UPDATE: Warner Chilcott Confirms $3.1 Billion Buy Of P&G Drug Unit

(Updates throughout, including comments from conference calls, additional background, latest stock prices.)

 
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Warner Chilcott Ltd. (WCRX) confirmed Monday it will acquire Procter & Gamble Co.'s (PG) prescription-drug business for $3.1 billion, a deal that expands the specialty drug maker's footprint while allowing P&G to focus more on its consumer health-care business.

Warner Chilcott, whose shares recently were up 32% at $21.29, plans to exploit its own low tax rates and gain a foothold in Europe with the purchase. The Ireland-based company, which makes birth-control pills, gains access to P&G drugs Actonel for osteoporosis and colitis treatment Asacol while establishing the company in the urology market ahead of its expected introduction of erectile dysfunction treatments.

The deal is expected to close by the end of the year and increase Warner Chilcott's share in the so-called specialty market, in which companies focus on drugs for smaller disease areas than those targeted by major drug makers. P&G's pharmaceutical unit had about $2.3 billion in sales for the year ended June 30, compared with just under $1 billion in 2008 sales for Warner Chilcott. Until now, Warner Chilcott has focused primarily on the U.S. market, but the purchase will expand its presence in Europe.

Six banks, led by J.P. Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC), were expected to put up as much as $4 billion in financing for the deal, The Wall Street Journal reported Sunday. That would make it the largest leveraged loan - or one that is made to a borrower with a credit rating below investment-grade - in more than a year, potentially signaling that the market for such loans is loosening.

Some analysts suggested the price Warner Chilcott is paying - less than two times sales - is a bargain. "I'm surprised to see such a good price here," Roth Capital Partners analyst Scott Henry said on a conference call hosted by Warner Chilcott executives.

That price could reflect the fact that drugs Asacol and Actonel won't be permanent cash generators for Warner Chilcott - their U.S. patents expire in the mid-2010s and there is always the possibility of early generic challengers. Still, P&G also has a pipeline of experimental drugs that could contribute down the line.

For P&G, whose shares recently were down 0.8% at $53.16, the acquisition will result in a one-time gain of $1.4 billion, or 44 cents a share. P&G also expects earnings dilution of at least 10 cents to 12 cents a share this fiscal year and up 18 cents annually thereafter because of lost profit and remaining overhead costs from the unit. Sanford Bernstein analyst Ali Dibadj said the dilution estimates were higher than expected.

The divestiture fits in with P&G's recent moves to divest operations that are slower growth or that don't fit in with its main businesses. Major success in the pharma industry has eluded the consumer-products giant, which had only a few major drugs in its portfolio. P&G is holding on to over-the-counter products like heartburn treatment Prilosec OTC.

The deal is the company's first under newly appointed Chief Executive Bob McDonald, who took the helm in early July. Speaking to investors on a conference call, McDonald left open the possibility of a further pruning of the company's businesses.

-Jeffrey McCracken of The Wall Street Journal, and Peter Loftus, Anjali Cordiero and Tess Stynes of Dow Jones Newswires contributed to this story.