An uptick in spending on health care, particularly elective medical treatments, procedures and services, is good news for the future sales of the drug giant that will be created from the combination of Allergan (NYSE:AGN) and Actavis (NYSE:AGN).
Allergan, the maker of the wrinkle reducing injection Botox and other cosmetic treatments, recently agreed to be purchased by Actavis for $66 billion in cash and stock. A combination of the two pharmaceutical companies will create a global behemoth with more than $23 billion in sales and launch the larger firm into the ranks of the world's top 10 drug makers.
The timing of the deal is also good given the products the two companies are known for in the dermatology, cosmetics, plastic surgery, and women's health arena.
Consumers' confidence is growing, particularly in their ability to make health care purchases, thanks in part to the Affordable Care Act and its millions of new paying patients. But when it comes to products like Botox and other products perceived as cosmetics, plastic surgery and eye care, insurance coverage often doesn't help sales because health plans often frown on such elective treatments, particularly when the economy is in a slow growth mode.
But several new reports indicate Americans in particular are ready to spend more on medical care that isn't always covered by insurance and falls outside of essential medical care services.
"Over the past few years, the overall economic situation kept consumer spending on discretionary items -- including health care -- down, and we observed a lower rate of premium increases," Tim Nimmer, chief health care actuary at employee benefits consultancy Aon Hewitt (NYSE: AON) said in a statement accompanying its recently released annual employer health care cost survey, which you can see here.
"Now, with employment rates stabilizing, individuals are feeling more secure about their financial situation and have been willing to reengage in using the health care system," Nimmer added. "As these utilization rates increase, we expect to see health care cost increases follow."
The cost increases mean premiums are on the rise for consumers. Yet for investors looking for a reason to purchase drug and device maker stocks, the boost in consumer spending is welcome, particularly in health care where employers are increasing deductibles, copayments, and other cost-sharing for their workers.
The Aon Hewitt study says the workers' share of health care costs, including employee contributions to premiums and out-of-pocket costs have jumped more than 50 percent since 2010.
However, rising employment and increased consumer confidence makes patients less stingy when it comes to health care purchases.
Actavis and Allergan have portfolios of products in franchises that include ophthalmology as well as aesthetics, dermatology and plastic surgery. Though Botox has been on the market for more than two decades, it is still considered a leading treatment and brand in its ability to soften wrinkles, primarily in the forehead or around the eyes were lines known as "crow's feet" form.
Such products, which do have some health insurance coverage, are generally purchased by consumers with cash or on credit cards in what is known as the "private pay" health care market.
"This combination will greatly enhance our U.S. and international commercial opportunities," Actavis executive chairman Paul Bisaro said in announcing the deal. "In the U.S., the combination makes us more relevant to an even broader group of physicians and customers. Overseas, it will enhanced our commercial position, expand our portfolio and broaden our footprint in Canada, Europe, and Southeast Asia and other high-value markets, including China, India, the Middle East and Latin America."
The combined firm's products are also expected to benefit in emerging markets where countries like India and China are also spending more on elective medical care and health care in general and the combined company will have a larger sales reach.
In these emerging markets, Actavis makes and sells generics, branded generics and over-the-counter products in more than 60 countries.
While many analysts and investors have been focusing on the tax benefits of the deal and the recent bidding war over Allergan, the future sales prospects shouldn't be ignored.
"Overall, however, the value of this acquisition should lie more with future growth opportunities," said Ana Nicholls, a health care analyst at The Economist Intelligence unit. "By pushing the combined companies into the top 10 worldwide, it will give them more clout in supplier deals, as well as access to a bigger sales and marketing network."
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Aon. 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.
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