Cambrex (CBN) - An Evaluation.
Who is Cambrex?
Cambrex was founded in 1981 and is headquartered in NJ. It provides products and services for the development and commercialization of new and generic meds worldwide. Its products are active pharmaceutical ingredients and intermediates that are used in the production of prescription and over-the-counter medications. It serves generic drug companies, and companies that discover and commercialize small molecule meds.
Cambrex assists big drugmakers and biotech companies, providing processes and active pharmaceutical ingredients to help them start to manufacture commercial quantities of drugs. It has several hundred customers, but biotech giant Gilead is its biggest customer. Gilead accounted for 24% of revenue in 2014.
How did you learn about them?
I learned about it when PuddinHead brought it to the board a month or so ago. Thanks, PuddinHead. Some of what I’ll write here is straight from PuddinHead.
Let’s look at criteria? Are they growing Revenue?
For a quick look at Revenue:
2012: 278
2013: 317
2014: 374
Thus 2013 revenue was up 14% and 2014 revenue was up 18%. They predict revenue for 2015 will be up 16% to 20%.
How about earnings?
2013: 99
2014: 133
So they were up 33% last year. Their trailing earnings are now $1.96 as I calculate them, and they are up 91% for the first nine months. I don’t think that pace will be maintained, but comparisons will obviously be good.
Is there a reasonable PE?
It’s currently 25
Tell me more what they actually do?
CBM makes small molecule meds, which are the standard drugs constructed through chemical processes and still comprise the majority of all drugs (as opposed to biologics like Humira for rheumatoid arthritis). Since each of these small molecule meds is composed of smaller components, there is a market for someone to mass produce those components as CBM appears to do.
Cambrex categorizes its products and services into three categories - Innovator, Generics and Controlled Substances.
The Innovator category is CBM’s biggest and fastest-growing area. They bid on already approved and sometimes already commercialized products. These products are owned by Innovator pharmas interested in having a second source of supply. Custom manufacturing is also part of the Innovator category. At present, CBM custom manufactures 30-35 products under medium-to-long-term supply contracts. Overall, CBM anticipates 31%-34% growth in sales of Innovator products this fiscal year, up from earlier guidance of 27%-30%.
In the Generic category, CBM has 18 generic products in development. The Company minimizes its competition in this space by targeting more complex products that utilize its biocatalysis technology platform and/or special technologies and capabilities. CBM expects mid to high single-digit sales growth for this business in this fiscal year.
Controlled Substances is a highly regulated niche market with entry controlled by the DEA. CBM is currently sampling two new opiate products and developing the third controlled substance for an ADHD product. The Company shipped samples of the ADHD product during the quarter and expects commercial volume to begin in 2018. By adding opiate products to its offerings, CBM is able to address more market opportunities. Controlled substances sales were $17 million, up 60% from to $11 million and management increased its guidance for this business to low double-digit sales growth this year versus earlier guidance of high single-digit growth.
Can they meet demand?
To meet growing demand, CBM is expanding capacity and capabilities at its various plants. The majority of capital expenditures are supporting a large-scale expansion of its Iowa facility, the second expansion of this facility in three years. The build-out remains on schedule and the additional capacity is scheduled to come on-line in the March quarter. Importantly, this expansion includes a large shell that provides enough space for a subsequent future build-out of equal size.
Do they have a moat?
It would be very hard for anyone to start a competing business in his or her garage. This isn’t a software business. However there are competing companies, and some are lots bigger. Their moat, as I see it, is their skilled set and their long-term contracts. By the way, they recently renewed a 5-year supply contract with Gilead.
Do they have recurring income?
In so far as they have long-term supply contracts they don’t have to go out and resell each day’s sales, but it’s not a real razor-razorblade model.
What is your overall impression?
It seems to be an interesting investing prospect. I like that it gets you into a biotech-type or pharma type investment but in a company that is already successful and making money regularly. I consider the current 90% growth in earnings to be a fluke, but I can imagine 25% to 35% regularly for a while, easily. It would provide a counterbalance to some of my riskier stocks.
Saul