gs: Kos Pharmaceuticals, Inc. (KOSP): Raising
EPS on better pricing, softer volumes
52-Week Range US$75-37
YTD Price Change -18.96%
Market Cap US$2.0bn
Current Yield —
Long Term Growth Rate
EPS Growth Estimate 9%
What"s changed
We are raising our EPS and price target on Kos, and our 2006/2007 estimates are mainly
in line with consensus expectations prior to today?s earnings release. Our new 2006-2010
estimates are $1.62, $2.60, $2.38, $2.55, $3.27 (from $1.46, $2.55, $2.26, $2.47, $3.17).
With our EPS revisions and the rise in specialty pharmaceutical multiples, our price target
is now $48 from $45.
Implications
With 2Q2006 EPS exceeding our view by $0.14/share and a $0.16 increase to our 2006
estimate, the increase to our estimate in the remainder of 2006 is nominal. We note that
the revenue upside appeared to be driven by price increases and better rebate/return
economics, which we have passed through our model. We will reevaluate these after
additional data are published in the 10-Q. We also note that major products have had
difficult trends in recent weekly total prescription (TRx) and new prescription (NRx) data:
Niaspan TRx growth is flat; Advicor NRx are declining (possibly due to generic
simvastatin); Azmacort TRx are down 12%, but NRx are down only 9%. We believe that
the ability to take price increases is likely to become increasingly difficult as the gap closes between
Kos products and other therapies (as the gap has in their lipid-modifying agents).
Valuation
Our 12-month price target of $48 is derived from a relative P/E valuation (70% weight) and
DCF-driven valuation (30% weight). Using our 2007 estimate and a 15% discount to the specialty
pharma sector?s 2006 P/E ratio of 21.9X, we obtain a $48 valuation. Our DCF valuation is $48,
using a three-stage DCF with our five-year free-cash-flow estimates, a second stage with 2%
growth, and a no-growth terminal value.
Key risks
Key risks to our price target and view include a markedly longer period of price increases without
an effect on demand, changes in the competitive dynamic for HDL raising therapies, marked
acceleration/deceleration of key products, and regulatory risks to the pipeline. |
