4 Pharmaceuticals Making Moves To Boost Profits

 |  Includes: JNJ, PRX, SPPI, VRX
by: ValueMax

Even though it has been a disappointing week for Spectrum Pharmaceuticals (SPPI), the company does have some good news to report. In the wake of the failure of two clinical trials conducted to test the effectiveness of apaziquone, an experimental bladder cancer drug, the company announced the acquisition of Allos Therapeutics, Inc. This acquisition could be the turnaround Spectrum needs to regain some of its strength in the stock market and to begin restoring investor confidence.

Spectrum plans to purchase Allos for $108 million plus an additional $12 million at the end of the year if Folotyn, developed by Allos to fight blood cancer, is granted EU approval. Chances are good that the drug will be approved, so acquiring the company when Spectrum did was a smart move. Once the drug is approved, Spectrum can begin selling it in most parts of Europe along with its own blood cancer drug, Zevelin. The two drugs treat different types of blood cancer, but can be marketed to the same physicians for various patient needs.

Acquiring a company is nothing new in biotech and pharmaceutical arenas. This is how most companies expand into new and familiar markets. By purchasing other business entities, these companies can reap the benefits of acquiring drugs already on the market or those very close to approval by U.S. and other drug safety agencies around the world. This saves time and money in clinical trials and marketing brand new products.

Valeant Pharmaceuticals (VRX) recently signed an agreement to purchase Russian-based Natur Produkt, JSC. Valeant will pay $180 million for the company and an additional $5 million if Natur Produckt's drugs perform as well as expected within the time frames outlined in the purchase agreement. Natur manufactures a variety of drugs including AntiGrippin and Anti Angin, used in cold and cough medications. Since Valeant already manufactures and sells drugs used in everyday OTC (over-the-counter) products for pain relief and skin care, moving into the OTC cold and cough medication market is an obvious next step.

Also, acquiring a company that already has approval to manufacture and sell these types of drugs will save Valeant alot of money in the long run.

Par Pharmaceuticals (PRX) recently purchased India-based Edict Pharmaceuticals, a privately owned generic drug manufacturer. Par Pharmaceuticals, already a big player in the generic drug market, paid $20.5 million, plus $4.4 million to pay off Edict's outstanding debts. Through the acquisition of Edict, Par Pharmaceuticals will have access to 15 new drugs currently under review by the FDA.

In some cases, companies want to purchase information rather than products currently on the market or in company pipelines. For some companies, having access to patented ideas or manufacturing methods is far more valuable than taking over and merging a company's day-to-day operations with its own.

Ethicon, a unit of Johnson and Johnson (JNJ), recently acquired the intellectual property rights to Canadian pharmaceuticals company Angiotech Pharmaceuticals' Quill line of wound closure products. Angiotech will retain worldwide rights to manufacture, sell and market these products, but Ethicon now has the right to use certain manufacturing methods and other ideas when developing its own products. For these rights, Ethicon will pay Angiotech $20 million upfront and up to $42 million at various points in the future if Ethicon can successfully use the information it purchased in conjunction with its own products (those currently on the market and those still in development).

Angiotech will still be able to manage its business as it sees fit - it just now has to share some of its company 'secrets' with Ethicon.

For investors, it's important to check out companies acquired by companies they invest in to determine if the acquisition will yield additional profits. After all, a company that acquires another company not only acquires its products, but also its reputation. A company with a bad reputation could prove difficult to manage at first. Investors may see a decline in stock value until the company can make the improvements needed to revitalize a tarnished reputation.

Another important factor to consider is why a company chooses to acquire another company. In Spectrum's case, buying Allos may be the smartest move the company makes this year because of the market potential. Being able to sell multiple blood cancer drugs gives the company an edge over the competition. Selling in both domestic and overseas markets increases net worth, which could translate into large investor profits.

Unfortunately, even with this acquisition, many analysts still don't think Spectrum will recoup from the loss of two failed clinical studies. This can be problematic for investors who want to stay with a stock over a long period of time. Investors thinking long term may have to suffer through a steady decline until Spectrum releases new clinical studies with positive results or increases its revenue through other means, such as acquiring other business entities. For the moment, Spectrum is not a stock for short-term investors. These investors should sell and move on to more profitable stock.

The ultimate lesson to learn here is that investing is a tricky endeavor with many twists and turns. One day, a company may be doing well and the next day, the results of a couple of failed clinical tests can destroy all the work it has done so far. But, at least Spectrum continues to think ahead. Acquiring Allos may be just what the company needs to get back into the marketplace and recoup some of its losses. For investors, the decision to stay or leave will not be an easy one. As with any acquisition, investors must give companies time to transition in terms of management, supply and manufacturing are concerned. But once Spectrum does that, it can start reaping the benefits of a smart business move.

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