The mergers and acquisitions market in the pharmaceuticals industry has been stormy of late, especially in generic drugs. Goldman Sachs explains the situation to slower organic growth, because there are fewer opportunities for exclusive launches of generic drugs in the US, while tax rates are making acquisitions more worthwhile.
"Serial buyer" Perrigo Company (NYSE:PRGO; TASE:PRGO) has announced a particularly large acquisition, of Irish drug company Elan Corporation plc (NYSE; LSE; Dublin: ELN) for $8.6 billion; Actavis Inc. (NYSE: ACT), itself the product of a merger between Actavis and Watson Pharmaceuticals, is due to shortly close its acquisition of Warner Chilcott plc (Nasdaq: WRCX) for $8.5 billion (including debt) in shares; while Mylan Inc. (NYSE: MYL) is acquiring India's Agila Specialties pvt. Ltd. for $1.6 billion.
At the same time, in contrast to previous years, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), the world's largest generics company, is not joining in the party, and is mainly focused on rebuilding its drugs pipeline. In view of the changes in the industry, which is the stock pick, and what do analysts think about the four leading companies in the market?
Building on generic Copaxone
Mylan is traded on Nasdaq at a market cap of $14.8 billion. With significant acquisitions, Mylan transformed itself from a US-only, generic-only story into a global, diversified, vertically-integrated one," says BofA Merrill Lynch. "We are encouraged by several quarters of robust execution, which has mitigated the risk of high acquisition related debt levels to a large extent. We believe that continued execution with an emphasis on improved ex-US performance, and potential business development activity could be the keys to future stock performance." It gives Mylan a "Buy" recommendation with a target price of $43, 11% above the market price.
Mylan also has a "Buy" recommendation from UBS, albeit with a lower target price of $39, which is closer to the market price.
Following the investors day in early August, UBS said that Mylan has many opportunities. One of the opportunities that Mylan is building on is "generic Copaxone", a generic version of Teva's blockbuster treatment for multiple sclerosis.
Mylan believes that it can launch generic Copaxone in 2014, when the patent expires (the launch is subject to US Food and Drug Administration (FDA) approval). However, UBS takes a more conservative attitude, and does not include this in its model.
Goldman Sachs considers Mylan as its stock pick in the sector, and gives it a "Buy" recommendation with a target price of $46 (a 19% premium). It believes that the share is cheap, given the expected growth rates. "Mylan stands out in the sector as the only name with significant top line optionality, not dependent upon future deal activity for stock outperformance, in our view. Mylan remains our long-held top pick in the group," it says.
The pipeline is maturing
Actavis is traded at a market cap of $18 billion. Goldman Sachs recently raised its target price for the share from $135 to $150, an 11% premium on the share price. However, it reiterated its "Neutral" recommendation. "While Actavis is likely to significantly grow its earnings in 2014-2015 from financial drivers, expected organic growth is less impressive," says Goldman Sachs, and predicts that the company will carry out more mergers and acquisitions.
UBS has a more positive attitude. It gives Actavis a "Buy" recommendation with a target price of $155, a 14% premium over the market price. "As the pipeline matures, we would expect investors to start giving more credit to Actavis for its branded portfolio," it says. "Further, once the Warner Chilcott deal closes, we look for improved visibility into earnings growth to drive momentum in Actavis."
Outlook beats market forecasts
Perrigo is traded at a market cap of $11.8 billion. In late July, the share reached an all-time high, but it has fallen 7% since the acquisition of Elan was announced. Perrigo specializes in over-the-counter drugs that are sold under store labels, while Elan produces brand drugs. Its most important asset is royalties on sales of Tysabri for the treatment of multiple sclerosis, after it sold the rights to the drug to Biogen Idec Inc. (Nasdaq: BIIB).
UBS gives Perrigo a "Buy" recommendation with a target price of $140, 12% above the market price. "Internal outlook is stronger than expected," says UBS, adding that its management expects 14% earnings per share growth per year in 2013-18. "We expect the stock to gain momentum as investors get comfortable with the base biz earnings per share growth and sustainability of Tysabri royalties," it says.
BofA Merrill Lynch and Goldman Sachs both give Perrigo a "Neutral" recommendation. "We continue to like the store brand theme and the long cash flow tail such products typically provide, and Perrigo's superior positioning in the space," says Merrill Lynch. "We also believe management is doing the right things to increase value longer term. We continue to believe the positives of the store brand theme are well understood by investors, but the financial circumstances have changed with the Elan deal (assuming completion)."
"Copaxone is worth $10 per share"
Teva is traded at a market cap of $31.9 billion. After years of being the analysts' darling with, at worst, a "Neutral" recommendation, Teva's share has lately garnered some negative recommendations.
Goldman Sachs was the first to downgrade its recommendation for Teva to "Sell", in view of the pending competition to Copaxone, Teva's most important drug, and because the investment bank saw better opportunities in pharmaceuticals shares.
Copaxone had $4 billion in sales in 2012, and accounts for an estimated 40-60% of Teva's profits. Copaxone's patent expires in May 2014, and, subject to approval by the FDA, competitors (such as Mylan) will be able to launch competing generic versions of the drug.
UBS estimates that Copaxone is currently worth $10 per share for Teva (its share price closed at $37.72 on the New York Stock Exchange on Friday). It gives Teva a "Neutral" recommendation with a target price of $40.
Another investment bank that gives Teva a "Neutral" recommendation is JPMorgan, which says that although Teva is traded at a low multiple, in view of the "rapidly consolidating specialty pharma/generic space, we see more compelling opportunities elsewhere."
According to Thompson/First Call, of the 25 investment banks covering Teva, most (thirteen) are neutral, ten give it positive recommendations, and two give it negative recommendations. One of the positive recommendations is from Deutsche Bank, which gives Teva a "Buy" recommendation, and believes that, at the current multiple and risk-reward profile, the share is attractive.
Published by Globes [online], Israel business news - www.globes-online.com - on September 23, 2013
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