BTIG Recommends 'Beaten Down' Drug Manufacturers Like Teva

BTIG’s Timothy Chiang mentioned that shares of specialty pharmaceutical companies are down 20 percent year-to-date, as compared to a 5.8 percent decline in the S&P 500. The decline is largely attributable to investor concerns surrounding the sustainability of earnings growth and the recent wave of M&A deals.

Analyst Timothy Chiang recommended investments in companies offering strong cash flow generation, geographic diversification and having seasoned management teams with proven track record of delivering upside. The recommended Buy-rated stocks include “Beater Down” drug manufacturers like Teva Pharmaceutical Industries Ltd (ADR) TEVA [PT: $77], Mylan NV MYL [PT: $60], Shire PLC (ADR) SHPG [PT: $230] and Perrigo Company plc Ordinary Shares PRGO [PT: $170].

Allergan Generics Business Acquisition: Positive For Teva

The closure of Teva’s $40 billion acquisition of the generic business of Allergan plc Ordinary Shares AGN is expected by early April. The $40.5 billion deal involves payment of $33.75 billion in cash plus 100 million Teva shares.

Chiang expects the FTC review of the deal to end soon, with planned divestitures of overlapping generic products expected in late March. “Assuming a closing by early April, we estimate CY 16 and CY 17 proforma EPS of $5.66 and $6.00, respectively, factoring in cost savings of $450M and $1,000M,” the BTIG report stated.

The acquisition is expected to boost Teva’s 2016 EPS by 7 percent and 2017 EPS by 17 percent.

“Post the acquisition of Allergan’s generic segment by Teva, we estimate Teva’s pro forma debt/EBITDA leverage ratio will increase to ~3.7x. In turn, Allergan’s leverage ratio of ~5x drops to less than 0.5x,” the analyst added.