Monday, July 10, 2006

Calls of Note Part 3

- Prudential is lowering their Lunesta revenue estimates to account for the early plateau in prescription volume. Firm's new 2006 Lunesta estimate of $619M is down from their old estimate of $644M and guidance of $650M. This new forecast assumes growth in the second half of the year coming from Sepracor (NASDAQ:SEPR)'s additional sales reps; downside could exist if SNY's managed care push for Ambien CR gets traction.

Firm's biggest question for management is whether they'll increase spending to reinvigorate Lunesta growth, or cut expenses to make an earnings commitment. They are also decreasing '06 and '07 estimates for Xopenex MDI, with new forecasts of $45M and $185M lower than previous $90M and $226M, respectively.

Updating their accretion/dilution model for SEPR + other large pharma companies shows earnings dilution in all cases with no merger synergies. With sales and R&D cuts, the '08 figures turn dilutive at a share price around $55. Maintains Underweight.

Notablecalls: Double blow to SEPR. Lowering ests on both drugs plus saying there won't be any merger synergies above $55 level. Recall, SEPR has been surrounded by takeover talk for several months. The more optimistic analysts have been calling $75 per share in case of a takeover by larger pharma player.

- JP Morgan adds Metrologic Instruments (NASDAQ:MTLG) to their Weekly Top Picks owing to belief that the company continues to win share of the automated data capture market (bar code scanners and imagers), and the stock is undervalued. Based on concerns that expenses would ramp ahead of revenue, MTLG stock fell sharply when the company revealed a bold strategic investment program in April designed to grow the business at 20-22% CAGR over the next 5 years. In firm's view, the strategy is being introduced from a position of strength, and the costs will grow incrementally - aligned with the revenue ramp, and hence the stock now factors in much of the risk, but not the potential upside if the company executes well. They like this risk-reward trade-off and believe evidence for their positive interpretation will be forthcoming when MTLG releases 2Q results in July or August.

MTLG is trading at 12.9 times firm's revised FY07 PF EPS forecast of $1.19.

Notablecalls: Not actionable but good to know category.

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