Caraco Pharma Is a Compelling Value at This Price

| About: Caraco Pharmaceutical (CPD)

Caraco Pharma (NYSEMKT:CPD) offers a compelling value at its current price of $3.30 per share and I bought some shares today, as the stock has lost an astounding two-thirds of its market value in just the past month and over three-quarters of value in the past year.

1.) Defensive: Healthcare Sector, Generic Drug Industry

2.) Growth: Net income of $17.9M for the first six months of FY09 (up 36% from the year-ago period) on $230.5M in revenue for the same time period (up 200% from a year ago) – largely due to a distribution agreement with India's largest generic drug company by market cap, Sun Pharma (524715), which also owns 16.6M of the 34.7M total shares of outstanding common stock for Caraco. Caraco has guided for 25% sales growth for FY09 and expects to complete the expansion of its facilities (manufacturing + distribution) by the end of the current fiscal year.

3.) Value Parameters: Market Cap - $115M, Enterprise Value [EV] - $146M, Revenue (ttm) - $504M, Net Income (ttm) - $40M, Price to Sales Ratio [PSR] – 0.22, EV to EBITDA Ratio – 2.6, Cash & Equivalents - $33.6M, No Debt. As a comparison, the average PSR for all 48 companies in the ETF Innovators [ETFI] Global Generic Drug Index is 2.4X versus a lower valuation of 1.7X for the 25 companies featured in my analysis of generic drug companies from India.

The most obvious negative factor and overhang on Caraco's share price is an outstanding warning letter from the FDA which was issued at the end of October related to an inspection of the Company's manufacturing facility in Detroit earlier this year in May. Caraco responded to the FDA within the 15 business day window on November 24 and has requested a follow-up meeting with the agency to resolve the matter. The FDA warning letter does not impact the sale of currently marketed products, but may affect the approval of applications for new drug products produced at the facility in question.

In a recent move, Sun Pharma acquired Chattanooga, TN-based Chattem Chemical to strengthen its presence in the controlled drug market, as Chattem is a registered with the DEA as an importer and manufacturer of active pharmaceutical ingredients (APIs) for a variety of Schedule 1-5 controlled substances. Sun Pharma has also extended its tender offer to acquire Taro Pharma (TAROF) until Decemeber 19, and Sun remains a major player in the generic drug industry behind only Teva Pharma (NASDAQ:TEVA) in terms of market cap since Barr Pharma (BRL) is being acquired by Teva.

Caraco Pharma offers U.S. investors a way to play Sun Pharma's growth through their distribution agreement and the Company believes it has addressed the issues raised in the FDA warning letter completely, which provides a potential upside catalyst upon resolution. Also, Caraco is committed to product development agreements with other companies and internal R&D efforts focused on formulations aimed at expanding its product offerings.