TEVA’s Q1 Effect on Specialty Pharma

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Following the sell-off driven by TEVA’s Q1, Canaccord Genuity specialty pharmaceutical analyst Randall Stanicky said:

“The quarter was mixed with concerns linked to (1) weak EU result, (2) lack of guidance update and (3) a combination of the two. The bottom line is that the move on guidance shouldn’t be a surprise given the CEO change but the EU result was and is a reversal from the more stable Q4 message. . . The broader question is what the read-through from Q1 is for the group in combination with macro headlines from Europe.”

Teva Pharmaceuticals (TEVA), BUY – $52 target: We still see a Copaxone win as the key driver and like the risk/reward. A Copaxone win is needed and while the magnitude of upside on a win could be trimmed if EU headwinds persist (which we have to assume), we still like the trade here. . . While we make modest downward adjustments to EPS, this remains one of our best 3- to 6-month plays for those with risk appetite relative to the binary Copaxone risk.

Watson Pharmaceuticals (WPI), BUY – $90 target: Remains our top idea on favourable growth and geographic exposure. Watson holds the most robust 3-year EPS growth at +22% fueled by the Actavis deal, least exposure to troubled EU regions and valuation that is reasonable on absolute and relative terms at < 7x 2015E p/f EPS. Perrigo Company (PRGO), BUY – $125 target: offers the most defensive growth with limited exposure to Europe. Perrigo has historically proven relatively resilient in the face of macro concerns given defensive nature (trade down effect to store brand) and limited exposure to Europe. Mylan, Inc. (MYL) HOLD – $24 target: Inexpensive but we need greater earnings comfort for a change in view. Mylan has become both less expensive and less well owned, creating what could be a solid set-up if we had comfort or insight into (1) 2013+ earnings outlook or (2) catalysts. We don’t.

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