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Tuesday, May 27, 1997
Duramed
Pharmaceuticals, Inc.
"Nothing happens, nobody comes, nobody goes, it's awful." HOW DID IT FIND TROUBLE? In Samuel Beckett's absurd play Waiting for Godot, Estragon and Vladimir wait for their friend Godot, and he never comes. Duramed Pharmaceuticals shareholders waited patiently for FDA approval of generic Premarin and, as of this month, it hasn't come. From a price of almost $20 a year ago and $11 as recently as December, the stock has been crushed. Premarin is the 55-year old drug now owned by AMERICAN HOME PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> that is the numero uno prescription drug in the U.S. with over $1 billion in sales annually. The prospect of generic Premarin made investors salivate. How does the number one drug in the nation stay exclusive for so many years? It is because this is an extremely complex drug. Premarin is named for the source of the drug, PREgnant MAre urINe. Indeed, American Home keeps pregnant mares on a farm as a source for the drug. Because it is a natural byproduct there are several compounds present within the drug, although all science points to the conjugated estrogen component as being the active ingredient. Duramed's product was a pure form of the conjugated estrogen. Due partly to the efforts of American Home, and perhaps a great deal of political intrigue, the FDA rejected Duramed's version because of the absence of a minor impurity. (American Home sells Premarin in Canada without the impurity -- go figure how it could lobby against a purer drug). Waiting for the FDA has led many investors to quote from Beckett's play, "Some are born mad, some remain so." The vagaries of the FDA approval process spelled trouble for Duramed investors. BUSINESS DESCRIPTION Duramed Pharmaceuticals is a generic drug manufacturer. It also repackages pharmaceuticals on a contract basis. The company makes its own drugs and markets drugs made by other manufacturers. The company has been focusing on the hormone replacement area, and it has poured enormous resources into the development of conjugated estrogen generics. Other important drugs include generic methylprednisolone (prednisone) and generic Compazine. The company has at least 34 drugs on the market and has 9 new drug applications in with the FDA. FINANCIAL FACTS Income Statement
12-month sales: $43.9 million
12-month income: ($30.2 million)
12-month EPS: ($2.60)
Profit Margin: N/A
Market Cap: $51.4 million
Balance Sheet
Cash: $3500
Current Assets: $20.7 million
Current Liabilities: $14.7 million
Long-term Debt: $12 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 1.2
HOW COULD YOU HAVE SEEN IT COMING? Well, it depends on where you sit on the FDA approval issue. I have the benefit of having fielded questions on Duramed over one year ago as a member of the Healthcare Industry area team. At that time I said I wouldn't hold these shares. Basically, anyone who owned the shares had a lottery ticket on Duramed. There was only one guarantee about the FDA approval of Duramed's generic Premarin -- it would be controversial. It was never a sure bet. Even if the stock's collapse was not absolutely predictable, the possibility of collapse was certainly in the cards. Peter Lynch has correctly pointed out that there is enough money to be made after a major drug approval to make the risk of pre-approval stock ownership prohibitive. WHERE TO FROM HERE? Well, the future is certainly cloudy for Duramed. There are no analyst estimates available on the firm. So we Fools will have to fend for ourselves. The financials look pretty ugly for this company. Earnings have steadily slid downhill over the past 4 years. The company is burning cash. Although there are drugs in the pipeline, there are none with the potential of conjugated estrogens. It seems to this Fool that the only near-term help for Duramed would be a reversal of the FDA decision on generic Premarin. While this could happen (the original decision is highly controversial), it will not happen any time soon. Waiting for this stock to rally could be the investing equivalent of Waiting for Godot, and the result could easily be the same. That said, at this point, the downside is limited. -Mark Weaver, MD ([email protected])
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