Actavis (ACT) is a large and integrated specialty pharmaceutical company focused on developing generic, brand, and over-the-counter drugs. Actavis has soared with remarkable gains in the last couple of years - 170% to be exact. Yet despite these gains, a closer comparison to biopharmaceutical peers might reveal that future gains can still be realized. The reason is a rare combination of both growth and value that is not seen in this particular space.
The growth of Alexion
One thing that makes Actavis so appealing is that it has growth not normally seen with large pharmaceutical companies.
During its last quarter, revenue soared 57% to $2 billion, but what's more impressive is that the company managed this feat while improving gross margin by 4.3%. This growth was driven by new generic products such as Suboxone, Lidoderm, and also a 208% boost in international revenue.
With that said, Actavis is at a half-way point in a five-year $133 billion period where brand drugs are losing their patent protection, also known as the patent cliff. Therefore, analysts expect full-year sales growth of 45% this year and another 22% in 2014, as Actavis capitalizes on this event.
Actavis's growth is very comparable to Alexion Pharmaceuticals (ALXN), which has been a Wall Street favorite for the better part of 10 years. Alexion markets Soliris, a drug that treats rare blood and genetic disorders.
Analysts estimate that sales of Soliris will be $1.54 billion and $1.95 billion for 2013 and 2014, respectively, translating to year-over-year growth of 35.8% and 26.4%. While Alexion is expected to grow faster in 2014, Actavis's growth is very comparable despite having five-times more annual revenue.
The value of Pfizer
The company continues to battle the loss of important patents, such as for Lipitor, and has failed to develop its pipeline at a rate to replace lost revenue. Therefore, Pfizer has not been the best-performing pharma in the market, losing 10% of its value over the last decade while the Dow Jones has increased 57% in the same period.
With these struggles in mind, Pfizer trades at 3.55 times trailing 12-month sales and a forward P/E ratio of 13.4. Essentially, these are the multiples that have been given to Pfizer to reflect its fundamental woes.
Now, what's interesting is that Pfizer and Actavis's multiple are very similar. Actavis trades at 3.75 times sales and a forward P/E ratio of 12.85! Clearly, this shows a large disconnect between Actavis's growth and the valuation of the company.
What does this mean?
Theoretically, a company with rapid market-leading growth will be awarded a premium to industry peers with less growth.
It is this concept that has allowed companies such as Regeneron, Gilead, Celgene, and Alexion to trade at more than 10 times sales, while those like Pfizer are valued at 3.5 times revenue. However, Actavis is proving itself to be a company that investors have devalued, one that has slipped through the cracks, being somewhere in the middle of these two types of companies.
With that said, if you could buy a company with the same growth, one trading at 3.75 times sales and the other at 17 times sales, clearly you'd choose the cheaper option.
Also, if there's two companies with the same valuation multiples, but one has 20% plus growth and the other is producing year-over-year losses, obviously you'd choose the one with growth.
By using this logic, Actavis is without question a better investment opportunity than either Pfizer or Alexion, but is also a very rare combination of value and growth that is likely to yield large future returns.