Watson Pharmaceuticals Inc said on Wednesday it will 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 fell 4.6 percent, expects the cash and stock deal to close the second half of 2009 and boost earnings next year before any cost savings.

Under CEO 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.

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 deals.

The Arrow deal also may better position Watson 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 now, 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.

Arrow, which has about 1,000 employees worldwide, operates in the United States and Canada as Cobalt Pharmaceuticals.

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's closing.

Watson plans to fund the cash portion through 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 need for the transaction would be modest, allowing it continued flexibility for more deals.

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

Watson shares fell 4.6 percent to $27.50 in premarket trading from Tuesday's close of $28.84 on the New York Stock Exchange.

(Reporting by Lewis Krauskopf; Editing by Derek Caney and Maureen Bavdek)

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