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Stock slump won't force Warner Chilcott's M&A hand

by Jonathan Marino  |  Published January 9, 2013 at 10:46 AM
Warner Chilcott plc spent Tuesday morning hoping to convince investors that its stock is underappreciated by Wall Street despite increasing generic competition aimed at several of its top-selling products.

Executives of the Dublin-based women's healthcare products company, originally spun out -- or, as CEO Roger Boissonneault quipped at the JPMorgan Healthcare Conference on Tuesday, "tossed out" by Warner Lambert Co. in 1996 -- claimed in a presentation that by maintaining a disciplined dealmaking approach and expanding its core franchises, it will break out of the stock slump it has endured over the past year.

"The market sentiment today is, we will not enjoy even a scintilla of the success we've enjoyed in the past," CFO Paul Herendeen said. "We expect in 2013 to reveal strategies to you [about] growing our key franchises, and my hope is that we demonstrate that we have what it takes to compete in the market and that market sentiment will return value and reflect our strong fundamentals."

Wall Street hasn't been kind to Warner Chilcott over the past year, largely because the company abandoned a sale process in August and faces looming attacks from generic drugmakers.

Warner Chilcott, which is partly owned by private equity firms Thomas H. Lee Partners LP, Bain Capital LLC and CCMP Capital Advisors LLC, put itself up for sale in May. Bayer AG had been rumored as the most likely suitor, with analysts speculating that the German drugmaker could benefit from Warner Chilcott's specialty in women's healthcare -- a segment that accounts for more than half of its revenue -- and use the company to boost its presence in the U.S.

Analysts even speculated that potential bids of between $27 and $32 per share could have been made for Warner Chilcott following a report in the Times of London that Bayer was considering a bid.

The company, however, turned heads when it publicly announced it discontinued the sale process and would instead incur $600 million in new debt that would be used, along with its existing cash, to fund a one-time dividend to its shareholders worth about $4 per share, or about $1 billion total.

Warner Chilcott's shares promptly slumped 7%, to $16.54 per share from $17.77 per share, and just a month later, the company revealed that its PE backers, which originally invested about $815 million in a $3.15 billion leveraged buyout of the company in early 2005, planned to unload 55% of their shares via a secondary stock offering.

Shares have since continued their slide and closed at $12.78 per share on Tuesday. Though Herendeen said in August that Warner Chilcott has the capacity to make acquisitions of its own, the company has yet to pounce. Warner Chilcott, in fact, hasn't participated in an M&A deal since it paid Novartis AG $400 million for the rights to bladder drug Enablex, which accounted for $171 million of Warner Chilcott's $2.73 billion in sales in fiscal 2011, according to regulatory filings. Warner Chilcott hasn't bought a company outright since it paid $3.1 billion for Procter & Gamble Inc.'s prescription drug business in 2009.

"We maintain a very disciplined approach to business development. That seems to have frustrated some in the investment community," Herendeen told attendees at the conference. "We can and will transact if the opportunity presents itself."

In the meantime, Herendeen stressed that even though its top-line sales have decreased over the past year -- to $2.58 billion over the 12 months ended Sept. 30 -- the slowdown actually comes from the continuing decline of the sales of Actonel, the osteoporosis treatment it acquired in the P&G buyout that is now facing generic competition.

Actonel posted $1.03 billion in sales in 2010 but trailed off to $771 million in sales in 2011. While those sales represent the highest among Warner Chilcott's drugs, they really are more happenstance than design.

"We didn't target it as a growth asset," Herendeen said. "It just came along as part of the [P&G] acquisition."

But Warner Chilcott also faces other issues. Acne treatment Doryx is already facing generic competition, while Enablex and oral contraceptive Loestrin 24 FE ($396 million in 2011 sales) could both lose their patents by 2015.

Herendeen countered that the company is working on improved versions of its existing products to protect its brands. Regulatory filings show that Warner Chilcott is working on products such as a Phase 2 product for rosacea and acne and a Phase 3 treatment for erectile dysfunction.

"We fully expect to be able to protect our brands and build the company despite the challenging environment," he said.

Time will tell.

Tags: Bain Capital LLC | CCMP Capital Advisors LLC | Doryx | Enablex | JPMorgan Healthcare Conference | Loestrin | Paul Herendeen | Roger Boissonneault | Thomas H. Lee Partners LP | Warner Chilcott plc

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Jonathan Marino

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