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 (NYSE: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.
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 (NYSE:TEVA) 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.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Celgene, Gilead Sciences, and Teva Pharmaceutical Industries. The Motley Fool owns shares of Gilead Sciences. 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.