Actavis Seen Selling for Higher Valuation: Real M&A

Actavis Inc., the generic drugmaker whose merger negotiations with Valeant Pharmaceuticals International Inc. stalled over price, may deserve the industry’s second-best valuation ever in a deal.

Gamco Investors Inc. said buyers may be lured by Actavis’s lineup of drugs, including generic versions of birth-control pill Seasonique and pain killer Percocet. The $13.5 billion company should get about $115 a share in a sale, Cowen Group Inc. and Canaccord Financial Inc. said. That price from Valeant or another suitor would represent the second-highest multiple to profit on record for the purchase of a generic-drug company, according to data compiled by Bloomberg.

Discussions for a merger with Valeant reached an impasse in April because Parsippany, New Jersey-based Actavis balked at the premium offered, according to a person familiar with the matter. The revelation that the companies were negotiating prompted two large pharmaceutical firms to begin looking into whether buying Actavis makes sense, another person with knowledge of the matter said. Cowen said Valeant may still win Actavis, while Aegis Capital Corp. sees Novartis AG as a potential suitor.

“Actavis is a very strong company and kind of uniquely positioned in the generic space,” Kevin Kedra, an analyst at Rye, New York-based Gabelli & Co., a unit of Gamco, said in a telephone interview. The company owns Actavis shares. “They have about everything that you would want across the whole array of generic product offerings. For anybody looking to get into the space, buying Actavis would give you critical mass right away.”

Watson Pharmaceuticals

Charlie Mayr, a spokesman for Actavis, declined to comment on the company’s takeover prospects. Laurie Little of Montreal-based Valeant also declined to comment.

Actavis was created when Watson Pharmaceuticals Inc. bought Actavis Group hf, which was backed by Deutsche Bank AG, for 4.25 billion euros ($5.6 billion) in October. The world’s third-biggest generic drugmaker by revenue changed its name to Actavis in January.

Discussions between Valeant and Actavis had been going on for some time, though it was unclear if the companies would reach an agreement on a deal, Bloomberg News reported April 26, citing a person familiar with the matter who asked not to be identified because the negotiations were private. The talks were said to have stalled because of a disagreement over price, people familiar with the matter said April 28.

‘Crucial Factor’

“Price is the crucial factor here,” Herman Saftlas, a New York-based equity analyst at Standard & Poor’s, said in a phone interview. “Actavis is a very solid company, and it’s doing great on its own. Actavis shareholders are looking for some appreciative premium, and it doesn’t seem that the deal with Valeant was yielding that.”

Actavis and Valeant shares both rallied on April 29, the first trading session after the negotiations became public. Actavis rose 4.6 percent to $105.58, while Valeant added 3.8 percent to $75.94.

Today, shares of Actavis fell 1.3 percent to $104.39, and Valeant declined 3.1 percent to $73.69.

Ken Cacciatore of Cowen estimated Actavis could fetch $110 to $115 a share in a takeover, while Randall Stanicky, a New York-based analyst at Canaccord, said a buyer would likely have to pay a premium to his share-price estimate of $115.

A $115-a-share bid would value Actavis at $20.8 billion, including net debt, or 20 times its earnings before interest, taxes, depreciation and amortization from the past 12 months, data compiled by Bloomberg show. Among generic-drugmaker deals larger than $500 million, only one was completed at a higher multiple: The 23 times Ebitda that Teva Pharmaceutical Industries Ltd. agreed to pay for Ivax Corp. in 2005, the data show.

$134 Value

Gamco’s Kedra estimates Actavis should be valued at $134 a share in a sale, 27 percent higher than yesterday’s closing price and 33 percent more than the end-of-day level on April 26, before the talks with Valeant were reported.

Kedra said it’s possible that other suitors may be drawn to Actavis’s foothold in the generic pharmaceuticals market, with capabilities to produce drugs in injectable, topical and inhaled dosages as well as pills. Potential bidders include large pharmaceutical companies with an interest in expanding into generic drugs, he said.

“Big pharma is probably always going to be in the discussion,” said Kedra of Gamco, which has $36 billion in assets. “Those guys have a lot of money to throw around.”

‘Long Shot’

Pfizer Inc. stands out among the biggest drug companies for its large generics business, said Mark Schoenebaum, a New York-based analyst at International Strategy & Investment Group LLC. Still, a takeover by Pfizer is “a long shot,” he said.

Pfizer, the world’s biggest drugmaker, said yesterday that it will analyze over the next eight months whether it should break itself in two, with one business focused on brand-name products and the other on generics. The New York-based company said a separation wouldn’t happen until at least 2016.

Sanofi of Paris, France’s largest drugmaker, has also shown an appetite for generic drugs, including through its purchase of a stake in Toyama, Japan-based Nichi-Iko Pharmaceutical Co. The company could be interested in Actavis, although a deal for a large generic drugmaker would likely be a lower priority than acquisitions of branded medicines, said Alistair Campbell, an analyst at Berenberg Bank in London.

Actavis may appeal to Petach Tikva, Israel-based Teva or Canonsburg, Pennsylvania-based Mylan Inc., according to S&P’s Saftlas, who said an offer from either company would likely draw scrutiny from antitrust regulators. Teva and Mylan are the two biggest generic drugmakers by sales.

Meaning More

Among large pharmaceutical companies, Novartis has the most to gain by acquiring Actavis, Raghuram Selvaraju, managing director and head of health-care equity at Aegis Capital in New York, said in a phone interview. The Basel, Switzerland-based company’s generic-drug division, Sandoz, doesn’t have a major American presence, he said. Actavis got about 80 percent of its $5.9 billion in revenue last year from the U.S.

“Novartis for a long time has been chasing the mantle of ‘top three generics company,’ but they’ve never quite managed to get there,” Selvaraju said. Adding Actavis’s products “would mean more to Novartis than anyone else.”

Joan Campion, a spokeswoman for Pfizer, Teva’s Denise Bradley, Novartis’s Eric Althoff and Mylan’s Nina Devlin said their companies don’t comment on speculation. Sanofi’s Jean-Marc Podvin didn’t respond to a phone message or e-mail seeking comment after normal business hours.

Valeant’s Interest

A deal with Valeant is still possible, Cacciatore of Cowen said. The company is a logical buyer of Actavis and is likely lured by the drugmaker’s cash generation and the chance to bolster its market share in generics, the New York-based analyst said. Actavis is projected to produce a record $863 million of free cash flow this year, according to the average of analysts’ estimates compiled by Bloomberg.

“If this transaction was consummated, it would unlikely be a final stop, but a major move to create a significant platform enhancer along the way to doing something even larger,” Cacciatore wrote in an April 29 note to clients. “From that platform it would appear that Valeant could begin to look at a whole host of assets previously unattainable.”

Actavis doesn’t need to sell itself, said David Amsellem, a New York-based analyst at Piper Jaffray Cos.

“They’ve built a high-quality overseas infrastructure, they’ve got a very strong U.S. generics portfolio that continues to expand,” he said in a phone interview. “They have put all of the pieces in place for sustainable growth and cash flows.”

Still, Actavis’s management could be motivated to eventually agree to a merger with Valeant to avoid grappling with the costs of a potential expansion into branded and other drugs, Cacciatore said.

“This deal will eventually get done,” he said. “The next stage of growth for Actavis is difficult, and this gives them a solid way out.”

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