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Generic Drug Makers

Here's another terrific post by Pharmboy, this time discussing Generic Drug Makers. – Ilene

Generic Drug Makers


Courtesy of Pharmboy

Coming to the end of a good year, and good riddance for some!  Whilst the market has been irrational for some time, it is not about what we think but rather about what others that have money think.  I have my notions, and here are a few companies that may do well in the New Year with a passed health care reform bill.

I really like the generic market right now. With patents expiring you can literally gauge how much a generic will make based on the patents expiring in the next few months. These generics are the vultures that follow the in a pack of lions.  They have a good way of scavenging for their food and vultures have a distinct relationship with the lions.  They may not come up with the drugs but they are definitely going to make a nice margin from them.  But the competition is fierce these days, and competitors in the generic market include Watson (WPI), Teva (TEVA) , Dr Reddy's Labs (RDY), Hi-Tech Pharmacal (HITK), Par Pharmaceuticals (PRX), and Caraco (CPD).

First up, Mylan Pharmaceuticals (MYL) – I know that Phil has liked Teva in the past and I have noted Mylan (#3 in generics), WPI and RDY (pre-GSK rumors).  Currently, Mylan has blown through its 52 week high so is it still a buy?  In short answer, yes.  Mylan's future comes from a swath of FDA approvals that have come in over the past few months.

  1. August 27, 2009 Mylan Begins Marketing First Generic Version of BenzaClin(R) Acne Treatment
  2. August 18, 2009 Mylan's Matrix Receives First and Only Tentative FDA Approval Under PEPFAR for Generic Version of Atripla(R) HIV Treatment
  3. August 10, 2009 Mylan Receives FDA Approval for Generic Version of Migraine Treatment Imitrex(R)
  4. July 20, 2009 Mylan Receives FDA Approval for Additional Strengths of the Antipsychotic Haloperidol— Key News from the article. Currently, Mylan has 119 ANDAs pending FDA approval representing $84.7 billion in annual brand sales, according to IMS Health. Thirty-five of these pending ANDAs are potential first-to-file opportunities, representing $16.6 billion in annual brand sales, according to IMS Health.
  5. July 16, 2009 Mylan Receives FDA Approval for Generic Version of Thyroid Deficiency Treatment Cytomel
  6. July 7, 2009 Mylan Receives FDA Approval for Generic Version of Prostate Cancer Treatment Casodex
  7. June 17, 2009 Mylan Receives FDA Approval for Additional Strength of Generic Restoril(R)
  8. May 29, 2009 Mylan Receives Tentative FDA Approval for Generic Version of Singulair(R)
  9. May 7, 2009 Mylan Receives Final FDA Approvals for Generic Versions of Anti-Rejection Medication CellCept(R)
  10. April 14, 2009 Mylan Confirms First-to-File Patent Challenge Relating to Xeloda(R) Cancer Treatment

But with the good I would like to investigate their financials a little closer. They have a Market Cap of 5.4B.  On October 29, Mylan reported a third-quarter net loss of $40 million, or 13 cents a share, compared to profit of $182.4 million, or 47 cents a share, in the same period a year ago. On an adjusted basis, the Pittsburgh-based drugmaker said third-quarter profit totaled $142.3 million, or 32 cents a share. A survey of analysts by FactSet Research produced a consensus forecast for a profit of 27 cents a share. The company reported total third-quarter revenues of $1.26 billion, down from $1.66 billion. The company raised its forecast for full-year 2009 earnings to a range of $1.24 to $1.28 a share, up from a previous range of $1.13 to $1.20 a share.

Chart for Mylan, Inc. (MYL)

High target is 21, low is 17.  I like to buy 15 Jan11 for 4.5, selling the 18 Dec09 strangle for 1.8.

Dr Reddy's Labs (RDY) – I mentioned RDY way back in March when they were $12, because they were in bed with MRK, making generic Zocor for them.  For Dr. Reddy's


RDY is a $4 B market cap company, which trades about 300K shares a day, and in the last quarter, generics were $264 of the $382M in revenue, or 69% for them. While Indian based, this is a global company with 1/3rd of business in the US and 1/4th in Europe; India is under 20%.  Let's take a quick look at their last earnings report to show some of the positive growth metrics.

  • Indian drug maker Dr Reddy's Laboratories Ltd (RDY) said on Friday quarterly profits doubled from a year ago helped by the launch of new generics abroad, beating forecast and sending its shares higher.  Global demand for generic drugs from companies such as Dr Reddy's and domestic rivals Ranbaxy Laboratories and Cipla Ltd is booming as nations around the world battle rising healthcare costs.
  • Consolidated revenues at Rs. 18.4 billion ($382 million) in Q2 FY10 as against Rs. 16.2 billion ($336 million) in Q2 FY09, representing a growth of 14%. The growth is largely driven by Global Generics.
  • Operating income at Rs. 2.6 billion ($53 million) in Q2 FY10 as against Rs. 1.8 billion ($37 million) in Q2 FY09.
  • During the quarter, the company launched 39 new generic products, filed 24 new product registrations and filed 5 DMFs globally.
  • Gross profit at Rs. 8.7 billion ($181 million) in Q2 FY10 represents a margin of 47% to revenues as against 49% in Q2 FY09. The current quarter margins have been impacted by one-time inventory provisions of €6 million in betapharm on account of non-moving stocks and $4 million in the US for inventory valuation adjustments of sumatriptan stocks lying with the company. Excluding these non-recurring items, the adjusted margins are at 51%.  (have to love a 50%+ gross margin)
  • R&D expenses at Rs. 963 million in Q2 FY10 represent 5% of revenues.
  • Dr Reddy's said its U.S. revenues grew 39 percent in the quarter ended September to 4.3 billion rupees, while European sales dropped 15 percent to 2.8 billion rupees weighed down by its German subsidiary. The company's wholly-owned German unit Betapharm, which Dr Reddy's bought in 2006 for $572 million, has been a drag on its earnings due to supply constraints and falling prices.
  • Dr Reddy's plans to launch six to seven new generics in the U.S. in fiscal 2009/10 including blockbuster omeprazole, a generic version of AstraZeneca's Prilosec for treating stomach ulcers and acid reflux.  Last year, the New York-listed company launched acute migraine drug sumatriptan, a generic of GlaxoSmithKline's Imitrex, in the U.S. market.

RDY has run for the roses here, but buying a small lot here and selling the 25/22.5 Mar10 C/P strangle for $5 is a nice 25% if called away.

Par Pharmaceuticals (PRX) – Generic drugmaker Par Pharmaceutical Companies Inc. said November 6, its profit surged in the third quarter on a boost in product sales.  Par said it earned $26.3 million, or 76 cents per share, in the period ended Oct. 3, compared with profit of $475,000, or 1 cent per share, a year ago. Revenue nearly doubled, to $294.8 million from $149 million.  Analysts polled by Thomson Reuters expected a profit of 49 cents on revenue of $290.5 million.  Par's revenue included $161.1 million in sales of generic Toprol XL, or metoprolol, which is used to treat angina, high-blood pressure and heart failure. The branded version is made by AstraZeneca PLC. Par did not provide sales comparisons to the year-ago period. Instead, it focused on comparisons with the second quarter of 2009, which actually shows a steep decline in sales, when comparing consecutive quarters.  Par also makes an injectable generic version of the migraine drug sumatripan, or Imitrex. It also makes Dronabinol, a generic version of Marinol, which includes the active ingredient in marijuana and treats nausea from chemotherapy.  Shares of Par Pharmaceutical rose 67 cents, to nearly 3 percent, or $23.45 in morning trading.

Quarterly revenue growth is moving with PRX, and I like them as a longer term play and take-over candidate.  With a market cap of 770M, and little debt and FCF of 34M, they have room to grow.  Needham thinks so as well, and raised their top line to $29.

Chart for Par Pharmaceutical Companies Inc. (PRX)

Easing into them, because if they fail 20, it is a long way down.  Buying a few 20 Dec09 P for60c is a good way to ease into them.  If the chart changes, we might be able to enter an attractive bull call spread, but I do not like the chart at the moment.

Caraco (CPD) – Earlier, in June, the FDA had seized all medicines produced by Caraco following repeated violations of manufacturing standards.  However, the company said it would attempt to have some of the seized inventory released, and said it would be difficult to release other inventory, except $8.1 million worth raw material.  The company said it instituted indefinite layoffs of about 430 employees in two phases. In June, it had terminated the employment of 52 percent of its workforce.  The FDA's action and the company's voluntary actions have had, and are expected to continue to have, a material adverse effect on operations and operating results, it said.  As of Sept. 30, the company had $73 million in cash and $10 million in short-term investments, which it believes are enough to support its ongoing business needs.The company also expects lower research and development expenses in the near future as it puts a part of the related team into working on regaining compliance and technical validations.  On Tuesday (this was Oct 29), Caraco said its second-quarter sales fell 36 percent to $78.4 million, hurt by "price erosion" on distributed products, the FDA's action and the cessation of manufacturing.

With many companies in this arena, manufacturing is a BIG place to fail for the FDA.  Just ask Savient, SGP (now MRK), etc.  Options are not traded on this company, but they could be worth a flier for a potential buyout or long term hold.  They do have room to run up to old highs.


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