We are reverting to a Neutral recommendation on
Warner Chilcott plc
) from Outperform as we believe that the stock is fairly valued
at current levels with limited upside potential from current
levels. Our target price is $15.00.
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Why the Downgrade?
Warner Chilcott's revenues declined 5% in the fourth quarter of
2012. Revenues were hurt by generic competition faced by products
such as Actonel (osteoporosis) and Doryx (dermatology).
On Apr 30, 2012, a US district court issued a verdict regarding
) applications to the US Food and Drug Administration (FDA) to
sell their respective generic versions of the drug. The court
ruled that the generic versions of neither of the companies
infringed the patent of Doryx. Following the verdict, Mylan has
entered into the US market with its generic version of Doryx 150
mg. The generic threat is expected to intensify in the coming
years. The genericization of key products will make it
challenging for the company to drive the top line.
We are also concerned about the weak late-stage pipeline at
Warner Chilcott with erectile dysfunction candidate Udenafil
being the only late-stage candidate. Given the generic
competition faced by the key drugs at Warner Chilcott, the
pipeline must deliver. Generic competition is likely to intensify
further at Warner Chilcott going forward. Consequently, the lack
of a decent late-stage pipeline is a matter of concern.
In Mar 2012, Warner Chilcott received a warning letter from the
FDA regarding its Fajardo facility in Puerto Rico for its oral
contraceptive Ovcon 50. Even though the company responded to the
warning letter in Apr 2012, we believe that any slip on the
company's part to comply with the FDA's quality control
requirements will invite strict action from the US regulatory
body. Such an action will weigh heavily on the stock.
In view of these challenges, we see limited upside potential from
current levels and hence downgrade the stock to Neutral.Warner
Chilcott carries a Zacks Rank #3 (Hold) in the short run.
Lannett Company, Inc.
) is favorably placed in the pharma sector. The stock carries a
Zacks Rank #1 (Strong Buy) and is worth considering.