In the end, R&D sealed the deal. Allergan Inc. rejected the hostile overtures of one giant specialty pharma for a deal with another, fleeing from Valeant Pharmaceuticals International Inc. into the waiting arms of Actavis plc.
Actavis will acquire Irvine, Calif.-based Allergan for a combination of $129.22 in cash and 0.3683 Actavis shares for each of Allergan's common shares. Based on the Dublin-based pharma's closing price of $243.77 per share (NYSE:ACT) on Friday, the transaction is valued at approximately $66 billion, or $219 per Allergan share.
After the deal was disclosed Monday morning, shares of Actavis hit a 52-week high of $255.51. The stock trailed off during the day, closing at $247.94 for a gain of $4.17, with nearly 16 million shares traded. Unsurprisingly, Allergan's shares (NYSE:AGN), which closed Friday at $198.65, also hit a one-year high of $213.91, closing at $209.20 for a gain of $10.55. Nearly 19 million shares were exchanged, or eight times the average daily volume.
The companies said the combination will create one of the top 10 global pharmaceutical companies by sales revenue, with a strong balance sheet, growing product portfolios and commercial reach across 100 international markets producing annual pro forma revenues of more than $23 billion beginning next year. A chart that Brent Saunders, Actavis president and CEO, shared on a conference call with analysts Monday morning pegged the value of the combined company at $147 billion, ranking it in those terms ahead of traditional biopharmas such as Glaxosmithkline plc, Sanofi SA, Abbvie Inc., Astrazeneca plc, Bristol-Myers Squibb Co. and Eli Lilly and Co.
Though the transaction still needs shareholder approval and the customary antitrust clearance, it was unanimously approved by the boards and supported by the management teams of both companies.
On the call, Saunders pledged the enlarged Actavis will become "the fastest growing and most dynamic growth pharmaceutical company in global health care," with the prospect of posting double-digit accretion to non-GAAP earnings within 12 months.
"With this combination, we plan to transform the growth profile of our pharmaceutical business and have the ability to generate organic revenue growth at a compound annual growth rate of at least 10 percent for the foreseeable future," he added. Saunders predicted the addition of Allergan's product portfolio and revenue stream will generate free cash flow of more than $8 billion in 2016 and substantial growth thereafter, enabling the rapid repayment of debt. The transaction is expected to close in the second quarter of 2015.
"We will combine two exceptional companies, each delivering strong revenue and earnings growth," he added, praising David Pyott, Allergan's chairman and CEO, and the company's management team. "I promise we will create even more value for physicians and patients who encounter our products and, in the process, create strong shareholder value," Saunders vowed.
Saunders will lead the combined company, with Paul Bisaro remaining as executive chairman of the board. Although the companies were mum on the role, if any, of Pyott in the expanded Actavis, he committed to helping lead the integration of the companies in a process that will begin immediately, characterizing the new Actavis as "a powerhouse." Two members of Allergan's board of directors, as-yet unnamed, also will join the Actavis board once the transaction closes.
NOT BACKING AWAY FROM GENERICS
Allergan's portfolio, which includes the blockbuster Botox (onabotulinumtoxinA) franchise, will double the revenues of Actavis' North American specialty brands business, giving the combined company three franchises – ophthalmology, neurosciences and medical aesthetics/dermatology – each with annual revenues in excess of $3 billion on a pro forma basis beginning in the 2015 calendar year. Actavis said specialty product franchises in gastroenterology, cardiovascular, women's health, urology and infectious diseases will have combined revenues of approximately $4 billion.
Actavis' management projected the transaction will generate at least $1.8 billion in annual synergies beginning in 2016, in addition to $475 million of annual savings previously announced by Allergan in connection with its belt-tightening Project Endurance – undertaken, in part, to conserve cash and hunker down in its defense against Valeant. Actavis said it plans to maintain annual R&D investment of approximately $1.7 billion – a key sticking point in the Valeant proposal.
The initial bid, in April, of approximately $45 billion by the Laval, Quebec-based specialty pharma was upped a month later, with Valeant offering to fund up to $400 million in additional research for Allergan's designed ankyrin repeat protein, or Darpin, products in ophthalmology. (See BioWorld Today, April 23, 2014, and May 29, 2014.)
Despite that overture, Allergan's management team publicly disparaged the mismatch with Valeant's business model, consistently concluding that bids were grossly inadequate, substantially undervalued the company and created risks and uncertainties for shareholders. Allergan even posted a letter on its website inviting physicians to chime in with their misgivings about the consequences of a Valeant acquisition on Allergan's R&D efforts. Even Valeant's investors seemed to lose enthusiasm for the takeover as the tug-of-war waged on, although its shares (NYSE:VRX) continued to trade in the same neighborhood as in April, when the plan was disclosed, closing Friday at $134.21 and gaining $2.52 Monday to close at $136.73.
Following disclosure of the deal between Actavis and Allergan, Valeant chairman and CEO J. Michael Pearson issued a statement acknowledging Valeant "cannot justify to its own shareholders paying a price of $219 or more per share for Allergan." He added that Valeant "will remain focused on delivering strong organic results and evaluating acquisition opportunities as we always have: prudently, in a disciplined manner and in the best interests of our shareholders."
The acquisition represented an unqualified win for Allergan's shareholders. Although the Botox franchise has been growing and Restasis (0.05 percent cyclosporine solution) is so far the only approved treatment for dry eye syndrome, the company most recently endured the disappointment of a third complete response letter from the FDA for Semprana (dihydroergotamine), the orally inhaled acute migraine treatment formerly known as Levadex, and the heart of its $958 million acquisition of Map Pharmaceuticals Inc. (See BioWorld Today, Jan. 24, 2013, April 17, 2013, and July 1, 2014.)
Based on feedback from ratings agencies, Actavis elected to finance the acquisition with a combination of new equity and debt rather than using cash resources from either company, which Saunders said helped to maintain an investment grade rating for the combined company and provide long-term financing flexibility. The cash portion will be financed with a combination of new senior unsecured notes, term loans and equity securities. The company also has committed bridge facilities from J.P. Morgan Chase Bank NA, Mizuho Bank and Wells Fargo plus commitments to replace its existing facilities to the extent they are not amended to permit the acquisition and related financing.
Pyott called Actavis a partner "ideally suited to realize the full potential inherent in our franchise," singling out the Bausch + Lomb Inc. background of Saunders – who assumed his role at Actavis in July following its takeover of Forest Laboratories Inc. and Furiex Pharmaceuticals Inc. – and the company's commitment to continued R&D investment. (See BioWorld Today, April 29, 2014, and July 3, 2014.)
Both Saunders and Pyott also praised the numerous synergies in the transaction, which they said would expand the company's footprint in direct-to-consumer marketing and extend its global outreach to primary care and a variety of specialty physicians.
Although Saunders emphasized the importance of advancing the product portfolio of the combined company – which adds approximately 15 mid- and late-stage candidates from Allergan – he was quick to assure investors that Actavis remains committed to the generics and biosimilars markets and plans to "invest for innovation."
Although the company will likely withdraw from markets where its products are not best in class, "that will not be generics," he insisted. "We're not backing away from the generics business but embracing it."
In terms of integration, Saunders said Actavis will maintain its global headquarters in Dublin and U.S. administrative headquarters in Parsippany, N.J. and will make Orange County, Calif., the center of its specialty business.