Actavis-Forest Bid Shines Light on Valeant Next: Real M&A

Actavis Plc’s purchase of Forest Laboratories Inc. accelerates a pharmaceutical merger wave that stands to engulf even more drugmakers.

The $21 billion transaction, which includes Forest’s net cash, is fueling the busiest 12-month period for acquisitions in the industry since 2009, according to data compiled by Bloomberg. Generic-drug companies such as Actavis and Valeant Pharmaceuticals International Inc. are boosting growth by crossing over into specialty medicines including skin-care treatments, birth control and remedies for digestive diseases.

The most active dealmaker among its North American peers, Valeant may make a competing bid for Forest, according to Piper Jaffray Cos., which also sees Mylan Inc. as a target or acquirer after so far having been largely left out of the consolidation. Valeant, the $49 billion company that’s aiming to more than triple its market value by the end of 2016, could merge eventually with the new Actavis-Forest, Stifel Financial Corp. said. Or Valeant may opt to buy Teva Pharmaceutical Industries Ltd., which would be a better fit, said Aegis Capital Corp.

“You have to wonder, what is Mylan going to do now? Where does this leave Valeant?” David Amsellem, a New York-based analyst at Piper Jaffray, said in a phone interview. “Valeant really sort of paved the way for broader consolidation and now we’re just seeing it accelerate. There absolutely could be more deals to come.”

Brand Names

Representatives for Forest, Valeant, Mylan and Teva said the companies don’t comment on speculation. Representatives for Actavis didn’t respond to a phone call or e-mail seeking comment.

Forest investors are receiving $26.04 in cash and 0.3306 of Actavis stock, valuing their shares at $89.48 apiece, a 25 percent premium, based on Feb. 14 closing prices. The transaction will transform Actavis, the generic-drug maker formerly known as Watson Pharmaceuticals Inc., into a developer of brand-name medicines.

The deal boosted shares of Valeant and Mylan. Valeant, which climbed 4.9 percent yesterday, has returned 25 percent in 2014, the most among the 15 biggest pharmaceutical companies by market value, data compiled by Bloomberg show. Mylan rose 4.8 percent yesterday, the biggest advance since Sept. 10, and sending the shares to the highest level on record. Even Actavis surged 5 percent.

Today, Valeant fell 1 percent to $145.02. Mylan climbed 5.9 percent to $51.15, and Actavis rose 4.5 percent to $210.56.

Deal Incentive

“Investors have incentivized management to do transactions because they’ve bid the stocks up,” Les Funtleyder, a consulting partner at investment firm BlueCloud Healthcare, said in a phone interview. “As long as Wall Street keeps incentivizing management to do transactions to get assets to scale up, they’re going to keep doing them.”

Pharmaceutical and biotechnology deals totaled about $110 billion in the 12 months through February, data compiled by Bloomberg show. That’s the most for any 12-month period since 2009, the data show.

Actavis and Valeant held talks about a merger last year, and the discussions eventually stalled because of a disagreement over price, Bloomberg News reported in April. It also spurned an offer from Mylan, people familiar with the matter said in May. Actavis opted to instead buy Warner Chilcott Plc, allowing the company to shift its domicile from the U.S. to Ireland and reduce its corporate tax rate.

Valeant Options

Valeant is on the hunt for a deal large enough to help the Montreal-based company increase its market value to more than $150 billion and land a spot among the world’s five biggest drugmakers. Actavis was one of the most logical targets to help Valeant reach that goal, Timothy Chiang, an analyst at CRT Capital Group LLC in Stamford, Connecticut, said last month.

Valeant still could pursue Actavis after it digests the Forest acquisition, according to Stifel’s Annabel Samimy. While Valeant planned to do at least one “significant” deal in 2014, it now may need to hold off until Actavis becomes available again, the New York-based analyst said in a phone interview.

“If Valeant wants to be a $150 billion company, they definitely have to start thinking outside of their box,” she said. Yesterday’s deal “consolidates the space, but it doesn’t preclude any further consolidation going forward.”

Better Target

The Actavis-Forest deal doesn’t throw a wrench in Valeant’s plans because Teva, the $39 billion Israeli drugmaker, would be a better target than Actavis anyway, according to Raghuram Selvaraju, head of health-care equity research at Aegis Capital. Teva’s $20 billion in annual sales would easily get Valeant to its goal and it has a presence in areas where Valeant doesn’t, such as the U.S. generic drug market in which Teva is the leader, he said.

“It’s an open secret that Valeant looked at Actavis, but Actavis was never at the top of my list for Valeant,” Selvaraju said in a phone interview from New York. “There are plenty of other targets for Valeant to focus on.”

Given Forest’s growth rate and cash flow generation, Actavis may face competing offers from Valeant or other possible suitors, Amsellem of Piper Jaffray said.

Forest’s net income is projected to surge to almost $2 billion by fiscal 2020 from $218 million in the year that ends in March, analysts’ estimates compiled by Bloomberg show. Last month, the company acquired Aptalis Pharma for $2.9 billion, adding treatments for gastrointestinal ailments and cystic fibrosis to its Alzheimer’s drug Namenda and antidepressant Lexapro.

“I would not be surprised” to see rival bidders, Amsellem said. “Would this be of interest to Valeant? I think the answer is unquestionably yes.”

‘No Non-Targets’

Mylan, after missing out on Actavis last year, could pursue other targets or sell itself, he said. The Canonsburg, Pennsylvania-based company, with a market value of $18 billion, bought the injectable-medicine unit of India’s Strides Arcolab Ltd. last year in its only purchase for more than $1 billion since 2007, data compiled by Bloomberg show. Mylan had $365 million of cash and $6.3 billion of debt as of September, the data show.

“When you see others in your peer group doing transactions and being successful, you have to consider the possibility that you should do it yourself,” Funtleyder of BlueCloud said. “I think everything is a target now. There’s no non-targets at this point.”

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