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(Reuters) - Generic drugmaker Actavis Plc ACT.N said on Tuesday it would buy Forest Laboratories Inc FRX.N for about $25 billion in cash and stock, giving it a major focus on higher-margin, branded treatments for Alzheimer's, hypertension and other disorders.
The deal also means a major payday for activist investor Carl Icahn, the second-largest shareholder at Forest Labs, who waged two proxy battles and threatened a third to change its leadership and strategy.
Actavis said it would pay the equivalent of $89.48 per share, representing a premium of 25 percent to Forest's closing price on Friday. The offer comprises $26.04 in cash and 0.3306 Actavis share for every Forest share.
Actavis started on its path to the $25 billion deal less than two years ago. Formerly known as U.S.-based Watson Pharmaceuticals, it announced a plan to buy Swiss-based Actavis for about $5.6 billion. It changed its name to Actavis and last year bought Ireland's Warner Chilcott for $8.5 billion, allowing it to relocate to Dublin, where it benefits from a significantly lower tax rate.
The new deal grew out of a dinner meeting between Actavis Chief Executive Officer Paul Bisaro and Forest CEO Brent Saunders during the JPMorgan Healthcare Conference in San Francisco last month.
"We weren't really thinking about buying or merging or getting together. It was really 'let's get to know each other a bit,'" Bisaro said in a telephone interview. "As Brent and I came together and talked about this, we realized that combined we can actually grow faster."
The companies completed the deal over the past weekend, helped Saunders said, by snowstorms that nearly locked up their teams in a New Jersey hotel. The Forest buyout, expected to close by the middle of the year, ranks as one of the top five pharma deals of the past decade.
Actavis shares rose more than 7 percent on Tuesday as investors backed the latest step in the company's strategy of acquiring specialty drugmakers to boost profit margins and sales. Shares of Forest jumped nearly 30 percent.
"This is a huge win for all shareholders of Forest Labs and yet another validation of the activist investment philosophy in general," Icahn, who holds an 11.32 percent stake in Forest, said in a statement. Since the close of trade on Friday, the value of Icahn's holding has increased by more than $641 million.
Icahn had criticized Forest for being ill-prepared to generate growth in the face of looming generic competition for its biggest drugs and for warnings the company had received from U.S. health regulators about its marketing.
He helped bring about a management change at the company last year, when longtime Chief Executive Officer Howard Solomon retired and was replaced by Saunders, a former Bausch & Lomb CEO. In January, the company delivered quarterly financial results well ahead of analysts' expectations. Saunders said he expects Icahn to continue to be a shareholder in the new company.
The deal has a breakup fee of about 3.5 percent of the equity value of each company, Actavis said.
Actavis expects the deal to add to its profits in the double-digit percentages in 2015 and 2016, including about $1 billion in tax and operating savings. The tax savings are about 10 percent of that, or $100 million, Actavis said.
New York-based Forest, which had a tax rate of 19.5 percent in its most recent quarter, will pay the combined company's estimated 16 percent rate. Actavis' purchase of Warner Chilcott last year and move to Dublin helped lower its tax rate from around 28 percent to 17 percent.
The addition of Forest will boost specialty drugs to represent about 50 percent of combined company revenue, estimated at about $15 billion. North American specialty pharmaceuticals comprise about 30 percent of Actavis' stand-alone revenue now, the company said.
"Overall, this was a bit of a surprise, but we've been expecting more consolidation in specialty pharma," said Morningstar analyst Michael Waterhouse. He said Actavis, Teva Pharmaceutical Industries (TEVA.N) and other generic drugmakers are on the hunt for branded drugs, such as those for women's health, in which large drugmakers have lost interest because of poor sales potential.
Forest brings a diverse portfolio of treatments for disorders of the central nervous system, digestive tract issues and women's health. Its branded drugs include Bystolic for high blood pressure and Linzess for patients with irritable bowel syndrome.
It faces patent expirations on several of its biggest drugs, including next year's lapse of marketing exclusivity for Alzheimer's treatment Namenda. It is trying to protect that revenue by shifting patients to a longer-acting form of the drug called Namenda XR, which has its own patent protection, beginning in August. It also has an advanced pipeline of new experimental therapies for infectious disease, lung disorders and schizophrenia.
The status of Namenda may prove tricky for Actavis, which had sought to sell a generic version of the drug.
"It's a challenging situation," said Siggi Olafsson, president of Actavis Pharma. "There are a lot of new products out there, but we know the situation for both sides of the coin."
BMO Capital Markets analyst David Maris cautioned that Actavis may have trouble managing Forest's sprawling sales force.
"We don't want to be the grown-ups at the party but we wonder why Actavis would seek to complete such a large deal when near- and intermediate-term earnings are, in our view, already in a good position," Maris wrote in a note to clients. "We acknowledge the deal frenzy and earnings accretion deal environment, but are not convinced that such a deal makes strategic sense."
Wellington Management Co is the largest shareholder of Forest with a 13.8 percent stake.
Additional reporting by Natalie Grover, Paritosh Bansal, Olivia Oran and Ransdell Pierson; Editing by Michele Gershberg, Bernadette Baum and Jonathan Oatis