What happened

After confirming that it will be merging with a privately held drug manufacturer, shares of Impax Laboratories (NASDAQ:IPXL), a maker of generic and branded drugs, fell 10% as of 12:00 p.m. EDT on Tuesday.

So what

Amneal Pharmaceuticals and Impax Laboratories confirmed today that they are joining forces. Once the all-stock transaction is complete, Amneal's shareholders will own approximately 75% of the newly formed company, and Impax shareholders will own approximately 25%.

As expected, the management teams of both companies provided shareholders with a list of reasons why this deal makes sense, including:

  • The combined company will be the fifth largest producer of generic drugs in the U.S.
  • The deal provides the new company with a diversified product portfolio.
  • Double-digit organic revenue and adjusted EPS is expected after the deal closes.
  • The new company will realize $200 million in annual cost savings within three years, and the deal will be accretive to adjusted EPS within the first year.
  • The transaction will provide the newly created entity with enough cash flow to allow for debt reduction and investments in future growth.
  • Impax's CEO Paul Bisaro will take the top chair at the newly formed company.
  • The deal is expected to close in early 2018 and has already been unanimously approved by both companies' boards of directors.

As part of the transaction, Amneal's members have signed an agreement with a few institutional investors to sell 46.8 million unregistered common shares at $18.25 per share in a private placement. Total proceeds of the deal will be $855 million, or about 15% of the total shares outstanding.

Business people shaking hands and smiling

Image source: Getty Images.

Given all of the above, why are shares falling in response to this news? Two reasons:

First, Impax's stock closed yesterday at $19.95. That's higher than the $18.25 price at which Amneal's members are selling their stock in the private placement.

Second, Impax's current shareholders will only own 25% of the newly formed company. That will not represent enough voting power to be able to control what the newly formed company does.

Now what

Since this deal has already received the thumbs up by both companies' boards of directors, it looks likely to go through. That means Impax's shareholders will have to decide for themselves whether or not they want to be passive owners of the newly formed company.   

While I wouldn't bet against the new company's success, it's important to remember that the generic drug industry is facing some headwinds right now that may or may not abate in the future. For that reason, my plan is to steer clear of Impax's stock for the time being. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.