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.
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