NEW YORK ( TheStreet) -- With three weeks until 2015, Merck (MRK) stunned investors Monday with its $9.5 billion deal for antibiotic maker Cubist Pharmaceuticals (CBST) . But no one should have been surprised.
While the health care sector leads all major groups with year-to-date gains of 27.6%, according to Fidelity Investments, investors should remember 2014 more for the number of mergers and acquisitions (M&A) and -- at times -- the asset swapping that has taken place.
This year, drugmakers with plenty of cash but short on growth have bought quick access to products and markets that would have otherwise taken years to build. One of the earlier deals occurred in April when Zimmer Holdings (ZMH) picked off orthopedic device maker Biomet for $13.4 billion.
Let's not forget how some of these fierce rivals can partner up overnight when it comes to swapping assets. In April GlaxoSmithKline (GSK) and Novartis (NVS) agreed to swap assets, allowing Glaxo to strengthen its vaccines business, while Novartis built up its position in cancer drugs.
Acquiring assets of one company is often the focus of these deals. In June, Merck spent $3.9 billion to buy biotech firm Idenix Pharmaceuticals (IDIX) . In October, Endo Pharmaceuticals (ENDP) acquired Auxilium Pharmaceuticals (AUXL) for $2.6 billion in October, paying an 18% premium to its previous bid of $2.2 billion offered in September. In total, Auxilium shareholders received a 52% premium for their shares.
The price, however, rarely means anything to the acquirer. They're more focused on what they're getting for their money.
For Endo, its branded drug business was under attack from generic competition, posting a 40% year-over-year decline in the most recent quarter. With the deal, Endo addressed its weak pipeline situation with fresh new products that can deliver long-term growth. At the same time, it raised its investment profile, given that it will save roughly $175 million per year.
Another high profile deal occurred in July when medical device maker Medtronic (MDT) picked off rival Covidien (COV) for $42.9 billion, paying a 29% premium. Looking for ways to enter new markets, Medtronic saw Covidien as too valuable to pass up, especially with Covidien's lead in surgical over the likes of Johnson & Johnson (JNJ) and Stryker (SYK) .
There were other notable deals including Swiss drugmaker Roche Holding (RHHBY) spending $8.3 billion in August for InterMune (ITMN) , paying a 38% premium. Also, in October Becton Dickinson (BDX) bought CareFusion (CFN) for $12.2 billion.
These types of deals will likely continue in 2015 because they make too much sense not to. The consulting firm Bain & Company conducted a study of the most successful drug companies over the past two decades. They found that the top 10 drug companies, delivering the highest rate of shareholder returns, all had one thing in common -- they used mergers and acquisitions to strengthen their product portfolios and growth in markets to which they didn't have access.
What's more, the study revealed some of the best drug companies generated almost 70% of their sales from products they did not develop themselves but bought through deals. In that regard investors can expect more deals to take place in 2015. At the top of the list of names you'll be seeing in M&A: AbbVie (ABBV) .
Backing out of its $54 billion deal for Shire (SHPG) didn't mean an end to AbbVie's appetite. For that matter, Shire will remain a target and -- as I've argued recently -- Bristol-Myers Squibb (BMY) will likely seal the deal sometime in 2015.
All told, I expect drug stocks to continue making new highs in 2015. While I don't expect the volume of these deals to stay at such a high level, investors can expect drugmakers to use excess cash for buybacks and raising their dividends. Keep an eye on those resorting to strict cost-cutting measures to boost earnings. This, too, will become a popular trend in 2015.
TheStreet Ratings team rates MERCK & CO as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate MERCK & CO (MRK) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, solid stock price performance, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
You can view the full analysis from the report here: MRK Ratings Report