Actavis has made acquisitions to transform from generic-focused drugmaker into a bigger player in prescription drugs and now finds itself in an enviable position -- thriving, with its home base in Ireland.
Actavis ( ACT ), analysts say, could pull the trigger on another big acquisition in the year ahead, further bolstering its heft and future earnings. That helps explain why Actavis has been rumored as a possible buyer ofSalix Pharmaceuticals ( SLXP ).Expected to generate $15 billion in revenue in 2015, it is now large and diverse enough to forge ahead as an international power in the pharmaceutical industry. Yet in an era of health care industry consolidation, the large-cap is also widely viewed as an appealing buyer, given the success of its recent dealmaking.
"I suspect Actavis is getting a lot of calls (from investment bankers representing sellers) because of all the experience they have now," Timothy Chiang, an analyst at CRT Capital Group, said in an interview. "They are probably getting a lot of looks."
Actavis and Salix are on the IBD 50 list of top-rated growth stocks.
Allergan Takeover Talk
Actavis has found itself amid a swirl of deals involving drug companies in recent years. Such firms are seeking greater scale in order to more effectively negotiate drug prices with insurance companies that have partnered with growing health care systems and doctors' practices. What's more, U.S. pharmaceutical companies, as well as firms in other industries, have sought to use deals to move their headquarters to countries where corporate tax rates are lower.
Most recently, on Oct. 6, Actavis announced that it would acquireDurata Therapeutics ( DRTX ) in a deal valued at about $675 million. The Durata purchase would broaden Actavis' portfolio of infectious disease drugs.
Acquiring Salix -- it is not clear if the relatively small Durata buy would dissuade Actavis from another near-term deal -- would mark the third large acquisition for Actavis since 2013.
When IBD last profiled Actavis for The New America, in June, the company was nearing the midyear closing of its $28 billion acquisition of rivalForest Laboratories . That cash-and-stock deal was finalized in July. With the addition of Forest's offerings, Actavis, historically focused on generic drugs including a version of Lipitor, expanded deep into the branded-drug market with successful medications for gastrointestinal, neurological and high blood pressure conditions.
In 2013, Actavis had acquired Ireland-basedWarner Chilcott , a women's health company, for about $8.5 billion. The deal expanded Actavis' offerings of specialty pharmaceuticals and, importantly, lowered the buyer's tax obligations. On closing the deal, Actavis, previously based in the U.S., reincorporated itself in Ireland, where Warner Chilcott was and where tax rates are significantly lower.
These moves were important for Actavis, analysts say, because the surge in branded-drug patent expirations that juices Actavis' generics business is expected to abate. So making a big foray into the branded realm is a vital step toward needed diversity.
"They've got good position on both the branded and generic sides now," Chiang said.
"I don't necessarily think Actavis has to do anything big right now" in M&A, he added. "I think they are pretty well-positioned for next year and the year after."
That noted, Chiang said, consolidation has come to a head over the past couple years, in part because low interest rates have made financing deals relatively inexpensive and in part because of a bull market in pharma-biotech that has strengthened buyers' currencies and positioned them to pull the trigger on deals. But interest rates will eventually rise, he noted, and the bull-market stock rally will inevitably stall.
Deal-Making Time?
Against that backdrop, Chiang said, Actavis may well be looking hard at Salix and other possibilities. There is a "growing perception" that now is the time to get a deal done, he said.
Regardless of its next move, Actavis is currently on solid ground financially. It posted a second-quarter profit of $48.7 million. Excluding acquisition expenses and other special items, its earnings per share climbed to $3.42 from $2.01 a year earlier. Revenue ballooned 34% to $2.67 billion.
On average, analysts surveyed by Thomson Reuters expect third-quarter EPS of $3.09, a nearly 50% jump from a year earlier. For all of 2014, analysts forecast earnings of $13.28 per share. They also expect revenue of $12.6 billion for 2014 and $15.4 billion for next year.
Actavis is the largest company by market cap in IBD's Medical-Generic Drugs industry group, followed byTeva Pharmaceutical Industries (TEVA),Perrigo (PRGO) andMylan (MYL). Like several others in the group, Actavis holds a best-possible Composite Rating of 99. In performance, the group itself ranks No. 16 of 197 groups that IBD tracks.
Actavis' stock is up 45% this year.
Of drugmakers, "Actavis is probably one of the best positioned out there right now," Morningstar analyst Michael Waterhouse told IBD.
Actavis' strength and newfound diversity, he added, may also make Actavis an appealing target for a larger drug company. Having its headquarters in Ireland adds additional appeal. Waterhouse noted that health care giantPfizer (PFE) has reportedly shown interest in buying Actavis, in part because of a tax inversion incentive.
The companies involved in the recent rounds of deal speculation do not comment on specific rumors. But Actavis CEO Brent Saunders told investors at a conference in September that the company would consider selling if it were clearly in shareholders' best interest.
"If someone wanted to put an offer in front of us to buy the company, we would always entertain it so long as it was a legitimate offer," he said. "I would hope that if someone ever wanted to buy Actavis they would view us as a growth driver for them -- that the quality of the underlying business would be the compelling reason why someone would want to buy us, and the tax attributes would be a reason to pay more."
Saunders spent more time addressing the landscape from the perspective of a buyer. He said that Actavis continues to look at transformational opportunities. "And there are a few that we are monitoring very closely," he said.
He added that Actavis would be a selective, careful buyer, though; and regarding major acquisitions, it would shy away from the hostile takeover approach. "The people matter, and if you create such bad blood by going hostile, integrations are risky deals to begin with," he said. "So once you poison the well, I worry that you could integrate a company in that way."
Source: http://www.nasdaq.com/article/actavis-finds-rx-to-grow-on-busy-drugmaker-ma-scene-cm399318#ixzz3FVdPtqGL
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