Wednesday, December 29, 2010

Recap of Healthcare Holdings

Endo Pharmaceuticals

As expected, the specialty pharmaceutical firm wrapped up its acquisition of Qualitest Pharmaceuticals, cementing Endo as the 6th largest generics company in the United States. Reflecting the closing date, the acquisition should be fully accretive to earnings in 4Q 2011. To help cover a portion of the financing for the acquisition, Endo issued a $400 million privately placed note offering this past November. The notes were priced at 7% and will be due in 2020. With the closing of the deal finalized, management revised its earnings estimate for FY 2010, increasing full year revenue projections to $1.7 billion from a range of $1.63 billion to $1.68 billion. The Qualitest acquisition was a major catalyst in my valuation for Endo.

Just today, Endo received FDA approval for Fortesta, which is a topical gel for testosterone replacement therapy. Fortesta was a minor catalyst for my valuation of Endo, but with currently just 9% of the 14 million men suffering from low levels of the key hormone being treated, this drug has huge potential. What differentiates Fortesta from competitor drugs like AndroGel is Fortesta contains 2% testosterone and is applied to the thigh, which should further help prevent the transfer from one person to another. The product is expected to be launched in early 2011 and while Endo did not give revenue projections for the drug, Abbott Laboratories is expecting FY 2010 revenue of $633 million for AndroGel. Endo’s stock was up over 3 percent in after-hours trading earlier today.

Even more important is the hearing for the approval of the tamper-resistant form of Opana ER on January 7, 2011. I am confident that Endo will receive approval for the drug due to the positives for both physicians prescribing and patients who use tamper-resistant forms of painkillers. Approval of Opana TR would also help Endo fight off generic competition for Opana ER.

- David, Co-President, Healthcare Sector Head

Novartis AG

Novartis has recently finished its acquisition of Alcon by purchasing the remaining 23 percent of the company. Novartis offered 2.8 of its own shares per share of Alcon, which equates to $168 per share. The remainder of Alcon was valued at $12.9 billion, wrapping up a $28.1 billion deal earlier this year, and a $10.4 billion deal in 2008. The complete merger had been stalled for a year, until the offer became more lucrative due to the appreciating Swiss franc and a rise in the Novartis share price. Novartis purchased Alcon in order to strengthen its eye-care division, and believes the acquisition will bolster sales, and allow Novartis to expand into a market that was previously untapped by the Swiss drug maker. Joseph Jimenez, the CEO of Novartis, says the improved eye-care division would have had created $8.7 billion in new sales last year. In addition to an increase in sales, Jimenez believes the companies will complement each other well, and that they can create $300 million in cost savings through synergies.

In addition to merger news, Novartis has seen some new drug activity lately. Tasigna, a blood cancer drug, has been approved in the European Union for treating leukemia. Studies showed that Tasigna produced better results than Gleevac, a widely prescribed drug for patients with leukemia. Gleevac is also owned by Novartis, and the company hopes Tasigna will replace the former drug before patent expiration. Novartis drugs have also seen some setbacks though, with Zometa failing to help with breast cancer. Zometa was seen as a promising new way to treat the disease, but has failed to produce significant results in clinical studies. Previous studies showed great promise for the drug, as the osteoporosis medicine seemed to reduce cancer reoccurrence by 33 percent. The successes could not be replicated, however, and the drug did not reduce reoccurrences of breast cancer in the latest study.

In addition to bad news from clinical testing, the Swiss drug maker has recently paid-out $350,000 to settle a fraud case. The company settled a case with the state of Idaho, after allegations that the company was engaging in bribery. The state of Idaho alleges that Novartis was bribing doctors to prescribe a drug used to treat epilepsy. The company had been coercing the prescription of its drug through providing entertainment and travel gifts to medical professionals. The case with Idaho is settled, but the company may see further lawsuits from other states.

-Ryan Kennedy, Junior Analyst

Allscripts-Healthcare Solutions

Allscripts-Healthcare Solutions announced on 12/28 that two of their current offerings, sunrise Acute Care Version 5.5, are Sunrise Emergency Care Version 5.5 are 2011/2012 CCHIT compliant and were certified as Complete EHRs on December 21, 2010 by the Certification Commission for Health Information Technology (CCHIT). This is only a few weeks after 5 other offerings were CCHIT certified as well. "Certification of our Sunrise Acute Care, Emergency Department and Ambulatory Electronic Health Records is an important milestone for the company as it marks the completion of ARRA (American Recovery Reinvestment Act) certification for our full portfolio of ambulatory and acute EHRs, a commitment we made to our clients," said Glen Tullman, Chief Executive Officer of Allscripts. "The Federal incentives for EHR adoption represent an unparalleled opportunity for healthcare organizations to implement tools which can help improve healthcare quality and efficiency. We believe our ARRA-certified products, coupled with our experience delivering meaningful value for tens of thousands of physician practices and hospitals across the country, make Allscripts an ideal organization to partner with as we create a connected community of health."

-Devon Gould, Junior Analyst

Life Technologies

At the beginning of the month, Life Technologies launched its newest revolutionary technology in DNA sequencing, which has significant cost lowering implications for the now expensive process of sequencing DNA. Life’s Personal Genome Machine is a printer-sized device that is currently being marketed to research laboratories for about $50,000, which is about a tenth of the cost of similar machines. More importantly, the new device has streamlined the sequencing process so that it only takes a few hours, as opposed to several days of laboring with large machines that must be operated by specially trained technicians. Life’s COO, Mark Stevenson, aspires to sell the machine to hospitals to diagnose diseases.

Also during December, Life raised $800 million in a two part sale of bonds. The $400 million notes, which carry a coupon rate of 3.5%, will mature on Jan. 15, 2016, while the securities costing $400 million, which carry a coupon rate of 5%, will be due on Jan. 15, 2021. The company will use the proceeds from the offering, which is expected to close on Dec. 14, 2010, for repayment of existing indebtedness and for general corporate purposes.

Finally, the company announced that it was taken as a member of the Dow Jones Sustainability World Index for the third year in a row. The company also declared its debut on the NASDAQ Global Sustainability List and second year on the Maplecroft Climate Innovation Index, and its commitment to transparency and carbon footprint reduction through participation in the Carbon Disclosure Project, demonstrating the company’s continued global leadership in business, environmental and social issues.

- Jesus Rincon, Junior Analyst

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