Beaten Down, But Far from Out

04/23/2013 7:00 am EST


Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

These shares were hit hard for all the wrong reasons, says Taesik Yoon of Forbes Investor. Now growing revenues and earnings provide a buying opportunity.

Cambrex (CBM) provides pharmaceutical firms with products, services, and technologies designed to accelerate and improve the development and commercialization of small-molecule therapeutics.

The company’s offerings include active pharmaceutical ingredients (APIs), advanced intermediates, and enhanced drug-delivery products and technologies. In 2012, CBM derived 54.2%, 37.9%, and 4.6% of sales from Europe, North America, and Asia, respectively, with the rest from other regions.

CBM offers custom development of products and services for clinical phase compounds used by innovator drugmakers. It also provides custom manufacturing of approved, branded, and patented products. These two businesses were responsible for 45% of sales in 2012.

Sale of APIs used to produce generic pharmaceuticals and controlled substances accounted for 36% and 14% of sales, respectively. The remainder was derived from its drug-delivery business, which consists of products utilizing CBM’s taste masking and delivery technologies, and finished dosage form products, such as gums for nicotine replacement therapy.

Gross sales in the fourth quarter of 2012 climbed 4.8% year-over-year, to $70.4 million. CBM’s operating margin improved by 187 basis points to 10.54%, as it benefited from higher volumes and a favorable product mix.

Adjusted income from continuing operations, which excludes favorable tax benefits and adjustments totaling $39.4 million, jumped 60% to $4.8 million, or 16 cents per share. This was three cents better than expected.

The strong Q4 results have helped the stock gain about 10% so far this year. But it has yet to fully recover from the severe sell-off from mid-October to mid-November last year—one that was exacerbated by lower-than-expected Q3 earnings.

This earnings miss was primarily the result of greater-than anticipated expenses, mostly associated with greater performance-based stock compensation triggered by a higher stock price.

It also incurred a higher effective tax rate of 32.5%, versus 28.5% the prior year and 23.1% in the first half of 2012, due to an increase in reserves for unrecognized tax benefits. This stems from ongoing litigation with European tax authorities regarding tax deductions taken by one of its subsidiaries in prior years.

The key takeaway is the fact that the earnings shortfall in the third quarter was primarily non-operating-expense-related and not a reflection of weakening demand, which is more difficult to overcome.

The return to earnings growth in Q4 further supports this view. So does guidance for 2013, for which CBM expects full-year sales to increase 8% to 12%. It also projects full-year operating income of $40 to $44 million, up 12% to 23% from 2012.

Yet much like the prior year, we believe this guidance is on the conservative side, due to favorable industry trends and market opportunities, including:

  • the growth of contract manufacturing for the innovator pharmaceutical market, due to increased preference by its customers to source APIs from Western suppliers
  • emerging and midsized biopharmaceuticals rebuilding their clinical pipelines, as evidenced by the number of FDA approvals in 2012, which was the highest since the mid-1990s.

Furthermore, CBM expects the continuation of the recent trend by large pharmaceutical companies to downsize their manufacturing capacity, which should result in additional demand for highly reliable outsourcing partners with significant industry experience.

The generic drug market also offers substantial opportunities, as the desire for lower-cost medications from developing markets and the increased penetration in developed markets, stemming from the need to control health-care costs, fuels greater demand for generics.

CBM currently has 15 new generic APIs in various phases of development and ten additional APIs under evaluation for potential development. Similarly, within its custom development business, the company currently has 11 Phase III products in its pipeline that are expected to provide additional sources for sales growth.

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