A stock that could double before the end of the year
Thanks to the fine folks over at Above Average Odds Investing, I recently became aware of a company called Caraco Pharmaceuticals (CPD). The following is a link to post that AAOI (who plays CAPS btw) recently made on this company.
Caraco Pharmaceuticals (CPD): A Generic Misunderstood Pharma
CPD is a fascinating situation that anyone who is interested in special situation investing should check out. If nothing else, it's an extremely interesting story.
Apparently Caraco Pharmaceutical is a distribution and manufacturing subsidiary of an Indian generic pharmaceutical manufacturer called Sun Pharma. It was humming along, growing at 20% per year, and not even having to spend any of its own money on R&D (Sun does all of the heavy lifting) when WHAM in late 2009 it was forced by the FDA to temporarily closed its manufacturing facility in Detroit, Michigan and seized some of its drugs because the plant failed to comply with its Good Manufacturing Practice (cGMP) requirements.
While I don't know the details of the specific violations, this sounds much like Johnson & Johnson's recent problems at its PA plant. Unlike JNJ though, CPD doesn't have any other plants to shift its production to so it had to circle the wagons, clean house, outsource additional production, and work on straightening out the issues at its plant. This incident caused the company's stock to fall from $15 pre-incident to the $4.80 that it sits at today.
I'm still looking into this story, but it intrigues me enough that I'm doing so pretty thoroughly today. At first glance, one would think that this stock would be an easy double in a rough market if the FDA gives it the green light to reopen its Detroit plant.
Here's what I have been able to find out by doing some independent research on this situation this morning. Many people believe that Caraco is close to re-opening its Detroit production facility. It at least has slowed its cash burn by outsourcing production of its licensed drugs while its plant was down. While its plant was closed CPD is supposedly modernized it and it supposedly has been bringing employees back as needed.
Here's one potential sign that an FDA decision on the closed plant could be arriving in the near future. After Caraco ran into trouble with the FDA it appointed Jitendra N Doshi as its interim CEO to fix the situation (on 7/28/2009). Mr. Doshi is essentially a representative of Caraco's parent company. From 2006 through this appointment he was the Executive Director of Sun Pharmaceutical Industries, Inc., a generic pharmaceutical company and wholly-owned subsidiary of Sun Pharma. Clearly Sun wants to get things fixed at its U.S. subsidiary.
Anyhow, here's the interesting part, Mr. Doshi has 45,000 in CPD stock that is currently worth $203,000. It appears as though on June 15th, he filed to sell his shares. If I am not mistaken, officers who file to sell shares must do so within 90 days.
This could mean that either Mr. Doshi expects CPD to receive FDA approval to reopen its Detroit, Michigan manufacturing facility at some point between June 15 and September 15 and he will sell his shares at a significant profit once the stock pops on the news. OR it could mean that he has failed and wants to get out of the stock before news hits the street and it implodes. IMHO, the former seems more likely than the latter. Of course, it's always possible that he just needs money and that I'm looking into this planned sale way too deeply.
Another problem with the Company, unrelated to the issues with the Detroit plant, is Caraco just had an independent member of its Board of Directors resign on July 6th. This resignation put it in violation of the rules of the NYSE Amex, which requires companies to have three independent board members. CPD has stated that it will replace the outside Board member within 180 days which is the legal time allowed. Should it not do so theoretically the company could be delisted, but I don't foresee this being an issue.
Anyhow, this is one of the more interesting situations that I have seen out there lately. Here we have what was once a rapidly growing company that ran into a huge, but fixable problem that cause its stock to fall off of a cliff. Despite the problems at its manufacturing facility, Caraco still has a solid pipeline of generic products and the support of Sun Pharma out of India.
Obviously (since I'm talking about it) I have not put any real money to work here yet, but I did add CPD in CAPS a week or two ago at a starting price of $4.95/share.
I am trying to find out as much about this company and situation as possible before committing any real money to this idea (which I am seriously considering). Is there anyone out there in CAPS who is familiar with Caraco or Sun Pharma? How about anyone from Detroit that has heard about this story or might know someone who has?
On a side note, stories like this are one of the things that I love about investing in situations. Every company has a unique, fascinating story. I love reading about them, trying to figure out the outcome, and whether the odds justify investing in them. If CPD receives approval to re-open its Michigan production facility its stock will absolutely explode, regardless of what the overall market does. This is just the sort of alpha-generating returns that special situations can create in a world where individual stocks are consistently trading more and more in tandem with each other.