Goldman Initiates Specialty Pharma At Neutral, Highlights 'A Confluence Of Concerns'

Goldman Sachs has started coverage of specialty pharma with a Neutral rating, saying the sector faces "multiple challenges, including levered balance sheets, intensifying pricing pressure and deteriorating fundamentals."

The brokerage's top picks are Jazz Pharmaceuticals plc - Ordinary Shares JAZZ and Horizon Pharma PLC HZNP.

"Our analysis reveals that much of the M&A has destroyed value, and balance sheets are now bloated — making traditional multiples insufficient to capture the full story," analyst Stephan Stewart wrote in a note.

Stewart expects "limited M&A, increasing payer pressure and ongoing government focus to limit branded price aggression" and "sees branded companies with durable growth and pipelines with near-term commercial opportunities as best positioned."

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Meanwhile, the analyst said the generics sector faces "increased manufacturer competition, FDA's focus on reducing its backlog, and purchaser consolidation" amid continued pricing pressures.

"In this context, scale, portfolio exposures and pipelines increasingly matter and we await signs of stabilization before getting more positive," Stewart highlighted.

Specialty Pharma Picks And Pans

Stewart likes Buy-rated Jazz Pharma, as it "boasts leading organic growth, returns and balance sheet quality, with 2016 catalysts to drive shares higher."

In addition, the analyst also hailed Buy-rated Horizon Pharma‘s emerging orphan portfolio.

Related Link: Goldman Likes Horizon Pharma's Emerging Orphan Franchise

On the flipside, the analyst recommends investors sell Impax Laboratories Inc IPXL, as he sees "high expectations, premium valuation, increasing competition and tail risk limiting relative upside."

Stewart said he would avoid companies with "sizeable exposure to the generic pain market," such as Endo International plc - Ordinary Shares ENDP and Mallinckrodt PLC MNK — both Neutral rated.

The analyst noted he is concerned by the durability of Neutral-rated Concordia Healthcare Corp CXRX's North American portfolio, on historical price reliance. "However, the company's ongoing strategic review could limit downside."

The analyst also likes Momenta Pharmaceuticals, Inc. MNTA's (Neutral) "biosimilar and novel pipeline opportunities, but expect(s) litigation around its near-term generic Copaxone 40mg opportunity to drive near-term stock performance."

Sector Catalysts

Among the sector catalysts, Stewart lists out the following key upcoming events:

• 1. "Expected 1Q17 approval and trial decision on MNTA's generic Copaxone 40mg, which could more than double its current revenue base and provide a path to the more attractive longer term biosimilars and novel compound pipeline.
• 2. "HZNP's 4Q16 phase 3 data for Actimmune in FA, which we believe could be a $500+ million opportunity if approved, versus HZNP's current revenue run rate of ~$1,000 million.
• 3. "JAZZ's anticipated 4Q Phase 3 data for JZP-110, a wake promoting agent with a potentially large addressable market and comfortable $300+ million revenue opportunity versus JAZZ's current revenue base of $1.5 billion."

At the time of writing, shares of Jazz Pharma were up 2.2 percent at $156.11, Horizon Pharma were up 4.94 percent to $18.69, while Impax Labs were down 1.48 percent to $33.86.