Magic Formula Stock Review: Impax Labratories (IPXL)
Impax Labratories (IPXL) is a generic drug maker. The company focuses on controlled-release generic substitutes for brand-name drugs that have gone off-patent, or have insufficient patent protections. Currently, the company has 57 approved generic drugs, including substitutes for Claritin, Wellbutrin, Prilosec, and Flomax. The bulk of Impax's sales are directly to wholesalers like Cardinal Health (CAH) or McKesson (MCK), although the firm also has joint ventures with several larger generics companies to sell their drugs, including a fairly large one with generic powerhouse Teva (TEVA). Impax is also developing a couple of branded drugs, although this is not really material to results yet.
Generics are a much different business than branded pharmaceuticals. In branded drugs, companies like Pfizer (PFE) spend billions on large R&D pipelines to develop proprietary drugs. The success rate is low, but the winners are incredibly lucrative, with a decade of patent protection and huge profit margins.
Success in generics is much different. There are two keys here. One is consistently getting short (8 week) exclusivity periods on generic compounds by being the first to file applications (ANDAs) with the FDA. Impax's recent success and, in fact, its appearance in MFI is solely due to the company winning this period for generic Flomax in Q1. Having this uncontested period allowed Impax to book $176 million of incremental revenue over Q1 of 2009. That gain alone triples the total of $59 million booked last Q1! This higher revenue of course led to much higher profits - operating income was up 4,726%! As a result, the Magic Formula earnings yield is measured against a one-time revenue event and is unsustainably high at 29%.
While generic Flomax will continue to produce very good results for the first month of Q2, exclusivity ended at the end of April. For the remainder of the year, it will be a modest contributor to revenue. If we look out to 2011 expectations, earnings yield is around 10.8%. That is still pretty cheap but not exceptional.
The other key to success in generics is scale. Price is *the* competitive advantage, and being the low cost producer is paramount. Unfortunately for Impax, it pales in size to the big generics makers like Teva and Sandoz, the generics division of Novartis (NVS). Due to this fact, Impax's success will be lumpy and largely dependent on how well they invest their windfalls like Flomax.
MagicDiligence believes that generic drugs is a good industry to be in right now, and Impax has a lot of interesting qualities. For one, the company is very sound financially. The balance sheet has over $130 million in cash and no debt. Second, management has a pretty strong record of getting ANDAs passed and winning exclusivity. In addition to Flomax, Impax has been early to market with versions of OxyContin and Wellbutrin. Finally, there is a landslide of big-name drugs coming off patent in the 2011-2015 period, presenting a massive opportunity for generics makers. Impax has 32 generic drug applications pending with the FDA, and another 50+ in development.
Also intriguing is Impax's history with Teva. The two companies have had agreements for a decade, and Teva has even invested in Impax in the past. Currently, Teva distributes several of Impax's products, including generic Prilosec and Claritin. Teva has been very aggressive about expanding their already dominant scale, swallowing large competitor Barr in 2008. Impax could be a very attractive acquisition to further this cause.
And Teva isn't the only potential acquirer. As mentioned, scale is key in generics. A lot of traditional drug makers, including Pfizer, have been looking to expand their generics business. Impax also has alliance agreements with Wyeth, now a part of... Pfizer. While the potential to be acquired should never be a prime reason to invest, it is nevertheless an interesting potential catalyst for these shares.
Overall, Impax has a good track record, excellent financial health, and operates in a growth industry with both organic expansion and the potential to be bought. MagicDiligence believes it makes a nice Magic Formula purchase at current prices - and a potential future Top Buy.