I never know how to characterize drug developer Alpharma (NYSE:ALO). It's a sort of a miniaturized diversified pharmaceutical company with three distinct segments consisting of its pharmaceuticals, animal health, and active pharmaceutical ingredients (API) divisions.
Yesterday, Alpharma announced its fourth-quarter and year-end financial results. Revenue was up a measly 9% for the quarter, and gross margins contracted 500 basis points to 56% as a result of reduced margins in the API segment. With sharply higher R&D spending on its drug pipeline, operating income was flat for the year, and adjusted earnings came in at $1.25 a share for 2006.
In 2007, Alpharma is guiding for earnings per share in the range of $1.25 to $1.45. Of its three business segments, only the pharmaceutical division is worth getting excited about. The animal health and API segments can be counted on to produce boring but consistent earnings growth. In 2007, both of these divisions are expected to have top-line growth in the 6% to 8% range, whereas the pharmaceutical division is estimated to grow 15% to 20%.
Alpharma's goal of 40%-50% compound annual sales growth until 2011 for its pharmaceutical division seems ambitious, considering that there is a whole host of drug developers, like New River Pharmaceuticals (NASDAQ:NRPH) (soon to be part of Shire Pharmaceuticals (NASDAQ:SHPGY)) and Pain Therapeutics (NASDAQ:PTIE), that will provide fierce competition to Alpharma's abuse-resistant drug program -- and that's if it does manage to produce any winners. Regardless of this fact, Alpharma needs to bring drugs out of the clinic and to the market to propel its slow top-line growth. Therefore, investors need to pay close attention to how its drug pipeline progresses in 2007, and keep an eye on its competitors as well.
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Fool contributor Brian Lawler stubbed his toe yesterday and owns shares in Pain Therapeutics, but no other company mentioned in this article. The Fool has a disclosure policy.
