Monday, December 21st, 2009
Warner Chilcott: An Undervalued Growth Play
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Warner Chilcott Plc (NASDAQ:WCRX) may not be as large as Johnson & Johnson (NYSE:JNJ) or Merck & Co., Inc. (NYSE:MRK), but the stock may be significantly undervalued given Wall Street’s growth expectations for the fully-integrated pharmaceutical company.
A Brief Company Overview
Warner Chilcott is a leading fully-integrated, specialty pharmaceutical company that is focused on women’s healthcare, gastroenterology, dermatology and urology segments in the U.S. and Western Europe. The company’s diversified portfolio of branded products include popular names like Actonel and Asacol, which generated over $2 billion in sales last year.
Actonel is the only monthly pill approved to help prevent fractures at both the spine and other areas where fractures commonly occur in women suffering from postmenopausal osteoporosis. Since it is estimated that women experience more osteoporosis-related fractures every year than have a stroke, heart attack or breast cancer combined, this represents a significant market.
Warner Chilcott’s largest contributor to sales in 2010 is expected to be that of its Loestrin 24 FE drug, which is designed to prevent pregnancy in women. Revenues from the drug are expected to increase at a CAGR of 59%, from $44 million in 2006 to $284 million in 2010, which represents absolute growth of $240 million.
A Growth and Value Story…
Wall Street is also decidedly bullish on Warner Chilcott’s prospects going forward. Eleven analysts covering the firm project its sales to increase 123.2% during the fourth quarter with eight rating the stock a “Strong Buy”. Meanwhile, 12 analysts covering the company earnings per share are expected to increase 38.8% to $0.56 per share, according to Thomson Reuters.
Assuming that Warner Chilcott hits street estimates, the stock appears to be undervalued on a price-earnings to growth basis. Currently, the company trades with a trailing 12-month price-earnings multiple of 16.9x and a forward price-earnings multiple of just 8.73x. A PEG ratio of 1.0 conservatively suggests a 25x multiple, which implies a stock price of around $40 per share.
Warner Chilcott also maintains an impressive balance sheet that is backed by strong cash flow generation. The company’s debt-to-equity ratio stands at just 0.2 with a strong return-on-equity of around 25%. Meanwhile, the company generated some $102 million in net cash during the second quarter that it plans on applying, in part, to pay off some notes that expire in 2015.
The Big Wildcard…
On September 23, 2009, Warner Chilcott entered into a definitive asset purchase agreement whereby it was paid $1 billion in cash by LEO Pharma A/S to terminate its exclusive product licensing rights in the U.S. to distribute its Taclonex and Dovonex products, and acquire certain asset related to the distribution of those products.
While Warner Chilcott received some $380.1 million in after-tax gains from the transaction, the two products accounted for approximately $101 million of the firm’s revenues. However, investors are looking towards significant growth in Actonel, Asacol and Enablex, resulting from its acquisition of PGP on October 30, 2009.
The Takeaway…
- Warner Chilcott appears undervalued given Wall Street’s estimates compared to its price-earnings to growth ratio.
- Warner Chilcott is not only generating strong cash flows, but is also using the funds to pay down its debt and enhance its balance sheet.
- While Warner Chilcott’s future may be a little checked from its asset sale to LEO Pharma, its acquisition of PGP should continue to drive growth.
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-- Written by Simon Monger
