This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

Today, we examine three high-profile ratings moves on Wall Street, as our favorite investment bankers position themselves for a new year with new ratings on DepoMed (NYSE: DEPO  ) , EXACT Sciences (Nasdaq: EXAS  ) , and Amylin Pharmaceuticals (Nasdaq: AMLN  ) .

DepoMed
New rating: Market outperform
Citing "encouraging" sales of the company's new Gralise pain medication, JMP Securities initiated coverage of DepoMed with a "market outperform" rating (essentially, a buy rating). The drug has only been on the market a few months, but JMP sees it reaching perhaps $200 million in annual sales by 2018. Even better, now that Abbott (NYSE: ABT  ) has terminated its licensing agreement as it prepares to split itself in two, the drug is all DepoMed's to profit from.

JMP sees this and other revenue streams lifting DepoMed to perhaps $8 a share within a year, and I can't say I disagree. The stock costs barely two times annual sales today, which is a discount to the P/S ratios common even among larger, slower-growing Big Pharma shops like Pfizer or Merck. Tack $200 million or so more onto annual revenues -- that's DepoMed's enterprise value, by the way -- and I could see the stock doubling pretty easily.

EXACT Sciences
New rating: Market outperform
Like DepoMed, JMP's other recommendation last week is a company centered in the life sciences space. Like DepoMed, EXACT Sciences is now rated a "market outperform" by the analyst. But there the similarities end.

Where DepoMed is currently profitable and sells for a low price-to-sales ratio, EXACT Sciences isn't... and doesn't. In fact, this specialist in colorectal cancer screening costs something on the order of 90 times sales. While it's got a product undergoing phase 3 testing for the FDA right now, there's no guarantee that will pan out, or produce the significant revenue investors may expect. What's more, going from product to market... to profit... may take longer than anyone thinks. At last report, EXACT Sciences had $75 million in the bank -- enough cash to keep its doors open for three years at the current $25 million cash-burn rate. Yet last month, EXACT felt the need to raise $27 million more through a follow-on stock offering.

I won't say JMP is wrong to recommend it, but this latest development doesn't EXACT-ly sound encouraging.

Amylin Pharmaceuticals
New rating: Market underperform
Speaking of discouraging news, the analysts at Rodman & Renshaw recently downgraded shares of Amylin Pharma. Arguing that Eli Lilly's (NYSE: LLY  ) termination of a development agreement with the company "places a heavy financial burden" on Amylin, the analyst counsels investors to sell the stock.

As Fool biotech ace Brian Orelli described last year, the breakup between Lilly and Amylin leaves the latter with all the potential if its new Bydureon drug pans out, but at a steep cost -- about $1.45 billion in upfront and royalty payments. That's a tough burden to bear, considering Amylin today generates only about $17 million in annual free cash flow. Brian thinks the pros outweigh the cons here, but as Rodman's downgrade shows, at least some "pros" disagree.

Looking for something a bit less "exciting" than the high-tech health-care stocks that Wall Street is pitching? Perhaps I can interest you in a nice, safe dividend check instead? Check out the Fool's new report: "13 High-Yielding Stocks to Buy Today." It's free today -- but only available for a limited time.

Fool contributor Rich Smith does not own shares of, nor is he short, any company mentioned above. He does, however, have public recommendations available on 57 other companies. Check them out on Motley Fool CAPS page, where he goes by the handle "TMFDitty" -- and is currently ranked No. 333 out of more than 180,000 CAPS members.

The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 10, 2012, at 11:56 AM, Mikey925 wrote:

    Rich, I'm sorry but your knowledge base about some of these stocks is mediocre at best. You really should try doing some investigative financial reporting, instead of simply throwing up "mud balls" and hoping that something might stick.

    For example, your comments regarding Exact Sciences are absurd. You obviously don't know much about the biotech sector, let alone this Company that is developing a NON-INVASIVE stool DNA colorectal cancer screening TEST for the #2 killer of Americans over the age of 50, that costs Medicare $12 BILLION a year.

    The recent secondary offering was shareholder driven; hence the rather high $8.00 offering price. Notice that the stock is dramatically higher since last month's offering. This is evidence that the offering was shareholder driven.

  • Report this Comment On January 10, 2012, at 12:56 PM, drivegt3 wrote:

    Rich, I have to agree with Mikey. You know little about these companies, and even less about financial analysis.

    For DEPO, you recommend the stock based on its price/sales, but most of those sales are currently one-time and nonrecurring. Then you lump in projections for six years from now to justify "the stock doubling pretty easily".

    The stock may be attractive, but not for the reason you suggest.

  • Report this Comment On January 10, 2012, at 8:05 PM, TMFDitty wrote:

    Mikey925 and drivegt3:

    You both clearly (think you) know a lot about these companies, and perhaps other companies in the biotech realm. But do you, really?

    You see, I'd be happy to take your opinions into account. Problem is, since neither of you have any track record to speak of, there's really no way to know whether *you* know whereof you speak.

    Why don't you visit caps.fool.com, and make a few stock picks before posting comments. Develop a bit of a track record, and your opinions may carry greater weight.

    Foolish best,

    TMFDitty

  • Report this Comment On January 11, 2012, at 9:03 PM, drivegt3 wrote:

    Discounting my comments and claiming they aren't credible because I haven't posted any stock picks on your site is a really weak argument to support extremely amateurish analysis.

    If Rich is going to continue to pen articles like this, he should spend a little more time understanding the subject matter. Otherwise, he will just continue to be an embarrassment to himself and your organization.

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