Watson/Actavis Merger Requires Near Record Divestiture; Sandoz, Par Pick Up 18 Products

The required divestitures are quite significant relative to the size of the transaction: this is the second-largest divesture, but only the fifth-largest merger of generic firms.

Allergan PLC agreed to sell 18 products and relinquish rights to three others to get Federal Trade Commission clearance to acquire Actavis, making it the second largest divestiture in the history of generic mergers.

The breadth of the agreement does not reflect a tougher posture by FTC, however. Seth Silber, a former advisor to FTC Chairman Jon Leibowitz, said divestiture is driven by the size of the companies and the number of overlaps they have.

“FTC’s analysis of when divestitures are required is by the numbers,” said Silber, a partner at Wilson Sonsini Goodrich & Rosati. A decline in the number of competitors to less than four or five “usually requires divestiture.”

“I wouldn’t perceive [the Watson consent agreement] as FTC being more aggressive but as FTC applying the approach they’ve used for several years to large transactions,” he added.

Watson’s $5.9 billion acquisition of Actavis will make it the third largest generics company in the world (Also see "Watson Expands Its Geographic Reach With Actavis Acquisition" - Pink Sheet, 26 Apr, 2012.). It is the fifth biggest merger in the generic industry (see chart of deals and divestitures). The largest was Teva Pharmaceutical Industries Ltd.’s $8.9 billion acquisition of Barr Pharmaceuticals Inc., and that transaction also holds the record for the largest required divesture.

In that deal FTC required Teva and Barr to divest certain formulations of 16 on-market generics representing approximately $60 million in annual sales, and 13 overlapping pipeline generics. These products were sold to Watson, with the exception of Teva’s oral contraceptives, which went to Qualitest Pharmaceuticals.

Watson will now be selling 14 drugs to Par Pharmaceutical Inc. (five approved, eight pending approval and one in development) and four to Novartis AG’s Sandoz International GMBH unit. According to analysts at Canaccord Genuity, the product divestitures account for approximately $50 million in profit. Although the required divestures are quite significant relative to the size of the merger, the analysts said in a note that the 21 products in the agreement “fall in line with expectations with no real surprises.”

The products include Watson’s generic versions of GlaxoSmithKline PLC’s smoking cessation drug Zyban (extended release bupropion); Biovail Corp.’s Cardizem CD (extended release diltiazem); Janssen Pharmaceuticals Inc.’s fentanyl transdermal patch; Schwarz Pharma AG’s Reglan (metoclopramide) and Actavis’ Kadian (extended release morphine sulfate).

Watson Loses Right To Embeda Authorized Generic

FTC explained in an analysis of the agreement that Watson’s acquisition of Actavis would reduce the number of competitors for generic Zyban from four to three and result in a 45% market share for the combined entity based on 2011 sales. The number of competitors for generic Cardizem CD would be reduced from four to three and result in a 55% market share for the combined entity while the number of competitors for the generic fentanyl patch would drop from five to four and give the combined entity a 34% market share and the number of suppliers of metoclopramide would be reduced from three to two and give the combined entity a 34% market share. The combined company would also have a monopoly in generic extended release morphine sulfate capsules.

FTC noted that the merger would also reduce competition for six future generic products, including generic versions of Purdue Pharma LP’s tamper resistant extended release OxyContin (oxycodone), and Pfizer Inc.’s Chantix (varenicline) and Embeda (extended release morphine sulfate/naltrexone). Pfizer recalled Embeda last year because of stability problems. FTC said the company plans to return the pain product to the market in the near future.

Actavis and Pfizer had entered into an exclusive development and manufacturing agreement to manufacture Embeda, which also grants Actavis authorized generic marketing rights. The consent agreement requires Watson to amend this agreement to eliminate Actavis’ right of first refusal to market a potential authorized generic and transfer manufacturing rights to Pfizer.

In addition, Watson and Actavis must waive Actavis’ rights to isradipine capsules and loxapine succinate capsules. Watson manufactures the only generic isradipine (the branded product was discontinued) and the only generic loxapine. The FTC said Actavis has a marketing and profit-sharing arrangement with the best-positioned entrant for generic isradipine and a profit-sharing arrangement with a best-positioned entrant for loxapine, both of which are likely potential suppliers for these markets.

FTC Intervention In Generic Drug Company Mergers
Year	Merger	Deal Value	FTC Requirements
2012	Watson Pharmaceuticals Inc./Actavis Inc.	$5.9 billion	Watson must sell 18 drugs to Sandoz International GmbH and Par Pharmaceuticals Inc.
2012	Novartis AG/Fougera Holdings Inc.	$1.5 billion	Novartis agreed to divest rights to four generic topical skin care products (Also see "Sandoz + Fougera = 4 Topical Generics For Tolmar" - Pink Sheet, 16 Jul, 2012.)
2011	Teva Pharmaceutical Industries Ltd./Cephalon Inc.	$6.8 billion	Teva divested its generic versions of Actiq (fentanyl) and Amrix (cyclobenzaprine) to Par Pharmaceuticals Inc. (Also see "Par Gets Pumped: Teva To Divest $200 Million Of Products To Acquire Cephalon" - Pink Sheet, 11 Oct, 2011.)
2011	Perrigo Co./Paddock Laboratories Inc.	$540 million	Companies sold six drugs to Watson Pharmaceuticals Inc.
2011	Hikma Pharmaceuticals PLC/Baxter Healthcare Corp.’s generic injectable pharmaceutical business	$111.5 million	Hikma sold phenytoin and promethazine generic injectables to X-Gen Pharmaceuticals Inc. (Also see "Hikma To Divest Phenytoin, Promethazine Injectables To Acquire Baxter Business" - Pink Sheet, 27 Apr, 2011.)
2009	Teva Pharmaceutical Industries Ltd./Barr Pharmaceuticals Inc.	$8.9 billion	Teva and Barr divested certain formulations of 16 on-market generics and 13 pipeline products; Watson bought all but the oral contraceptives.
2009	Watson Pharmaceuticals Inc./Arrow Group	$1.7 billion	Watson sold cabergoline and dronabinol to Impax Laboratories Inc. (Also see "Impax Gains Products In Watson Deal With FTC To Finalize Arrow Acquisition" - Pink Sheet, 7 Dec, 2009.)
2008	Sun Pharmaceuticals Industries Ltd./Taro Pharmaceutical Industries Ltd.	Merger valued at $1.8 billion, has not yet been completed (Also see "India’s Sun Pharma Makes Final Move To Take Taro Private; Spins off Booming India Operations" - Scrip, 15 Aug, 2012.)	Sun sold three generic carbamazepine drugs to Torrent Pharmaceuticals Ltd. (Also see "Sun Clears FTC Hurdle For Taro Acquisition; Sells Carbamezapine To Fellow Indian Co. Torrent" - Scrip, 14 Aug, 2008.)
2007	Mylan Laboratories Inc./ Merck KGaA’s generic unit	$6.7 billion	Merck KGaA divested five generic drugs to treat hypertension and cardiac problems to Amneal Pharmaceuticals LLC (Also see "Mylan/Merck KGaA To Divest Five Generic Drugs To Clear Antitrust Hurdle For Acquisition" - Pink Sheet, 27 Sep, 2007.)
2007	Hospira Inc./Mayne Pharma Ltd.	$2 billion	Companies agreed to divest Mayne’s rights to five generic injectable products to Barr.
2007	Activas Group/Abrika Pharmaceuticals Inc.	$235 million	Activas divested rights to generic isradipine capsules to Cobalt Laboratories Inc.
2006	Watson Pharmaceuticals Inc./Andrx Corp.	$1.9 billion	Watson divested rights to one product and Andrx divested rights to 12, including 11 oral contraceptives (Also see "FTC Clearance Of Watson’s Andrx Acquisition Requires 13 Generic Divestitures" - Pink Sheet, 31 Oct, 2006.)
2006	Barr Pharmaceuticals Inc./Pliva	$2.5 billion	Barr divested three generic drugs (Also see "FTC Clears Barr’s Acquisition Of Pliva Based On Divestiture Of Generic Drugs" - Pink Sheet, 23 Oct, 2006.)
2006	Teva Pharmaceutical Industries Ltd./Ivax Corp.	$7.4 billion	Companies divested 15 products, 11 to Par and four to Barr (Also see "Teva/Ivax Merger Gets FTC OK Pending Divestitures" - Pink Sheet, 23 Jan, 2006.)
2005	Novartis AG/Eon Labs Inc.	$1.7 billion	Companies divested three generic drugs to Amide Pharmaceutical Inc. (Also see "Novartis' Purchase Of Eon Clears FTC; Amide Gets Three Divested Generics" - Pink Sheet, 19 Jul, 2005.)