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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Eagle Pharmaceuticals

August 19th 2016

Eagle Pharma
Nasdaq Symbol: EGRX
Industry: Drug maker
Price as of 8/19/16: $59.27

 

                So far so good for the stock market. August is statistically one of the worst months of the year, but so far has held up like a champ. We'll see if September, which is also one of the worst months for the major averages, does as well. In any event, as we mentioned last month, we are seeing money rotate out the sectors that worked well Telecom, Utilities, and Consumer Staples and into the beaten up sectors like Healthcare. Our featured stock last month, Celgene is off to a good start. Celgene should be a good stock for the rest of the year and into 2017 and beyond. This week we'll highlight a small cap healthcare drug maker that just reported better than expected earnings. The stock of the week is Eagle Pharmaceuticals. Eagle, like most healthcare stocks, underperformed in the first half of the year dropping over 50%. But since the start of the third quarter and following better than expected earnings, Eagle Pharmaceuticals is now set up to outperform going forward. Eagle Pharma is not a conservative stock and is certainly a volatile stock, but for growth investors that don't mind a little volatility, Eagle Pharma has great growth prospects and a cheap valuation that should provide good capital appreciation for the next year or two.

 Eagle Pharmaceuticals is a specialty pharmaceutical company that focuses on developing and commercializing injectable products in the critical care and oncology areas. In the first half of the year there were a lot of concerns that earnings estimates were too high and had to come down, but following earnings a few weeks ago, those concerns have subsided. On August 9th, Eagle Pharma beat earnings by 9 cents on better than expected sales. Revenues rose 581.7% year over year to $40.9 million thanks in large part to their drug, Bendeka which now commands a market share of 80%. Other good news that came out of the earnings report was the FDA determining that no additional human safety and efficacy data was required for their drug Ryanodex. Eagle Pharm is also reducing their royalty payments for the acquired drug, Ryanodex from 15% to 3% for a purchase price of $15 million in cash. Thanks to the better than expected earnings and management's improved visibility and confidence in cash flow, the company issued a $75 million share repurchase program or 8% of their current market cap. The initiation of a share buyback could be the direct result of a private equity firm, Hudson Executive that bought a 6.1% equity stake in company in the second quarter getting more involved to boost shareholder value.

  Eagle Pharmaceuticals has run up nearly 100% from the June lows, but is still down 30% for the year. Now that management has more confidence in earnings, the stock looks cheap. Currently, Eagle trades for 3 times sales, 18 times earnings, and 11 times next year's earnings. The analysts are expecting a big pick up in sales and earnings next year with sales growing 44% and earnings improving by 63%. If the company can excuse on these numbers or even come close, the stock should not be trading for just 11 times earnings. With M&A activity heating up in the healthcare sector, Eagle could also be humored to be a takeover target. Even any event, the stock valuation has good risk reward for growth investors going forward.