The selloff in specialty pharmaceutical stocks has found a new "irrational low," following Wednesday's attack on Valeant Pharmaceuticals (VRX) by Citron Research, which caters its research to short sellers.

"The ongoing negative headline assault on the specialty pharmaceutical business model has continued driving a sizable, and we think irrational, downward move in the sector," RBC Capital Markets analyst Randall Stanicky wrote in a note to clients.

"While we've been apprehensive about trying to call a near-term bottom in the face of more anticipated political and media headlines, rotation out of a well-owned sector and year-end selling, group valuation is now within 10% of October 2008 lows and compelling for those with a 6-12 month horizon," the note said. RBC Capital Markets is a division of Royal Bank of Canada.

The large-cap pharmaceutical stocks covered by RBC are down a collective 24% since the end of July, following second quarter earnings results compared to the iShares Nasdaq Biotechnology ETF (IBB - Get Report) , down 19%, and the S&P 500 down 4%, Stanicky wrote.

"While initial concerns arose from the introduction of a drug plan by Presidential candidate Hillary Clinton, it has been exacerbated by negative headlines around the overall specialty pharmaceutical business model which has come from multiple media outlets with follow through from Valeant's earnings," he wrote.

There are three important points that investors should pay attention to, he added.

"We think the sell-off is overdone and fundamental concerns misunderstood; valuation at these levels is only 10% away from the lowest month in 2008, with a similar -31% valuation re-rating to the downside; we believe companies should be pivoting to share repurchases at these levels, which combined with more M&A will ultimately help reverse weakness," according to the note.

Here are five pharmaceutical (three large cap and two small cap) stocks to buy now, according to RBC Capital Markets, with ratings from TheStreet Ratings for added perspective.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

ENDP Chart ENDP data by YCharts

1. Endo International Plc (ENDP - Get Report)
Year-to-date return: -24.5%

Endo International plc, a specialty healthcare company, focuses on branded and generic pharmaceuticals and devices worldwide. It operates through four segments: U.S. Branded Pharmaceuticals, U.S. Generic Pharmaceuticals, Devices, and International Pharmaceutical.

RBC Capital Markets Rating: Top Pick - Outperform
RBC Capital Markets Said: Reaffirmed 2016-17E guidance 9/28

Per our outreach to ENDP and its intra-day 10/21 release, it utilizes specialty pharmacy services primarily for certain physician-administered brand products including XIAFLEX, AVEED, TESTOPEL, Supprelin LA, Vantas and Valstar (<10% of brand revenue and ~3% of 2015E revenue). ><less than 10% of brand revenue and ~3% of 2015E revenue).

TheStreet Said: TheStreet Ratings team rates ENDO INTERNATIONAL PLC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

We rate ENDO INTERNATIONAL PLC (ENDP) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income and weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 7.3%. Since the same quarter one year prior, revenues rose by 24.0%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.88, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.27, which illustrates the ability to avoid short-term cash problems.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, regardless of the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 1283.5% when compared to the same quarter one year ago, falling from $21.16 million to -$250.42 million.
  • Net operating cash flow has significantly decreased to $12.32 million or 93.65% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • You can view the full analysis from the report here: ENDP

AGN Chart AGN data by YCharts

2. Allergan Plc (AGN - Get Report)
Year-to-date return: 0.62%

Allergan plc develops, manufactures, and distributes generic, branded, biosimilar, and over-the-counter (OTC) pharmaceutical products. It operates in three segments: North American Brands, North American Generics and International, and Anda Distribution.

RBC Capital Markets Rating: Outperform
RBC Capital Markets Said: Provided guidance update 9/29; R&D day coming up 11/4.

AGN put out an intra-day release 10/21 to state that 3% of US brand products (largely unique specialty products - BOTOX and ZENPEP) are distributed through unaffiliated specialty pharmacies. It also noted that its Anda distribution business is a traditional wholesaler with no specialty pharmacy capability.

TheStreet Said: TheStreet Ratings team rates ALLERGAN PLC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

We rate ALLERGAN PLC (AGN) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and feeble growth in the company's earnings per share.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • AGN's very impressive revenue growth greatly exceeded the industry average of 7.3%. Since the same quarter one year prior, revenues leaped by 115.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, AGN's share price has jumped by 26.16%, exceeding the performance of the broader market during that same time frame. Although AGN had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • The current debt-to-equity ratio, 0.59, is low and is below the industry average, implying that there has been successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.78 is somewhat weak and could be cause for future problems.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 599.2% when compared to the same quarter one year ago, falling from $48.70 million to -$243.10 million.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Pharmaceuticals industry and the overall market, ALLERGAN PLC's return on equity significantly trails that of both the industry average and the S&P 500.
  • You can view the full analysis from the report here: AGN

 

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3. Teva Pharmaceuticals (TEVA - Get Report)
Year-to-date return: 0.71%

Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic, specialty, and other pharmaceutical products worldwide. The company operates in two segments, Generic Medicines and Specialty Medicines.

RBC Capital Markets Rating: Outperform
RBC Capital Markets Said: We anticipate the closing of its AGN Gx acquisition in 1Q2016.

Per our conversation with TEVA, ex-Copaxone use here is insignificant. Close to 80% of US Copaxone goes through third party specialty pharmacies (including CVS, WAG etc.) with only about 1% going through TEVA's internal specialty pharmacy the use of which is not inconsistent with MS drugs

TheStreet Said: TheStreet Ratings team rates TEVA PHARMACEUTICALS as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

We rate TEVA PHARMACEUTICALS (TEVA) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its reasonable valuation levels, good cash flow from operations, expanding profit margins, solid stock price performance and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Net operating cash flow has increased to $1,480.00 million or 40.55% when compared to the same quarter last year. In addition, TEVA PHARMACEUTICALS has also vastly surpassed the industry average cash flow growth rate of -41.41%.
  • The gross profit margin for TEVA PHARMACEUTICALS is rather high; currently it is at 64.78%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 10.85% trails the industry average.
  • Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • TEVA PHARMACEUTICALS's earnings per share declined by 27.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, TEVA PHARMACEUTICALS increased its bottom line by earning $3.56 versus $1.50 in the prior year. This year, the market expects an improvement in earnings ($5.33 versus $3.56).
  • You can view the full analysis from the report here: TEVA

INSY Chart INSY data by YCharts

4. Insys Therapeutics Inc. (INSY)
Year-to-date return: 12.2%

Insys Therapeutics, Inc., a specialty pharmaceutical company, develops and commercializes supportive care products.

RBC Capital Markets Rating: Outperform
RBC Capital Markets Said: Sell-off began after 2Q earnings; expect a solid 3Q result.

Per conversation with management there are no specialty pharmacy financial relationships. Recent filings show 88% of revenue through the big three wholesalers and Rochester Drug Cooperative (RDC - 8th largest distributor) which is 38% of that. Specialty distribution is used in the TIRF class and must go through REMS.

TheStreet Said: TheStreet Ratings team rates INSYS THERAPEUTICS INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

We rate INSYS THERAPEUTICS INC (INSY) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, solid stock price performance and expanding profit margins. We feel its strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 8.3%. Since the same quarter one year prior, revenues rose by 39.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • INSY has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, INSY has a quick ratio of 2.29, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to its closing price of one year ago, INSY's share price has jumped by 39.00%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, INSY should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • The gross profit margin for INSYS THERAPEUTICS INC is currently very high, coming in at 90.95%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, INSY's net profit margin of 9.42% significantly trails the industry average.
  • You can view the full analysis from the report here: INSY

 

SGNT Chart SGNT data by YCharts

5. Sagent Pharmaceuticals (SGNT)
Year-to-date return: -36%

Sagent Pharmaceuticals, Inc., a specialty pharmaceutical company, develops, sources, manufactures, and markets pharmaceutical products, principally injectable-based generic equivalents to branded products in North America.

RBC Capital Markets Rating: Outperform
RBC Capital Markets Said: Recently hosted management meetings; bullish on outlook.

TheStreet Said: TheStreet Ratings team rates SAGENT PHARMACEUTICALS INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

We rate SAGENT PHARMACEUTICALS INC (SGNT) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, poor profit margins and weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.3%. Since the same quarter one year prior, revenues rose by 11.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • SGNT's debt-to-equity ratio is very low at 0.01 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.37, which illustrates the ability to avoid short-term cash problems.
  • Net operating cash flow has significantly decreased to -$4.69 million or 119.53% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Pharmaceuticals industry. The net income has significantly decreased by 108.3% when compared to the same quarter one year ago, falling from $3.07 million to -$0.26 million.
  • You can view the full analysis from the report here: SGNT