Able to Gain in Generics

06/13/2003 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

"The generic drug wave is still growing by more than 20% a year," says Tobin Smith, editor of ChangeWave Investing. "ChangeWaves are transformational events that will last for many years; one such ChangeWave is the growing popularity of generic drugs. Says Tobin, "With $65 billion of patented drugs going off patent in the next three years, we will be able to ride this wave for many years to come." Here’s his latest generic play.

"Able Laboratories (ABRX NASDAQ) is our newest aggressive growth buy. Their latest FDA approval came in recently for a generic version of Lortab, a drug used to treat moderate to severe pain, with an estimated market of $230 million. This approval, along with Able's eight other hydrocodone bitartrate and acetaminophen tablet products, represents the completion of ABRX' line of hydrocodone-based products. This will accelerate sales in this space. What we like the best about ABRX is that they specialize in drugs that are hard to manufacture or represent niche products with little competition. This is reflected in their enormous return on equity-- more than 100% a year. They also focus on products that have extended release dosage forms, which are difficult to develop igeneric form.

"We see earnings growth in the 40%-50% range during the next two years as they continue to add new drugs to their portfolio. Top line growth of 67% in the first quarter of 2003 should be repeatable over the near term. The first quarter had some one-time expenses and manufacturing additions that temporarily slowed profit growth. But, this represents an opportunity to get ABRX at a reasonable value vs. its future value as their heavy portfolio of new generic drugs hits the market. Our target for Able is $30 by early 2004 as they announce two or more new generic drug approvals with 180-day exclusivity--this is the key to the stock's appreciation. In addition, they make a nice acquisition candidate for one of the leading generic drug players. Buy under at $20."

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