Barr Pharma's Pros & Cons

Barr Pharmaceuticals, Inc. (BRL) is a global specialty pharmaceutical company that specializes in the development, manufacture, and marketing of both branded and generic drugs. The company's product line is primarily focused in the following categories: oncology, female healthcare, cardiovascular, psychotherapeutics, and anti-infective agents. Barr is seeking to expand its footprints in the European generics market through the acquisition of Pliva in October 2006.

Barr shares received a boost recently when the company announced a favorable court ruling in the Yasmin patent challenge. We await clarity on the company's launch plans for a generic version of Yasmin. We believe that Barr will increase its financial guidance for the year thanks to the favorable Yasmin ruling. We maintain a Hold rating on the stock with a target price of $55.

Barr shares are currently trading at 15x our estimated 2008 EPS of $3.41. Barr's shares were down following the release of fourth quarter results as the financial guidance for 2008 was below expectations. With the Yasmin case going in its favor, Barr should be in a position to increase its financial guidance for the year.

Meanwhile, the company's generics segment continues to represent significant growth opportunities. Barr currently has 70 ANDAs pending at the FDA, and 80 products that are in active development using different kinds of development technologies. Most of these are barrier-to-entry products and represent an estimated $29 billion in branded sales. However, we note that the pricing situation in the U.S. generics market remains tough.

We maintain a Hold rating on Barr with a $55 price target. Our target assumes Barr trades to roughly 16.1x our 2008 EPS estimate of $3.41.

TriZetto Gets Taken Private

TriZetto, Inc. (TZIX) announced that it agreed to be acquired and taken private by funds advised by Apax Partners and the release of a new version of Facets. In addition to strong revenue growth and expanding gross margins, earnings growth has been driven by lower SG&A. Our target price is equal to the cash offer price of $22.00 per share.

Changing market dynamics are expected to create demand for the company's products and services for the next several years. In particular, the healthcare market is experiencing a shift to one that is consumer-directed, from one based on a wholesale model. This change in market behavior is the direct result of the increase in healthcare costs, which have reached a point where employees are expected to cover a greater burden.

As a result of the acquisition deal that is expected to close within four to six months of the announcement, we expect limited price appreciation in the stock.