New drug developments, partnerships and clinical-trial results could propel the sector this year, analysts say.
Larry NeiborRobert W. Baird & Co. [email protected]
Area of coverage: Specialty Pharmaceuticals
Sector outlook: We believe that macro factors should be favorable over the next twelve months including demographics, an economic outlook for uncertain/uninspiring growth leading to an expected flow of funds into counter-cyclical stocks, and attractive markets and market growth stories. Risks to the industry include the high level of competition in many markets — including formidable big pharmaceutical and biotech concerns, a reliance on in-licensing discovery from others, the inherent uncertainty of the drug development process, a cautious regulatory environment, and patent challenges by generic challengers.
We believe the risk/reward balance is favorable and look for successful companies to be rewarded with expanding price-to-earnings multiples over the next twelve months.
Outperform Ratings: Alkermes, Inc. (ALKS), Cephalon, Inc (CEPH), Endo Pharmaceuticals Holdings Inc. (ENDP), Forest Laboratories Inc. (FRX), Noven Pharmaceuticals Inc. (NOVN), Obagi Medical Products Inc. (OMPI), Penwest Pharmaceuticals Co. (PPCO), Pozen Inc. (POZN), and Seracor Inc. (SEPR).
About Forest Laboratories: The first fiscal quarter was solid with revenue/EPS beating our and consensus estimates. Revenue advanced 13.7 percent to $928.3 million versus our $901.8 million (consensus of $901.2 million), while EPS gained 35.3 percent to $0.83 versus our $0.75 (consensus of $0.77). EPS guidance remained at $3.05-$3.15 despite beating our estimate by $0.08, likely viewed as disappointing by investors.
Forest will spend considerable amounts to launch Nebivolol (used to treat hypertension) and (the antidepressant) Milnacipran, depressing near-term comparisons but positive in the longer term. We recommend purchasing Forest at current levels, as we believe the multiple is too low given solid results and significant prospects.
Specialty pharmaceutical companies are often development driven, not discovery driven. They rely on discovery companies just as these discovery companies rely on them. Forest has proven itself a strong, reliable partner through its development of Celexa (an antidepressant), Lexapro and Namenda.
Forest has recently bolstered its late-stage pipeline with the acquisition of Nebivolol, LAS34273 (used to treat lung disease) and Ceftaroline (an antibiotic). This active in-licensing program should provide a meaningful source revenue growth over the intermediate term.
Forest has about $2 billion in cash, $800 million of annual free cash flow and a desire to expand its product line to cover any potential gaps beyond 2012. We look for the company to continue expanding its product line in the next 12-18 months.
Jason Kantor, Ph.D. RBC Capital Markets [email protected]