Needham & Company: Specialty Pharmaceuticals - 2012 Preview: European Hangover Expected to Ease; Valuations Reflect Fear Not Fact
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Up: 7 | Down: 8 | New: 10
Rating Summary:
17 Buy, 13 Hold, 0 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 7 | Down: 8 | New: 10
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Needham & Company: Specialty Pharmaceuticals - 2012 Preview
European Hangover Expected to Ease; Valuations Reflect Fear Not Fact
Needham analyst, Eliot Wilbur, said, "While 2011 was initially characterized by a money flow migration from capital deployment stories to more momentum oriented growth names where valuation constraint became far less restrictive for the right secular growth play, extraordinary equity volatility and generational highs in intra market and asset class correlations rapidly shifted sector bets to more traditional defensive “safe havens” as investors began to emphasize capital return. In terms of key themes, the avoidance of risk within our coverage universe largely meant avoidance of names with geographic exposure to ongoing Euro zone turbulence. Companies that had made big bets on broadening geographic footprints via mainly acquisitions of European-based businesses were hit hard during 2011 and while worst-case market scenarios are far from being realized, valuations of these franchises remain markedly below historical and current peer group levels. We remain of the belief that potentially dire European healthcare scenarios remain a product of fear rather than fundamentals and we continue to favor names where the flight from Europe has excessively discounted near-term risks. That said, we expect quality and consistency will move to the forefront of investor selection criteria marked by a return to growth stories with strong nearterm product dynamics and greater pipeline visibility affording increased confidence in sustainable near-term growth metrics. Within the broader universe of Specialty Pharmaceutical names, we remain positive on the generic drug subsector which delivered significant returns in 2011 despite rather pronounced underperformance from some of its most high profile constituents, mainly those names connected to Europe in any way, shape or form. We believe the combination of secular low absolute and relative valuations; continued strong demand side fundamentals; and the most favorable pricing environment in nearly a decade form the basis for a potent combination of multiple expansion driven upside. We believe Mylan (NYSE: MYL)(Strong Buy) offers the highest reward-to-risk tradeoff in the group given our view that near-term growth prospects remain underpriced and 2012-2013 EPS visibility is substantially greater than peers. We also expect shares of Teva Pharmaceutical, 2011’s biggest negative surprise in terms of equity performance, to reverse their recent slide based on “less bad” European results and a snap-back in U.S. generics performance. Teva, in our view, still represents the best play on global generic industry growth trends, and given management’s strong track record of execution, near and intermediate-term financial targets appear well within reach. We also view Par Pharmaceutical (NYSE: PRX)(Strong Buy) as possessing a favorable reward-to-risk tradeoff post a “doubling-down” on the company’s U.S. generic business. Within our specialty pharmaceutical coverage space, we believe that smaller is better and favor shares of Pernix Therapeutics (NYSE: PTX)(Buy), an emerging specialty pharmaceutical name focused on the underserved pediatric marketplace. Pernix possesses two best-in-class therapeutics that we believe could propel tripling of current revenue run rates over the next three years."
European Hangover Expected to Ease; Valuations Reflect Fear Not Fact
Needham analyst, Eliot Wilbur, said, "While 2011 was initially characterized by a money flow migration from capital deployment stories to more momentum oriented growth names where valuation constraint became far less restrictive for the right secular growth play, extraordinary equity volatility and generational highs in intra market and asset class correlations rapidly shifted sector bets to more traditional defensive “safe havens” as investors began to emphasize capital return. In terms of key themes, the avoidance of risk within our coverage universe largely meant avoidance of names with geographic exposure to ongoing Euro zone turbulence. Companies that had made big bets on broadening geographic footprints via mainly acquisitions of European-based businesses were hit hard during 2011 and while worst-case market scenarios are far from being realized, valuations of these franchises remain markedly below historical and current peer group levels. We remain of the belief that potentially dire European healthcare scenarios remain a product of fear rather than fundamentals and we continue to favor names where the flight from Europe has excessively discounted near-term risks. That said, we expect quality and consistency will move to the forefront of investor selection criteria marked by a return to growth stories with strong nearterm product dynamics and greater pipeline visibility affording increased confidence in sustainable near-term growth metrics. Within the broader universe of Specialty Pharmaceutical names, we remain positive on the generic drug subsector which delivered significant returns in 2011 despite rather pronounced underperformance from some of its most high profile constituents, mainly those names connected to Europe in any way, shape or form. We believe the combination of secular low absolute and relative valuations; continued strong demand side fundamentals; and the most favorable pricing environment in nearly a decade form the basis for a potent combination of multiple expansion driven upside. We believe Mylan (NYSE: MYL)(Strong Buy) offers the highest reward-to-risk tradeoff in the group given our view that near-term growth prospects remain underpriced and 2012-2013 EPS visibility is substantially greater than peers. We also expect shares of Teva Pharmaceutical, 2011’s biggest negative surprise in terms of equity performance, to reverse their recent slide based on “less bad” European results and a snap-back in U.S. generics performance. Teva, in our view, still represents the best play on global generic industry growth trends, and given management’s strong track record of execution, near and intermediate-term financial targets appear well within reach. We also view Par Pharmaceutical (NYSE: PRX)(Strong Buy) as possessing a favorable reward-to-risk tradeoff post a “doubling-down” on the company’s U.S. generic business. Within our specialty pharmaceutical coverage space, we believe that smaller is better and favor shares of Pernix Therapeutics (NYSE: PTX)(Buy), an emerging specialty pharmaceutical name focused on the underserved pediatric marketplace. Pernix possesses two best-in-class therapeutics that we believe could propel tripling of current revenue run rates over the next three years."
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