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Biotech/Health Care: Growth Drivers

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John T. Boris
Citigroup Global Markets
[email protected]

The U.S. major pharmaceutical group is trading at 8.3x (times) 2011 estimated earnings per share (EPS), representing a 32 percent discount to the S&P 500 on consensus EPS and a 38 percent discount on Citi Investment Research & Analysis earnings.

This compares to the European Union drug multiple (for example, Novo Norisk, NVO) of 9.0x and the U.S. Large Cap Biotech multiple of 12.8x. The mean 10- and 20-year premiums are 8 percent and 9 percent, respectively.

We reiterate our Buy rating (on Watson Pharmaceuticals Inc., WPI) and $48 price target, which assumes WPI trades at approximately 12.5x our 2011 estimated cash EPS (earnings per share) of $3.84 (versus $3.81 for the Street), below WPI’s 10-year historical median (22x) & average (23x) forward P/E multiple.


Zacks Investment Research

Watson Pharmaceuticals posted first-quarter earnings of $0.81 per share, well above Zacks’ consensus estimate of $0.74 and the year-ago earnings of $0.69. Revenues increased 28% to $856.5 million, mainly due to the strong performance of the generics business.

We believe that the company’s cost-saving initiative and new product launches, both brand and generic, will help drive growth.

We also view the company’s acquisition of Arrow as a smart strategic move. This acquisition should help boost Watson’s product portfolio and expand its footprint in ex-U.S territories. However, integration risks remain and competition in both the branded and generic markets remain fierce. We remain neutral on the stock.


Jeffrey Holford
Jefferies International Ltd.
[email protected]
+44 20 7029 8673

At the operating profit (pre-exceptionals) level, Roche’s (RHHBF, RHHBY) results were 5 percent better than we expected (+11 percent CER [coupon equivalent rate]). The benefits of productivity initiatives (including Genentech restructuring) are clearly apparent, with the main cost lines (Marketing & Distribution, R&D and General & Administration) better across the board.

The outlook for the year has been reconfirmed: 2010 sales (ex-Tamiflu) for Pharma and Group to increase in mid-single digit range (CER) with double-digit growth in core EPS (CER).

In conclusion, these are strong results (Core EPS: +11 percent CER) that overall are in line with our expectations, although better at the operating level. They leave the company well positioned to deliver this year’s target of double-digit underlying EPS growth.


Alexandra Hauber
J.P. Morgan Cazenove
[email protected]
+44 7742-6655

Roche reported solid first-half results circa 5 percent ahead on the operating line with a small underlying increase of the fiscal year guidance.

Guidance was left unchanged but increased on an underlying basis: Core EPS is expected to grow at double digits despite a negative 2 percent impact from a (Swiss Francs) SFr 144 million (~ $151 million) charge in first half 2010 for the early redemption of the March 2012 $2.5 billion bond to be repaid in September 2010.

Sales guidance was left unchanged despite a reduction of Tamiflu sales by SFr 200m ($210 million). Early repayment of the March 2012 bond should have a positive impact on core EPS in 2011 of 1%.


Karen Alexander, CFA

Roche’s second quarter reflected increased pressure from global measures to reduce drug spending, and we have lowered our 2010 sales growth figures for several of Roche’s top products, particularly in Europe. However, we still think that the firm is capable of achieving its forecasted mid-single-digit top-line growth and double-digit bottom-line growth, and we’re maintaining our fair value estimate.


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