Stifel analyst Justin Keywood expects continued market volatility in the North American pharmaceuticals sector, pointing to “macro uncertainty as the U.S. election approaches.”
“We see a general inflection in the Pharma sector, stemming from record FDA approvals and submissions, highlighting extensive ongoing innovation. GLP-1 drug growth also remains favorable and supportive of overall sector sentiment,” he added. “Pharmaceuticals are largely not impacted by the broader economy, and we see the election as having a relatively muted impact at this point. Pharma also has defensive attributes with potential torque, dependent on product life cycles.
“The broader Pharma/Healthcare indices may reflect this dynamic more recently with the S&P 500 Pharmaceuticals and Healthcare indices, outperforming the S&P 500 in a 3-month period by 400 & 300bps. The S&P Pharma index has also outperformed the S&P 500 year-to-date, up 16 per cent vs. 12 per cent with the broader Healthcare index, slightly lagging in performance at up 9 per cent.
In a research report released Tuesday, he raised his rating for four stocks to “buy” recommendations, expecting outperformance for the remainder of 2024 “with upcoming growth, M&A or regulatory catalysts.”
“We also refine certain targets in our broader coverage, where medium-term opportunities could still exist, but we see limited stock price appreciation in 24,” he added.
Mr. Keywood’s changes include:
* Cipher Pharmaceuticals Inc. (CPH-T) to “buy” from “hold” with a $16 target, up from $9.50. The average on the Street is $15.50.
Analyst: “Cipher is a specialty pharma company focused in dermatology, a therapeutic area that we see as having secular tailwinds, including in a social media world. The base business is high margin at 60-per-cent EBITDA with a strong conversion into Free Cash Flow, including from the use of tax loss credits, where we estimate a balance, approaching $200-million. Cipher announced a transformational acquisition on July 29 of US$89.5mm for the global rights and commercial infrastructure of Natroba (Spinsoad), where we estimate the asset will more than double Cipher’s EBITDA. We also see the use of tax loss credits for Natroba, implying substantial FCF inflection. Natroba (Lice & Scabies) is a condition that cannot be ignored and the incumbent, market share leader, permethrin could be ineffective with genetic mutations, where there has been no innovation for many years, prior to Natroba. We also see the commercial infrastructure of 50 employees in the U.S., as underutilized and supporting a revenue level, in excess of US$100-milion. Operating leverage could be realized as we expect Natroba to grow double-digits organically in the near-term but also with the opportunity for Cipher to acquire/in-license additional U.S. products with the infrastructure to support.”
* DRI Healthcare Trust to “buy” from “hold” with a $16 target, up from $15. Average: $18.58.
Analyst: “DRI is a portfolio of 25 royalty assets tied to the global pharmaceutical industry. After a period of substantial capital deployment and solid growth quarters recently, a surprise development, related to the prior CEO and alleged expense irregularities, led to a sharp correction in share price on July 8. We also downgraded the stock at the time with uncertainty of the eventual fallout of an ongoing investigation. However, our recent discussions with several members of DRI’s executive team and chairman, has provided us confidence that the identified US$6.51-million in irregular expenses is accurate and several initiatives to improve governance and controls are underway.
“We also see limited impact of DRI’s revenue and cash flow receipts for 2024 but expect one-time expenses, related to the investigation. DRI has conveyed still an active M&A pipeline as an inflection in the industry is underway in capital constrained markets and on-pace to more than double in 2024. Although, perceived counter-party risk in transacting with DRI is a valid concern, we also see price as the most important consideration and expect M&A to resume in the near-term, serving as catalysts.”