Flying on the Wings of an Eagle: The Unsustainable Trajectory of the Healthcare Sector

Eagle Pharmaceuticals (EGRX) is one of those companies. The ones that you look at, and you think that you might have just struck gold. The company has incredible profitability metrics, is undervalued with regards to the PE ratio, and has lots of room for expansion, as they carry no debt.

The only problem: they are a biotech stock.

Even worse: they are a biopharmaceutical stock.

These types of stocks live and breathe off FDA decisions, which is perfect, as long as the FDA decides in their favor. If they don’t, it could spell out certain death for the company.

For example, the FDA gave a preliminary disapproval to Ryanodex, a drug that constitutes a huge part of Eagle’s revenue. Once that news broke, Eagle dropped 33%, going from $75.20 on July 21st to $50.48 on July 28th, the day after the decision was made.

So yeah, Eagle is definitely an opportunity to buy low, and sell high.

Eagle Pharmaceuticals itself is an interesting company. They focus on developing injectables for orphan diseases (diseases that affect <20k people worldwide) and oncology. They use the 505(b)(2) regulatory pathway through the FDA to do this. (Information courtesy of www.eagleus.com)

So the basis behind the company is this: they ask doctors and nurses what they would want to improve about the drug, and then take the existing formulation, modify it, and stick an Eagle patent on it.

I think that’s an excellent business plan. Going straight to the source to figure out what is wrong is the best thing that a company can do. It reminds me of a problem that I see in the educational system. We have all these lawmakers making decisions about what needs to be done in schools, but they really don’t have the experience or industry know-how to be making those decisions. If we had teachers deciding how schools should be organized, I can guarantee that the education system would be a lot more effective.

Eagle seems to agree with that sentiment. They’ve labeled themselves as an “improvement company” and are “committed to conducting business in accordance with the highest ethical standards.” (eagleus.com)

I think that’s great. As an economist, I completely understand the necessity to make money, and believe that there are steps necessary to get there. But I also believe that good business standards and habits are the key to long term success.

Eagle is a young company, but these business habits seem to be paying off. Just from 2015 to 2016, they saw their revenue from royalties, product sales, and licenses increase by 212%, 1093%, and 10.67%, respectively. Total revenue increased from $66.3m to $189.4m, which in the span of a year, is pretty stellar. (Information courtesy of SP Capital IQ)

They’ve made some pretty good business decisions too, buying out Arsia Therapeutics to get exposure to the Pharma market. They have an agreement with SymBio, a Japan based company to distribute Eagle’s (very) profitable drug, Bendeka, in Asia. Eagle already has a partnership with the TEVA distribution company, and they made $30m last year in royalties alone from that synergy.

They have patents. They have drugs. They have millions in available market opportunity. All their metrics are fabulous. Their EPS is far above industry average. They don’t carry any debt. They have a gross profitability (gross profit / total assets) of 83.92%. The SP 500 has an average of about 30%, for comparison. They are outperforming competitors in net income, ROE, ROA, and ROIC. (Information courtesy of SP Capital IQ)

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In fact, they are outperforming the entire biotechnology industry with their profitability metrics.

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(Graphs are self-made; Information courtesy of SP Capital IQ)

Everything is great. Right?

I’m going to go out on a limb and say no.

And it’s not because our government can’t decide on a healthcare policy. And it isn’t because Eagle Pharmaceuticals is engaging in unethical behavior. It doesn’t have anything to do with the present, but everything to do with the past. With the entire healthcare system.

I have written on this before. I’ve written on big pharma before. And when I look at companies like Eagle Pharmaceuticals, I am completely torn.

In the United States, we spend enormous sums on healthcare systems that have little to no effect.

healthcare-costs1

Graph courtesy of Wall Street Journal

I think the above chart gives a pretty good description of that. As you can see, we spend the most (by over $2,000) per person, for the 3rd lowest life expectancy.

That doesn’t seem like a very good trade-off.

We are paying higher and higher costs for uneven healthcare. And one of the problems that Eagle itself has run into is the complex regulations surrounding the practice of medicine.

The number of administrators in the field, seeking out non-compliance orders, filing claims, counter-claims, and writing new regulations far outweigh the number of doctors and nurses. Medicine is becoming more of a study of the law than the study of health.

With healthcare costs increasing 6-7% on a year-to-year basis, and the economy growing, at best, at a 2% rate, we are entering a downward spiral of costs. Things are getting EXTREMELY expensive, and pushing those expenses onto the employers only encourages them to cut jobs or move offshore.

But the biopharmaceutical stocks (like Eagle) are profiting off that. 0208indxx1

Nasdaq.com

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EvaluatePharma

Drugs are getting expensive. Eagle charges $4,500 per dose for one of their injections. Eli Lilly charges $50k per treatment for one of their drugs. And as evidenced by the graph above, people are still buying, because their life depends on it.

Sometimes, it’s hard to take a step back and see the bigger picture. Sometimes, we get so caught up in the metrics of a company, and how it performs that we forget about the morality behind it.

And it’s a tough decision to make. I’m a Finance/Economics double major. I LIKE money. I like money a lot.

But when there are discrepancies in the system, when I see things that make me question the longevity of the ideology being followed, I have to remind myself that I’m in this for the long haul.

Being an investor is a life-long process.

So something has to give with the healthcare system, and soon. We are adding trillions of dollars of debt to our books, even though the Fed is planning on reducing their balance sheet, allowing securities to mature over time. (By the way, every single time they have done this, we have experienced a recession afterwards – 1922, 1930, 1937, 1941, 1950, and 2000.)

But that doesn’t even take into account the trillions that we have in unfunded entitlement liabilities, or the other payments that need to be made to keep America running.

Just this morning, I was reading an article on the Wall Street Journal that talked about the city-run NY Health Hospital group only having enough cash to survive for 2 weeks. They were expecting a payment of $380 million from the state. The state is facing a $2.1 billion cut, and of that, $330 million will be cut from healthcare. There’s just no way a pattern like that can continue. There simply isn’t enough money.

So it isn’t so much that I don’t believe in Eagle Pharmaceuticals as a company.

I just don’t believe in the healthcare sector, in their current business approach. And that might make me a bad financial analyst. But when I see the “sickcare” approach and the unsustainable pattern it seems to be following, it makes me nervous about investing in that.

Graphs like the one below make me question things not just as an investor, but as a consumer, as a student, and as a person in general. Student loans, federal debt, healthcare costs, and money printing have all increased.

Home ownership, labor force participation, and median income, have all decreased.

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Graph Courtesy of ZeroHedge.com

There’s a bit of a discrepancy there.

So in conclusion of that tangent, I like Eagle. I think its a good stock with a successful approach in current market conditions. But with regards to longevity, I’m concerned about the entire healthcare system, and the economic health of America as a whole.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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