July 22, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Healthcare and life science stocks have been a little flat this year, at least in comparison to the last five years. Some of this is likely due to the U.S. presidential election, which has inserted discussions about drug pricing into the debates. Nonetheless, people still buy drugs, the U.S. population is aging, and there’s still dazzling new therapies and approaches being developed.
George Budwell, writing for The Motley Fool, takes a close look at three specialty pharma companies that have been beaten up by the stock market. Here’s a peek.
Dublin-based Endo International has been on a fairly consistent downhill slide for at least the last year, but it plunged noticeably in May after its first-quarter financial report. Although the quarter went fairly well with revenues of $964 million, a 35 percent jump compared to the first quarter 2015, the company downgraded its projections for the rest of the year.
“Despite increasing competitive and pricing pressures across both our Generics and Branded businesses, Endo was able to delivery first quarter results largely in line with our expectations,” said Rajiv De Silva, Endo’s president and chief executive officer, in a statement. “However, as we move further into 2016, we are rebasing our full-year financial expectations due to the impact of several previously unanticipated headwinds: new competitive entrants, including for Voltaren Gel; greater than expected price erosion across the Generics sector; and delays on regulatory actions related to certain Endo products.”
In 2017, Endo projects bottom line growth of about 10 percent and top line growth by more than 5 percent. Budwell writes, “Given the lingering pricing concerns in the generic-drug space, Endo’s falling share of the $40 billion pain management market, and the company’s total debt that exceeds $8.5 billion, there are ample reasons to steer clear of this stock right now. On the flip side, the worst may be over, and the company’s rock-bottom forward price-to-earnings ratio of 3.4 might be too cheap for bargain hunters to ignore.”
Also headquartered in Ireland, Horizon Pharma appears to be a victim of its own business practices and the current political environment. Horizon is a specialty pharma company which has a big focus on acquiring older drugs and then dramatically raising their prices. The poster child for this is Martin Shkreli, the former boss at Turing Pharmaceuticals, who famously acquired Daraprim, a drug to treat toxoplasmosis, that was priced at $13.50 per tablet and jacked it to $750 per tablet, a 5,000 percent increase.
On the other hand, Budwell argues that Horizon is in good shape otherwise and its top line is projected to grow by more than 33 percent in 2016 and 13 percent in 2017. It’s also trying to move away from the reliance on increasing older drug prices to becoming a legitimate orphan-drug maker. “This pivot toward orphan drugs is important,” Budwell writes, “because this particular niche of the drug industry has been largely immune to pricing controversies, even though treatments for rare diseases tend to garner the highest prices of all pharma products.”
Horizon is currently trading for $18.90.
Budwell’s third choice is Valeant Pharmaceuticals , headquartered in Laval, Quebec. Summarizing the company’s problems is complicated and lengthy. It has been compared to Enron, is being investigated by the U.S. Securities and Exchange Commission for both insider trading and drug pricing practices, and is about $32 billion in debt. It’s also under new management, which is probably a positive thing. It’s also in the process of selling off some of its assets.
Budwell writes, “For serious bargain-hunters willing to overlook some of these issues, though, Valeant does have some tremendous assets that could get the company back on the right track. Its $11 billion acquisition of Salix Pharmaceuticals last year, for instance, brought the newly approved opioid-induced constipation drug, Relistor, into the fold.”
It also has a very profitable ophthalmology and eye care franchise it picked up when it bought Bausch & Lomb. “And given that Valeant is on track to generate mid- to high-single-digit sales growth next year,” Budwell writes, “while its stock trades at a forward price-to-earnings ratio around 3 (no, that’s not a typo), a stunning comeback could be in the cards.”
Valeant is currently trading at $23.64.
Budwell sums up the three companies, saying, “The bottom line is that Endo, Horizon and Valeant could all be nearing the end of their trials and tribulations, making them great value buys right now for investors willing to take the long view.”
