Growth & Generics Balance Shire

Shire Pharmaceuticals Group, PLC (SHPGY) is a specialty pharmaceutical company focused on three therapeutic areas: Central nervous system (CNS), gastro intestinal (GI), and renal disorders. The company's ADHD franchise continues to perform very well, increasing market share to over 31% in 2007. Strong top-line growth should continue in 2008 as a number of new drugs ramp.

Beyond 2008, we expect revenue growth to significantly slow due to the presence of generic Adderall XR. Vyvanse, the company's new flagship ADHD product, continues to perform very well and will be the key driver of the top-line. We maintain our Hold rating with a price target of $65 per ADR. This is 21.5x our 2008 estimate of $3.02 per ADR share (excluding the impact of FAS-123R).

As of today's price the stock is down about 10% since the beginning of the year. We expect strong top-line growth in 2008 but only mid-to-high single-digit growth in the following years. Adderall XR will likely experience a precipitous drop-off in sales in 2009 due to generic competition. On the other hand, Shire's drugs account for 31.1% of ADHD U.S. prescription share, and other very formidable growth prospects should help earnings average a CAGR of about 10% over the next 5 years.

Comtech Group a Near-Term Hold

Comtech Group, Inc. (COGO) reported stronger than expected revenues for 4Q07, although higher SG&A drove earnings below our estimates. The announcement of stock repurchase plan and a proposed acquisition in the second quarter of 2008 will divert cash resources necessary to fight pricing pressure in the mobile handset business.

The recent acquisition of KA has hindered margin growth while a proposed acquisition in 2Q08 has led us to lower our earnings estimates for 2008, while raising our revenue expectations. However, we expect an overall improvement in operating and pre-tax margins in 2008 compared to 2007.

The announcement of stock repurchase plan and a proposed acquisition in the second quarter of 2008 will divert cash resources necessary to fight pricing pressure in the mobile handset business. The company has started to provide module solutions to manufacturers of learning devices in China, as part of an expansion of its business in the digital media sector. We believe that this expansion into the hitherto untapped education market will provide for significant upsides to future earnings.

The company is aiming to drive profitability growth faster than the growth in revenues while continuing to improve its operating margins. The company is selling at a PEG ratio of 0.64x based on 2008 earnings estimate and EPS, which is expected to grow at 25%. Our estimate reflects expected improvement in operating and pre-tax margins in 2008. We believe that it is priced fairly at this time and there exists a possibility of substantial upside to shares of COGO after it hits the revenue target for FY08.