Warner Chilcott To Explore Its Options

Target: Warner Chilcott plc

Price: $8 billion

Sponsors: Bain Capital LLC, CCMP Capital Advisors LLC, Thomas H. Lee Partners

Financial Adviser: Goldman Sachs

Specialty pharmaceutical company Warner Chilcott plc said it would explore strategic options, including preliminary talks with potential buyers, sending its shares up as much as 24 percent, sister news service Reuters reported. The company, which makes women’s health care and dermatology products and other specialty drugs, said it hired Goldman Sachs as its financial adviser.

The announcement comes after speculation that Bayer AG would make a bid for the Irish drugmaker at $32 per share. A deal at that price would value the company at nearly $8 billion. Warner Chilcott declined to comment on the Bayer rumor.

Warner Chilcott was purchased and taken private in 2004 by private equity buyers. It returned as a publicly traded company two years later but its three largest shareholders, which account for about 30 percent of company ownership, remain private equity firms Bain Capital LLC, CCMP Capital Advisors LLC and Thomas H. Lee Partners, according to Thomson Reuters data.

Some analysts suggested that other options, such as selling certain assets or declaring a special dividend, were as likely as a sale of the company. Warner picked up potentially attractive products with its 2009 purchase of Procter & Gamble’s pharmaceuticals business, including the osteoporosis drug Actonel and the ulcerative colitis drug Asacol.

Sources told Reuters in April that the German drugs and plastics maker Bayer was close to making a multibillion-euro acquisition to strengthen its health care division.

“I don’t know about Bayer as a buyer. This doesn’t seem to me that that gets them anything that they’d need,” said Jefferies & Co. analyst Corey Davis. “I’ve always seen Warner as more of acquirer than acquiree given their declining revenue stream, but bigger companies are completely loaded with cash and there’s tons of M&A going on,” Davis said, adding that he believes that “this is really more the start of the process than nearing the end.”

In January, Warner Chilcott had forecast a weak 2012 on lower sales and loss of market exclusivity for Actonel in Western Europe. And the generic threat to its acne drug Doryx has come to pass after a court ruled in favor of Mylan Inc. in a patent infringement case. Mylan said it would begin shipping its generic version immediately.

Warner, which reported Doryx sales of $46 million in the fourth quarter, said it would appeal the ruling. It expects an impairment charge of $90 million to $108 million due to the court decision, cutting into its 2012 profits. Asked what Warner has to offer a potential buyer aside from cash flow, Davis said, “a women’s health franchise and the durability of Asacol are probably their two biggest strategic assets right now.”

Morningstar analyst David Krempa also said he would be surprised if Bayer were interested in Warner Chilcott and suggested that it may be looking to sell off Actonel rather than the entire company. Actonel had sales of $180 million in the fourth quarter of 2011, a 23 percent decline.

“Their product portfolio has a lot of patent issues coming up, which will kind of limit the amount of people that are interested in buying the whole company,” Krempa said. “If they could get someone interested in the entire company, they would definitely be open to that,” Krempa said. “But if they can’t, then I think they would still be open to selling only certain assets.”

The company said it would not discuss further developments until the board has approved a course of action or deems further disclosure to be appropriate or required.

Acquisition activity in the health care sector has been extremely robust in recent weeks. Medical device maker Hologic Inc. agreed in April to buy diagnostic test maker Gen-Probe Inc. for $3.75 billion. Earlier in the month, Watson Pharmaceuticals Inc. said it would buy rival generic drugmaker Actavis Group for $5.6 billion and British drugmaker AstraZeneca said it would buy Ardea Biosciences for $1.26 billion. Meanwhile, Illumina Inc., Human Genome Sciences Inc. and Amylin Pharmaceuticals are all in play after rejecting takeover bids by large drugmakers.

“Trading at roughly five times 2012 estimated earnings per share, Warner Chilcott’s valuation remains at the very low end of the historical specialty pharma range,” JPMorgan analyst Chris Schott said in a research note.

(Bill Berkrot is a correspondent for Reuters in New York; additional reporting by Zebi Siddiqui and Vidya P L Nathan in Bangalore.)