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Jefferies Highlights 20 Specialty Pharma Targets as M&A Frenzy Continues (VRX) (ZTS) (MNK) (JAZZ) (KYTH) (BDSI) (more...)

May 28, 2015 11:40 AM EDT
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M&A has been hot and heavy in the Specialty Pharmaceuticals space and everyone in the sector is on the lookout for who's next. In a report today, Jefferies analyst David Steinberg said the current phase of the 10-year M&A cycle has turned into a "virtual feeding frenzy" - with 2014 the most prodigious year by any measure (45 transactions/ $141B) and 2015 already on a new record pace (16 transactions/$99B). In his report the analyst highlights 20 potential takeout targets (22 including MYL and PRGO) that fit key criteria.

The analyst highlights three key phenomena driving the current phase: "First, “ultra” low interest rates following the 2008 financial crisis have led to an abundance of cheap, easy to access debt. This in turn has allowed for numerous “all-cash” transactions, including several “mega-mergers.” Second, an apparent race among competitors to secure the lowest possible tax rate has led to a bevy of “inversions.” And while new Treasury rules were designed to deter these types of transactions, we expect more to come – though perhaps mostly among smaller cos in the near-term. And third, the advent of “cash” EPS reporting has made it possible for acquirers to realize immediate earnings accretion post transaction close. In a seeming paradigm shift, investors now handsomely reward (rather than penalize) acquirers, thus further incentivizing consolidation."

The firm broadly defined three classifications of acquisition candidates: Profitable Companies; Development-Stage Companies or Those Expected to be Profitable Shortly; Special Situations.

Profitable Companies:

  • Valeant Pharma (NYSE: VRX) - The “ultimate” inversion with industry low 5% tax rate; Attractive cash pay, ophthalmics, dermatology, and EM businesses
  • Shire plc (NASDAQ: SHPG) - Arguably the premier Spec Pharma target for Large Pharma; Long duration biologics, CNS assets; Attractive tax structure
  • Perrigo (NYSE: PRGO) - 70% market share in store brand OTC's; Highly profitable Tysabri royalties from Biogen; Attractive Irish domiciled tax structure
  • Zoetis (NYSE: ZTS) - Largest global animal health care company; strong cash flow generation; shareholder activist involvement
  • Mallinckrodt (NYSE: MNK) - A leading player in pain management and critical care; Attractive Irish tax structure
  • Jazz Pharmaceuticals (NASDAQ: JAZZ) - Long duration orphan assets; Attractive Irish tax structure; Critical gating item is potential Xyrem settlement
  • United Therapeutics (NASDAQ: UTHR) - Attractive specialty cardiovascular product portfolio; ... Inversion candidate due to high tax rate
  • Pacira Pharma (NASDAQ: PCRX) - Exparel has blockbuster potential in several post-op pain procedures; Inversion candidate due to expected high LT tax rate
  • Indivior (INDV-GB) - High cashflow generation from Suboxone; Growing CNS/addiction R&D pipeline
  • Insys Therapeutics (NASDAQ: INSY) - Fast-growing pain franchise; deep, low risk pipeline; concentrated ownership; Inversion candidate due to high tax rate
  • Medicines Co. (NASDAQ: MDCO) - Attractive product portfolio for hospital market; Inversion candidate due to high tax rate
  • DepoMed (NASDAQ: DEPO) - Growing neurology/pain franchise; IP settlement on Gralise increases durability; Inversion candidate due to high tax rate
  • Spectrum Pharma (NASDAQ: SPPI) - Five approved products; Top oncology sales force; Shareholder activist involvement

Development Stage Companies That Fit Key Acquisition Target Criteria:

  • Kythera Biophrarma (NASDAQ: KYTH) - Kybella a potential blockbuster in cosmetic dermatology; One of few remaining independent aesthetic companies
  • Revance Therapeutics (NASDAQ: RVNC) - Novel botulinum toxins could emerge as best-in-class; One of few remaining independent aesthetics companies - Horizant is a fast growing long duration CNS asset; Pipeline optionality with XP'829 in psoriasis and MS
  • Xenoport (NASDAQ: XNPT) - Horizant is a fast growing long duration CNS asset; Pipeline optionality with XP'829 in psoriasis and MS

Generic Drug Companies That Fit Key Acquisition Target Criteria:

  • Mylan (NASDAQ: MYL) - Top tier global generic drug manufacturer; significant capabilities in India
  • Akorn (NASDAQ: AKRX) - One of few remaining independent players in generic injectables; A diversified specialist; Inversion candidate due to high tax rate
  • Impax Laboratories (NASDAQ: IPXL) - Leading oral controlled release player; emerging branded CNS business with Rytary; Inversion candidate due to high tax rate
  • Amphastar Pharma (NASDAQ: AMPH) - Emerging leader in complex generic drugs - including high barrier to entry injectables and inhalation niches

Special Situations Companies That Fit Key Acquisition Target Criteria:

  • Anacor Pharma (NASDAQ: ANAC) - One of few remaining independent dermatology co's; Sandoz pays 50% of gross profit on Kerydin; AN2728 a potential blockbuster
  • BioDelivery Sciences (NASDAQ: BDSI) - NPV on Belbuca royalty stream (via Endo) could be worth more than current market cap; Growing pain management business


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