The Generics Empire Of Watson Pharma Soon To Be Named Actavis

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In 2013 Watson Pharmaceuticals (WPI) is changing its name to Actavis because the brand is more recognizable globally and to avoid confusion with other businesses also called Watson. Actavis is the name of the Swiss-Icelandic generics manufacturer that Watson took over in October 2012 in the biggest deal in its history.

Actavis has a strong brand in 40 countries, among them Brazil, Mexico and Russia, fast-growing areas where Watson is anxious to expand. In 2013 the company will initiate a multi-year rebranding campaign and change its symbol on the New York Stock Exchange. The $5.51 billion purchase of Actavis moves Watson from fifth to the third place in the ranks of the biggest generics makers in the world by sales just behind Teva (NYSE:TEVA) and Novartis (NYSE:NVS)'s Sandoz unit.


Actavis, even before the acquisition, was a giant: a top-5 generics player with $2.5 billion in sales in 2011,, 1,100 products on the market, 315 products in pipeline, 700+ launches in 2011. Actavis manufactured 22 billion tablets and capsules in 2011. Actavis will contribute an estimated €2 billion ($2.6 billion) in sales to Watson's total in 2012. Actavis makes, among others, a generic version of Ritalin, a drug to treat attention deficit disorder and Ambien, a sleeping pill.

The company also has a robust supply chain that is more flexible than many of its competitors. They hold bulk supplies of undifferentiated, near-finished goods which can be finalized quickly on demand for different markets. Reduced lead times, enhanced flexibility and improved customer service are among the features its customers love.

Actavis was taken private in 2007 by Icelandic billionaire Thor Bjorgolfsson's private-equity firm Novator in a roughly $5 billion deal. The chunk of the buyout loan came from Deutsche Bank (NYSE:DB) in Germany. The company then went on an acquisition spree, snapping up generic-drug companies all over the world, building a big debt load in the process.

Paul M. Bisaro, CEO and president of Watson said that among the first steps after the deal is complete will be paying down the company's debt. Watson took out $1.8 billion in loans and issued $3.9 billion in debt to fund the Actavis deal. The purchase of Actavis was a culmination of Watson's recent effort to expand globally. In 2011 it bought Greek generic drug maker Specifar Pharmaceuticals for €400 million ($417 million) and an Australian unit of Strides Arcolab Ltd. for A$375 million ($391 million).

Growth engines

The combined Watson-Actavis' growth will come from a variety of sources. At the end of 2011, Watson had more than 130 abbreviated new drug applications ((ANDAs)) pending before the FDA. Sales should benefit from the generic versions of Seasonique, Concerta, Lipitor, and Lovenox, Xopenex and potential approval and launch of generic versions of Loestrin 24 in 2014 among others.

This is a good time to be in the generics business. One of the aims of the US healthcare reform is to enable more people to access prescription drug benefits.

In September 2013, Watson launched the generic version of Lidoderm, as a result of a deal with Lidoderm maker Endo Health Solutions (NASDAQ:ENDP). Watson will have 180 days of market exclusivity before other generic competitors can participate and drive down the price. Lidoderm, a painkilling skin patch, brought in more than $800 million for Endo last year. This medication is used to relieve nerve pain after shingles (infection with the herpes zoster virus).

According to US law, generic drug companies are rewarded for being the first to start making a copycat version. The first company that successfully challenges the patent protection gets 180 days of exclusive rights to sell the generic version, usually at a price not much discounted compared to the brand. The brand drug maker also can offer an official generic, as Pfizer (NYSE:PFE) did with Watson, allowing it to sell an "authorized generic version" of mega-blockbuster Lipitor in November 2011. Pfizer, though, undercut Watson's price in an effort to hang onto its own brand market share.

Watson CEO Bisaro says the deal was worth it anyhow, for the additional recognition it brought his company.

Watson is also getting involved with the biosimilar business. In August 2012, Amgen (NYSE:AMG) and Watson struck a deal with Dutch biotech Synthon to develop a biosimilar version of Herceptin, Roche's (OTCQX:RHHBY) blockbuster cancer drug, whose patent in Europe will expire in 2014. Watson will contribute up to $400 million in co-development costs and share the risk. The products will be sold under a joint Amgen/Watson label. Watson will receive royalties and sales milestones. The collaboration will not pursue biosimilars of Amgen's proprietary products.

"Nothing comes without a price, and biosimilars are going to come with a big price," says CEO Bisaro. "And that's why I think the assets are so valuable. There's just not enough people who can spend that kind of money to get to that point."

The lack of competition might make up for the fact that Watson is a bit late to the biosimilars party. In Europe, where biosimilars have been on the market for several years, Teva, Sandoz and Hospira (NYSE:HSP) dominate the market and are expected to have first-mover advantage in the U.S.


Watson's sales increased 18.8% to $1.29 billion in the third quarter, about $200 million over analyst estimates. Net income was $172.3 million in the third quarter, up 24 percent from a year earlier. Earnings were $1.35 per share. The company projects full-year sales at $5.9 billion, well ahead of analysts' estimate of $5.54 billion. CEO Bisaro predicts that in 2013 earnings will grow 30% to 40% from the high end of the 2012 range.

Investors are impressed. The stock hit 90 for the first time in its 19-year trading history in October 2012. The share price's 52 week range is $55 to 90. Since Bisaro took over in September 2007, the stock has about tripled.

This is a strong company that just got stronger. It is in concert with the worldwide demand for moderately priced generics manufactured in large volumes and variety, and global availability including the fast growing emerging nations.

This is an investment with potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.