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A Drug That Adds Pounds Can Also Fatten Your Wallet
By
Michael Brush
August 11, 2005
In an age when most people are losing the battle to shed pounds, you might
find it odd that there’s one pharmaceutical company staking its future on a
drug that helps people gain weight.
But a drug offered by Woodcliff Lake, NJ-based Par Pharmaceutical (PRX)
to help people put on the pounds is no joke.
Its appetizer-enhancing drug helps people who are at risk because they’ve
lost too much weight, typically because they suffer from some ailment like
AIDS that makes it easy to lose weight or hard to eat. People who don’t eat
enough risk dying from opportunistic infections because their immune systems
are weak.
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Par Pharmaceutical’s Megace ES, a synthetic derivative of a naturally
occurring hormone, is a much better version of prior forms of this drug
because you only have to take a teaspoon a day, instead of a big glass.
Plus, it works on an empty stomach. Prior versions of the drug required
patients to eat food with the drug to make it work – an odd request for
people who don’t want to eat.
Megace ES, launched July 6, costs three times as much as the main existing
drug used for the same purpose (also sold by Par Pharmaceutical). Insurance
companies, however, seem to be going along with reimbursement. Par
Pharmaceutical will start trials at the end of this year for use of the drug
in cancer patients – but doctors, of course can already use if off label for
this purpose.
So why has the stock lost weight?
If Megace ES is so promising, why has Par Pharmaceutical’s stock been so
weak? The stock has fallen to $24 this year from above $43.
The reason is simple. Par Pharmaceutical is a generic drug producer making
its first major foray into the higher-margin world of patented – or
“branded” drugs – with this summer’s launch of Megace ES.
But here’s the main problem: Par Pharmaceutical’s revenues from generic
drugs have eroded a lot faster than its sales from Megace ES have increased.
The company has spent lots of money to set up the marketing effort for
Megace ES and explore other branded drugs. Meanwhile, it’s lost exclusive
rights to generic versions of blockbusters like Paxil and Prozac.
The result has been a sharp decline in revenue at a time when expenses are
shooting up – exactly the kind of thing that makes investors lose their
appetite for a stock.
A turnaround in the works
But the Megace ES weight-gain drug could be a big deal. In a sense, Par
Pharmaceutical is robbing from itself by introducing Megace ES, since it
produces the generic form of a similar drug. But branded drugs like Megace
ES carry much higher profit margins – and Megace ES just might expand the
whole market since it seems to work so much better. The company is also
looking to move into other branded drugs.
What’s more, it’s simply too early to count out Par Pharmaceutical in the
generic space, even though investors have had their fill of this stock. The
company has a backlog of around fifty generic drugs that could help turn
things around – if the Food and Drug Administration picks up the pace again
on generic drug approvals.
Par Pharmaceutical is looking to introduce a generic version of the
anti-allergy drug Flonase, a hypertension treatment patch called Catapres-TTS,
and a muscle relaxer used to treat painful musculoskeletal conditions called
Skelaxin, among others.
All told, these changes could push earnings per share back up into $4 to $5
in a few years, believes John LaForge, of SRQ Capital Management in
Sarasota, FL. (Analysts expect Par Pharmaceutical to earn $1.51 per share
next year, according to Thomson Financial.)
If LaForge is right – and he’s betting that way because he has a position in
the stock -- that suggests Par Pharmaceutical could double or more in two
years or so. This kind of drug company normally trades for somewhere between
twelve and twenty times forward earnings.
That might explain why Par Pharmaceutical chief executive Scott Tarriff
bought $240,000 worth of stock for about $24 per share on August 8,
according to Thomson Financial, the insider buy that caught our attention.
The bottom line: Par Pharmaceutical is a beaten up name and there are
surely more disgruntled investors who want out. But the stock looks like it
is basing here. And surprises on the uptake for Megace ES or more generic
drug approvals could give investors a fresh appetite for Par Pharmaceutical
over the next six months. I’d buy right here – with a long-term view, as
always.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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