Morgan Stanley: We Still Like Actavis Despite Weaknesses

In a report published Friday, Morgan Stanley analysts maintained an Overweight rating on Actavis plc ACT, with a price target of $343.

Actavis' shares have declined by 8 percent since March 20. The analysts believe that four factors have exerted pressure on the share price:

1. Concerns surrounding 1Q dilution from financing before close of AGN as well as the company missing consensus 1Q EPS - The analysts believe that this is "irrelevant to the investment thesis," since it is a financing issue.
2. Management suggested that it may not update guidance for 2015 until after the announcement of 2Q results
3. Concerns surrounding competition to key Allergan drug Restasis (dry eye) from Shire's new drug lifitegrast, after the FDA granted priority review to Shire's lifitegrast NDA and assigned a PDUFA date of October 25 - The analysts expect Restasis to generate $1.4B in revenue in 2016, representing 6 percent of the company's total revenues $24.8B. This drug could contribute 10 percent of EPS.
4. Some hedge funds have shorted ACT stock due to the three factors above.

"We remain bullish on ACT growth prospects (14% EPS CAGR from 2015-2020), and we still see ACT's transition from value (generics) to growth (brands) as a positive for investors," the analysts said. Morgan Stanley considers the current weakness in Actavis' shares as a "buying opportunity."
The EPS estimate for 1Q15 has been reduced from $4.25 to $3.85 to reflect deal financing dilution prior to the Allergan stock close.