Thursday, February 09, 2006

No Holds Barred: Barr Labs Smokes Estimates

First Albany downgraded Barr Labs (BRL) on Wednesday after the generic drug manufacturer smashed earnings.

Excluding one-time items, Barr's second-quarter profit was 85 cents, well above the average estimate of 78 cents analysts supplied to Thomson First Call. The consensus sales forecast was $316 million.

Its star product, Seasonale, an oral contraceptive, remains a key revenue driver.

Seasonale reduces the number of periods in a woman's menstrual cycle to four from 13. Seasonale will exceed the $100 million sales target for the fiscal year ending June 30. Seasonale produced $29 million in revenue during the second quarter, up 40%. Barr is currently pushing the FDA to let it release Seasonique, another extended-cycle oral contraceptive.

Barr has a niche that they dominate, and we think profit-taking is the only reason one might even think of selling this stock. Barr sells 22 generic oral contraceptives.

Last September, when shares of Barr traded hands at $54, we contemplated whether or not Barr was a viable takeover candidate:
We think Barr Labs is the next one to go. Rivals like Teva (TEVA) and Watson (WPI) must be eyeing Barr's lucrative oral contraceptives franchise. Women's health in general is an attractive, underserved niche. If Barr can get FDA approval for over the counter use of Plan B, other larger firms will give BRL's healthy balance sheet a second look.
Shares of Barr are up 24% since we first wrote about the stock on 9/9/05.

Although Barr is fairly valued on a price/sales and price/cash flow basis, its price/earnings multiple still trails that of Israeli drug giant Teva by a mile (note, however, that Teva pulls in almost 5x as much revenue as Barr).

Barr's a keeper, for now at least.

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