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 Reports and Commentary from the Investment World

Reports and commentaries are posted here on a regular basis.


Genepharm revisited


Genepharm  (ASX:GAA)

Genepharm has been our only underperforming share in Australia, in the last year.  It is a good time to re examine the case for investing in this small biotech company.
This is a company that we have traded before for our clients.  On previous occasions  we almost tripled our money in less than a year.
The fundamentals remain good - the increase in use of generic pharmaceuticals looks set to continue well into the future. The acquisition of Douglas Pharmaceuticals last year, added more products & distibution channels for the company and is a great fit . All our original reasons for liking this stock are still relevant and the stock price has been depressed lately.
Below is part of the original report on the company, from July 2004. We bought the shares then at AU$0.52 and sold out at AU$1.39 in January  2005. 
The shares are hovering around 0.50cents, at present and we would expect them to get back to at least AU$1 within the next year.

"Genepharm is the only dedicated generic pharmaceutical company listed in Australia. The company was an IPO in June , when it listed on the ASX.
This small cap stock has the potential to return big profits to early investors.
Genepharm is a specialist generic pharmaceutical company committed to the development, marketing and distribution of a premium range of generic pharmaceuticals. This includes some of the newest and highest value pharmaceuticals in the Australian Pharmaceutical Benefits Scheme (PBS), for which patents are due to expire over the next 1 -3 years.
Genepharm was incorporated in 2003 to specifically enter into an exclusive distribution arrangement with the Genepharm Group, in order to bring to the Australian and New Zealand pharmaceutical markets the extensive range of products currently manufactured and distributed by Genepharm SA in Europe, and the future product pipeline of major generic prescription pharmaceuticals under development.
The pipeline of files and drugs from Genepharm SA in Europe  positions Genepharm Australasia  with key competitive strengths:
Genepharm Australasia  does not have to negotiate individual license arrangements for drug registrations and does not have to pay royalties to products sourced from Genepharm SA. The Company will have lower TGA registration costs due to technical and regulatory assistance from Genepharm SA and will enjoy highly favourable payment terms for manufactured products imported from Genepharm SA.
The mission of the Company is to build a valuable business that will be a leader in Australasia’s expanding generic pharmaceutical market through the sale of a premium range of generic pharmaceuticals using innovative marketing strategies that will create value for its customers and shareholders.
Genepharm is focused on bringing to the Australian and New Zealand pharmaceutical markets a portfolio of products that takes advantage of the robust market opportunity that is open to generic pharmaceutical suppliers in coming years.
Generic pharmaceuticals in Australia are expected to increase almost threefold to an estimated $2billion in dispensed value by 2008.
Genepharm will target Australia and New Zealand via pharmaceuticals with high Australian Pharmaceutical Benefits Scheme (PBS) contributions and with patents expiring during the next 1-3 years. Genepharm expects to grow  through the introduction of new generic pharmaceuticals, possible expansion into Asia and licensing new  therapeutic products to complement its product portfolio.
Acquisition opportunities of related businesses to introduce new products or new markets for Genepharm pharmaceuticals will also be targeted.
The company’s short-term strategy is to complete registration and market approval of its first range of pharmaceutical products with the Therapeutic Goods Administration (TGA).
Genepharm will initially register 40-50 products in the first 36 months of listing that will include 36 of the top 100 pharmaceuticals subsidised by the PBS.
Following this Genepharm will expand its product portfolio by a further 40 to 50 new products over the next 5 years.
Products will be sourced from European Genepharm SA.
Drugs expected to be marketed are Simvastatin cholesterol lowering medicine, Sertraline and Citalopram antidepressant drugs, Felodipine a cardiovascular medicine and  Carboplatin a specialist anti cancer drug for lung cancer.
Markets to be targeted are all retail pharmacies and hospitals.
Genepharm products will be purchased through wholesalers Australian Pharmaceutical Industries, Mayne Group and Sigma Pharmaceuticals.
Buy Genepharm Australasia (GAA:ASX) up to AU$0.75 and hold for 3 years."

In August 2007, the share price was negatively impacted when the company announced the pending termination of its existing distribution agreement. But having a closer look at this, it would appear that in the long run, this will have a good outcome for Genepharm.  Below is an extract from the company announcement: 

Financial impact on the Company of the (conditional) termination of the Distribution Agreement
As a consequence of the (conditional) termination of the Distribution Agreement, the Company has written-off all of the intangible asset value of the Distribution Agreement and its associated costs of $18,461,106.26, of which 90% or $16,696,689.16 is the write-off of the remaining non-cash intangible value of the Distribution Agreement on the Balance Sheet of the Company. Given the existence of the Dispute, the decision of the Company’s management to write-off of the intangible asset value of the Distribution Agreement and its associated costs will not be reversed if Shareholders do not vote in favour of the resolution.
The write-off of the Distribution Agreement will not have any impact on the tangible asset position of the Company. The write-off will significantly reduce the Company’s ongoing amortisation expense in future years; which currently amounts to approximately $2.4 million per annum.

Reasons for Termination of the Distribution Agreement
The Directors of the Company decided to approve (subject to Shareholder approval) the termination of the Distribution Agreement and the Related Agreements for the following reasons:
• Under the Distribution Agreement, the Company must not sell third party products if those third party products are or will be competitive with the Genepharm Group’s products. On termination of the Distribution Agreement, the Company will be allowed maximum fl exibility to seek cost competitive pharmaceutical products from a wide range of suppliers, unencumbered by the Distribution Agreement.
• Today the Company is not being supplied any pharmaceutical products by GAPE.
• GAPE is not the lowest cost supplier of products available to the Company. The Company needs to source products from low cost suppliers in order to ensure that it remains competitive in the market. Under the Distribution Agreement, the Company was to be supplied products at a specifi ed percentage of Price to Pharmacy (“PTP”), prevailing at the time of the Distribution Agreement.  However, market developments have meant that generic pharmaceuticals can be accessed at lower prices than those at which GAPE was prepared and able to supply products to the Company.
Having the flexibility to draw on a variety of suppliers will enable the Company to access generic pharmaceuticals on  more competitive terms & conditions.
After the termination of the Distribution Agreement and the Related Agreements, the Company will be able to use the “Genepharm” name and the Logo in Australia and New Zealand. The Genepharm Group will be able to use the Logo outside Australia and New Zealand and may register the Logo in conjunction with the Name outside Australia and New Zealand.

The Company has recently announced a share buy back to commence on 5th November 2007. This is usually an indication that the insiders at the company have confidence going forward.

We believe at the current price, Genepharm is a good speculative buy.


Disclaimer: All the information above is provided as a service for individuals and institutions. It should in no way be construed as a recommendation as an investment. Investment decisions should be based on the risk tolerance and planning horizon of the investor. Market participants must understand that past performance is also not a guarantee or predictor of future results.