US Pharmaceuticals
4Q/08 EPS Preview: Defensive-ish?
Pharmaceuticals
Chris Schott, CFAAC
(1-212) 622-5676
christopher.t.schott@jpmorgan.com
Jessica Fye
(1-212) 622-4165
jessica.m.fye@jpmorgan.com
Yuriy A Prilutskiy
(1-212) 622-4162
yuriy.a.prilutskiy@jpmorgan.com
J.P. Morgan Securities Inc.
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• Major Pharma 4Q EPS: Focus on FX Impact, further signs of cost
reductions. As we have seen for several names in the group, FX has had a
greater-than-expected impact to guidance from both a topline as well as EPS
perspective. Coupled with lower interest income, these non-operating factors
create a challenging headwind for the group heading into 2009. While arguably
reflected in valuation, we remain below 2009 consensus EPS expectations for
most of the US pharma group. We continue to watch for signs of aggressive
cost cutting (SGP), which could partially offset FX headwinds.
• SGP: Well-positioned for the long term but FX impacting near-term
results. This will be the first quarter in several years in which the group will be
impacted by negative currency trends. This impact will be of particular note for
SGP (70% of sales ex-US). Our $0.27 4Q/08 EPS estimate is $0.03 below
consensus and we believe Street forecasts for 2009 may need to come down
modestly to reflect currency. That said, we remain enthusiastic about Schering’s
opportunities for SG&A reductions as it integrates Organon as well as the
company’s longer-term pipeline prospects.
• MYL: 2009 guidance/ progress of integration. We are looking for 4Q/08 EPS
of $0.13 and we expect management’s commentary on progress of the Merck
KGaA integration and the components of EPS growth (including FX, Depakote
and Duragesic) to be focal points of the call. We forecast Mylan’s EPS to
increase from $0.65 in 2008 to $1.04 in 2009 and $1.42 by 2010 and expect
rapid EPS growth fueled by the integration of Merck KGaA to be a driver of
MYL shares in 2009.
• TEVA: Watching initial barr guidance. While Teva remains optimally
positioned longer-term, we see initial Barr guidance, expected 2/17, as
representing a near-term overhang on Teva shares. We expect the deal to result
in modest NT dilution, particularly if Teva continues to include merger related
amortization in its guidance, and currently forecast $2.85 in 2009 EPS.
• SEPR: Potential SG&A cuts, R&D increase with 2009 guidance. We will
listen for any indication of further SG&A cuts as Sepracor rationalizes its
Lunesta investment, which would represent a positive catalyst for shares. We
will also watch for potential greater-than-expected R&D spend in 2009, as
SEPR has several pipeline assets potentially advancing into later stages of
development. We currently assume a -7.5% YOY decline in SG&A ($715 mm)
and 20% YOY growth in R&D ($295 mm) in 2009.
• CEPH: Eye on Treanda uptake. We anticipate 4Q/08 EPS of $1.31 on
Treanda sales of $39 million. Management commentary on the split between
CLL and NHL Treanda sales, Nuvigil launch plans as well as ongoing M&A
activity represent key items to watch in the quarter. We believe strong product
trends will continue to offset higher R&D expenses/lower interest income
resulting from ongoing product acquisition/in-licensing activity.

WPI: Focus On guidance, strategic position. We will focus on Watson’s
2009 guidance and listen for management’s commentary on the impact of
new generic launches such as Cardizem LA and Toprol XL (improved
competitive position following KV manufacturing issues), gross margin
trends from the ongoing shift of manufacturing to the Gao facility, and
thoughts on potential international expansion. We will also listen for
clarity on a potential extension of the Ferrlicit agreement with Sanofi
(currently set to expire in late 2009).
• Merck: Expecting inline quarter, watching cost cuts and updated
Gardasil guidance. We forecast 4Q/08 EPS of $0.72 (consensus: $0.74).
We will continue to watch for execution on MRK’s aggressive cost-cutting
programs and forecast SG&A down 10% YOY to $2.0 billion in the
quarter. We believe 2009 Gardasil guidance could be reduced following
the delay to approval in women ages 27-45. We will also listen for any
comments on what ex-US national immunization programs may come
online in 2009.
• LLY: Looking for additional details on Imclone acquisition & impact.
Following LLY’s ’09 guidance and initial details on the ImClone
acquisition at its December analyst day, we will listen for additional clarity
on the impact of the acquisition to the P&L as well as any comments on
the timeline for resubmitting the Erbitux NSCLC filing in the US after
Lilly highlighted new indications for Erbitux as driving significant value.
We expect limited prasugrel commentary ahead of the product’s February
3 advisory panel meeting.