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By Ann McQueen

Acquisitions have been a trend in the pharmaceuticals industry for a few years, and with several giants facing unprecedented patent cliffs, the trend will likely continue, as players team up to maintain their competitive advantages. In this article, I analyze five pharmaceutical and related healthcare companies to see how their financials and products fit with their industry peers to determine if they are targets for acquisitions or alliances.

Becton, Dickinson and Company (NYSE:BDX) – This company makes medical and diagnostic devices. Its operations are divided into three business segments: BD Medical, which makes disposable needles and syringes, IV catheters, insulin syringes, anesthesia needles and trays and containers for the disposal of needles; BD Diagnostics, which makes products for collecting and transporting specimens, blood culturing systems, microbiological testing and cytology screening, and more; and BD Biosciences, which develops and makes equipment used for analyzing, imaging and culturing cells.

BDX is currently trading near $73 a share. Its market capitalization is over $15.5 billion, and its enterprise value is over $17 billon. Earnings before interest, tax, depreciation and amortization (EBITDA) are $2.27 billion. Its ten-year performance in terms of revenue and earnings growth is strong, with revenue growing at a rate of 9.2 percent and earnings growing at a rate of 15.4 percent. BDX’s debt to equity ratio is a little high at 56 percent. BDX’s operating cash flow is $1.72 billion, and its levered free cash flow is $798.4 million.

With three main business segments – consumer health care, medical devices and diagnostics, and pharmaceuticals -- the healthcare giant Johnson & Johnson (NYSE:JNJ) could benefit from BDX’s product offerings in its medical devices and diagnostics division. BDX’s anesthesia needles, syringes and trays are a particularly good fit, as JNJ’s product list is lacking in this area. More importantly, it has the cash on hand, almost $31 billion, with which to bargain. JNJ is currently trading near $64 a share. Its market capitalization is already huge at over $176 billion, and its EBITDA are well over $19 billion. Its operating cash flow is $14.67 billion, and its levered free cash flow is $10.72 billion. Its debt to equity ratio at 21 percent also contributes to its positioning for a strategic acquisition.

Pfizer Inc. (NYSE:PFE) – This pharmaceutical giant manufactures dozens of name brand, patented drugs. It operates a total of nine business segments: primary care, specialty care, oncology, emerging markets, established products, consumer healthcare, nutrition, animal health and capsugel. On Nov. 30, PFE’s patent for Lipitor, which is touted as the world’s biggest selling drug, expired. With Lipitor, PFE has controlled a 40 percent share of the cholesterol drug market and has generated over $10 billion a year in sales, which set an industry record. Over the last ten years, Lipitor sales account for one quarter of PFE’s revenue. In fact, 68 percent of PFE’s portfolio, including Viagra, is threatened by loss of exclusivity over the next three years, leaving the company facing a patent cliff that is more than double that of any other major pharmaceutical company. Furthermore, its product pipeline is weak. Its days as the world’s largest drug maker are numbered.

It is currently trading near $21 a share. Its market capitalization is over $158 billion, and its enterprise value is almost $170 billion. EBITDA are $26.72 billion. PFE’s ten-year revenue growth rate is only 4.1 percent, and its earnings growth rate is only 0.3 percent. PFE’s debt to equity ratio is 39 percent. Its operating cash flow is $21.24 billion, and its levered free cash flow is $17.60 billion. With a yield of 4%, PFE is a healthcare dividend king.

An alliance with Novartis AG (NYSE:NVS) could brighten PFE’s outlook, and the multinational giant has the resources, the patents, the drugs and a diversified business structure to make it happen. NVS is currently trading near $55 a share. Its market capitalization is over $133 billion, and its enterprise value is close to $151 billion. EBITDA are $17.6 billion. NVS’s ten-year revenue growth rate is 13.5 percent, and its earnings growth rate is 12.6 percent. Its debt to equity ratio is 21 percent. Its operating cash flow is $14.16 billion, and its levered free cash flow is $11.21 billion. Its balance sheet shows $5.57 billion in cash.

NVS is positioned to become the world’s leading pharmaceutical company. Its pipeline is full, it leads the world in generic offerings, and its vaccine division is gaining momentum. NVS brings stability, a solid portfolio of brand name drugs, a leading generics business, and cash to PFE’s table, and an alliance or a consolidation can bring tremendous opportunities to investors.

Watson Pharmaceuticals, Inc. (WPI) – This pharmaceutical manufacturer operates three business segments: global generics, global brands and Anda distribution. It markets about 160 generic prescription drug families through its global generics segment.

It is currently trading near $62 a share. Its market capitalization is almost $8 billion, and its enterprise value is almost $9 billion. EBITDA are $815.80 million. WPI’s ten-year revenue growth rate is 11.9 percent, and its ten-year earnings growth rate is flat. WPI’s quarterly growth rate is 165 percent. Its debt to equity ratio is 33 percent. The company’s operating cash flow is $658.60 million, and it levered free cash flow is $626.17 million. Its generic segment would make a nice addition to Pfizer or any of the other giants facing patent cliffs. WPI’s drugs for women fit well with JNJ’s offerings. WPI’s schizophrenia drug Loxitaine could be particularly attractive to Bristol-Myers Squibb Company (NYSE:BMY), which also faces a steep patent cliff. BMY has positioned itself to negotiate partnerships and make strategic acquisitions.

BMY is currently trading near $34 a share. Its market capitalization is close to $57 billion, and its enterprise value is a little over $54 billion. EBITDA are $7.62 billion. BMY’s ten-year growth rate in revenue is only 0.6 percent. Its earnings growth rate over the past five years is 23.5 percent. Over the past 12 months, BMY is showing a decline in earnings of 64.8 percent. Its debt to equity ratio is 33 percent. BMY carries $8.19 billion on its current balance sheet. Its operating cash flow is $4.87 billion, and its levered free cash flow is $5.26 billion.

Obagi Medical Products, Inc. (NASDAQ:OMPI) – This small-cap biotech company develops and manufactures specialty skin-care products that are marketed to physicians and dispensed under prescription. It is currently trading near $10 a share. Its market capitalization is $185 million, and its enterprise value is $159 million. EBITDA are $30.54 million. OMPI’s revenue has grown by 7.4 percent over the past five years and by 14 percent over the past 12 months. Earnings are down 23.1 percent the past 12 months. Ten-year trends were not available. The company carries no debt. Its operating cash flow is $16.90 million, and its levered free cash flow is $25.13 million. Its skin-care systems, acne medicines, chemical peels and rosacea treatments complement products offered by Valeant Pharmaceuticals International Inc. (NYSE:VRX) through its dermatology segment. OMPI’s skincare systems compete with VRX’s Kinerase products, but a strategic alliance could improve the struggling VRX’s bottom line.

VRX is currently trading near $47. Its market capitalization is over $14.5 billion, and its enterprise value is over $19 billion. EBITDA are $1.10 billion. VRX’s ten-year revenue growth rate is -0.1 percent. No information is available for its ten-year earnings growth rate, but over the past 12 months, earnings have declined by 137.9 percent. VRX shows $257.53 million in cash on its balance sheet. Its operating cash flow is $485.29 million, and its levered free cash flow is $479.90 million. It carries a lot of debt, with a debt to equity ratio of 129 percent.

VRX has been working toward expanding its market penetration, and the anti-aging skincare niche is one that should bring opportunities for improved revenue and growth.

PhotoMedex Inc. (NASDAQ:PHMD) – This company develops skincare products and LED light systems for treating dermatological conditions. It is currently trading near $15 a share. Its market capitalization almost $52 million, and its enterprise value is over $73 million. The company is showing a loss before interest, taxes, depreciation and appreciation of $3.03 million. Revenue has grown by 9.5 percent over the past ten years, but PHMD’s earnings have declined at a rate of 14.9 percent. Cash totals $2.42 million. Operating cash flow is -$581,640, and levered free cash flow is $93,430. Its debt to equity ratio is 209 percent.

PHMD announced a merger with the private company Radiance Inc. in June, expanding its reach to the home-use aesthetic device and over the counter skincare niche. GlaxoSmithKline PLC (NYSE:GSK) has the industry clout to pull PHMD out of its slump. GSK is currently trading near $45 a share. Its market capitalization is over $221 billion, and its enterprise value is over $239 billion. GSK’s revenue has grown at a rate of 6.1 percent over the past ten years, and its earnings have grown at a rate of 1.6 percent. It shows $8.71 billion in cash on its balance sheet. Operating cash flow is $8.69 percent, and levered free cash flow is $11.53 percent. Its debt to equity ratio is 191 percent.

With its recent merger with Radiance, PHMD has optimized its position in the aesthetic dermatology niche. An industry leader, GSK, through its consumer healthcare and Stiefel subsidiaries, has the medical expertise and the business know-how to bring PHMD’s products lines into the forefront of the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 5 Healthcare Merger Candidates To Consider