Actavis (NYSE: ACT) posted remarkable results for 2Q13; recording double-digit sales growth, strong non-GAAP EPS, and also revealed some color on the Warner Chilcott (NASDAQ:WCRX) acquisition, which is expected to create a Specialty Pharmaceuticals firm that produces an annual revenue of $11.0B.
On a segmented basis, ACT posted strong growth through their three divisions. Actavis Pharma, a division that focuses on generic oncology injectables and OTC drugs, posted results of $1,569.2MM, a 57.7% increase vs last year’s $995.0MM, mostly attributed to strong international sales, which was up 209.0% for the quarter. Gross margin expanded 430 bps to 51.9%, due mostly to margin expansion of generic version of Concerta. Actavis Specialty Brands, a primary U.S. division looking to expand internationally, focuses on Urology and Women’s Health products. Revenue for the division increased 21.4% year over year from $119.3MM to $144.8MM this year and saw gross margin expand 30 bps. Selling & marketing expenses increased by 10.6%, utilizing product promotion effectively to drive sales for the quarter. R&D for this segment also increased significantly by 23.2%, putting the extra cash used into investments to expand their biosimilar programs. Lastly, the Distribution segment which, as the name suggests, distributes products from more than 200 suppliers to 62,000 different locations, including hospitals, pharmacies, and nursing homes. Revenue for this segment increased 14.5% due to increased sales to chain customers. Unfortunately, it was the only segment to contract its gross margin, which dropped 30 bps.
On a consolidated basis, net revenue increased 46.8% to $1,989.8MM vs $1,355.2MM last year, beating UASBIGs estimate of $1839.0MM and in-line with Street expectations of $1990.0MM. $655.3MM was added back to net income due to non-cash impairment adjustment, driving an EPS loss of $4.27 to a non-GAAP EPS gain of $2.01, which was $0.01 above Street expectations and 41.5% greater than the $1.42 posted in the same period last year.
Management gave guidance for FY13, raising the low end of their expectations due to a stellar quarter. Non-GAAP Net Income was raised from $1,087.0MM-$1,141.0MM to $1,094.0MM-$1,141.0MM. Non-GAAP EPS for the full year was raised from $8.10-$8.50 to $8.15-$8.50.
On shedding some light around the Warner Chilcott acquisition, management stated that they hope to close the deal by early 4Q13, creating an anticipated $11.0B annual revenue-generating global Specialty Pharmaceutical firm. A potential $400.0MM saved annually is expected due primarily to operational synergies and a transition of headquarters into Ireland, which gives them exposure to lower tax laws, potentially dropping their current taxes of approximately 28.0% to around 17.0%. This acquisition gives them a deeper exposure into Women’s Healthcare, a project they now plan to heavily pursue. This acquisition increases product portfolio size in Women’s Health, Urology, Gastroenterology, Dermatology, and a pipeline with 25 additional products, 15 of which are oriented for Women’s Health. After quarter end, approximately 6.4% of revenue is attributed to the Specialty Brands segment; Actavis seeks to address this problem through the acquisition of WCRX, which aims to increase the contribution to nearly 25.0%. Based on their own valuation, they expect this acquisition to be more than 30.0% accretive to 2014 EPS.
Our thesis of aggressive acquisitions and portfolio expansion still holds true, and I personally believe ACT is going to be a leader in the Pharmaceuticals space, but due to our valuation and a price target of $133.00, we will bench our position for now until we can see a better entry point and/or a revaluation of the company. I believe management has done a great job, and will continue to do great but for now we must stay true to our principles and for that reason, and that reason alone, we are downgrading our position from a BUY to a HOLD until further analysis.
EDIT: Since releasing before market open on Thursday July 25, 2013, Actavis share prices have appreciated 4.7% to end the week at $132.71 a share.