This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Drug Stocks Rally: Consider These Profitable Stocks as Pharmaceutical Deals Rise

Stocks in this article: AGN MYL NVO SLXP

Mary Lynn Cesar, Kapitall: Will Actavis's announced $25 billion purchase of Forest Labs increase the appeal of drug stocks?

Leading generic drug company Actavis (ACT) agreed to buy branded drug maker Forest Laboratories (FRX) for $25 billion on Tuesday morning. The agreement states that Actavis will acquire Forest Labs for $89.48 per share in cash and stock. Following the announcement, MarketWatch reports that shares of Forest Labs and Actavis surged by 30% and 7.9%, respectively, in early morning trading.

[Read more from Kapitall: Will Offshore Tax Havens Face More Scrutiny in 2014?]

The Actavis-Forest Labs deal is the latest consolidation in an industry increasingly beseiged by bids and acquisitions. Last year Actavis rejected multi-billion dollar offers from fellow generic drug makers Mylan Inc. (MYL) and Valeant Pharmaceuticals (VRX), opting to purchase branded drug manufacturer Warner Chilcott for $5 billion instead. According to Bloomberg, roughly $110 billion in drug and biotechnology deals took place between February 2013 and February 2014.

More deals are expected as Valeant CEO Mike Pearson seeks to build his firm into one of the largest drug companies in the world with a market cap exceeding $150 billion by the end of 2016. Just this month Valeant acquired privately held PreCision Dermatology for $475 million. And Businessweek writes that Pearson told Goldman Sachs conference attendees in January that later this year Valeant plans a “significant” deal similar to its earlier $8.7 billion acquisition of Bausch & Lomb.

Investing Ideas

The recent activity in these drug stocks inspired us to look for other investment opportunities in this sector. To begin, we constructed a universe comprised of drug stocks belonging to the "drugs manufacturers – generic" and "drug manufacturers — other" industries. We selected those specific industries instead of using all drug-related segments because Actavis belongs to the former while Forest Labs is part of the latter.

We then screened for increasingly profitable stocks as indicated by rising gross profit margins year-over-year for the last three years. Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes. The formula is:

Gross Margin = Gross Profit / Revenue

The higher the percentage, the greater the gross profits a company takes from its revenue. When a company has rising gross margins, it indicates that the firm is in control of its costs.

Next, we screened for stocks that are rallying above their 20-day, 50-day, and 200-day moving averages (MA). This indicates that these stocks have strong upward momentum.

We were left with four drug stocks on our list.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs