It's about nine months since I last looked at Canadian specialty pharma company AxcanPharma
Fourth-quarter results are something of a glass half-full/half-empty issue. In absolute terms, there's nothing especially exciting about 10% revenue growth coupled with lower gross margins and a 32% drop in operating income. On the other hand, both revenue and earnings were better than expected, so it's not all bad.
Axcan's prescription growth was pretty good, and sales in both the Canadian and European businesses were quite strong (up 21% and 34%, respectively). In the U.S., though, wholesale inventory adjustments and slower sales did result in only low single-digit growth here.
On a more positive note, Axcan did generate pretty good cash flow for the fiscal year. Operating cash flow nearly tripled, and free cash flow (operating cash flow minus capital expenditures) was much higher, as well. It's important to note, though, that this benefit was a product of working capital management, as structural free cash flow (net income plus depreciation/amortization-capital expenditures) actually declined almost 20%.
The big story here continues to be about ITAX, the company's experimental drug for functional dyspepsia. Although phase 3 trial enrollment has proven difficult, the company has expanded the number of trial sites by 50% in an attempt to speed up the process. Assuming that the studies can reach the enrollment targets on time, results should come out sometime in 2006. It should be noted that the international phase 3 study has completed enrollment and randomization, and those results will most likely precede those of the North American study. Assuming that the data are positive, an FDA filing should follow and the drug could possibly be on the market in late 2007 or early 2008.
This is an odd company in many respects. While Axcan's specialized focus on gastroenterology is a plus, investors have to balance the reality of a slow-growth base business with the potential contribution of ITAX. What's more, while Axcan would seem to be an interesting acquisition target, management's commentary suggests to me that it would rather acquire other compounds than be acquired itself. For better or for worse, though, it would seem that ITAX is going to be the main driver of the stock price over the next year or two.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
