The Recent Drop In Albany Molecular's Stock Price May Be Overdone

| About: Albany Molecular (AMRI)

Albany Molecular (NASDAQ:AMRI) primarily produces compounds for pharmaceutical and biotechnology companies worldwide. Since the company was founded in 1991 until recently, the company has also been involved in developing proprietary pharmaceuticals to bring to market. In the 1990’s, the company seemingly struck gold when it licensed a key patent out to make Allegra, one of the highest selling antihistamine’s on the market. While a long term chart of the company shows that the stock has fallen precipitously from a high of over 60 in 2000, more recently, since July of 2011, the stock is off 46%, possibly creating an interesting buying opportunity for patient investors.

There are multiple reasons that the stock price has fallen, however, the primary reason is persistent underperformance since pharmaceutical companies began to pull back on funding early stage drug projects in 2008. In addition to a slowdown in a main part of AMRI’s business, the company has spent $14 million per year on research and development, most of which has not led to any revenue generation. As a result, on its most recent quarterly call, management indicated that they will be scaling back on the company’s remaining proprietary compound projects in order to be able to restructure the business for sustained profitability. Another major headwind for the company has stemmed from the acquisition of Hyaluron, a liquid filler specialist, in June, 2010. Management initially indicated that the acquisition would be accretive to the company within the first year; however, what it did not anticipate was an FDA warning letter that was to be issued on August 17, 2010. Since then, as a result of the plant related to the acquisition ceasing significant operations, gross margin at the company has fallen from approximately 12.5% before the acquisition to 3% since. From looking at the chart above, it appears that while investors were willing to give the company the benefit of the doubt that the issues would be resolved, every quarter that went by without resolution led to a fall in the stock price. Finally, investors are likely pricing in an end to royalties the company receives from the sale of Allegra in 2015.

With all of the above points being considered, there are just as many reasons to be optimistic about the prospects for Albany Molecular. First, the company trades at a substantial discount to book value of approximately 38%. The likely culprit is that plant, property and equipment make up the bulk of the company’s assets. Considering the industry in which the company participates has recently experienced excess capacity, there is likely some reluctance on the part of investors to give full credit on PP&E. Below is a stress test for the company’s book value.

Tangible Book Value Per Share

Change From Current Share Price of $2.70

Current Tangible Book Value



50% Write Down on PP&E



75% Write Down on PP&E



100% Write Down on PP&E



Click to enlarge

In the extremely likely scenario that the company would never have to write down the entirety of its property ownership and equipment, the above table illustrates that there could be considerable value in AMRI shares. In addition, the company has a net $19 million cash buffer to support operations until it reaches profitability.

Albany Molecular generates over $175 million in sales in its core business and sales have been growing at an average of 7% over each of the past two years. Recently, the company has inked multi-year deals with Eli Lilly (NYSE:LLY) and the National Institutes of Health. Also, as the company has sustained significant losses associated with the FDA warning letter, in addition to the time management has had to divert to deal with the issue, it wouldn’t be farfetched to imagine that management will go back to the seller of Hyaluron for significant financial remediation. Management is expecting that production will be able to resume full scale at the acquired plant in 2012, which should help the company return to pre-acquisition gross margins and possibly higher. While I typically like to see insider buying on deep value stories, it should be noted that the CEO owns 15% of the company.

With ample liquidity to cushion the company while it returns to profitability and recent contract wins, combined with a significantly discounted valuation, it could be worth taking a look at Albany Molecular as an investment opportunity.

Disclosure: I am long AMRI.