At first glance, it may seem like bioscience investing is so complicated and risky that it's hardly worth your time and money to invest, at least if you don't have someone knowledgeable to guide you.
And it's true. Putting your money behind new, experimental drugs, without some guidance, is a crapshoot.
But there's an approach to making profits from this sector that doesn't rely on breakthrough discoveries, expensive drug trials, or constant cash infusions through dilutive public offerings to fuel its engine.
That's what makes the company we'll look at today such an attractive investment.
Welcome to the lucrative world of generics...
These Unassuming Little Pills Can Make You Rich
According to the U.S. Food and Drug Administration (FDA), generics "...are copies of brand-name drugs and are the same as those brand name drugs in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use."
In other words, they're the knock-offs of some of the most recognizable pharmaceutical brands on the market.
However, generic drugs don't get off scot-free from FDA scrutiny just because they're copies. The manufacturer has to prove they're good copies, that is, that they're bioequivalent to their brand-name doppelgangers. They have to absorb, distribute, metabolize, and excrete in the same way (equivalent pharmacokinetics) as the original brand.
Similarly, they have to demonstrate similar pharmacodynamics - the therapeutic effect must be the same at the site of action in the body, including the time it takes for the drug to work, and side effects should occur at no greater intensity or frequency than with the brand-name drug.
And so, generics work in the same way as their more famous "brand-name" competitors. Only they're cheaper for consumers, more lucrative for manufacturers, and, right now, just as- or perhaps even more- attractive to investors.
The key driver for investors is recognizing their current window of opportunity.
The Patent Cliff Is Your Generic Advantage
Generics hold a huge advantage in the marketplace. According to Forbes, the average new drug costs $4 billion to develop, and the price tag can run as high as $11 billion. A large portion of those costs are research and development (R&D) expenses that occur over the course of 10 to 15 years of preclinical and clinical trials, which generic manufacturers skip altogether.
Once they prove they've got a good copy, they just make 'em and sell 'em.
Of course, before they can legally do that, the patents (and any marketing exclusivity granted by the FDA for drugs in certain categories) on the target brand medication have to expire. Normally, that takes about 20 years, but patents are often filed at the beginning of clinical trials, and by the time the drug actually gets to market, there may be only 10 years of protection left.
Currently, a lot of brand drugs are going over the so-called "patent cliff," and generics manufacturers are having a field day, making money hand over fist. The compound annual growth rate for the industry- depending upon which report you read- lies between 11.5% and 15%. Well over 80% of all prescriptions in the United States are currently filled with generics. That's a lot of revenue.
For the neophyte bioscience investor, it's a platinum opportunity... but the time to invest is now.
This year, 18 drugs will lose their patent protection. In 2015, only nine will.
So the opportunities for generics manufacturers will be cut in half, just like your investing advantage time horizon.
With so little time available, you need to focus on the best opportunity in the market.
Put Your Money into Lannett Company
The challenge is in finding a stock that has established a strong track record but still has room to grow. The big generics makers, like Teva Pharmaceuticals Industries Ltd. (NYSE ADR: TEVA), (Sandoz) Novartis AG (NYSE ADR: NVS), and Mylan Inc. (Nasdaq: MYL), sport market caps in the many billions of dollars. They've already seen most of their upside- particularly now, with fewer patents closing out next year.
Micro-cap companies, on the other hand, are very risky- they're easily pushed out of the competition by the big guys, and, again, the opportunities for them after this year will be severely limited.
But there are a few companies that have recently enjoyed explosive expansion and are still moving upward. One is Lannett Co. Inc. (NYSE: LCI).
Lannett's current product portfolio includes about 25 compounds, all available in various strengths and order sizes, and 19 more product applications already pending at the FDA. So even with the slow-down in patent expirations, Lannett should be able to nearly double its catalogue in the near future.
Lannett's Top and Bottom Line Growth Is Set to Surge
It isn't just Lannett's remarkable product portfolio that makes this company low-hanging fruit for investors- incredible financial performance is also in the mix.
Over the past two years, LCI's price per share (PPS) has grown over 1,000%. What's driving it up?
Among other things, profits and sales.
Earnings have gone up for seven straight quarters, with the last showing a gain of 242%. Over the last three quarters, sales have also rocketed- up 105% at the last earnings report.
In fact, performance has been so strong that Lannett has earned a 99 Composite and Relative Price Strength Rating for its industry- the highest possible.
On June 2, 2014, the company announced that it would be added to the S&P SmallCap 600 Index, in order to increase its visibility in the investment community- and by implication, investor interest. And it worked. Since the announcement weeks ago, PPS has risen 16.7%.
With a current mid-range market cap of $1.71 billion, Lannett is in a great position to continue its expansion- and raise its valuation- through the foreseeable future.
In short, it's a terrific opportunity for investors.