Two top pharmaceutical companies announced a merger this morning, continuing 2015's massive run of M&A activity.
Botox maker Allergan Plc. (NYSE: AGN) announced today that it will purchase Kythera Biopharmaceuticals Inc. (Nasdaq: KYTH) for $2.1 billion. That values KYTH shares at $75 each - 24% higher than Tuesday's closing price.
KYTH stock jumped to $74.30 in early trading Wednesday. AGN shares climbed 0.6% to $301.40 in early trading.
The biggest reason these top pharmaceutical companies are merging is Kythera's newest product, Kybella. It's an injection that eliminates "double chin," or unwanted fat in the chin/neck area. Kybella is expected to reach the market shortly.
Company officials are unsure of Kybella's full potential because it's a brand new market. Kythera's CEO Keith Leonard previously stated the product will be aimed at patients who already receive Botox treatments. That makes Allergan the perfect company to partner with.
This morning's deal is just the latest in this year's massive healthcare M&A market.
According to PricewaterhouseCoopers, the "life sciences" field had 35 M&A deals in Q1 2015. The life sciences industry is made up of pharmaceuticals, medical devices, biotech, diagnostics, and contract-research organizations.
Those deals totaled $166.3 billion. That's more money than was spent during all of 2014, which saw M&A activity total $150.1 billion. In Q1 2014, just $46.5 billion was spent.
It's a trend that Money Morning Defense & Tech Specialist Michael A. Robinson saw coming, even when Wall Street "experts" called the M&A market dead in late 2014.
And the spending won't stop anytime soon.
Top pharmaceutical companies go on the hunt for smaller firms when their older patents are about to expire. Instead of developing their own drugs - which can take up to 10 years and $1 billion - they buy other companies with new drugs.
"M&A deals will remain a big driver for the whole healthcare industry," Robinson said in February. "The pickup in M&A activity will translate into healthy bonuses for bankers and lawyers, certainly, but it will also continue accelerate stocks in the biotech and pharmaceutical sectors way past the overall market."
In early 2015, Robinson found an investment that taps into this shopping spree of the top pharmaceutical companies. It's already gained 16.7% and will continue climbing from here...
How to Profit from the Top Pharmaceutical Companies Now
The investment Robinson recommends is the SPDR S&P Pharmaceuticals (NYSE Arca: XPH) ETF. It's composed of some of the top pharmaceutical companies on the market and several aggressive small caps.
"XPH is not an M&A fund - but it's a great way to take advantage of the trend," Robinson said. "This ETF focuses on the industry's bread and butter: high earnings.
"And many companies in the fund's portfolio will likely end up growing through mergers. Or they could become targets themselves."
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The ETF has 40 holdings with an average market cap of $40.2 billion. It invests in some of the top pharmaceutical companies and biotech firms in the world, including the following:
- Eli Lilly and Co. (NYSE: LLY) is one of the best-known firms in pharmaceuticals, and is worth more than $93 billion. In 2015, LLY stock has gained 21.8% compared to a gain of just 0.5% for the Dow Jones in the same time.
- Jazz Pharmaceuticals Plc. (Nasdaq: JAZZ) is a Dublin-based company with substantial operations in California. It has grown quickly since its founding in 2003 and has a market cap of almost $11 billion. JAZZ is up 8.9% in 2015.
- Allergan Plc. (NYSE: AGN) is the company that will be benefitting from today's merger news. AGN is a $117 billion company that has seen its stock gain 16.3% in 2015.
In the last 12 months, XPH has climbed 24.6%. The Dow Jones and S&P 500 are up just 6.6% and 8% respectively in that time.
"The beauty of a play like this one is that rather than try to pick a single winner, we get the benefit of the entire sector's operations," Robinson said. "That makes XPH an excellent foundational investment to pave your road to wealth."
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Related Articles:
- The Wall Street Journal: Botox Owner Allergan to Buy Maker of Double-Chin Treatment