Today’s delightful tidbit of teasermania comes in from Marc Lichtenfeld, who tends to focus on biotech and health care stocks. He’s been around for a while, and is now drumming up members for the Oxford Club instead of one of his own biotech-focused letters, and pitching some ideas that sound like they’re a little larger and more mainstream than some of his past picks.
I haven’t written about a lot of Lichtenfeld picks over the last year or so, but they come up every now and again — and like most analysts’ teaser picks, especially in areas where federal regulations swing stocks dramatically (as with FDA decisions on drugs and devices), the results are mixed and depend on your sell timing. He made a strong push for MELA a couple years ago, and was certainly right about the stock soaring, at least for a little while … and even Barron’s got on board to tout and re-tout it later on as the profile climbed, but just this month the stock collapsed on surprisingly negative FDA news. Later, about a year ago he teased Celldex (CLDX) as the “greatest little stock no one’s ever heard of” and promised it would double by this past June … and what do you know, it did double (roughly), but then it fell back down just as quickly over the Summer and is back to about where it was when he teased it. That’s one of the limitations of the teaser sniffing biz, I usually have no idea what kind of followup or sell advice these folks give.
So anyway, he’s been around for a while and has teased some interesting stock ideas — what’s the pitch for this time?
This time, it’s all about generic drugs — the SR-417 in the title was a 1984 bill, the actual law is PL 98-417, which is more commonly known as the Hatch-Waxman Act and effectively created the generic drug business in the United States by making it easier for generic drug companies to challenge patents, and by establishing the abbreviated version of the FDA’s new drug application for generics and providing for a six-month exclusivity window as the reward for the first generic version of a patented drug to file for approval. The act began consideration as a patent extension bill and had the price control stuff added on a bit later, so it also does allow an extension for patents that had become necessary to account for the long FDA approval process (patents are generally applied for and issued several years before the drug is in clinical trials, and those trials can themselves often take 8-10 years to complete — which is substantial, considering that patents generally expire in 17-20 years).
The newsletter-ese explanation of this is that the law “mandates” a “$139 billion ‘private wealth release'” — which is Lichtenfeld’s (or his copywriter’s) way of dramatizing what other folks call the “patent cliff,” the big dropoff that is expected in big pharma revenue as some of the largest blockbusters in pharmaceutical history go off patent over the next two or three (or five, depending on who you talk to) years and their multi-billion-dollar franchises face generic competition. That “cliff” is why Pfizer looks so cheap today, since their ultra-blockbuster Lipitor is going off patent shortly (I think Lipitor is still by far the biggest prescription drug in the world — last I saw, it had sales of about $13 billion, about twice the sales of second-place Plavix … which is also going off patent soon).
Here’s how Lichtenfeld puts it:
“… as a direct result of SR-417, a whopping $139 billion in ‘Private Wealth’ is scheduled for release to the general public between now and 2013.
“And in this letter, I’m going to explain how you could become hundreds of thousands, even millions richer, thanks to U.S. Government Code SR-417….
“To put this $139 billion ‘private wealth release’ into perspective, that’s more money than the entire Gross Domestic Product of oil-rich Kuwait ($98 billion)… New Zealand ($117 billion)… or even Hungary ($129 billion).
This opportunity is so big, Standard and Poor’s expects it to trigger ‘double-digit growth rates for the next several years’…
Research and Markets, a leading international data consultancy, says this multi-billion dollar shift will be ‘peaking in 2011, and continuing through to 2013’…
“And Bloomberg reports that those who are well-positioned could see ‘an earnings ‘windfall’… from 2011 through 2013’ and that ‘there is a tremendous amount of profit to be had.’
“Keep in mind, most people won’t hear of these wealth releases until the news spreads in the Wall Street Journal or on CNBC in the coming months. Of course, by then, it’ll be too late to get in ahead of the crowd.
“That’s why right now is the time to act.”
There’s a big leap of assumption that seems to be buried in that spiel is that this loss of earnings exclusivity creates a “wealth release” of equivalent size for the companies Licthenfeld is touting — which clearly isn’t the case.
The whole point of this generic competition is that the billions spent on these patented drugs will shrink once the creator of the drug has had enough time to recoup their investment and the patent expires. The generic companies do get a six-month windfall period of exclusivity in exchange for being first with a generic equivalent drug, but after that the assumption is — and the reality seems to be — that prices drop rapidly with generic competition. Demand might go up a bit, too, but still, you can easily imagine prices for many blockbuster prescription drugs dropping by 90% or more in the years after they go generic, so that “wealth release” is a good thing in that it redirects cash to more productive uses (arguably), but only a relatively small portion will actually be redirected to the bottom lines of generic drug companies.
Still, there is a big profit opportunity — even if it’s not exactly a $139 billion windfall. And I suppose it’s clear by now that Lichtenfeld is touting some generic pharmaceutical makers, who would be expected to have the opportunity to cannibalize some of the sales of these huge branded drugs that are facing the “patent cliff” in the coming few years.
So … that’s a pretty long preamble to get us to the meat of the question: which stocks is he teasing us with today? He throws out a basket of clues for two different picks that he’s recommending, which he calls “Patent Profit Plays” … I’ll take a quick look at each, in order:
Patent Profit Play #1:
“This company – we’ll call them ‘Patent Profit Play #1’ – is ready to spring out of the starting gate in virtually every major generic race they enter.
“Consider everything they’ve got lined up…
“» Infrastructure: They’re already sitting on an ultra-successful production and distribution network. It provides ‘Patent Profit Play #1’ with direct access to dozens of retail chains, wholesalers, distributors, hospitals and government agencies. This tried and tested infrastructure supports the nearly $10 billion per year in generic medicines they’re already cranking out.
“And now as the Patent Cliff floodgates burst open, ‘Patent Profit Play #1’ is ideally poised to choose from literally dozens of hundred-million and billion dollar ‘cash machines in waiting.'”
And we get some specifics to help us narrow down the name of the stock:
“On May 25, they launched a generic version of a $2.1 billion GlaxoSmithKline product…
“On June 1, they launched a generic version of a $782 million Bayer product…
“On July 1, they launched a generic version of a $2.75 billion Wyeth product…
Talk about a license to print money!
“And they’re not just waiting for one or two patents to expire. They currently have fully 206 applications out to the FDA to produce copies of drugs, with a stunning 44 of them tentatively approved.”
And we’re told that these 206 applications represent “some $107 billion (yes that’s billion with a B) in potential U.S. sales.”
This company also makes branded drugs and develops new products, we’re told, and has at least one big drug of their own:
“With their world’s leading branded therapy for one of nature’s most crippling diseases, ‘Patent Profit Play #1’ raked in $2.8 billion in 2009, up 25% over the previous year.
“Yet their in-house future pipeline is even more impressive. They’re projecting FDA Phase III endpoints for no less than thirteen proprietary drugs in 2010-2012, and another nine in 2013-2015.”
There are quite a few more clues and tidbits in the tease — including that they have over 135 lawyers working to challenge patents, and they think they’re in line to be “first to file (and get that profitable six month exclusivity) for 82 of their abbreviated new drug application filings, and they make 60% of their own ingredients, further helping them trim costs. But really, that’s all icing on the cake — this is more than enough info to tell us that he must be teasing:
Teva Pharmaceuticals (TEVA)
Teva is definitely the big granddaddy of the generic drug makers, it has a market cap of nearly $50 billion and is by far the largest public company in Israel, and in a business where scale and efficiency make a big difference they are tough to beat — their margins are dramatically better than large generic competitors like Mylan Labs (MYL), though they fall short of the very impressive recent numbers put up by Navellier tout Impax Laboratories (IPXL). In truth, they’re so much bigger than other generic companies, and the business is so riddled with lumpy earnings, especially for the small players (that six month profit windfall on a big drug may give a large lift to Impax, for example, but it goes away quickly), that it’s hard make good comparisons. I think the second biggest generic drug company is still Novartis (NVS), with their Sandoz subsidiary (one reason that NVS is one of my favorite big drug stocks, though I don’t own it), but even that division probably has sales that are about half of Teva’s, and it gets a bit lost in the massive Novartis conglomerate.
And you won’t find me arguing against Teva — they’re very profitable, the stock is cheap, and they’ve got such a diverse pipeline of generics that they don’t rise or fall based on the success of their relatively young branded pharmaceuticals business (though their lead branded drug, Copaxone, certainly gets attention and impacts the stock — it generates sales of several billion dollars a year). Competition is certainly out there around the world, including from companies like Dr. Reddy’s in India that would probably like to become the “next Teva,” but it’s hard to avoid being impressed by Teva’s valuation (forward PE under 10, with 14% annual growth expected by analysts over the next five years). The shares are down quite a bit from their highs of last Spring, and I haven’t dug deep enough into their recent performance to tell you why so there may be some skeletons I’m not seeing — but at this price, I might be willing to accept some skeletons. (I don’t own the stock, to be clear, and won’t trade in it for at least three days per my rules.)
So that’s one, and it’s a global large cap stock that’s an analyst and press darling, so you can easily go on to do a bit of research on your own if you like. What’s the second one?
“‘Patent Profit Play #2’ is a small-cap generic drug company with 115 products on the market, 21 more waiting for approval and 50 in development.
“Many of its products are in the pain management niche, an area where it has a tremendous advantage due to its status as one of only seven companies in the United States with a license to import opiate raw materials….
“‘Patent Profit Play #2′ has been in business since 1942, and its customers are some of the largest drug retailers and wholesalers, including Wal-Mart and Walgreen’s. Its products are often the top one or two bestsellers in terms of market share for a given treatment or condition.
“’Patent Profit Play #2’s’ strategy is smart. Rather than going up against the big boys to compete for a tiny share of blockbusters, they go after niche drugs where they’re not likely to face intense competition.”
So … that all sounds pretty compelling. How about some more specific details?
“Over the next five years, earnings growth is predicted to grow 30% annually.
“The ‘Patent Profit Play #2’ stock represents an excellent value, trading at about half the multiples of its peers. They have cash on their balance sheet, little debt, they’re profitable and cash flow positive.
“With strong margins, a healthy balance sheet and low valuation, don’t be surprised to see a larger company swoop in and acquire ‘Patent Profit Play #2’ to get access to its profitable, market-leading niche products.”
So who is our little “profit play” number 2? Well, it is genuinely tiny compared to Teva, but this must be …
You can read the spiel about LCI on their website if you like, but they were founded in 1942, do focus on pain meds (largely because they bought Cody Pharmaceuticals a few years ago — which is also where the opiate import license came from), and do sell both unbranded generic pharmaceuticals and active pharmaceutical ingredients. And yes, analysts do expect them to average 30% annual growth for the next five years (including a huge boost of 130% next year), which makes their PE ratio look palatable (trailing PE of 33 in a down year, forward PE of about 13).
That’s about all I know about Lannett after a quick glance — they seem like a perfect match for the tease, but I had never heard of them before today. And yes, they have been mentioned as a takeover target by at least one biotech investment blogger, Mike Havrilla — you can see his analysis from a couple months ago here if you’d like some more details. The speculated take-over-er, by the way, Endo Pharmaceuticals (ENDP), is a larger pain meds company that looks similarly cheap and has had a big run up in the last few months.
So there you have it, two possible stocks to investigate for your “patent profits” … if you’ve any thoughts on generic drug stocks, or Teva, Impax, Lannett or anyone else in the business, feel free to share them with a comment below.
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