Sector Wrap: Goldman downgrades generics sector

A Goldman Sachs analyst on Tuesday downgraded his rating on the generic pharmaceutical sector, due to lackluster first-quarter results and fewer product catalysts for the companies coming in the second half of the year.

Following first-quarter earnings reports that he characterized as "disappointing" for most generic drug makers, analyst Randall Stanicky said the only companies in the sector he rates a "Buy" are Israel's Teva Pharmaceutical Industries Ltd. and Mylan Inc. All other companies in the sector garnered a "Neutral" rating.

Stanicky praised Teva's low cost structure and long-term growth strategy in dubbing the company a "best in class manufacturer." However, he noted that while shares have risen about 36 percent since early March 2007, he sees future gains coming more from execution of its business strategy rather than short-term catalysts. Stanicky has a $56 price target on shares, implying he expects the stock to rise about 25 percent in the next year.

Teva shares gained 25 cents to close at $44.85.

And although Mylan gave a 2008-2010 earnings outlook that was below Wall Street forecasts, Stanicky sees costs reduction from the integration of Germany's Merck KGaA generics division really begin to take hold in 2010. He has a price target of $17 on Mylan shares, implying he expects the stock to gain nearly 47 percent in the next year.

Mylan shares lost 19 cents, or about 2 percent, to close at $11.40.

Among other generic companies, Stanicky said that the outlook for Barr Pharmaceuticals Inc. is "challenging" over the next year, resulting from lower than expected sales, limited gross margin growth and increasing research and development expenses. On May 8, following Barr's first-quarter earnings release, he cut his rating on shares from "Buy" to "Neutral." He noted the company's first-quarter results missed analyst consensus by 17 cents and Barr also lowered its 2008 guidance range, leading to a 23 percent drop in shares by market close.

Barr also faces the continued execution and integration of Croatian generic drug maker Pliva, which it acquired in 2006. Stanicky has a $45 price target on the stock, implying he expects it to gain just over 12 percent in the next year.

Barr shares ended down 19 cents, at $39.86.

For Watson Pharmaceuticals Inc., Stanicky said despite solid first quarter results and the removal of a Food and Drug Administration sanction against the company's Davie, Fla., manufacturing site, he sees limited growth for the company in the 2009-2010 timeframe. He has a $35 price target, implying he expects a nearly 24 percent gain in the next year.

Watson closed down 58 cents, or 2.1 percent, at $27.74.

Looking ahead to the future of the generic drug makers, Stanicky said he sees global consolidation of the industry "defined by four to five global leaders over the next several years."