Earnings previews from Bernstein analyst Tim Anderson
Bernstein analyst Tim Anderson has thoughts on local pharmaceutical companies.
Earnings previews from Bernstein analyst Tim Anderson
Tim Anderson of Sanford C. Bernstein & Co., is among the Wall Street research analysts we follow.
Anderson earned medical and business degrees at the University of Chicago.
This being earnings season, we're sharing some of his thoughts on pharma companies that he covers that have a large local presence and have not yet issued their fourth-quarter and full-year 2012 reports. Bear in mind that AstraZeneca and GlaxoSmithKline figures sometimes show up in British pounds because the companies are based in the United Kingdom.
AstraZeneca (AZN: Market-Perform; Price Target of 3,353p for the underlying, or $54 for the ADR)
We rate AZN Market-Perform primarily because of the company's uninspiring 5-year financial outlook. AZN faces some important patent expiries between 2012-2016 such as Seroquel (US expiry 2012), Nexium (US expiry 2014), and Crestor (US expiry 2016). Coupled with what appears to be a thinner late-stage pipeline and a mixed longer-term R&D track record, the multi-year view of AZN is challenging in our view. While the outlook is clearly challenging, because AZN is a lower valuation stock with a high dividend yield (current yield ~6%), with a large number of sell (or commensurate) ratings, it is worth periodically evaluating whether a bull case can be made with the name. With its longer-term earnings profile, many have questioned whether AZN might be forced into doing one or more fairly sizeable acquisitions to fill in its longer-term financial gaps which seems possible. Investors are watching to see in what direction new CEO Pascal Soriot, from Roche, decides to take the company.
Our price target increases from 3,002p to 3,353p for the underlying (or $54 for the ADR) which reflects a new higher target P/E multiple of 9x (vs 8x previously) applied to our new 2013 EPS of $5.96.
GlaxoSmithKline (GSK: Market-Perform, Price Target 1,426p; $46 for the ADR)
We rate GSK as Market-Perform. The company has a comparatively robust long-term revenue and EPS profile but had execution issues in 2012 in terms of lower-than-expected financial performance, which impacted investor confidence. Historically, we have taken issue with GSK over-selling its R&D abilities. However, pipeline progress is finally being made (dolutegravir, trametinib, dabrafenib, etc) and 2013 should see the approval/launch of several new medicines. One of the reasons for the comparative earnings stability at GSK is its diversification into areas like Consumer Health and vaccines and a lighter load of patent expiries ahead of it. One major controversy persists which is when exactly GSK's lead drug, Advair/Seretide, might face generic competition. We believe that at some point, fully substitutable Advair generics are likely to enter the market and currently model that this occurs beginning in 2016 in the US. European quasi-generics could begin to get approved in EU potentially in 2014. Ahead of any potential generic threat, there is likely to be at least some stepped-up level of competition to this franchise from the introduction of other brands into the category, but GSK will likely remain the category leader partly because it will have its own expanded offerings in this area.
Our new price target on GlaxoSmithKline is 1,426p vs 1,508p previously (or $46 for the ADR) which reflects a target P/E multiple of ~ 12x on our new 2013 EPS estimate of 118.8p.
Merck (MRK: Outperform, Price Target $50)
We rate Merck as Outperform. We upgraded the stock in March 2009, a few days after the SGP merger announcement that led to a meaningful pull-back in MRK share price. Our rating has been predicated on MRK being a comparatively good R&D organization, with a solid long-term R&D track record that hopefully foretells future new product flow that is meaningful. The stock stagnated in 2011 partly due to failure of key pipeline products (the biggest of which was vorapaxar, from SGP, in January 2011) and withdrawal of the long-term guidance but became more in favor in 2012 as a result of pipeline traction across different products (e.g. suvorexant and odanacatib). Many investors cite the ongoing IMPROVE-IT trial with Vytorin/Zetia as being a major risk to the name, but we think that at this point results – whether positive or neutral – will largely be meaningless to the franchise (but not necessarily to share price). MRK’s valuation is reasonable relative to the fact that it should have fairly stable revenues and EPS growth through 2016 and beyond, marked by some pockets of future patent expirations.
Our new price target on Merck is $50 vs $47 previously which reflects a new target P/E multiple of ~13x (vs ~12x) applied to our 2013 EPS estimate of $3.81.
Pfizer (PFE: Outperform, Price Target $30)
We rate PFE as Outperform. We upgraded the stock in November 2010 primarily because we felt PFE had an under-appreciated pipeline of several important products, which was especially noticeable because PFE has often been viewed as the poster-child for inefficient R&D. Building on this thesis was management’s decision to restructure and sell off certain parts of the company, and it is still possible that PFE will go the full distance and eventually split up the drugs side of the business but this is not certain (for more details, see our March 14, 2011 report titled "Pfizer: Hang On To Your Hats! Revenue Base May Be Pared From $67B to $35-40B (The So-Called "Innovative Core")). PFE has begun to raise this possibility consistently in its meetings with investors, and the question is whether it could really happen or not. Management has been viewed as being responsive to shareholder concerns and seems to be pulling whatever levers it can to make its share price go higher. Because of significant future patent expirations, our long-term model shows that the achievement of revenue growth could remain elusive, yet EPS growth is possible partly driven by large share buybacks.
Our price target increases from $27 to $30 which reflects a new target P/E multiple of 13x (vs 11x previously) applied to our new higher 2013 EPS of $2.34.