Sell Barr Pharma on Bleak Outlook

We downgraded Barr Pharmaceuticals (BRL) to Sell from Hold , after the generic drugmaker posted disappointing first-quarter results and slashed its full-year outlook. We expect the second quarter to remain challenging for the company as it works on reviving growth across key business segments. We also do not see any significant catalysts that could drive the shares in the near-term, barring a positive decision in the Miraprex trial.

While Barr’s generic pipeline has a lot to offer, first-quarter generic product sales were a major disappointment at $468.9 million, missing our estimates by $66 million. The company said its generic Fosamax failed to impress due to intense pricing pressure and lower market share. We believe that shared exclusivity with Teva (TEVA - Snapshot Report) on a single dose (70mg) and the launch of an authorized generic version of Fosamax by Merck (MRK - Analyst Report) and Watson (WPI - Snapshot Report) contributed to the downside. We were also disappointed to see that Barr did not raise its revenue guidance for 2008 despite the upcoming launch of generic Yasmin.

While we expect Barr to settle a patent dispute involving the oral contraceptive Ortho Tri-Cyclen Lo later this quarter, we believe that its impact will not be felt before 2009-2010. Given the lack of any other significant catalysts and the ongoing issues related to pricing pressure and intense competition in the generics market, we would avoid Barr for the time being. We have a $34 price target on the stock, based on 11.1x our 2008 EPS estimate of $3.04.

Jason Napodano, CFA, contributed to this report

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