One more time!PHARMACEUTICALS
PanGeo Has A Secret
Mon, Oct. 30, 2000 17:44
By Thien Huynh, Canada-iNvest
B>PanGeo Pharma Inc. (PIL) has a little secret that it wouldn't mind sharing with investors. The company says it could increase its annual
revenues by 500% next year, based on acquisitions that have not yet been accounted for.
The Oakville, Ont.- based company is often described as a baby Patheon (PTI) because both companies compete in the contract drug
manufacturing space. Patheon is Canada's largest discount drug maker with a market capitalization of close to $600 million. The smaller
PanGeo made only $5.7 million in total revenues in 1999 and lost money. But the company announced that it made $4,787,453 in revenue in its
September second quarter report for 2000. It was the firm's first profitable quarter ever.
Bob Leshchyshen, a Special Situations analyst at Northern Securities thinks that investors will be in for quite a surprise when PanGeo releases
its third quarter results. The Q2 revenue numbers are deceiving because the assets that PanGeo acquired through acquisitions were not counted
in the official report.
Leshchyshen thinks that annual revenues will rocket towards $35 to $45 million once acquisitions are accounted for. He predicts the following
year will bring in about $55 million in revenue. The company already has shown 57% organic growth in fiscal 2000 over fiscal 1999.
"They are going to be, by the end of this year, somewhere within the vicinity of $40 million in sales with the acquisitions they have made because
these acquisitions just occurred and all the revenues have not shown up on their statement. So the next quarterly statement that comes out is
going to be higher than the $4.7 million that came out last quarter," says Leshchyshen.
"People are going to be surprised. This is going to be a big company. All of sudden people are going to see this so right now, it is like a hidden
secret, at this point in time because they are not on anyone's radar screen. They are going to be in pretty good shape. When the results come
out and people begin to be aware of it, I think you'll see the stock move up. On a run rate basis, if you take the last quarter in the year 2002 and
multiply it by four, it will probably be closer to $65 million. By the year 2001 they will be very profitable."
The global pharmaceutical industry is a lucrative one, totaling US$260 billion worldwide in 2000. Approximately $60 billion represents
manufacturing costs. Of that, $20 billion is spent on the primary manufacturing of active drug substances (bulk drugs). The other $40 billion goes
to secondary manufacturing of final dosage forms.
It's estimated that approximately 20% of the secondary manufacturing is outsourced and that number is expected to increase over the next few
years. Patheon and PanGeo are primarily involved in the secondary manufacturing area, so the market size is potentially US$8 billion.
Leshchyshen says there are external risks investors should know about.
"Some of the contracts could be cancelled. But typically, that doesn't happen and companies don't cancel the whole contract. Another risk is
that demand for certain drugs could diminish and the contract size will decrease in unison. But that's an outside risk. There is some risk in terms
of foreign exchange because they sell outside of Canada, but that's a typical business risk."
"There is liquidity risks in the stock because a lot of it is held by institutions and some people have big chunks of it and are holding on. There is
some more distribution going on to try to get some more liquidity."
Leshchyshen is in the process of issuing a recommendation and price target on PanGeo. The stock has a 52-week high of $2.56 and a low of
$1.10. The company recently announced the closing of the private placement of 3,549,300 special warrants and 3,950,700 units through Dundee
Securities and Northern Securities. The subscription price is $1.40 for each special warrant or unit for gross proceeds of $10,500,000.