Is Actavis Inc (ACT) a Buy at This Price?

Actavis Inc (NYSE:ACT), the largest generic drug company in the US, just got even bigger. In a deal valued at $8.5 billion, Actavis Inc (NYSE:ACT) has agreed to buy the Irish women’s healthcare company, Warner Chilcott Plc (NASDAQ:WCRX) to create what would be the third largest specialty pharmaceutical company in the US market.

Investors naturally want to know what is in it for them – should they hoard up on the stock right now or wait to see how the deal goes through?

The deal

For each share of Warner Chilcott Plc (NASDAQ:WCRX), shareholders of the company are to receive 0.16 shares of the new entity. The agreement places the value of the company at $20.08, which is 4% above the price at which the Warner Chilcott Plc (NASDAQ:WCRX) stock closed on Friday, May 17. This values the company at $5 billion. The total acquisition value however is $8.5 billion considering that Warner Chilcott has a debt of more than $3 billion.

What is interesting is that Actavis Inc (NYSE:ACT) itself was an acquisition target. Only recently, the company rejected offers from Mylan Inc. (NASDAQ:MYL) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The deal with Warner Chilcott is seen as an attempt by Actavis Inc (NYSE:ACT) to kill any chances of a hostile takeover as there was news that even Novartis AG (ADR) (NYSE:NVS) was considering making an offer.

Growth through acquisitions

Warner Chilcott is Actavis Inc (NYSE:ACT)’s second major acquisition this year. Earlier, in January 2013, the company acquired the Belgian firm, Uteron Pharma SA for $150 million in cash, plus $155 million in potential future pipeline payments. The present acquisition of Warner Chilcott highlights Actavis Inc (NYSE:ACT)’s strategy of expanding its specialty pharmaceuticals. Whereas purchase of Uteron expanded its pipeline of women’s health (contraception, infertility), the present acquisition marks its entry into the branded pharmaceutical market in gastroenterology, urology and dermatology.

Asacol, for treatment of ulcerative colitis, is Warner Chilcott’s top selling drug. This February, it got approval for Delzicol, its other candidate for the same disease. The company’s revenues were under pressure ever since generic versions of Actonel, its medicine for prevention of osteoporosis, appeared in the market.

Actavis is emulating its competitor, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), the world’s largest manufacturer of generic drugs, has recently turned to specialty branded pharmaceuticals in an effort to increase its profit margins.