The healthcare sector has rebounded nicely from its second-quarter woes, with a number of big names like Gilead Sciences and Celgene Corporation posting stellar gains in recent weeks. The specialty pharmaceutical company Actavis (AGN), for instance, has seen its share price climb a whopping 71% over the past year, propelled by soaring pharmaceutical sales and value-creating acquisitions.
Despite its parabolic-like chart, I believe there are three compelling reasons why this stock could continue to rise going forward.
Reason No. 1
Actavis is growing sales at breakneck pace and this trend is expected to continue for the foreseeable future. Per the second-quarter numbers, for example, sales of Women's Health products skyrocketed by 984% year over year. In total, this unit raked in $230.8 million in the quarter, with most of this growth coming from double-digit sales increases for Lo Loestrin Fe and Estrace Cream.
Actavis also saw major jumps in the sales of urology/gastroenterology (284%) and dermatology products (110%) in the second-quarter compared to the same period a year ago. And not to be outdone, Anda distribution revenue grew by an astounding 55% to $427 million, compared a year ago.
All told, Actavis grew total revenue by 34% year over year due to the strong performance of these units.
Looking ahead, management believes that revenues could climb yet another 25% to 35% in 2015, giving investors ample reasons to be optimistic moving forward. Indeed, this rosy revenue forecast yields a relatively cheap forward price-to-earnings ratio of only 13.8.
Reason No. 2
Earlier this year, Actavis acquired Forest Laboratories in a cash and stock deal worth a reported $28 billion. And because Forest was in the midst of gobbling up Furiex Pharmaceuticals for its irritable-bowel syndrome drug eluxadoline, Actavis essentially merged with two promising companies at once.
The net result is that this new entity is expected to have pro forma combined revenue of $15 billion in 2015. Moreover, this merger significantly strengthens Actavis' GI product portfolio.
Perhaps most importantly, Actavis is now forecasting double-digit growth in EPS out until at least the end of 2017, primarily as a result of this acquisition.
Reason No. 3
Management is expecting the company to generate upwards of $4 billion in free cash flow next year. While I wouldn't expect the company to begin offering a dividend, this bump in free cash flow could be used to create long-term value for shareholders in other important ways such as expanding research and development activities, share buybacks, or perhaps buying yet another company.
Foolish wrap-up
Based on these three reasons, I think Actavis' star is rising in the generic/specialty pharma industry. Top competitors in this industry like Teva Pharmaceutical Industries (TEVA 1.06%) are struggling to stave off newer versions and formulations of top-selling brands like generic Adderall, Lovaza and Xeloda, making their outlook precarious compared to Actavis.
Actavis' secret to generating strong top and bottom-line growth would appear to be its aggressive merger and acquisition strategy. The Forest Laboratories acquisition, for instance, is projected to grow product sales by nearly 50% in a single year. Teva, by contrast, is seeing sales growth slip into the low single digits and this trend is likely to continue with increasing generic competition for Copaxone.
Overall, I think Actavis looks like one of the best choices when it comes to specialty pharma companies and is poised to continue its upward momentum, making it a stock worth watching.
