Why Oak Ridge Is Bullish On These Small Caps

Includes: AKRX, PRAA, SLXP
by: Fusion Research

Oak Ridge Investments, LLC is a Chicago-based investment advisor. The investment company had over $3.18 billion under its management as of June 30, 2012. Its investment strategies cover large cap, mid-cap, small/mid-cap and dividend growth. In the second quarter, the company initiated positions in 8 stocks and sold 7 out. In this article, we take a look at the top three holdings of Oak Ridge in the latest quarter. These are as follows:

Oak Ridge top holdings as on June 30, 2013:

Oak Ridge Investments

% of Total investment

Salix Pharmaceuticals (SLXP)


Portfolio Recovery Associates (PRAA)


Akorn (AKRX)


Expansion and new product for future growth

Approximately 25,000 to 50,000 patients in the U.S. suffer from chronic disease like ulcerative proctitis, or UP, and ulcerative proctosigmoiditis, or UPS. Currently, the patients of UP and UPS are treated with an "enema formulation" and oral medication. These treatments aren't very effective at treating the medical condition since the drug isn't retained inside the patient's body. Seeing this opportunity, Salix has developed a treatment named "budesonide foam". Patients find the foam formation more acceptable compared to the enema formation and oral medication. This drug has already passed the Phase 3 level and has shown positive results. Salix is expecting its FDA approval in mid-2014. This will be the first foam product in the U.S. for patients of UP and UPS, and its demand is expected to rise since it is effective in treating the disease. Salix anticipates the drug to contribute revenue of $3.7 million in 2014 toward its total revenue.

Xifaxan is Salix's key drug, which contributed 70% in total revenue in 2012. This drug is a gastrointestinal-specific antibiotic used for traveler's diarrhea and hepatic encephalopathy. With some alterations in the drug, it is capable of treating patients with Irritable Bowel Syndrome, or IBS. This disease affects approximately 5%-20% of the U.S. population. The company is developing this drug for IBS treatment under its label Xifaxan. This drug is expected to receive FDA approval in mid-2014. With this, the analysts expect Xifaxan sales to increase from $514 million in 2012 to $653 million in 2013.

Development of a new drug and penetration of its key drug for a third disease will drive Salix's earnings, which are expected to grow by 14% this year, followed by 16.08% next year. With this earnings growth, its PEG ratio is currently 0.85. A ratio less than 1 depicts an undervalued stock, implying the stock is below its true value.

Shifting toward low-cost product portfolio

Portfolio Recovery Associates provides factoring services to various banks. Under factoring services, it buys banks' accounts receivables and charges service fees to collect the receivables. In the second quarter of 2013, the company's service fees revenue from accounts receivables grew at 28% year over year, amounting to $296.4 million. In the same quarter, Portfolio Recovery Associates acquired receivables worth $3.2 billion for approximately $200 million. This will fetch the company more servicing fees.

As a business service company, Portfolio Recovery Associates acquires bankruptcy debtors from the banks at a discount and recovers the full amount from debtors over the period of 2-3 years. This is considered a low cost business since it purchases debtors at a discount, and it enhances the company's margins. For this reason, Portfolio Recovery Associates has focused on purchasing bankruptcy debtors from banks since 2009. In the first quarter of 2013, the company reported 40% of the cash collected from its bankruptcy business. Additionally, it purchased bankruptcy debtors worth $82 million in the first quarter of 2013, which should further improve its operating margins going forward. The continuous shift toward this product will act as a tailwind in the long run in terms of improved operating margins and higher profits. Portfolio Recovery Associates' operating margins are expected to increase from 36.4% in 2012 to 39.7% in 2013.

Revenue from contract services and strategy of long-term revenue from its bankruptcy business are the main drivers of the company's future growth. With these strategies, its earnings are expected to grow by 36.76% this year, and its PEG ratio is 0.98, implying it is an undervalued stock.

Capacity expansion for demand requirement

Akorn is a manufacturer of diagnostic and therapeutic ophthalmic pharmaceuticals and injectables. The company operates in three segments: ophthalmic, hospital drugs and injectables, and contract services.

In the first quarter of 2013, 21% of Akorn's revenue came from its contract services segment. The establishment of Akorn India in 2012 was a key strategy for contract services. In the first quarter of 2013, Akorn India generated 66% of company's total revenue from contract services. With this rising Indian market, it is planning to expand the manufacturing units. It is expecting FDA approval of its additional facility by the end of 2014. In addition to this, there are approximately 60 products under review for contracts. These products will drive the revenue from contract services, which are expected to increase from $22 million in 2012 to $28 million in 2013.

Akorn has merely 12% market share of Pantoprazole, a drug used to treat ulcers. The current annual requirement for this product is 30 million units globally. For this reason, the company is expanding its capacity at Somerset, New Jersey. The FDA approved the expansion of this plant's production as safe for drug manufacturing. The expansion will add an additional 10 million units, where currently it manufactures only 4-5 million units annually. With the expanded capacity, Akorn's market share is expected to increase to 50% by the end of third quarter 2013.


These top holdings are anticipated to be in line with the expectations of Oak Ridge Investments, as they have high earnings growth potential and strong fundamentals. Along with this, these companies have strong five-year EPS growth rates. EPS of Salix, Portfolio Recovery Associates and Akorn are expected to grow at 21%, 19.3%, and 23%, respectively, in the next five years. Therefore, these companies are providing long-term growth prospects for investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.