The pharmaceutical industry’s ongoing plunge over the patent cliff isn’t exactly a secret. But some of the numbers illustrating the paradigm shift from a brand-name-driven focus to a generic-drug-driven focus are nothing less than amazing.
Just look at the bite generics took out of name brands. Prescriptions of generics grew 8% last year in the United States, while prescriptions for name-brand drugs slumped nearly 21%. More than that, the total dollars spent on brand-name drugs actually fell in 2012 — the first decline in a long time.
The IMS Institute for Healthcare Informatics projects that by 2017, 87% of U.S. prescriptions will be filled by generic options, and though generics are priced at an average of 15% of the brand-name version of the same drug, the total “spend” on pharmaceuticals won’t actually fall that much. Rather, some experts believe the combination of Obamacare and more affordable generics means more patients will actually fill prescriptions they couldn’t or wouldn’t before.
In other words, it’s a great time to be a generic drug maker, particularly for the United States market. It’s not a bad time to be a generic drug maker investor either. Here are five names interested investors might want to consider.
The breadth and depth of the Mylan (MYL) portfolio might be one of the industry’s most underappreciated drug portfolios. It’s not necessarily the best, mind you, but it is one of the most underappreciated.
Case in point: Mylan makes a version of omeprazole, or generic Prilosec (for ulcers and reflux), which was actually 2011’s third-best-selling generic drug. It also makes simvastatin, or the generic form of Merck’s cholesterol drug Zocor. Both have been on the market for a while now, and Mylan has proven it can push them into consumers’ hands.
Meanwhile, the FDA has all but told Mylan exactly how it can compete with asthma medication Advair — a GlaxoSmithKline (GSK) product — when its patent expires and the door is opened to generic versions in 2016. The Advair franchise currently produces about $8 billion in worldwide annual sales.
It’s entirely possible you’ve used an Actavis (ACT) — formerly Watson Pharmaceuticals — drug without even knowing it.
The company makes several generics, but one of its most important is paracetamol. You may know it better as Tylenol, or under its broader name acetaminophen. Whatever it’s called, the consumers bought more than $6 billion worth of paracetamol last year.
With Johnson & Johnson (JNJ) still feeling the fallout of its Tylenol recall in the middle of last year, contract manufacturers like Actavis had a chance to garner some new customers.
Most would hail Teva Pharmaceutical (TEVA) as the king of the generic drug world, not just because it’s one of the biggest, but also because it’s one of the best, with more than 350 generic drugs under its umbrella, and a few non-generics as well.
Despite the recent ruling that one of its top-selling drugs — copaxone, a treatment for multiple sclerosis — wouldn’t be able to extend its patent until 2015 (allowing generic versions of the same drug as early as 2014), the impact of that looming sales drop has been more than baked into the stock’s current price.
Again, even though copaxone makes up about a fifth of the company’s revenue, Teva has 350 generics generating sales; the company has proven it knows how to acquire, develop, or partner its way into new solid revenue-bearing pharmaceuticals.
Doctor Reddy’s (RDY) is often one of generic drug industry’s forgotten names, possibly because it’s only a $6.4 billion outfit, or possibly because most consumers would struggle to name one generic drug the company actually makes.
Size is all relative to sales and profits, however, and on that front, Doctor Reddy’s is a growth machine. Revenue has improved an average of 25% for the past couple of fiscal years, and profit growth has been commensurate. The decision to shift away from generics and towards self-developed branded drugs is seen by some as a liability, but could just as easily be deemed an opportunity to complement its existing generic business.
It’s rarely a wise idea to own a company simply because you think it’s an acquisition target, but if there was ever a generic drug maker worth making that bet on, it’s Taro Pharmaceuticals (TARO).
Sun Pharma has already made an offer that was ultimately rejected by shareholders, which was probably the right move. Even with the stock’s 137% runup since the end of last year, shares are still priced at only 11.6 times their trailing earnings. That’s a buyout target at a bargain price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.