Sagent Pharmaceuticals IPO Preview

Apr.18.11 | About: Sagent Pharmaceuticals (SGNT)

Sagent Pharmaceuticals (NASDAQ:SGNT) is scheduling a $75 million IPO with a market capitalization of $392 million at a price range mid-point of $15 for Wednesday April 20, 2011. The full IPO Calendar lists 4 other IPOs for this week.

Sales are up 147% to $74 million for 2010 vs. 2009. The company lost $24 million in 2010 vs. $31 million in 2009. This generic injectable pharmaceutical company is starting to ramp up growth, with a large product pipeline. The company has established distribution through the three largest wholesalers in the business and established relations with major Group Purchasing (medical) Organizations (GPOs).

VALUATION & CONCLUSION -- Even on increased sales of $33 million for the December 2010 quarter SGNT lost 11% on revenue with an 18% gross margin.

The company is priced at 3x book value, 5.7 times 2010 sales. There is speculation about whether their new generic injectable products will become mainstream. In the meantime SGNT continues to lose money. Here are SGNT's valuation metrics.

SGNT is a generic injectable pharmaceutical company that develops and sources products sold primarily in the U.S. As of October 31, 2010, SGNT marketed 21 products, substantially all were generic injectable products, and SGNT had a pipeline that included 45 new products represented by 77 Abbreviated New Drug Applications (ANDAs), which either are currently under review by the FDA or were recently approved and their associated products are pending commercial launch.

The ANDAs currently under review by the FDA have been on file for an average of approximately 19 months.

GROUP PURSHASING ORGANIZATIONS (GPOs) -- A medical GPO brings the purchasing power and negotiating leverage of large medical consortiums or hospital systems to doctors' offices. SGNT has significant relations with medical GPO’s.

REASONS FOR RECENT QUARTERLY REVENUE GROWTH -- Net revenues increased by $10.7 million and $12.3 million between the second and third quarters of 2010 and between the third and fourth quarters of 2010, respectively.

In early July 2010, SGNT launched nine different presentations of heparin sodium injection in latex-free vials following the FDA’s approval of three heparin Abbreviated New Drug Applications (ANDAs),

HERPARIN FINISHED PRODUCT -- SGNT is currently one of three suppliers of heparin finished product in the U.S. market. Heparin products accounted for approximately 33%, 38% and 26% of net revenue for the three month periods ended September 30 and December 31, 2010 and for the full year ended December 31, 2010, respectively.

Net revenues in the fourth quarter of 2010 were favorably impacted by stocking orders associated with the launch of SGNT’s new topotecan product in early December 2010. As a result, SGNT does not expect sequential revenue growth in the first quarter of 2011.

GROWTH PLAN -- As of December 31, 2010, SGNT marketed 22 products, and its new product pipeline included 38 products represented by 68 ANDAs that we had filed, or licensed rights to, and were under review by the FDA, and eight products represented by nine ANDAs that have been recently approved and are pending commercial launch.

SGNT expects to launch substantially all of these 46 new products by the end of 2012. However, SGNT says it may encounter unexpected delays in the launch of these products or these products.

DISTRIBUTION THROUGH WHOLESALERS -- SGNT sells through the three largest wholesalers in the U.S. market: Cardinal Health (NYSE:CAH), AmerisourceBergen (NYSE:ABC), and McKesson (NYSE:MCK). For the year ended December 31, 2010, the SGNT products sold through these wholesalers accounted for 33%, 29% and 23%, respectively, of net revenue. Collectively, sales to these three wholesalers represented 79%, 89% and 85% of net revenue for the years ended December 31, 2008, 2009 and 2010

BARRIERS TO COMPETITION -- SGMT believes there are significant barriers to entry facing generic and specialty injectable companies in the U.S. market. These barriers include:

  • Complex manufacturing processes that must comply with high GMP and FDA regulatory standards, particularly with respect to oncology products;
  • Difficulty in developing and sourcing often complex APIs required for product development;
  • FDA requirements that certain products be produced in dedicated single-product facilities or manufacturing lines;
  • Long regulatory approval times;
  • Complex U.S. wholesale and GPO market channels through which end-user customers are reached
  • Various strategies undertaken by branded pharmaceutical companies to extend the exclusivity period of their products.

SGNT believes these barriers create attractive industry characteristics for successful participants, including fewer competitors, high loyalty from GPO and end-user customers and, as compared to oral generic drugs, more favorable pricing environments, stable demand and long product life cycles.

COMPETITION -- Principal competitors include Baxter International Inc.; Boehringer Ingelheim Group; Fresenius Kabi, a division of Fresenius SE (NYSE:FMS); Hikma Pharmaceuticals PLC (OTCPK:HKMPY), principally as a result of its pending acquisition of Baxter’s (NYSE:BAX) generic injectable business, Hospira, Inc. (NYSE:HSP); Pfizer Inc. (NYSE:PFE); Sandoz International GmbH, a division of Novartis AG (NYSE:NVS); and Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA).

Branded pharmaceutical companies often take aggressive steps to thwart competition from generic companies. The launch of SGNT’s generic products could be delayed because branded drug manufacturers may, among other things:

  • Make last minute modifications to existing product claims and labels, thereby requiring generic products to reflect this change prior to the drug being approved and introduced in the market;
  • File new patents for existing products prior to the expiration of a previously issued patent, which could extend patent protection for additional years;
  • File patent infringement suits that automatically delay for a specific period the approval of generic versions by the FDA;
  • Develop and market their own generic versions of their products, either directly or through other generic pharmaceutical companies (so-called “authorized generics”); and
  • File citizens’ petitions with the FDA contesting generic approvals on alleged health and safety grounds.
  • Furthermore, the FDA may grant a single generic manufacturer other than SGNT a 180-day period of marketing exclusivity under the Drug Price Competition and Patent Term Restoration Act of 1984 as patents or other exclusivity periods for branded products expire.

Approximately $67mm will be used for general corporate purposes.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.