Actavis PLC Buys Pricey Lumber with Forest Labs

Forest Labs will transform Actavis. Whether for good or bad comes down to execution.

Feb 18, 2014 at 9:30AM

Investors were greeted with an intriguing rumor early Tuesday morning, as the Wall Street Journal and other financial news sources were reporting that Actavis (NYSE:AGN) and Forest Labs (NYSE:FRX) were closing in on a deal. It didn't take long for this to play out, as Actavis announced the deal before the market opened.

This is a bold move for Actavis, as Forest Labs substantially expands its therapeutic end-markets, its addressable health care markets, and its balance sheet. There are definitely rich opportunities for operational and financial synergy here, but successful execution on this premium deal is an absolute must.

The deal 
Actavis confirmed that it had reached an agreement to acquire Forest Labs for approximately $25 billion or $89.48 per Forest Labs share. This cash+equity deal gives Forest Labs shareholders a 25% premium to Friday's pre-holiday close, and shareholders will be getting $26.04 per share in cash and 0.3306 shares of Actavis for each Forest Labs share. 

This is the latest, and certainly the greatest, of the many deals that built Actavis into what it is today – dwarfing the $9.2 billion acquisition of Warner-Chilcott and the $5.9 billion acquisition of Actavis (the company now known as Actavis used to be Watson Pharmaceuticals).

This deal will vault Actavis's revenue to more than $15 billion in 2015 (assuming no divestitures), while growing the branded drug business to about one-half of the total. Forest Labs will significantly augment Actavis's already-strong position in gastrointestinal medicine, adding Linzess, Canasa, and Carafate to the business. Forest Labs will also bring meaningful scale in CNS (Saphris, Fetzima, Viibryd, and Namenda XR) and some scale in respiratory, cardiovascular, and hospital medicine.

Why do the deal?
Drug companies like Actavis and Valeant (NYSE:VRX) have shown voracious deal appetite of late, stimulated in part by the synergy benefits of running a larger enterprise, but also cheap debt, advantageous taxation, and an increasing premium on scale when negotiating with payers and health care organizations.

Both Valeant and Actavis have taken extensive advantage of their particular tax structures. Legally domiciled outside of the U.S., these companies book their revenue in tax jurisdictions like Ireland where corporate tax rates are much lower, effectively giving them a 10% to 20% advantage on their tax rates compared to U.S.-based drug companies of similar size.

"Re-domiciling" was a significant part of the Forest Labs bull thesis, and I would estimate about $10 to $12 per share in value to Forest Labs just from having that option. That covers almost half of the premium that Actavis will be paying if this deal goes through as currently contemplated.

There are other potential advantages for Actavis in this deal. As companies like Actavis and Valeant have grown larger, so too has their bargaining power with health care systems in Europe and payers in the U.S. As both public and private health care systems are trying to hold the line on costs, that is no trivial detail. Larger companies generally have an easier time getting included in formularies, and that can be critical to sales.

There is also a relatively routine synergy play here, though perhaps not as much as the bulls will be expecting. Combined, the two companies will be able to pare away superfluous overhead and operating costs. On the marketing side, Forest Labs' sales force is nearly five times the size of that of Actavis, but I'm not sure how much Actavis can (or should) trim that. Forest Labs has significant primary care exposure, and that is a market that requires an above-average level of detailing and personnel to maintain share.

Probably safer to take the "over"
All things considered, it seems likely that there will be more deals across the pharmaceutical space. Valeant management has already made it clear that they see the company as a Big Pharma in the making, and companies like Endo Health are also looking to get better by getting bigger. With that, a host of companies including Salix, Mallinckrodt, and Ironwood could find themselves visited by a larger company.

The bottom line
There is a valid argument as to whether it is better to invest billions developing drugs through internal R&D programs or to acquire already-approved drugs through M&A. Forest definitely has a relatively young roster of drugs to market, and Actavis is an experienced hand at integrating deals. All of that said, this is not a cheap deal, so Actavis must execute to preserve (let alone build) shareholder value. 

For Forest Labs shareholders, I'd be in no rush to sell just yet. This company has been bandied around as a target for some time now and it wouldn't be a complete surprise to see another company (perhaps Teva or Valeant) make a competing bid.

Three stocks to build long-term value
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers