Big Pharma may not be smiling, but 2005 has been a pretty respectable year thus far for many manufacturers of generic drugs. One of the largest, Barr Pharmaceuticals
For the company's fiscal fourth quarter, revenue declined nearly 8%. Declines were led by the absence of ciprofloxacin sales (which accounted for about $40 million last year) and an 11% decline in oral contraceptives, offset by a near-doubling of the company's proprietary product sales.
In at least this one case, the decline in revenue was actually not that bad for the company. Ciprofloxacin sales were very low-margin. The improved product mix for this quarter boosted gross margin from 61% to 71%, while gross profit increased by about 9%. In other words, the company actually made more money on fewer sales.
Looking down the income statement, matters get a bit more confusing. There was a charge in this quarter (due to a product acquisition/legal settlement) and last year's quarter (also due to some litigation-related events). Netting out both charges, net income grew about 29% year over year.
Barr produced not only strong operating profits, but also good cash flow. Even if you include acquisitions in the free cash flow calculation (which I feel is reasonable, since it's an ongoing part of the business), the company produced about $263 million in free cash flow for the fiscal year -- more than double the year-ago level and about 25% of revenue. This paid for ongoing share repurchases while still leaving the company with more than $6 per share in cash on the balance sheet.
Generics is a tough business, and Barr is not immune to that basic fact. Rivals like Teva
That said, Barr seems to be in decent shape. The company has a top-notch return on assets and a valuation that, while not cheap, isn't ridiculous either. Further, should the company be successful in patent litigation against the likes of Sanofi-Aventis
More brand-name Fool Takes on generics:
- An Anxious Time for Andrx
- Novartis Keeps Gorging
- Teva: Built to Last?
- Teva Tries to Buy Back the Top Spot