Medicate Your Portfolio

 | Dec 17, 2012 | 12:00 PM EST
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I have found that if a patient and disciplined investor is willing to do some work, they can find some undiscovered gems in the small-cap space. These stocks tend to have sparse analyst coverage, if any, and far less information available around their businesses. However, with some intrepid research, one can usually piece together more than enough data to make an informed investment decision on these stocks.

I constantly troll this neglected area, as I have found some of my best value and growth plays here -- and I recently came across a stock that appears to be extremely undervalued with good growth prospects. The company has $82 million in market capitalization and has some intriguing valuation metrics, which we will cover after a basic overview of the company.

The name is Cumberland Pharmaceuticals (CPIX), a specialty pharmaceutical outfit focused on hospital acute care and gastroenterology. The company currently produces three main products: Acetadote, Caldolor and Kristalose.

Acetadote, a patented product, is used in hospital emergency departments. It's used to prevent or lessen potential liver damage resulting from an overdose of acetaminophen, a common ingredient in many over-the-counter pain relief and fever-reducing products. Acetaminophen continues to be the leading cause of poisonings reported by U.S. emergency rooms.

Recently, Cumberland successfully defended Acetadote in a lawsuit against Perrigo (PRGO), a large generic drugmaker. Perrigo agreed this compound has valid patent protection until 2026. Unfortunately another pharmaceutical company, InnoPharma, has recently received approval from the Food and Drug Administration to market a generic version of Acetadote. Cumberland is expected to seek a preliminary injunction to stop the marketing of this generic version, and to seek other legal methods to enforce its patent protection.

Caldolor, another of Cumberland's main products, is the first injectable treatment for pain and fever available in the U.S. In September the company announced the top-line results from a clinical pediatric pain study evaluating the compound's safety and efficacy in treating pain for children receiving tonsillectomies. It is now pursuing a pediatric indication for the treatment. The company met its internal goal of having this compound stocked in 500 institutions, and it is now working towards 800. The company believes this product can achieve $50 million in annual sales by 2016; that would equal all of the company's total current revenue.

Finally, Kristalosa is a constipation treatment. The company recently acquired FDA registration and worldwide trademark for this product, and believes it has good growth prospects.

In summary, Cumberland has some approved niche products with solid potential for growth. It is also partnering with other firms to extend its reach overseas, including in Korea, China, Canada and Dubai. The stock is selling at just $4.30, and sentiment has been negative since InnoPharma received an FDA patent for generic Acetadote in November.

However, this is where it gets interesting. The company currently has $3.50 per share in net cash and marketable securities. This seems to be an extreme undervaluation for a company that has been consistently profitable since 2004, has grown sales at a 13% annual rate since 2008 and shows strong ownership among insiders -- who are not selling.

In short, while Cumberland currently produces around $50 million in annual revenue and achieved almost $10 million in net income in 2011, an investor can buy it for a valuation of just $17 million after subtracting cash. The stock sold for near $8 a share just six months ago, and came public at around $16 a share in the summer of 2009. Any progress regarding the patent issues with Acetadote could send the stock soaring in the near term, and Cumberland growth prospects outside this product are undervalued at these price levels over the long term.

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