Health care is an industry with a great deal of merger activity recently. S&P Capital IQ, as reported by Morningstar, says $89 billion worth of health care mergers and acquisitions have been announced just this year, up from $56 billion in the fourth quarter of 2014. Just in the past couple of weeks, two deals were announced in the space: Horizon Pharma's (HZNP) takeover of Hyperion Therapeutics (HPTX), and Teva Pharmaceutical's (TEVA) purchase of Auspex Pharmaceuticals (ASPX).
S&P Capital IQ reports that from Jan. 1, 2011 to Dec. 31, 2014, the S&P 1500 Biotechnology stock index rose 288.5% compared with a 63.6% rise for the S&P Composite 1500. The report goes on to note that "biotech's current 19.1 multiple is equal to the health care sector's PE multiple of forward 12-months EPS and only slightly higher than the broader S&P 1500's PE multiple of 18X, despite much stronger growth."
I do not try to anticipate which companies might be takeover targets, but I believe this is a good time to invest in the biotech/pharmaceutical industry, whether or not a company is a takeover target, buys another company or just stays put.
One pharma company worth a look is Gilead Sciences (GILD), which focuses on infectious diseases. It bet the farm years ago when it took on HIV and won by creating drugs that help stave off the disease. More recently, it hit the jackpot with a treatment for hepatitis C. A strategy I use to analyze stocks is based on the writings of investor Joel Greenblatt, and this strategy currently recommends Gilead. It looks as earnings yield and return on total capital (yes, only two variables), ranks each based on the entire universe of domestic stocks, and then provides a combined ranking. Of all the thousands of stocks in our database, Gilead is ranked an impressive 15th.
Lannett Co. (LCI), rather than developing innovative drugs, develops and markets generic versions of branded drugs. My Peter Lynch-based strategy favors Lannett because of its very favorable P/E/G ratio, which is price-to-earnings relative to growth, and measures how much the investor is paying for growth. Lannett's P/E/G of 0.42 -- any P/E/G below 0.50 is considered strong -- is in very favored territory. Another reason the Lynch strategy selects this company is its very low level of debt.
One more company worth discussing is DepoMed (DEPO), which focuses on conditions and diseases of the central nervous system. Like Gilead, it is recommended by my Greenblatt strategy, which ranks the company's stock 22nd among all stocks.
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