Hi-Tech Pharmacal (HITK)

TOP CONTRIBUTORS

Lawrence Gu

Hi-Tech Pharmacal is a specialty manufacturer and marketer of prescription, Over the Counter (OTC) and nutritional products. It makes money by producing medicine that treat glaucoma, asthma, bronchial disorders, dermatological disorders, allergies, pain, stomach, oral care and other conditions. These generic product lines primarily include prescription items through oral solutions and suspensions, topical creams, ointments, and nasal sprays.^[1] Increased legislation favoring generic production and limiting original pharmaceutical patent lives will help companies such as Hi-Tech Pharmacal reach greater profitability.

Business Growth

Hi-Tech depends upon customers that include chain drug stores such as CVS Caremark Corporation (CVS), Walgreen Company (WAG), Wal-Mart (WMT), as well as managed care purchasing organizations such as McKesson (MCK). Its operating segments are as follows:

• Hi-Tech Generics represents roughly 79.0% of total revenues. This segment include some private label contract manufacturing.
• Health Care Products represents roughly 6.9% of total revenues. This segment markets OTC products.
• Midlothian Laboratories represents roughly 0.3% of total revenues, and sells nutritional products.
• ECR Pharmaceuticals represents roughly 11.4% of total revenues, and is a acquired entity that sells branded prescription products.

Trends and Forces

As a Generic Manufacturer, Hi-Tech is Exposed to Highly Competitive Market Fighting for the Same Expiring Patent

Typically, a pharmaceutical company that sells a patented drug receives special designation to hold all rights to reap the benefits of R&D for the original development of the drug for a set number of years after approval from the Food and Drug Administration (FDA). Once these patents expire, companies such as Hi-Tech receive the authorization to develop same or similar products that often dilute the market share of the first developer. Because the Food and Drug Administration (FDA) give special privileges to the first generic manufacturer to submit an application, called Abbreviated New Drug Application (ANDA), for approval in order to encourage the generics industry, generics such as Hi-Tech are highly incentivized to rush into drug as soon as the medicine is off-patent. Unfortunately, this prompts extremely high competition which erodes the profitability quickly such that generics have a tougher time to sustain the same gross profit margins experienced by the same pharmaceuticals under patent.

Generic Customers are Limited to Few Major Customers that may Control Profitability

Hi-Tech's top five customers, including such companies as Wal-Mart (WMT), control 66% of total sales. As a result, these large customers control the ability to influence the price Hi-Tech may charge to them, which therefore influences its profitability. Any significant reduction of businesses from these top five customers may have material effects upon the business, and this is a force that is similar across most companies producing generic drugs (small molecule).

Competition

Hi-Tech competes against other generic manufacturers including:

• Wockhardt DS (BOM:532300) is an India-based integrated pharmaceutical, biotechnology and healthcare company, that covers lifestyle diseases such as diabetes and nephrology.
• Endo Pharmaceuticals Holdings (ENDP) is a specialty pharmaceutical company in pain management, as it researches diseases that cover pain, overactive bladder, prostate and bladder cancer and central precocious puberty.^[2]
• Pharmaceutical Resources (PRX) is a US based developer and licensor of generic and branded drugs.

References

1. ↑ HITK Business Description
2. ↑ ENDP Business Description