Mylan (MYL) just agreed to buy Abbott Laboratories’ (ABT) generics business outside of the U.S. in a deal valued at $5.3 billion.
MYL stock is popping about 5% this morning on the news, but investors should take note for far more than the one-day move in Mylan.
That’s because generic drug stocks are quickly becoming one of the few sure-thing sectors on Wall Street, and Mylan’s consolidation of power only means that trend will continue.
Mylan and Teva Show the Power of Generics
The deal with Abbott is a shrewd one for Mylan, a company that focuses mainly on generic drug sales worldwide and serves 140 countries. MYL stock is up about 60% in the past 12 months, almost four times the S&P 500 Index, thanks to strong generic drug sales — and tightening its grip on this market will lead to even more success.
But it’s worth noting that even at roughly $20 billion in market cap and almost $7 billion in sales last year, Mylan isn’t even the biggest generic drug player out there.
That title belongs to Teva Pharmaceuticals (TEVA), a $52 billion company with more than $20 billion in sales.
And TEVA stock is up 36% since Jan. 1, with a 3% dividend to boot.
This combination of growth and stability makes generic drugmakers an ideal investment. Rather than worry about big spending on research and marketing, a company like Teva or Mylan simply waits until a big pharma company like Merck (MRK) or Pfizer (PFE) has has run its course with a patented medication, then steps in and makes the same drug for cheaper.
The margins are thinner, but you can make up for this with scale — and Teva and Mylan both have been racing to gobble up as much market share as possible.
Emerging markets are the big battleground, however, and it’s here that the competition heats up. It’s not just Mylan and Teva in the fight, but also companies like India-based Dr. Reddy’s Laboratories (RDY) also racing to establish connections in fast-growing regions across Asia and Latin America.
But Teva is making a play for India drugmaker Cipla Ltd. for $6 billion, and the recent Abbott move shows Mylan isn’t slowing down either.
There still are a lot of unknowns about how these companies will grow and expand in emerging markets, but the recession-proof nature of healthcare stocks broadly and the already-established market share of Teva and Mylan make them some of the best healthcare stocks out there to buy right now.
Particularly because Mylan has a forward P/E of about 13 and Teva has a forward P/E of just more than 11. That means even after this run, they are both still pretty fairly valued.
As I mentioned in a recent article about seven crash-proof blue chips, I like TEVA stock best for its size and dividend. But the pop Mylan stock is seeing today should not be discounted.
Both generic drug investments will serve traders well across the next few years as they grow market share and enjoy the stability that comes with providing cheap, life-saving medication that will be bought in all corners of the world, even when spending is tight.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.