How Impax Labs Can Impact Your Portfolio

Migraine drug Zomig helped Impax Laboratories (Nasdaq: IPXL  ) avoid a major financial headache this quarter.

The company licensed Zomig's U.S. commercial rights from Astra Zeneca (NYSE: AZN  ) earlier this year, and the deal has already started to pay off. Impax's revenue this quarter increased 32% year over year, and adjusted net income grew by 225% compared to Q2 2011. Net profit margin also increased from 10% to 11.2%, and this number is likely to improve as Impax pays the remainder of its Zomig licensing expenses this year.

Impax's generic-drug division, which comprised 80% of the company's sales this quarter, also had solid growth. Its generic version of the ADHD drug Adderall was a big seller and helped to increase year-over-year revenue by 10.4%.

Pipeline
A strong quarter is always good news for investors, but long-term success in the pharmaceutical industry depends on a rich pipeline. Fortunately, Impax has 46 new generic drugs under review at the FDA, and recently agreed to license several approved generics from pharmaceutical company TOLMAR. These drugs reportedly brought in almost $380 million over the past year, and Impax only has to pay TOLMAR up to $46 million in upfront and milestone payments to complete the deal.

The future for Impax's drug discovery division also looks rosy. Its Parkinson's disease drug, Rytary (IPX066), is gunning for FDA approval in October, its multiple sclerosis therapeutic has completed a first phase III trial, and a restless leg syndrome (RLS) drug is in phase IIb clinical trials.

RLS is indeed a real disease. According to the National Institute of Neurological Disorders and Stroke, it afflicts 10% of Americans. To give you an idea of its market size, GlaxoSmithKline's dual RLS/Parkinson's disease drug Requip earned $68 million in U.S. sales in fiscal 2011. RLS treatments clearly lack the blockbuster potential of drugs like Viagra and Lipitor, but Impax's drug will diversify the company's product line and can bring in modest and steady revenue if approved.

A look at the books
To get a quick sense for Impax's operational efficiency and financial health, let's compare its data with competitors Par Pharmaceutical (NYSE: PRX  ) , Endo Health Solutions (Nasdaq: ENDP  ) , and Mylan (Nasdaq: MYL  ) :

Company

Market Cap

Operating Margin (TTM)

Net Debt (MRQ)

Impax $1.6 billion 21.4% ($354.5 million)
Par Pharmaceutical $2.0 billion 18.1% $75.9 million
Endo Health Solutions $3.5 billion 19.1% $3.1 billion
Mylan $9.4 billion 17.4% $5.3 billion

Source: Author, data from Yahoo! Finance. TTM = trailing 12 months; MRQ = most recent quarter.

Impax is the smallest player in this group, but has a superior operating margin and carries no debt. This is a huge advantage, as Impax can use its free cash flow toward more R&D and in-licensing deals rather than making interest payments. Par is likely going to be purchased by private equity group TPG, and the high debt loads of Endo and Mylan are enough to scare me off.

I've given Impax an outperform rating on my Motley Fool CAPS page in light of its strategic growth and rich product pipeline. However, it didn't make our analysts' list of 3 Stocks That Will Help You Retire Rich. Click here to download the report today -- it's free.

Fool contributor Max Macaluso holds no position in any company mentioned, but his Ph.D. supervisor was part of the research team that originally discovered Zomig. The Motley Fool has a disclosure policy.
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