With shares of Hi-Tech Pharmacal (HITK) already up about 20% since I profiled the Company as a value play two days ago , investors interested in the small-cap generic drug industry should take a look at Caraco Pharma (CPD) today at around 5 bucks. CPD reported results for its fiscal 3Q09 yesterday, including $55.7M in revenue and net income of $5.1M, which was down from the year-ago period revenue of $81.9M and net income of $10.8M. The year-ago period benefited substantially from the 180-day exclusivity period associated with the generic drug launch of oxcarbazepine (Trileptal) in conjunction with Sun Pharma (India: 524715).
Caraco noted that full-year revenue for fiscal 2009 is expected to be about the same as the previous year, reflecting uncertainty over the at-risk launch of generic Protonix (pantoprazole) and lower sales of oxcarbazepine since the exclusivity period has ended. Gross profit margin through the first nine months of FY09 declined to 21% from 36% in the year-ago period due to a higher mix of sales from distributed products, which have a much lower margin compared to manufactured products, with the latter posting 48% profit margin for the fiscal year to-date.
For the first nine months of FY09, Caraco filed six abbreviated new drug applications (ANDAs) related to five new generic drug products with a total of 25 pending ANDAs related to 21 new generic drug products. Caraco ended the calendar year with $34M in cash and $104M in working capital and expects cash flow from operations will be sufficient to fund its business plans, including the expansion of manufacturing facilities in Detroit which is nearly complete. Caraco is currently debt free and would only consider taking on debt for strategic acquisitions.
The major overhang on the stock price is the FDA warning letter related to Form 483 concerns by the agency related to an inspection of manufacturing facilities and quality control concerns. Caraco has already responded in full to the warning letter and the FDA will evaluate the corrective actions taken by the Company at its next scheduled inspection (although the exact date was not disclosed) of the Detroit manufacturing facility in question. The Company noted that the FDA did not require additional meetings and Caraco has made changes to its leadership in the areas of manufacturing and quality control since the warning letter.
The warning letter does not impact the sale of products which are already on the market, eliminating any concerns of a blow-up like the situation at KV Pharma (KV-A). Based on personnel changes and improvements in training and equipment, Caraco believes it is compliant with the FDA's cGMP regulations related to manufacturing and quality control. Once the FDA completes its inspection and is satisfied with the corrective actions, Caraco will be eligible to receive new generic drug product approvals from the Detroit facility and remove all uncertainties related to quality control and manufacturing, which could result in the stock price finding its way back to double digits around the 200-day moving average of 10 bucks.
In addition, India's largest generic drug maker by market cap, Sun Pharma, acquired 1.1M shares at year end, increasing its ownership stake in Caraco to over 50% (17.7M shares owned versus about 35M shares outstanding). Given this majority stake and the strong business ties between the two companies, Sun Pharma may even decide to buy its smaller partner at such low prices around 5 bucks (with an enterprise value to EBITDA ratio of less than 4X) since Caraco functions as a U.S. subsidiary of Sun to a large extent in terms of product distribution.
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$4.9 (01/30/09)
