Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of pharmaceutical company Mallinckrodt (NYSE:MNK) are trading 10% higher this afternoon after the company issued a pre-market announcement that it would acquire Cadence Pharmaceuticals (NASDAQ:CADX) for $1.2 billion. Cadence is also trading higher -- the all-cash purchase price of $14 per share represents a 26% premium over Cadence's last close.
So what: Mallinckrodt was principally interested in Cadence's hospital painkiller Ofirmev, an intravenous form of acetaminophen that had estimated sales of $110.5 million last year. This is Cadence's only commercialized drug, but it's already posting strong growth -- 2013 sales were more than double the $50.1 million revenue Cadence generated from Ofirmev in 2012. Mallinckrodt has been pushing to expand its drug portfolio and its hospital footprint since being spun off as an independent company, and Cadence is an ideal way to address both needs at once.
Now what: Mallinckrodt had already been growing steadily before the acquisition, as its latest earnings report showed a 7% year over-year-improvement in sales and a strong 35% year-over-year rise in earnings per share. The Cadence acquisition is expected to provide a major lift to earnings in the next fiscal year. It could have greater benefits than many investors expect as Mallinckrodt uses the company's toehold in hospitals to sell more of its drugs. Mallinckrodt is not cheap at a 64 P/E, which would be the major worry for investors looking for sustainable growth -- don't dive right in without doing some further analysis on Mallinckrodt's drug portfolio.
Go big with tomorrow's blockbuster drugs...
The best way to play the biotech space is to find companies that shun the status quo and instead discover revolutionary, groundbreaking technologies. In the Motley Fool's brand-new FREE report "2 Game-Changing Biotechs Revolutionizing the Way We Treat Cancer," find out about a new technology that big pharma is endorsing through partnerships, and the two companies that are set to profit from this emerging drug class. Click here to get your copy today.
Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.