UBS From Barron's. Price target of $53 doesn't square w/ est. of $3.22 earnings for '08 and 22% CAGR
By UBS Investment Research ($46.91, March 28, 2007)
WE ARE INITIATING coverage of Sepracor with a Neutral rating and $53 price target.
Sepracor is a research-based pharmaceutical company that develops single-isomer or active-metabolite forms of existing drugs as well as new chemical entity compounds. Sepracor's product development is focused on three major therapeutic areas: respiratory; urology and gastroenterology; and central nervous system disorders.
Recent pressure on Sepracor shares has created a seemingly attractive opportunity to enter one of the more rapidly growing names in the specialty pharmaceutical sector. However, investors may be appropriately handicapping Sepracor shares for various challenges in 2007 in both its insomnia and respiratory franchises. While we could see some price appreciation, we believe shares are fairly valued given its challenges.
The risks the company is facing in the central nervous system disorders (CNS) and respiratory franchises are real. Its signature product, Lunesta for insomnia, continues to drive the story. Lunesta is confronting slower growth and a changing market dynamic with stiff competition from its competitor, Sanofi-Aventis, who is pushing conversion to Ambien CR ahead of generic entry. Although the troubles within the respiratory franchise are not as acute, they are not perfect either.
Xopenex nebulizer for (asthma/chronic obstructive pulmonary disease, or COPD) is still at risk of losing some Medicare reimbursement. The respiratory franchise could see renewed growth from Xopenex HFA (launched late 2005) and the upcoming launch of Brovana for COPD (April 2007). However, these may not be significant contributors for several years. While Sepracor shares have significantly retreated from its highs, we believe shares are now fairly valued given its challenges today.
Despite the caution we ascribe to Sepracor's franchises, we note earnings-per-share (EPS) growth prospects remain favorable with meaningful operating leverage to drive shareholder value despite pressures to the top line. We project EPS of $2.36 for 2007 and $3.22 for 2008, and estimate a three-year EPS compounded annual growth rate of 22%.
We value Sepracor using a blend of discounted cash flow (weighted average cost of capital 11%, terminal growth 2%) and forward price-to-earnings (20 times 2007-2008 EPS estimates) methodologies.
Our $53 price target suggests only approximately 13% upside potential. |
