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The Best of Both Worlds: A Firm with an 8.5% Yield
and a 40% Discount |
Published:
September 14,
2007
Biovail (NYSE: BVF, $17.58)
is a Canadian pharmaceutical company that specializes in
developing and marketing drugs that utilize advanced delivery
techniques, such as orally disintegrating tablets. The firm is
perhaps best known for Wellbutrin XL, which is used to treat
depression. Other key drugs include Zovirax (anti-fungal),
Ultram (pain-killer) and Cardizem (blood pressure regulator).
Biovail has grown steadily over the past decade, with revenues
soaring 10-fold to reach the $1 billion mark in 2006. However,
over the last several years investors have seen little of that
growth reflected in the firm's share price, as the company has
been marred by poor managerial decisions and squandered
shareholder capital. Fortunately, that has all changed under the
direction of new chief Doug Squires.
Last December, the stock soared after management decided to lay
off its U.S. sales force in lieu of distribution partnerships.
At the same time, the company announced that future excess cash
would be used for core research and development (R&D), as well as a
sharp +200% hike in the quarterly dividend payment -- which now
stands at $0.375 per share.
However, the FDA dealt the company a serious blow in July by
rejecting (at least for now) an alternative form of Wellbutrin.
The shares tumbled on the news and have lost nearly one-third
of their value since the announcement. It hasn't helped matters
that the company is also now trying to fend off generic
competition for Wellbutrin.
While the FDA's decision was certainly a setback, we think this
is a classic knee-jerk overreaction. Wall Street has shaved more
than $1.3 billion off Biovail's market capitalization, yet the
proposed new drug would have only played a small role in the
company's sales --
some analysts didn't even factor it into their forecast models.
In the meantime, sales of other key drugs are up sharply. For
examples, year-to-date revenues for Ultram have reached nearly
$50 million, versus just $16 million at this point last year.
Biovail may not have any immediate catalysts for a rebound, but
the company is debt-free, has $470 million in cash, and is
devoting significant resources to the product development
pipeline. And with the stock now trading nearly 40% below our estimated
fair value, we believe patient, long-term investors will enjoy
strong gains from BVF in the coming years. In the meantime,
thanks to this pullback, they can lock in a hefty yield of 8.5% while they
are waiting.
Good investing!
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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