In a much anticipated move to expand globally, Watson Pharmaceuticals agreed on June 17 to pay $1.75 billion to acquire privately held Arrow Group, which markets generics in more than 20 countries. The deal is part of a strategy to explore more partnerships, although another major acquisition is not expected "anytime soon," according to Watson execs.

The move allows Watson to gain Arrow's more than 100 molecules marketed throughout the world as well as its international sales, legal and regulatory infrastructure. Additionally, Arrow owns product registrations in regions where Watson does not yet market, giving the company a boost in expanding commercial operations.

Arrow also offers Watson opportunities in biogenerics, given that Arrow has a stake in Eden Biodesign, which provides various services to companies pursuing biogenerics. And Watson execs noted that they remain open to still further opportunities, in part because they did not take on a lot of debt in acquiring Arrow.

In fact, U.S. product launches in the next three years will "rapidly improve" Watson's balance sheet, taking into account generic formulations of Pfizer's Lipitor (atorvastation) and Sepracor's Xopenex (levalbuterol), according to Mark Durand, Watson's senior vice president and chief financial officer. Watson also assumes a patent challenge for a generic formulation of AstraZeneca's Pulmicort (budesonide).

Analysts note that the purchase price - about 2.7 times 2008 revenue figures - is in line with recent prices paid by U.S. generics companies taking a first-time plunge into global acquisitions. These include deals between Mylan/Merck KGaA and Barr/PLIVA (¹ [A#00690410003] p. 6).

Under terms of the deal, Watson will hand over to Arrow a cash payment of $1.05 billion and the issuance of about 16.9 million shares of Watson common stock, valued at $500 million, at the closing expected in the second half of 2009. An additional $200 million will be paid in the form of zero coupon preferred stock, redeemable three years to the closing, Durand told investors on a conference call.

"This transaction is one that is financially attractive in a way that doesn't impede on our ability to continue to grow our brand business, as we've been growing it for the past two years," Watson chief executive Paul Bisaro said on the call. He anticipates the deal will be accretive to cash earnings per share in 2010 before synergies, excluding the effect of transaction-related expenses.

Arrow was founded in 2000 by its chief executive, Tony Tabatznik, who will join Watson's board, and operates as Cobalt Pharmaceuticals in the U.S. The company, which also has facilities in Brazil, Canada, Malta and Australia, generated $647 million in revenues in 2008 and notched a 67 percent compound annual growth rate since 2001, Watson execs noted.

Arrow generated roughly 30 to 35 percent of its 2008 revenues in the U.S., 25 percent in France, 11 percent in Canada and 7 percent in the U.K, with 25 percent split among other markets.

In 2008, Watson held a 5.9 percent share of the U.S. brand and generics market, behind Teva (leading with 16.4 percent), Mylan (8.2 percent) and Novartis (6.6 percent), according to IMS Health prescription trend figures. Under Bisaro's helm, it comes as little surprise that the company was looking to expand more broadly in the global market.

But the U.S. market, of course, holds significant appeal, given that Arrow has exclusive rights to market authorized generic atorvastatin here when Pfizer's cholesterol blockbuster faces generics in November 2011. Shareholders will be eligible for additional contingent payments based on atorvastatin sales, Watson execs said.

Looking to the launch of generic atorvastatin, execs told investors there will be an ongoing profit split between the larger company and Arrow shareholders, dependent on market conditions. Ultimately, though, the split will terminate, with more specifics on the arrangement to be released after the deal closes, he said on the call.

Additionally, Arrow has rights to launch generic Xopenex in 2012, expected to enter the market 180 days before other generics.

Arrow has 32 ANDAs pending at FDA, in addition to Watson's 60 ANDAs also pending at the agency.

Arrow gives Watson access to biogenerics

Investors asked whether additional manufacturing or R&D assets will be needed to develop products, including biogenerics, to which Bisaro said Arrow provides a "foundation," but will not account for "all of our needs to be able to deal with all of the products that we might want to develop."

"I think this [deal] allows us to develop certain products, but it doesn't mean we won't, on a selective basis, do partnerships with other companies to develop products we're not developing here, so it would be a combination of both things - internally developed and externally sourced products," Bisaro continued.

The deal turns over Arrow's 36 percent stake in the biopharma Eden Biodesign to Watson, and Watson execs believe they've now gained a long-term investment in generic biologics. But a change of hands is not expected to disrupt the relationship that Arrow has established with Eden, though Watson execs said they will likely give the biopharma "more work."

"We have no standing obligation to acquire more of that company, but I believe we have the opportunity to increase our overall ownership in that organization over time," Bisaro said.

-Carlene Olsen (c.olsen@elsevier.com)

Watson Acquires Arrow Group And Expands Its Global Footprint

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