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

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.

The List

Click on the interactive chart below to see sales data over time.

Do you think these drug stocks are rallying because of the Actavis-Forest Labs acquisition? Use this list as a starting point for your own analysis.

 

1. Salix Pharmaceuticals Ltd. ( SLXP): Develops, and commercializes prescription drugs for the treatment of gastrointestinal disorders in the United States.

Market cap at $6.40B, most recent closing price at $105.04.

Gross profit margins increased from 77.66% to 79.62% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 79.62% to 82.35% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 82.35% to 83.06% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

The stock is currently rallying 5.92% above its 20-day MA, 12.06% above its 50-day MA, and 38.54% above its 200-day MA.
 

2. Mylan, Inc. ( MYL): Engages in the development, manufacture, marketing, licensing, and distribution of generic and branded generic pharmaceuticals, specialty pharmaceuticals, and active pharmaceutical ingredients (APIs) worldwide.

Market cap at $19.97B, most recent closing price at $52.13.

Gross profit margins increased from 40.73% to 40.81% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 40.81% to 41.95% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 41.95% to 43.76% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

The stock is currently rallying 14.19% above its 20-day MA, 17.40% above its 50-day MA, and 37.37% above its 200-day MA.
 

3. Allergan Inc. ( AGN): Operates as a multi-specialty healthcare company primarily in the United States, Europe, Latin America, and the Asia Pacific.

Market cap at $37.77B, most recent closing price at $125.67.

Gross profit margins increased from 85.32% to 86.18% during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). For the second time interval, gross margins increased from 86.18% to 86.7% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the final time interval, gross margins increased from 86.7% to 87.37% (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31).

The stock is currently rallying 5.71% above its 20-day MA, 11.04% above its 50-day MA, and 28.31% above its 200-day MA.
 

4. Novo Nordisk A/S ( NVO): Engages in the discovery, development, manufacture, and marketing of pharmaceutical products in Denmark and internationally.

Market cap at $112.18B, most recent closing price at $44.73.

Gross profit margins increased from 80.78% to 81.03% during the first time interval (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). For the second time interval, gross margins increased from 81.03% to 82.63% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31). And for the final time interval, gross margins increased from 82.63% to 82.94% (12 months ending 2013-12-31 vs. 12 months ending 2012-12-31).

The stock is currently rallying 8.87% above its 20-day MA, 16.01% above its 50-day MA, and 27.92% above its 200-day MA.

( List compiled by Mary-Lynn Cesar, a Kapitall Writer . Gross margin data sourced from Google Finance. Quarterly sales data sourced from Zack's Investment Research. All other data sourced from Finviz.)

More from Stocks

Video: Jim Cramer on What Trade Tariffs and Rising Rates Mean for Stocks

Video: Jim Cramer on What Trade Tariffs and Rising Rates Mean for Stocks

Dow Makes Move Higher as Bond Yields Hover Near 3% Threshold

Dow Makes Move Higher as Bond Yields Hover Near 3% Threshold

The Stock Market Isn't Rigged, Just Look At The Odds (VIDEO)

The Stock Market Isn't Rigged, Just Look At The Odds (VIDEO)

Kanye West Loves His Tesla - But Should He Love the Company's Stock, Too?

Kanye West Loves His Tesla - But Should He Love the Company's Stock, Too?

Should You Invest In DowDuPont Now?

Should You Invest In DowDuPont Now?