A Small Cap Company Worth Noting

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Over the past few weeks I have mentioned how enthusiastic I am about the future of generic drugs, more specifically biosimilars .

When President Obama's healthcare reform bill passed in late March 2010, name- brand pharmaceutical companies immediately scrambled. The timing could not have been worse. Most branded pharmaceutical companies were already nervous about the lack of branded drugs in the pipeline. They were all privy to the fact that during 2011 and 2012 several best-selling, brand name drugs were losing their patent protection.

They knew several of the industry's cash cows, including Lipitor, Plavix and Seroquel were going to be affected.

So, the announcement of an upcoming healthcare reform coupled with a loss of patents led to the inevitable - a sharp increase in brand name pharmaceuticals.

Brand pharmaceutical companies know that the upcoming healthcare reform will severely eat away at their profits - so they are trying to get as much profit out of their current pipeline as possible. Blue Shield of California, Vice President Nancy Stalker agrees, "...because of the increased number of drugs going generic, they profit more from the brand drugs on the market by increasing prices".

Generic drugs already represent 70 percent of prescriptions in the U.S., but that percent will ultimately increase as healthcare reform beings to roll out. The government will place significant cost pressures on pharmaceutical companies to keep their prices low. Lower priced generics mean lower cost to government programs, private insurance companies and most importantly, the patients.

It is inevitable; patients will be encouraged to go with generic alternatives to keeps costs low across the board.

One small-cap company is well prepared to take advantage of the upcoming boom for generic drug makers.

Founded in 1971, Akorn Incorporated (Nasdaq: AKRX) is one of just a few generic pharmaceutical companies that specializes in the hospital market for generic biosimilars

Some of the leading patents expiring are in injectables, so it makes perfect sense that generic injectables will benefit in this environment. And injectables are an area with high margins - very high margins - nearly two to three times alternative oral products.

Margin expansion was the primary reason for Akorn's net income growth in 2010. Sales increased to $86 million from $75 million in 2009, a 14.6 percent increase. But income soared nearly 200 percent and went from negative $25 million to positive $21.8 million.

And gross profit climbed 180% to $42 million in that same period. This trend illustrates the huge surge in margins Akorn has recently enjoyed for its injectables.

In addition to the historically strong financial performance, the future is bright for Akorn. The consensus analyst estimate is that the company will generate $0.20 EPS in 2011 from sales of $114 million. Next year, in 2012, sales are expected to climb 40 percent to $160 million and EPS should jump to $0.25.

Because of its strong growth Akorn is standing on firm financial ground - the company generated $12 million in cash from operations last year and is sitting on $40 million in cash. This is a ton of money for a firm with a market cap of only $655 million.

Most analysts have a $9 price target. But given the recent financial performance, history and current healthcare trend I think that shares of AKRX should hit $11. More specifically, the reason Akorn will do well is the strong growth in biosimilars and specifically injectables, and because it is enjoying huge margins.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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