Pharma Space Heats Up with Actavis-Forest Merger

Edited by Vani Rao

$25-billion deal would value Forest Labs at 7.1 times 2014 sales

b0The spotlight is on the pharmaceutical industry after Bloomberg and Wall Street Journal reported that generics drug maker Actavis PLC (NYSE:ACT) is close to acquiring Forest Laboratories Inc. (NYSE:FRX), the maker of the Alzheimer’s drug Namenda and the blood pressure drug Bystolic, in a $25-billion deal. Namenda is a blockbuster drug that generated sales of $1.3 billion in FY2012; moreover, it holds huge potential since it will go off patent in April 2015. Furthermore, Forest Labs reported that sales of Bystolic rose 31.6% year-over-year in 2012 to $347.8 million, suggesting that the drug is a major cash cow for the company in the forthcoming quarters. Bystolic’s primary US patent will expire in 2021.

Looking ahead, the Forest Labs merger will provide Actavis with a major focus on higher-margin, branded treatments for Alzheimer’s, hypertension, and other disorders. Actavis, formerly known as Watson Pharmaceuticals Inc., is going ahead with a spree of buyouts, having purchased Warner Chilcott in 2013. Continuing with the wave of acquisitions being witnessed in the pharma industry, Forest Labs agreed to buy Aptalis Pharma in January 2014 for $2.9 billion for the latter’s portfolio of gastrointestinal disorders and cystic fibrosis treatments.

The deal also means that Carl Icahn, the second-largest shareholder at Forest Labs with an 11.32% stake, will rake in $641 million. Icahn had earlier criticized Forest Labs for not being able to prepare itself to face generic competition and for warnings that the company had received from US health regulators regarding its marketing activities.

If Actavis closes the $25-billion deal, it would value Forest Labs at 7.1 times its 2014 expected sales, which a considerable premium over its current market cap of $19.3 billion. The Forest Labs buyout, expected to close by mid-2014, ranks as one of the top five pharma deals of the past decade. Following the news related to the buyout, Actavis shares rose more than 7% on Tuesday, 18 February 2014, while shares of Forest jumped nearly 30%.

Source: Bloomberg
Source: Bloomberg

Consolidation in the Offing for Specialty Pharma

Overall, the pharmaceutical industry is expected to witness major consolidation in specialty pharma. Whatis more, generic drug makers such as Actavis and Teva Pharmaceutical Industries (NYSE: TEVA) are looking to add branded drugs, such as those for women’s health, in which large drug makers have lost interest because of poor sales potential, according to Reuters.

In a parallel development, Novartis AG (NYSE: NVS) announced on 18 February 2014 that it will acquire privately held CoStim Pharmaceuticals to increase its portfolio of cancer immunotherapies. Novartis is building up its oncology portfolio to offset expected losses from its blockbuster blood pressure drug Diovan, which lost patent exclusivity in the US in 2012, and its top selling blood cancer drug Gleevec, which goes off patent in 2015, according to company data.

Novartis is not the only one looking for acquisitions to boost its oncology pipeline. Merck & Co. (NYSE:MRK) and Bristol-Myers Squibb (NYSE:BMY) are also on the lookout for companies offering major next-generation cancer treatments.

However, the pharmaceutical industry is dogged with major concerns, the most important being the Byzantine approval process for new medications and the endless consequences related to Obamacare. Both these have made investors wary about investing in the biotech/pharma stocks. On the other hand, the consolidation being witnessed in the market is expected to give pharma companies enough financial muscle to get through the drug approval process and expand their pipeline of offerings in the year ahead.

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