Our Top Stock Idea

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Impax Laboratories profile

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch :

The numbers are kinda insane.

• market cap $1.43 billion
• P/E 5
• PEG 0.72
• profit margin 28%
• operating margin 47%
• ROE 83%
• cash $358 million
• no debt
• revenue 2008: $210 million
• revenue 2009: $358 million (70% growth)
• revenue 2010: $580 million (through 3 quarters, should be over $700 million for the year, 100% growth).
• earnings 2008: $18 million
• earnings 2009: $50 million (175% growth)
• earnings 2010: $180 million (through 3 quarters, should easily pass $200 million for year, or 300% growth)

One of the reasons this stock is so cheap is because the generic market is hard to predict. Here are the revenues for the last four quarters: $176 million, $323 million, $153 million, $303 million. So the general direction is up but there's a huge fluctuation. The way the generic model works, the first to file has six months of exclusivity (i.e. has a duopoly with the original drug maker). But after that the drug prices usually fall through the floor. Add to this uncertainty all the litigation in the sector, and the race to file first, and you have a really unpredictable business model.

On the plus side, they have a huge pipeline. They have filed for drug approval for 33 drugs with the FDA. At least eight of those have first-to-file or first-to-market potential. Some of those are likely to surprise to the upside. What is a small or unprofitable drug for a big pharma can be a nice money-maker for a generic company who sells the hell out of it at a cheaper price. And of course some of them will not surprise at all. For instance, they just got a tentative approval for Cymbalta, the anti-depression drug ($3 billion in annual sales). It goes off-patent in two years. So just write in an extra $600 million in sales for 2013.

In the short term, we're all expecting bad news. There's been a huge demand for their ADD drug and Shire (the original drug maker) is supposed to supply them with unlimited quantities. Shire has been screwing them over, sending their supplies to Teva [(Nasdaq: TEVA)] instead. So that's another lawsuit. The last conference call was a mess, with the company unhappy with their lack of supplies and unable to predict their near term revenues. Go ahead and write in a bad quarter, I don't care. Their p.e. is (bleep) 5. $200 million in profits and they're growing those profits annually at 300%. And those numbers include a bad quarter. Which is just theoretical at this point, anyway. The company is looking to make an acquisition to bolster their near term earnings.

I ask you, does it really matter? I wouldn't mind a cheaper price. Look at the business, look at what they are doing. Impax is printing money and they have 63 drugs in the pipeline. I want to put real money in this one.

The nicest thing about this company, for those of you who hate the bottom-feeders--and I am with you--is that this company is actually making the transition to real pharmaceutical company. They have two unique drugs in phase III trials, an MS drug and a Parkinson's drug. They are particularly happy with the Parkinson's drug. They file in Q4 of this year. GlaxoSmithKline [(NYSE: GSK)] has already signed on as a partner for international sales. Impax gets $11 million in cash, plus $125 million if the drug is approved, plus double digit royalties.

The stock has done nothing but go up in two years. It's beating Apple, man. And the scary thing is that the near term uncertainty is actually suppressing the stock.

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