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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: doug5y who wrote (14372)	4/25/2002 8:38:03 PM
From: - with a K	Respond to of 78746

I looked at BMY but didn't like their inventory and pipeline problems. I think I read something about the terrible morale issues they're dealing with, too. I'm more attracted to the generics and bought PRX after it fell hard in late February. Here are my notes: Date: Wednesday, February 20, 2002 Subject: PRX Now On Sale! PRX got whacked 36% today because they announced a competitor got FDA approval for their weight gain drug for which PRX had a head start. (Bristol-Meyers makes the propriety drug that PRX first copied; now another generic is in the game.) My thesis for buying: * severe market overreaction (Even though the PRX generic accounted for up 25% of their business, they lost 36% of stock value in one day. And PRX, with its nice margins, can always respond with lower prices.) * They have many others products out and more in the pipeline. Have some patent protection, too. * I was interested in PRX when the stock was at $26; now it's back up over $20 * Seems like a great value at this price. Nice fundamentals. * It bounced off it's low and has shown some strength in a choppy market * With all the bad news from Bristol-Myers, Merck, Elan, and Watson, this is a contrarian play when things look bleakest for drug companies. * Fell dramatically below its 200 DMA and (should?) pull back up to around $25-28 BUT: Not a steady-eddy kind of company. Ugly chart. Lost money 1997-00; current liabilities are rising steadily; NAIC SSG looks like teenage vomit in a mosh pit. Overview: Pharmaceutical Resources makes those generic drugs that your insurance company likes so much. Through subsidiary Par Pharmaceutical, the company offers more than 100 products representing various dosages of more than 40 prescription and over-the-counter drugs, concentrating on nervous system, cardiovascular, anti-inflammatory, anti-infective, and anticancer drugs. The company makes about half of the products it sells; the rest are made by such companies as BASF, Halsey Drug, and Merck KGaA (which owns more than 40% of Pharmaceutical Resources). The firm bought ISP FineTech from International Specialty Products. The company sells its products mainly to drug distributors, wholesalers, and retail pharmacy chains. Nice PRX Ratios: TPE: 18.5 FPE: 12.4 PEG: .45 ROE: 28.7% ROA: 17.1% NPM: 17.6% 5 Yr. Sales Growth: 19.17% Only 4 analysts Expect $1.85 in '03, up from $1.84 Did $1.39 in '01 and expect $1.78 in '02 Consensus EPS growth: 27% vs. industry's 14% Paying off LT debt Graham Fair Value: Company: PRX Date: 3/14/02 Next year's expected earnings: $1.73 (now raised to $1.78) Estimated 7-10 EPS growth rate used: 10 (vs. 28% consensus) P/E maximum if not 8.5: 13 Graham Fair Value: $39.19 Current Price: $20.95 $ difference: $18.24 Percent Growth to Fair Value: 87.06% News: April 8 /PRNewswire-FirstCall/ -- Par today announced that it has entered into an agreement to expand its strategic product partnership with Merck KGaA. Under the terms of the agreement, Par has licensed from Merck the exclusive rights to 11 generic pharmaceutical products currently under development. Most of these products are expected to enter the U.S. market between 2003 and 2006. "These 11 new product opportunities further enhance our prospects for sustained growth in the years 2003 and beyond." Terms of the agreement call for Merck to develop the products and submit all corresponding applications to the FDA. Merck will also manufacture the products. Par will serve as exclusive U.S. marketer and distributor of the products plus pay a share of the costs, including development and legal, incurred to obtain final regulatory approval. In return, Par will receive slightly more than 50% of the profits. In 2001, the cumulative sales of the 11 branded products totaled approximately $7.8 billion. Barron's January Roundtable Story (Best Picks For 2002) Schafer: "Pharmaceutical Resources still has huge potential. The company is stronger now, and better able to implement the strategy I talked about last year, when I said it would earn $1.25 to $1.50 in 2001. That will be close to $1.40, and the early estimate for 2002 is close to $2. Meanwhile Merck, which held 42% of the stock, has sold its shares in an offering to institutional shareholders. Pharmaceutical Resources is now able and anxious to make strategic product and corporate acquisitions, so it can transform itself from a me-too generic drug company into a more sustainable and profitable grower which could earn close to $4 in the next two to three years. [On January 11 the company announced it will acquire ISP Finetech, which manufactures organic compounds for the pharmaceutical industry. Oscar calls this a "company-transforming transaction".] If the company sells at only the average P/E of its peers, the stock could sell at 80 a share. To get to $4 in earnings, though, the company needs to introduce some of the 20 or so products, whose current branded volume is about $12 billion, that it now has [awaiting approval] at the Food and Drug Administration. It also needs to make strategic acquisitions. Recently the company licensed a sustained-release technology from Elan, which, if successful, could add another layer of insulation against other generics entering the market. Since last January, Pharmaceutical Resources has launched several strengths of generic Prozac into a $2 billion market. It also has introduced a product for AIDS patients to help them gain weight. This is a $250 million market. Since the company introduced the product it has garnered 70% of total prescriptions. Unlike most generics, Pharmaceutical Resources has its own patents which can stave off competition for more than the normal 180-day exclusivity period. Q: How can you have a patent on a generic? Schafer: They have a process patent. If the company is successful it will evolve in the next few years into a specialty pharmaceuticals company with long-lived products. Then it will deserve a higher-than-20 price/earnings multiple, in which case the stock could be closer to 100. If the company earns $2 this year the stock will be close to 50. Right now it's around 29.