Today was a big day for the healthcare sector. Of the 10 sectors that I tracked today, healthcare stocks were up the most, gaining an average of 1%. And it doesn’t take a brain surgeon to see why these companies are doing so well.
Here in the U.S. and around the globe, people are spending more money on medications than ever before. In 2014, global spending is expected to hit $1 trillion. By 2017, we’re looking at $1.2 trillion in global spending. There are several reasons for the surge, but the simplest way to put it is that a pill is cheaper than a procedure. And with several major world powers (the U.S. included) expanding their national health care systems, pharmaceutical companies are expected to reap windfall profits.
And if investors play their cards right, they can be on the receiving end of this growth. So today I’m going to cover one major biotech play that is profiting from this powerful trend and deserves a closer look.
My Top Generics Play: Actavis Plc
If you’ve been following the news today, you probably heard the buzz surrounding Actavis Plc (ACT) and Forest Laboratories (FRX). Actavis, one of the world’s largest generic drugmakers, is scooping up its slightly smaller competitor for $25 billion. The cash and stock deal is one of the top five pharma deals of the past decade.
Investors celebrated the move because Forest Laboratories has stunning sales and earnings prospects. For FY 2014, the company is expected to see 12.6% annual sales growth and 232.5% earnings growth. (Yes, you read that bottom-line number correctly). The company specializes in treating Alzheimer’s and hypertension, two areas which are in hot demand. Better yet, with Forest Laboratories under its umbrella, Actavis Plc expects the deal will add to its earnings growth in the double-digits. The deal is also expected to yield $1 billion in tax and operating savings by 2015.
So it’s small wonder that ACT shares broke through an all-time high after the report. I already had ACT on my radar and recommended it to my Blue Chip Growth readers back in March. Since then, the stock has skyrocketed over 136%! But I see further upside from here. With a portfolio of over 190 pharmaceutical product families, Actavis has its name on everything from antibiotics to contraceptives to smoking cessation treatments. 2013 was a record year for Actavis, but going forward the company’s prospects remain as bright as ever. For FY 2014, analysts forecast 38% sales growth and 21% earnings growth. And those estimates will likely climb higher as the company works to absorb Forest Laboratories.
One of the most exciting things in the works at Actavis is generic versions of biologic drugs, which are created by biological rather than chemical processes. The generic, potentially cheaper, versions of biologic drugs are called biosimilars, and to date they’re not available in the U.S. So right now there is a race between biotechs to develop and get their biosimilars approved. Considering that the global market for biosimilars is forecast to be between $11 billion to $24 billion by 2020, this is a lucrative opportunity, and I look forward to seeing where Actavis goes with this. ACT is an A-rated Buy.