M&A Deals of the Year Nominee: Watson/Actavis

It's time for the IN VIVO Blog's Fifth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

At first glance, Watson Pharmaceuticals Inc.’s $5.6 billion acquisition of Switzerland-based Actavis Group seems run of the mill – a big generics player buys another big generics company, continuing a consolidation trend in the sector.

But the deal, announced April 25, 2012, is far more than that. It is the culmination of more than a decade of work that has seen once provincial US generics industry become globally integrated – and Watson’s story in particular shows how hard yet crucial that evolution has been.

The deal comes in the nick of time, coming off a lucrative year for generics companies overall, and Watson in particular. The sector benefited from a record-breaking number of high-value patent expirations, and Watson gained even more from its multi-billion-dollar semi-exclusivity opportunity for generic atorvastatin. 2013 and beyond isn’t going to be as easy, as generics companies begin to face a new era, commonly referred to as a ‘reverse’ patent cliff.

The problem isn’t of course unexpected – one can detect a dearth of patent expirations for innovative brands years in advance, and the generics industry is historically cyclical. But shifting the business model away from one that is heavily reliant on commodity generics to one that embraces more differentiated, higher margin products has been extremely tough, even for the best capitalized generics companies.

Watson itself recognized the problem years ago and tried to diversify both through in licensing innovative drugs and geographic expansion, but early efforts met limited success. It was not alone - chief competitors such as Mylan Inc., Teva Pharmaceutical Industries Ltd. and Ranbaxy Pharmaceuticals Inc. – also stumbled in serious ways.

The odds of success rose moderately with the arrival in August 2008 of CEO Paul Bisaro, a former president of Barr Laboratories Inc., which Teva bought in that same year. In fact, Watson was able to do the Actavis deal because Bisaro brought in seasoned management, in this case Sigurdur Oli Olafsson, the former CEO of Actavis. Olafsson, from within Watson, helped guide the purchase of Actavis and subsequent post-M&A planning. He will now serve as the amalgamated group’s president for global generics where his intimate knowledge of both Watson and Actavis will prove invaluable.

And the rough-and-tumble story has implications for the much larger branded business, as it looks to buttress its core business through diversification, albeit coming at the opportunities from the opposite end of the spectrum.

Underscoring the need to go global and reinvent itself, Watson will change its name to Actavis from 2013.

Bisaro believes the name change is necessary because too many other companies named Watson exist worldwide. “We couldn’t protect the name in markets around the world,” he said. “We will adopt the Actavis name, which is well-known and respected both inside and outside the United States.”

--Wendy Diller and Sten Stovall
art via clker