Watson Pays Up to Stay in the Game

If it's a Monday, you know it's time to talk about deals. And while newspapers and banks aren't exactly the most scintillating sectors out there, it won't surprise me much if deals in those sectors get a little more press than the deal announced this morning in the generics sector.

Watson Pharmaceuticals (NYSE: WPI  ) is buying Andrx (Nasdaq: ADRX  ) for $25 a share. The deal is all in cash and comes to a total of about $1.9 billion for the buyer. While it's kinda pointless to talk about "fair value" in the face of a deal -- after all, at some point it's true that the value of an asset is really whatever someone is willing to pay for it -- it looks like Andrx shareholders are getting a pretty respectable price.

I believe this will prove to be a pretty important deal for Watson. Assuming it goes through, Watson will cement its place as one of the world's largest generic drug companies. And that's significant -- scale matters in the business, and I think smaller generics will find it increasingly hard to compete with bigger firms like Teva (Nasdaq: TEVA  ) , Barr (NYSE: BRL  ) , and Novartis' (NYSE: NVS  ) generic franchise.

Of course, it's not fair to say that Andrx brings only added size. While Andrx has had more than its share of troubles (relating to violations of FDA Good Manufacturing Practices), it does have a good business in controlled-release drugs and a sizable distribution business that I'm sure Watson intends to leverage for itself.

If Andrx shareholders are getting a good price for their shares, it stands to reason that Watson might be overpaying. It certainly seems to me that the price has some optimistic assumptions baked into it, but not ridiculously so. That said, I wasn't a huge fan of Watson before, and while I see this deal possibly taking a little risk out of the story (with the added leverage of increased size and scale), I don't really think it makes Watson all that much more compelling.

For more pharm-fresh Foolishness, pop one of these:

• Still Waiting for Teva to Stumble
• Mylan: Generic Drugs, Premium Price
• Barr None

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).