Since April 18, I have been introducing different companies to the `Retire Young` portfolio. We started out with Monster Beverages (MNST), followed by Statoil (STO), Wells Fargo (WFC), American Express (AXP), The Walt Disney Company (DIS), Hewlett-Packard (HPQ), Smith & Wesson (SWHC) and the Cheesecake Factory, and we will add three more companies to the portfolio before tracking its performance and managing it actively.
Starting with this article, I will introduce the last three companies in this portfolio. These companies will have a few things in common: 1) high growth rate in the recent past, 2) high growth rate in the future, and 3) strong momentum. In these three companies, a high P/E ratio will not be a deal breaker because high P/Es are not that bad for high-growth companies. High P/Es are usually bad for companies that are seeing slowing growth or no growth at all. Now, it's time to introduce this fast growth healthcare/medicine company to our portfolio.
Introducing Santarus (SNTS)
The company currently has five FDA approved drugs and three drugs in the works. Having current drugs in the market separates Santarus from many other small pharmaceutical companies because the company can fund itself and its future research from its existing products rather than issuing more shares or debt every time it needs money for a project. Even in small pharmaceutical companies, I prefer a diversified portfolio of products rather than having only one product. When companies have only one product and that product's fate depends on the FDA, things can get pretty ugly pretty quickly if the product fails to impress the federal agency.
The last few quarters have been full of positive developments for the company. During the last six months, the company's share price has appreciated by 139% and there is still more room for the share price to appreciate.
Last year, the company gained market exclusivity for its drug ZEGERID, which was very helpful for revenue growth. Until the court decision, Par Pharmaceutical was developing a similar drug but this came to a stop after the decision. Sometime this year, there will be another legal battle between the two companies to determine the amount Par Pharmaceutical has to pay to Santarus for using its patented drug until it stopped doing so. In the first quarter of 2013, the company gained FDA approval for UCERIS, which is meant to treat active, mild to moderate ulcerative colitis.
In 2012, Santarus generated $218 million in revenue, representing a growth of 83% compared with the previous year. The company's net income was $18.6 million, up from $6 million in the previous year. While these numbers may not compare that well with the company's current market value of $1.45 billion, we are looking at a high-growth company. For example, Santarus increased the number of sales representatives it has from 150 to 235 during last year, which shows that the company is confident of future growth. In the beginning of the year, the company's guidance indicated $325 million in revenues and $0.92-$1.00 per share in net income, which indicates a growth rate of 49% for revenues and 174% for net income.
A couple years ago, the management realized that Santarus can't really compete with some of the giant pharmaceutical companies unless the company changed its strategy. The company started to switch from being a primary-care company to a specialty-care company where it has a much better chance of thriving. As mentioned in the last analysts' day on April 11, the company will continue to make drugs for narrow target audiences that are not aggressively being addressed by the large companies. This way, Santarus won't have to fight for market share with companies that are much larger.
In order to fuel more growth, the company plans to hire a senior executive whose specialty is strategic planning and acquisitions. Once this happens, it will be interesting to see Santarus grow at an even faster rate as the company uses some of its profits to buy companies with a lot of promise.
In the first quarter of this year, Santarus continued to impress investors as well as the analysts. The company earned 32 cents per share when analysts were expecting it to earn 14 cents per share. The company generated $79 million in revenue whereas the analysts were looking for $69 million. It raised its guidance for the full year to $335 million in revenues and $1.03-$1.11 per share in net income. Year to year, revenue grew by 73% as every drug of the company posted double-digit volume growth.
As a result of a very successful quarter, the analysts have increased their guidance for the company. Of the five analysts covering the company, all rate it as "strong buy." For 2014, the analysts expect the company to earn $1.29 per share, followed by $1.75 per share in 2015. Effectively, we are looking at a forward P/E ratio of 20 for this year, 17 for 2014, and 13 for 2015.
We are going to add 400 shares of Santarus at $22.20 in our portfolio. Next, we are selling covered calls that expire in July, with a strike price of $25.00, which lands us $90 per contract. This effectively reduces our breakeven price to $21.30. We have two more companies to add to the portfolio, and then we will be good to go.
PS: The covered calls we sold on our Monster Beverage shares expired worthless last Friday. Therefore, we wrote additional covered calls with a strike price of $57.50 expiring in June. This resulted in a premium of $1.75 per share, effectively bringing our breakeven price down to $52.44.