Note: All changes since the last report date have been highlighted.
Reason for Report: Teva acquisition of Barr cleared in US, Europe
Prev. Ed.: November 12, 2008; 3Q08 Earnings Update
Brokers’ Recommendations: Neutral: 85.7% (6 firms); Positive: 14.3% (1); Negative: 0.0% (0) Prev Ed.: 6; 2; 0
Brokers’ Target Price: $67.67 (↑ $0.38 from the last edition; 6 firms) Brokers’ Avg. Expected Return: 1.02%
*Note: Though dated December 22, share price and broker material are as of December 19.
Portfolio Manager Executive Summary
Barr Pharmaceuticals, Inc. (BRL) is a global specialty pharmaceutical company engaged in the development, manufacture, and marketing of prescription generic and proprietary pharmaceuticals, biopharmaceuticals, and active pharmaceutical ingredients. BRL is expected to be acquired by TEVA, with the transaction scheduled to be closed by 4Q08.
Of the 7 firms providing ratings on BRL, 1 (14.3%) gave positive ratings and 5 (85.7%) gave neutral ratings.
Neutral or equivalent outlook (6/7 firms): Target price range – $66-$68. The analysts believe that Barr’s focus on drugs with high barriers to entry and the Pliva acquisition gave Barr a foothold in fast-growth Central/Eastern Europe markets. However, the analysts view the Pliva acquisition as somewhat disappointing with unclear synergies and a higher-than-expected tax rate, obfuscating the real earnings or cash flow benefit. Further, the analysts believe that Yasmin sales (recently approved) is currently discounted in the shares and that generic Adderall XR (ADHD) will be a key 2009 EPS driver. Given the back-weighted nature of 2008 EPS and the recent guidance cut, the analysts prefer to remain at the sidelines.
Positive or equivalent outlook (1/7 firms): The firm provided a target price of $70. The analysts believe BRL should be viewed as a lucrative Buy as the company’s operating performance and pipeline visibility is expected to improve in future. Barr is positioned to benefit from the growth of its existing domestic generic pharmaceutical business and the analysts expect the company’s capital redeployment into international operations and branded franchises to bolster its profitability and topline growth. The analysts believe that Barr’s near-term financial performance will be the most important catalyst for the stock, although any patent litigation win may also aid the stock’s performance. The analysts view these as meaningful drivers that would position BRL to resume growth in 2009 and believe that Barr offers excellent visibility for 2009 with the exclusive launch of Adderall XR and the possibility that Yasmin’s exclusivity period will be extended beyond 2008. Moreover, the analysts consider the recent Yasmin settlement agreement with Bayer as a positive because the growth opportunities from this product are substantial and sustainable and provide some visibility on 2011 oral contraceptives (OC) sales for BRL.
Long-Term Outlook
Longer term, Barr is positioning to be a future leader in the biogeneric market. Barr has six generics that could launch within the next twelve months, including Allegra-D, Yasmin, TriCyclin Lo, Nasocort, Adderall XR, and Mirapex. The prospect of 2009 appears bright. The Digest long-term growth rate is 12.5%. Three-year (2007–2010) CAGRs for revenue and net income are 5.1% and 11.3%, respectively, as per the Zacks Digest model.
The analysts in general view the takeover of BRL by TEVA as a sensible deal. According to them, BRL provides TEVA access to the leading generic oral contraceptive line in the US, a larger geographic footprint (esp. Eastern and Central Europe), and complementary skill sets in Paragraph IV filings and biologics capabilities.
December 22, 2008
Recent Events
On December 19, 2008, Teva announced that the Federal trade Commission (FTC) as well as the European Commission approved its acquisition of Barr. Earlier on November 21, 2008, Barr announced that its shareholders overwhelmingly approved the proposals submitted to them relating to the acquisition of Barr by Teva. BRL and Teva signed a definitive agreement in July 2008, under which Teva will acquire Barr. Under the terms of the deal, Barr shareholders will receive $39.90 in cash and $0.63 of a Teva ADR for each share they own. Teva will also incur $1.5 billion in debt. The deal is expected to close on December 23, 2008.
Overview
Key investment considerations as identified by brokerage firms are as follows:
Key Positive Arguments / Key Negative ArgumentsSolid cash flow, reasonable valuation, and growth in the generic/specialty pharma group, all led to the growth of the company. / Active patent challenges require litigation, thereby leading to higher general and administration expenses.
BRL has intensified focus on its branded business to expand its margins in the longer term. / Entry of multiple competitors to the generic business as well as rapid deterioration of Barr’s oral contraceptive revenue from the entry of additional competitors poses significant challenge for BRL.
Barr’s record of successfully resolving patent challenges has contributed to its growth and challenging patents continue to be an important part of the company’s generic product development strategy.
Barr Pharmaceuticals, Inc. is a global specialty pharmaceutical company that operates in more than 30 countries worldwide and is engaged in the development, manufacture and marketing of generic and proprietary pharmaceuticals, biopharmaceuticals and active pharmaceutical ingredients. A holding company, Barr operates through its principal subsidiaries: Barr Laboratories, Inc., Duramed Pharmaceuticals, Inc. and PLIVA d.d. and its subsidiaries. The Barr Group of companies markets more than 120 generic and 27 proprietary products in the US and approximately 1,025 products globally outside of the US.
The company’s website is http://www.barrlabs.com.
Note: The company’s fiscal year coincides with the calendar year.
November 17, 2008
Revenue
The company reported total revenue of $737 million in 3Q08 versus $602 million in 3Q07. The Zacks Digest average total revenue was $732.7 million.
Provided below is a summary of total revenue as compiled by Zacks Digest:
Revenue ($ in million) / 3Q07A / 2007A / 1Q08A / 2Q08A / 3Q08A / 4Q08E / 2008E / 2009E / 2010ETotal Revenue / $601.3 / $2,506.0 / $604.1 / $725.3 / $732.8 / $742.7↓ / $2,808.3↓ / $3,065.9↑ / $3,143.2↑
Digest High / $601.4 / $2,506.4 / $608.0 / $778.6 / $737.0 / $781.3 / $2,858.3 / $3,158.0 / $3,219.8
Digest Low / $601.0 / $2,500.6 / $602.9 / $719.9 / $732.0 / $723.0 / $2,778.1 / $2,993.7 / $3,019.8
Barr reports revenue through three segments – Generics, Branded, and Alliance and Development Revenue. The Generics segment is the major contributor to the topline.
Generic Product Sales
BRL is one of the world’s leading generic drug companies. More than 75% of its total revenue come from the company’s Generic drugs segment. It currently manufactures and markets 25 OC products in the US, with Watson Pharma being its closest competitor.
Barr’s generic business offers solid growth opportunities. As of September 30, 2008, the Company had submitted approximately 70 Abbreviated New Drug Applications (ANDAs), including tentatively approved applications, pending at the FDA targeting branded pharmaceutical products with an estimated $29 billion in sales. The Company also had approximately 350 product registrations, representing 87 molecules, pending with regulatory bodies in Europe and ROW.
During 3Q08, the Company received four generic product approvals in the US from the FDA, and approximately 30 approvals, representing 27 molecules, from regulatory bodies in Europe and ROW.
The Company's generic product sales were $562 million in 3Q08 versus $434 million in 3Q07.
Sales of US generic products totaled $350 million in 3Q08 versus $276 million in 3Q07. The increase in sales was primarily driven by the higher sales of generic oral contraceptives.
Sales of generic oral contraceptives were $159 million in 3Q08 versus $112 million in 3Q07. The increase was primarily driven by the sales of Ocella ($50 million), the company's generic Yasmin oral contraceptive product that was launched at the end of 2Q08, which more than offset the lower sales of other oral contraceptive products.
Sales of generic products in Europe and the rest of the world (ROW) were $212 million in 3Q08 versus $158 million in 3Q07. The $54 million y/y revenue growth was primarily driven by the higher sales in most of BRL’s ROW markets including increases in Poland, Russia and Germany as well as the positive impact of foreign currency fluctuations, which accounted for $22 million of the increase.
$ in millions / 2007A / 2008E / 2009E / 2010E / CAGR(07-10)Generic OC Sales / $458.8 / $561.7↓ / $572.7↓ / $476.6↓ / 2.0%
Proprietary Product Sales
The company's proprietary product sales were $133 million in 3Q08 versus $125 million in 3Q07. The increase in proprietary sales was primarily attributed to the increased sales of Seasonique extended cycle oral contraceptive, Plan B contraceptive, and the ParaGard IUC. The company expects sales from this segment to grow 10% y/y, down from its previously-expected growth rate of 20%.
The company currently has an extensive proprietary clinical development program that includes four products in Phase III studies and three New Drug Applications (NDAs) pending at the FDA.
Alliance and Development Revenue
The company reported alliance and development revenue of $33.1 million in 3Q08 versus $32.5 million in 3Q07. The slight increase was attributed to the higher reimbursements from the company's development agreement with Shire plc, which more than offset decreased the royalties earned from the company's agreement with Teva Pharmaceuticals for Fexofenadine hydrochloride tablets, the generic version of Allegra tablets, and lower reimbursements under its Adenovirus agreement with the Department of Defense.
Other Revenue
Other revenue primarily includes revenue from non-core operations acquired as part of the Pliva acquisition, including the diagnostic, disinfectant, dialysis, and infusion (DD&I) businesses. Other revenue totaled $9 million in 3Q08 versus $10 million in 3Q07.
Outlook
The company changed its total revenue expectation for 2008 to $2.8 billion (from $2.7 billion-$2.8 billion), including total product sales of approximately $2.6 billion (prior expectation of $2.5 billion-$2.6 billion).
A graphical representation of revenue from Generic, Branded, and Alliance and Development is given below:
Branded Products
The main focus of the company’s Branded segment is on the development of women’s healthcare products. The leading products in the company’s branded segment include Seasonique, Plan B, Mircette, ParaGard IUD, and Enjuvia. Barr sells its branded products under the Duramed label in the US and Canada. These include both internally-developed as well as acquired products. Barr is a leader in the extended-cycle oral contraceptive category, which was established with the launch of Seasonale in 2003. The company has also expertise in the development of hormone replacement therapies. Barr is planning to expand into a second therapeutic category.
Specific Products
Note: The recent changes have been highlighted in bold.
Seasonale
Indication: Prevention of pregnancy. Seasonale offers excellent potential as the drug provides women with more hormonal exposure on a quarterly basis than other monthly oral contraceptive pills. Seasonale patients will experience contraception protection with only four periods a year instead of the normal twelve.
Product Life Cycle: Mature, widely sold, and distributed.
Sales: According to Zacks Digest, Seasonale sales were $22.1 million, up 49.0% y/y. Prior to the onset of generic competition, Seasonale sales totaled approximately $100 million annually. However, its sales have now come down to approximately $45-$60 million annually.
Partners: Seasonale was developed under a research and license agreement with Eastern Virginia Medical School (EVMS). Barr has a marketing partnership with Paladin in Canada.
Patents: The US Patent and Trademark Office has been re-issued the patent for Seasonale, which will now extend until June 23, 2017.
Seasonique
Indication: Prevention of pregnancy in women who choose hormone products for contraception. Seasonique has identical active ingredients as Seasonale, with an additional low-dose estrogen component taken during the placebo period.
Importance: Seasonique is the company’s flagship extended-cycle oral contraceptive product, which was launched in July 2006.
Product Life Cycle: Marketed. Expected to face generics in May 2009.
Patents: The US Patent and Trademark Office (PTO) issued a patent for the Seasonique extended-cycle oral contraceptive in January 2008. The patent will expire on January 30, 2024. The company also announced it submitted the patent to the FDA for issuance in the Orange Book.
Watson Pharma is seeking to bring a generic version of Seasonique to the market. Barr filed a patent infringement lawsuit against Watson, and plans to seek an injunction prior to the expiration of its exclusivity in 2009. However, Seasonique could face threats from generics from as early as late May 2009 if Barr fails in its patent infringement case.
$ in million / 2007A / 2008E / 2009E / 2010E / CAGR(07-10)Seasonale / $55.3 / $85.8↑ / $91.3 / $87.0 / 16.3%
Plan B
Indication: Plan B is an emergency contraceptive that can prevent pregnancy after contraceptive failure or unprotected sex.
Product Life Cycle: Plan B is currently available as an over-the-counter (OTC) product for consumers of 18 years of age and older. Plan B was previously available only on prescription and the OTC indication has helped to boost its sales.
Partner: BRL has a distribution and marketing partnership in Canada with Paladin for Plan B.
Patents: Plan B does not have any patent protection and its exclusivity status expires in August 2009.
Enjuvia
Indication: A synthetic conjugated estrogen HRT product that relieves vasomotor symptoms in menopausal women; treats moderate-to-severe vaginal dryness and pain during intercourse; and symptoms of vulvar and vaginal atrophy associated with menopause.
Product Life Cycle: The drug is patent protected until 2020, and is available in pharmacies nationwide.