House Democrats have an agenda... They intend to repeal a provision in the 2003
Medicare drug benefit law that prevents the government from being involved in
negotiations of prescription drug prices. This would essentially unravel
Medicare Part D as it’s known today.
Democrats believe this will lower prescription drug prices and be great for
America.
We couldn’t disagree more.
My colleague, Craig Walters, has found a company that could benefit if the White
House wins. This is a pure-play generic small-cap producer, selling at a very
attractive price.
At Agora Financial, we don’t believe government has a place in negotiating lower
drug prices. And as an investor, I’d be willing to place capital on a small-cap
drug company that’s poised to grow if the government lets the free market do
what it does best.
If the Democrats get their way on this issue, then you want to stay away from
generic drug companies. But if you think the White House will win, then this is
the stock to own…
-Addison Wiggin
The Way to Profit if Medicare Part D is Left Intact
by Craig Walters
One of the producers of Lisinopril, the No. 4 most-prescribed drug in the United
States., is one of the largest generic companies in the world. It also happens
to be a very rare virtual pure play on generics.
The company is called Par Pharmaceutical Companies Inc. (NYSE: PRX).
As a business, Par Pharmaceutical is fairly easy for investors to understand.
It’s a drug company with two primary segments: a generics business, and a very
small branded drug segment. The company is the fifth-largest generics company in
the United States, with annual sales of around $500 million.
Par’s brand segment is continuing to make investments in new candidates. And
ultimately, this is where margin improvements will spring.
The Stock to Own if the White House Wins When President Clinton’s health
plan was defeated, we began to see the start of a great bull market in
pharmaceutical stocks. It was also coincident with an unbelievable bull market
in the broader market as well.We could be in store for something similar.
If Democratic lawmakers do not get drug price negotiating powers for Medicare,
look for a black cloud-lifting effect across this sector, possibly moving it out
of the sideways trading range we’ve witnessed over the last couple of years.
The fact of the matter is that PRX is beaten down, and investors are scared to
buy, because of Congress:
Note the bottom in PRX’s share price in the summer of 2006, and the trend that’s
been quietly forming over the second half of the year.We think the stock is
constrained by drug pricing uncertainty. This is the time to buy — before it
becomes clear which side will win.
PRX’s income statement shows us a company that is not posting the record numbers
that it did a year ago, but sales growth and profitability are still strong and
will likely improve when brand products, with their higher margins, contribute
more to the overall revenue mix.
Par’s capital structure is stout, with $148 million in cash, or $4.35 per share.
Long-term debt to total capital is 23%, and the company can easily service it.
The market is clearly scared of this generics stock and does not yet want to
place much value on its burgeoning brand business, as evidenced by its low
trading multiples.
With investors scared, we have a nice opportunity.
