We believe the stock's discount to the peer group reflects A.M. Best's negative outlook for this company, the increased risk inherent in the company's mono-line business model, as well as the risk that catastrophe reinsurance terms and pricing don't improve as much as currently anticipated. Up until now the share appeared cheap at 0.9x book value (which had incorporated a modest acceleration of top-line growth next year along with risk of further outsized losses) however, the median has moved down the IPCR multiple level.
We note that the generous dividend yield (currently 2.8%) provides some downside cushion for total return. Our new six-month target price of $32.45 per share incorporates a lower price-to-book multiple of 0.9x to our adjusted book value estimate of $36.05 per share at December 31, 2008. This translates to a total potential return of 5.9% over the next six-months.
Durect Pharma a Buy to $7
Durect Corp. (DRRX) currently has three products in phase II development. We are optimistic about the developing pipeline, and are pleased to see that the company filed a new drug application (NDA) for its first candidate, pain drug Remoxy, on schedule. The Food and Drug Administration (FDA) granted priority review which means a response should be out by December 10.
We also expect the company to enter into a partnership deal for Eladur shortly. This year should be catalyst-filled for Durect. In our opinion, the current share price represents an attractive entry point. We thus rate the shares a Buy with a price target of $7 and revenue forecast of $26 million.
Durect's phase II products are all addressing large market opportunities primarily in the pain management field. Potential milestones in 2008 include the initiation of phase III trials for pain relief anesthetic Posidur. The company already has agreements in place for the development of Transdur-Sufentanil, Remoxy, Posidur and Memryte.
Additional partnership opportunities exist for Eladur, TRANSDUR-Sufentanil (ex-U.S. and Canada), and Posidur (for Japan / Asia). The company reported that several companies have expressed an interest in Eladur. The company is also engaged in discussions with potential partners for TRANSDUR-Sufentanil and Posidur.
Partnership announcements for these candidates would be a major boost. There could be significant upside to our estimates as our model does not include any potential milestone or upfront payments related to the signing of agreements or achievement of development milestones.
Williams Cos Strength to Continue
We are reiterating our Buy recommendation, earnings estimates and price objective for Williams Companies, Inc. (WMB) shares. The company remains well positioned to capitalize on attractive growth opportunities in its low-risk exploration and production (E&P) business, besides enjoying strong leverage to continued strength in natural gas liquids margins in its Midstream business.
We believe that Williams Rockies development drilling program focused on the Piceance Basin is the key to its upstream growth going forward. Additionally, the company raised its earnings outlook for the rest of 2008 and 2009, citing production growth. A recently completed $1 billion share repurchase program, a 10% dividend increase, and creation of a pipeline MLP are some of the other positives in the Williams story.
We believe that the company has moved beyond its restructuring phase and is now clearly ready to focus on growth opportunities. We expect double-digit volume gains in 2008, after production growth in excess of 20% in 2007. In January 2008, Williams created a new publicly traded pipeline MLP, expected to act as an important catalyst for the company's future growth.
