Bloomberg News

Watson CEO Looks Past Actavis Deal to Next Growth Plans

November 01, 2012

Watson Pharmaceuticals Inc. (WPI:US) will become the third-biggest generic drug company worldwide as it changes its name to Actavis and seeks to diversify by using brand-name products to fuel growth.

The name change was announced yesterday with the close of Parsippany, New Jersey-based Watson’s 4.25 billion euro ($5.51 billion) purchase of Actavis Group hf. It moves Watson from fifth biggest to the top maker of copycat drugs by sales after Teva Pharmaceutical Industries Ltd. (TEVA), based in Petach Tikva, Israel, and Basel, Switzerland-based Novartis AG’s Sandoz unit.

Chief Executive Officer Paul Bisaro has put Watson on an expansionary path during his tenure, announcing plans to push the company’s generics business worldwide, and to buy and develop brand-name drug assets that provide higher profit margins. Investors have rewarded the company; since Bisaro took over in September 2007, the stock has about tripled (WPI:US).

“This is the transaction that Watson needed to do to be significant and truly relevant on a global stage,” Bisaro said in a telephone interview Oct. 29. “We will be focusing even more heavily on brand acquisitions and brand-licensing deals to diversify our business.”

As part of the acquisition, Watson will cut about $300 million in costs over three years and close some of the combined companies’ 28 manufacturing plants, he said in the interview.

Beat Estimates

Watson announced third-quarter results (WPI:US) today that beat analyst estimates. Net income was $172.3 million, up 24 percent from a year earlier. Earnings excluding some items were $1.35 per share, and $1.30 per share once a 5 cent benefit from a tax settlement was excluded, the company said in a statement today. That beats the $1.28 per share average of 21 analyst estimates surveyed by Bloomberg.

Sales were $1.29 billion, about $200 million more than the average of analyst estimates, according to the statement. It also raised its adjusted earnings guidance (WPI:US) for the year by 20 cents a share, to $5.85 to $5.95 per share, up from $5.65 to $5.85 per share.

Watson shares (WPI:US) rose 2.1 percent to $87.71 at the close in New York.

Watson is changing the name to Actavis in 2013 because the brand is easier to use globally, without the copyright issues Watson would have had abroad because of similarly named business. Actavis also had a strong brand in areas the company is eyeing, including Russia, which will be the company’s fastest growing market, according to Siggi Olafsson, president of global generics. The company’s stock also will start trading under the Actavis name in 2013.

Overseas Markets

While the deal, Watson’s biggest-ever purchase, gives the drugmaker operations in more than 60 countries, the business in Brazil and Mexico isn’t as large as Bisaro wants.

“To be honest, we’re a little undersized in those markets,” he said. Acquisition targets in those areas are “a bit too rich” because of the competition for deals, he said.

The Actavis deal “really makes them a major global player,” Michael Faerm, an analyst with Credit Suisse Group AG in New York, said in a telephone interview. “Financially, it’s very beneficial as well. It adds another source of growth to some of their existing business.”

Bisaro said among the first steps after the deal is complete will be paying down the company’s debt (WPI:US). Watson took $1.8 billion in loans and issued $3.9 billion in debt to fund the Actavis deal. “We’re also going to have to invest very seriously in R&D,” Bisaro said.

Biosimilar Growth

Watson also has potential for growth in “biosimilars” -- generic versions of biotechnology drugs such as Amgen Inc.’s Epogen (AMGN:US), an injectable blood booster. Biosimilar drugs, since they aren’t exact copies and are difficult to manufacture, can cost $50 million to $100 million to get approved by regulators and bring to market, Bisaro said.

“These are significant investments, but we see it as required as the price to play,” he said. Last year, Amgen and Watson announced an agreement in which Watson would develop biosimilars, and spend $400 million to do so.

The brand drugs Watson is looking for will be primarily in areas where it already has portfolios, such as women’s health and urology.

“It’s challenging, as we’ve seen with Prochieve,” Bisaro said, referring to the company’s experimental drug to prevent pre-term births. “We think we have a great product, we’ve passed all the tests, and then we get thrown a curve ball with the FDA.”

An advisory panel to the Food and Drug Administration voted in January not to recommend approval, and the agency hasn’t cleared the drug.

‘Major Players’

“It is challenging, but nevertheless we’re still committed to the opportunity because we think we can be one of the major players in these types of therapeutic categories.” That may also mean finding new delivery mechanisms and dosing amounts for existing brand-name molecules, for example a birth-control patch that uses lower doses of hormones.

“It’s a niche that we hope could generate $50 million to $100 million at its peak,” Bisaro said.

On the generics side, the company’s best opportunities will be challenges that give it six months of exclusive sales rights when a drug goes off patent. Watson was on the other side of that dynamic with Lipitor, Pfizer’s top-selling cholesterol pill. Pfizer had an agreement by which Watson would manufacture an “authorized generic” version of the drug to compete with Ranbaxy Laboratories Ltd.’s version, splitting sales with Pfizer.

Market Effort

Generic drug companies are rewarded for being the first to start the process of making a copycat version. The first company to successfully challenge the patent protection gets 180 days of exclusive rights to sell the generic version, typically at a price not much lower than the brand. The brand drug maker also can offer an official generic, as Pfizer did with Watson.

Pfizer, though, undercut Watson’s price in an effort to hang onto its own brand market share after the drug lost patent protection last November.

Bisaro said the deal was worth it, though, for the additional recognition it brought his company.

“For us, Lipitor was a great one-off opportunity,” he said. “I don’t think Pfizer maximized its value, and as such I don’t think it maximized our value.”

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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