3 Specialty-Drug Makers Trying to Spark Investor Interest -- Are They Buys?

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Specialty-drug makers are under the microscope following revelations that some have acquired long-standing medicines only to raise their price indiscriminately. The risk of potential blowback on profit at specialty-drug makers has led to significant haircuts in share prices, declines that these three specialty-drug makers hope to offset with investor-friendly moves. Let's take a closer look at these companies, their strategies for regaining investor confidence, and their future potential.

No. 1: Mallinckrodt Pharmaceuticals (MNK)
Covidien spun off Mallinkcrodt Pharmaceuticals in 2013. It manufacturers a variety of medications, including opioids that are used to treat pain.

Last year, Mallinkcrodt spent $5.6 billion acquiring specialty-medicine maker Questcor to get its hands on Acthar Gel, a medication used to treat a variety of rare conditions, including infantile spasms and nephrotic syndrome, a kidney disease.

Acthar Gel is one of the globe's most expensive drugs, with a price tag north of $200,000 per year. Over the decades, its price has risen from $1,500 to $34,000 per vial. Investors have cut Mallinckrodt's share price in half over worry that payer pushback could reduce Acthar Gel's revenue, which totaled more than a quarter of a billion dollars last quarter.

Hoping to firm up shares and resurrect investor interest, Mallinckrodt recently unveiled a $500 million share-buyback program and announced a commitment to cutting its long-term debt, which has swelled to more than $5.3 billion from less than $4 billion in the past year.

Although it's unclear how much and how quickly Mallinckrodt will repay its debt, improving its balance sheet could create significant value for investors, because it will reduce the amount of money it pays in interest. Last quarter, Mallinkcrodt forked out more than $72 million on interest on its debt.

If Mallinckrodt's buybacks and debt-payment plans boost EPS and payer fear fades, then Mallinckrodt's shares could be a bargain, because they're already trading at about 7 times next year's estimated earnings.

No. 2: DepoMed (ASRT 4.78%)
DepoMed's recent acquisition frenzy and the relaunch of acquired drugs with higher price tags means that it's also felt the pinch from drug-pricing scrutiny.

While DepoMed isn't attempting to win back investors with buybacks and debt reduction, it is actively communicating with investors about its long-term prospects. In November, DepoMed updated its corporate presentation to highlight its ongoing transformation into a leader in specialty pain and neurology medicine. That transformation is due in large part to its acquisition of Nucynta from Johnson & Johnson earlier this year.

Nucynta is a pain medication that competes against Oxycontin, and following DepoMed's acquisition of it, the company relaunched the drug with a tripling of its sales force and a price increase that brings its cost in line with Oxycontin.

As a result of its SG&A investments, Nuncynta's year-over-year prescriptions are up more than 14% and Nucynta's market share has improved to 1.7% from 1.49% at the time of DepoMed's purchase.

Source: DepoMed.

Because Nucynta's market share remains small and it's already selling at a $65 million quarterly clip, DepoMed believes that Nucynta's peak sales could eclipse $1 billion someday. If so, then investors willing to step in and buy shares that have tumbled 37% since July could end up getting a bargain. Earlier this month, DepoMed boosted its product revenue guidance for this year to at least $336 million from its prior forecast of at least $320 million, and that growth trajectory has industry watchers thinking EPS will be $1.87 next year, up from $0.80 this year.

Source: BioMarin.

No. 3: BioMarin Pharmaceuticals (BMRN -1.58%)
BioMarin is the biggest by market cap of these three specialty-drug companies, and it also boasts the most robust drug-development program, but its shares have still tumbled by 26% since July.

BioMarin spent $158.7 million on therapies in its drug pipeline last quarter, including treatments for Batten disease and Pompe disease, two rare conditions.

Financing that spending are ultra-high-price enzyme replacement therapies, including Naglazyme, a treatment for the ultra-rare Maroteaux-Lamy syndrome that BioMarin charges a jaw-dropping $485,747 per year for and that brought in sales of $54 million last quarter.

Because therapies such as Naglazyme carry sticker shock-evoking price tags, investors have been fleeing BioMarin shares, but that might not be the right move.

Most of the companies that are under the biggest scrutiny for sketchy price policies are those that have avoided spending the money necessary to develop new medicines. Instead, they've focused on an acquisition and rebrand/reprice strategy. Since BioMarin is investing heavily in new treatments for orphan diseases and its spending is high enough that it doesn't turn a profit yet, it probably shouldn't be lumped into that category.

If I'm right that BioMarin is being unfairly punished, then BioMarin's recent decline and promising pipeline could make it the most attractive of these three stocks to own, especially for long-haul growth-oriented investors willing to stick it out until revenue is high enough to drop money to the bottom line.

Tying it together
There's no doubt in my mind that attention and criticism over pricing will remain a major focus of payers, patients, and politicians, and that focus could limit price increases in the future, but that doesn't mean there aren't valid reasons to consider owning Mallinckrodt, DepoMed, or BioMarin.

However, out of the three it's DepoMed and BioMarin that are my favorites.

DepoMed's price for Nucynta is in line with the market, the market is competitive, and DepoMed is profitable and growing. Meanwhile, BioMarin's pipeline is packed with therapies that address the significant unmet needs of small patient populations, and that makes me think investors are undervaluing its potential.

SUNDAY/MONDAY, NOV. 22-23