US ADHD Headwinds but Compelling Valuation for Growth
* Key Takeaway
We are trimming EPS up to 2% mostly on the sluggish 1Q US ADHD
prescription trends, with the market actually declining c.-1% and Vyvanse's
share stagnating. We still believe robust +13% EPS CAGR 2013-18E, at a
minimum given pipeline news and further cost control, justifies upside for the
shares; hence we reiterate our Buy. We view the recent share price weakness to
be an attractive buying opportunity.
* Trimming EPS c.0-2% of US ADHD: The US ADHD market slowed in 2013 but in 1Q14
may actually have stalled, driving our lower Vyvanse sales estimates. These downgrades are
somewhat offset by higher Cinryze and Firazyr, but still yield 0-2% lower earnings. Despite
the somewhat disappointing US ADHD trends, we remain bullish on the stock given the clear
evidence of cost control, plus the outstanding potential for pipeline news, which together
could accelerate EPS growth and justify multiple expansion. The substantial cash flows also
facilitate possible accretive company or product acquisitions.
* Pipeline can still boost momentum: Pipeline focus is increasingly on rare orphan
diseases, potentially putting pressure on management to execute more BD deals and/or
M&A, in our view. We view Premiplex (peak $650m) to be perhaps the most overlooked
programme, which "best case" could reduce complications for preterm infants triggering
an accelerated regulatory filing after data 1H15E. Lifitegrast (peak $400m) for dry eye disease
is theoretically a substantial commercial opportunity, but pending 1H14E FDA discussions
post equivocal Phase III data we cap its possible contribution. Despite recent positive
Vyvanse binge eating (BED; peak $500m) pivotal results, we have lingering regulatory
concerns, but we acknowledge that, if approved, it would be the only drug to treat BED and
a "bull" case on S&M raising diagnosis rates could be up to $1bn peak.
* Attractive valuation: On just c.14x 2015E, the shares are trading below an average 15.5x
12-month forward consensus, which we believe offers a compelling entry-point given the
robust earnings growth.
* Valuation/Risks
Our 3550p/share Price Target assumes the bottom-end of the historical 1.3-1.6x PEG range
for 17x 2015E P/E given a +13% EPS CAGR. NPVs suggest fair value c.2440p per share. Risks
include: (1) Vyvanse pricing pressure or loss of market share; (2) slower HGT sales growth;
and (3) late-stage pipeline failures.