Actavis CEO Saunders Has $70 Billion in Deals to Choose From

Brent Saunders has been chief executive officer of Actavis Plc for just three months, and already he’s put the company at the very center of a shakeout in the drugs business.

Actavis has been linked to almost $70 billion worth of potential purchases: it could get in a bidding war and try to acquire Allergan Inc., which is looking to thwart a hostile takeover; gastrointestinal drugmaker Salix Pharmaceuticals Ltd.; or consumer-health company Omega Pharma NV, people with knowledge of the matter have said. It’s also caught the eye of Pfizer Inc., which months ago had the company on a list of several potential targets that could help it cut its tax bill.

The 44-year-old Saunders is no stranger to dealmaking -- he sold Bausch & Lomb Holdings Inc. last year for $8.7 billion -- and Actavis’s hunting expedition underscores a desire to create a more formidable competitor, which a purchase of Allergan would achieve in one move. Saunders has told Allergan CEO David Pyott that he is open to discussing a deal that merges the two companies, said a person with knowledge of the matter, who asked not to be identified discussing private information.

“A deal with Allergan would be the biggest deal they would have done so far. It’s certainly not outside the realm of possibility,” said Kevin Kedra, an analyst with Gabelli & Co. in Rye, New York. “They’ve had success with small deals, they’ve had success with larger deals. I’d expect them to do both.”

Friendly Terms

Saunders and Pyott know each other and communicate regularly, the person familiar with the situation said. It is unclear if Actavis could bid as high as Valeant Pharmaceuticals International Inc. since the company has no common business units from which to reap cost savings and boost earnings in a combined company, several people said.

Both CEOs are on the advisory board of the Foundation of the American Academy of Ophthalmology.

Actavis itself is the product of multiple deals. Paul Bisaro, who preceded Saunders as CEO of Actavis, steered the company since 2007, when it was known as Watson Pharmaceuticals Inc. He became chairman in July when Saunders was named CEO. Actavis has been the most active buyer of drug companies since January 2011, making more than $36 billion of purchases, according to data compiled by Bloomberg.

Allergan has a market value of about $54 billion, Salix $8.6 billion and Omega is said to be valued at about $5 billion. While Actavis may not be able to buy everything on its wish list, it could acquire Allergan and do some smaller deals, Kedra said.

David Belian, a spokesman for Actavis, declined to comment, as did Bonnie Jacobs, a spokeswoman for Allergan.

Hostile Bidder

If it makes a run at Allergan, Actavis would face a contest from Valeant. The Laval, Quebec-based company has offered about $55 billion for Allergan with the help of activist investor Bill Ackman, and may raise that bid again.

Allergan has fought Valeant and Ackman every step of the way, with Pyott telling shareholders that he doesn’t believe in Valeant’s business model and thinks the company’s offer, which is about half stock, is too risky to accept.

“We should own Allergan, we have the most synergies and Allergan shareholders will benefit the most with the combination with Valeant,” Valeant CEO J. Michael Pearson said on a conference call this week. The company said Oct. 20 it may raise its offer, declining to give a precise amount by which the company could increase its bid.

Serving as a white knight for Allergan, Saunders could try and strike a deal in November -- ahead of an Allergan shareholder vote on Valeant’s offer, one of the people said.

Buying Allergan would give Actavis the Botox franchise as well as ophthalmology drugs to add to its portfolio. The combined company would have close to $120 billion in market capitalization and about $17 billion in annual revenue.

Lower Taxes

It would also offer Allergan’s shareholders one of the key benefits that Valeant is offering -- a lower tax rate. Even though its operational headquarters are in Parsippany, New Jersey, Actavis obtained an Irish tax domicile by acquiring Warner Chilcott Plc last year.

Actavis is the “logical white knight for Allergan,” Larry Robbins, head of $9.8 billion hedge fund Glenview Capital Management LLC, said yesterday at a conference in Toronto. “Every opportunity on the tax side that Valeant brings is an opportunity on the tax side that Actavis brings.”

Cost Cuts

What Actavis may not be able to do is slash costs at Allergan the way Valeant is promising to do. Valeant, which has built its entire business by acquiring companies and cutting research and development spending and other costs, said it would find about $2.7 billion in savings. Valeant also boasts a tax rate of about 5 percent while Actavis, in its prospectus for the acquisition of Warner Chilcott, said it would lower its tax rate to 17 percent.

Both Valeant and Allergan sell implants and ophthalmology drugs and could lower costs in production, distribution and other areas if the businesses are combined. With operations savings and a lower tax rate, Valeant should be able to pay a higher price than Actavis, said Umer Raffat, equity analyst with ISI Group in New York.

“Valeant can always pay more,” Raffat said. “Valeant hasn’t pushed the limit on how much they can raise.”

Still, Saunders and Pyott have similar views on R&D spending, one person familiar with the companies said. Unlike Valeant CEO Pearson, who focuses on growth by acquisition instead of the development of new drugs, Actavis and Allergan are looking for blockbuster products.

Last year, Actavis spent $617 million on R&D, or about 7.1 percent of sales, compared with $403 million the year before. Valeant spent $157 million, or 2.7 percent of revenue. R&D accounted for 16.5 percent of Allergan’s sales, according to data compiled by Bloomberg.

Acquisition Machine

When Valeant bought Bausch & Lomb last year, Saunders stayed on in an advisory role and eventually left because the acquirer planned to manage the business on its own. He didn’t stay out of work for long. Activist investor Carl Icahn, who owned 11 percent of Forest Laboratories Inc., played a role in putting Saunders into the CEO’s job. Within a year, he had sold the company to Actavis and become CEO of the combined company.

The strategy was to use Actavis’s generic drugs business combined with Forest’s specialty drugs to be a one-stop shop for hospitals and other large purchasers of pharmaceuticals. Once the two combined forces, Saunders found himself at the helm of a more diversified pharmaceuticals company that could -- like Valeant -- become a low-tax-paying acquisition machine.

“He might break the record of being the CEO of the most companies on one year,” said Tim Chiang, an analyst with CRT Capital Group LLC. “He definitely knows the drug business, and what he wants, and where he wants to grow.”

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