Actavis (ACT) has the best exposure to alternative dosage forms of any of the global generic drug manufacturers, a segment of the generic market that has higher barriers to entry and more sustainable cash flow generation over the longer term, says David Amsellem, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“Our top larger-cap idea is Actavis,” Amsellem said. “We think that the company has optionality on a number of high-value generic opportunities in the United States. They’re really not reflected in the company’s own expectations, Street expectations, and there are a number of high-value products in the portfolio right now that when combined with these opportunities give us real comfort on what we think is likely a double-digit growth story — top EPS growth for at least the next two to three years.”
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Actavis trades at about 10 to 11 times 2013 earnings, and Amsellem says this is a sustainable multiple given the dynamics of the company’s generics business.
“You’ve got a deep generics pipeline, you’ve got a number of high-value opportunities, higher barrier to entry opportunities in the pipeline that if they bear fruit are opportunities that are less likely to be commoditized,” Amsellem said. “Net-net, you have a p/e that is sustainable, good visibility on double-digit growth, and I think this makes for a very nice risk/reward for Actavis among the larger caps in the group. So that’s our thesis on Actavis.”
Achillion Pharmaceuticals (ACHN) remains undervalued as investors continue focusing almost exclusively on Gilead Sciences (GILD) for hepatitis C treatment, a market so large that ACHN has the opportunity to find and penetrate segments Big Pharma is not expected to reach for years, says Brian Skorney, Senior Analyst at Robert W. Baird & Co.
“I think Gilead is a great powerhouse on hepatitis C, but the market opportunity is so large from a volume perspective that I just can’t see one company really dominating the market; to that extent, there will be pockets where pricing is going to have an opportunity to create a market where Gilead may not even want the price to penetrate for a number of years,” Skorney said.
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Skorney adds that GILD‘s recent acquisition of Pharmasset for HCV constitutes most of the market cap increase for the company, and Achillion‘s HCV treatment would come close to matching GILD‘s hepatitis profile.
“[A] name that I like a lot is Achillion, a hepatitis-C-focused company. I think they’re undervalued because of the focus on who’s really dominant in hepatitis C right now — is Gilead, and I certainly alluded to the acquisition they made in the space that’s created over probably about 50% of their market cap at this point,” Skorney said. “I think Achillion has a great opportunity with a regimen for hepatitis C that I think will come very close to matching Gilead‘s profile.”
Theravance Inc (THRX) has partnered with GlaxoSmithKline (GSK) to develop three respiratory drugs for the treatment of COPD and asthma, and THRX will see an annual royalty of $500 million or more and a value of roughly $51 a share when the drugs make it to market, says Ian Somaiya, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“When we value the cash flow stream that’s resulting from this royalty, we can get to a value of roughly $51 a share for THRX. The stock’s trading at $23. The most risky of the three drugs, Breo, is scheduled to go before an FDA advisory panel meeting on April 17 and has a PDUFA date of May 12, so that question is going to get answered relatively soon,” Somaiya said.
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Breo has since received approval from the FDA advisory panel. Should the drug get ultimate approval from the FDA and go to market, Somaiya expects investor appetite for THRX to increase and the company to be set up for acquisition.
“I think Glaxo would likely come in after the approval of this drug Breo and acquire Theravance, or at least the portion of Theravance that they don’t already own; Glaxo owns roughly 27% of Theravance today. So that’s probably the one I would highlight as a potential near-term M&A candidate,” Somaiya said.
Incyte Corporation (INCY) and Eli Lilly‘s rheumatoid arthritis drug has moved into Phase III trials, and could move into Phase III trials for psoriasis as well, opening up multibillion-dollar opportunities that are not factored into Incyte‘s current valuation, says Ian Somaiya, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“What’s absent from the valuation is the opportunity for another drug they have called baricitinib, which is partnered with Eli Lilly (LLY) and which has moved into Phase III trials for rheumatoid arthritis, and which could move into Phase III trials for psoriasis. And those are all multibillion-dollar opportunities, with Incyte collecting an 18% to roughly 28% royalty on sales, so very high profitability, one that approaches a profit-profit split, and that’s not factored into any of the valuations,” Somaiya said.
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INCY and LLY‘s new drug is a JAK1/2 inhibitor, so clinical trial and regulatory risks are both low, creating a very large market opportunity for both companies in the rheumatoid arthritis space over the next decade, Somaiya says.
“The market opportunity, If you more think of a biologics use in RA over the next seven to 10 years, it could be well north of $20 billion. So even getting some segment of that market is very meaningful for Lilly and also for Incyte, and that’s not being factored into valuation,” Somaiya said.
Sarepta Therapeutics (SRPT) currently has some investors watching this biopharmaceutical company from the sidelines, waiting to see how the FDA approval for one of its drugs for an orphan indication resolves, but Brian Skorney, Senior Analyst at Robert W. Baird & Co., says the company is poised to see upside regardless of the FDA outcome.
“[Sarepta] is a really great opportunity. There is a lot of sort of near-term binary risk perceived on the name, because there is a sentiment that the company is going to request accelerated approval from the FDA on a very, very small patient population that, if it is approved, it would be the smallest patient database of any drug ever approved. I think that’s created a little bit of a valuation inefficiency, in that a lot of investors have been scared to be involved ahead of that data point,” Skorney said.
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Sarepta appears to be significantly undervalued when compared to peers, and Skorney expects a correction in the stock price to benefit the drug manufacturer once the market realizes the value of its muscular dystrophy treatment.
“I think with the FDA approval or without FDA approval, there is a lot of upside to this company, when you kind of think of some of the valuations that are comparable to it for other very small orphan indications where you’ve seen very substantial clinical benefits in a company like a Vertex (VRTX). I think is a relatively reasonable comparison and has probably $8 billion or $9 billion in market cap for their CF franchise, versus Sarepta, which as I said — about $1 billion for their muscular dystrophy franchise. I think there is a pretty significant valuation disparity between those two right now,” Skorney said.
Apple (AAPL) stock prices have jumped up and down from the double digits all the way to $700 and then down in the last few years, leading some investors to doubt the value of this technology innovator. But Gordon Reid, President and CEO of Goodreid Investment Counsel Corp., says the current stock price is a better value proposition than seven years ago, when he first bought equity.
“We first bought Apple at $65 a share in 2006. They had $2.25 a share of earnings, and today they are trading at $430, but they have $45 a share of earnings. So by our thinking, Apple today at $430 is much better value than it was at $65. The price is much higher, but the earnings have grown at a much faster rate than the price, and that is the value proposition,” Reid said.
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Apple has a track record of creating new technology, and although some investors say the passing of Steve Jobs meant the end of innovation for this company, Reid says such talk is premature. He adds that, should any fears materialize, a good portfolio-diversification strategy should quell some of inherent risks of investing in equities.
“As we always say to clients when we have a bad day in the market, if Apple or any company comes up with a bad report and falls, it’s just a bad day. It never gets back to their investment policy statement, their asset allocation, their financial plan that determines when they’re going to retire and what their long-term plans are,” Reid said.
Endocyte, Inc. (ECYT) is poised to outperform due to significant profits from its $120 million deal with Merck (MRK) for their lead ovarian cancer drug vintafolide and three major cancer drug opportunities in Europe and the U.S., says Dr. Jason Kantor, Research Analyst at Credit Suisse Group.
“They partnered with Merck (MRK). It was a $120 million upfront deal, and Merck splits the profits with Endocyte in the U.S. 50-50. It’s a lucrative deal with a validating partner,” Kantor said. “Although they have partnered with Merck, they still retain a 100% of the rights to the diagnostic and 100% of the rights to the follow-on compound.”
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Kantor sees three major catalysts for stock coming over the next 12 months: a regulatory decision in Europe on platinum-resisitant ovarian cancer, topline results from a radomized Phase II study in lung cancer and an ongoing Phase III trial designed to support U.S. approval in ovarian cancer. Together these catalysts are providing multiple opportunities for ECYT to outperform, Kantor says.
“If these events play out as we hope, there are other reasons why the stock could go even higher,” Kantor said. “I expect in general to see the small-cap companies outperform in the second half of the year.”
Celgene Corporation (CELG) is diversifying its revenue stream by utilizing three other drugs in its pipeline, and CELG could see up to a $1.5 billion opportunity in Abraxane, a drug that recently received FDA approval for nonsmall cell lung cancer, says Ian Somaiya, Managing Director and Senior Research Analyst at Piper Jaffray & Co.
“The focus has always been on their lead drug Revlimid, with the company getting very little credit for three drugs they are either in the process of launching or expanding their label…Pomalidomide for myeloma was launched earlier this year; Abraxane, which received FDA approval for nonsmall cell lung cancer last year. And while we saw positive pancreatic cancer data earlier this year, where that translates into a much larger market opportunity for that drug going from 300 million or it’s hovering on today, so what could ultimately be a $1 billion to $1.5 billion opportunity over the next five to seven years,” Somaiya said.
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Celgene is also focusing on Apremilast, an oral drug for psoriasis and psoriatic arthritis that is more tolerable for patients and will drive a lot of interest in earlier-stage patients as well as doctors, who will be more comfortable with the safety profile of the drug, Somaiya says.
“Its safety profile is benign, and it will enable patients to tolerate the drug, so those patients that respond will stay on the drug for many, many years. And that’s going to drive a lot of interest in the drug, at least use of that drug in earlier-stage patients, the patients who are not on biologics today, which represent — about 25% of psoriasis patients are on biologics today, but the drug is used on the other 75% of patients where the biologic use has been absent,” Somaiya said.
JPMorgan Chase & Co. (JPM) is growing its regional banking units in California and Florida, competing head to head with the regionals while currently trading at 1.25 times tangible book and engaging in measures to return capital to shareholders, says Moshe Orenbuch, Managing Director at Credit Suisse Group.
“JPMorgan, which has been consistently earning 15% on tangible equity, trades at 1.25 times tangible book, does have an almost 2.5% dividend yield and is buying back stock. I think it has maybe a little less capital return than was approved for in 2012, although we would expect that they will actually do more of it than they did last year, when they had to stop it because of trading issues that they had come to light in April and May,” Orenbuch said.
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Orenbuch says JPM is one of his top stock picks among money center banks, and he highlights the company’s healthy capacity to generate capital through earnings, as well as the regional growth strategy of the bank.
“I would say JPMorgan is interesting because it is actually growing its regional bank. It is building branches in Florida and California and areas that it entered more recently in 2008, 2009 through acquisitions and going head-to-head at a regional bank level. That’s one area,” Orenbuch said.
Wells Fargo & Co. (WFC) is expected to see some upside once interest rates rebound, and it currently is taking all the right measures and it trades inexpensively similar to most large-cap money center banks, says Moshe Orenbuch, Managing Director at Credit Suisse Group.
“As a bank analyst, you should want to see a bank with large market shares, high levels of core deposits and low funding costs, but in this environment, that kind of works against you, because the lower they are, it’s hard to take them down as your asset yields come down, and that has somewhat hurt Wells Fargo. I think they will turn around when interest rates do start to rise again. I think it’s tough, because I think the company is doing the right things, but it’s hard for the stock to perform in this environment,” Orenbuch said.
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Low interest rates have depressed the regional banking component of large banks, but the volatility in the capital markets may turn in 2013, and the future may hold a better environment for banks, Orenbuch says.
“Our overall sentiment has been that the regional banking component, if you will, of the earnings is still under pressure because of ongoing low interest rates and fixed rate assets that are rolling off, and that has had some negative implications. Capital markets have been volatile, but we are expecting that the early part of 2013 should be better than a year ago, so that’s been a bit of a bright spot,” Orenbuch said.
