Despite Actavis Inc (NYSE:ACT)’ obvious upside, its shift into the specialty drug business puts it into more direct competition with branded drug giants, especially Bayer, Johnson & Johnson, and Merck in the contraceptive segment.Teva, the world’s #1 generic drug maker has been employing a similar strategy for years, with varying degrees of success. As such, investors might want to look down the supply chain to the pharmaceutical suppliers that help ensure a steady supply of raw material ingredients, like Cambrex Corporation (NYSE:CBM).
The company is one of the leading providers of active pharmaceutical ingredients to Warner Chilcott Plc (NASDAQ:WCRX), as well as the rest of the industry. Drug companies use Cambrex Corporation (NYSE:CBM)’s products in order to supplement their internal capacity and to preserve consistent supply for their key drug programs. In the past two years, Cambrex has reinvigorated its growth as drug makers have expanded their development programs, leading to strong stock price gains.
In its latest fiscal year, Cambrex Corporation (NYSE:CBM) reported solid financial results, with increases in revenues and adjusted operating income of 8.2% and 50.0%, respectively, compared to the prior year. Despite slightly lower average product pricing, down 2% during the period, the company enjoyed double-digit volume gains that led to better plant operating efficiency and a higher operating margin. Looking ahead, Cambrex is looking for growth opportunities in its small Asia-Pacific segment, currently accounting for only 5% of sales, primarily through its majority stake in India-based Zenara Pharma, a leading supplier to the region’s drug makers.
Actavis should generate value from its acquisition of Warner Chilcott Plc (NASDAQ:WCRX), although Actavis Inc (NYSE:ACT)’ stock price valuation has been stretched after a 70% gain over the past year. In addition, it needs to manage looming patent expirations and the higher costs of the branded drug segment. The pharmaceutical suppliers may be a better investment choice, as they will benefit from higher global drug sales, regardless of the brand provider. As such, Cambrex Corporation (NYSE:CBM) is the one to own.
The article Can You Profit From This Pharma Tie-Up originally appeared on Fool.com.
Robert Hanley owns shares of Cambrex Corporation (NYSE:CBM). The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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