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'98 Year In Review
December 17, 1998

Winner #3 --
Roberts Pharmaceutical

by Jeff Fischer (TMF Jeff)
Up 124.2% as of 12/15/98

It was a long time coming, but in 1997 Roberts Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: RPC)") else Response.Write("(AMEX: RPC)") end if %> began to market two new drugs that had been in the hopper for years. The result: 1998 was a great year to own the stock. Shares have more than doubled since January, as sales, margins, and profits rocketed for the young company.

Roberts had plenty of companions sharing its success in 1998. The pharmaceutical and biotech industry enjoyed sharply rising stock prices, even when major market indices were weak. Each stock in a basket of nine leading pharmaceutical companies we track in the Fool's annual Industry Focus publication gained, on average, over 50% in 1998.

The success and sustainable double-digit earnings growth of pharmaceutical stocks, including Roberts, is rooted in strong industry fundamentals assisted by favorable world demographics (an aging population), advances in science (creating more drugs), a streamlined FDA approval process (helping companies get drugs to market faster), and much more. In Industry Focus 1999, we write about the industry and its leaders in-depth, explaining where the sector is going and why pharmaceuticals are very attractive investments.

Biotechs, on the other hand, enjoyed a strong year largely on the whim of investors. Aside from biotech leaders -- such as Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>, Chiron <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %>, and Genentech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNE)") else Response.Write("(NYSE: GNE)") end if %> -- most companies in the industry are struggling for breakthrough products that will give them a viable future. All biotechs are searching for products that will lift them from the small-time to Amgen-like status (Amgen has $2.4 billion in sales from just two products). If that's not possible, biotechs at least want to discover promising compounds that can be sold to pharmaceutical giants. In 1998, a few small biotechs announced compounds that might help cure cancer in five or ten years (if ever), and their shares quickly rose five, seven, or even ten times in price. All of these stocks soon retreated and will probably linger until more progress is made, which could mean years.

Not unrelated to such phenomena, it is often suggested on the Fool that most investors buy stock in pharmaceutical leaders rather than pie-in-the-sky biotechs. Pharmaceutical giants are able to slurp up (like aardvarks) biotech inventions like so many ants -- at a price, of course. If not, marketing partnerships are frequently formed. Either way, with or without the many "never-to-emerge" biotechs on the market, established pharmaceutical companies are much more likely to grant investors market-beating returns year-in and year-out, over time, than are speculative biotechs.

The pharmaceutical leaders are well-known: Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>, American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, Glaxo-Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %>, Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>, Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>, Abbott Labs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>, Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>, Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %>... but what is this Roberts Pharmaceutical? And following a 135% gain in 1998 (as of December 8, 1998), is this company's stock still worth a Fool's consideration in 1999?

New Jersey-based Roberts Pharmaceutical searches for late development-stage or underperforming drugs, buys the rights to them, finishes their development, and then introduces them to the market. The concept is smart, but far from novel. In the used car business, Roberts Pharmaceutical is akin to the guy down the block (maybe your Uncle Max) who is always looking for junked cars to buy, fix up, and sell for a profit. In the drug business, this "find and repair" approach saves Roberts the time and expense usually needed to discover and develop a drug. It also greatly reduces the risk of "discovery failure."

Roberts went public in 1990. The company first bought U.S. and Canadian rights to several nonprescription products from Upjohn. In 1991, it purchased rights to a blood platelet drug, Agrylin, from Bristol-Myers Squibb. The company experienced high costs in building a product line, which meant losses until 1996. From the start, Roberts targeted drugs that treat heart, reproductive, glandular, blood, and stomach ailments. In 1995, it sold its nonprescription drug businesses to focus on higher-margin drug sales.

Business improved greatly when ProAmatine -- the company's first early stage drug purchase, bought in 1985 when still a private company -- was finally approved by the FDA in 1996. It hit the market in 1997. This drug was purchased twelve years earlier as a developmental low blood pressure drug. Quick on the heels of this 1996 approval, the company's 1991 purchase of Arglyin (for blood platelets) began to pay off when the drug was approved in 1997. Alas, two new revenue streams were born in 1997 and contributed to a very successful 1998. These two products are the only FDA-cleared drugs for orthostatic hypotension and essential thrombocythemia. Roberts now has a leading niche.

What's next?

The company has begun to manufacture drugs, too. In 1998 it purchased its own distribution center. Also in '98, Roberts bought U.S. marketing rights to an ulcerative colitis treatment from Hoechst <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HOE)") else Response.Write("(NYSE: HOE)") end if %>. Roberts took the drug to market in the second quarter of this year and it's already adding to sales.

This S&P 600 company -- with $43 million in Q3 sales, up 49% from last year -- has its heart set on a bright future selling high-margin pharmaceuticals. Due to its focus and disciplined cost cutting, last quarter's gross margin hit 65% compared to 51% last year. At $23 per share, Roberts trades at 31.9 times 1999 earnings estimates of $0.72 per share. Earnings are expected to grow 32.5% annually, on average, over the next three to five years.

For more about Roberts Pharmaceutical, visit the company's website and call the company for more information. Also, consider Industry Focus 1999 to learn much more about pharmaceuticals and 19 other industries.

Roberts Pharmaceutical Company Information:
Trades on the AMEX under symbol RPC
Roberts' Web Site (www.robertspharm.com)
Current Quote
Roberts' Chart

Other Related Roberts Pharmaceutical Links:
Roberts Pharmaceutical Message Board

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