Watson A Step Closer to Actavis

Watson Pharmaceuticals, Inc. (WPI) recently received a favorable vote from the Federal Trade Commission (FTC) for its proposed acquisition of the Actavis group of companies. However, Watson Pharma will be required to sell certain products.

These products will be sold to Par Pharmaceuticals, Inc. and Novartis’ (NVS - Snapshot Report) generic division, Sandoz. Currently marketed products that will be sold to Par Pharma include Actavis' generic versions of Johnson & Johnson’s (JNJ - Analyst Report) fentanyl transdermal film (chronic pain), Ani Pharmaceuticals, Inc.’s Reglan (nausea), Kadian (acute pain), and Bayer’s (BAYRY - Analyst Report) Adalat CC (hypertension and angina) among others.

Moreover, Par Pharma will acquire Watson’s pending applications for its generic versions of several products including Shire’s (SHPG - Snapshot Report) Adderall XR (attention deficit hyperactivity disorder) and Endo Health’s (ENDP - Analyst Report) Opana ER (chronic pain), among others.

Sandoz will acquire Actavis’ generic versions of drugs including Ativan (anxiety disorders) and GlaxoSmithKline’s (GSK - Analyst Report) Zyban 150 mg (to help quit smoking).

All total, Watson Pharma and Actavis will be selling the rights and assets to 18 drugs and the manufacturing rights to three more.

EC Approval Already Gained

The FTC vote comes a few days after Watson Pharma received the green signal from the European Commission (EC) for its proposed acquisition of Actavis. The EC said that although the acquisition will lead to major changes in the competitive scenario, the combined entity will, nevertheless, continue facing strong competition.

The EC focused on the impact of the acquisition on the markets for drugs like anti-depressants and anti-hypertensives, especially in Denmark, Sweden and the UK.

Acquisition a Smart Strategic Move

Watson Pharma had first announced its intention to acquire Actavis in April 2012 for an upfront payment of €4.25 billion. Actavis stakeholders could also receive an additional consideration depending on the achievement of certain 2012 performance targets. The achievement of these targets would result in the delivery of up to 5.5 million shares of Watson Pharma in 2013. Actavis has a presence in more than 40 countries. The acquisition is slated to close later this month/early next month.

We view the upcoming acquisition of Actavis as a smart strategic move by Watson Pharma. This deal, which is expected to be immediately accretive, should help the company strengthen its presence in the ex-US generics market and expand and strengthen its presence and product portfolio. The acquisition will more than double the company’s commercial position in key European markets as well as emerging markets, including Central and Eastern Europe and Russia.

We note that this acquisition will make Watson Pharma the third largest global generics company. Other players in the generics market include Dr. Reddy’s Laboratories (RDY - Snapshot Report), Mylan (MYL - Analyst Report) and Teva (TEVA - Analyst Report). We currently have a Neutral recommendation on Watson Pharma, which carries a Zacks #2 Rank (short-term ‘Buy’ rating).