>GALENICA (EUROPEAN STOCK)

Unattractive near-term

■ Trading above fair value, near-term risks remain
Galenica trades c10% above our DCF-derived fair value of CHF295 (which assumes the stock trades on 9.6x our 2010E EPS estimates) and, in our opinion, is overvalued relative to its ’10-13E EPS CAGR of 2%. While pharma EBIT is growing, this is due to a decline in amortisation from the Aspreva acquisition, with EBITDA in decline (BAS-MLe -18% in 2009E). With the near-term risk to US sales of Galenica’s intravenous (IV) iron Venofer, (c20% of 2008A pharma sales) from a newly launched competitor, AMAG Pharma’s Feraheme, we see only downside risk to consensus 2010E forecasts and maintain our Underperform rating.

■ 2H09 likely to be a tough half
We believe 2H09 is likely to be a tougher half for Galenica than 1H09, as we expect it to face: 1) The full impact of the decline in its US Cellcept royalties following US generic entry in May 2009; 2) New competition to its intravenous (IV) iron Venofer in the US from the launch of AMAG Pharma's Feraheme in July 2009, as well as; 3) The higher development and commercialisation costs
associated with the roll-out of IV iron Ferinject across Europe that saw 1H09 miss versus our expectations.

■ Feraheme remains key overhang
Feraheme, AMAG Pharma's IV iron, launched in the US in July 2009. Given its more convenient dosing we believe it has the potential to take significant share from Venofer. While uptake may initially be slow as dialysis centres run pilot studies to establish treatment protocols, we forecast that US Venofer sales decline 16% in 2010E as a result of the competition. Feraheme offers more convenient dosing than Venofer in non-dialysis indications and could offer economic benefits to clinics in the dialysis setting.

To see full report: GALENICA (MERRILL LYNCH)