The acquisition of Allergan Inc. (NYSE:AGN) by Actavis Plc. (NYSE:ACT) will lead to the creation of one of the biggest pharmaceutical companies in the world. The $66bn deal is expected to be closed by the second quarter of 2015. The acquisition by Actavis brings an end to the months-long pursuit of Allergan by the Canadian Valeant, after offering a much higher price to the management.

Transaction Drivers

By carrying out the $66bn deal to acquire Allergan, Actavis aims to diversify and increase its pharmaceutical portfolio, by expanding its commercial activity across 100 international markets.
With its focus on medical aesthetics, medical dermatology, breast aesthetics, and urology, Allergan will contribute to integrate Actavis business, mainly based on women health, urology and dermatology.
As Brent Saunders, CEO and President of Actavis, said, “This acquisition creates the fastest growing and most dynamic growth pharmaceutical company in global healthcare, making us one of the world’s top 10 pharmaceutical companies.” The combination is supposed to produce a strong free cash flow of over $8 billion in 2016 and a steady growth afterwards. The combined company will have a strong balance sheet and it will be able to generate organic revenues while achieving synergies ($1.8bn savings expected by 2016) and cutting R&D costs down by $400m.
However, $1.8bn is considerably less than the $2.7bn cuts planned by Valeant that would have drastically reshaped the R&D activities. The Valeant’s history of cutting R&D became one of the key points Actavis used to persuade the shareholders. Furthermore, an eventual combination between Valeant and Allergan would have led to a monopoly in ophthalmology, dermatology, and aesthetics, given the highly complementary portfolios of the two companies.

Terms and Structure

The value of the transaction is estimated to be about $66bn, and this figure corresponds to a price of $219 per share. Specifically, Actavis will pay $129.22 in cash and the remaining sum due (just below $90) through 37% of its own shares. The day before the announcement (which was made on November 17th 2014), Allergan Inc. was trading at $198.65. Therefore, the premium paid by Actavis will be of 20.35$, corresponding to 10% of the stock price.The deal should help achieve cost synergies of at least $1.8bn, while maintaining a strong commitment to R&D for about $1.7bn. According to the forecasted data the two companies disclosed, FCF generation will rise up to $8bn by 2016. Even if the deal will require Actavis to increase its leverage in the short term, the Debt to Adjusted EBITDA multiple is expected to plummet to 3.5x within 12 months from the current 9.5x, following a clear desire by the company to deleverage its position as swiftly as possible.
The Allergan-Actavis deal was spurred by some rather peculiar economic events. Canadian Pharmaceutical Company Valeant (NYSE:VRX) along with Pershing Square CM hedge fund have been trying to complete a hostile takeover of Allergan over the last year. Increasing concerns among physicians about heavy cuts for the R&D budget in case this attempted takeover succeeded led to an open letter on the Allergan website that has registered a huge number of signatories. According to their view, reducing the funding of such a core activity would mean preventing excellent research from being carried out. If the trust between those professionals, who decide which drug a patient should take, and the company is weakened, Allergan could face enormous profit losses. From these fears, the company started looking for potential acquirers in order to escape Valeant, and Actavis was deemed the most feasible choice.
Shareholders of both companies (common for the target, but quite infrequent for the acquirer) seem to have expressed great satisfaction for this agreement and for the much stronger, competitive and profitable company that will stem from the incorporation of Allergan into Actavis.
If stock price movements correctly assess investors’ moods, great optimism is surrounding the deal. Allergan stock is currently trading at just below $212 (up 6.5% in comparison to the announcement date) while Actavis is currently listed at $266.88 (up 9.5%).
Actavis is being advised by JP Morgan, while Goldman Sachs and BofA Merrill Lynch are advising Allergan on the transaction.

Industry Overview

Actavis, headquartered in Dublin, Ireland, is a unique specialty-pharmaceutical company focused on developing, manufacturing, and commercializing high quality affordable generic and innovative branded pharmaceutical products for patients around the world. The company is an industry leader in product research and development, with one of the broadest brand development pipelines in the pharmaceutical industry, and a leading position in the submission of generic product applications. It has a portfolio comprising medicines for patients suffering from diseases in the central nervous system, gastroenterology, women’s health, urology, cardiovascular, respiratory and anti-infective therapeutic categories.
Allergan is a global, technology-driven multi-specialty healthcare company headquartered in Irvine, California, United States. Allergan’s flagship franchises include eye care, neurosciences, medical dermatology, and urology. The company is an industry leader in meeting the needs of patients in the areas of facial and breast aesthetics. Also, with its specialty product lines focused on high-growth markets, Allergan represents a new multi-specialty health care model for the future, where diversification and focus live together to offer physicians and patients best-in-class treatments and a robust pipeline for continuous innovation.
This year is on track to be the best year the M&A industry has seen in a while after the financial crisis and the healthcare industry certainly represents a standout. Large drug makers are buying and selling businesses to control costs and deploy surplus cash, whilst a rising stock market, tax strategies and low interest rates are also fueling the M&A activity. Combining all these factors, it doesn’t come as a surprise that 2014 is being the most active year for health care deals in at least two decades. In fact, according to data provider Dealogic, the industry has announced about $438 billion worth of mergers and acquisitions worldwide so far, which is about 14 percent of the $3.2 trillion total for all industries.
This comes also as a benefit for patients, as they could see a slight increase in new medicines and medical devices over time. That’s because bigger companies typically have more money to spend on developing treatments, and have more experience navigating the difficult process of getting products approved by regulators. However, patients could also have fewer doctor and hospital options as companies combine to lower costs. This being said, the frenzy of healthcare M&A has brought benefits to stock investors as well. The health care sector has surged 23 percent this year, making it the best-performing industry group in the SP500 and putting it on track to outperform the broader market for the fourth straight year.

Federico Cattani                           federico.cattani@studbocconi.it

Peter Valach                                  peter.valach.mail@gmail.com

Riccardo Zanasi                            riccardozanasi@libero.it

Luca Papa                                      luca.papa@studbocconi.it