We are initiating coverage of Accuray (ARAY) with a Buy rating and a 12-month price target of $12.30 or two times our fiscal 2012 revenue per share estimate of approximately $6.15 (approximately $430 million in revenue and approximately 70 million shares post acquisition of TomoTherapy).
We believe that the aging of the population will drive an increase in the number of new cancer cases; we believe that ARAY’s clinical focus on oncology positions the company for significant growth. ARAY’s CyberKnife System automatically tracks, detects, and corrects for tumor and patient movement in real-time throughout the treatment. Potential benefits include shorter treatment times, improved precision, greater radiation exposure to the cancerous tumor, and less radiation exposure to the healthy tissues.
Accuray Incorporated’s (ARAY) [July 26] announcement that it would be offering $75 million in convertible debt coincided with an updated look at the June quarter revenue guidance. For the period, core ARAY revenue is expected to come in relatively in line with both our estimate and the Street, which implies solid pro forma year-over-year growth … of 11 to 13 percent.
We believe the proceeds from the [TomoTherapy] deal are being earmarked for future acquisitions. In our view, management is running the Elekta playbook, only with what many of our contacts in the industry deem to be superior technologies. The company has a great deal of momentum in its core business, and we expect growth acceleration in FY2012 sufficient enough to offset any sluggishness that might remain in the TOMO business.
Karen Andersen, CFA
The long patent life of Roche Holdings’ (RHHBY) portfolio puts it among the biotechs least exposed to generic competition. Patents don’t begin to expire until 2013 — when Rituxan loses protection in Europe — and management is implementing strategies to counteract future competitive pressures that we think will enable the firm to achieve 5 percent five-year earnings growth.
Subcutaneous versions of Roche’s blockbuster antibodies are in the works, which could reduce hospital costs and add to convenience. Novel drugs are in development that could improve on the efficacy of its current products or represent new, personalized treatments for cancer patients.
Roche also has a solid pipeline beyond oncology, including drugs to treat schizophrenia and hepatitis C. With the Genentech integration starting to yield synergies, we think Roche’s drug portfolio and industry-leading diagnostics conspire to create sustainable competitive advantages.
Roche’s first-half group core operating profit was clearly ahead of consensus, but only marginally ahead of Societe Generale’s, driven by strong pharmaceutical margins. Consensus was for a pharmaceutical core operating profit of 7,174 million Swiss francs for a 41.8 percent margin, and Societe Generale’s [outlook was for] 7,130 million Swiss francs for a 41 percent margin; Roche reported 7,385 million Swiss francs for a 43.9 percent margin.
We maintain our 2011 core EPS forecast of 13.40 Swiss francs, up 14.5 percent in [local-currency] terms, but see scope for consensus (currently 12.91 Swiss francs) to rise.
Citi Investment Research
Watson Pharmaceuticals Inc. (WPI) beat consensus on both the top and bottom line, with the magnitude of the raise $0.10 higher than we expected. WPI reported 2Q11 EPS of $1.01 (+22 percent), in line with our $1.01 and above the Street’s $1.00.
Total revenue of $1,082 million (+24 percent) beat our estimate by $88 million ($993 million) and the Street’s $994 million, driven by higher generic sales, partially offset by lower distribution revenues. Higher than projected sales (+$0.20), lower R&D (+$0.03) and lower than projected interest expense (+$0.04) were offset by lower gross margins (-$0.14), higher selling, general, and administrative expenses (-$0.12) and lower other income (-$0.01).
WPI raised its ’11 estimated EPS range by +$0.30 to $4.25(+24 percent) to $4.50 (+31 percent) from $3.95-$4.20 versus our $4.32 (+26 percent) and the Street’s $4.32. The high end of WPI’s range is above the $4.25-$4.40 we projected in our 2Q11 preview. We would take advantage of weakness in WPI’s shares and reiterate our Buy/$72 price target.
WPI acquired privately-held Specifar Pharma for $562 million in cash and $17.5 million in assumed debt in May, with an earn-out of up to 40 million euros tied to generic Nexium (esomeprazole) sales. The deal makes strategic and financial sense to us, with the price (ex-earn-out) representing about 4.9 times enterprise value/2010 sales of 80 million euros.
Strategically, Specifar provides WPI [with] a highly-profitable EU business that enhances its Arrow business, additional manufacturing and access to a significant generic, Nexium (a $1.2 billion brand value in Western Europe). WPI expects immediate accretion to ’11 non-GAAP EPS and “substantially” accretive thereafter.
Morgan Stanley & Co. LLC
We are raising our ’11 estimated revenue (for WPI) by 5 percent from $4.3 billion to $4.5 billion and raising ’11 estimated EPS by 3 percent from $4.34 to $4.45. Higher Concerta sales ($576 million versus our previous $442 million) are partially offset by slightly lower gross margins (estimated 35 percent versus our previous 37 percent).
Our ’11 estimate of $4.45 is 2 percent above the midpoint of management’s revised range of $4.25–$4.50 (midpoint: $4.38). We are also bumping ‘12–’13 estimates by 1 percent from $5.74–$5.80 and from $6.06–$6.10.