The recent tumult in the specialty pharma space has dragged the valuation of some good companies down to very appealing levels, says Laurentian Bank Securities analyst Joseph Walewicz.
Walewicz notes that several Canadian pharmaceutical companies he currently covers will report results over the next two weeks, including Acerus Pharmaceuticals Corp. (TSX:ASP), Cardiome Pharma (TSX:COM), Cipher Pharmaceuticals Inc. (TSX:CPH), Concordia Healthcare Corp. (TSX:CXR), Knight Therapeutics Inc. (TSX:GUD), Merus Labs (TSX:MSL), and Tribute Pharmaceuticals Canada Inc. (TRX-V).
The analyst, who has a “Buy” rating on all aforementioned stocks (save for Tribute Pharma, which he rates as a “tender” to offer in light of its proposed merger with Pozen Inc., and Knight Therapeutics, which he rates as a “Hold”), says headlines have dragged down the valuations of many companies that have limited exposure to the U.S. market, clean balance sheets, and multiple organic growth drivers investors. The analyst thinks investors should be buying.
“At a macro level “specialty pharmaceutical” companies, and Valeant Pharmaceuticals in particular, have been a lightning rod of discontent over the past few weeks,” says the analyst. “Three macro issues have dominated the discussion: (1) aggressive price increases, punctuated by “that Hillary Tweet”, (2) credit markets, and (3) the use of “specialty pharmacies”. As these macro issues have buffeted the space, some investors have questioned the whole “R&D-lite / growth by acquisition” business model that has been employed to varying degrees. The result has been a re-rating of the sector, with depressed share prices across the board, which presents an opportunity to enter the space at a better valuation.”
The Valeant/Turing Pharmaceuticals pricing scandal has rocked the sector to the point where some companies have specifically distanced themselves from it. Recently, Concordia Healthcare CEO Mark Thompson appeared on BNN to defend his company, which he said he feels was being unfairly swept up in the Valeant/Turing soap opera.
“I think there is a fair bit of guilt by association which I think is completely unwarranted, he said. “We have a very different business model than both Valeant and Turing. We have a model that doesn’t rely on taking geometric price increases. We also have a model that buys products. Were not like Valeant, who buys companies and tries to find synergies and strip them down.”
Walewicz has a $1.35 target on Acerus Pharma, a (U.S.) $12.50 target on Cardiome, a (U.S.) $8.50 target on Cipher Pharma, a (U.S.) a $60.00 target on Concordia Halthcare, an $8.50 target on Knight Therapeutics, and a $3.40 target on Merus Labs.