Pharmaceutical stocks have absolutely soared amid the broader bull market. Shares of the specialist and generic drugmaker Actavis plc (AGN), for example, have more than tripled in value since 2012 alone:
Actavis' rocket-like trajectory, though, isn't without good reason. Since moving its tax base to Ireland in 2013, the company has executed a number of high-impact acquisitions that have grown revenue at a blistering pace. The Street expects revenue in the fourth quarter, for instance, to grow by a stately 45.6% year over year.
With Actavis recently committing resources to two additional acquisitions -- Durata Therapeutics and Allergan -- I think it's a good time to consider if this stock is poised for even more growth.
The Durata acquisition won't be a high impact move
Last October, Actavis agreed to pay $675 million to gain access to Durata Therapeutics for its next-generation antibiotic Dalvance, recently approved by the Food and Drug Administration as a treatment for acute bacterial skin and skin structure infections. This is an indication in need of new therapeutic options, as evidenced by the faster than expected approvals of both Dalvance and Cubist Pharmaceuticals' Sivextro this year.
Nonetheless, I think Dalvance's impact on Actavis' bottom line is going to be minimal going forward. As a reminder, Durata had licensing and debt agreements in place with both Pfizer and PDL BioPharma that appear to remain in play following this takeover. More problematically, Sivextro is being launched by a specialist in the antibiotic field that has a remarkable track record in this particular market. Overall, I think Actavis will turn a profit on this acquisition, but it won't be a major windfall for the company.
Allergan was a reach at $66 billion
In the highly publicized battle for Botox maker Allergan, I think Actavis came out the clear loser, sealing the deal at $66 billion. Because Valeant Pharmaceuticals was reportedly willing to up their offer to $60 billion, Actavis was forced to pay top dollar for Allergan, perhaps even overpaying. A while back, I estimated Allergan to be worth roughly $65 billion max via a takeover bid, but this would leave the buyer in a bind in terms of creating immediate value for its shareholders.
What's critical to understand is that a big chunk of Allergan's upward valuation earlier this year was based on deep cost-cutting measures instituted after Valeant's initial tender offer. Given that most buyers go through a similar process after a takeover, I am left wondering how Actavis can justify paying such a rich premium -- a premium Valeant decided was too high.
Last week, we gleaned some insight, learning that Actavis is already eyeing further reductions in Allergan's workforce, perhaps a tacit admission that this purchase was indeed a reach.
My overall impression of this mega merger is that it added unnecessary bulk to a rapidly growing company that was starting to fire on all cylinders. Now Actavis' management will have to divert their attention away from promising experimental drugs, like eluxadoline for IBS, to try to figure out how to make this massive acquisition work. In short, I see limited near-term upside from the Allergan buy, but much potential for unintended problems arising from simply having too many irons in the fire at the same time.
Investing takeaway
I've been a fan of Actavis and its management team over the last two years. In many ways, it seems like everything they touched turned into gold. That said, these latest moves have left me scratching my head. Durata's novel antibiotic is undoubtedly an important new therapeutic option, but its long-term commercial potential is far from certain. And paying top dollar for Allergan suggests, to me, that management fell victim to their own success. After these two moves, Actavis looks like a "Jack-of-all-trades"-type company, which tends to work out poorly for drugmakers.
Most, if not all, of the top drugmakers specialize in some form, allowing them to out-compete their rivals in niche markets. Again, the Cubist Pharmaceutical example with Sivextro vs. Dalvance comes to mind. How can Actavis realistically expect to maximize Dalvance's commercial potential against a potent rival, when it's also trying to wade deeper into the IBS market with eluxadoline, and enter into the cosmetic market with Botox? Perhaps Actavis will prove me wrong, but I'm happy waiting it out on the sidelines until then.
