mlkrborn
14 years ago
Report: jan 28 10
Caraco Pharmaceutical Laboratories, Ltd. Reports Results for the Third Quarter and First Nine Months of Fiscal Year 2010
Date : 01/28/2010 @ 5:43PM
Source : PR Newswire
Stock : (CPD)
Quote : 4.24 -0.09 (-2.08%) @ 11:05AM
Caraco Pharmaceutical Laboratories, Ltd. Reports Results for the Third Quarter and First Nine Months of Fiscal Year 2010
DETROIT, Jan. 28 /PRNewswire-FirstCall/ --
Caraco Pharmaceutical
Laboratories, Ltd. (NYSE Amex: CPD) generated net sales of $52.0 million and $178.4 million for the third quarter and first nine months of Fiscal 2010, respectively, compared to $55.7 million and $286.2 million, respectively, during the corresponding periods of Fiscal 2009. Net sales decreased during the third quarter and first nine months of Fiscal 2010, in comparison to the corresponding periods of Fiscal 2009, primarily as a result of the adverse effect on sales of Caraco-owned products (those products for which Caraco owns the ANDAs) due to the actions of the FDA and the cessation of manufacturing, and in part due to the negative impact of our voluntary recalls. Sales of distributed products were lower during the first nine months of Fiscal 2010 over the corresponding period of Fiscal 2009 due to higher sales of Paragraph IV products during the first nine months of Fiscal 2009, particularly sales of certain Paragraph IV products which were launched by the Company during the fourth quarter of Fiscal 2008 under the distribution and sale agreement with Sun Pharma. These product sales may or may not be sustainable, as previously disclosed. The sales of distributed products were also lower due to price erosion on the products sold, partially offset by new product launches. The Company incurred a net pre-tax loss of $4.9 million during the third quarter and $8.8 million during the first nine months of Fiscal 2010, as compared to earning net pre-tax income of $6.5 million and $33.4 million, respectively, during the corresponding periods of Fiscal 2009. Net pre-tax income in the third quarter of Fiscal 2010 was lower primarily due to the cessation of manufacturing at the Company's Michigan facilities resulting in the loss of revenues from such products. The net pre-tax loss for the first nine months of the current fiscal year was due to a reserve created, in the amount of $15.9 million, relating to inventory seized by the FDA, and also due to the cessation of manufacturing at the Company's Michigan facilities, partially offset by non-recurring income earned during the second quarter of Fiscal 2010 in the amount of $20.0 million as part of an asset purchase agreement arising out of a settlement agreement entered into by the Company. Such income is not expected to recur in future periods. Caraco incurred a net loss of $3.0 million and $5.8 million during the third quarter and first nine months of Fiscal 2010, as compared to net income of $5.1 million and $22.9 million, respectively, during the corresponding periods of Fiscal 2009. Caraco generated cash from operations in the amount of $15.5 million during the first nine months of Fiscal 2010, as compared to generating cash from operations in the amount of $0.2 million during the corresponding period of Fiscal 2009.
As previously disclosed, on June 25, 2009, U.S. Marshals, at the request of the FDA, arrived and seized drug products manufactured in our Michigan facilities. The seizure also included ingredients and in-process materials held at these same facilities. The estimated value of such seized inventory as of December 31, 2009 was $24.0 million. Products sold and distributed by Caraco that are manufactured by third parties and outside of these facilities are not impacted and distribution and marketing of these products continues. The Company has also transferred certain Caraco-owned products to additional alternate manufacturing sites that would allow the Company to regain revenues from those products while Caraco completes the necessary remedial actions that would lead to resumption of its manufacturing operations.
As previously disclosed, the Company voluntarily entered into a Consent Decree of Condemnation, Forfeiture and Permanent Injunction ("Consent Decree") with the FDA on September 29, 2009. As stipulated in the Consent Decree, the Company will attempt to have the seized inventory released. The Company believes that, except for the raw materials which were opened solely for the purpose of sampling, the estimated value of which is $8.1 million, all other seized inventory would be difficult to recondition. Accordingly, a reserve in the amount of $15.9 million has been created as of December 31, 2009 for this remaining inventory. In accordance with the Consent Decree, the Company has also provided third party certification to the FDA and requested the release of raw materials which were opened solely for the purpose of sampling.
The Consent Decree provides a series of measures that, when satisfied, will permit the Company to resume manufacturing and distributing those products which are manufactured in its Michigan facilities. In accordance with the Consent Decree, the Company has engaged a consulting firm which is comprised of current good manufacturing practice ("cGMP") experts and has submitted a work plan to the FDA in October 2009 for remedial actions leading to resumption of its manufacturing operations. Some additional details and clarifications to the work plan were submitted to the FDA for its approval on January 14, 2010. As a result of the FDA action, Caraco voluntarily ceased manufacturing operations and instituted, in two phases, indefinite layoffs of approximately 430 of our employees. The Company has subsequently started recalling some of these employees in conjunction with its efforts to restart its manufacturing activities. Further details on the results of operations are provided below.
Caraco earned gross profit of $3.1 million in the third quarter of Fiscal 2010 and incurred a gross loss of $4.7 million during the first nine months of Fiscal 2010, as compared to earning gross profit of $15.9 million and $61.5 million, respectively, during the corresponding periods of Fiscal 2009. The gross loss in the first nine months of Fiscal 2010 was, in large part, due to a reserve of $15.9 million provided on the inventory seized by the FDA, as well as lower sales of both distributed and Caraco-owned products. The decrease in gross profit in the third quarter of Fiscal 2010, as compared to the corresponding period of Fiscal 2009 was primarily due to the negligible sales of Caraco-owned products.
Selling, general and administrative ("SG&A") expenses during the third quarter and first nine months of Fiscal 2010 were $5.4 million and $15.9 million, respectively, as compared to $3.7 million and $11.8 million, respectively, during the corresponding periods of Fiscal 2009, representing increases of 45% and 34%, respectively. SG&A expenses, as a percentage of net sales, increased to 9% for the first nine months of Fiscal 2010, as compared to 4% for the corresponding period of Fiscal 2009. The higher percentage of SG&A is partly due to the lower sales in the current period versus the corresponding period last year.
Total R&D expenses incurred for the third quarter and first nine months of Fiscal 2010 were $2.8 million and $8.3 million respectively, as compared to $5.8 million and $16.9 million, respectively, during the corresponding periods of Fiscal 2009. The R&D expenses during the first nine months of Fiscal 2010 were lower compared to those during the corresponding period of Fiscal 2009 as we were reimbursed a certain amount relating to certain product litigation costs during the second quarter of Fiscal 2010, as part of a settlement agreement, as previously disclosed. Although R&D expenses have decreased in the current period due to the focus of the Company on remediating FDA concerns, they are likely to increase once the company refocuses on new product filings and approvals with the FDA.
Caraco filed two Abbreviated New Drug Applications ("ANDAs") relating to two products with the FDA during the first nine months of Fiscal 2010. The Company has not received FDA approval for any ANDAs during the first nine months of Fiscal 2010 and does not expect to receive any approvals for products out of its Michigan facilities until resolution of the FDA's concerns. The total number of ANDAs pending approval by the FDA as of December 31, 2009 was 31 (including four tentative approvals) relating to 27 products.
As previously disclosed, the FDA has initiated certain actions and, as a consequence, production at the Company's Michigan facilities has voluntarily been ceased. This will adversely affect the overall profitability of the Company in the near term. The Company has initiated a reduction in various expenses in an effort to bring its expenses in line with its current levels of sales. Such reduction is expected to continue until FDA concerns are resolved and the Company resumes its manufacturing activities, of which there is no assurance. As of December 31, 2009, we have $67 million in cash and another $10 million in short-term investments, including the proceeds from a loan in the amount of $16.2 million, currently classified as a short term liability. The Company believes that its cash flow from operations and cash balances will continue to support its ongoing business requirements, however, because of, among other things, decreased customer confidence, the uncertainty of future costs of FDA compliance and associated costs, there can be no assurance. Caraco intends to continue to work with the FDA to effectively and expeditiously resolve remaining concerns, although there can be no assurance that the Company will succeed in reaching such a resolution or the terms thereof.
This press release should be read in conjunction with our quarterly report on Form 10-Q which will provide more detailed information on the results of the third quarter of Fiscal 2010.
Detroit-based Caraco Pharmaceutical Laboratories, Ltd., develops, manufactures, markets and distributes generic pharmaceuticals to the nation's largest wholesalers, distributors, drugstore chains and managed care providers.
surf1944
14 years ago
Caraco Pharmaceutical Laboratories, Ltd. Reports Results for the Second Quarter and First Six Months of Fiscal Year 2010
Press Release
Source: Caraco Pharmaceutical Laboratories, Ltd.
On 9:13 am EDT, Tuesday October 27, 2009
Companies:Caraco Pharmaceutical Laboratories Ltd.
DETROIT, Oct. 27 /PRNewswire-FirstCall/ -- Caraco Pharmaceutical Laboratories, Ltd. (NYSE Amex: CPD) generated net sales of $78.4 million and $126.4 million for the second quarter and first six months of Fiscal 2010, respectively, compared to $122.2 million and $230.5 million, respectively, during the corresponding periods of Fiscal 2009. Sales of distributed products were significantly lower for the second quarter and first six months of Fiscal 2010, in comparison to the corresponding periods of Fiscal 2009 primarily as a result of significantly higher sales of Paragraph IV products during both periods of Fiscal 2009. Sales of distributed products were also lower due to price erosion for the products sold. The Company continues to remain competitive on products sold and marketed during the first six months of Fiscal 2010. However, during the second quarter and first six months, sales of Caraco-owned products (those products for which Caraco owns the ANDAs) were adversely affected by the actions of the FDA as discussed below and the cessation of manufacturing and in part due to the negative impact of voluntary recalls. Caraco earned a net pre-tax income of $10.6 million during the second quarter and incurred a net pre-tax loss of $3.9 million during the first six months of Fiscal 2010, as compared to earning net pre-tax income of $12.3 million and $26.9 million, respectively, during the corresponding periods of Fiscal 2009. Net pre-tax income in both periods of the current fiscal year was lower as the Company has created a reserve in the amount of $7.5 million and $15.9 million, respectively, during the second quarter and first six months of Fiscal 2010 relating to the inventory seized by the FDA. Pre-tax income was positively affected by non-recurring income of $20.0 million as part of an asset purchase agreement arising out of a settlement agreement entered into by the Company during the current period that is not expected to recur in future periods.
The Company voluntarily entered into a Consent Decree with the FDA on September 29, 2009. As stipulated in the Consent Decree, the Company will attempt to have some of the seized inventory released. As previously disclosed, the estimated value of this inventory of drug products manufactured in Caraco's Michigan facilities including ingredients and in-process materials was $24.0 million, as of September 30, 2009. Products sold and distributed by Caraco that are manufactured by third parties and outside of these facilities are not impacted and the Company continues distribution and marketing of these products. The Company believes that, except for the raw materials which were opened solely for the purpose of sampling, the estimated value of which is $8.1 million, all other such inventory would be difficult to recondition. Accordingly, a reserve in the amount of $15.9 million has been created as of September 30, 2009 for this remaining inventory. As a result of the FDA action, Caraco has voluntarily ceased manufacturing operations and instituted, in two phases, indefinite layoffs of approximately 430 employees. The Consent Decree provides a series of measures that, when satisfied, will permit the Company to resume manufacturing and distribution of those products that are manufactured in its Michigan facilities. The Company has engaged a consulting firm which is comprised of cGMP experts, in accordance with the Consent Decree, and has submitted a work plan to the FDA for remedial actions leading to resumption of its manufacturing operations.
Caraco incurred a gross loss of $4.1 million and $7.7 million, respectively, during the second quarter and first six months of Fiscal 2010, as compared to gross profit of $22.0 million and $45.6 million, respectively, during the corresponding periods of Fiscal 2009. The gross loss in the second quarter and first six months of Fiscal 2010 were, in large part, due to a reserve of $7.5 million and $15.9 million provided on the inventory seized by the FDA during the respective periods. The gross profit has also decreased due to negligible sales in second quarter of Caraco-owned products and lower sales of both distributed as well as Caraco-owned products in the first six months of Fiscal 2010.
Selling, general and administrative ("SG&A") expenses during the second quarter and first six months of Fiscal 2010 were $6.8 million and $10.5 million, respectively, as compared to $4.2 million and $8.1 million, respectively, during the corresponding periods of Fiscal 2009, representing increases of 60% and 30%, respectively. SG&A expenses, as a percentage of net sales increased to 8% for the first six months of Fiscal 2010, as compared to 3% for the corresponding period of Fiscal 2009. The higher percentage of SG&A is partly due to the lower sales in the current period versus the corresponding period last year. Also during the second quarter of Fiscal 2010, the Company recorded additional expenses related to a) severance paid to its former CEO, b) legal and professional consultation fees related to FDA issues and c) payments made to its customers in lieu of contractual unfulfilled product supply obligations.
Total R&D expenses for the second quarter and first six months of Fiscal 2010 were $(1.5) million and $5.6 million, respectively, as compared to $5.6 million and $11.1 million, respectively, during the corresponding periods of Fiscal 2009. The R&D expenses during the second quarter of Fiscal 2010 were lower compared to those during the corresponding period of Fiscal 2009 as Caraco was reimbursed a certain amount relating to certain product litigation costs as part of a settlement agreement, as previously disclosed. Also, the R&D costs were lower due to non-incurrence of any major expenses in the second quarter relating to bio-equivalency studies and material costs for development.
Caraco has filed two Abbreviated New Drug Applications ("ANDAs") relating to two products with the FDA during the first six months of Fiscal 2010. Caraco has not received FDA approval for any ANDAs during the first six months of Fiscal 2010 and does not expect to receive any approvals for products out of the Detroit facility until the Company resolves the FDA's concerns. The total number of ANDAs pending approval by the FDA as of September 30, 2009 was 31 (including four tentative approvals) relating to 27 products.
The FDA's action and the Company's voluntary actions have had, and are expected to continue to have, a material adverse effect on operations and operating results. At September 30, 2009, the Company had $73 million in cash and $10 million in short-term investments, including the proceeds from a loan of $17.2 million, currently classified as a short term liability. The Company believes that its cash flow from operations and cash balances will continue to support its ongoing business requirements, however, because, among other things, of the uncertainty of future costs of FDA compliance and associated costs, there can be no assurance. Caraco believes that it will emerge a stronger company on a long-term basis. In the last two years the Company has added considerable amount of infrastructure in its quality control laboratories. The Company's current focus remains on manufacturing and quality assurance. In the near term, Caraco will utilize part of its R&D team to help with technical validations and compliance initiatives. The Company's R&D expense will decline as a result. The Company anticipates gaining back its momentum on filings of new ANDAs internally once the compliance initiatives and technical needs are satisfied. Any third party development in process will continue. This press release should be read in conjunction with our quarterly report on Form 10-Q which will provide more detailed information on the results of the first quarter of Fiscal 2010.
Detroit-based Caraco Pharmaceutical Laboratories, Ltd., develops, manufactures, markets and distributes generic pharmaceuticals to the nation's largest wholesalers, distributors, drugstore chains and managed care providers.
Safe Harbor: This news release contains forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Without limitation, the words "believe" or "expect" and similar expressions are intended to identify forward-looking statements. Such statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties are contained in the Corporation's filings with the Securities and Exchange Commission, including Part I, Item 1A of our most recent Form 10-K, and include but are not limited to: information of a preliminary nature that may be subject to adjustment, potentially not obtaining or delay in obtaining FDA approval for new products, governmental restrictions on the sale of certain products, development by competitors of new or superior products or less expensive products or new technology for the production of products, the entry into the market of new competitors, market and customer acceptance and demand for new pharmaceutical products, availability of raw materials, timing and success of product development and launches, dependence on few products generating majority of sales, product liability claims for which the Company may be inadequately insured, material litigation from product recalls, the purported class action lawsuits alleging federal securities laws violations, delays in returning the Company's products to market, including loss of market share, increased reserves against the FDA-seized inventory, and other risks identified in this report and from time to time in our periodic reports and registration statements. These forward-looking statements represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update our forward-looking statements.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS OF INCOME
Six Months ended Quarter ended
September 30, September 30,
2009 2008 2009 2008
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net sales $126,445,911 $230,465,165 $78,375,895 $122,188,425
Cost of goods
sold 118,243,578 184,879,891 75,010,528 100,186,562
----------- ----------- ---------- -----------
Gross profit before
reserve for
inventory seized
by FDA 8,202,333 45,585,274 3,365,367 22,001,863
Reserve for
inventory seized
by FDA 15,950,188 - 7,503,654 -
---------- --- --------- ---
Gross (loss)
profit (7,747,855) 45,585,274 (4,138,287) 22,001,863
Selling, general
and administrative
expenses 10,452,575 8,055,246 6,793,364 4,237,244
Research and
development costs -
other 5,592,951 11,065,940 (1,492,184) 5,581,711
--------- ---------- ----------- ---------
Operating (loss)
income prior to
non-recurring
income (7,843,193) 26,464,088 (1,935,813) 12,182,908
Non-recurring
income 20,000,000 - 20,000,000 -
---------- --- ---------- ---
Operating (loss)
income 12,156,807 26,464,088 18,064,187 12,182,908
---------- ---------- ---------- ----------
Other (expense)
income
Interest expense (258,085) - (127,135) -
Interest income 264,660 420,259 160,204 142,486
Loss on sale of
equipment (114,272) - - -
Other income 46,309 - 11 -
------ --- -- ---
Other (expense)
income - net (61,388) 420,259 33,080 142,486
------- ------- ------ -------
(Loss) income
before income
taxes 12,095,419 26,884,347 18,097,267 12,325,394
Income tax
(benefit)
expense (1,100,256) 9,020,309 3,925,076 3,901,421
Net (loss) income $13,195,675 $17,864,038 $14,172,191 $8,423,973
=========== =========== =========== ==========
Net (loss) income
per common share
Basic (0.07) 0.54 0.17 0.25
Diluted (0.07) 0.44 0.16 0.21
Weighted number of
shares
Basic 38,138,937 33,035,602 38,723,585 33,389,920
Diluted 38,138,937 40,565,004 40,468,406 40,593,328
mlkrborn
15 years ago
UNDERVALUED? UNDERAPRECIATED? PART 1 ALPHA ARTICLE -full text..
Investment Thesis
Caraco (CPD) has annual $350M in sales and $32M in net income. The company has almost no CapEx, and over $45 in net cash. The company sells for a market cap of $116M and an EV of $70M, an EV-to-earnings multiple of 2x. The management has publicly stated a 25% sales growth for FY 2009 and should be growing revenue in high double-digits after that. At current prices, you are getting a dollar for 15 cents (we think the company should sell for 12x net income).
The main drag on the stock price is a recent FDA drug seizure at its facilities. This puts a hold on any manufacturing from their facilities, although the company can still distribute drugs produced by different companies. The company has a distribution deal with Sun Pharma, the largest pharma company in India and 76% owner of Caraco, to distribute and market drugs manufactured at Sun Pharma's facilities. The company has stated that while it works out the FDA issues, the company's distribution revenue will create enough cash flow to cover its expenses.
The Business
Caraco Pharmaceuticals is a generic drug producer in a highly competitive market. Once a branded drug comes off patent, a generic drug producer can sell its product in direct competition with the branded drug. A generic drug product is one that is comparable to a branded drug in dosage form, strength, performance characteristics, among other criteria. The generic drugs are not required to include preclinical (animal) and clinical (human) data, since the branded drugs have already passed the testing. This makes it a huge cost advantage for the generic drug and also expedites the process from R&D to distribution.
The 1984 Hatch-Waxman Act (also known as Drug Price Competition and Patent Restoration Act) was a major turning point for the generic drug industry. Hatch-Waxman established the criteria which has become the foundation of generic product approval. The process to produce a generic drug is: generic drug producer files an Abbreviated New Drug Application [ANDA] with the FDA. FDA reviews the application for many criterias including whether the drug meets the bioequivalence and patent violation. Once the FDA approves the application the generic company can begin to produce the medication. The entire process usually takes around 12 to 18 months, although with the current backlog it can take longer than 18 months.
If the generic producer is the first company to file a generic drug application for a branded product, the company receives a Para IV status. The Para IV status allows the generic drug maker a 180 days exclusive distribution of the generic. This allows the generic drug maker to gain from high margins before other generic drug manufacturers enter the market and lower prices.
The generic drug industry is expected to grow at a healthy rate going forward. With a number of blockbuster drugs losing patent in the next 3 yrs, the generic market is expected to grow at double-digit rates from 2008-2011. The generic market is expected to generate over $69 B in revenues by 2011.
The Company
Caraco Pharmaceutical Laboratories is a Detroit based generic drug manufacturer. It has its manufacturing and distribution facilities located in Detroit but has a major backing from a big international pharma company. Although it is a small cap company, it low-cost manufacturing coupled with the backing from a big pharma company, Sun Pharma, provides it with R&D and manufacturing capabilities that allow it to complete with much bigger companies.
The company has been growing at a torrid pace. In FY 2008 the management predicted 35% sales growth. The company delivered almost 200% growth. For FY 2009 the management predicts 25% sales growth. In the first six months of the FY, it has produced over 78% growth.
The company has a strong pipeline of drugs awaiting FDA approval. The company currently has 23 generic drugs awaiting approval. The company has received 4 approvals this FY. Also, it has a distribution agreement with Sun Pharma, which allows Caraco to market and distribute Sun Pharma’s generics. The Sun Pharma and Caraco pipeline includes 88 filings awaiting approval, with Sun Pharma providing guidance for filing 30 new drugs for approval in FY 2009. The company has a strong future and growth.
Compared with other generic drug producers, Caraco is one of the smaller companies in the industry. Caraco currently has a market cap of 145M, compared with the leaders in the industry: Teva (TEVA) (34B), Mylan (MYL) (2B), Watson (WPI) (2B), Perrigo (PRGO) (3B). Caraco’s sales are much smaller than competition. Caraco had $350M in sales in FY 2008, compared to Teva ($9B), Watson ($2.5B), Mylan ($2B), Perrigo ($1.8B).
By market cap, the company looks small compared to its peers. Although, the company’s partnership with Sun Pharma gives it access to R&D facilities that its peers enjoy. This is at the core of the value proposition of Caraco, for some reason the market hasn’t realized this yet. Sun Pharma has publicly stated that it expected huge growth in the US market and Caraco has been the major driver for this growth. Also, with Sun Pharma’s recent acquisitions, Caraco is positioned to benefit enormously.
The Caraco and Sun Pharma Relationship
Sun Pharma is one of the largest pharmaceutical companies, the largest via market cap, in India. It owns about 76 percent of Caraco, including both common and preferred stock. Sun is the largest drug company in India, valued by market size, at over $5 billion.
In 1997 Caraco was struggling to survive. The company had $28M in accumulated losses and practically no ANDAs awaiting approval. The company had a FDA approved manufacturing site in Detroit but with no ANDAs awaiting approval, it was like a zombie.
During that time, Sun Pharma was looking to enter the US generic market. In 1997, Sun Pharma made a purchase of 5.3 million shares for $7.5 million. Sun Pharma also provided over $9.7M in debt. Sun Pharma’s investment in Caraco was the turnaround point for the company. Not only was capital provided to Caraco, Sun Pharma put in place its own management team to lead the company back to growth and profitability.
In August of 1997, Caraco entered into a technology transfer agreement with Sun Pharma. Under the terms of the pact Sun Pharma was to transfer 25 generic products in exchange for 544,000 shares apiece over a five year period. The technology transfer for each medication took place once a bioequivalency test was completed on the generic drug. Sun Pharma transferred 13 drugs under this agreement.
In 2002, Caraco and Sun entered into a new technology transfer agreement. Similarly to the previous arrangement, Sun Pharma agreed to supply Caraco with 25 generics over a five year period in exchange for 544,000 preferred shares apiece. These preferred shares are not convertible for three years. As of the most recent quarterly filing all 25 products have been selected for transfer and have passed bioequivalency tests.
Under both of these agreements Caraco had the right to sell products in only the United States and Puerto Rico. Also, Caraco expenses all technology transfers as R&D expenditure on its income statement. In Caraco’s quarterly and annual SEC filings they expense the technology transfers as non-cash R&D expenditure at the current market value of Caraco’s shares.
In FY 2007 Sun Pharma and Caraco entered into a marketing agreement where Caraco will market and distribute Sun Pharma’s products. The margins on these marketing and distribution products is capped at 10% for Caraco. Although the margins are much lower than the manufactured products (with are around 46%), Caraco gains an additional source of revenue stream.
In FY 2008, Sun Pharma and Caraco entered into an agreement where Caraco will market and distribute Sun Pharma’s Para IV products. Caraco’s margins are capped at 8% for these Para IV products. Although the margins are low, Sun Pharma’s Para IV are usually for multi-billion dollar branded drugs. The agreement provides another additional source of revenue stream for Caraco.
In 2005, Sun Pharma purchased a manufacturing facility, out of bankruptcy, in Ohio. Although Sun Pharma hasn’t done much with that facility, recently Sun Pharma took one of its top executives from Caraco and placed him in charge of the Ohio plant. Also, Caraco has signed multiple agreements with a third-party for distribution and marketing of products. Caraco currently had agreements to produce 4 different products with unaffiliated third party firms. It is very likely that Sun Pharma sees Caraco as a distribution and marketing arm to get the Ohio manufacturing facility into profitability.
Although the technology transfer agreement between Sun Pharma and Caraco has ended, Sun Pharma has a strong vested interest, 76% equity interest, in Caraco. Also the recent agreements between Sun Pharma and Caraco show that Caraco has plenty to gain from the relationship with Sun Pharma. Sun Pharma’s founder and CEO, Dilip Sanghvi, serves on the Board of Caraco, along with 3 other Sun Pharma executives on the Board.
Caraco’s Business
FY 08
FY 07
FY 06
FY 05
Sales
$350M
$117M
$83M
$64M
Net Income
$32M
$26M
($10M)
($2M)
Non Cash R&D Expense
$12M
$12M
$35M
$26M
Net Income + Non Cash R&D
$44M
$38M
$25M
$24M
Cap Ex
($5M)
($6M)
($3.6M)
($.6M)
Caraco’s turnaround has been spectacular for Sun Pharma and Caraco. From the 1997, near death status, Caraco has become a growth machine. It has gone from practically zero ANDAs awaiting approval in 1997 to 23 ANDAs awaiting approval as of October 2008. It has gone from an accumulated $28M in NOLs, to a net income of over $35M (this doesn’t include $12M in non-cash R&D expense due to the technology transfer agreement) in FY 2008. Also the company has gone from buried in debt and no cash, to a balance sheet with zero debt and over $30M in cash.
Management expects sales to grow by 25% in FY 2009. Compared to the 6-months of FY 09 to FY 08, Caraco has grown sales by over 70%.
Caraco continues to expand its product offerings and ANDAs awaiting approval. The company currently has 23 ANDAs awaiting approval for 19 products. Also, with its distribution agreement with Sun Pharma the company has access to additional products awaiting ANDA approval. Combines Caraco and Sun Pharma, there are 95 ANDA awaiting approvals. So the growth pipeline looks extremely good.
Caraco also continues to expand its manufacturing facilities. At the start of 2007, Caraco owned 114,000 sq ft and leased 67,000 sq ft of manufacturing facilities. In 2008, Caraco acquired 135,000 sq ft of distribution warehouse. Also, the company started a building an expansion facility of 140,000 sq ft in Detroit. Once the expansion facility is ready to go, the company plans to double its headcount. The cost of new facility is estimated at $14.5. Caraco secured the deal under very favorable terms with the city of Detroit and the state of Michigan where these local governments give the company $14 million of tax abatements over the next 12 years. Also, the State of Michigan will provide a comprehensive job training and retention program, which the State values at $13M. The training program will be focused on developing coursework at community colleges for pharmaceutical manufacturing. This will decrease Caraco’s operating costs and should make its employees more productive.
Competition
Caraco is like a hobbit compared to its competitors. Although it might be small in size, you will be amazed by how big its feet are.
All data is 12 month trailing
Caraco
Teva
Perrigo
Watson
KV Pharma (KVA)
Sales
500M
10.6B
1.9B
2.5B
620M
SG&A Expense
15M
2.35B
288M
420M
226M
Pre-tax Profit
55M
2.193B
191M
331M
141M
Net Income
40M
1.89B
139M
220M
95M
EPS (34.74M outstanding)
1.01
SG&A as % of Sales
3%
22%
15.15%
16.8%
36.45%
Pre-tax Profit Margin
11%
20.69%
10%
13.24%
22.75%
Market Cap
144M
34.8B
3B
2.6B
784M
Shares Outstanding
34.74M
Cash
33M
2.85B
250M
352M
134M
Long Term Debt
0M
5.1B
893M
825M
267M
EV (Mkt cap + LT Debt – Cash)
111M
37B
3.64B
3.07B
917M
Earnings Yield
25%
The above table has mixed results, so let’s look at it carefully.
Caraco has over 20% of market cap in cash and zero debt. Compared to its peers, it has the most amount of cash compared to market cap and its zero debt allows it to operate without needing to access the capital markets. With an EPS of $1 and a stock price of $4.15, you get an earnings yield of almost 25% for a company that is growing over 25%.
The SG&A expense shows that Caraco has the lowest SG&A expense compared to its peers. One of the strengths of Caraco, and Sun Pharma, is that their management is extremely efficient in running a low-cost operation compared to peers in the industy. Sales of the company have increased from 64M in 2005 to 350M in 2008, in the meanwhile, SG&A has increased from 5.8M in 2005 to 14.3M in 2008.
Caraco’s pre-tax profit margin is low compared to its peers. The main reason for this is the distribution and marketing agreements that state 8% margins on Sun Pharma Para IV drugs and 10% margins on Sun Pharma ANDA drugs. Since Sun Pharma is taking all the risk in R&D, filing, waiting for approval, and legal costs the margins that Caraco more than compensated for the risk it is taking, which is zero. Caraco gains from flow-thru of the additional stream of sales dropping to the bottom line.
Let’s take a look at what happened in the past two quarterly reports.
Q2 2008
Q2 2007
Q1 2008
Q1 2007
Sales
122M
41M
108M
35M
SG&A
4.23M
3M
3.8M
3.4M
Pre-tax profit
12M
4M
14.5M
9.6M
SG&A as % of Sales
3.47%
7.3%
3.5%
9.7%
Sales increase compared to prev quarter
81M
73M
Pre-tax profit increase from prev quarter
8M
5M
Estimated Gross Margin on increased sales
9%
9%
Gross Profit
7.29M
6.57M
We know that the distribution deal with Sun Pharma has a 8-10% gross margin. Based on the information above, if we assume that all the sales increase is coming from the sales via the distribution agreement we can see that most of the sales is dropping to pre-tax income. I’ve taken an average 9% gross margin to apply to the additional sales. In Q2 of 2008, the company had increased sales of 81M, compared to last year. Taking 9% of the increase we get 7.29M. The company’s Pre-tax Income increased by 8M in Q2 of 2008, so most of the gross profit dropped to the bottom line.
The company’s low-cost advantage and distribution agreement with Sun Pharma will allow the company’s bottom line to grow at a healthy pace.
Part 2 >>
surf1944
15 years ago
Caraco Pharmaceutical Laboratories, Ltd. Reports Results for the First Quarter of Fiscal Year 2010
Press Release
Source: Caraco Pharmaceutical Laboratories, Ltd.
On Tuesday July 28, 2009, 4:42 pm EDT
Companies:Caraco Pharmaceutical Laboratories Ltd.
DETROIT, July 28 /PRNewswire-FirstCall/ -- Caraco Pharmaceutical Laboratories, Ltd. (NYSE Amex: CPD) recorded net sales of $48.1 million in the first quarter of Fiscal 2010, ended June 30, 2009, compared to $108.3 million during the corresponding period of Fiscal 2009. The reduction in sales was primarily due to reduced sales of Para IV products in the current period, as compared to the corresponding period of Fiscal 2009. Sales of distributed products were also lower due to price erosion on the products sold, partially offset by new product launches. Caraco's manufactured product sales in the first quarter of Fiscal 2010 were lower due to the negative impact of our voluntary recalls of certain products, and, in part, the FDA's seizure of certain of our inventory and cessation of manufacturing, as previously disclosed. We incurred a net pre-tax loss of $14.4 million during the first quarter of Fiscal 2010, as compared to net pre-tax income of $14.6 million during the corresponding period of Fiscal 2009. The net pre tax loss was primarily due to the creation of an inventory reserve relating to the inventory seized by the FDA, as well as lower sales.
Dan Movens, Caraco's Chief Executive Officer, said, "As previously disclosed, on June 25, 2009, the FDA seized drug products manufactured in our Michigan facilities. The seizure also included ingredients held at these same facilities. The FDA's most recent inspection of Caraco's Detroit facility, completed in May 2009, found observations of potential unresolved violations of cGMP requirements as previously disclosed in our last SEC filing on Form 10-K for the fiscal year ended March 31, 2009, filed on June 15, 2009. The Company believes that corrective actions have been made and continual improvements are in process. We are working with consultants to further define and correct any remaining deficiencies. Products sold and distributed by Caraco that are manufactured outside of these facilities are not materially impacted. As a result of this event, there has been a material adverse effect on our current operations and may be a material adverse effect on our near term operations. We anticipate working with the FDA to resolve these concerns as effectively and expeditiously as possible."
The total value of the seized inventory is $22.9 million. Of such inventory, we have created a partial reserve in the amount of $8.4 million which consists of work in process relating to those materials which are in various stages of production within our manufacturing facilities, finished goods having a shelf life of one year or less as of June 30, 2009, and those products which will be difficult to recondition. Once we have further understanding and clarity from the FDA on the status of the entire inventory, we will make a determination of whether adjustments to the reserve need to be made.
We incurred a gross loss of $3.6 million during the first quarter of Fiscal 2010, as compared to gross profit of $23.6 million during the corresponding period of Fiscal 2009. The gross loss in the first quarter of Fiscal 2010 was primarily due to the $8.4 million inventory reserve and lower sales of manufactured and distributed products. "Although gross profit margins have decreased to a negative 7.5% for the first quarter of Fiscal 2010 as compared to 21.7% during the corresponding period of Fiscal 2009, due to the creation of the inventory reserve, lower sales, and the mix of distributed products weight over manufactured products, we believe we will remain competitive in marketing and distribution product sales and manufactured products sales that are manufactured by third parties," Mr. Movens said.
Selling, general and administrative ("SG&A") expenses during the first quarter of Fiscal 2010 were $3.7 million, as compared to $3.8 million during the corresponding period of Fiscal 2009, representing a decrease of 4%. SG&A expenses, as a percentage of net sales increased to 8% for the first three months of Fiscal 2010, as compared to 4% for the corresponding period of Fiscal 2009. The higher percentage of SG&A is primarily due to the lower sales in the current period versus the corresponding period last year.
Total R&D expenses for the first quarter of Fiscal 2010 were $7.1 million, as compared to $5.5 million during the corresponding period of Fiscal 2009. The R&D expenses during the first quarter of Fiscal 2010 were higher compared to those during the corresponding period of Fiscal 2009 as we incurred increased expenses relating to bio-equivalency studies for certain products under development and increased patent related expenses in an effort to expand our product portfolio. We did not file any Abbreviated New Drug Applications ("ANDAs") with the FDA during the first quarter of Fiscal 2010. We have not received FDA approval for any ANDAs during the first quarter of Fiscal 2010 and do not expect to receive any approvals until we resolve the FDA's concerns. The total number of ANDAs pending approval by the FDA as of June 30, 2009 was 29 (including four tentative approvals) relating to 25 products.
We incurred a net pre-tax loss of $14.4 million during the first quarter of Fiscal 2010, as compared to net pre-tax income of $14.6 million during the corresponding period of Fiscal 2009. Net pre-tax income was lower because of the $8.4 million inventory reserve, as disclosed above, and the decreased sales. During the first quarter of Fiscal 2010, we provided for an income tax benefit of $5.0 million, as compared to an income tax expense of $5.1 million in the corresponding period of Fiscal 2009. We incurred a net loss of $9.4 million during the first quarter of Fiscal 2010, as compared to net income of $9.4 million during the corresponding period of Fiscal 2009.
As noted, the cessation of manufacturing operations will adversely affect the overall profitability of the Company in the near term. The Company has initiated a reduction in various expenses in an effort to bring its expenses in line with its current levels of sales, including the indefinite reduction in its workforce of approximately 350 employees. At June 30, 2009, the Company had $55 million in cash and $10 million in short-term investments (excluding borrowings). The Company believes that its cash flow from operations and cash balances will continue to support its ongoing business requirements, however, because of, among other things, decreased customer confidence, the uncertainty of future costs of FDA compliance and associated costs, there can be no assurance.
Mr. Movens added, "Though Fiscal 2009 and the first quarter of Fiscal 2010 have seen several challenges in manufacturing and compliance, we have hired experienced people in these areas to help us correct any deficiencies. Sun Pharma has provided assistance and guidance from its own corporate quality group. It also continues to provide improvements for our quality systems. We believe the Company's future performance in these areas will be capable of supporting our efforts in providing a quality product on time to satisfy our customers' needs once we have satisfied the FDA's remaining concerns. Though near term sales of manufactured products face significant challenges, we believe we are effecting the changes required to improve our performance on manufactured product sales on a long-term basis. We continue to market 29 products which are categorized as distributed products. We also currently have 4 products that are categorized under manufactured products that are manufactured by third party manufacturers including Sun Pharma for a total of 33 products that we currently market and distribute. We intend to continue to compete effectively in the market we serve."
This press release should be read in conjunction with our quarterly report on Form 10-Q which will provide more detailed information on the results of the first quarter of Fiscal 2010. This report will be filed shortly.
Detroit-based Caraco Pharmaceutical Laboratories, Ltd. develops, manufactures, markets and distributes generic and private-label pharmaceuticals to the nation's largest wholesalers, distributors, drugstore chains and managed care providers.
Safe Harbor: This news release contains forward-looking statements made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Without limitation, the words "believe" or "expect" and similar expressions are intended to identify forward-looking statements. Such statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties are contained in the Corporation's filings with the Securities and Exchange Commission, including Part I, Item 1A of our most recent Form 10-K, and include but are not limited to: information of a preliminary nature that may be subject to adjustment, potentially not obtaining or delay in obtaining FDA approval for new products, governmental restrictions on the sale of certain products, development by competitors of new or superior products or less expensive products or new technology for the production of products, the entry into the market of new competitors, market and customer acceptance and demand for new pharmaceutical products, availability of raw materials, timing and success of product development and launches, dependence on few products generating majority of sales, product liability claims for which the Company may be inadequately insured, material litigation from product recalls, the purported class action lawsuits alleging federal securities laws violations, delays in returning the Company's products to market, including loss of market share, increased reserves against the FDA-seized inventory, and other risks identified in this report and from time to time in our periodic reports and registration statements. These forward-looking statements represent our judgment as of the date of this report. We disclaim, however, any intent or obligation to update our forward-looking statements.
CARACO PHARMACEUTICAL LABORATORIES, LTD.
(A subsidiary of Sun Pharmaceutical Industries Limited)
STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended June 30,
2009 2008
---- ----
Net sales $48,070,016 $108,276,740
Cost of goods sold 51,679,584 84,693,329
---------- ----------
Gross (loss) profit (3,609,568) 23,583,411
Selling, general and administrative expenses 3,659,211 3,818,002
Research and development costs 7,085,135 5,484,229
--------- ---------
Operating (loss) income (14,353,914) 14,281,180
----------- ----------
Other (expense) income
Interest expense (130,950) -
Interest income 104,455 277,773
Loss on sale of equipment (114,272) -
Other income 46,298 -
------ -
Other (expense) income - net (94,469) 277,773
------- -------
(Loss) income before income tax (benefit)
expense (14,448,383) 14,558,953
Income tax (benefit) expense (5,025,332) 5,118,888
Net (loss) income $(9,423,051) $9,440,065
=========== ==========
Net (loss) income per common share
Basic $(0.25) $0.29
Diluted $(0.25) $0.23
Weighted number of shares
Basic 37,547,864 32,677,391
Diluted 37,547,864 40,536,369
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SkribbleD
15 years ago
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