Notable Calls

Barclays is upgrading Par Pharmaceuticals (NYSE:PRX) to Overweight from Equal Weight with a $30 target (prev. $18)

Despite admittedly strong YTD performance, the firm sees sufficiently significant upside in the stock to justify the higher rating based primarily on attractive valuation on their upwardly revised, high-conviction EPS ests. & high probability of further upside to their forecast. Specifically, they view the unexpected approval/ launch of generic Catapres in Aug as a "thesis changer" given the windfall cash flow which will increase Par's financial flexibility. Potential delayed competition for Catapres & approval/ launch of generic Ultram ER offer EPS upside, the latter potentially adding +$0.50 on annual basis. With the stock trading at only 8.6x Barclays' revised FY11 est, they see ample room for outperformance as the story gains greater appreciation.

As a reminder, in May, Barclays first highlighted Par as an interesting special situation which warranted diligence, based on very achievable FY09 estimates, characterized by strong visibility and potential significant upside, the latter from potential delayed generic competition on generic Toprol XL, Imitrex, Antivert, and Marinol. However, despite confidence in their estimates, tempering their stock conviction was the view that management still needed to build a more consistent track record of solid earnings and communication (neither of which it had done in the past).

While we are still in the early stages of the latter, the “thesis-changer” for Barclays was the completely unexpected FDA approval of Par’s generic Catapres (announced Aug 18) -- after the application sat at the agency for 8 years and, deservedly, was viewed by the Street as a near zero probability commercial opportunity before the approval. Close behind Catapres in importance was a favorable lower court patent litigation decision on Ultram ER (announced Aug 17), which is an attractive first-to-file generic opportunity for Par. It is these two events which also drove much of the recent stock outperformance, in otheir opinion. What makes generic Catapres particularly attractive is that, unlike most first-to-market generics, limited competition can be expected for quite some time, with Mylan and perhaps an authorized generic as the only likely additional competition owing to very high technological and regulatory barriers to entry. As a result, the firm expects this long-tail product to raise Par’s earnings base and provide a fairly sustainable source of cash flow. With this windfall, they expect management to have greater flexibility to potentially renegotiate existing product partnerships on more favorable terms, increase new business development activities, and/or restructure Par’s balance sheet as it sees fit (with yesterday’s announcement to repurchase outstanding senior convert notes an example) – all which should further strengthen the company’s long-term outlook. At the time of the FDA approval of Par’s generic Catapres, some uncertainty remained on launch timing and near-term competitive outlook. Now, nearly two months after launch, Par has shipped product to 90% of the potential customer base, and has captured over 50% share of total prescriptions. With our current assumptions, they estimate the product adding at least $0.35 in annual EPS versus their previous estimates

Raising FY09 EPS est to $2.19 from $1.81. Critical FY11 breakout year est. moves to $2.57 from $2.11.

Notablecalls: Nice target raise, nice chart. It's not too hard to see the logic behind Barclays' upgrade. I think this one will work.

I suspect it can trade to $23 as soon as today.