Actavis Tops Q1 Estimates, Sees More Growth Ahead

Investor's Business Daily

Specialty-drug giant Actavis (ACT) beat analyst Q1 estimates Wednesday, as management projected a solid future from an expanding product line aided by acquisitions.

Earnings jumped 75% over the year-earlier quarter to $3.49 a share, topping analysts' consensus by 26 cents, according to Thomson Reuters. Sales gained 40% to $2.66 billion, beating estimates by about $70 million.

The stock rose 3% to 204.15 — up 93% over the past 12 months.

Actavis has declined to give specific guidance for 2014 until the close of its $25 billion acquisition of Forest Laboratories (FRX), expected by midyear. But Actavis did say that earnings should be lower than in Q1, because it expects competition for its generic version of painkiller Lidoderm. Actavis had 180 days of market exclusivity when it launched the product Sept. 16 due to a settlement with Lidoderm developer Endo Health Solutions (ENDP), but the 180 days have ended.

Analysts expect earnings of $3.25 a share in the current quarter vs. $2.01 in Q2 2013.

Sales Of Cymbalta Surprised

Much of Actavis' Q1 growth came from the acquisition of women's health company Warner Chilcott, completed on Oct. 1. But executives also said that sales of its generic version of Eli Lilly's (LLY) antidepressant Cymbalta were better than they expected. No one had market exclusivity when the drug became available in December, but President Siggi Olafsson said on a conference call that fewer companies had entered the market than Actavis anticipated. However, he expects more entrants this year.

Actavis CEO Paul Bisaro said that the acquisition of Forest is moving as expected. He also said that Forest's $1.1 billion buy of Furiex Pharmaceuticals (FURX), announced Monday, "fits perfectly with the kind of transactions we're looking at" in future acquisitions. While he wouldn't rule out another big buyout, he said that Actavis is focusing on smaller assets of that sort.

"It's an important addition to a very important therapeutic category for us," he said, referring to Furiex's bowel-disease drug in late-stage testing. "It also has long-term, enduring value .. . and we have worldwide rights.

Bisaro added that the mergers are building a "very clear growth profile" for Actavis through 2016, as dozens of both generic and branded launches are expected over the next few years. Now, he said, the company is looking mainly for assets expected to bring growth in 2017 and beyond, and Furiex fits that profile.

Competition In Generics

In a research note Wednesday, Cowen analyst Ken Cacciatore wrote that this strategy, combined with the Q1 outperformance of Actavis and Forest in Actavis' Tuesday report, underscores his thesis that Actavis is undervalued. The stock has been consolidating since hitting an all-time high of 230.77 on Feb. 26, having sold off along with drug stocks and the market in general.

"The bottom line is that we believe this management team will rightly focus on attempting to add long-duration, high-margin products to its portfolio, and (has) the right size, balance sheet and tax structure to execute," he wrote. "If that were to occur, the valuation disconnect we describe below should rapidly close. We would be buying right here.

In the near term, Actavis faces uncertainties around its generic drugs. On Monday, it sued the FDA for granting 180-day exclusivity to Teva Pharmaceutical Industries' (TEVA) version of Pfizer's (PFE) arthritis drug Celebrex, a setback that management said it had not expected. Actavis' generic version of Johnson & Johnson's (JNJ) ADHD drug Concerta is also facing more competition this year.

Still, Morningstar analyst Michael Waterhouse wasn't especially worried, writing in a research note Wednesday that, despite some uncertainty, " we still expect limited competition on these products (Concerta and Lidoderm) will maintain their strong ongoing contribution to the company's bottom line regardless of near-term FDA decisions."

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