Barr Should Get Earnings Boost From Key Drugs

The pharma favorite should report a strong quarter, with products such as generic Allegra leading the way.
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Barr Pharmaceuticals

(BRL)

is expected to report another strong quarter, with continued periods of market exclusivity on its generic Allegra and DDAVP product lines.

This is likely to support further margin gains and good earnings leverage in the quarter. The period is also expected to benefit from additional upfront milestone payments on recent patent litigation settlement deals.

Overall, the consensus is forecasting 42% growth in quarterly earnings to 78 cents per share, and 23% growth in revenue to around $316 million. I believe the company will deliver a favorable earnings report Tuesday morning as positive trends remain in place for several key franchises.

I expect the stock to perform well during the first half of the year, with a number of new product and collaboration opportunities providing ongoing support to the near-term outlook.

One of the key drivers for Barr is expected to be the performance of the generic Allegra product line. This product contributed nearly 25% of the company's earnings last quarter, and is expected to post $35 million to $45 million in sales this quarter. Since generic Allegra is co-promoted with Teva, the benefit from this product line will show up in the outsized gains on the royalty line.

The company is also expected to benefit from the lack of additional generic market competition and an extended period of market exclusivity for its generic version of DDAVP (desmopressin acetate). This product line has made continued market penetration, which should lead to over $20 million in sales this quarter. In the branded segment, oral contraceptive Seasonale is expected to record a stable performance compared with last quarter, with about $24 million in sales.

On the negative side, the company continues to show slowing momentum in its generic oral contraceptive franchises. This group of products is likely to record a 6% to 12% decline in sales as the company faces increased competition and pricing pressures in this segment.

Overall, the product mix is expected to have moved in a positive direction this quarter, which should lead to further margin gains on a comparable year-over-year basis.

Management has done a good job of providing investors with a steady flow of interesting, new product opportunities over the past few quarters. On the earnings call, I expect the company to talk up the prospects for its nearing Enjuvia launch and Seasonique approval. I also expect the company to provide some further clarity on the financial impact of the recent

Cephalon

(CEPH)

patent agreement on upcoming results.

Investors will likely be most interested in gaining some insight into the potential for branded settlement agreements on Adderall XR with

Shire

(SHPGY)

and Ortho Tri-Cyclen Lo with

Johnson & Johnson

(JNJ) - Get Report

. An Adderall XR deal, in particular, is expected to come through in the very near term and serve as the next potential catalyst for the stock.

The other key area of interest for investors will be the attitude of management toward a potential launch of a generic version of Allegra-D later in the year. It appears that Barr still has a lot of potential new product opportunities in front of them, which should continue to support investor interest in the stock in the short term.

Prior-Quarter Recap

BRL's fiscal first-quarter earnings came in 3 cents ahead of market consensus at 80 cents a share. This represented a huge 63% gain from the prior year. Total revenue jumped 27% to $310 million in the quarter. The company's generic business grew 15% overall to $207 million. Underlying results were mixed in this segment, though, with a 5% contraction in generic oral contraceptives and a 40% gain in other generic product lines.

The branded side of the business also encountered some problems, with a 5% drop to $60 million in quarterly sales. This segment faced an inventory work-down on Cenestin, but Seasonale posted a good recovery from the fiscal fourth quarter 2005 with a $22 million sales contribution. The company's quarterly results were greatly helped by a big increase in alliance and development revenue of $44 million. This was largely on the strength of the generic Allegra launch and milestones on other product collaboration deals.

The product mix improved in the quarter, but the gross margin dipped to the 70% level, with the inclusion of stock-option expenses in the current fiscal year. On the strength of these results, R&D spending rebounded in the quarter, with a 21% increase to $35 million, while SG&A advanced at an 8% pace.

Last quarter, management reiterated its prior guidance for 2006, in the $2.95 to $3.10 per-share range. This forecast includes the impact from stock-option expensing but excludes provisions for the acquisition of rights to Organon's Mircette and other potential new business collaboration opportunities.

At the time of publication, Latwis had no positions in Barr Pharmaceuticals.

Michael Latwis is Director of Health Care Content at TheStreet.com Professional Products. Michael has 10 years of investment experience, most recently with Barclays Wealth management division where he was Associate Director of Research. His responsibilities included portfolio management and research of global pharmaceutical stocks as a senior equity analyst. Michael covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, and healthcare services. He has also covered retail and media stocks and was previously associated with Lazard Freres and Fiduciary Trust. Michael has an MBA from Pace University.