Tuesday, September 26, 2006

Calls of Note Part 1

- Deutsche Bank notes that fundamentals at Kos Pharma (NASDAQ:KOSP) continue to appear lackluster. And while they remain hopeful for a turnaround given the company's unique product portfolio, the outlook remains murky. It is well documented, but Rxs remain sluggish with flagship drug Niaspan growing just 2%, Advicor just 4%, and Azmacort declining 9% Y/Y. Only Cardizem LA Rxs have improved, with NRxs up 12% after declining 1% last May. And with the Takeda copromote ending soon, Kos will have roughly 15% less "share of voice" in 2007.

Several long-standing officers of the company have departed in the past month. They include, most importantly, the head of sales and marketing, and the two R&D leaders of the inhalation program. In tandem with historically high turnover in the sales force, these changes could potentially foreshadow execution issues or pipeline delays.

The most noteworthy of which is Richard King, who was Kos' executive Vice President of commercial operations for the past five years. Besides leading Kos' sales effort and helping grow the company's revenue base from approximately $91M in 2001 to well over $800M currently, Mr. King was responsible for 800+ professionals (over half of all employees). Given his major role within the company, the firm is not sure why his resignation was not announced. In addition, two vice presidents who lead the company's inhalation R&D and biomedical engineering development programs have also recently resigned.

Much has been made of the potential competition from Merck (MK-0524) and Pfizer (torcetrapib) later this decade. At this point the jury is still out and may well be so for some time. That said, they believe '07 consensus EPS ($2.63) is too high and even firm's $2.43 may well be unachievable per the aforementioned issues. 12-month price target is $43, based on 17.5x '07 EPS est. Key risks to this target primarily relate to Rx trends and patent challenges to the company's core promoted products.

Notablecalls: Ouch! This one's not pretty! Deutsche has done some quality work here and this will put pressure on the shares. The only problem with this trade is that it may already be somewhat crowded. If a guy of Mr. King's reputation leaves a company, people will soon know. So, there may be some people already short the common. Also, Deutsche has some of the most powerful in-house trading operations on the Street.

No comments: