Thread, Merrill Lynch, which upgrades WLA to a buy yesterday, had issued a report on Jan 19 examining the Rezulin impact on WLA. The firm has reduced their EPS estimate to $1.92 and $2.20 from $1.94 and $2.27 respectively, driven by reduction of Rezulin estimates to $750 million and $600 million from $900 million and $913 million, respectively.
"Our long term growth rate for the company is reduced to 19% from 22% as we shift our base year for this calculation to 1998. Our buy/buy rating remains intact."
The Rezulin effect on WLA, from the same Merrill Lynch report:
"Even with the reduction in our Rezulin estimate, we expect WLA to be the fastest growing company in the pharmaceutical industry, both for 1999(20%) and in terms of long tem growth rate (19%). Currently trading at roughly a group P/E multiple of 35 times our 1999 EPS, the 1999 P/E-to-growth multiple of 1.8x puts WLA severely below the group's average of 2.5x. We do not believe that a discount of this magnitude is warranted and view the current pullback as a solid buying opportunity."
Rezulin is 11% of WLA's total earnings per share, about $0.17 of ML's 1998 estimate of $1.48.
"Our estimate assumes that Rezulin remains in the market. While the chances of FDA pulling the product off the market are greater than zero, we view this event as highly unlikely in the near term given that Avandia and Actos are not approved and have only been used in a few thousand patients each to date. The FDA may choose to be conservative in terms of labelling these new agents as a result of the Rezulin experience. WLA views the March 26 FDA meeting as a forum for rational discussion of Rezulin's benefits. We expect the company to highlight Rezulin's safety data since the last label change.
For the sake of this exercise, we have outlined below what WLA's EPS would look like if Rezulin is totally removed from the P & L, assuming that Rezulin's EPS impact remained at 11% going forward. This is conservative as we expect Rezulin's relative contribution to shrink.
In the no-Rezulin scenario, the long term growth rate would still be 19%. Apply a 25% discount to the group average 1999 P/E-to-growth rate multiple of 2.5x would get us to roughly $61. Because the scenario represents the total absence of Rezulin, we view $61 as the "rock bottom price" or downward risk case."
The full report, which I suggest all long term WLA investor to read, is at their website. Free registration is available until end of February:
askmerrill.com
Anthony
P.S. the bolds and typos are mine. Can't do a copy and paste. File in Acrobat format.
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