To save money, governments, including Britain's, are refusing to pay for expensive medical treatments where health improvements are deemed marginal. They are also getting doctors to prescribe more generic drugs, rather than their more expensive branded counterparts. Generic drug manufacturers could therefore get a boost in 2012 as $34bn worth of drugs in America alone are due to lose patent protection. It's estimated that more than 50% of prescription medicines will be open to copycat versions before the end of 2015, in a market that's already 80% generic.
It won't all be plain sailing for the generic manufacturers, who are facing tougher competition. Of the 22 biggest drugs facing patent expiries this year, almost 75% will trigger at least two low-cost copies. The bigger ones could attract as many as ten. To succeed, a firm needs to do something more than churn out mass-produced tablets. This is where California-based Impax Laboratories comes in. Focusing on niche therapeutic areas, it already sells 102 generic products, including its top-selling clone of Shire Pharmaceutical's attention deficit hyperactivity drug, Adderall.
Impax is also formulating its own in-house medicines in areas such as Parkinson's disease, restless legs syndrome and spasticity in patients with multiple sclerosis. In February, it spent $130m for the US distribution rights to AstraZeneca's migraine treatment, Zomig. The agreement, which is expected to enhance earnings immediately, also permits Impax to develop its own drugs containing the Zomig molecule. At the fourth-quarter results, the chief executive, Larry Hsu, said: "Our internal generic pipeline continues to expand with 45 compounds waiting for approval at the Food and Drug Administration (FDA). We're also excited about our branded business."
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Impax Laboratories (Nasdaq: IPXL), rated a BUY by Piper Jaffray
For 2012 Wall Street is expecting turnover and underlying earnings per share (EPS) of $664m and $1.83 respectively. That puts the stock on an undemanding price/earnings (p/e) ratio of 13. I rate the business on a ten-times EBITA multiple, which, adjusted for proforma net cash of $216m, generates an intrinsic worth of about $30 a share.
As for risks, Impax is exposed to intensifying competition, the usual regulatory hurdles and pipeline setbacks relating to its own research and development efforts. It is also awaiting final clearance from the FDA, after being issued with a warning letter following an audit of one of its factories. The board is confident it has addressed the issues.
Piper Jaffray has a price target of $32 per share, with first-quarter results due out in early May.
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI , or phone 020-7633 3634 for more.
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