Our generic biotech bonanza continues, sans pomp and circumstance, sans Wisdom, sans pain and suffering -- at least, we hope.
We've looked at the generic drug industry and taken a gander at a leader, Mylan Laboratories
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, or 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, read up on the Fool's 13 Steps to Investing Foolishly before you go on. If you're ready to continue, 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.)
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 also produce generics. Generics are big biz. In fact, 77 of the top 200 drugs sold in the U.S. in 2000 were generic.
The companies I came to focus on 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 has a strong, diversified business. Similar to Mylan, it 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. The company just filed an Abbreviated New Drug Application (ANDA) with the Food and Drug Administration (FDA) to offer the bio-equivalent of GlaxoSmithKline's
It has more debt than any company on this list 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.)
2002Revenue: $1.197 billion (-1.4%)Net income: $122 millionFree cash flow: $53 million (-60%)Cash & equivalents: $155 millionLong-term debt: $872 millionShare price: $12.50P/E: 20.82003 est. P/E: 17.8 Enterprise value: $3.1 billionEV/FCF: 58
American Pharmaceutical Partners
American Pharmaceutical Partners is a rapidly growing newcomer that went public in January 2002 at $15 per share. It 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 between its three foci. During the last few years, it's been able to file more than 12 ANDAs 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 recent trading range (it's volatile), 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 worth considering as its free cash flow is likely to increase handily, 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.)
2002Revenue: $277 million (+44%)Net income: $122 millionFree cash flow: $19.9 million (+610%)Cash & equivalents: $39 millionLong-term debt: $0Share price: $19.75P/E: 21.92003 est. P/E: 18.4 Enterprise value: $860 millionEV/FCF: 43
The name of this company may conjure up images of a cyber-game character, but Sicor does hold a place in reality. The result of a 1997 merger, Sicor has a generic drug business focused on oncology and injectable 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's, 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.
2002Revenue: $456 million (+23%)Net income: $128 millionFree cash flow: $98 million (+92%)Cash & equivalents: $169 millionLong-term debt: $30 millionShare price: $17.3P/E: 16.32003 est. P/E: 18 Enterprise value: $2 billionEV/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.
Here are additional generic drug makers that, at first and second glance, interested me. All are profitable, or should be this year, and growing.
P/E: n/a, FCF: NegativeBarr Laboratories
P/E: 22, FCF: Strong PositiveEon Labs
P/E: 25, FCF: SporadicPharmaceutical Resources
P/E: 17, FCF: PositiveTaro Pharmaceutical
P/E: 26, FCF: SporadicTeva Pharmaceutical
P/E: 27, FCF: PositiveWatson Pharmaceutical
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.