Biotech Beat: Analysts Advise Caution on Valeant Pharmaceuticals Intl Inc (VRX), ACADIA Pharmaceuticals Inc. (ACAD) and Teva Pharmaceutical Industries Ltd (ADR) (TEVA)

Analysts are coming to the biotech round table circling the sidelines on Valeant Pharmaceuticals Intl Inc’s (NYSE:VRX), ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Let’s explore why:

Valeant Short-Term Set-Up Could Be Positive, but Challenges Lie Ahead

In light of Valeant’s new segment structure, Deutsche Bank analyst Gregg Gilbert has “re-vamped” his model, reducing estimates to indicate the uphill battle management anticipates will face the troubled biotech giant in 2017, coupled with waning growth for Xifaxan, the firm’s pipeline drug for treating small intestinal bacterial overgrowth. Though Gilbert is “sticking” with the sidelines, he does acknowledge, “we like the short-term set-up.” The analyst reiterates a Hold rating on VRX while lowering the price target from $29 to $24, which represents just under a 40% increase from where the shares last closed.

Having been outspokenly “cautious on the stock for several years,” what is it that management said that has the analyst newly encouraged on the giant’s near-term? Gilbert commends the following: ” 1) the bar for ‘16 has been lowered and new CFO Paul Herendeen thinks of guidance as a commitment, 2) we have moved into a period of enhanced transparency from the company, 3) management seems confident in its ability to sell some non-core assets soon, hopefully at prices that result in improved leverage ratios, and 4) management is willing to sell a core asset (such as Salix, which we hope VRX sells) if the price is right.”

However, “Viewing the story through a longer-term lens, we still believe it will take time for former VRX fans to take a fresh look, and new investors could take time to think about the magnitude of potential revenue and earnings declines in ’17, growth potential and durability in ‘18 and beyond, and the cost and ultimate price to be paid for investigations and lawsuits,” Gilbert concludes.

For 2016, the analyst has pulled back on his revenue projection of $9.8 billion and tweaked it to $9.6 billion. For 2017, Gilbert reduced his $10.1 billion revenue forecast to $9.5 billion, in light of declining sales for its Neuro and Other segment, Generics, and Xifaxan. Volume growth for Xifaxan Rx, whose growth is decelerating, has been sliced from 14% in fourth-quarter to 5%. The analyst’s estimates for 2017 gross margins were pulled back, although the analyst sees room for some development throughout the forthcoming years thanks to the giant’s supply chain rationalization plans.

Subsequently, the analyst has also reduced EPS 2016 estimates from $6.33 to $5.46 and 2017 EPS from $7.45 to $5.62. Gilbert’s model anticipates $6 billion of new debt come 2018, a sharp rise from initial expectations for $1.5 billion, with room for changes as VRX looks to near-term asset sales.

As usual, we recommend taking analyst notes with a grain of salt. According to TipRanks, one-star analyst Gregg Gilbert is ranked #3,651 out of 4,214 analysts. Gilbert has a 42% success rate and faces a loss of 3.0% in his yearly returns. When recommending VRX, Gilbert earns 0.0% in average profits on the stock.

TipRanks analytics indicate VRX as a Hold. Out of 12 analysts polled by TipRanks, 2 are bullish on Valeant, 8 remain sidelined, and 2 are bearish on the stock. With a return potential of 36%, the stock’s consensus target price stands at $23.45.screen-shot-11-15-16-at-06-01-pm

More Skeptical than Optimistic on ACADIA Pharmaceuticals

Leerink analyst Paul Matteis offers insights on ACADIA with regards to its clinical pipeline. Overall, the analyst sees plenty of causes to urge caution on the biotech firm’s prospects. Particularly, Matteis underscores skepticism that though the firm’s leading drug pimavanserin has been successful in Parkinson’s Disease Psychosis (PDP) does not automatically mean it will bring forth the same success in Alzheimer’s Disease Psychosis (ADP), as the two are “not the same disease.”

As such, the analyst reiterates a Market Perform on shares of ACAD with a $29 price target, which mirrors current levels.

Matteis opines, “We see a few potential outcomes on phase II pimavanserin Alzheimer’s Disease Psychosis (ADP) data this quarter; while we believe the stock risk/reward is highly upside biased, KOL checks and our analysis suggest low expectations are warranted.”

Moreover, the analyst explains, “Street expectations are fairly low, however we believe most models (especially on the sell side) include ADP sales with a significant risk-adjustment – which given the size of the oppty translates into at least a few dollars in value. Biological/phenotypic differences between ADP and Parkinson’s Disease Psychosis (PDP), as well as ACAD’s experience in PDP – where it took 3 iterations to generate a positive study – underlie our cautious view.”

Yet, on the positive side, with investor concerns at a high and expectations at a low, it would be an easier “bar for success” for the Phase 2 ADP trial to meet to be able to excite the Street.

Overall, “Risk/reward is highly upside biased in our view – with up to 50% upside on a clear win and 10% to 15% downside on study failure; though two mid-cases also exist,” Matteis contends.

As usual, we like to include the analyst’s track record to give a perspective on the effect it has on stock performance. According to TipRanks, five-star analyst Paul Matteis is ranked #198 out of 4,214 analysts. Matteis has a 63% success rate and gains 15.0% in his annual returns. When recommending ACAD, Matteis earns 12.2% in average profits on the stock.

TipRanks analytics exhibit ACAD as a Strong Buy. Out of 10 analysts polled by TipRanks, 80% are bullish on ACADIA stock and 20% remain sidelined. With a return potential of 43%, the stock’s consensus target price stands at $41.63.

Staying on the Sidelines with Teva Pharmaceutical Shares

Barclays analyst Douglas Tsao dives in on Teva stock from a vigilant standpoint. For now, until the analyst can closer investigate the U.S. Department of Justice (DOJ) investigation surrounding allegations that the firm is guilty of generic drug price collusion coupled and until palpable signs that generic pricing has normalized come to play, he reiterates an Equal Weight rating on TEVA with a $46 price target, which represents a 16% increase from current levels.

Tsao notes, “We continue to like the generics industry and the TEVA story, especially at the current valuation, but we would like to get better visibility on the pricing cycle before being more aggressive in recommending shares […] Sentiment in generics is as bad as we can recall, driven primarily by a downturn in the pricing cycle as a result of consolidation among customers and an increase in ANDA approvals has offset the industry consolidation in recent years.”

Overall, “We think the strategic underpinnings of TEVA’s acquisition of the Actavis business was correct by enhancing its on-market portfolio and giving it the best pipeline of product launches by far. TEVA’s pipeline strength, especially on first to files, offers much improved competitive positioning compared to MYL or ENDP, in our view,” Tsao surmises.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Douglas Tsao is ranked #447 out of 4,214 analysts. Tsao has a 58% success rate and realizes 9.8% in his annual returns. When recommending TEVA, Tsao yields 7.9% in average profits on the stock.

TipRanks analytics demonstrate TEVA as a Strong Buy. Based on 17 analysts polled in the last 3 months, 13 rate a Buy on TEVA, while 4 maintain a Hold. The 12-month price target stands at $63.00, marking a nearly 54% upside from where the shares last closed.


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