There are number of factors that have contributed to the rapid growth of the generic pharmaceutical industry. These include growing middle class, increasing healthcare expenditures and longer life expectancy. Also the number of patent expirations for blockbuster innovator drugs contributed to the industry’s growth.
The industry currently stands at $80 billion, an increase from $50 billion in 2004. Many pundits are still bullish over the industry’s expansion for the coming years. According to these pundits, blockbuster drugs valued at $150 billion are set to lose patent protection from 2010 to 2017. Having said this, this will translate to double digit gains for pharmaceutical companies with generic drugs division.
However, there are risks of intense competition for blockbuster drug expirations. A good way to mitigate this risk is to find a generic pharmaceutical company with diverse revenue sources. Such is the case of Aceto Corp. (NASDAQ: ACET). The company is primarily engaged in the sourcing, regulatory support, quality assurance, marketing, sales and distribution of pharmaceutical intermediates, finished dosage form generics, agricultural products and specialty chemicals. It operates in three segments: Human Health, Pharmaceutical Ingredients and Performance Chemicals. It has presence in China, Germany, Singapore, India, Hong Kong, United Kingdom and US along with warehouses globally.
It recently announced its first quarter fiscal 2013 results. Net sales amounted to $111.7 million, an increase of 10.3% compared to the same period last year. Gross profit reached $21.5 million, also an increase of 16.1% year on year. This translates to reported net income of $4.8 million and diluted earnings of $0.18 per share. On a year-on-year basis, this is an increase of 58.9% and 63.6%, respectively. Excluding one-off charges, adjusted net income is at $3.6 million, or an increase of 34.9% from the prior year.
Analysts expect the company to earn $0.82 per share for the current fiscal year. This is an increase of 24.20% compared to the prior year. For the next 5 years, it is forecasted to grow its earnings by 22% a year. This is higher than the pharmaceutical industry’s projected earnings growth of 14.66%.
The robust growth is attributed to its human health division, largely driven by new generic product launches from its Rising Pharmaceuticals subsidiary. Performance Chemicals also showed significant increase from strong demand for agricultural products. These results offset the decline in Pharmaceutical Ingredients for the period.
It has recently launched several notable products assuring investors, strong revenue visibility moving forward. For instance, its subsidiary Rising Pharmaceuticals launched the generic version of Pfizer’s (NYSE: PFE) Cleocin Pediatric, an antibiotic used to cure serious infections caused by bacteria. The drug has estimated sales of $59 million annually. It will also be launching the first generic version of the 125mg and 250mg strengths of Ultramicrosize Griseofluvin tablets. Based on the IMS Health Data, the US market for ultramicrosize Griseofluvin has annual sales of around $16.7 million.
This already constitutes 15% of the projected income of the year on a best case scenario. Going forward, the company is expected to develop more generic versions of the expired patented blockbuster drugs from the bigger pharmaceuticals. This will definitely enhance its profitability in the following years.
Despite these attractive prospects, the stock trades at 10.1 times earnings. This is lower than its 5-year average price earnings ratio of 32.20 times. It also trades at 0.6 times its earnings growth and carries a dividend yield of 2.60%. Assuming the company expands its multiples to 15 times, the stock price could move closer to $12. This implies upside of 26% for the investor. The main share price catalysts include better than expected earnings growth from its generic drugs division and more new product launches.