Three Companies To Consider

In part III of our generic drug study, we take a look at three industry companies, one a leader, one a promising middling player and one a newcomer. All offer various opportunities for investors, as does the list of additional generic drug companies offered.

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By Jeff Fischer (TMF Jeff)
April 3, 2003

Our generic biotech bonanza continues, sans pomp and circumstance, sans Wisdom, sans pain and suffering -- at least we hope.

We've overviewed the generic drug industry and taken a gander at a leader, Mylan Laboratories (NYSE: MYL), which is scoring new highs as I type. In today's Foolhardy installment, we'll overview three other promising companies in the industry.

Before we consider the companies, we're due for a reminder of what the Fool believes: Whether you decide to own stocks, an index fund, a combination, or whether you want to speak with an unbiased advisor to help you decide, you are the best person to make your financial decisions. It's all about you. It's all you. You're the man -- or the woman. Nobody is more interested in seeing you succeed than you. And your mom.

I know most of you already know this, and have been reading the Fool for years, but if not, visit the Fool's "13 Steps to Investing Foolishly" before you go on. If you're ready to go on, you must already realize that the following generic list of stocks doesn't count for all your research or as buy recommendations. As with all Fools, those efforts and decisions must be undertaken on your own.

(Preachy? Yes, earlier in my life I considered being a preacher. For obvious reasons, I backed off. You got a problem with that?)

Generic drug companies
You can probably name a dozen or two pharmaceutical giants, but there are several dozen generic drug companies on the market. Additionally, many branded drug companies produce generics as well. Generics are big biz. In fact, seventy-seven of the top 200 drugs sold in the U.S. in 2000 were generic.

The companies I came to focus upon where those with steady free cash flow, strong balance sheets, and, in general, hopeful prospects. (I looked right over any company struggling to survive. Go figure. And no penny stocks!) Let's look.

Along with an interesting name, IVAX (AMEX: IVX) has a strong, diversified business. Similar to Mylan from last week, IVAX sells both generic drugs (58 and counting) and branded drugs (with a focus on respiratory diseases), giving it advantages over generic-only companies.

IVAX is the fourth-largest generic drug and over-the-counter pharmaceutical manufacturer in the country, with nearly $1.2 billion in 2002 sales. Sales soared in the 1990s and early this millennium before cooling last year, but they're expected to turn upward nicely again this year, and with that, free cash flow, too. IVAX just filed an Abbreviated New Drug Application (ANDA) with the Food and Drug Administration (FDA) to offer the bio-equivalent of GlaxoSmithKline's (NYSE: GSK) popular Flonase nasal product.

The company has more debt than any company that follows, and higher valuation multiples than Mylan, but its debt is serviceable (indeed, IVAX continues to buy-back shares), and its enterprise-value to free cash flow (EV/FCF) multiple might contract by a good 60% this year as FCF rebounds. All-in-all, it's been a long-term leader. (IVAX was highlighted in the December 2001 Motley Fool Select.)

IVX 2002
Revenue: $1.197 billion (-1.4%)
Net income: $122 million
Free cash flow: $53 million (-60%)
Cash & equivalents: $155 million
Long-term debt: $872 million
Share price: $12.50
P/E: 20.8
2003 est. P/E: 17.8 
Enterprise value: $3.1 billion
EV/FCF: 58

American Pharmaceutical Partners
(I'll repeat this company's name only once.) American Pharmaceutical Partners (Nasdaq: APPX) is a rapidly growing newcomer that went public in January 2002 at $15 per share. The company markets more than 100 generic products in primarily oncology, critical care and anti-infective, and it runs one of only two generic drug manufacturing facilities in the country devoted to anti-infectives.

APP has more than 50 product candidates in development, split evenly btween its three foci. The last few years, it's been able to file more than a 12 Abbreviated New Drug Applications annually. Impressive. Just be forewarned: this relatively little company has a volatile stock, swinging by large amounts in the last 15 months.

At recent prices, the stock is in the middle of its trading range, but it's still not inexpensive to free cash flow. Yet, net income should rise 20% to 25% this year, and most investors are probably (misguidedly in my view) looking more closely at P/E rather than EV/FCF. The P/E is lower than the earnings growth rate.

APP is another to watch, especially given its volatility and youth. Price opportunities may arise for interested investors, and long-term, the company promises to go a long way. (This stock made our small-cap Foolish 8 list in January, and was featured in the February Motley Fool Select.)

APPX 2002
Revenue: $277 million (+44%)
Net income: $122 million
Free cash flow: $19.9 million (+610%)
Cash & equivalents: $39 million
Long-term debt: $0
Share price: $19.75
P/E: 21.9
2003 est. P/E: 18.4 
Enterprise value: $860 million
EV/FCF: 43

Sicor Inc.
The name of this company may conjure up images of a cyber-game character, but Sicor (Nasdaq: SCRI) does hold a place in reality. The result of a 1997 merger, Sicor has a generic drug business focused on oncology and injectible drugs. Following strong 2002 results, flat net income is expected this year, but then 16% earnings per share growth is estimated for 2004.

What we're seeing here may be what we spoke of in our first column on the industry: sporadic, inconsistent growth related to the inconsistent nature of drug approvals, and generics hitting the market and doing well at first, but then meeting more competition. 

Overall, Sicor (I'm sorry, I can't help but picture an ogre-like monster with big horns) has been growing at a rate comparable to APP, but Sicor's multiple to free cash flow is more attractive. It has more cash than APP, too. Between the two, APP is a riskier investment with perhaps higher growth potential, while Sicor offers relative stability alongside decent growth. So far, it's my favorite next to Mylan.

SCRI 2002
Revenue: $456 million (+23%)
Net income: $128 million
Free cash flow: $98 million (+92%)
Cash & equivalents: $169 million
Long-term debt: $30 million
Share price: $17.3
P/E: 16.3
2003 est. P/E: 18 
Enterprise value: $2 billion
EV/FCF: 20

Summary and more companies
Most generic drug makers have performed well, and many industry stocks are near highs. Of the three companies mentioned above and Mylan from last week, I like Mylan best. In a nutshell, it has the most robust business and lowest free cash flow multiple. All the younger companies are predictably valued at greater multiples to free cash flow, whether or not free cash flow is consistently growing.  

I'm following all these companies, learning more, and watching for purchase opportunities, which of course I'll write about. Right now, of all the companies I studied, the stocks look fully or fairly priced, and most are granted similar multiples. As I said from day one, I'm just learning about the industry. I've started to learn publicly and hope you've been able to learn something with me.

Following are additional generic drug makers that got interest on first and second glances. All are profitable, or should be this year, and growing.

Andrx Pharmaceuticals (Nasdaq: ADRX), P/E N/A, FCF: Negative
Barr Laboratories (NYSE: BRL), P/E 22, FCF: Strong Positive
Eon Labs (Nasdaq: ELAB), P/E 25, FCF: Sporadic
Pharmaceutical Resources (NYSE: PRX), P/E 17, FCF: Positive
Taro Pharmaceutical (Nasdaq: TARO), P/E 26, FCF: Sporadic
Teva Pharmaceutical (Nasdaq: TEVA), P/E 27, FCF: Positive
Watson Pharmaceutical (NYSE: WPI), P/E 17, FCF: Positive

Do you have a favorite generic drug company? Share it on the Fool on the Hill board -- and thank you for reading.

Jeff Fischer doesn't own any of the companies mentioned, but will accept any stock gifts mailed him. The Fool has a giving disclosure policy.