GeoPharma Poised for Rapid Revenue, Earnings Growth

We reiterate our “Speculative Buy” recommendation on GeoPharma, Inc. (GORX) based on:

1) Its price appreciation potential due to an expected increase in annualized revenues of over 50%, together with a return to profitability in FY 2009 and, 2) our earnings projections for FY 2009 and beyond as higher margins on revenues from new generic drugs contribute to earnings growth.

INVESTMENT SUMMARY

GeoPharma, Inc. (“GeoPharma” or “GORX” or the “Company”) is a drug and drug-related manufacturer specializing in the manufacture and distribution of over-the-counter, nutritional, generic drug, and functional food products. The Company’s pharmaceutical operations range from research and development to manufacturing, as well as marketing and distribution of its branded and private label products by means of a distribution network that extends to many mass retailers in the United States. The Company’s growth strategy in the generic drugs area is to capitalize on its product selection and manufacturing expertise to develop high-margin generic or novel drugs for niche markets with high barriers to entry. The Company is poised for rapid revenue and earnings growth as it expands operations and prepares to launch over a dozen new generic drugs within two years.

INVESTMENT HIGHLIGHTS

• The Company’s revenue for Q3 2008 soared by 203% to over $18 million, up from about $6 million in Q2 2008.
• We had projected revenue of over $23 million for Q3 2008, and we are reducing our revenue expectations to about $25.9 million for Q4 2008 and $57 million for FY 2008, down from $27 million and $63 million respectively (see our January 30, 2008 report).
• Net losses continued in Q3 2008, and we are lowering our projections to a net loss of over $(3.9) million or EPS of $(0.31) for FY 2008 (to end March 31, 2008), down from our earlier expected net income of $1.6 million or EPS of $0.12.
• Its acquisition of Dynamic Health Products, Inc., greatly expanded GeoPharma’s distribution segment revenues, and we continue to project combined annual revenues of the two companies of about $110 million in FY 2009 ending March 31, 2009, up from our projected revenue of $57 million for FY 2008.
• The Company’s manufacturing revenues in the last quarter increased to over $7 million, up from $4.9 million and $4.7 million in Q1 2008 and Q2 2008, respectively.
• Pharmaceutical revenues failed to materialize in the latest quarter and are now expected to begin in the current quarter, reaching about $2.5 million in FY 2008 and building to about $20 million in FY 2009 as several of the Company’s new generic drugs gain manufacturing and marketing approval from the FDA.
• The Company also confirmed during a conference call on February 14, 2008, that it is preparing to meet with the FDA for discussions about beginning clinical trials of its new diagnostic test intended for the early detection of cervical cancer. We view this as a major development given the large potential market for such a test. Management stated that it plans to develop and commercialize this product in-house as opposed to out-licensing it, which means that the Company intends to take full advantage of this business opportunity.
• We are making no changes to our projections for FY2009 and continue to expect revenue of about $110 million and net earnings of about $16.6 million, or fully diluted EPS of $1.10.

We leave unchanged our “Speculative Buy” recommendation and our price target of $8.00 for GORX.

COMPANY BACKGROUND

GeoPharma, Inc., manufactures, packages, and distributes dietary supplements, over-the-counter [OTC] and generic drugs, and health and beauty products for companies worldwide through four of its wholly owned companies based in Florida: Innovative Health Products, Inc.; Libi Labs; Belcher Pharmaceuticals, Inc.; and Breakthrough Engineered Nutrition, Inc.

The Company was incorporated as Energy Factors, Inc., a Florida corporation, in 1985. Its name was changed to Innovative Health Products, Inc., in August 1998, and to Go2Pharmacy.com, Inc., in February 2000. In September 2000, its name was changed to Go2Pharmacy, Inc., simultaneously with its initial public offering, prior to its merger with the Delaware corporation Go2Pharmacy.com, Inc., during November 2000. In September 2002, it changed its name to Innovative Companies, Inc., and on May 18, 2004, to GeoPharma, Inc. The Company’s common shares are listed on NASDAQ and trade under the symbol “GORX.”

In August 2005, the Company formed American Antibiotics LLC, a Florida corporation for manufacturing and distributing beta-lactam antibiotic products. GeoPharma owns 51% of American Antibiotics LLC. In June 2006, the Company formed a wholly owned manufacturing subsidiary, Libi Labs, Inc., for the purpose of manufacturing branded nutraceuticals and cosmeceutical liquid, gel, and cream products. In June 2007, the Company acquired EZ-Med Technologies, Inc., a manufacturer of a soft-textured chew technology. On October 17, 2007, the Company acquired Dynamic Health Products, Inc., a company that distributes non-prescription dietary supplements, vitamins, over-the-counter drugs, health and beauty care products, health food, sports nutritional products, and soft goods to wholesale and retail customers.

The Company is based in Largo, Florida, where it has about 90,000 square feet of facilities that house its business operations including product manufacturing, packaging/labeling, and quality control that comply with current good manufacturing practices (cGMP). In addition, through its controlling interest in American Antibiotics LLC, the Company has approximately 100,000 square feet of manufacturing dedicated to beta-lactam antibiotics in Baltimore, Maryland. Following its acquisition of Dynamic Health Products, Inc., the Company has close to 285 employees.

RECENT DEVELOPMENTS

– On December 3, 2007, the Company announced that it signed an agreement with the University of South Florida Research Foundation to acquire worldwide patent rights to a diagnostic technology for early-stage detection of ovarian cancer using patient urine samples.

The National Cancer Institute estimates 15,280 women in the United States will die from ovarian cancer in 2007. Ovarian cancer’s symptoms often go unnoticed until the disease has progressed to an advanced stage and spreads from the pelvis, killing over 70% of patients in the long term. If ovarian cancer is treated when it is limited to the ovaries (stage I), 90% of patients can be cured. Currently early-stage diagnosis, at stage I, occurs in only 20% of ovarian cancer cases.

There is currently no approved test for early detection of ovarian cancer. The only ovarian cancer diagnostic test is the CA-125 blood test that is approved by the FDAto “monitor progression of the disease.” The CA-125 test is usually done serially or in combination with other physical tests such as transvaginal sonography and pelvic examination.

Preliminary clinical studies have been conducted at the University of South Florida, and further studies are under progress. GeoPharma will initiate the necessary steps for FDA approval.

Dr. Kotha Sekharam, president of GeoPharma, said:

Ovarian cancer diagnostic tests with (a) high reliability, (b) ease of use, and (c) detection at an early stage could save thousands of women from untimely deaths. Our technology could offer significant help in this direction.

– On November 19, 2007 GeoPharma, Inc., reached an agreement with Vetoquinol USAfor the marketing and distribution of Vetprofen™ nationwide. The agreement, executed with GeoPharma’s wholly owned subsidiary Belcher Pharmaceuticals, represents GeoPharma’s first generic drug offering and features the active ingredient carprofen. Carprofen is a non-steroidal anti-inflammatory drug [NSAID] that is used by veterinarians for the relief of pain and inflammation associated with osteoarthritis and postoperative pain management in canines.

“Vetoquinol has long been a leader in the marketing and distribution of veterinary health products, so working with them was a logical choice to proliferate the acceptance of Vetprofen™ into the marketplace,” said Mihir Taneja, CEO of GeoPharma.

“Vetoquinol is very pleased to be partnering with Belcher Pharmaceuticals in an effort to market and distribute Vetprofen™ (carprofen) in the United States,” stated Dan Schildgen, director of business development for Vetoquinol USA. “This is an important opportunity for GeoPharma. Vetprofen, as a companion animal pain management product, is a very good fit for Vetoquinol’s business model in terms of species, geographic region, and therapeutic segment. The introduction of Vetprofen will enhance Vetoquinol’s presence in the U.S. market and complement its growing line of successful products.”

Founded in 1933, Vetoquinol is the 12th largest animal health company worldwide dedicated to both livestock and companion animals. The company distributes products in approximately 100 different countries and employs over 1,200 people. Vetoquinol is publicly traded on the Euronext Exchange in Paris, France. Vetoquinol acquired Evsco Pharmaceuticals and Tomlyn Products to form Vetoquinol USA. Additionally, in December of 2006, Vetoquinol acquired VET Solutions.

– On November 12, 2007, GeoPharma, Inc., announced that it received approval from the FDA to begin producing carprofen. Commonly marketed by Pfizer as Rimadyl™, carprofen is a non-steroidal anti-inflammatory drug [NSAID] that is used by veterinarians for the relief of pain and inflammation associated with osteoarthritis in dogs. Additionally, carprofen is often used in the treatment of postoperative pain associated with soft tissue and orthopedic surgeries in dogs. Annual sales of Rimadyl™ are estimated at $80 million–$100 million.

“This is a major step forward in the Company’s tactical plans to offer generic drugs,” stated GeoPharma CEO Mihir K. Taneja. “We are tremendously pleased to have received final approval on carprofen from the FDAfor both the Company and our shareholders. GeoPharma has anticipated this approval and is well-prepared to have its arrival begin to translate into sales and net income almost immediately. This is the first of what we anticipate will be many approvals for GeoPharma. We continue to be enthusiastic about our drug pipeline, which holds 12 Abbreviated New Drug Applications (ANDAs) and other drug products in various stages of development and the approval process. It is our hope to receive additional approvals by the end of our fiscal year on other drugs, as well as a production approval of our dedicated 100,000 square foot Beta Lactam manufacturing facility located in Baltimore, Maryland.”

The Company detailed its plans to produce carprofen in three strengths, 25 mg, 75 mg, and 100 mg caplets, allowing for appropriate dosing and cost-effective pain management for the animals. Furthermore, the Company reiterated its strategic commitment to aggressively pursue attractive generic drug and medical device opportunities wherever they present themselves.

– On October 17, 2007, the Company announced that it has finalized the acquisition of Dynamic Health Products, Inc., with all merger conditions satisfied.

Dynamic is a leading distributor in the sports nutrition product and performance drink industries in the U.S. with revenues and gross margins comparable to GeoPharma’s, presenting an attractive opportunity to significantly expand its product offering and its existing distribution platform. GeoPharma expects increased revenues, operating profits, productivity, cost savings on multiple levels, and an enhanced distribution platform supported by a highly experienced management team from both the companies that has extensive industry knowledge in marketing, developing, manufacturing, and distributing.

In explaining the significance of the Dynamic transaction for the Company, Mihir Taneja, CEO of GeoPharma, remarked:

This deal creates a compelling value for our shareholders. Undoubtedly, our companies are stronger collectively than we are individually, and we look forward to leveraging our obvious synergies to achieve greater shareholder value for all involved.

With 3,000 SKU’s and over 5,000 customers in its distribution-based business, Dynamic will expand and perfectly complement GeoPharma’s already flourishing manufacturing and distribution business segments. The combination of our two companies will allow for meaningful savings that currently tax each company as separate entities.

The Company went on to state that the combined revenues of the two companies are expected to be in excess of $90 million on an annualized basis. Furthermore, the Company believes that the acquisition will be accretive within the first year of consolidated operations. Dynamic sales will begin to be recognized by GeoPharma during the 3rd fiscal quarter ending December 31, 2007. Dynamic’s revenues for the six months ended September 30, 2007, were approximately $29.2 million.

– On May 9, 2007, GeoPharma, Inc., announced that it closed a $12.5 million debt and equity financing with a single institutional investor. Of the $12.5 million gross proceeds before placement fees and other costs, GeoPharma issued $10 million of convertible debt, $2.5 million of equity, and warrants. In addition, the investor has the option to invest additional funds in the future. Proceeds of the funding will be used to strengthen the Company’s cash position, support sterile injectable and other ongoing generic pharmaceutical expansion including plant infrastructure, equipment expansion, research and development, and related generic drug working capital needs. The funding, in which Rodman & Renshaw LLC acted as the exclusive placement agent, was completed April 5, 2007.

– On May 1, 2007, GeoPharma, Inc., announced that AMERIGROUP New York, LLC, and the Company have agreed to an amicable mutual termination of their Pharmacy Benefit Management and Services Agreement (the Agreement) in a manner that will allow each party to pursue their respective business interests. Under the Agreement, the Company previously managed AMERIGROUP’s health care plan members and administrated the members’ related pharmacy claims. The termination of the Agreement will become effective on May 15, 2007, unless extended by the parties for one or more 30-day periods as needed for the transition of services to another pharmacy vendor.

RECENT FINANCIAL NEWS

– On February 14, 2008, the Company indicated during a conference call that it expects to achieve revenues in FY 2008 in the range of $60 million, as compared to $56 million in FY 2007 ended March 31, 2007, and stated that it expects revenues in excess of $100 million are achievable in FY 2009.

– On November 15, 2007, GeoPharma, Inc., reiterated the positive outlook for its overall business as detailed in its second quarter conference call on November 14, 2007, including positive forward-looking revenue guidance for the fiscal year ending March 31, 2008, and the fiscal year ending March 31, 2009.

"The Company looks forward confidently to the future as our short-, intermediate-, and long-term plans begin to come together in a manner that will translate into top- and bottom-line growth,” said CEO Mihir K. Taneja. “The Company couldn’t be more pleased to have consummated the Dynamic Health Products, Inc., acquisition on October 15, 2007, and for its completion to improve the revenue expectations anticipated for the fiscal years ending March 31, 2008, and March 31, 2009.”

“The benefit of the first five months of the Dynamic deal should contribute $27 million to GeoPharma’s revenues during that period. That being said, we anticipate revenues in the $63 million–$65 million range for the March 31, 2008, fiscal year,” stated GeoPharma VP/CFO Carol Dore-Falcone. “Furthermore, for the fiscal year ending March 31, 2009, we believe that revenues in excess of $100 million are more than achievable. Eliminating a marginally profitable Pharmacy Benefit Management (PBM) business segment effective May 15, 2007, and replacing it with Dynamic, a more profitable distribution model, makes for an attractive transition given Dynamic is expected to provide higher revenues and profits.”

Commenting on the FDA approval of generic carprofen, GeoPharma CEO Mihir K. Taneja stated:

We intend to produce and distribute our newly approved drug offering and fully expect the first batches to be shipped shortly and those sales to be reflected in the 3rd quarter ending December 31, 2007.

Having the Dynamic deal closed and our first FDA drug approval realized should illustrate to the street our ability to execute our stated strategic objectives.

This is only the beginning of the Company’s financial blueprint. GeoPharma’s drug pipeline contains 12 ANDAs and other drug products, and several of these initiatives are pending approval and process completion. GeoPharma projects having six drug products contributing to the business model by the period ending March 31, 2009, adding approximately $15 million for that period to the top line. Our dedicated 100,000 square foot Beta-Lactam facility will play a major role in our future success and we continue to be encouraged by its progression toward production.

The Company predicts significant improvements in revenue and income in all aspects of our core businesses, not only for the remainder of the fiscal year, but for the foreseeable future. Understandably, with our recent developments, coupled with the knowledge that several new manufacturing contracts are currently coming online and the inventory restructuring of a major manufacturing client completed, it is easy for the Company to be bullish.

– On November 14, 2007, GeoPharma, Inc., announced financial results for the three months ended September 30, 2007.

GeoPharma CEO Mihir K. Taneja stated:

Although the second quarter proved to be a challenging one for GeoPharma, many recent positive developments allow the Company to look forward with continued confidence and optimism. Two major developments for the Company including the completion of the Dynamic Health Products Inc. acquisition, as well as the FDA approval of our first generic drug offering, carprofen, are prime examples of the Company’s growing advancement opportunities.

We maintain the belief that GeoPharma is well-positioned to finish the year strongly, with new manufacturing contracts coming online, the overhead inventory supply of a major manufacturing client eliminated, and the addition of new revenues and income generated from manufacturing Carprofen and the Dynamic acquisition.

Furthermore, we continue to make progress on the 12 ANDAs as well as other drug products in the pipeline.” He added, “The Company will obviously expound on all new developments as they reveal themselves in the next one-, three-, and six-month periods.

– On August 14, 2007, GeoPharma, Inc., reported a net loss of $(1.1) million, or $(0.11) a share, for the three months that ended June 30, compared to net income of $194,900, or $0.02 a share, in the same period a year earlier. Revenue for the quarter was $6.8 million, down 52% from revenue of $14.4 million in the year-ago period. Overhead associated with GeoPharma’s expanding pharmaceutical segment weighed on overall expenses, the Company said in a release. That segment had an increase in head count as well as more research and development costs, the release said. At the same time, the Company’s manufacturing and distribution segments had less revenue in part because of falling customer orders, the release said.

RISKS

Investment risks include, but are not limited to, the following:

Regulatory risks: New or amended government regulations could adversely impact GeoPharma’s business and operations. These may be subject to additional laws or regulations by the FDA or other federal, state, or foreign regulatory authorities or subject to the repeal of laws or regulations that are favorable, such as the Dietary Supplement Health and Education Act of 1994, or subject to more stringent interpretations of current laws or regulations, from time to time in the future. The Food and Drug Administration has also announced that it is considering promulgating new Good Manufacturing Practices regulations specific to dietary supplements. Such regulations, if promulgated, may be significantly more rigorous than currently applicable regulations and contain quality assurance requirements similar to Good Manufacturing Practices regulations for drug products. GeoPharma may, therefore, be required to expend additional capital resources on upgrading manufacturing processes and/or equipment in the future in order to comply with the law. The FDA or other governmental regulatory bodies could require the reformulation of certain products to meet new standards, recall or discontinue certain products that can not be reformulated, impose additional record keeping requirements, expand documentation of the properties of certain products, and expand or require different labeling and scientific substantiation. Any or all of such requirements could have a materially adverse affect GeoPharma’s business, financial condition, results of operations, and cash flows. Failure to comply with applicable FDA regulatory requirements could result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines, and possible criminal prosecutions.

FDA Approvals: GeoPharma plans to submit generic drug human and animal ANDAs for obtaining the FDA’s approval to manufacture generic drugs, as well as innovator drugs, for animals and humans in the future. It can not be predicted or guaranteed that the FDAwill approve any or all applications submitted, or when such applications will be reviewed or approved. Failure to receive FDA approval of certain generic drug products as they are submitted by GeoPharma could have an adverse effect on its future revenues, cash flows, and financial position.

Supplier risk: Since the federal drug application process requires specification of raw material suppliers as related to the production of generic drugs, if raw materials from a specified supplier were to become unavailable, FDA approval of a new supplier would be required. A delay of six months or more in the manufacture and marketing of the drug involved while a new supplier becomes qualified by the FDA and its manufacturing process is found to meet FDA standards could, depending on the particular product, negatively impact GeoPharma’s results of operations and financial condition. GeoPharma generally attempts to minimize suppliers’ risks by providing for, where economically and otherwise feasible, two or more suppliers of raw materials for the drugs it manufactures that may negatively impact GeoPharma’s ability to source API in adequate quantity, time, and prices.

Competition risks: Certain manufacturers of brand name drugs and/or their affiliates have introduced generic pharmaceutical products equivalent to their brand name drugs at relatively lower prices or partnered with generic companies to introduce generic products. Such actions have the effect of reducing the potential market share and profitability of generic products developed by GeoPharma and may inhibit it from developing and introducing generic pharmaceutical products comparable to certain brand name drugs. This price competition has led to an increase in customer demand for downward price adjustments by the manufacturers of generic pharmaceutical products for certain products that they may have planned to manufacture in the future. There can be no assurance that such price reductions for these products or others will not continue, or even increase, and therefore could have a material adverse effect on GeoPharma’s revenues, gross margins, income generated from operations, and cash flows.

Liquidity Risk: GORX is a speculative stock that is part of the Micro-cap segment of the market in which investors encounter risks that are less common in the Blue Chip, Large-cap, or even Small-cap segments of the market. Such risks include liquidity risk, arising from small trading floats and low trading volume, which may result in large spreads as well as high volatility in stock price. Moreover, micro-caps tend to have higher company specific risk, which contributes to lower valuations in this segment of the market. Micro-caps also have a higher risk of financial default.

Although we have factored the risks above into our projections, there can be no assurance that risks, known or unknown, may come to have an unforeseen effect on the performance of GORX and adversely affect the price of this stock.

DISCUSSION

Financial results for the third quarter of FY 2008 ended December 31,2007:

Total revenue for the third quarter ended December 31, 2007, increased by 203% to $18.2 million, up from continuing operation revenues of $6.0 million for the three months ended September 30, 2007.

Gross Profits for the third quarter ended December 31, 2007 increased by 200% to $3.6 million from $1.2 million in continuing operations gross profits for the previous quarter ended September 30, 2007.

Selling, general, and administrative expenses, exclusive of depreciation and amortization, increased to $5.3 million for the quarter ended ended December 31, 2007, from $3.7 million for the quarter ended September 2007. The increases in the last quarter were attributable to higher costs related to the acquisition of Dynamic Health in addition to legal and accounting costs and other business expansion items such as rents, payrolls, and related insurances.

Research and development (R&D) expenditures for the three months ended December 31, 2007, totaled approximately $310,000, all of which was charged as an expense to operations, as compared to $336,000 of R&D expense for the quarter ended in September 2007.

Net loss for the quarter ended December 31, 2007, was $(1.675) million or $(0.12) per share as compared to the quarter ended September 30, 2007, net loss of $(1.9) million or $(0.16) per share.

As of December 31, 2007, the Company’s balance sheet showed $6,844,828 in cash and near-cash. OUTLOOK

As seen in the table below, Manufacturing Segment Revenues increased sharply to $7 million in the latest quarter, reversing their downward trend of the preceding two quarters. We see this development as critical as we expect manufacturing revenues to amount to over 40% of total revenues and to contribute about 57% of gross profits in FY 2008.

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As expected, Distribution Segment Revenues in the last quarter also increased to over $11.2 million, of which $10.2 million was contributed by Dynamic, the results of which were consolidated for 2.5 months.

The revenues increase resulting from the Dynamic acquisition was offset by an increase in expenses, which contributed to the net loss of about $(1.6) million, or EPS of $(1.67), for the latest quarter.

Dynamic has been operating at close to breakeven in recent quarters, and management expects that tax and overhead savings resulting from Dynamic’s merger with GeoPharma will contribute to restoring profitability in Dynamic’s operations within 12 months.

In the course of the earnings call of February 14, 2008, management also disclosed news about its proposed ovarian cancer test to the effect that:

a) The Company is about to meet with the FDA to discuss how to proceed with clinical trials for this diagnostic test.

b) The Company is inclined to proceed with development of this test on its own rather than to out-license it or proceed with it by means of collaboration with third parties.

This news indicates that it is the Company’s intention to take full advantage and keep for itself the potentially very large market opportunity that the development and commercialization of this ovarian cancer test represents.

We now project revenue for FY 2008 of about $57 million and a net loss of $(3.97) million, or fully diluted EPS of $(0.31), down from our earlier expected revenue of $63 million and net income of $1.16 million, or EPS of $0.12 (see our of January 30, 2008 report).

We leave unchanged our projections for FY 2009 with revenue of $110 million and net income of about $16.6 million, or EPS of $1.10.

VALUATION

We used the discounted cash flow method for our valuation that we based on our projected EPS of $1.10 for FY 2009, given that FY 2009 will be the first full year of operation and consolidation of results following the merger with Dynamic.

Assuming that the market will give GORX a P/E of 10 at the end of FY 2009, its price will be 10x $1.10 or $11.00.

We used a risk-adjusted annual discount factor of 0.365 that we calculated by combining a risk factor of 0.25 to the risk-free Treasury yield of 2.30% (see our January 30, 2008 report).

To calculate a price target for GORX, we discounted back by one year our projected price of $11.00 by the end of FY 2009 and arrived to a 12-month price target of $8.00 (rounded down from $8.06).

We believe that this stock has good appreciation potential as it recently traded in the range of $2.75–$2.35, and we reiterate our “Speculative Buy” recommendation for it.

INVESTMENT CONCLUSION

We keep our 12-month price target at $8.00 for GORX, and we recommend it as a “Speculative Buy.”

Disclosure: The analyst(s) contributing to this report do not hold any shares of GORX