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Barr Laboratories Stock

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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