Analysts play M&A chess with Actavis, Pfizer
This article was originally published in Scrip
The $28bn acquisition of Forest Laboratories by Actavis just closed on 1 July, but Leerink Swann analyst Jason Gerberry already is speculating about the next strategic chess move for generic drug maker turned specialty pharmaceutical giant Actavis.
Mr Gerberry's wish list includes an acquisition of Actavis by Pfizer, whose last mega-merger proposal was spurned by AstraZeneca (scripintelligence.com, 19 May 2014). The Leerink analyst also suggested that Actavis look for additional "bolt-on" purchases, such as Salix Pharmaceuticals, or consider a bid for Allergan, which is fighting off a $54bn offer from competitor Valeant Pharmaceuticals (scripintelligence.com, 24 June 2014).
In a follow-up report from Leerink, analyst Seamus Fernandez notes that an Actavis deal could deliver the highest return on New York-based Pfizer's investment when compared to potential acquisitions of AstraZeneca or Shire. All three companies have headquarters in Dublin or London, which have much lower tax rates than in the US.
Whether or not Actavis would consider a buyout so soon after its acquisition of Forest, which changed Actavis from a generics-dominated to a specialty brands-dominated company, remains to be seen. But as Mr Gerberry noted in his assessment of Actavis's strategic options, the company plans to grow through incremental mergers and acquisitions.
Actavis "has indicated the company would prefer to focus on using M&A to address subscale categories [and] management has highlighted women's health, cardiovascular and respiratory, and certain emerging markets (for the generics business)," he wrote.
But Actavis appears to be immediately focused on operations and development activities for its three lines of business – specialty brands, generic medicines and over-the-counter products – rather than M&A.
"Our business model is driven by a broad portfolio of strong brand, generic and OTC products; a commitment to development-focused, results-oriented research and development; and the size and scale needed to efficiently and cost-effectively meet the needs of our global customer base," Actavis president and CEO Brent Saunders said on 1 July.
Mr Saunders previously was Forest's president and CEO. Former Actavis chairman and CEO Paul Bisaro will serve as the merged company's executive chairman.
Actavis closed up 0.4% at $224 per share on 1 July – an 11.2% premium over the company's share price on 18 February when the acquisition of Forest was first announced (scripintelligence.com, 18 February 2014). Actavis's market cap is $39.1bn.
Mr Gerberry estimated that Pfizer would have to pay $102bn to acquire Actavis, assuming that Pfizer would pay $325 per share for Actavis and take on the company's $15bn in debt. He said Pfizer would benefit from sales and marketing overlap with Actavis's commercial operations as well as a 5% reduction in the big pharma company's tax rate.
Actavis also could cut Allergan's tax rate by 5% if it were to buy the Irvine, California-based specialty pharma company for $200 per share versus Valeant's third acquisition bid valued at $180, by Mr Gerberry's analysis. Allergan also may benefit from Actavis's commitment to research and development, which Valeant plans to cut if it buys Allergan.
But an Actavis-Allergan transaction seems unlikely, given Allergan's unwillingness to sell to Valeant and the lack of portfolio similarities between Allergan and Actavis.
What seems more in line with Actavis's stated strategy are bolt-on transactions that add key products and drug candidates to the company's portfolio. Mr Gerberry specifically pointed to Salix, because the Raleigh, North Carolina-based company's top-selling product Xifaxan (rifaximin) may soon add an irritable bowel syndrome with diarrhea (IBS-D) indication to its label based on new Phase III data (scripintelligence.com, 2 July 2014).
Salix's Xifaxan would complement the Forest/Actavis drug Linzess (linaclotide) for IBS with constipation (IBS-C), but it would compete with the IBS-D candidate eluxadoline that Forest bought in its acquisition of Furiex Pharmaceuticals before the Actavis deal closed.
In his rebuttal, Leerink's Fernandez estimated that Pfizer's hypothetical $102bn acquisition of Actavis with 50% cash and 50% equity would reduce the combined companies' operating costs by $1.7bn and tax costs by $1bn annually. That would make an Actavis acquisition 15% accretive to Pfizer earnings by 2019.
Under the most recent AstraZeneca proposal, which values the London-based company at $117bn, the deal would be 13% accretive to Pfizer in 2019 by Mr Fernandez's estimates even with $3.9bn in annual operational cost savings and a $1bn per year tax rate cut.
The analyst pegged a Pfizer acquisition of Shire at $56bn with 18% of the purchase price in cash and the other 82% in equity. Such a deal would be 2% accretive to Pfizer in 2019, but it would give the combined company a $1bn annual tax savings and cut operational costs by $750m.
"As we rank Pfizer's options, we view Pfizer-AstraZeneca as the most compelling strategically but with an unwilling target; Pfizer-Actavis as financially and operationally sound with a potentially willing target; and Pfizer-Shire as fundamentally unattractive," Mr Fernandez wrote. "In our opinion, a combination of Pfizer-Actavis makes financial, operational and strategic sense, although it fails to deliver the same long-term pipeline benefits that we believe Pfizer-AstraZeneca would."