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U.S.-based specialty healthcare company Endo Pharmaceuticals (NASDAQ:ENDP) has agreed to buy Qualitest Pharmaceuticals, the sixth largest generic pharmaceutical company in the U.S., for around $1.2 billion in cash from London-based buyout shop Apax Partners, it said Tuesday.

Huntsville, Alabama-based Qualitest manufactures controlled substances from its facilities in the U.S., which make up approximately 40% of its product portfolio, with liquids making up the remaining 17% of its portfolio. Thirty-two of Qualitest's products are listed among the top 250 generics by total prescription (TRx) volume.

The deal, which significantly broadens Endo's range of generics with 175 added product families, will create a combined company with revenues of approximately $2.0 billion on a pro forma basis for fiscal 2010 and more than 3,000 employees.

The new entity will also have a stronger pipeline of abbreviated new drug applications, with 46 under active FDA review in multiple therapeutic areas including pain, urology, CNS, as well as oncology and hypertension, and 24 under development.

"The transaction provides Endo with an enhanced competitive position and critical mass in the generics market and when combined with our growing Branded Pharmaceuticals and Devices & Services businesses, makes us a more comprehensive healthcare solutions provider," said president and CEO of Endo, David Holveck.

With more than 90% of all pain prescriptions now filled by generic drugs in the $15 billion U.S. pain market, the acquisition of Qualitest is a forward-thinking play to keep Endo one step ahead of the game. 40% of Qualitest's revenues are derived from pain products, making the deal a logical step as Endo looks to build its pain management portfolio.

As part of the deal, the current chairman and CEO of Qualitest, Marvin Samson, along with Julie McHugh, Endo's chief operating officer, will lead a team designed to integrate the two companies and accelerate the new entity's growth, comprised of senior professionals from both organizations.

Endo will retain Qualitest's facilities located in Huntsville, Ala. and Charlotte, N.C., as well as its own facility in Westbury, N.Y.

The deal, which has already been approved by Endo's board, will be financed using $500 million in cash from Endo's balance sheet and an existing $300 million revolving credit facility. Up to $400 million has already been secured.

Endo expects the transaction to be immediately accretive to adjusted earnings per share in the first full year after closing of the transaction, it said.

Upon deal closing, the company anticipates that Qualitest would add approximately $400 million in annualized revenue and $0.40 in annualized adjusted diluted earnings per share.

The pharma business also expects revenue growth of the combined business to be at least 15% over the next two years, and anticipates a $30 million annualized cost synergy run-rate in 2013, associated with procurement, distribution, manufacturing and other general and administrative expenses.

Apax's sale of Qualitest will raise cash for the firm as it looks to bring profits to its investors. Healthcare is one of five sectors on which the private equity firm focuses, and has dabbled in it quite heavily as of late. In December last year, Apax acquired clinical trial logistics company Marken in a 1 billion pound buyout, closing the largest deal in the UK so far last year.

The transaction is still subject to regulatory conditions and anti-trust clearances and is expected to close in the fourth quarter of 2010 or early in the first quarter of 2011.

Separately, Endo has re-iterated its 2010 revenue guidance of between $1.63 billion and $1.68 billion and full-year adjusted diluted earnings per share to be between $3.30 to $3.35 per share.

Endo delivers a suite of diagnostics, drugs, devices and clinical data to meet the needs of patients in areas such as pain, urology, oncology and endocrinology. The company was up more than 8% in pre-market trading on Tuesday to $33.07.

Disclosure: No position

Source: Endo Pharmaceuticals Acquires Apax's Qualitest for $1.2B