Actavis To Increase Operational Synergies By Acquiring Warner

| About: Warner Chilcott (WCRX)

The pharmaceutical industry is one of the biggest industries in the world. Currently the global pharmaceutical industry is worth $300 billion a year, and expected to reach $400 billion in the coming few years. According to the World Health Organization, the top 10 drug makers control around one-third of the global pharmaceutical market. Six of them are based in the United States and four are in Europe. In other words, the United States is dominating the pharmaceutical industry. The United States is also the world leader in bio pharmaceutical research and development (R&D), as 80 percent of the world's research and development is conducted by United States firms.

Actavis, Inc. (ACT) is the third-largest pharmaceutical company in the United States, with around10 percent market share. Actavis has recently announced its acquisition of Warner Chilcott (NASDAQ:WCRX) at about $8.5 billion in an all-stock deal, which would create the third-largest specialty pharmaceutical company in the United States.

About the acquisition:

According to the deal announcement on Monday May 20, 2013, Warner Chilcott shareholders will get $20.08 per share, a 34 percent premium to the May 9, 2013 closing price. This acquisition will help Actavis to become the leading global pharmaceutical company with around $11 billion in global revenues, and the third-largest specialty pharmaceutical company in the United States with more than $3 billion in revenues--focused solelyon the core therapeutic categories of women's health, gastroenterology, urology and dermatology.

About Warner Chilcott

Warner Chilcott is one of the leading specialty pharmaceutical companies, focused on the women's healthcare, gastroenterology, Urology and dermatology segments of the branded pharmaceuticals market, primarily in North America. It is fully incorporated with internal resources dedicated to the development, manufacture and promotion of its products. Its products include the ulcerative colitis treatment Asacol, which is its top-selling drug, and Delzicol, another ulcerative colitis medication.

Acquisition Benefits:

  • Strengthen brand portfolio

This acquisition will create a strong specialty brand portfolio in the therapeutic category for the company with strong growth potential. The acquisition will develop an exciting commercial position for the company and strengthen its global competitive position and extend its global market reach.

Paul Bisaro, Actavis's CEO, said in a statement that the deal will help to launch new women's health products over the next several years, including Minastrin 24 Fe birth-control pills. He also stated that it gives Actavis a broader portfolio of specialty products that have sales potential outside North America.

The strengthening of their product portfolio will also help Actavis to compete with other big players in the market.

  • Synergies benefit

The deal will enhance the product development pipeline and provide opportunities for both companies to bring their combined product portfolio to new and emerging markets. The combined companies will use each other's resources to reduce costs extensively. And with the help of highly advanced research and development (R&D) facilities, both companies will employ each other's facilities to develop more advanced products and improve existing ones.

  • Strong balance sheet

The deal will strengthen its financial position as well. As I mentioned above, the acquisition will help the company to reach $11 billion in annual revenues by the end of 2014. Second, the combined companies will boost the specialty brand sales to 25 percent of total revenues, compared to around 7 percent for Actavis alone. Third, and most importantly, is the tax benefit. This acquisition will lower the company's tax rate by 17 percent to 37 percent over the course of a year because the combined company will be incorporated in Ireland, and analysts have said that country's lower tax rate is a key to making the deal work. In such a case, the company is expecting more than $400 million after-tax operational synergies and related cost reductions and tax savings, which will also provide an opportunity to deleverage its balance sheet. Furthermore, the deal will enhance the borrowing capacity of Actavis with substantial cash flow impact from expected synergies and tax benefits.

Growth Potential:

This acquisition is very important for Actavis because this will not only help to strengthen its existing product line, but also create opportunities for whole new product lines. The deal will help it to execute and launch next-generation strategies. This deal will also enhance its supply chain optimization to increase growth potential. It can also expand its And a Distribution services in new and emerging markets.

The Anda Distribution segment distributes generic and selected brand pharmaceutical products, vaccines, injectables, and over-the-counter medicines to independent pharmacies, alternate care providers, pharmacy chains, and physicians' offices.

Historic Performance:

Source: Bloomberg

The above chart shows the stock price of Actavis as compared with the S&P 500 index of the last three months. The chart clearly shows that the company has managed to outperform the market in that period despite its negative earnings in the last year.


After analyzing the whole scenario, I conclude that investors should consider this stock. From an investment point of view, after the acquisition the company's market position will become quite attractive-with an extensive product line-and based on its current share outstanding the company will be able to save $3.13 per share from synergies and supply chain optimization, resulting in increased profits. Furthermore, because of its strong position in the market, the company will able to compete with larger pharmaceutical companies. My recommendation for this stock is 'buy'.

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.

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