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Recent Court Ruling

The latest news of AstraZaneca (NYSE:AZN) patent setback has opened the doors for investors to make long/short bets and make a good sum of money from the companies' fate. The patent protecting AZN's Pulmicort Repsules asthma treatment has been ruled invalid by a U.S. court. The decision has paved way for the general copy of the same medicine by Actavis (NYSE:ACT). The news is a huge setback for AZN, which is considering lodging an appeal. On the other hand, the court's ruling is a new profitable journey for ACT, which is considering launching the treatment immediately. In this article, I have outlined the impact of the news on AZN and Actavis stocks and have laid down a strategy for investors to increase their wealth.

AZN was already going through a tough time and the news has added fuel to the fire. Many patents for AZN's medicines have expired, resulting in a large sales decline. To further worsen the scenario, the expired patents have made the restructuring plan worth USD 2.3 billion crucial for the company. In the light of the declining sales and necessary restructuring expenses, the analysts were expecting a mid to high negative single-digit growth in the company's earnings. I believe this news will dip the growth even more to bring it to a double digit negative growth for AZN in the coming quarters.

Global Asthma Market

The asthma market is quite large and a large chunk of asthma drug demand comes from the emerging markets. Emerging countries have growing populations and inadequate health facilities that are attracting large pharmaceutical companies from all over the world.

According to Transparency Market Research "Asthma and COPD Drug Market - Global Industry Analysis, Market Size, Share, Trends, Growth and Forecasts, 2010 - 2017":

The global asthma and COPD market was worth USD 25,102.3 million in 2010, which is expected to reach USD 26,965.5 million in 2017 with a CAGR of 1.03% over the forecasted period (2010 - 2017). Asthma drug segment dominated the overall asthma and COPD market at USD 14,509.1 million in 2010. The COPD segment was estimated to be worth USD 10,593.2 million in 2010, which is expected to reach USD 12,619.8 million in 2017.

Keeping aside the long term prospective, the overall sales in the asthma and COPD drugs is expected to increase to USD 31 billion by 2014 whereas the asthma segment's sales are expected to reach a level of U.S. 17 billion by the same year.


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Actavis has an opportunity to bank on the bright prospects of the asthma market as AZN is out of the way now.

About the Companies

Actavis Inc.

As the author perfectly puts it:

Actavis, Inc. is the world's third-largest generics prescription drug manufacturer. Operating as Actavis Pharma, the Company develops, manufactures and markets generic, branded generic, legacy brands and Over-the-Counter (OTC) products in more than 60 countries. The Company is ranked in the top 3 in 12 global markets, the top 5 in 16 global markets, and in the top 10 in 33 global markets. Actavis Pharma also develops and out-licenses generic pharmaceutical products outside the U.S. through its Medis third-party business, the world's largest generic pharmaceutical out-licensing business. Medis has more than 300 customers globally, and offers a broad portfolio of more than 200 products.

AstraZeneca

AstraZeneca plc is a British-Swedish multinational pharmaceutical and biologics company headquartered in London, United Kingdom. Measured by 2009 prescription drug sales, it is the world's fifth-largest pharmaceutical company after Pfizer (NYSE:PFE), Novartis (NYSE:NVS), Sanofi (NYSE:SNY), and GlaxoSmithKline (NYSE:GSK) having operations in over 100 countries. It has a portfolio of products for major disease areas including cancer, cardiovascular, gastrointestinal, infection, neuroscience, respiratory and inflammation.

Financial Analysis


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Source: Yahoo Finance

ACT has a beta of 0.16 compared to AZN's beta of 0.54, representing a lesser risky investment comparatively. The earnings of ACT are expected to inflate which will drag down the forward P/E of the company. On the other hand, evident by the negative price to earnings growth ratio (PEG) the earnings growth of AZN is negative and is expected to further decline. The analysts are expecting the market to realize this fact and value the stock lower than its current market value.


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ACT's earnings growth has been roaming in the positive territory and this trend is expected to continue in the long run, whereas, AZN is having a tough time. The company has posted a negative growth rate of 27.1% in the current quarter and this double digit negative growth rate is expected to continue for the whole year.

This data has been extracted from Yahoo finance and I am pretty much sure that these figures do not incorporate the effect of the latest patent cancellation news. By the time analysts will incorporate the impacts of AZN losing the market for its Pulmicort Repsules asthma treatment, analysts will significantly revise these growth estimates downward.


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Source: Yahoo Finance

Conclusion

In 2011, AZN's revenue drastically fell by 89%. The following year the revenue dropped by 17% pushing down the gross profit by 18%. 2011 and '12 have been strong and stable for ACT whereas I believe that by the time company posts its next yearly results, a good upward boost in the top line will be reported.

Investment Strategy

I believe this is the right time to make the bets on these two pharma giants. I would suggest going long on ACT and taking a short position on the AZN before the market makes its move in the same direction. AZN has already been struggling. This patent push will throw AZN deeper into the pits whereas the "sky is the limit" for ACT's prospects. I suggest a sector neutral strategy by taking opposite positions in the two companies that will reduce the overall exposure of investor to the pharmaceutical industry and gives investors good start in making money in both positions . I do not hesitate to recommend a Short Position on AZN and a Long Position on ACT.

Source: Actavis And AstraZeneca - One's Gain, Another's Pain