Big Buyouts

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Forget Yahoo-Tumblr – This $8.5 billion Deal is the REAL Buyout Story

Yahoo! (YHOO) kicked off the week with a big buyout deal — the $1.1 billion acquisition of blogging platform Tumblr.

But that’s not the big deal investors should be paying attention to. There is another buyout from the last few days that is slightly less sexy but many times more important: The acquisition of pharmaceutical company Warner Chilcott (WCRX) by generic drug maker Actavis (ACT) for $8.5 billion in stock.

Why should you forgo a juicy story about Web 2.0 innovation for yet another story about consolidation in pharma? Because the deal-making in the specialty drug industry has reached a fever pitch, meaning more buyouts are likely and a new era of consolidated power is very close at hand.

Every corner of the pharmaceutical market has been shrinking since the financial crisis. There was a spate of mega mergers in 2009 that included Merck (MRK) teaming up with Schering-Plough and Pfizer (PFE) joining forces with Wyeth. Then there was a massive pharmacy benefit management merger between Express Scripts (ESRX) and Medco, and a series of midsized biotechs bought out in 2012 including GlaxoSmithKline (GSK) snapping up Human Genome Sciences and a deal between Bristol-Myers Squibb (BMY) and Amylin.

The constant drumbeat of acquisitions means big shakeups — cost cutting to gain efficiencies, big pops for smaller targets who get sucked up and a general race to make sure you’re not left behind in this new world of pharma.

Thus the Warner Chilcott buyout is a big deal — not just for WCRX and Actabis, but for the entire sector.

The plot is particularly interesting this time because Actavis itself had been the subject of takeover talk in recent months. Reuters reports that Valeant Pharmaceuticals (VLR), a $23 billion Canadian pharma stock, was “discussing an all-stock merger under which the Canadian drugmaker would buy its smaller rival for more than $13 billion, before the talks broke down in late April. Reuters also reports that in the wake of the breakdown, U.S. drugmaker Mylan (MYL) tried to make a big reach for Actavis with a $15 billion deal of its own.

The fact that ACT sucked up Warner Chilcott will certainly send Valeant and Mylan scurrying to figure out a plan B. And the move to buy WCRX assuredly means that nobody will be willing to bid for Actavis in the near term without knowing how this partnership will affect the company going forward.

Even more interesting is that Warner Chilcott faces a number of patent expirations and wasn’t really on the radar of other pharma companies as a result.

So why make a grab for a company with patents that aren’t all that compelling? Well, the prevailing wisdom is that Actavis needs to diversify beyond just generics, and even branded drugs with a short shelf life beats not having much patent protection at all. There’s also the benefit of having treatments beyond Actavis’ core women’s health and gastroenterology business.

Oh yeah, and you politicos may be interested in noting that Warner Chilcott is headquartered in Ireland, which has a very enviable corporate tax rate that could juice earnings simply by moving where the company is domiciled.

Still, there are serious questions about why this deal — and why this deal now, with Valeant and Mylan in the mix already. A merger with Mylan would have created a company with 20% generic market share in the U.S. and efficiencies that a JPMorgan analyst predicted could save the combined company $500 million annually.

So why would Actavis go it alone? Is it really just to maintain autonomy, through some hubris of management that doesn’t want to give up the helm despite overwhelming consolidation as the general rule in pharma? Or will it succeed and prompt other smaller companies to seize their own future rather than simply be digested by a bigger player?

Only time will tell. But in the meantime, pay close attention to the details of this merger — and expect the remaining players in the space to scramble to make deals of their own.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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