Hold Hospira Shares for Now

Hospira, Inc. (HSP) reported Q4 EPS that beat our estimate by $0.07 on sales that significantly exceeded our forecast. We lowered our FY08 sales estimate to within the initial guidance but increased our FY08 EPS estimate.

Our price target is based on roughly 19x FY08 EPS estimate. Management revealed its initial sales guidance and EPS guidance for 2008. Total sales are expected to grow 6%-8% ($3642.4-$3,711.1 million).

Sales in Specialty Injectables are expected to benefit from the delay in launching generic Zosyn in mid-2008 and other new drug releases. Adjusted EPS are expected to be in a range of $2.45-$2.55 on a diluted share count that is expected to be 162 million. This adjusted EPS projection excludes the manufacturing optimization charges, integration costs and amortization expense related to the Mayne Pharma acquisition. This guidance includes a stock option expense that is expected to be $46 million. At its current price of $43 per share, HSP is trading at roughly 17x our 2008 EPS estimate of $2.49, which is at a discount to the group average multiple of roughly 19x.

As a result of the completed acquisition of Mayne Pharma, the high debt load to finance the transaction and execution are the risks that are expected to pressure multiple expansion. The company continues to progress with its manufacturing optimization initiative and expects to complete integrating the acquisition by the end of the year.

The company must continue to successfully launch new products. A larger portion of the R&D pipeline is now composed of internally developed programs. Our price target moves to $48, roughly 19x our 2008 EPS estimate.

Ardea Bio Balances Risk, Reward

Ardea Biosciences, Inc. (RDEA) is a clinical stage biopharmaceutical company focused on the discovery, development and commercialization of anti-infectious, cancer and anti-inflammatory diseases. The company's lead drug candidate is RDEA806, which is under phase II studies for HIV and phase I for gout. Another candidate is RDEA119, under preclinical studies for cancer indications.

We are concerned about the weak pipeline and early stage of development. Competition in the HIV and cancer markets, combined with the cash burn concern make us believe Ardea's risk/reward is balanced. We are pleased to see Ardea getting into drug research and development business again after the transaction with Valeant Pharmaceuticals (VRX) in December 2006.

Although its two lead candidates RDEA 806 and REDA 119 target rather large HIV and cancer markets, we are concerned about the fierce competition in these two markets. Further, both REDA806 and REDA119 are still in early or middle stages of development (phase II and phase I respectively) and the company's pipeline is weak in our opinion.

Apparently, this weak pipeline and early stage of development is associated with higher risks. Even if RDEA806 and RDEA119 can navigate clinical and regulatory hurdles, both candidates will face substantial competition from both big pharmaceutical companies and biotech companies in the anti-HIV and anti-cancer markets.

We see a balanced reward/risk profile for Ardea at this point which supports our Hold rating. At our six-month price target of $16 per share, the market cap for Ardea is $162 million. We think this is fair to Ardea based on the fundamentals of the company.

 

Soft Drinks Softening for PepsiCo

Strong international growth, productivity improvements, an aggressive share repurchase program and a strong new product pipeline are driving low double-digit earnings growth for PepsiCo, Inc. (PEP). Nevertheless, a sluggish domestic carbonated beverage environment, only modest low-single digit volume growth at Frito-Lay (3% in both 2006 and 2007), and pressure from higher energy and raw material costs (especially orange costs) are concerns.

Management provided its financial outlook for 2008. Earnings are expected to be at least $3.72 per diluted share, driven by volume growth in the 3% to 5% range and mid-to-high single-digit revenue growth. Management expects total commodity inflation to be in the mid single-digit range. Cash flow from operating activities is expected to be approximately $7.6 billion and capital spending is expected to be about $2.7 billion. In 2008, the company intends on repurchasing shares worth approximately $4.3 billion, and to continue selling PBG common stock to an ownership level of 35%.

PepsiCo stock is currently selling at 21.1 times trailing 12-month EPS, reflecting the company's growth profile, primarily due to the significant exposure to the snack food category. Carbonated soft drink volume in the U.S. has declined for the last four years.

We do not expect PepsiCo stock to outperform until expectations for volume growth at FLNA [Frito Lay North America] accelerates to 5 per cent or more. The Hold recommendation is maintained.