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A Wide-Moat Opportunity in Health Care

Wed, 11 Mar 2015

Actavis' transformation to a wide-moat company following its deal with Allergan represents a good buying opportunity for long-term investors.


Video Transcript

Michael Waterhouse: We think Actavis' transformation to a wide-moat company represents a good buying opportunity for long-term shareholders. This company has dramatically changed over the last few years from a small generic-drug manufacturer to a very large branded-pharmaceutical firm with pro forma sales after the Allergan (AGN) deal on par with big players like Eli Lilly (LLY) and GlaxoSmithKline (GSK).

We like the business and we give it a wide moat for three primary reasons. The first is that we think the business will be very diversified. The largest product, Botox, will be about 10% of sales; but below that, no single product will be more than 5% of the franchise. So, there's no big risk of any patent loss really hitting earnings hard.

The second reason is we think that the products have a very long lifecycle. A lot of the major products like Botox and Restasis have very little risk of branded and generic competition, which should provide a long life of cash flows. And then third, we really like the pipeline. Granted, a lot of that is inherited from Allergan, but we think there is a lot of growth potential--especially in ophthalmology--from those products in development.

We think Actavis remains undervalued. We think the company will create over $8 billion in free cash flow annually, and earnings per share should hit $23 by 2017, based on cost synergies from the recent Allergan deal. We currently have a $330 fair value estimate on the stock, which is currently in 4-star territory. And even though the stock has had a run earlier this year, we still think there is plenty of room for appreciation.

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