mmm profitable and share buy back coming..Got to be worth >50c...

mmm profitable and share buy back coming..

Got to be worth >50c soon me thinks.
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Genepharm (GAA) 43c

OSTENSIBLY the generic drug game holds little investor appeal given the Government has ordered suppliers to charge 25per cent less next year.

But Genepharm chief Dennis Batsas says that folk have wrongly assumed that if market leader Sigma is doing it tough, others must be doing it even harder. "Elmo was shocked when we disclosed our gross profit position," boasts Batsas.

Batsas describes the effect of the mandatory price cutting - part of the Government's effort to rein in the runaway cost of the Pharmaceutical Benefits Scheme - as "asymmetrical", saying: "For some there will be opportunities to grab market share and for some there will be insurmountable hurdles."

Following its $70 million acquisition of rival Douglas in June last year, Genepharm late last month reported net sales of $54.6 million (post discounting) and a net profit of $4.6 million.

Genepharm claims an 11 per cent market share, almost double the level of a year ago. According to Batsas, this share has been mainly at the expense of the No2 competitor, Alphapharm.

Alphapharm still has a 30 per cent market share, but this figure was more like 50 per cent a year ago. Despite its woes, Sigma has maintained its share at about 35per cent.

Batsas forecasts current-year profit growth of "in excess of 25per cent". He argues the 25per cent wholesale generics reduction need not translate into Genepharm's actual turnover - or margins - falling by the same degree.

"We are budgeting for a 10 per cent reduction in the net sales value of drugs," Batsas says. "But balancing that, we have been working with suppliers to lower the cost of goods.

"We see cost reductions of 20-40 per cent and can do that because we have the most flexible supply contracts in the market."

(Sigma, incidentally, targets a 15 per cent reduction from "current PBS values".)

Batsas says the generics market is naturally expanding as brand-name drugs come off patent. On Genepharm estimates, generics will turn over $1.8 billion by 2010.

Batsas says the more recent drugs to go off-patent have won greater acceptance as a substitute than the older ones. Pharmacists are free to prescribe a generic alternative if the doctor's scrip does not specify a branded drug.

"The older drugs achieved only 10-30 per cent substitution but the bigger drugs are getting in excess of 50 per cent when they are launched," he says.

But if Batsas is convinced he holds the formula to success, investors are hoping for a stiffer prescription. Genepharm shares are a far cry from their $1.08 level in early June last year, when Criterion rated the stock a long-term buy.

We think Genepharm deserves a further chance and we ascribe a buy call. Batsas is backing his lament that the shares are undervalued by planning a share buyback to take advantage of the price malaise.

www.theaustralian.news.com.au/story/0,25197,22453713-23634,00.html