Piper Jaffray Upgrades Biovail to Overweight (BVF)
Piper Jaffray is out with a research report this morning, where its upgrades shares of Biovail Corp. (NYSE: BVF) to Overweight from Neutral; it has a new price target of $25 (from $16.50).
The PJ analysts said, “We are upgrading Biovail to an Overweight from a Neutral and raising our price target to $25 from $16.50. The change is a function of a more accurate reflection of where BVF should be trading at closing (bearing in mind that BVF is the going-forward stock though Valeant (NYSE: VRX) will run the combined company). We believe that with combined annual free cash flows (FCF) of $900M or more longer-term, there is substantial potential for meaningful value creation.”
They also noted, “Our previous PT calculation on BVF did not reflect the stock as the going-forward entity. We were wrong. Recall that VRX holders will receive 1.7809 shares of BVF shares upon closing (BVF has 162M diluted). With VRX diluted shares outstanding at an estimated 90M, the exchange ratio points to VRX holders receiving around 161M shares and combined shares outstanding of 322M. This translates into a share price of near $22 for the new entity given the current combined market cap of $7B, though one could argue that net of the one-time dividends to be paid at closing, the combined market cap is closer to $5.3B-$5.4B post-closing. Either way, given the cash flow generation, there is significant value creation potential. Our new PT of $25 is based on a conservative estimate of 2012 FCF of around $800M and a FCF yield of 10%.”
The PJ analysts further noted, “Longer-term, annual free cash flow generation of $900M or more is possible. Recall that VRX/BVF management has targeted $175M in cost savings by year 2. We believe however that this target is beatable since VRX management does not have much of an appetite for higher-risk R&D programs. In this context, it is likely that R&D spending as a percentage of sales longer-term will look more like VRX's current 6%, pointing to around $130M in R&D expenses in 2012, compared to the estimated combined expenses of around $170M this year (refer to our note on VRX on 7/9/10 for more details). Further tax synergies are also likely with more utilization of BVF's NOL's and further leveraging of BVF's Barbados domicile.”
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