3 Things to Watch With Sagent Pharmaceuticals

How does 146,443% growth in revenue over five years sound to you? To the folks at Sagent Pharmaceuticals (NAS: SGNT) , that number sounds familiar. It's the statistic that recently catapulted the specialty pharmaceuticals firm into the No. 3 spot on Deloitte's Technology Fast 500 ranking of the fastest-growing technology companies in North America.

Sagent only went public in 2011, so many investors might not yet be familiar with the rapidly growing company. Here are three key things to watch.

1. New products
Sagent's primary business is selling generic versions of established injectable drugs. The company's products fit into one of three product lines: anti-infective, oncology, and critical care.

Anti-infective drugs bring in the most money, accounting for 42% of total revenue in 2011. The chief product in the mix is cefepime, a generic antibiotic equivalent to Elan's (NYS: ELN) Maxipime. Cefepime contributed 13% of Sagent's net revenue last year.

Sales for oncology injectables more than doubled from 2010 to 2011 and now make up 22% of Sagent's total net revenue. Key to this growth is gemcitabine, a generic version of Eli Lilly's (NYS: LLY) cancer drug Gemzar.

Critical care products made up 36% of 2011 total net revenue. The biggest contributor to this total was heparin, a blood anticoagulant. Sagent markets several forms of heparin, which combined to account for 26% of total net revenue.

A key thing to watch is how quickly Sagent brings new products to market. Typically, generic sales are strongest shortly after they are launched but then begin to fade over time. Sagent experienced this effect in the most recent quarter as sales of new products increased $18.3 million but overall sales only grew by $8.1 million because of declining sales of older products.

One new drug that could boost Sagent is calcium leucovorin. The generic drug has been in short supply because of manufacturing issues. Some have speculated that physicians could turn to the generic instead of Spectrum Pharmaceuticals' (NAS: SPPI) Fusilev once more supply was available. If they're right, Sagent could reap the benefits.

2. Competition
The generic pharmaceuticals business has no shortage of players. Sagent competes against much larger rivals, including Hospira (NYS: HSP) and Teva Pharmaceuticals (NYS: TEVA) . Even if Sagent is able to bring new products to market, there is no guarantee the company will gain sufficient market share.

A glance at the number of rivals for current generic products shows Sagent's challenge. At least six other companies market cefepime. Nine others sell gemcitabine. Five other companies supply heparin in the U.S. With that many organizations fighting in the same markets, winning big isn't easy.

Acquisition activities by large competitors could also be a factor. For example, Bloomberg recently reported comments from Teva chairman Phillip Frost that indicate the company could focus on more smaller acquisitions. This change in strategy could make life more difficult for Sagent-- or perhaps quite interesting.

3. The bottom line
While revenues skyrocketed over the past few years, the same can't be said for earnings. Sagent lost $26.4 million and $24.5 million in 2011 and 2010, respectively.

The good news is that 2012 is looking better than last year. The bad news is that Sagent is still losing money. Losses for the first nine months of this year totaled $16.7 million compared to $17.3 million during the same period in 2011.

How long can the company continue without a positive bottom line? Sagent reported $65.8 million in cash, cash equivalents, and short-term investments as of the end of the third quarter. The company has no debt. Unlike many in the biotech industry, Sagent isn't facing a cash crisis anytime in the near future.

Something must change sooner or later, though. Sagent can't go on indefinitely operating in the red. Investors should watch closely to see if new product additions allow the company to improve its bottom line performance.

Foolish take
Sagent receives only one star out of five in the Motley Fool CAPS community. The company boasts skyrocketing revenue growth, but the expectations of stronger earnings are the more important factor in powering a stock. With Sagent shares falling around 30% over the last year, the market doesn't appear to have those expectations.

Foolish investors like lists such as Deloitte's Fast 500 because they can help spot rising stars. But the lists we like even better are the ones with our big stock winners. Sagent makes the former list but isn't ready at this point to be on the latter.

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The article 3 Things to Watch With Sagent Pharmaceuticals originally appeared on Fool.com.

Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Elan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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