Generating Momentum – The Generic Way
Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I'm a big fan of pharmaceutical companies that hold a considerable amount of promise as they are great drivers of growth in this depressed economy and belong to the niche potential sector in the market today. When it comes to investing it’s wise to analyze the stocks in the manufacturing sector of the generic drugs.
Approximately 70% of all prescriptions in the U.S. are filled with generic drugs. Companies moving at a meteoric rate are generic drug makers who have a long experience with the FDA approval. They enjoy two advantages over other companies in the industry - a larger scale and the cost benefits associated with it, and ability to develop innovative compounds. Large well-established pharmaceutical companies are meeting the challenges of this highly competitive market. This is a time of growth and change for the generic pharmaceuticals sector. IMS Health estimated $42 billion in global generic drug sales in 2011, representing growth from an expected $28 billion in global sales in 2009 and $17 billion in 2008, and the recent estimates are growth at 7.8%, which is a faster pace than the worldwide market for pharmaceuticals.
Major industry players
Large generic drug makers like Mylan (NASDAQ: MYL), Watson Pharmaceuticals (NYSE: ACT) and Teva Pharmaceutical (NYSE: TEVA) are expected to continue their spectacular rise and far outpace the rest of the economy. Mylan a top producer of active pharmaceutical ingredients for generic drugs has grown from the third largest generic and pharmaceuticals company in the U.S. to the third largest generic and specialty pharmaceuticals company in the world. It is encouraging to note Mylan’s geographic reach and product depth. The growing market for generics is generating new sales and increased share value for the company and can expect even more sales in the U.S. when Obamacare goes into effect in 2014. It is expecting to record more than $8.5 billion in revenues in 2013 which represents a top-line CAGR (compound annual growth rate) of 15%, from 2010. In addition, EPS is likely to exceed $2.75 in 2013 representing a CAGR of 20%. New generic versions of key drugs are powering sales growth. Mylan should book double-digit revenue growth, according to various analysts. At a Market Cap of 9.82B and revenue growth of 0.08 Mylan's market is on the rise. It has been growing at a scorching pace since 2006. Although Mylan's debt level (1.28) is something that we need to watch out, it has new opportunities to greatly increase its revenue because it will soon be able to offer some of the world's most popular prescriptions in generic form. On a valuation basis Mylan’s stock looks appealing
The poster boy of generic drug industry Teva Pharmaceuticals is getting bigger by the day. Revenue doubled in the past five years, and for a company with $18 billion in revenues, the profit margin seems very healthy. The company's strengths can be seen in multiple areas, such as its robust revenue growth, attractive valuation levels and expanding profit margins. The company's dividends grew with a CAGR of 20.2% in the last five years. Teva's branded products are segmented into five different categories, namely central nervous system, women's health, respiratory, oncology and pain. Moreover, the company is a global leader with more than a 20% market share in the generic category of pharmaceuticals. Teva has the ability to pay off its dividends without any debt support. Generics account for more than half of Teva's revenues and it will remain its top earning segment for some more time. Along its ten year journey, Teva bought a number of companies, either to consolidate its leading position in generics or to balance its generic portfolio with branded drugs. The stock is undervalued and has considerable prospects to show an upward trend with the launch of new products, which are currently awaiting FDA approval. The PE ratio for TEVA (0.33) is very favorable. The company has a proven formula for growth and sustainability a strong recommendation of a buy.
With Acquisitions going smooth Watson Pharmaceuticals is already one of the biggest fish in the generics pool. Most of Watson's 2011 increase came from one product launch after another, some of them under exclusive arrangements with branded drug makers. Watson is one of the few generic drug companies that have been in the business for more than 25 years. In the past five years, there has been a 179.41% increase in price. The stock has stayed on a steady roll and during the last six months and analysts project revenue will increase by 20.00% this year and another 46.10% next year. Watson Pharmaceuticals is a growth stock that is projected to have a sturdy increase in revenue, earnings and total return. This a strong buy stock by any standards. The strength of the company’s performance has an upward trend and I feel that it is one of the stocks to vote for. From a trough of $21 per share in late 2008, WPI has risen to $ 83.34, more than twice as high as rival Teva and almost three times more than MYL.
Brownie points for the Generic drug makers
- Sustained growth over the past ten years
- Commendable annual revenue growth of 9.6%
- Large well established companies
- Several FDA approvals
- Long term profitable prospects
Generic drugs are here to stay and will take on an increasing proportion of global prescriptions. It’s high time to invest in these stocks.
SharmisthaB has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.