Actavis Prescribes Profits via M&A and Generic Drugs

by John Jagerson and Wade Hansen | March 17, 2014 1:27 am

Actavis Prescribes Profits via M&A and Generic Drugs

Actavis (ACT[1]) — This specialty pharmaceutical company is consolidating its way into becoming a post-Affordable Care Act (ACA) powerhouse.

The stock has been in an extended uptrend for years now, but really started to take off on May 10, after the company announced it was in talks to buy Warner Chilcott for $8.5 billion in a stock-for-stock deal. Many analysts on Wall Street viewed this deal as a stroke of genius by Actavis management to avoid being gobbled up themselves by the likes of Valeant Pharmaceuticals (VRX[2]) and Mylan (MYL[3]), both of which were reportedly interested in adding ACT to their portfolio, while boosting the company’s revenue-generating potential at the same time.

This news kicked off an explosion of bullish interest in the stock that has continued to accelerate, and the company’s prospects are only getting better. On Feb. 18, ACT announced it was going to be adding to its market reach by buying Forest Laboratories (FRX[4]), which had just bought Aptalis Holdings in January, for $25 billion in cash and stock. Analysts expect this deal will give ACT combined revenues of $15 billion in 2015 and free cash flow of more than $4 billion, while also giving it a dominant position in multiple arenas, such as gastroenterology, urology and women’s health — prime markets in light of the aging baby boomer population.

When you combine this increased market strength with the news last week that a U.S. District Court ruled that the extension Pfizer (PFE[5]) had received giving its blockbuster drug Celebrex patent protection until Dec. 2, 2015 is invalid, ACT investors can hardly contain themselves. Celebrex is a $2.2 billion per year drug, and ACT has a generic version of the drug ready to release to the market.

From a technical perspective, ACT jumped higher after the Feb. 18 announcement, but has pulled back slightly since hitting a recent high of $230.77 on Feb. 26. The stock found solid support just above $205 and is poised to climb higher. If you apply a Fibonacci projection analysis to the stock, the 100% projection level gives you a price target of approximately $245. This is right in line with RBC Capital’s $249 price target and Barclays’ $250 price target.

This trade may take a few weeks to fully develop, but it shouldn’t drag on for months and months. We recommend entering now on its support bounce and setting an initial stop loss below recent support near $205. Set your first price target at the 52-week high of $230.77 and your second price target near $245.

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John Jagerson and Wade Hansen are the co-founders of LearningMarkets.com, a source for free investment education and daily analysis of the stock, options and Forex markets. Wade is the co-author of Profiting With Forex: The Most Effective Tools and Techniques for Trading Currencies (McGraw-Hill, 2006). John Jagerson has worked in the capital markets and private equity for most of his career, including investing, writing, education and money management. Together, John and Wade are the editors of Slingshot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get one free month today by clicking here[6].

Follow John Jagerson[7] and Wade Hansen[8] at Google+!

Endnotes:
  1. ACT: http://studio-5.financialcontent.com/investplace/quote?Symbol=ACT
  2. VRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VRX
  3. MYL: http://studio-5.financialcontent.com/investplace/quote?Symbol=MYL
  4. FRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRX
  5. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  6. by clicking here: https://order.investorplace.com/?sid=CU8101
  7. John Jagerson: https://plus.google.com/115711248746858558308?rel=author
  8. Wade Hansen: https://plus.google.com/108450692850544646698?rel=author

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