Watson Pharmaceuticals Inc said on Wednesday that it would buy privately held Arrow Group for $1.75 billion, clinching a long-expected deal by the U.S. generic drugmaker to expand internationally.

In acquiring Arrow, Watson will gain a generic drugmaker with $647 million in revenue last year, selling drugs in more than 20 countries, including Canada, France and Britain.

The combined company will have revenue of more than $3 billion. Watson, whose shares rose nearly 5 percent, expects the cash-and-stock deal to close the second half of 2009 and boost earnings next year before any cost savings.

Under Chief Executive Paul Bisaro, Watson has made no secret of its desire to make an acquisition that would allow it to sell its products internationally and better compete in the increasingly global generic drug industry.

This deal is in line with the expectations that the company has set for investors, Collins Stewart analyst Louise Chen said. They said they would do an international deal and that it would be accretive quickly.

Over the long term, Chen said the deal could position Watson -- which said it would become the No. 4 global generic player -- as an acquisition target in its own right.

Watson's main rivals in the U.S. market -- Teva Pharmaceutical Industries , Mylan Inc and the Sandoz unit of Novartis -- have been more substantial global players, due to their own acquisitions.

(Arrow) is a company that is well-run and is on the upswing so it enhances our long-term growth profile, Bisaro said in an interview. They have a nice solid commercial footprint across key markets for us, and they're at the size where we can help them grow in all of those markets by providing our products to them.

The deal also may provide Watson a foundation in the burgeoning market for generic biotechnology drugs, as Arrow owns 36 percent of Eden Biodesign, which provides services to early-stage biotechnology companies.

Arrow, which sells more than 100 products, expects approval of 40 more over the next three years. One of its opportunities includes exclusive U.S. rights to sell an authorized generic version in November 2011 of Pfizer Inc's

Lipitor, the mammoth-selling cholesterol fighter.

Watson also gains exclusive rights to launch a generic version of Sepracor's Xopenex asthma drug in 2012, and assumes a patent challenge of AstraZeneca Plc's Pulmicort asthma medicine, Bisaro said. Overall, he said, the two companies have limited overlap with their product lines.

Arrow, which has about 1,000 employees worldwide, operates in the United States and Canada as Cobalt Pharmaceuticals, which recently has had a big product launch with a generic version of King Pharmaceuticals' Altace blood pressure drug.

At 2.7 times 2008 sales, the price for Arrow is not overly rich in comparison to Mylan's deal for the generics business of Germany's Merck KGaA (2.7 times sales) or Barr's deal for Pliva (2 times), said Needham & Co analyst Elliot Wilbur.

Morningstar analyst Brian Laegler said: After adjusting for generic Lipitor, which is huge, they paid a fair price for it.

I'm neutral on the deal, but it's a step in the right direction, Laegler said.

Watson will pay $1.05 billion in cash and issue about 16.9 million shares, worth $500 million. It will pay the remaining $200 million in the form of zero-coupon preferred stock redeemable three years after the deal closes.

Watson plans to pay the cash portion with available funds and additional borrowings and is evaluating options for longer-term debt financing.

But Watson, which also sells branded drugs in specialty areas such as urology, said the additional debt needed for the transaction would be modest, allowing it continued flexibility for more deals.

Bisaro said Watson's next deals would probably be for brand medicines, such as licensing rights to drugs, and the company will look at smaller deals to expand upon the Arrow foundation.

Watson expects cost savings of $25 million to $35 million from the deal in the first 18 months after the closing.

Arrow shareholders will also receive additional contingent payments based on sales of the authorized generic version of Lipitor.

Watson shares rose $1.34, or 4.7 percent, to $30.18 in morning New York Stock Exchange trading.

(Reporting by Lewis Krauskopf in New York and Debra Sherman in Chicago; Editing by Derek Caney, Maureen Bavdek and Lisa Von Ahn)

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