manufacturers are looking to reposition themselves as the patent cliff subsides and the landscape for non-branded products continues to evolve.

There was some excitement that Actavis could be acquired by either Valeant or Mylan and thus trigger a wave of additional larger-scale combinations focused on the generic space.

However, such enthusiasm is somewhat misplaced, Sanford C. Bernstein analyst Ronny Gal suggested in a note to investors, citing weak fundamentals in the US generics space as a barrier to external interest. With the leading generic players taking more fragmented approaches in terms of strategic direction, mergers of equals are unlikely and smaller targets will remain in vogue.

Of the four largest generic players, for example, Mylan is now the only one pursuing a broad generics-focused strategy. As such, by acquiring Warner Chilcott, Actavis has voted with its feet and enhanced its own ambitions of diversification away from the generics market.