Note: More details to come; changes are highlighted. Except where noted and highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: 2Q12 Earnings Update
Prev. Ed.: 1Q12 Earnings Update
Flash Update
Par Pharma Beats Estimates – August 02, 2012
Par Pharmaceutical Companies Inc. posted second quarter 2012 adjusted earnings of $1.62 per share, well above the Zacks Consensus Estimate of $1.08 and the year-ago earnings of $0.79 per share.
On a sequential basis, second quarter earnings climbed 102.5%.
Quarterly revenues of $294.3 million surpassed the Zacks Consensus Estimate of $290 million and the year-ago revenues of $224.2 million. Higher sales from its generic version of Teva Pharmaceutical’sProvigil (modafinil), strong sales of key products along with an increase in the base generic business led to the rise in net revenues in the reported quarter. On a sequential basis, second quarter 2012 revenues climbed 8.4%.
Revenues in Detail
Par Pharma generated sales of $57.5 million from its generic version of Provigil in the reported quarter. The generic version was launched by Par Pharma in April 2012.
Sales of Par Pharma’s generic version of AstraZeneca’s hypertension treatment, Toprol XL (metoprolol), decreased 20.7% sequentially to $49.0 million. Revenues were negatively impacted by customer buying patterns.
Sales of some of Par Pharma’s other generic drugs decreased. These include Par Pharma’s generic versions of AstraZeneca’s Entocort EC (budesonide) (down 11.8% sequentially to $33.5 million), Glaxo’s Rythmol SR (propafenone hydrochloride) (down 6.3% sequentially to $17.9 million) and Glaxo’s Imitrex (sumatriptan) (down 16.7% sequentially to $13.9 million).
However, sales of some other generic drugs including the company’s generic version of Teva’s Actiq (fentanyl citrate lozenges) (up 30% sequentially to $2.6 million) increased due to customer buying patterns.
Bupropion hydrochloride ER and zolpidem tartrate, both of which were added to Par Pharma’s portfolio following its acquisition of Anchen Pharmaceuticals, posted second quarter sales of $12.0 million and $5.3 million, respectively.
Among Par Pharma’s branded products, sales of Megace ES increased 16.4% while Nascobal B12 Nasal Spray sales decreased 8.5%, both on a sequential basis. While Megace ES revenues of $14.2 million were boosted by customer buying patterns, Nascobal B12 Nasal Spray revenues of $5.4 million were affected by customer order timings in spite of higher prescription volume.
Other Details
Second quarter 2012 gross margin increased to 53% from 40.8% in the first quarter of 2012.
Research and development (R&D) expenses increased to $20.7 million, from $19.9 million in the first quarter of 2012. Second quarter 2012 selling, general and administrative (SG&A) expenses went down to $38.5 million from $39.8 million in the first quarter of 2012.
Par Pharma was in the news recently with the company announcing that it has entered into an agreement with an affiliate of leading global private equity firm TPG Capitals, whereby TPG will acquire Par Pharma for $1.9 billion.
However, the agreement also permits Par Pharma’s Board of Directors to search for alternative superior proposals until August 24, 2012, from other bidders. Prospective suitors could include other generic players or ex-US companies looking to strengthen their presence in the US. If no alternative offer turns up, the TPG deal is expected to go through in 2012.
As of June 30, 2012, Par Pharma had 72 abbreviated new drug applications (ANDAs) filed with the US Food and Drug Administration (FDA) of which 23 are believed to be first-to-file opportunities.
Details, other news update and broker comments will be provided in the next edition.
Portfolio Manager Executive Summary
Par Pharmaceutical Companies Inc. develops, manufactures, and markets generic drugs and innovative branded pharmaceuticals for specialty markets. Par’s Branded Products segment (Strativa Pharmaceuticals) currently markets Megace ES (anorexia, cachexia, or any other unexplained weight loss) and Nascobal Nasal Spray (vitamin B12 supplement).
In February 2012, Par acquired India-based generic company Edict Pharmaceuticals. Earlier, in November 2011, Par acquired Anchen Pharmaceuticals. In October 2011, Par acquired rights to three products from Teva Pharmaceutical, following the Teva’s acquisition of Cephalon. These acquisitions will add to Par’s product portfolio and top-line.
Of the 11 firms providing ratings on Par, 8 (72.7%) assigned a positive rating and 3 (27.3%) provided neutral ratings. Notably, none of the firms gave a negative rating.
Positive or equivalent outlook (8/11 firms):The firmsare encouraged by the performance of Par’s generics business, which is being driven by recent generic approvals/launches and some limited competition products. Even though competition has negatively affected the Toprol XL franchise, Par expects to be able to replace these lower-margin products with launches from its pipeline. Although the firms have expressed disappointment regarding the unfavorable Lovaza ruling, some of them believe that Par will still be able to achieve its guidance.
Neutral or equivalent outlook (3/11 firms):The neutral firms believe that Par has done a good job with its generics segment. They are positive on the Anchen and Edict acquisitions which are expected to drive long term growth. However the firms point to the lack of near term catalysts which could drive the stock. Moreover, the Lovaza ruling is a disappointment for these firms as it removes a near-term revenue generator for the company.
August 7, 2012
Overview
Par Pharmaceutical Companies Inc., based in New Jersey, is engaged in the manufacturing and distribution of generic and branded drugs. The company has two product divisions: Par Pharmaceutical and Strativa Pharmaceuticals. While the generics product division, Par Pharmaceutical, focuses on the development, manufacture and distribution of generic products in the US; Strativa, the company’s proprietary products division, is involved in the acquisition, manufacture and distribution of branded products in the US. In February 2012, Par acquired India-based generic company Edict Pharmaceuticals, which has been renamed Par Formulations Private Limited.Earlier, in November 2011, Par acquired Anchen Pharmaceuticals for $410 million in cash. In October 2011, Par acquired rights to three products from Teva Pharmaceutical, following Teva’s acquisition of Cephalon.
The company’s website is
The firms have identified the following issues for evaluating the investment merits of Par:
Key Positive Arguments / Key Negative ArgumentsContinued investment in R&D, marketing and strategic alliances and relationships are expected to accelerate Par’s earnings. / The unfavorable Lovaza ruling has removed a near term revenue generator.
With a growing business in supportive care and a proven platform for high value and authorized generics in the U.S., Par has take-out potential. / With the introduction of Watson Pharma’s generic version of Toprol XL, the competitive landscape for Par’s generic version of the drug has increased
The acquisitions of Edict and Anchen Pharma have expanded Par’s product portfolio, which will help drive the top-line and long-term growth of the company.
Note: The company’s financial year coincides with the calendar year.
August 7, 2012
Long-Term Growth
With a growing business in supportive care (for cancer and HIV patients) and a proven platform for high value and authorized generics in the US, Par is a take-out candidate for a specialty pharmaceutical or generic drug company seeking to add incremental assets. The company plans to increase its branded portfolio more aggressively with licensing activities, acquisitions, and internal development of up to a few hundred million dollars.
In February 2012, Par acquired India-based generic company Edict Pharmaceuticals. Earlier, in November 2011, Par acquired Anchen Pharmaceuticals for $410 million in cash. Prior to that, in October 2011, Par acquired rights to three products from Teva Pharmaceutical, following Teva’s acquisition of Cephalon. These acquisitions have strengthened Par’s product portfolio and will help drive the topline. Moreover, cash flow from the generics business and the restructured branded business should enable the company to execute more deals.
August 7, 2012
Target Price/Valuation
Rating DistributionPositive / 72.7%↑
Neutral / 27.3%↓
Negative / 0.0%
Avg. Target Price / $45.39↑
Digest High / $50.00↑
Digest Low / $35.00
No. of firms with TP/Total / 9/11
A few firms raised their target price based on strong 1Q12 results.
Recent Events
Par Pharma Beats on All Fronts - May 09, 2012
Par Pharmaceutical Companies Inc. posted first quarter 2012 adjusted earnings of $0.80 per share, well above the Zacks Consensus Estimate of $0.73. The year-ago earnings was $0.96 per share.
On a sequential basis earnings climbed 2.6% during the first quarter.
Quarterly revenues of $271.5 million surpassed the Zacks Consensus Estimate of $238 million and the year-ago revenues of $233.0 million. Increase in units of the top generic products of the company led to the rise in net revenues in the reported quarter. On a sequential basis, first quarter 2012 revenues climbed 7.0%.
Revenues in Detail
Sales of Par Pharma’s generic version of AstraZeneca’s hypertension treatment, Toprol XL (metoprolol), increased 9.6% sequentially to $61.8 million. Revenues benefited from customer buying patterns.
Sales of some of Par Pharma’s other generic drugs also increased, including budesonide (up 14.8% sequentially to $38.0 million), propafenone hydrochloride (up 16.5% sequentially to $19.1 million) and sumatriptan (up 9.2% sequentially to $16.7 million).
However, sales of some other generic drugs including fentanyl citrate lozenges (down 23.1% sequentially to $2.0 million) went down due to customer buying patterns.
Bupropion hydrochloride ER and zolpidem tartrate, both of which were added to Par Pharma’s portfolio following its acquisition of Anchen Pharmaceuticals, posted first quarter sales of $11.4 million and $6.4 million, respectively.
Sales of Par Pharma’s branded products, Megace ES and Nascobal B12 Nasal Spray, decreased 22.8% and 10.6%, respectively, on a sequential basis. While Megace ES revenues of $12.2 million were impacted by customer buying patterns, Nascobal B12 Nasal Spray revenues of $5.9 million were affected by lower prescription volume.
Other Details
Gross margin remained flat on a sequential basis at 40.8%.
R&D expenses increased to $29.9 million, from $18.1 million in the fourth quarter of 2011. The primary reason for the increase was a one-time upfront payment as well as the inclusion of R&D expenses following the acquisition of Anchen (for full quarter) and Edict Pharmaceuticals (for partial quarter).
On the other hand, first quarter 2012 SG&A expenses went down to $42.2 million from $44.5 million in the fourth quarter of 2011, mainly due to lower transaction-related costs.
Outlook
Par Pharma expects 10 to 14 product launches and 13-17 ANDA filings throughout the year.
TPG to Acquire Par for $1.9 billion – July 16, 2012
Par entered into an agreement with an affiliate of leading global private equity firm TPG Capitals, whereby TPG will acquire Par for $1.9 billion.
TPG specializes in leveraged buyouts, recapitalizations, joint ventures, restructuring, etc. Some of its notable investments in the healthcare sector include Aptalis Pharma, Biomet, IMS Health and IASIS Healthcare.
Par represents strong growth prospects especially given the focus on low cost healthcare solutions and growing demand from an aging population. As of March 31, 2012, Par had 71 ANDAs filed with the FDA representing more than $20 billion combined branded product sales. These ANDA filings included 21 first-to-file opportunities.
Terms of the Agreement
As per the terms of the agreement, TPG is offering Par shareholders $50 in cash for each share of Par’s common stock. The offer price represents a premium of approximately 37% over the July 13, 2012 closing share price, which was the last full trading day before the announcement.
However, the agreement also permits Par’s Board of Directors to search for alternative superior proposals until August 24, 2012, from other bidders. Prospective suitors could include other generic players or ex-US companies looking to strengthen their presence in the US. If no alternative offer turns up, the TPG deal is expected to go through in 2012.
Revenue
The company reported revenues of $271.5 million in 1Q12, up 16.5% y/y. Increase in units of top generic products led to the rise in net revenues in the reported quarter.
On a sequential basis, revenues for the quarter climbed 7.0%.
Outlook
The company closed on the Edict Pharmaceuticals transaction on February 17 at a price of $36.6 million. During 2012-14, Par expects to experience an increase in the number of internal product launches, resulting in less dependence on authorized generics.
A few firms have reduced their revenue estimates based on the unfavorable Lovaza ruling.
Specific Products
Note: Recent significant changes are in bold.
Core Generics
In 1Q12, generic segment revenues increased 19.7% y/y to $ 251.2 million. Products like the company’s generic versions of Toprol XL (metoprolol; 1Q12 sales of $61.8 million, up 9.6% sequentially), Entocort (budesonide EC; 1Q12 sales of $38 million, up 14.8% sequentially), Rythmol SR (propafenone hydrochloride ER; 1Q12 sales of $19.1 million, up 16.5% sequentially) and Imitrex (sumatriptan; 1Q12 sales of $16.7 million, up 9.2% sequentially) drove generic segment sales.
As of 1Q12, Par had about 71 ANDAS pending with the FDA, 21 of which are believed to be first to file opportunities.
Par plans to file 13-17 ANDAs annually along with 10-13 generic drug launches over 2012-14. These launches do not include any authorized generics deals.
The company expects to launch 10-14 generic products from April to December. Par launched its generic version of Teva’s Provigil (modafinil) in April 2012.
Update on the Lovaza Patent Lawsuit
An US District Court Judge ruled in favor of Pronova in the Lovaza patent infringement litigation. The court ruled that Pronova’s patents are valid and Teva and Par’s generic versions would infringe the same. Most firms point out that this ruling removes a near term growth driver for Par.
Branded Products
Strativa Pharmaceuticals sales slipped 12.5% y/y to $20.3 million in 1Q12.
In June 2011, Par announced restructuring plans for its branded drugs business wing, Strativa Pharmaceuticals. The company reduced its workforce by about 90 people as a result of the restructuring, which is expected to drive the Strativa business to profitability. The remaining workforce will focus on the marketing of Megace ES and Nascobal.
Megace ES
Indication: Treatment of anorexia, cachexia, or any other unexplained weight loss in patients with AIDS.
Stage of Development: Mature and widely sold
Sales: Net sales were $12.2 million in 1Q12 compared to $15.8 million in 4Q11. The decrease was due to customer buying patterns.
Nascobal Nasal Spray
Indication: Nascobal Nasal Spray is a vitamin B12 supplement indicated to treat vitamin B12 deficiency.
Product Life Cycle Status:Marketed
Sales: Net sales were $5.9 million in 1Q12 were $5.9 million compared to $6.6 million in 4Q11. The decrease was due to lower prescription volume.
The company anticipates Nascobal sales to reach $40 – $50 million in future.
Zuplenz
Indication: Zuplenz is an odansetron orally dissolving film strip (ODFS) used for the prevention of post-operative nausea and vomiting associated with high and moderately-emetogenic chemotherapy and radiotherapy.
Product Life Cycle Status: Launched in the U.S. in 4Q10
Partners: In July 2011, Strativa returned the U.S. commercialization rights for Zuplenz to MonoSol Rx, as part of the resizing of Strativa. According to the licensing agreement with MonoSol Rx, Par had been marketing the product in the U.S. since October 2010.
Sales: Zuplenz sales amounted to $85,000 in1Q12, down 61.5% y/y.
Oravig
Indication: Oravig is an innovative antifungal therapy for the treatment of oropharyngeal candidiasis (OPC), an opportunistic infection commonly found in immuno compromised patients, including those with HIV and cancer.
Product Life Cycle Status:Launched in the U.S. in 3Q10
Partners: In September 2011, Strativa terminated its agreement with BioAlliance Pharma SA, thereby returning all the rights and obligations related Oravig.
Sales:Oravig sales came in at $0.2 million in 1Q12, down 79.3% y/y.
Acquisitions and Agreements
On April 19, 2012, Par entered into an agreement with Handa Pharmaceuticals, whereby it acquired the abbreviated new drug application (ANDA) for Handa’s generic version of Takeda Pharmaceuticals’ Dexilant. The ANDA is yet to receive final FDA approval. Under the terms of the agreement, Par acquired the right to market, sell and distribute the generic drug in the US and will receive a percentage of profits from the sale of the product.
Handa is currently involved in a patent infringement lawsuit in the US District Court for the District of Northern California, in relation to its generic version of Dexilant. As a part of the agreement, Par will be responsible for the ongoing litigation.
Handa believes it is the first to file an ANDA for the 60 mg formulation of the drug, which means, on regulatory approval, the company could enjoy 180 days of marketing exclusivity.
Dexilant is marketed for the treatment of gastroesophageal reflux disease (GERD) and erosive esophagitis. US annual sales of Dexilant 60 mg amounted to $517 million, according to IMS Health Data.
Margins
The company reported gross marginof 40.8% in 1Q12 versus 40.9% in 4Q11.
Research and developmentexpenses were $29.9 million in 1Q12 compared to $18.1 millionin 4Q11. R&D spend was driven by a one-time upfront development payment as well as the inclusion of Anchen and Edict R&D expenses.
Selling, general and administrative expenses for the 1Q12 decreased to $42.2 millionfrom $44.5 million in the 4Q11.Lower transaction related costs led to the decline.
While R&D expensesincreased 179.2% on a y/y basis, SG&A expenses declined 10.2% from the year-ago period.
Outlook
During the three-year period (2012-14), Par expects gross margin to be around 50%. Further, the company plans to spend $65-$70 million annually on R&D, with SG&A expenditure expected to amount to $185-$190 million.