Health and Healthcare

Stifel Has 5 Specialty Pharmaceutical 2018 Buys With Massive Upside Potential

Lee Jackson

Published: January 4, 2018 10:45 am

Last Updated: January 12, 2020 4:51 am

Despite a roaring market in 2017, in which the S&P 500 was up almost 20% on the year, the specialty pharmaceutical group and biotechs severely underperformed. In addition, the performance for the sectors was below their usual solid levels. After years of growth through acquisitions, a strategy that absolutely hammered some of the top specialty pharmaceutical companies, many are now refocused on building out innovative pipelines for future internal growth. Toss in the quieter voices from politicians, and things are looking up for 2018.

A new research report, Stifel feels that overall sector fundamentals look much brighter to start 2018, and the report explained why:

While drug pricing rhetoric does not look to be translating into legislative action near term, market forces have continued to play against manufacturers, with consolidating payers/PBMs continuing to use their negotiating power to extract more concessions. That said, portfolio durability has improved and sector leverage has declined, lending us to believe that sentiment (more than fundamentals) is lagging. At an average enterprise value/EBITDA multiple of 8.5x versus 5-year historical norms in low-teens, we believe the group is due for reconsideration.

We screened the Stifel specialty pharmaceutical list and found five companies rated Buy that have massive upside potential and probably don’t have the investment risk of some of the more speculative biotech stocks.

Aerie Pharmaceuticals

This company could be poised for a monster 2018, with new products hitting the market. Aerie Pharmaceuticals Inc. (NASDAQ: AERI) is engaged in the discovery, development and commercialization of therapies for the treatment of patients with glaucoma and other diseases of the eye.

Its product candidates include Rhopressa (netarsudil ophthalmic solution) 0.02% and Roclatan (netarsudil/latanoprost ophthalmic solution) 0.02%/0.005%. The company’s product candidates are designed to lower intraocular pressure in patients with open-angle glaucoma and ocular hypertension. Its Rhopressa is a once-daily eye drop. Rhopressa inhibits Rho kinase and the norepinephrine transporter, which are both biochemical targets for lowering intraocular pressure. After a late 2017 approval, the company will be launching its first product, Rhopressa, for adjunct glaucoma in the second quarter of 2018.

Aerie’s Roclatan is a once-daily, fixed-dose combination of Rhopressa and latanoprost, which is a prescribed drug for the treatment of patients with open-angle glaucoma. The company is engaged in conducting Phase 3 clinical trial for Roclatan. The company will file a new drug application for the product later this year.

The Stifel price target on the stock is $80, and the Wall Street consensus target is $79.75. The shares traded early Thursday at $60.35.

Horizon Pharma

The may be a great play for more speculative accounts. Horizon Pharma PLC (NASDAQ: HZNP) is a specialty pharmaceutical company based in Ireland, and through its subsidiaries, develops and commercializes medicines for the treatment of arthritis, pain and inflammatory diseases. The company’s best known products include Actimmune for reducing the frequency and severity of serious infections associated with chronic granulomatous disease, and Duexis, a proprietary tablet formulation for the relief of signs and symptoms of rheumatoid arthritis and osteoarthritis.

Stifel remains bullish on the stock and here’s why:

Horizon has successfully reprioritized its investment focus to Specialty/Orphan drugs, which now comprises 65% of its business. In 2018, we see Krystexxa (chronic refractory gout) as the primary growth driver with opportunity beyond rheumatology into nephrology, which doubles its target audience—suggesting strongly that its >$400mn-peak opportunity (estimated on rheumatology only) is very conservative. HZNP believes Krystexxa alone could outpace the collective peak of its remaining commercial portfolio, or $800-1 billion product. Notably, teprotumumab—most recent addition—is expected to be of similar scale to Krystexxa, backed by clinically-meaningful data and an untapped market.

Stifel has a $20 price objective, and the consensus target price is $18.25. The stock traded at $15.35 Thursday morning.

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Jazz Pharmaceuticals

This top company is a favorite at Stifel and across Wall Street. Jazz Pharmaceuticals PLC (NASDAQ: JAZZ) is a biopharmaceutical company that identifies, develops and commercializes pharmaceutical products for various medical needs in the United States, Europe and elsewhere. The company has a portfolio of products and product candidates with a focus in the areas of sleep and hematology/oncology.

The company’s largest products are Xyrem for narcolepsy (excessive daytime sleepiness), followed by Erwinaze for acute lymphoblastic leukemia (ALL) and Defitelio for veno-occlusive disorder (VOD, blockage of blood vessels in liver). Many on Wall Street feel the growth opportunity from Vyxeos (expected to become new standard of care in secondary acute myeloid leukemia) and JZP-110 have the greatest upside potential.

The Stifel report noted this:

We look to 2018 as a key year for JAZZ’s Heme-Oncology platform, as Vyxeos makes commercial headway and Defitelio is able to leverage new access to an adult Heme-Onc population. Initial enthusiasm for Vyxeos clinical efficacy is high, though physicians for the time being are conservative to meaningful off-label use given the lack of supportive clinical data as yet for broader usage and the high cost making payer/Medicare reimbursement issues challenging—though not insurmountable.

The towering $180 Stifel price target compares with the $178.41 consensus target. The stock was last seen at $137.90 a share.

Mallinckrodt

This company has been on a mergers and acquisitions binge over the past three years, and its stock was hit hard in 2017. Mallinckrodt PLC (NYSE: MNK) is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents.

The company’s areas of focus include therapeutic drugs for autoimmune and rare disease specialty areas, like neurology, rheumatology, nephrology and pulmonology, as well as neonatal critical care respiratory therapies and analgesics and central nervous system drugs.

Stifel sees the stock as a top special value situation and noted this:

The value of Mallinckrodt shares have declined >55% in 2017 on the back of multiple perception-shifting reports, Acthar pricing and growth concerns, and fears around the potential loss of InoMax. But in our view, the level at which MNK shares begin 2018 is wholly disconnected from what we believe to be Acthar’s realistic product life, InoMax’s durability as a drug/device, and disregard for its hospital portfolio of >$1bn in sales and late-stage pipeline, collectively offering an additional >$1 billion opportunity. This does not start to even include the contribution from the $1.2 billion acquisition of Sucampo that offers commercial product and a Phase 3 rare disease pipeline. Even in a reasonable downside scenario, the company continues to generate strong cash flow, allowing the company to fulfill its debt obligations as well as pay down maturities. While we cannot control for headlines and reports that stoke investor fear and uncertainty, we strongly believe the current share level does not represent true value.

Stifel has set its price target at a strong $50. The consensus figure is $30.72, and the shares were trading at $23.50.

Shire

This is one of the top picks in specialty pharma on Wall Street, and the company came in with huge earnings. Shire PLC (NASDAQ: SHPG) develops, licenses, manufactures, markets, distributes and sells pharmaceutical products. It offers various products for the treatment of attention deficit hyperactivity disorder. The company also focuses on the development of resources projects in various therapeutic areas, including rare diseases, neuroscience, ophthalmics, hematology and gastrointestinal disorders, as well as early development projects, primarily on rare diseases. Shire markets its products through wholesalers and pharmacies.

Many on Wall Street have pointed to the resolution of multiple ongoing patent litigation cases the company has with major pharmaceutical peers. In addition, other catalysts include the ongoing Xiidra (dry eye) ramp targeting 18 million diagnosed patients in the United States. Then there is Xiidra European Union and the global launches of Natpara, Gattex, Firazyr, Cinryze, Kalbitor and Xiidra through the larger global footprint of operating affiliates. Another big catalyst is Onivyde and Natpar approval in EU for pancreatic cancer and hypoparathyroidism, respectively.

Stifel feels the stock is another outstanding value:

Despite solid financial performance and productive pipeline development, SHPG shares were under continual pressure through 2017. Much of this we attribute to a perceived existential threat to its hemophilia franchise, near term competitive pressure in Hereditary Angioedema., and skepticism regarding its strategic path forward with Neuroscience. While we acknowledge these concerns, we believe fear rather than fact has overtaken the stock and has pulled attention away from a pipeline that promises to address some of the franchise pressures. We also believe that current Shire shares do not factor in any residual/tail-value for any of the challenged products nor pipeline.

Shareholders receive just a 0.58% dividend. The Stifel price target is a whopping $235. The consensus target is $213.93, and the stock traded at $157.50.

Stifel is spot on in its assessment of some of these top companies. There is deep value for long-term investors and the opportunity to buy some of the best companies in the industry at rock bottom pricing. While changing sentiment can be like turning a huge ship, when the turn comes, it could mean big profits.