Morgan Stanley Expects 'Above-Market Organic Growth' For Patheon, Initiates At Overweight

Patheon NV PTHN is positioned for above-market organic growth with an end-to-end service contract manufacturing (CMO) model, according to a note from Morgan Stanley that initiated coverage of the stock with an Overweight rating and price target of $31.

"High operating leverage can drive ~330 bps in EBITDA margin expansion by FY18; we see EPS growth of 58 percent/20 percent in FY17/FY18," analyst Ricky Goldwasser wrote in a note.

Goldwasser said the company is poised to expand its CMO share due to its open platform, end-to-end service, quality and global footprint.

Related Link: Wells Fargo Initiates Coverage On Patheon At Outperform

Forward View

As such, the analyst believes Patheon can grow its top line at an 11 percent/8 percent CAGR in FY17/FY18, above market growth rates of 5–6 percent, with 209 bps and 121 bps in EBITDA margin expansion in FY17/FY18. The analyst estimates Patheon can grow EBITDA margins from 21.6 percent in FY16 to 24.8 percent in FY18.

"Patheon is poised to thrive on biologics, the fastest growing area in drug development, given capabilities that span formulation / development as well as API," Goldwasser noted.

The company's development (PDS) arm is a strategic feeder to finished dose manufacturing (DPS), which won 24 contracts for new products developed by PDS in FY15.

In addition, the analyst expects the high fixed-cost nature of contract manufacturing to expand margins by 330 bps over the next two to three years. Further, the company's growth through M&A has increased revenues by $890 million in FY15 (50 percent of total revenue) and could provide additional upside.

The analyst, who expects EPS of $0.85 for 2016 and $1.31 for 2017, sees 15 percent potential upside in Patheon shares based on Friday's close.

Shares of Patheon closed Friday's regular trading at $27.00. At time of writing Monday morning, Patheon was up 2.33 percent at $27.63.

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