Investors Still Must Pick Generic Drug Companies By Hand

Isn’t the market ripe for a generic drug exchange-traded fund?

The industry that makes copycat versions of brand-name medications now plays a prominent role in the global pharmaceutical business. Moreover, the companies that produce generics are poised to attract even greater investor attention in the years ahead, given that generic drugs could put more than $100 billion in annual brand-name drug sales at risk through 2015. That’s about one-third of the annual spending on all prescription drugs in the U.S., according to IMS data.

In an article published two years ago, Biomed Reports argued that with so many of the generic drug companies outside the U.S., an ETF would “provide average retail investors with a cost-efficient means to trade the entire industry in a single investment vehicle.” A Global Generic Drug ETF also would “provide instant, diversified access to the small- and midcap generic drug makers and suppliers that are tracked in the index and the subject of possible acquisitions by leaders in the industry … and even big pharma that have significant generic drug divisions.”

Absent such an ETF, investors are just going to have to do their own research to find the cream of the crop among generic drug companies. Bigger doesn’t necessarily mean better, but in terms of sales, Israel-based Teva Pharmaceuticals (NASDAQ:TEVA) stands atop the leader board with revenues of more than $17 billion in 2010. Unfortunately for company shareholders, TEVA stock has slid 20% in the past year and nearly 40% from its all-time high earlier in 2010.

Despite its dismal recent performance, the stock is getting a lot of love from Mark Bern, CFA CPA, who recently tabbed it as his favorite drug company on Seeking Alpha. In five years, Bern expects the share price to be near $80 — double TEVA’s current value. He thinks that when the company’s growth eventually subsides, Teva will expand its dividend and payout ratio, “providing further share price support far into the future.” Teva’s dividend currently yields 1.7%.

At the other end of the stock performance spectrum among generics is Watson Pharmaceuticals (NYSE:WPI). The company’s shares have climbed about 25% in the past year. Watson was in the news last week when it began selling a generic version of Lipitor, the Pfizer (NYSE:PFE) mega blockbuster cholesterol drug whose patent expired Nov. 30.

Another generic firm worthy of investor scrutiny is Mylan (NASDAQ:MYL), whose shares have remained virtually flat during the past 12 months. The company grew revenue by 16% in the third quarter, pushing its net income up 45%. Mylan expects annual bottom-line growth of 15% and bottom-line growth of 20%, with earnings per share of $2.75, by the end of 2013. Mylan plans as many as 500 global generic drug launches next year.

Other leading generic companies include Par Pharmaceuticals (NYSE:PRX); Hospira (NYSE:HSP), a maker of specialty generic injectable drugs and rumored takeover target; and Dr. Reddy’s Laboratories (NYSE:RDY), which is headquartered in India.

As pointed out in a previous article, while generic companies stand to benefit in the next few years, things promise to get tougher in 2015, when the pie they’re divvying up shrinks because of fewer blockbuster drugs losing patent protection.

As of this writing, Barry Cohen was long PFE.

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