Why Is Impax Labs Tumbling 11.7% Today

Money In A Pill Getty
Money In A Pill Getty

Image source: Getty Images.

What: After announcing that its buying a shopping cart full of generic drugs from Teva Pharmaceutical (NYSE: TEVA) and Allergan plc (NYSE: AGN) , shares in Impax Laboratories (NASDAQ: IPXL) are falling by 11.7% Tuesday afternoon.

So What: Teva Pharmaceutical is attempting to buy Allergan's generic drug business in a deal worth $40.5 billion, and to satisfy regulators who are concerned that the combination could be anti-competitive the two are unloading a slate of generic drugs.

Earlier today, Impax Laboratories announced it will pay $586 million to acquire a stable of 15 generic drugs that generated $150 million in sales last year. The acquisition also nets Impax Laboratories the rights to four other generic drugs that have yet to be launched.

Impax Laboratories expects this acquisition to be immediately accretive to its earnings this year, but investors appear less-than-happy that the acquisition will be financed largely with $400 million in loans.

Now What: After Allergan's merger with Pfizer, Inc. fell apart earlier this year, pressure has increased to close on its transaction with Teva Pharmaceutical and firm up its balance sheet. Allergan is expected to walk away with about $36 billion in cash and Teva Pharmaceutical stock once its deal with Teva Pharmaceutical closes. Exiting Q1, Allergan had more than $41 billion in debt and just $1.2 billion in cash on its balance sheet.

Allergan and Teva Pharmaceutical's eagerness to finalize their deal may mean that Impax Laboratories got a bargain.

The drugs its acquiring will add about $80 million to Impax Laboratories sales in the second half of this year. It will also increase EBITDA by $50 million, boost gross margin, and increase EPS by at least 20% this year versus a year ago.

The company's acquisition, however, does increase Impax Laboratories' interest expense and its leverage, and that's something that makes investors a bit nervous given how debt and leverage is causing significant struggles for Valeant Pharmaceuticals.

Nevertheless, investors might not want to be too worried about Impax Laboratories. After all, the company's $340 million in cash and $425 million in debt exiting Q1 isn't nearly as bad as Valeant's debt to cash ratio, and given that this deal will boost earnings right away, there should be plenty of cash coming in to cover the increase in interest payments. Industry watchers were modeling for Impax Laboratories to deliver $2.24 in EPS in 2017, up from $1.74 in 2016, but once this deal closes, I imagine that upward revisions will provide some tailwinds to the company's share price.

A secret billion-dollar stock opportunity

The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

Todd Campbell has no position in any stocks mentioned.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him on Twitter where he goes by the handle @ebcapital to see more articles like this.The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for the TradeTalks newsletter to receive your weekly dose of trading news, trends and education. Delivered Wednesdays.