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Barr Laboratories
6/4/2002
Buy at $28.25. Price
target: $60.00
By Chris Stallman
| E-mail
Our
first stock pick on the new website is a company that we believe
you should know about. This company is known as Barr Laboratories
and they make generic drugs.
When a company creates a new drug and gains FDA approval,
they are given a patent on the drug that gives them exclusive rights
to the drug for a set period of time, usually 3-5 years. After that
time, similar drugs (known as "generics") can come out
onto the market for a much lower cost. And Barr Laboratories is
one of the companies that makes these generic drugs.
When the patent on a drug is reaching the end date,
Barr Laboratories submits requests to the FDA to develop generic
drugs. Pending FDA approval, they can then market their new drug
and sell to the public for less than what the original drugmaker
is charging (the one that created the drug in the first place).
This allows us to get our prescriptions for less while making the
company a considerable amount of money.
After
they gain approval, they are given 180 days of exclusive marketing
rights to the generic drug. For this 180 days, they have virtually
no competition and rake in literally hundreds of millions of dollars.
After that time period, the marketplace becomes flooded with other
generic versions of the drug. Their revenues remain strong but not
nearly as close to the levels that they were at during the exclusivity
period.
Some of the generic drugs they have created are CyPat
(for prostate cancer), a generic version of Nolvadex (for breast
cancer), and their most successful drug, fluoxetine (a generic version
of Prozac). The company has 83 other generic drugs in their pipeline
and have submitted requests to develop 28 new generic drugs.
What I
like about this company is that it's cheap. It is currently
trading at 13.3 times FY2002 earnings (Pfizer is at 22.1 and Merck
is at 18.3). If you take a look at their earnings, they're expected
to make $4.73 this year but only $3.94 next year. The reason is
because this year's earnings were inflated by their 180 days
of exclusivity with their fluoxetine drug. However, their most recent
earnings report blew away expectations by 31% and that was with
only 1 month of exclusive rights to the fluoxetine drug (their rights
ended January 2002 and the earnings report was as of March 2002).
I see their bottom line growing over the next couple
years and they are on track to meet their expectations of 8-12 new
product launches in the 2nd half of this year. The company is very
solid with their earnings and have achieved growth rates higher
than the industry average.
One last thing that draws me to this stock is its efficiency.
Aside from the fact that they have revenues of $2 million per employee,
they have consistently had ROE's in the high teens (and recently
nearly 30%).
But there is still two things that you have to keep
in mind before buying this stock. The first is that they are entirely
dependent on what's in their pipeline. Even though they have
consistently performed well, if they should fail to get approval
for a few generic drugs, they could see their top line hurt greatly.
And the other thing I don't like is that they are currently
involved in a lawsuit against them and AstraZeneca. The American
Association of Retired People (AARP) is sueing them for allegedly
colluding with AstraZeneca to prevent a generic version of a drug
from coming to market. This, in turn, drives prescription prices
up, says the AARP.
However, despite these two small drawbacks, I believe
that the company is a strong company overall. And I feel that the
company should be trading at approximately $60/share within the
next two years.
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