3 Pharma Companies to Buy for the Long Run

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to IMS health report, the global pharmaceutical industry is expected to grow at a CAGR of 4.5% in the next five years to reach $1.20 trillion in 2017, from $963 billion in 2012. To keep pace with the industry's growth, pharmaceutical companies are spending on research and development in order to develop new drugs, and are pursuing various expansion strategies. These companies are also looking to enhance their presence in the global market through mergers and acquisitions. Acquisitions allow companies to enhance their product portfolio while reducing competition.

Three pharmaceutical companies are implementing these strategies; how will they benefit the companies and thus benefit investors? Let's take a look.

Acquisitions all the way

Valeant Pharmaceuticals, (NYSE: VRX) through its wholly owned Canadian subsidiary, VPII Escrow, has raised senior notes of $3.20 billion, due in 2021 and 2023. It had a public offering of its common stocks for approximately $2.3 billion on June 24, 2013. The funds will help in financing its $8.7 billion acquisition of Bausch & Lomb Holdings. It is a U.S.-based eye-care product company, including contact lenses and lens care products.

Through this acquisition, Valeant will secure growth opportunities in its eye-care segment, and it will also deepen its footprint in China and other emerging markets. It expects a cost synergy of around $800 million through this deal and a rise in revenue to $8.2 billion by 2014, compared to $3.54 billion in 2012.

Additionally, in December 2012, Valeant acquired Medicis Pharmaceuticals for $2.6 billion. Medicis primarily focuses on the treatment of dermatological and anesthetic conditions in the U.S. and Canada. Through this acquisition, Valeant became the leader in dermatology and has strengthened its foothold in its skin-care segment.

Medicis has leading branded skin-care and aesthetic products with a strong product pipeline. The U.S. and Canada have contributed 72% to Valeant’s revenue, and with the Medicis acquisition, it has grown 25% year-over-year in first quarter of 2013. Further, its sales in the U.S. are expected to grow at a CAGR of 3.5% to reach $2.4 billion by 2016 from 2013.

Strong specialty segment growth with API acquisition

Hospira (NYSE: HSP) entered into an agreement to acquire Orchid Chemical & Pharmaceutical's penicillin and penems active pharmaceutical ingredients, or API, production and R&D facilities in India for $200 million. This acquisition will help the company integrate penicillin and penems APIs into its product portfolio. With the world-class API facilities of Orchid Chemical, Hospira expects improvements in its antibiotics segment, thus increasing its cost competitiveness. The company expects flat revenue this year and will generate around $4.22 billion by 2014, from $4.09 billion in 2012.

Hospira's specialty injectable pharmaceutical, or SIP, is the major contributor to its revenue. The company reported revenue of $988.3 million; SIP has shown growth of 11.1% year-over-year, to $651.5 million in the first quarter that ended in March 2013. SIP includes generic injectable pharmaceutical and biological products. The company is among the top three players in the biological products market.

One of the SIP drugs, Precedex, has received a patent protection extension from the FDA for six months in the U.S. This drug is used in sedation treatment and is the major contributor to the SIP revenue. It is expected to contribute around $271 million, or nearly 7%, of total revenue in 2013.

The company anticipates SIP will generate revenue of around $2.72 billion in 2013 compared to $2.57 billion in 2012.

Acquisition expands company’s global reach

Elan (NYSE: ELN) plans to acquire 48% stake in Newbridge pharmaceuticals for $40 million in 2013, and the rest of the stake by 2015 for an additional $244 million. Newbridge is a specialty therapeutics company, operating in Dubai. Its drugs are already approved by the FDA, EMA, and Japanese PMDA and are used to treat oncology, metabolic disorders, and intestine problems.

It also specializes in licensing, acquiring, registering, and commercializing drugs in the Middle East and North Africa, or MENA. Elan believes that these regions possess untapped growth opportunities, as its healthcare contributes 4%-6% of GDP as compared to 10%-12% in Europe and 18% in the U.S. Also, the awareness and capacity to afford medical treatment in the MENA region has increased, thus, Elan believes this acquisition will generate good growth opportunities. 

In April 2013, Elan sold the full rights and control of its multiple sclerosis drug, “Tysabri,” to Biogen Idec (NASDAQ: BIIB) for $3.25 billion, and ongoing royalty interest on global Tysabri sales. The drug is used for the treatment of inflammatory intestine disease, and relapsing forms of multiple sclerosis, or MS. Elan will receive a royalty of 12% for the first 12 months on global Tysabri sales, thereafter the percentage will increase to 18% on drug sales of less than $2 billion, and 25% for sales over $2 billion.

Tysabri is considered the most effective drug for MS patients. In 2012, Tysabri reported a year-over-year growth of 8% to $1.6 billion and Biogen’s continuous efforts to increase the drug’s awareness will help it to grow further. Elan expects royalties of around $515 million in 2013 from Tysabri sales.

Conclusion

Valeant, with its acquisitions, has enhanced its presence in the eye care and skin care markets, which will drive the company's earnings and its growth prospects.

Hospira has strong expectations from its SIP segment, which is continuously driving revenue and has strong growth opportunities in 2014 and 2015. Additionally, its acquisition of Orchid's API unit will help in strengthening its API products capacity.

Sales of its blockbuster drug, Tysabri, should enable Elan to earn regular royalty income and the upfront sale of $3.25 billion provides the ability for further expansion of its operations. The acquisition of Newbridge opens opportunities for the company in the oncology segment.

Due to strong acquisitions and growth potential, a buy is recommended for all three stocks.

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Madhu Dube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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