Monday, May 13, 2013

Actavis Rises 12.2% After Confirming Merger Talks With Warner Chilcott (WCRX)

Actavis Pharmaceuticals (ACT) confirmed merger talks with Warner Chilcott (WCRX), a nearly $5.0B specialty pharmaceuticals company, on Friday May 10th, 2013. Warner Chilcott focuses their attention on Women’s Healthcare, urology and gastroenterology of branded pharmaceutical products. Their U.S. Sales accounted for 70.8% of their total sales for the first quarter of 2013. On a year over year basis, revenue was down 13.6%, attributed mostly to a decrease of $35.0MM in revenue for ACTONEL, a drug used to treat osteoporosis, and management decision to cease shipments of ASACOL 400mg, an anti-inflammatory drug, and transition to a similar drug in DELZICOL. Although revenues were down significantly, the low costs incurred for the first quarter of 2013 led to flat growth in GAAP net income and EPS, reporting $113.0MM and $0.45 respectively. Non-GAAP EPS, however, fell 20.7% to $0.92 when compared to $1.16 in the same period last year. Despite negative growth on both top and bottom line, Warner Chilcott did beat estimates. Reported revenue of $593.0MM and Non-GAAP EPS of $0.92 beat average street estimates of $588.1MM and $0.85, respectively. Warner Chilcott had total cash balance of $290.0MM and total debt of $3,682.0MM. 

This seems like a perfect opportunity for Actavis as they have been vocal about expanding into Women’s Healthcare, a specialty of Warner Chilcott. Additionally, Warner Chilcott’s tax structure can benefit Actavis in the long-term, in terms of tax rates. Analysts state that Warner Chilcott’s debt, comprised mostly of $2,425.0MM term loan borrowings under the senior secured credit facilities and $1,250.0MM of senior notes at 7.75% due in 2018, give Actavis flexibility in financing options for the deal while concurrently keeping their debt multiples stable. Many analysts within the sector, particularly within the generic pharmaceuticals industry, believe that company mergers and takeovers are inevitable, as organic driver and growth is becoming more and more rare. EPS accretion is estimated in a range of 20.0% - 50.0%, assuming the deal goes through. 

UASBIG suspects that deal talks between the two companies are due mainly to these two factors: 1) as Actavis looks to move into the Women’s Healthcare space, they would like to acquire a company with hallmark products and cost-effective strategies. Warner Chilcott’s tax-structure coupled with their specialization in Women’s healthcare products make them very attractive to Actavis; and 2) four recent FDA approvals between February and April. These approvals include two new oral contraceptives, with one expected to launch commercially by August of this year. Following this news, Goldman Sachs Analyst, Jami Rubin, raised their price target from $110.00 to $122.00, but maintains their neutral rating. Actavis ended the day at $119.86, an increase of 12.2% when compared to the previous day close of $106.81. Warner Chilcott price targets were raised to $20.00 from $16.00 and $21.00 from $18.00 by Jefferies and Susquehanna International Group, respectively. Warner Chilcott ended the day at $18.01, up 20.0% when compared to the previous day close at $15.01.

Update: 5/13/2013 12:18 PM - Actavis reiterated as a BUY at Buckingham Research Group. Price target raised to $140.00 from $125.00

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