Kos Pharmaceuticals – Heading Back Up Again?

by The Graham Investor on February 16, 2006

Kos Pharmaceuticals (KOSP) [ GI Quote, News ] recently caught our eye on the Intrinsic Value Screen as it had been falling for some time. It now seems to be in the process of reversing its trend. A surge in trading volume today, along with an 8.36% rise brought it back to The Graham Investor’s attention.

A large part of Kos’s revenue comes from a single cholesterol drug, Niaspan, the only drug currently approved by the Food and Drug Administration to raise blood levels of high-density lipoprotein (HDL), or “good” cholesterol.

Kos is something of a minnow compared with its direct competitors, Merck, Bristol Myers Squibb and Glaxo SmithKline. Even Pfizer could be a competitor, as all are trying to create blockbuster drugs that raise “good” cholesterol (HDL) levels, rather than merely creating and promoting drugs aimed at lowering “bad” cholesterol (LDL) levels. A combination of both types of drugs, addressing both LDL and HDL levels simultaneously may be even more beneficial for patients.

With all the Big Pharma companies playing catch-up for now, however, Kos still has an slim advantage. The only problem is that Niaspan accounts for the majority of their revenues, so they need to build up their product line fast. The purchase of a number of cardiac and asthma drugs using the cash flow from Niaspan has gone some way towards this aim, and Kos is currently working on an inhaled insulin drug, to rival Pfizer’s Exubera, which recently gained FDA approval.

A look at the numbers seems to show that KOS has the highest revenue growth of its competitors, and the largest gross margins. Combined with a PEG well under 1, little debt, impressive cash flow and over $300m in cash, plus double-digit forward earnings growth, the product diversification can allow Kos to prosper. FYE 2005 earnings will be released on 23rd February. It is likely the price will continue to appreciate until then. The Graham Investor will follow these developments with interest, and a view to adding Kos to the portfolio if the 23rd February announcement itself creates further strength in the share price.

Chart:

1 year Chart for NASDAQ:KOSP

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