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Shares of Watson Pharmaceuticals Inc. rose to all-time highs Thursday after it agreed to buy competitor Actavis for $5.6 billion in a move that expands its European business and makes Watson the third-largest generic drug company in the world.
THE SPARK: After the markets closed on Wednesday, Watson confirmed more than a month of reports and speculation by saying it would buy Actavis. The deal is expected to close in the fourth quarter. Watson said the two companies will have combined revenue of about $8 billion in 2012. Actavis, which is based in Switzerland, sells more than 1,000 products, and Watson said the deal will expand its business in Russia and Central and Eastern Europe.
The Parsippany, N.J., company said that after it acquires Actavis, more than 40 percent of its generic drug revenue will come from markets outside the U.S.
THE BIG PICTURE: Watson is currently the fourth-largest generic drug company in terms of revenue, and the purchase will bump it to third after Teva Pharmaceutical Industries Ltd. and Novartis AG's Sandoz division. Its revenue climbed in 2011 after it started selling the authorized generic version of Lipitor, the top-selling pharmaceutical in the world.
In 2011 the company also bought Specifar Pharmaceuticals of Greece for more than $560 million. In late 2010 Watson entered a partnership with Amgen Inc., the world's biggest biotechnology company, to create "biosimilar" versions of several biologic medicines for cancer.
THE ANALYSIS: Citi Investment Research analyst John Boris upgraded the stock to "Buy" from "Neutral" on the news. Boris said the deal increases Watson's manufacturing capacity and its generic drug business, and bolsters its drug development pipeline with potential treatments for cancer and injectable drugs, among other products. He said the expansion will be particularly useful in overseas markets.
Boris added that the acquisition reduces risks Watson faces as other companies begin selling their own generic versions of Lipitor and Concerta and diminishes the importance of setbacks for its preterm birth drug Prochieve. He raised his target on the stock to $85 from $69.
Jefferies & Co. analyst Corey Davis said it would have taken years for Watson to expand its business the way it will by acquiring Watson. He said he had been concerned about the company's growth beyond 2013, but once it acquires Actavis, Watson should be able to keep its earnings per share growing through cost cuts. The company has estimated that it should be able to reduce its annual spending by $300 million three years after the deal closes.
Davis said the four largest generic drug companies now have a large lead on any other competitors.
"In one fell swoop, Watson is now much more competitive with Teva and Sandoz for a global presence, and in our opinion, leapfrogs Mylan," he wrote.
He added that Watson will do more business in the fastest-growing areas of Eastern Europe and Russia. He said it still does not have a big presence in Latin America and lacks a significant branded-drug business.
SHARE ACTION: Watson Pharmaceuticals stock climbed $5.29, or 7.6 percent, to $74.98 in afternoon trading, and earlier, the shares reached an all-time high of $75.95. The stock is up 19.1 percent since rumors of the Actavis deal were first reported March 21.