Sciele Pharma: A Sular eclipse
Whether calming allergies, lowering cholesterol or treating diabetes, Sciele Pharma Inc. (Nasdaq: SCRX) is going to be very busy this year. Next year may be just as lively, as the company continues to expand into pediatrics and women’s health while maintaining its strength in the cardiovascular and diabetes arena.
Sciele (rhymes with dial) has seven products to launch in 2008, starting in January with Prandin for type-2 diabetes. In March, Sciele will launch its new Sular formulation for hypertension; other introductions include an allergy drug via an agreement with Sanofi Aventis, a cholesterol reducer, a prenatal vitamin, a head lice asphyxiator (just in time for the back-to-school season) and another diabetes offering. Next year’s slate includes a hypertension drug and remedies for pediatric chronic excessive drooling and other maladies.
There will be more if Sciele gets its way. The Atlanta, Ga.-based company’s key is to grow through licensing and by acquiring products in late stage review. It also purchases commercialized drugs for sale in the United States — usually from large pharmaceutical companies. Its licenses and products come from AstraZeneca, Bayer AG, Warner-Lambert, Sanofi-Aventis, Wyeth, Elan and Novo Nordisk, among others. It depends on third-party manufacturers and its own sales force.
Sciele’s active pipeline is why focusing on the company’s switch to Sular from its old formula is investing through a rear view mirror. Sales of Sular fell in the fourth quarter ended Dec. 31 as Sciele geared up for the March launch of new Sular sales. Lower sales are expected again in the first quarter of this year, but then they should begin to build as the transition is completed. There aren’t high growth hopes for Sular, anyway: generics are likely to come onto the market by summer, and Sular is an out-of-favor calcium channel blocker drug for hypertension.
Costs of the switch, while aggravating to investors, have virtually been absorbed and the groundwork is set for the upcoming launches. Given that, Sciele reiterated guidance for diluted earnings per share in 2008 at $1.97 to $2.07, with 40% of that expected in the first half of the year and 60% in the second half. That’s up from $1.56 per share — excluding non-operating costs — in 2007. Revenues are expected to grow 15% to 19% to $440 million to $455 million.
Amid so many new products, Sciele has reduced its sales force, not only to save costs but to realign sales with the key units of diabetes, cardiovascular, pediatric and women’s health.
"While at first glance, cutting a sales force in the year of seven product launches is intimidating, the alignment and target physicians we believe well serve the launches,” said analyst Angela Larson at Susquehanna Financial Group in a note last week.
Larson has a “buy” rating on Sciele; six of 11 analysts carry “strong buy” or “buy” ratings, and five have Sciele at “hold.” Valuation is attractive: “On calendar 2008 P/E multiples, SCRX shares trade at a 50% discount to the specialty pharmaceutical peer group average” of companies with $500 million to $5 billion market capitalization, Larson said. Considering her outlook for strong double-digit revenue and earnings growth, Sciele’s diversified revenue base and near-term research and development opportunities, Larson is surprised at such a discount and looks for the company to trade much closer to parity with its brethren.
Sciele, with a market cap of $722 million, ended Tuesday at $20.38, at the low end of its 52-week range of $19.70 to $28.83 per share. That puts its price/earnings ratio at 10.6 based on the average analyst estimate for 2008 at $1.99. In 2009, analysts expect earnings to grow to $2.42.
Standard and Poor’s 12-month price target is $31, reflecting a peer level price/earnings ratio of 15.3 based on S&P’s operating earnings forecast of $2.03 for 2008. In line with that is Credit Suisse’s target of $30.
Credit Suisse started coverage of Sciele last week at “outperform” following the company’s fourth quarter results released Feb. 26. Net revenues for in the quarter rose 32% to $105.0 million from $79.5 million in the fourth quarter of 2006. Diluted earnings per share, before restructuring and Sular inventory related charges of $0.21, increased 37% to $0.52.
For 2007, revenues increased 30% to $382.3 million, with cardiovascular/diabetes sales at 66.5% of the total, followed by women’s health products at 20.3% and pediatrics/other product sales at 13.2%. The fast growing pediatrics/other category was 22.1% of Sciele’s (SCRX) total fourth-quarter sales; in all of 2006, the category was just 5% of sales.
Credit Suisse analyst Scott Hirsch said the new Sular should defend “the majority of Sular revenues. With that hurdle behind us, we believe the question should now return to the fundamentals, which include near-term growth drivers, a more diversified portfolio of revenue generating products, and a strong late stage pipeline with the potential to collectively yield roughly 15% to 20% EPS growth over the next several years.”
Careful. Objects of growth are closer than they appear.
