Markets & Finance

S&P Says Sell Immunex


Immunex (IMNX): Downgrades to 1 STAR (sell) from 4 STARS (accumulate)

Analyst: Frank DiLorenzo

S&P is increasingly concerned that if Abbott Labs gets approval in 2003 on D2E7 for rheumatoid arthritis, it will aggressively price D2E7 sizably below Enbrel. If so, S&P feels many new patients and some current patients will move to D2E7. The problem of supply constraints increases the opportunity for J&J's Remicade, and for D2E7. In addition, Immunex's pipeline is sparse. S&P is lowering the 2002 earnings per share estimate to $0.30, from $0.35, and loweing the 2003 estimate to $0.45, from $0.55. On the 2003 estimate, the price-earnings-to-growth ratio of 2.0 is high compared to the biotech peer average of 1.4.

Amgen (AMGN): Downgrades to 2 STARS (avoid) from 5 STARS (buy)

Analyst: Frank DiLorenzo

S&P now feels that the pending Immunex acquisition is negative, based on continued supply constraints for Enbrel and potential competition from Abbott's D2E7 in rheumatoid arthritis. D2E7 could be okayed in 2003 and S&P is worried that Abbott Labs will aggressively price drug well below Enbrel. Also, Enbrel has low margins vs. Amgen's other, high-margin products. Margins may fall further if D2E7 is approved. With uncertainties over Enbrel, and with the Immunex acquisition reducing S&P's confidence in Amgen meeting S&P's 2003 EPS estimate of $1.73, S&P feels the stock is richly valued at 29 times estimates.

Roper Industries (ROP): Downgrades to 3 STARS (hold) from 1 STAR (sell)

Analyst: Robert Friedman

S&P is very disappointed by management's decision to offer five million additional common shares. In general, S&P was never comfortable with companies that are willing to part with valuable shares to pay down debt. S&P also thinks the offering doesn't square with Roper's history of strong cash flow generation, and is comfortable with the company's explanation for the secondary stock offering. On free cash flow models using a 15% hike in common shares, S&P values Roper shares at $22-$27.

GlaxoSmithkline (GSK): Maintains 3 STARS (hold)

Analyst: Herman Saftlas

The stock is off sharply in the wake of its patent invalidation. A U.S. court invalidated three patents on the antibiotic Augmentin, the company's second largest drug with $1.3 billion in U.S. sales. The company plans to appeal, but cautions that if it loses, then earnings per share growth could sink to 10% in 2002, vs. previous mid-teens guidance, and to high single digits in 2003. S&P believes generic erosion could start by July and is reducing its estimates to $2.30 for 2002, and to $2.50 for 2003. On the plus side, GlaxoSmithkline is expected to launch at least 13 major drugs over the 2003-2005 period. The stock is at a discount to peers on a price-to-sales and price-to-earnings basis.

Boeing (BA): Maintains 5 STARS (buy)

Analyst: Robert Friedman

S&P came away from Boeing's recent analysts' meeting with the feeling that the company has indeed morphed into an outfit that is focused on earnings per share and return on equity. S&P says it seems ongoing productivity improvements are becoming ingrained in Boeing's corporate DNA. Moreover, S&P believes the company may be able to pull off its strategy of using aircraft as a platform for more profitable servicing/financing offerings. However, S&P believes mature markets may always keep Boeing from outsized long term volume/pricing growth. As such, S&P is projecting a modest long term free cash EPS growth rate of 3%-5%. Despite the modest growth rate, S&P still calculates Boeing at 20%-25% below its intrinsic value.

Biogen (BGEN): Upgrades to 4 STARS (accumulate) from 3 STARS (hold)

Analyst: Frank DiLorenzo

An FDA panel recommended approval of Biogen's Amevive to treat psoriasis. S&P says the news is hugely positive, since the psoriasis field is now less crowded, due to the failure of Protein Design's Zenapax and Abgenix's IL8, and the delay in Genetech's and Xoma's Xanelim. The first-mover advantage is a big positive, and S&P feels that Amevive could reach $500 million in annual sales by 2005 or 2006. Also, Biogen has one of the best biotech pipelines, with Antegren for multiple sclerosis and Crohn's disease in Phase III and CDP 571 in Phase III for Crohn's. Based on cash flows, S&P feels Biogen is worth more than $60.


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