Virtually every investor is quite familiar with the names of big pharmaceutical giants such as GlaxoSmithKline plc (ADR) (NYSE:GSK), Eli Lilly & Co. (NYSE:LLY), and Abbott Laboratories (NYSE:ABT) and the fortunes that have been made by investors in these enormously successful businesses. What many investors fail to spend time considering is that a much of the growth of these large businesses came from buyouts of smaller faster growing companies within the pharmaceutical industry that were priced cheaply in comparison to their larger brethren.
Special protection for special drugs
Certain drugs developed for the treatment of rare diseases (orphan drugs) are granted lower barriers for approval and/or extended patent protection as an incentive to manufacturers to produce them, thus limiting competition for market share. That is the upside; the downside is that the market for each drug is quite limited.
Mylan Inc. (NASDAQ:MYL) carries a debt to equity ratio of 2.18 and only generates enough cash to cover interest payments 4.3 times–not a tremendous cushion. In addition, its 5-year average returns on equity, assets, and capital have only been 7.1%, 2.8% and 3.4%, respectively, and its 5-year average net margin is a paltry 5.5%. These are not good numbers for any business outside of discount retail, but are very poor for the drug business.
Smaller and better, but more expensive
The company carries no long term debt, as well as $349 million in cash and short term investments on hand against total liabilities of only $210.32, placing it is on a solid financial footing. While the 2013 price to earnings ratio of 117.5 is quite a bit higher than I would normally like to see, based on 2014 projected earnings of $0.57/share, it will fall to 32.98 and be closely aligned with the estimated 5-year growth rate of 26.9%. While this projection is a very aggressive rate of growth, the volume of products in the company’s pipeline does seem to justify the expectation. The past 5-year returns on equity, assets, and capital of 23%, 13.1%, and 16.8%, reveal an efficiently-run business with an exceptional ability to allocate capital effectively.
The projected rapid earnings growth and extensive product offerings and pipeline give Impax Laboratories Inc (NASDAQ:IPXL) the potential to produce very attractive returns for investors due to the business’s growth could also attract the attention of one of the larger generic manufacturers looking to grow through strategic acquisitions.
The cheapest price and most limited product line