After last week’s gut-wrenching sell-off, Monday’s snap-back rally was just what the doctor ordered. However, this is no time to rest on your laurels. Now is a great time to begin looking for new stocks to buy during the next sell-off.
One area that shows promise is specialty pharmaceuticals (which also may be just what the doctor ordered). These companies consist primarily of generic drug makers that design new formulations of name-brand drugs that are nearing patent expiration, or sell generic versions of drugs that have gone off-patent.
Optimism for Generics
The pharmaceutical industry continues to go through some pretty big changes. Over the next five years, drugs that currently generate more than $142 billion in sales are going off-patent.
That is going to create huge opportunities for generic drug makers to take market share.
In addition, U.S. healthcare reform is going to cut into the profits of pharmaceutical companies. The drug companies will have to provide the government with larger discounts on drugs for Medicaid patients and extend rebates to insurers who dispense drugs to people covered by Medicaid. Drug companies with a focus on reducing healthcare costs (like generic drug makers) should be in a better competitive position as prices are being reduced throughout the healthcare system.
Another positive for specialty pharma stocks is that they are not tethered to the business cycle. Their stock prices tend to move up or down depending on company-specific news. The overall economy has little impact on their price movements. You are not going see specialty pharma stocks experience huge declines if an employment report misses expectations.
That said, you will see stocks experience large moves on company-specific news. For example, stocks would react positively to news of successful clinical trials, FDA approval of a new drug, or a new contract with a pharmaceutical benefit manager. Conversely, specialty pharma stocks will react negatively to adverse court rulings, increasing competition, or product recalls.
Minimize the Risk
There are few things investors can do minimize the risk of the owning these stocks. The first is to not overpay for them. Make sure the P/E multiple is not too expensive based on the company’s expected growth and risk profile. I also like to look for stable revenues and a lean balance sheet.
The second is to include specialty pharma stocks in a diversified portfolio that includes cyclical stocks. The combination of cyclical stocks with specialty pharma stocks will actually help reduce the overall risk of a portfolio because those stocks will not move in tandem, reducing volatility.
Show Me the Stocks
We looked for specialty pharmaceuticals with Zacks #1 Ranks, solid balance sheets and a P/E multiple below 15. Below are three specialty pharma stocks that have solid upside potential and trade at attractive valuations.
China Biologic Products (CBPO - Free Report)
China Biologic is a biopharmaceutical company engaged in the research, development, production, and manufacture of plasma-based pharmaceutical products in the People's Republic of China. Its plasma products include Human Albumin, Human Hepatitis B Immunoglobulin, and Thymopolypeptides Injection.
In March, CBPO reported record fourth-quarter and full-year results. Fourth-quarter revenue was $37.6 million, up 186% year-on-year. The company earned $0.44 per share, topping the Zacks Consensus Estimate by 21 cents, or 91.3%. In addition, management issued 2010 revenue guidance of $142-$149 million, an increase of 19%-25% compared to 2009.
After the company’s Q4 report, analysts following the stock increased their estimates for 2010 and 2011. The 2010 Zacks Consensus Estimate increased 22 cents, or 19.0%, to $1.38, while the 2011 Zacks Consensus Estimate rose 39 cents, or 32.5%, to $1.59. China Biologic is scheduled to report first-quarter results on May 17.
The Zacks #1 Rank stock trades at just 9x consensus EPS estimates for 2010 and 8x consensus EPS estimates for 2011.
Impax Laboratories (IPXL)
Impax is a technology-based, specialty pharmaceutical company focused on the development and commercialization of generic and branded pharmaceuticals through the use of its controlled-release and other in-house development and formulation expertise.
The company has debt-free balance sheet and remains well positioned to expand its brand name products portfolio through internal development, licensing agreements, and acquisitions.
On May 4, Impax reported revenues of $323.3 million, up 489% over the year-ago quarter. The company earned $2.06 per share, soaring past the Zacks Consensus Estimate of $0.51. Impax experienced a huge revenue boost from its generic version of the enlarged prostate treatment Flomax, which launched March 2 and gave the company a two-month head start on the competition.
The company earned over $1.50 per share in the quarter from its generic Flomax. Going forward, that drug is expected contribute quarterly EPS of about $0.20.
After the strong first-quarter report, estimates for Impax moved higher. The Zacks Consensus for 2010 is up $1.97 to $3.29, and the Zacks Consensus for 2011 is up 29 cents, or 25.7%, to $1.42.
Impax is a Zacks #1 Rank stock. It is trading at 5x 2010 consensus EPS estimates, but that includes the one-time generic Flomax boost. Based on 2011 consensus estimates, IPXL trades at 12x, which is still an attractive multiple.
Medicis Pharmaceutical Corp. (MRX)
MRX is a specialty pharmaceutical company engaged in the development and marketing of products for the treatment of dermatological and aesthetic conditions. Its products address various conditions or aesthetic improvements, including facial wrinkles, acne, fungal infections, and rosacea.
On May 5, Medicis reported better-than-expected first-quarter results. Sales were up 66.8% year-on-year to $166.5 million. The company reported earnings per share of $0.54, beating the Zacks Consensus Estimate by $0.11, or 25.6%.
MRX’s strong Q1 results prompted analysts to boost their estimates for the next two years. In the last week, the Zacks Consensus Estimate for 2010 is higher by 15 cents, or 7.7%, to $2.09. The Zacks Consensus Estimate for 2011 is higher by 6 cents, or 2.8%, to $2.24.
This Zacks #1 Rank stock trades at 12x consensus estimates for 2010 and 11x consensus estimates for 2011.