5 Specialty Pharma Stocks Nomura Is Picking To Weather The Storm

Shibani Malhotra of Nomura is expecting the specialty pharmaceutical and generics "merger frenzy" will continue into 2016.

Malhotra argued that companies with access to capital are now "more likely" to pursue deals, be it either friendly or hostile.

However, Malhotra cautioned that investor reaction to M&A is "not as uniformly positive" today as it was in 2014.

Shibani Malhotra, Nomura's specialty pharmaceuticals and generics industry analyst, initiated coverage of the sector with five Buy-rated recommendations.

According to Malhotra, the "merger frenzy" seen in the sector is expected to continue into 2016. The analyst noted that the industry faces an "increasingly challenging" macroeconomic environment, characterized by patent expiration, pricing pressures and customer consolidations.

As such, management teams and boards of directors face "immense" pressure to focus their efforts on "optimal capital allocation."

The Role Of 'Optimal Capital Allocation'

Malhotra continued that companies with access to capital are now "more likely" to go on the acquisition hunt and acquire their peers either through friendly or hostile deals.

However, investor sentiment has shifted as of late and investors are now "more carefully assessing individual deals" and are only beginning to focus on execution and results from deals completed in the past 18 months.

Buy Companies With Favorable Risk-To-Reward Profiles

Malhotra initiated coverage of the following five names with Buy ratings given their positively skewed risk-to-reward profiles and low-risk value drivers that are not currently reflected in their stock.

Allergan PLC AGN's management is likely to use capital from the recent sale of its generics business to "generate shareholder value." In addition, the "strength and sustainability" of its underlying business remains "underappreciated."
Valeant Pharmaceuticals Intl Inc VRX's "solid execution" will be a "key driver of value," while M&A activity will "play a role" in further upside.
Pacira Pharmaceuticals Inc PCRX's market opportunity for its Exparel suggests "significant growth potential."
Endo International plc - Ordinary Shares ENDP investors "appear to be missing" the true value of the recent Par acquisition, which will become "clearer" when the deal closes.
RedHill Biopharma Ltd – ADR RDHL currently has three phase III candidates with a total market opportunity of $10.3 billion. Accordingly, the stock represents an "attractive" long-term investment.

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