Adding to the carnage, you can toss in stocks that were over-owned, algorithmic fast money trading and end-of-the-quarter window dressing as many funds end their fiscal year at the end of the third quarter, and it equaled up to a big mess. Generally such irrational and provoked selling leads to opportunity. We scanned the Merrill Lynch stock coverage universe for specialty pharmaceutical stocks rated Buy and found three top companies that have been crushed.
Allergan
This company has many of the top-selling drugs, but it has kept price increases reasonable compared to some of the egregious ones. Allergan Inc. (NYSE: AGN) is focused on developing, manufacturing and commercializing innovative branded pharmaceuticals, high-quality generic and over-the-counter (OTC) medicines, as well as biologic products, for patients around the world.
Allergan markets a portfolio of best-in-class products that provide valuable treatments for the central nervous system, eye care, medical aesthetics, gastroenterology, women’s health, urology, cardiovascular and anti-infective therapeutic categories, and it operates the world’s third-largest global generics business, providing patients around the globe with increased access to affordable, high-quality medicines. Allergan is an industry leader in research and development, with one of the broadest development pipelines in the pharmaceutical industry and a leading position in the submission of generic product applications globally.
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The company recently updated and upgraded earnings estimates for the balance of the year, and the response was very solid. This comes on the heels of Allergan’s gigantic $40.5 billion sale this summer of the firm’s generic business to Teva Pharmaceutical.
The Merrill Lynch price target is a gigantic $385, while the Thomson/First Call consensus price objective is lower at $375.29. Shares closed Wednesday at $268.99.
Perrigo
This company still has a tender offer from generics giant Mylan. Perrigo Co. PLC (NYSE: PRGO) is a top five global OTC consumer goods and leading specialty pharmaceutical company that has grown to become the world’s largest manufacturer of OTC health care products and supplier of infant formulas for the store brand market. Perrigo is also a leading provider of generic extended topical prescription products, and it receives royalties from sales of the multiple sclerosis drug Tysabri.
The rhetoric between Mylan and Perrigo has grown somewhat contentious, and in the middle of September in a letter to those investors, Perrigo CEO and Chairman Joseph Papa wrote that Mylan’s new, hostile bid “substantially undervalues our Company and does not adequately compensate shareholders for our exceptional stand-alone growth prospects.” According to Perrigo, its directors were unanimous in their objection.
The bottom line for investors is, trading at current levels, the stock may offer solid upside. Toss in the recent discord in the sector and the gain could be spectacular.
The Merrill Lynch price target for the stock, which pays a small 0.3% dividend, is $221, and the consensus target is $207.70. The stock closed Wednesday at $156.12.
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Valeant Pharmaceuticals
This company took a headline beating for raising prices way too much. It is also a gigantic holding in Bill Ackman’s Pershing Square hedge fund. Valeant Pharmaceuticals International Inc. (NYSE: VRX) develops, manufactures and markets pharmaceuticals, OTC products and medical devices worldwide. It has an extensive list of products that treat everything from severe acne to Wellbutrin XL for major depressive disorder in adults; Jublia for onychomycosis of the toenails; Xenazine for chorea; Targretin for cutaneous T-cell lymphoma; Arestin, a subgingival sustained-release antibiotic; and Provenge for the treatment of prostate cancer.
Shares of the company are down a huge 37% in the past two months. The downtrend was particularly dramatic in September after presidential candidate Hillary Clinton commented on the rising prices of specialty drugs that led to a massive sell-off in the biotech sector. Valeant has two acquired drugs for heart conditions, Isuprel and Nitropres, on which the company has increased prices by 212% and 525%, respectively.
Bill Ackman recently stated, “If I had to pick one stock in our portfolio that is the most undervalued, it is Valeant.” While there always has been an eye raised at the company’s acquisition strategies from some corners of Wall Street, the upside potential is strong.
The Merrill Lynch price target is a gigantic $290, and the consensus target is $273. The stock closed most recently at $169.83.
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The risk for investors isn’t these companies and their strong products and earnings. The risk is the continued headline and political rhetoric not just now, but all through the campaign and right up to the 2016 elections. Politicians see these companies as easy targets and a very good way to make voters forget about the real issues at hand.
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