A 130/30 Generic Pharma Trading Strategy

by: Mike Havrilla
The accompanying tables include 12 U.S. listed companies from the ETF Innovators Global Generic Drug Index along with eight brand name drug companies, which are ranked in descending order based on their patent expiration exposure through the end of 2011 as a percentage of total trailing 12-month revenue.

Investors who are bullish on the generic drug industry may consider implementing a 130/30 pharma trade by shorting any/all of the top seven brand drug companies by patent expiration exposure with 30% of their assets while investing 130% of assets in long positions among generic drug makers.

Favorable growth trends for the generic drug industry include nearly $70B in brand name drug sales with patent expirations through 2012, a push to increase generic substitution rates from 65% of all prescriptions dispensed to over 70%, continued industry consolidation of small and mid-caps by industry leaders such as Teva Pharma (NASDAQ:TEVA) and Mylan Labs (NASDAQ:MYL), and the potential for legislation this year to clarify a regulatory pathway for bio-generics.

The list of brand drug companies in descending order of patent expiration exposure through the end of 2011 includes: Pfizer (NYSE:PFE), GlaxoSmithKline (NYSE:GSK), Takeda Pharma (OTC:TKPHY), Bristol-Myers Squibb (NYSE:BMY), Sanofi-Aventis (NYSE:SNY), AstraZeneca (NYSE:AZN), and Merck (NYSE:MRK). However, MRK is hedging its bets with a recently established bio-generic division which will initially target Amgen's (NASDAQ:AMGN) anemia drug Aranesp and PFE has an in-house generic division under the Greenstone label.

MYL is on the move up today by nearly 10% after reporting results that beat expectations and the Company also transferred its stock listing to the Nasdaq and rang the opening bell today. The other 11 U.S. listed generic drug makers include Caraco Pharma (NYSEMKT:CPD), Lannett (NYSEMKT:LCI), Hi-Tech Pharmacal (NASDAQ:HITK), TEVA, Taro Pharma (TAROF.PK), Impax Labs (NASDAQ:IPXL), Dr. Reddy's Lab (NYSE:RDY), Par Pharma (NYSE:PRX), Perrigo (NASDAQ:PRGO), Momenta Pharma (NASDAQ:MNTA), and Watson Pharma (WPI) – which also posted strong results and guidance yesterday.
Brand Drug Makers - Patent Expiration Exposure

U.S. Listed Generic Drug Companies