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Coverage Initiation: Hi-Tech Pharmacal (HITK)
Hi-Tech Pharmacal (HITK) was founded in 1982 and went public approximately ten years later. The pharmaceutical concern develops, manufactures, and markets generic, prescription, and over the counter drugs. It specializes in difficult-to-manufacture liquid and semi-solid medications and manufactures a range of ophthalmic, otic, and inhalation products.
A relatively small participant in the industry, the company has three operating units. Its Hi-Tech Generics business represented about 81% of fiscal 2011 sales, ECR Pharmaceuticals accounted for 12%, and Health Care products the remaining 7%.
ECR Pharmaceuticals develops and distributes branded prescription pharmaceuticals. The group’s products treat various ailments from pain and sleep disorders, to allergies, poison ivy, and swimmer’s ear. The majority of this division’s products are not manufactured by Hi-Tech (the sole exception to this are generic versions of Vosol), and are, instead, created by contract manufacturers and sold by Hi-Tech. In addition, research and development for this unit is also conducted through contract organizations.
The Health Care Products Division markets a line of over the counter branded medications, nutritional products, cosmetics, and medical devices, primarily for people with diabetes. Its products include Diabetic Tussin (this product accounted for over one-third of this division’s sales in fiscal 2011), DiabetiDerm, Multi-betic, Mag-Ox, Choice DM, and DiabetiSweet. The division also sells the Zostrix brand of capsaicin products for pain management of conditions including arthritis and diabetic foot pain. Diabetes is a growing market, as an increasing number of cases are the result of poor dietary choices. This group also markets Nasal Ease homeopathic allergy reliever.
By far the largest division, however, is Hi-Tech Generics. This division primarily creates prescription items, including oral solutions and suspensions, topical creams and ointments, and nasal sprays. It manufactures products at a sterile facility that is capable of producing liquid ophthalmic, otic, and inhaled products. That said, products created at one location, which has two manufacturing facilities within it, account for over 80% of the company’s sales—any disruption at this facility would have an outsized impact.
In fiscal 2011, the company’s top five generic products were Fluticasone propionate (the generic equivalent of Flonase from GlaxoSmithKline), Dorzolamide with Timolol, and Dorzolamide (the generic equivalents of Cosopt and Trusopt from Merck), Sulfamethoxazole with Trimethoprim (the generic equivalent of Bactrim from Roche), Hydrocodone with Homatropine (the generic equivalent of Endo’s Hycodan) and Lactulose (the generic equivalent of Sanofi-Aventis’ Chronulac and Cephulac). Hi-Tech has about 50 prescription products approved for marketing by the Food and Drug Administration (“FDA”), with over a dozen more in the approval process. Another 20 products are in development.
Hi-Tech his historically developed and licensed branded products with a focus on niche markets, such as diabetes care and related areas, and in creating difficult to manufacture liquid and semi-solid dosage products requiring sterile manufacturing processes. This focus has helped to support the company’s expansion since its founding. As the company looks to expand its offerings, it tends to seek out products that have limited competition due to smaller market sizes but that management believes can generate long-term revenue streams and products that are difficult to bring to market and, thus, more likely to face limited competition. Management believes that the later group will allow the company to earn higher margins for a longer period of time. Nasal sprays and sterile products, including ophthalmics and inhalation products, fall into this category.
The company primarily operates in the generic drug space, making its outlays for research and development less onerous than those looking to create new medications. Still, the cost of creating generic versions of existing products is not insignificant and represents an important expense for the company. Indeed, research and development expenses equaled about 5% of 2011 revenues. Even in the generic space, having a pipeline of new products is a key factor in expanding the top and bottom lines.
Hi-Tech’s customers include chain drug stores, drug wholesalers, managed care purchasing organizations, certain Federal government agencies, generic distributors, mass merchandisers, and mail-order pharmacies. Key customers include McKesson Corporation, Cardinal Health, Inc., AmeriSourceBergen, CVS, Walgreens and Medco. The company’s top five customers accounted for over 50% of sales in fiscal 2011, with three representing more than 10% each. Although the company sells into fairly consolidated industry sets, the loss of any of its largest customers could severely affect both its top and bottom lines.
The company is also subject to numerous regulations, covering its research, manufacturing, production, and distribution efforts. Compliance with all of the laws and regulations to which it is subject is vital to the company’s business. Although not unique to Hi-Tech in the pharmaceutical industry, this cost is noteworthy because it affects such a broad swath of the company’s operations. Legal costs are also notable, as a large part of Hi-Tech’s business revolves around challenging existing drug patents.
Competition arising from other generic drug makers also has the potential to affect Hi-Tech’s fortunes. For example, the FDA recently gave approval to an Indian drug company to market generic Flonase, an important product in Hi-Tech’s portfolio.
Hi-Tech has expanded rapidly in recent years by using a focused and selective product approach. Interested subscribers should monitor Value Line’s quarterly coverage of the company, while keeping an eye out for Supplemental reports highlighting late-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.