A Healthy Future for Health Products

Previously in this column, I wrote about how special-situation stocks tend to be the strongest wealth creators. These kinds of companies aren’t necessarily the leaders in their respective industries, but they are doing something different. A collection of special-situation stocks makes for an ideal speculative portfolio.

Recently, I came across an interesting new special-situation opportunity. The company is called Obagi Medical Products Incorporated (NASDAQ/OMPI) and the stock listed for trading only this past December. So far, the stock has done well, and in my view, looks very promising for the future.

This company is in the business of selling skin-care products. But they are not in the makeup business; rather, Obagi’s products are developed for the dermatology, plastic surgery, and medical markets.

The company has proprietary technology that allows the medical agents in its topical products to penetrate the skin at a quicker rate than normal. This helps heal the problem areas faster. The company’s first was “Obagi Nu-Derm,” launched in 1988. In 2004, it launched the first and only prescription-strength vitamin C and hydroquinone system, “Obagi-C Rx.”

Obagi was founded in 1988 and is headquartered in Long Beach, California. It is still quite a small company, but it’s at the size where it’s just about to achieve the critical mass necessary to really be successful. Even though it might need to tap the equity markets for further financing, in a sense, the company is ready to go national.

In the first quarter this year, the company reported record revenues of $23 million, up some 34% over revenues of $17.2 million generated in the first quarter of 2006. Net income for the quarter grew 96% to $2.9 million, or $0.13 per diluted share, up from net income of $1.5 million, or $0.08 per diluted share, generated in the comparable quarter.

In this fiscal year, Obagi will break the $100-million revenue mark, and given the unfortunate growing rate of skin cancer and other medical problems, I believe Obagi has a bright future. Like I said, I’m always looking for a special-situation type of company in the stock market. In my view, Obagi Medical Products falls into this category.