EGRX - Eagle Pharmaceuticals: Upside Could Be Lying Ahead Very Nicely

Summary

• Among healthcare stocks, Eagle Pharmaceuticals is an interesting opportunity to benefit from volatility in stock markets.
• Eagle Pharmaceuticals' product portfolio continues to perform well and has the potential to strengthen its position in the market through new treatment development and certain strategic acquisitions.
• Eagle Pharmaceuticals' portfolio is currently paving the way for becoming a long-term player.
• Eagle Pharmaceuticals has some catalysts that could lead to a significant return in the near term.

Among the Healthcare Stocks, Eagle Pharmaceuticals, Inc. Appears to Offer Growth Opportunities

As the chart below shows, US-listed healthcare stocks, represented by the benchmark Health Care Select Sector SPDR ( XLV ) Index, are up 2.39% year-to-date, comfortably outperforming the broader stock market represented by the SPDR S&P 500 Trust ETF ( SPY ) benchmark index.

From time to time, stocks can fall somewhat, as on January 17-19, when renewed concerns about the extent of the economy's landing following the US Federal Reserve's monetary tightening caused market valuations of healthcare stocks to fall by 1.2%.

However, while these pullbacks are short-lived (as shares were already back in an uptrend last Friday), they could help investors increase their exposure to quality US-listed healthcare stocks by taking advantage of lower market valuations.

Therefore, investors may be interested in Eagle Pharmaceuticals, Inc. ( EGRX ) as the stock has the potential to grow significantly based on a positive outlook for the company's sales and earnings. As such, investors with a position in Eagle Pharmaceuticals, Inc. should "Hold" this stock and seize the opportunity to increase their exposure as soon as the market creates a convenient entry point compared to current levels.

Eagle Pharmaceuticals in the Healthcare Sector

Headquartered in Woodcliff Lake, New Jersey, Eagle Pharmaceuticals, Inc. is a pharmaceutical company with a fully integrated organization that includes diverse research and development, clinical research, manufacturing and commercial divisions.

With a goal of improving patients' quality of life, Eagle Pharmaceuticals develops novel medical treatments when they can help healthcare professionals achieve meaningful outcomes.

Eagle Pharmaceuticals' portfolio of commercialized products includes Vasopressin, Pemfexy, Ryanodex, Bendeka, Belrapzo, Treakisym [Japan] as well as Byfavo and Barhemsys.

Eagle Pharmaceuticals also has a pipeline of candidate products in development for various underserved therapeutic areas in oncology, central nervous system and metabolic diseases.

The Diseases Targeted by Eagle Pharmaceuticals

Vasopressin is administered to adult patients who have hypotension due to vasodilatory shock and who maintain it despite fluid administration and/or ad hoc catecholamine-based therapy.

Pemfexy is a drug used alone or in combination with other drugs to kill cancer cells in patients with metastatic non-squamous non-small cell lung cancer (NSCLC) by blocking the use of folic acid, which the body also uses to make cancer cell DNA.

Non-squamous NSCLC is a lung cancer that usually originates in the peripheral tissues of the organs of the respiratory system. Approximately 26 out of 100 patients with this disease have a 5-year survival rate.

Although non-small cell lung cancer (NSCLC) is the most common disease in lung cancer patients, lung cancer is not prevalent in the US adult population, with a few hundred thousand new diagnoses per year. Smoking is the most likely trigger of the disease.

Ryanodex is indicated as therapy for the treatment of patients with malignant hyperthermia or for the prevention of malignant hyperthermia in patients at high risk of developing this disease. Malignant hyperthermia is a serious reaction that can occur in patients given certain drugs for anesthesia. Without prompt treatment, the severe reaction, which usually consists of dangerously high body temperature, stiff muscles, spasms, and rapid heartbeat, can be fatal.

Bendeka and Belrapzo are given to patients as treatment with chronic lymphocytic leukemia [CLL] or indolent B-cell non-Hodgkin's lymphoma [NHL] that has progressed despite six months of treatment with rituximab from Biogen Inc. ( BIIB ) and Roche Holding AG ( OTCQX:RHHBY ).

CLL is a type of cancer that starts in the bone marrow and first affects the lymphocytes, which are a class of white blood cells.

CLL has a higher risk of developing in people with a family history, but exposure to certain chemicals is also a risk factor. Most patients do not live more than 10 years after diagnosis, but it depends on how aggressively and quickly the condition spreads. CLL is a rare disease as it occurs in not more than 0.005% of the general population each year, with the risk increasing with age.

An indolent lymphoma is a form of non-Hodgkin's lymphoma (NHL), a cancer of the lymphatic system of the body's germ-fighting immune system. Treatment is not easy, and patients usually go into remission (absence of symptoms/signs of the disease) and remain as such for many years while the disease could return. Non-Hodgkin lymphoma affects about 80,000 people each year, making it a rare condition.

Treakisym [ bendamustine ] has an expanded indication for the treatment of malignant lymphoma (cancer of the lymphatic cell system) in Japan.

Byfavo is indicated as sedation in adults undergoing sedation lasting 30 minutes or less.

Barhemsys is used to prevent nausea and vomiting after surgery.

Financial Results for the First Three Quarters of 2022

Eagle Pharmaceuticals Inc. continues to report steady earnings growth. Adjusted earnings of $6.69 per share for the first three quarters of 2022 marked a new record as it surpassed the company's best full year to date, according to Scott Tarriff, President and CEO.

Sales for the first three quarters of 2022 also exceeded the full year of 2021. Eagle Pharmaceuticals, Inc. had total sales of $256 million for the first three quarters of 2022 while total sales of $171.5 million were reported for the full year 2021.

Product net sales accounted for 69.3%, royalties for 29.2%, and license and other revenues for 1.5% of total sales.

Pemfexy and Vasopressin, which together account for 45% of total sales, form the core of the company's product portfolio.

Bendeka and Belrapzo, the two treatments for chronic lymphocytic leukemia and indolent B-cell non-Hodgkin's lymphoma, together account for over 90% of total overall bendamustine market share improving, among other things, by more than 500 basis points during 2022.

Gross profit for the first 9 months of 2022 was around 71%, down 600 basis points year-on-year. However, this decrease was primarily due to the launch costs of Pemfexy and Vasopressin, as well as higher amortization charges related to Barhemsys and Byfavo.

The Balance Sheet

As of September 30, 2022, Eagle Pharmaceuticals Inc.'s balance sheet looked robust despite approximately $44 million in net debt.

The robustness of the financial position is essentially based on the following three indices.

Eagle Pharmaceuticals' Altman Z-Score of 3.50 indicates the company will not face bankruptcy problems, while Eagle Pharmaceuticals' Interest Coverage Ratio of 39.2x suggests the company will have no problems paying off outstanding debt. The interest coverage ratio is computed as 12-month operating income of $98 million divided by 12-month interest expenses of $2.5 million .

Additionally, Eagle Pharmaceuticals' weighted average cost of capital of 7.04% is lower than its return on invested capital of 17.06%, meaning the investment is returning more than what is financially required for that investment. The last indicator means that the company is currently creating value for its shareholders.

The company believes this balance sheet is more than adequate to continue funding the pipeline of treatment in development and to support portfolio growth through acquisitions.

Regarding the treatments Eagle Pharmaceuticals is developing, the company has filed a new drug investigational application with the US Food and Drug Administration for its product candidate called CAL02. CAL02 is a novel, first-class, broad-spectrum antitoxin for the treatment of severe pneumonia and the product can be used in combination with conventional antibacterial drugs.

Regarding inorganic growth, Eagle Pharmaceuticals acquired an equity interest in Enalare Therapeutics Inc., with an option to purchase the private equity of this clinical-stage company developing innovative therapies for life-threatening acute respiratory and critical care disorders.

This investment has the potential to strengthen Eagle's position as a diversified operator in the pharmaceutical industry and could also enable Eagle to become a leader in the anesthesia space. This transaction allows Eagle to integrate its portfolio with strong intellectual property protections for at least a decade beginning in the mid-2030s.

Eagle also uses its balance sheet to repurchase its own stock as part of its $160 million stock repurchase program and has retired a total of $246.1 million of its own common stock since August 2016.

Analyst Earnings and Sales Estimates

In the short term, analysts are expecting strong earnings and revenue growth that could potentially give Eagle Pharmaceuticals' stock price an impressive boost.

Earnings per share are expected to be up 193% year-on-year from $2.59 for full-year 2021 to $7.59 for full-year 2022.

Revenue is expected to increase more than 88% year-over-year, from $171.55 million for the full year 2021 to $322.77 million for the full year 2022.

Wall Street's Analysts Ratings

On Wall Street, one analyst recommends a Strong Buy rating, while 2 analysts recommend a Hold rating, resulting in a medium recommendation rating of Buy.

Analysts have also issued price targets averaging $39, reflecting a 15% upside potential from current stock price levels.

Stock Valuation

Shares of Eagle Pharmaceuticals, Inc. traded at $33.73 per unit for a market cap of $441.37 million as of this writing.

Currently, shares are trading above the 100- and 50-day simple moving average lines. Shares are instead below the middle point of $39.065 of the 52-week range of $24.35 to $53.78.

Technically, shares don't trade low.

The share price appears to be in another recovery trend, so these valuations are probably not the most appealing this stock can offer, despite the growth potential represented by expected earnings and top-line growth.

The stock is due to publish its financial results for the last quarter and full year of 2022 on Monday, March 6, 2023 . This event has the potential to propel the stock very high if higher earnings and selling are the drivers of stock prices. There is also the risk that the price rally will not happen.

Those who follow this healthcare stock might think that these valuations have already factored in expected top-line and earnings growth.

But these people are likely to forget that the stock price goes through cycles as there is still uncertainty in the financial markets. This means that shares could also see declines other than a year-to-date rally, making the next earnings release still a powerful catalyst for a sharp rise in the share price, should one of the dips produce significantly lower levels than the current ones.

A few negative economic indicators issued last week were enough to have some depressing effects on Eagle Pharmaceuticals, Inc., and the broader healthcare sector, as investors saw these economic indicators as ghosts of the recession due to the Fed's hawkishness on inflation.

The next meeting of Fed policymakers, scheduled for January 31-February 1, could have quite a negative impact on Eagle Pharmaceuticals shares this time in the form of a significant drop in share price.

Currently, the consensus is for a 25 basis point rate hike, but as the Fed is still waiting for the desired outcome of its policy to show up, namely a weakening of labor demand and employment levels, the next rate hike could be more than 25 basis points. If that's the case, the decision is likely to fuel fears of a worse-than-expected recession for the U.S. economy, and that could be enough to push Eagle Pharmaceuticals down enough for a convenient entry point. Furthermore, with Eagle Pharmaceuticals still being perceived as a growth stock, sharply higher interest rates mean a greater likelihood that the present value of the US pharmaceutical stock's future earnings will be below market value, fueling investors' risk aversion.

But until the more convenient entry point, investors should Hold their positions. They might even want to consider the possibility of reaping some profit from their investment and try to anticipate the pullback if they expect it after the next Fed meeting as well.

Conclusion

Eagle Pharmaceuticals, Inc.'s portfolio is performing well, indicating the products have a good market, and this factor should continue and create a growth opportunity going forward.

A significant one could emerge in the near term, but in line with the strategic plans of investors particularly interested in the Fed's next move, certain conditions must be met.

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