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Small Pharma Big Value- HI-tech Pharmacal

March 14, 2011 | About:
bjm1625

bjm1625

0 followers
I have written this report on Hi-tech pharmacal (Hitk) for the March Value Idea Contest.

http://www.gurufocus.com/news.php?id=119858

This analysis is written to show why I am Long and bullish on Hi-Tech Pharmacal. Analysis for this is completely my own research. This report is not posted on any other website. The recent 16%

decline in the stocks price in one day and the 26% decline in the stock price have made this small cap pharmaceutical company a screaming buy.

Business Analysis

Hi-tech Pharmacal is specialty manufacturer and marketer of prescription, over-the-counter and

nutritional products. They develop products in three categories generics,

prescription brands, and over the counter brands. They produce a wide range of products for

various disease states such as glaucoma, asthma, bronchial disorder, skin disorder, allergies, pain, stomach, oral care and other conditions.

Hi-tech Pharmacal’s generic product are primarily prescription items and include oral solutions, topical ointments and nasal spray. The generic division also specializes in the manufacturing of

prescription vitamins through a subsidiary company.

Since the acquisition of subsidiary ECR Pharmaceutical, Hi-tech has been involved with

the development and distribution of branded prescription pharmaceuticals. The products in division includes solutions or cough and cold, allergies, poison ivy and pain relief. The company also has the rights to Zolpimist, a treatment for insomnia.

The Health Care products division markets a line of OTC products primarily for people with diabetes, including Diabetic Tussin, Diabetiderm, Diabetisweet and also the Zostrix brand of products for pain management of diabetic foot pain. They also market Nasal Ease homeopathic allergy reliever.

Distribution Channels

Hi-tech key customers are Mckesson Corp, Cardinal Health, CVS, Walgreen and Wal-Mart.

They also distribute to mass merchandiser and mail order pharmacies.

Fundmentals

Hi-tech currently trades around 9 times forward earning. Hi-tech has gross margins of 55.65% and Operating Margins of 26.34%, which is better than the industry averages for gross and operating margins of 53.02% and 13.15 % respectively. The price to sales ratio of 1.51 is more attractive than the industry average of 3.64.

Hi-tech 5 year revenue growth rate is 18.70. In the same span it earning growth rate is 28.80% while the industry as a whole earnings have only grown around 19.60%. Sales have grown at a rate of 19.32 % vs the industry 8. 5% growth over the last five years.

Management Effectiveness



_


Hi-tech


Industry


S&P


Return on Equity


28.2


5.2


22.4


Return on Assets


24.2


2.7


8.0


Return on capital


28.0


3.2


10.4


Hi-tech management been able to obtain more profit from shareholders invested money than the generic drug industry and theS&P as a whole. They have also beenable to make better returns on invested capital and assets than the industryand S&P.

Balance Sheet

The company currently has roughly $45.10 million in cash and cash equivalents on hand and roughly $756K in debt. The debt to equity ratio is about .49. The company has a current ratio of 7.58, which means they have the ability to pay of outstanding obligations.

Valuation

I am a believer using multiple valuation techniques because no one technique is ever 100% accurate. So to establish a price I like to take a average of sale estimate for the current year and divide them by shares outstanding to get sale per share figure and then multiply by a 10 year

average of price to sales ratio. The numbers go as followed:

10 year average price to sale: 2.54

Average Estimate of sales: $176.96 million

Shares Outstanding: 12.60 million

Sales per share: $14.04

Value = Sales per share x 10 year average

price to earnings ratio= 14.04 x 2.54= $35.66

If you are not comfortable with the above valuation, using the current S&P P/E ratio of 15.4 and the current $2.73earning per share you get a value of $42.04. These valuations give a considerable margin of safety based on the current closing price of 19.60.

Risk

Although the above valuation are achievable, there are certain risk that could hamper the stock. Reading through the annual report from July,2010, they mention risk of FDA regulation of previously unregulated areas. That being said recently, FDA forced a Hi-tech subsidiary to stop distribution of two of their cold and cough syrups. The company has initiated a

formal approval application and is in active pursuit of approval.

Also regulations that have increased the amount of rebate a pharmaceutical company revenue that they must pay from Medicaid reimbursed drug sales to individual states. With the cost of healthcare rising, government may take more action to lower the cost of drugs to the public.

Competition

Competition in the pharmaceutical industry is fierce and Hi-tech competes with competitors such as Bausch and Lomb, Falcon, Wockhardt, who are all larger than Hi-tech and may be able to price more aggressively.

Catalyst

The major catalyst for Hi-tech are as follow:

Recent approval of 180 day market exclusivity of the Gabapentin Oral solution ( the generic form of Pzifer’s Neurontin Oral solution), which is used for posthepetic neuralgia and epilepsy.

The company pipeline consist of 14 products awaiting approval at the FDA and 20

products in development targeting brandand generic sales of $1 billion and over $3 billion respectively.

8.3% of the population have diabetes and diabetes is becoming a wide spread epidemic.

The growing acceptance of generic drugs by medical practitioners.


Rating: 3.5/5 (25 votes)

Comments

bjm1625
Bjm1625 - 3 years ago
Marthoner00,

I agree that there are similarities between Hi-tech and Par but when you look at profitability ratios such as profit margin Hi-tech has been able to squeeze out more profit from there sales than Par. Another big difference I see is the pipeline that Hi-tech has. After glancing over Par annual report there pipeline is just not as strong as the pipeline at Hi-tech. I also feel as I stated in the article, a significant catalyst for Hi-tech for many years to come will be the growing number of Americans being diagnosed with diabetes. There Health Care division, which includes there successful line of diabetes products such as Diabetes Tussin, has seen a 27% growth and I predict that number will continue to rise and become a bigger profit generator for the company.
bjm1625
Bjm1625 - 3 years ago
Marathoner00,

I appreciate your constructive criticism as it helps me polish my analysis skills and become better at it.

The Gabapentin oral solution's $15 million in sales may be a insignificant thing for many larger generic company's such as Par which had about $980 million in product sales, but for a company such as Hi-tech, which only has nets sales of roughly $135 million, it represents roughly 10% of their total sales. Gaining 3 to 4% of the overall sales of the solution, would positively benefit Hi-tech's bottom line.

My arguments for the diabetes division is that it is a growing division as evidenced by the 27% growth from last year's number. My claims are that with diabetes becoming such an epidemic and the emphasis on cheaper drugs, Hi-tech will stand to gain from these events.

I do believe that Hi-tech can continue to have margins above the industry average as a portion of their company operates in what is called a "virtual company' structure in which they outsource the R&D and manufacturing and focus on the marketing. This allows them to keep cost down.

Please leave your comment:


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