* Deal to increase 2014 earnings per share by 30 percent
* Deal to boost branded drug business
* Incorporation in Ireland to cut taxes
* Shares of both Actavis and Warner Chilcott rise
By Caroline Humer and Ransdell Pierson
May 20 Generic drugmaker Actavis Inc, itself a recent takeover target, said on Monday it would buy specialty pharmaceutical company Warner Chilcott Plc for $5 billion in stock to expand its branded drug portfolio, lower taxes and increase profits.
The Warner Chilcott acquisition brings two new businesses - gastroenterology and dermatology - and adds additional women's health drugs like branded contraceptives to Actavis, which makes and sells drugs that are no longer under patent protection.
This is the second major purchase in the past two years for Actavis, which competes against larger companies like Teva Pharmaceuticals Industries Ltd and Mylan Inc.
Actavis is following Teva's path to growth. In recent years, Teva, the largest generic drugmaker in the world, has turned to acquiring specialty branded drugs, which have far higher profit margins than generics, to boost earnings.
Actavis recently rejected a $15 billion, $120 per share takeover offer from Mylan and an approach from Canadian company Valeant Pharmaceuticals International Inc was put on hold, Reuters has reported based on sources familiar with the situation. Analysts have said that buying Warner Chilcott would kill the chances of a takeover of Actavis.
Actavis Chief Executive Officer Paul Bisaro said he would not comment on speculation when asked if Actavis had seriously considered selling itself. In a conference call with analysts, he said the Warner Chilcott purchase was both an expansion and smart tax move.
Mylan would have gotten more out of a deal than Actavis, Morningstar analyst Michael Waterhouse said. Actavis could have given Mylan reach in Eastern Europe and a nice pipeline of products, he said. Waterhouse had some concerns about Warner Chilcott's pipeline, which faces looming patent expirations.
Actavis shares rose on news of the deal, and were up 1.9 percent in Monday afternoon trading to $127.86, after hitting a new all-time high of $131.18 earlier in the session.
Gabelli & Co analyst Kevin Kedra said Actavis seemed to have pursued what they thought was the best deal for shareholders. "I never got the sense their CEO was a maintain control-at-all-odds kind of guy," Kedra said.
Actavis said the deal would add 30 percent to earnings per share in 2014, in part because it would pay lower taxes when it incorporates in Ireland, where Warner Chilcott is based.
"The longer-term benefit of a lower tax rate is that it allows you to acquire other companies at even better prices," said BMO Capital Markets analyst David Maris. He said he expected the company to continue with more deals - maybe even bigger ones - after digesting Warner Chilcott.
Maris said Actavis will also likely move to acquire branded products for neurological conditions and allergies from drugmakers in Europe, that have far higher profit margins than generic drugs.
This is the second major acquisition in a year for Actavis. Bisaro, who has been CEO of the company since 2007, helped build Watson Pharmaceuticals into Actavis after it bought the Swiss company late last year and then took its name. Actavis revenues, which were $4.6 billion in 2011, rose to $5.9 billion in 2012 and are expect to hit $11 billion after it buys Warner Chilcott.
$8.5 BILLION WITH DEBT
Warner Chilcott shareholders will receive 0.16 share of the combined company. The companies said that would equate to $20.08 per share, based on Actavis' closing share price of $125.50 on Friday.
The purchase price is a 34 percent premium to Warner Chilcott's closing share price of $15.01 on May 9, the day before the companies disclosed that they were in talks. Warner Chilcott shares since rose to close at $19.19 on Friday, narrowing the premium to less than 5 percent. The shares were up 2.2 percent to $19.64 in Monday afternoon trading.
Warner Chilcott turned down offers at higher prices last year, company executives said during the conference call with analysts. But it has since issued special dividends, they said.
Warner Chilcott will have about a 23 percent stake in Actavis after the deal.
The companies said the deal, including debt, was valued at $8.5 billion.
Actavis advisors were Bank of America Merrill Lynch and Greenhill. Warner Chilcott was advised by Deutsche Bank .