RBC: Stay Away From Mylan, Perrigo; Go Long Teva, Allergan

RBC Capital Markets released a new report this week detailing its updated take on the specialty pharmaceuticals sector following the announcement of Teva Pharma TEVA’s buyout of Allergan Plc AGN. Analyst Randall Stanicky revisited several companies in the sector based on the information presented in conference calls and the deal’s analyst event.

Positive outlook for Teva
RBC is now projecting proforma earnings per share (EPS) of $5.88, $6.55 and $7.18 from Teva in 2016, 2017 and 2018, respectively. Stanicky believes that Allergan’s generics business will provide diversification for Teva and help bridge the gap to a future potential Teva growth.

Positive outlook for Allergan
Stanicky believes that Allergan could have access to about $36 billion in capital from the Teva deal as soon as Q1 2016. “A simple $36 billion debt reduction (total existing ~$45 billion) would add back ~$2.50 in EPS (14.5x 2017E) or if deployed to repurchases of 109 million shares ~$7.00 in EPS (12.1x 2017E),” he writes. However, Stanicky believes that the most likely scenario involves Allergan using a large portion of the capital for M&A, possibly a large “transformative deal.”

Stock picks
RBC is not confident that the proposed deal between Mylan NV MYL and Perrigo Company Public Limited Co PRGO will happen, and advises investors not to chase the stocks at premium prices.

On the other hand, none of the recent M&A news and speculation has impacted RBC’s view on its top pick in the space, Endo International Plc ENDP. Endo’s high exposure to the U.S. generics market continues to make the stock RBC’s top pharma stock to buy.