Generics Set to Soar

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

IMS Health pegs the worldwide generic drug market at an impressive $240 billion, which should only grow over the long-term as a large number of branded drugs lose patent protection -- pushing the total generic drug market to over $420 billion in 2016. 

Other key factors driving generic market growth will be a rapidly aging population and the healthcare reform in he U.S., which will give more people access to prescription drug benefits. This is offering investors an impressive investing opportunity. So what are some of the best ways to capitalize on this? 

Hospira (NYSE: HSP) is the 2004 spinoff from Abbott Laboratories and is now the leading provider of injectable drugs and infusion technologies. Specifically, it's the world's largest producer of generic injectable pharmaceuticals, manufacturing generic acute-care and oncology injectables. 

Hospira has had its ups and downs, with various manufacturing quality concerns, having received several notices form the FDA related to quality control issues at various facilities. Most notably, Hospira faced quality concerns regarding one its key plants in Rocky Mount, North Carolina, which it had to temporarily shut down. The plant resumed production in February last year. 

The company also imports various intravenous pumps manufactured at Hospira’s Costa Rica facility. Going forward, Hospira expects the import ban to impact 2013 sales by $50 million to $100 million, which in reality, is a small portion of the $5 billion in revenue it generated in 2012. 

Hospira has been making efforts to recapture its lost market share, improve its manufacturing quality, as well as expand its presence in emerging markets. Via this strategy, the company plans to modernize its device portfolio by removing its relatively old pump technology from the market and bringing in customer replacement programs over the next few years. While these efforts may be successful in the longer-term, the near term outlook for the company remains murky. Even still, the company appears to be a solid long-term investment option. 

The comps

Actavis (NYSE: ACT) is another leading specialty pharmaceutical company engaged in the development, manufacturing, and distribution of generic, branded generic, and over-the-counter (OTC) pharmaceutical products.

Actavis has an impressively strong position in the generics market. Its pharma division is expected to post sales of $6.3 billion to $6.5 billion in 2013, up from sales of $4.4 billion in 2012. 

Big news of late is its $8.5 billion acquisition of Warner Chilcott. The move will turn Actavis into an $11 billion global specialty pharma company. The deal also expands Actavis' reach internationally, including Australia, Brazil, Central and Eastern Europe, and Japan.

The acquisition also provides Actavis with operational expertise to support its long-term investment in biogenerics. Meanwhile, the company is also focusing on biosimilars, where its 2010 Eden acquisition gave it manufacturing capabilities.

Teva Pharmaceutical (NYSE: TEVA) is an Israel-based pharmaceutical and drug company. It develops, produces and markets generic drugs in all treatment categories. Last quarter, its U.S. generic business posted revenue that was down 27% year-over-year. The big drop comes as sales in 2012 were inflated by a large number of major drug patent expirations and robust sales of Copaxone, a multiple sclerosis drug. 

Teva, however, plans to focus on growth via specialty drugs and higher value generics. Teva expects to see $2 billion in cost restructuring savings through 2017. What's more, alongside Hospira, Teva is one of the cheapest generic drug stocks, but don't let that fool you. Teva could be cheap for a reason. At the middle of this decade, Teva will lose patent protection on the Copaxone MS franchise, which accounts for close to 50% of its profits. 

Beyond North America

Mylan (NASDAQ: MYL) is a fully integrated pharmaceutical company, developing, licensing and manufacturing generic pharmaceuticals. Generics accounted for nearly 90% of operating revenue in 2012, with specialty products making up the other 10%. The company markets more than 1,100 products throughout the world, with 365 generics in the U.S., primarily oral dose drugs encompassing a wide variety of therapeutic categories. 

Mylan is looking to tap the emerging markets for further generics growth. This includes its acquisition of Merck KGaA's generics business and Matrix. Its Merck KGaA Generics acquisition expanded the company's distribution and marketing presence in more than 150 countries and territories, while Matrix gave it a significant presence in India. 

Bottom line

On a price to sales basis...

…it appears that Hospira trades the cheapest. Hospira also has one of the best balance sheets in the industry.

With the rapid rise in generics, these stocks are sure to be great buys. With recent FDA issues, Hospira is now trading at a deep discount to the industry, but its initiatives for turnaround operations could mean now is a great time to buy. Actavis' Warner acquisition is a big positive for the company, but it's the most expensive and it has a levered balance sheet. Teva may not be a great buy due to the headwinds related to its MS drug.

I do like Mylan given its moves to break into the international market and relatively cheap valuation compared to Actavis. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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