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Friday, December 31, 2010

Recent upgrades on Cloud Peak Energy (CLD)

As I write this, CLD has broken past the $23 resistance - next resistance at $23.56 or 52 week high.  The recent upgrades are most likely due to recent developments relating to items that have plagued the stock over the past 12 months.

CLD has LBA's (lease by agreement) with the federal government relating to its PRB (powder river basin) coal.  Estimated payments through 2014 are estimated at almost $1 billion, causing potential liquidity issues in upcoming years.  Several things have happened to improve this outlook.  One, PRB coal prices have significantly increased over the past twelve months.  Second, several LBA's have been blocked by environmentalists and have been delayed due to litigation.

CLD's major shareholder, Rio Tinto Ltd, owned 48% of the company and was locked up until mid 2010.  In mid December, an offering for for approx. 26M shares at $19.50 solved this problem.  Investors were looking for Rio to liquidate their investment after the lock up period and feared what the selling would do to the stock price.  Now that this is behind the company, it puts a nice floor in the stock price at the $19.50 offer price.

Other key notes supporting this investment thesis -

- 85% of CLD's 2011 production volume has already been priced - less exposure to future volatility in PRB coal prices

- Management has recently stated utility inventories are at low points and are asking for Q4 2010 delivery of 2011 orders

- Management has recently stated several utilities have sent out RFP's for PRB & Illinois coal that typically burn Central Appalachia coal

- CLD currently trades at a discount to its peers and almost 13% of the float is short - provides for a nice short squeeze

If you are looking for a 100% thermal coal play with some legs, look no further and watch for that break of $23.56 with volume to get long.

Wednesday, December 29, 2010

Predictions for 2011: Generic Drug Wave part II

Another way to play the generic drug wave is through the drug distributors - Cardinal, McKesson and Amerisource Bergen.  In this space, I like Amerisource Bergen (ticker: ABC).

Customer Base:
ABC has a very diversified customer base that includes mostly independent pharmacies.  On the other hand , Cardinal has two large customers in Walgreen's and CVS Caremark.  In similar fashion, McKesson also has many large customers, of which a couple are known to be at risk (Katz Group, IPC).    ABC's smaller customers rely heavily on ABC's distribution channels and do not have the size to take this function of the supply chain in-house.

Specialty Niche
Per ABC's recent investor day presentation, ABC has over 50% on oncology offices in the United States in their network.  They are also the leading distributer in dialysis, blood plasma and opthalmology products as well.  The demand for specialty drugs, especially oncology, has significantly increased over the past several years. This trend will stay intact as our country's largest generation reaches retirement age and demands such treatment.  ABC offers a full range of solutions to these specialty physicians, such as Nucleus Solutions, which offers tools to monitor your clinical and financial performance, along with manage claims and inventory.  In addition, ABC offers consultation with many of the manufacturers in these areas to provide insight as seen from the end users of their products.  ABC also combines like-specialities and organizes GPO's to obtain group purchasing discounts that their clients could not obtain individually due to their size.  In fact, ABC has organized the US's largest oncology GPO.

The other major distributors have been late to to the game in this area.  McKesson recently acquired US Oncology and Cardinal Health acquired Health Solutions Holding, LLC, both of which offer an opportunity to tap into the growing oncology and specialty drug distribution channel.  However, ABC has long been the undisputed leader in the specialty area and grabbing market share will be an uphill battle.

Due to ABC's dominance in the specialty space, the growth in specialty generics will benefit ABC much more than Cardinal and McKesson.

Generic Wave
As I spoke in a previous post, ABC and the other distributors will benefit from the generic drug boom as big pharma go through the patent cliff.  At the investor day, ABC discussed their focus on growing their generic growth greater than the market through efforts such as PRxO Generics and TruVu, both parts of their Prime Vendor Model.

In addition to generics, biosimilars serve as another great growth opportunity as that technology catches on.

Uninsured Demand
Fueling the growth in specialty and generic is the 30 million (est provided by Dave Yost, CEO) uninsured patients coming on-line provided by the healthcare reform bill.

I like both my Watson and ABC play for different reasons.  For Watson, the aspect of international growth in compelling, which would drastically increase their market cap, earnings power and ultimately their share price.  In addition, Watson is a great takeover candidate for other generic or big pharma companies due to its smaller size and gateway into the generic growth story.  As for ABC, its more of a conservative bet on the generic growth story without the risk that Watson has, where its developing and manufacturing a generic version in which other players can easily bring their versions to market.  With ABC, the generics offer higher gross margins (as compared to branded drugs) and their customer base is diverse and greatly depends on their supply chain and other services.

Predictions for 2011: Generic Drug Wave part I

I see a huge opportunity in the generic space as big pharma battle the "patent cliff".  Over the next ten years, it is expected that approximately $100 billion of revenue will be lost to generic substitutions.  To mitigate these pending revenue losses, branded pharma companies have implemented price increases over the past five years for popular drugs such as Floxmax, Advair, Nexium and Lipitor - some almost doubling.  As a result, consumers & companies offering benefits have been pinched.  PBM's (prescription benefit managers) have recently started advising their clients to promote the use of generics by either waiving or reducing the co-pay's to the employee and this trend is really starting to gain traction.

So, how do you cash in on this trend?  One could invest in companies that produce generics - the bigger ones being Teva and Mylan.  However, Watson Pharmaceuticals (ticker: WPI) has a more compelling story for the reasons discussed below.

Watson is much smaller than Teva & Mylan with roughly 8% of TRx, or total number of drug prescriptions, in the US.  So, product approvals and launches can move the EPS needle much more due to its small size.  For instance, the major drug launches mentioned in the following paragraph will help Watson propel their revenue size from $2.8B in 2009 to $5.4B by 2012, some analysts believe.

Upcoming Drug Launches
Watson has recently partnered with Johnson & Johnson through 2014 to produce a generic version of Concerta, an ADHD drug, with approx. $1.2B in '09 sales.  This drug has no approved ANDA's (abbreviated new drug applications) and J&J has 'no tamper' language on the label, which will block other generic entrants until November 2012.  The drug is set to launch in May 2011.

Watson also acquired Arrow, which has the generic rights to Lipitor (Cholesterol), the #1 drug in the United States.  '09 sales for Lipitor were $5.4B and the drug is set to launch in November 2011 w/ exclusivity rights shared with another company (Ranbaxy).

In 2012, generic versions of Plavix (Blood Clot Preventative) and Actos (Type II Diabetes) are set to launch with '09 sales of $4.2B and $2.5B, respectively.  However, both drugs will have several players launching generics as well.

With these successful generic drugs in the pipeline, this also paves the way for Watson's branded drug business.  With branded drugs, gross margins are much higher and product lives are longer.

Core Competencies
Watson drugs are weighted toward extended release formula, patches and injectables, which make these drugs harder to replicate.  This is crucial since the generic drug industry is highly competitive with low barriers to entry, which can create pricing pressure.

International Opportunities
Currently, Watson has very limited international exposure which is both good and bad.  On the good side, Watson is not exposed to western Europe price cuts.  However, emerging markets offer tremendous growth.  The company will likely need to look at future acquisitions or joint ventures to increase their exposure.  With the stock trading close to a 52 week high as I write this, its obvious this is not pinning down the stock.  So, this could be a huge catalyst in upcoming years if Watson secured a presence in emerging markets such as India/Latin America and developed countries such as Russia.

If we get that much anticipated pullback in the market come January and February, I'd definitely pick up some WPI for the long-term account.   There is no doubt the generic drug wave will be huge in the upcoming years - especially with our nation's largest generation moving into retirement age, which will drastically increase the # of scripts written by doctors.  Don't get me wrong, the generic drug wave is much anticipated and its obvious this is baked into the stock at 1.9 PEG ratio.  However, the Street's valuation does not include the huge opportunity in emerging markets that Watson just hasn't touched yet and thats what makes it much more compelling then Teva and Mylan as a long-term investment.

Stay tuned for more ways to play this boom in generic drugs.

Sources used: Verispan, VONA; Credit Suisse; AARP