Nu Skin: Access to China, But at a Cost?

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Shares of Nu Skin Enterprises (NUS) are soaring today after the multi-level market of personal care products and nutritional supplements received a $210 million investment from a Chinese firm and offered upbeat guidance. Stifel’s Mark Astrachan and Claire Chamberlin are puzzled by the deal–and doesn’t believe Nu Skin deserves a premium valuation when compared to peers (think companies like Herbalife (HLF) and USANA Health Sciences (USNA):

After the close, Nu Skin Enterprises announced a $210mm strategic investment from a consortium of Chinese investors, including a subsidiary of Ping An Insurance Company of China. The investment consists of 4.75%, four-year convertible senior notes with an initial conversion price of $46.50 per share and includes the right to a board seat by a consortium member. Additionally, the company said 2Q16 sales would be at the high-end or slightly above previous guidance of $560-$580mm, compared to current consensus of $578mm. In a separate press release, Nu Skin announced the president of Greater China, Andrew Fan, was reassigned and will be replaced by Charlene Chiang, the current president of Taiwan.

Our initial take on the deal is that it is modestly favorable as the investment in part comes from a company (Ping An of China Securities Company) owned by a large Chinese insurance company (Ping An Insurance Company of China), providing Nu Skin with connections and best practices from a local business. We believe this could help Nu Skin navigate potential political headwinds in Mainland China, the company’s most important growth market accounting for ~25% of overall sales, particularly given the damaging government investigation into its business practices in early 2014. That said, we find the investment notable in that Nu Skin seemingly does not need cash, net debt of ~$0 at 1Q16, and has access to a meaningful portion of its revolver at a lower rate than the to-be-issued convertible notes. This implies Nu Skin believes access to the Chinese investment consortium justifies the higher rates, in our view.

2Q16 sales are slightly above consensus expectations and likely driven by the introduction of an LTO (limited time offer) of a new skin care system, ageLOC Me, in the quarter. That said, the company did not update 2Q16 EPS or full-year guidance. We believe this reflects continued limited visibility into current sales trends and whether an improvement in sales leaders, typically a leading indicator of company performance, driven by the LTO cycle is likely and/or sustainable. Relatedly, we think the Greater China leadership change is consistent with the lack of visibility in region results and note Mr. Fan had been in his role since 2007. Additionally, current valuation places NUS shares at a premium to direct-selling peers, unwarranted, in our view, given share loss in China and potentially weakening end-demand.

We nonetheless expect NUS shares to outperform near-term as we believe investors could interpret the strategic investment as an implicit approval of Nu Skin’s business by the Chinese government. We also anticipate the company will use a portion of the proceeds of the convertible notes to repurchase shares, with any share dilution potentially offset by a company option to settle the convertible in cash at the end of the period.

Nu Skin trades at 14.41 times 12-month forward earnings forecasts, compared to 11.18 times for Herbalife and 12.16 for USANA Health Sciences.

Shares of Nu Skin Enterprises have jumped 10% to $44.85 at 10:05 a.m. today, while Herbalife is little changed at $59.20, and USANA Health Sciences has declined 0.7% to $114.73.

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BioMarin: Overreaction?

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Evercore ISI’s Mark Schoenebaum contends that BioMarin Pharmaceutical’s (BMRN) 4% drop today thanks to reports that recruitment for a drug trial had been suspended is “an overreaction.” He explains why:

This morning, an update was posted to clinicaltrials.gov showing that patient recruitment for BioMarin’s BMN270 (hemophilia A gene therapy) p1 trial was suspended. Bottom line – this news is not new and we believe the stock move is an overreaction.

We spoke with the company, who confirmed that today’s news on clinicaltrials.gov is not new and that the posting of this update to the website just took a few weeks. Recall, BioMarin has said that they will need to speak with EU regulators prior to dosing the last 3 gene therapy patients in the trial (expected by around August) because one patient (#3) had an ALT elevation slightly above his ULN (47 vs ULN of 41). This discussion with regulators prior to dosing the last patients was meant to be an early safety precaution and was self-imposed as part of BioMarin’s protocol for a first-in-human hemophilia A gene therapy.

BioMarin confirmed that they are in the process of these discussions with EU regulators, but they have not been finalized. BioMarin also reiterated prior communications regarding dosing the final 3 patients by August and sharing the full 16 week data for all 12 patients by year-end.

Shares of BioMarin Pharmaceutical have dropped 3.9% to $80.77 at 1:00 p.m. today.

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Perrigo: ‘All We Hear is Noise’

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Yesterday, shares of Perrigo (PRGO) spiked on speculation that the specialty-pharmaceutical company would be taken over. Raymond James analysts Elliot Wilbur and David Su comment that “take out chatter [has been] revived again but all we hear is noise.” They explain:

Nothing like a little deal chatter to inject some life back into Perrigo shares, which spiked into the close on media reports (via StreetInsider.com) suggesting the company is going to be acquired an unnamed U.K. company for $20.0 billion. Assuming the suggestions of a pending merger have some grounding in fact, there are few U.K. companies capable of pulling off such a transaction that would even come to mind as possible suitors, outside of perhaps GlaxoSmithKline (GSK) or large consumer companies such as Reckitt Benckiser or even Unilever (UL).

We remain of the opinion that there are few natural buyers for Perrigo. In terms of potential strategic fit, we would argue that Mylan (MYL) was probably the closest thing to a natural buyer of Perrigo though with that company’s announced purchase of Meda and recent acquisition of Renaissance to attack the generic dermatology segment, the chances of a return bid for Perrigo post shares recent collapse seems increasingly unlikely.

We struggle to see the fit between a large-scale multinational pharma company focused on consumer assets with established brand equity and Perrigo’s primarily U.S. private label business, which has effectively one-third the margins and likely a lower growth profile. Same holds true, in our opinion, in terms of a combination with a large consumer powerhouse. Perrigo is essentially the anti-brand company from a consumer company’s perspective and how maintaining essentially a generic distribution arm to offset private label risk to branded franchises is worth the reported $20.0 billion purchase price escapes us. Additionally, 60% of
Perrigo’s operating income comes from Rx generics and Perrigo’s passive royalty income on Tysabri, assets that in and of themselves seem very much out of place in either a large pharma multinational or within the confines of a consumer company.

While never out of the realm of possible particularly in light of the recent valuation collapse in Perrigo shares, we continue to harbor skepticism around the possibility of any face saving bid for Perrigo. Longer-term, despite an apparent lack of historical bids, we believe the Perrigo platform makes the most sense for a large scale U.S. focused generics company given the manufacturing, distribution and formulation synergies that would likely exist, as well as the dosage form expansion possibilities afforded by Perrigo’s leading position in RX topical generics.

Shares of Perrigo have dropped 4.3% to $103.44 at 12:27 p.m. today, while GlaxoSmithKline has advanced 0.3% to $40.15, Unilever has risen 0.3% to $43.77, and Mylan is up 0.6% at $45.12.

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Biotech: It’s the Election, Silly

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Strategas Research Partners’ Daniel Clifton and team note that the iShares Nasdaq Biotechnology ETF (IBB) has been trading with Hillary Clinton’s election probability:

We are often asked which political party is better for stocks. Our answer is that stocks are not partisan and markets can work around any elected official, although at times there are macro adjustments. The real power of elections for investors is in sectors where policy can make huge differences. The big trade of 2012 was to be long hospitals and short coal and that pairing paid off quite large. This year Hillary Clinton has made the drug industry a prime target of her campaign. Not coincidentally, the relative performance of the iShares Nasdaq Biotechnology ETF has been inversely correlated with Clinton’s probability of winning the White House. As Hillary Clinton’s probability of winning the White House has increased, the biotech sector has underperformed the S&P 500. This relationship likely oversimplifies this year’s election dynamic as control of the House of Representatives will be very important for the industry. But the chart below leaves no doubt that the election will loom large over pharma and bio-pharma stocks this year.

As for the chart Clifton refers to:

The iShares Nasdaq Biotechnology ETF has advanced 0.6% to $263.96 at 11:41, while the SPDR S&P Biotech ETF (XBI) has gained 0.9% to $55.04, helped by Regeneron Pharmaceuticals (REGN), which has gained 1.5% to $371.79, BioMarin Pharmaceutical (BMRN), which has climbed 3% to $83.44, and Juno Therapeutics (JUNO), which has jumped 6.5% to $43.72.

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Exact Sciences: What the Heck is Going On?

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Yesterday, shares of Exact Sciences (EXAS) surged for no reason at all. Today, they’re up another 7%–and we now know the reason for the stock’s big move. Canaccord Genuity’s Mark Massaro and Mary Kate Gorman explain:

We reiterate our BUY rating on Exact Sciences and raise our PT to $12 from $9. Around 10 pm ET or so on Tuesday (June 14), the USPSTF uploaded a 12-page recommendation statement that we believe bodes well for Exact Sciences. In the document, the USPSTF removed the words “recommended” and “alternative” and reiterated that “colorectal cancer screening” is an A rating, and clearly removed any hierarchy of test modalities. We spoke late last night with management, which is declining comment until the USPSTF formally announces these statements (press release) or when JAMA publishes these findings (June 21 on the Task Force document). We’ll let events play out over the next few days before we update out-year revenue estimates. Our raised PT to $12 now uses a 6.0x multiple on our unchanged 2018 revenue estimate of $250M, discounted back to the present at a 15% discount rate. Our view is that this is long-awaited great news for Exact Sciences, a decision we believe will trigger commercial payor mandates, notably from UnitedHealth Group (UNH) and Aetna (AET), to name two. The next key controversy likely turns to at what price the large payors will pay for Cologuard.

Remember, shares of Exact Sciences lost nearly half their value back in October after it was originally designated an “alternative.”

Shares of Exact Sciences have gained 7.8% to $10.11 at 10:36 a.m. today, while UnitedHealth Group has ticked up 0.2% to $137.50, and Aetna has risen 0.8% to $120.53.

 

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MasterCard: Solid, Yes. But Too Expensive for a Buy Rating

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Wells Fargo analyst Timothy Willi and team call MasterCard (MA) a “solid portfolio holding” but its valuation explains their Market Perform rating. They explain:

After spending the day with the management of MasterCard, we continue to view the name as a solid portfolio holding with valuation driving our Market Perform rating. Rating aside, we are incrementally more confident in the earnings story with the following takeaways: (1) the outlook for secular growth in the U.S. as they focus on underpenetrated verticals; (2) overseas they continue to see progress in working with governments and other policy influencers to advance the electronic payment ecosystem; (3) capital allocation and deployment remain a key tool for value creation; and (4) it is possible, but not a given, that lower interchange in the EU could spur more merchant acceptance over time…

We arrive at our valuation range of $100-110 based on a long-term DCF model. The underlying assumptions in our model are a ten-year nominal free cash CAGR of 12%, a 3% terminal growth rate, and a 12% discount rate. Over the ten-year forecast period, we assume MasterCard returns a significant percentage of its free cash flow to shareholders through dividends and share buybacks. We discount after-tax dividends at 8% and unallocated free cash at 12%. The risks to our valuation include a structural shift away from credit cards by consumers, increased litigation and regulation, lower interchange and pricing compression.

Shares of MasterCard have declined 0.5% to $93.74 at 11:36 a.m. today, underperforming Visa’s (V) 0.2% dip to $78.26, but outperforming American Express’s (AXP) 34.8% tumble to $61.24, and Discover Financial Services’ (DFS) 2.6% drop to $54.06.

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Agios Pharmaceuticals: So Much the Good News

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Over the weekend, Agios Pharmaceuticals (AGIO) announced positive results from a Phase 2 trial of its anemia drug. Canaccord Genuity’s John Newman and Andrew Lam explain why that’s worth an upgrade:

We are upgrading Agios to BUY based on substantial increases in hemoglobin for AG-348 shown in Phase 1b…Agios presented Phase 2a data for AG-348 at EHA in Copenhagen, which demonstrated >2g/dL increase in Hb in 50% of patients (9/18), clearly establishing proof of concept activity in humans. Although only 3 patients reached 6 months dosing, Hb improvements persisted, suggesting the effect of AG-348 is not transient…

We have adjusted our peak sales numbers based on 50% of the market being addressable (missense mutations). Our $90 PT is based on an average of NPV and P/S methodologies. Although the company has not confirmed or offered any guidance, we suspect additional data for AG-348 and AG-519 may be available at ASH in December 2016.

The market has reacted with less enthusiasm: After trading up as much as 8.5% this morning, shares of Agios Pharmaceuticals have dropped 2.3% to $49.21 at 11:26 a.m. today.

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Citi Boost United Rentals Target As Demand Continues To Grow

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United Rentals (URI) is lower in Monday morning trading, but Citi doesn’t think the stock will be down for long.

Analyst Timothy Thein reiterated a Buy rating on the stock and raised his target from $72 to $85.

He writes that investors should get a number of updates from the North American equipment rental market this week, including Ashtead’s (ASHTF) fourth quarter, while United Rentals, Oshkosh (OSK) and Deere (DE) are slated to present at Citi’s Industrials conference.

Thein’s own checks  show that demand growth is “modestly” outpacing GDP, and low supply is also a tailwind.

More from his note:

Normal seasonal recovery taking hold, but it remains highly regionalized and not uniform by equipment type (same for rental rates). Parts of the aerial market (scissors and lower capacity telehandlers – both tied to housing) are performing well, while dirt equipment (~15% of URI’s fleet in OEC terms) is more a challenge

Contacts in energy markets (Houston and ND) noted some pick-up in non-res project bids as contractors get past the initial oil and gas “panic” (and lay-off announcements). In Houston, project start dates have been pushed-back by the flooding, with a pick-up in pump demand being a very small offset. Upstream comps ease through 2H16, and Citi expects a rebound in drilling activity in ’17.

US industry (ex-Sunbelt) supply growth has decelerated meaningfully (1.6% in April), which we believe continued in May, as most OEMs seemed generally underwhelmed by the pace of order activity. 2Q deliveries may disappoint, as we believe some have pushed deliveries back to just after the July 4th holiday.

We believe the overall rental rate backdrop continues to improve, reflective of the tightening supply/demand balance. Pricing competition remains elevated in certain hard-hit regions, evidenced by an ongoing package deal from Sunbelt to rent 3 of any products (regardless of price) for $900/month.

United Rentals is down 1% to $70.78 in morning trading.

 

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Danaher And Fortive Take First Steps As Separate Companies

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Starting today, Danaher (DHR) and its spinoff Fortive begin trading in the “when issued” market, and shareholders on record as of Wednesday will receive one share of Fortive for every two of Danaher.

Bernstein’s Steven Winoker takes a look at the two new companies Monday.  He reiterated a Market Perform rating on Danaher but raised his price target $4 to $112.

He explains:

We expect Danaher RemainCo to trade at a higher multiple given its higher recurring revenue and less cyclical portfolio. Fortive should still trade at a premium multiple, though lower, based on its solid portfolio anchored by an acquisitive growth strategy. Because DHR shareholders will receive 1 share of Fortive for every 2 shares of Danaher, the $48 is divided by 2 before being added onto the $88.

He writes that the “when issued’ market gives investors a first indication of relative valuation, and there will actually be a third security trading until next month:

For three weeks through Friday, July 1st, the “when issued” period, there will be three securities trading – FTV WI, DHR WI, and DHR. The “when issued” period ends on Friday, July 1st , which is the last trading day before the July 2nd distribution date. Legacy DHR stock will not see a price adjustment during the “when issued” period, and there will be three markets for Danaher securities during this time frame. On Tuesday, July 5th, FTV and DHR will commence regular-way trading, and there will be only two securities.

Danaher shares are down 0.4% to $98.88 in recent trading.

 

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Specialty Pharma: Perrigo and Endo Would Be ‘Logical’ Spin-Merger Partners, Probably Won’t Happen

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Leerink’s Jason Gerberry and team contend that Perrigo (PRGO) and Endo International (ENDP) would “make for logical spin-merger partners” but say the odds of “such a deal are low.” They explain:

Bottom Line: We remain MP on both Perrigo and Endo, but in this report we review each company’s strategic options and view Perrigo as having better optionality. Our sum-of-the-parts analysis suggests Perrigo should trade at $110 (or +11% above current price), but we view the odds of Perrigo splitting apart its three business units as low. We examined the value of Perrigo’s consumer and pharma businesses based on comparators in each market segment. For Endo, we would not anticipate divestiture of non-core assets fetching a meaningful premium, and sale of the company looks unlikely to us given the limited number of strategic buyers in the market for a large generic pharma deal. In our view, Perrigo’s pharma unit & Endo make for logical spin-merger partners, otherwise known as a RMT (Reverse Morris Trust), and we could see Endo’s equity stake appreciating ~20% on a 12-month PT with better prospects for upside than remaining a stand-alone company. However, we believe the odds of Perrigo’s structuring such a deal are low, as Perrigo views the pharma business as core and synergistic with its consumer business…we believe another difficult quarter or two would likely escalate shareholder pressure to create value through restructuring options.

Shares of Perrigo have advanced 0.4% to $98.90, while Endo International has risen 0.8% to $16.61.

 

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