Winning Long-Term Plays In Generic Drugs

Includes: AGN, MYL, PRX, TEVA
by: ValueMax

Teva Pharmaceutical Industries (TEVA), based in Israel, is a worldwide leader in generic drug manufacturing. Generic drugs are less expensive than their brand-name equivalents, but typically provide the same or similar results. Many people, especially those with inadequate or no medical coverage, rely on generic drugs to help cure or control diseases and conditions from the common cold to mental illness.

The health care industry, which includes health insurance companies, hospitals, medical offices and clinics, and health care programs such as Medicare and Medicaid, also relies on generic drugs as a way to cut costs to help as many patients as possible. With other medical costs such as equipment, medical practice insurance, paperwork, and supplies, finding ways to cut costs overall is essential for the industry to maintain a high standard of care. This is a major reason why generic drugs have become so popular over the years.

In 2011, Teva released generic versions of Zyprexa (manufactured by Lilly (NYSE:LLY) to treat schizophrenia) and Aricept (manufactured by Pfizer (NYSE:PFE) and Eisai for the treatment of dementia). Recently, the company announced the release of generic forms of Provigil (manufactured by Cephalon to treat sleepiness caused by narcolepsy) and Seroquel (manufactured by AstraZeneca (NYSE:AZN) for the treatment of schizophrenia). It should be noted that Cephalon is a subsidiary of Teva.

Teva also announced the release of two generic blood pressure medications for those suffering from high blood pressure and other related conditions. These medications are generic versions of Avapro and Avalide, developed by pharmaceutical company Sanofi Aventis (NYSE:SNY).

But even though the company is mostly known for selling generic versions of popular drugs, Teva also releases its own name brands. Brands include Copaxone (glatiramer acetate injection) for the treatment of multiple sclerosis and Azilect (rasagiline tablets) for the treatment of Parkinson's disease.

Other pharmaceutical companies that manufacture generic drugs for mental illness include Mylan (MYL). Like Teva, Mylan has released a generic version of Seroquel, used to help treat schizophrenia, among other disorders. The company also released a generic version of Boniva, used to help treat osteoporosis.

Watson Pharmaceuticals (WPI) released a generic version of Boniva and offers generic versions of emergency contraception, nicotine gum, acetaminophen, and overactive bladder medications. Both companies are competitors of Teva and should be given ample consideration when building a strong stock portfolio. Even though the generic drug market is less glamorous than the brand name market, investors should know that there is enough competition between these and other pharmaceutical companies that make and sell generic medications to maintain steady profits.

Another example is Par Pharmaceutical Companies (PRX). In February 2012, it acquired India-based pharmaceuticals company Edict Pharmaceuticals Private Limited - another generic drug manufacturer - for $20.5 million with an additional $4.4 million repayment of debts accrued prior to closing the deal. Along with this acquisition and strong earnings during Q4 2012, Par Pharmaceutical continues to shine on the New York Stock Exchange.

When it comes to investing in the generic drug market, investors should consider the following advantages. First, generic drugs aren't developed, meaning these types of drugs are manufactured, not created through extensive lab testing and experimentation. This not only lowers manufacturing costs, but also reduces the time it takes for drugs to go from the production line to pharmacy shelves. Manufacturers must use the same materials as brand name drugs to make generics. Once a pharmaceutical company's patent has expired, a brand name drug may be replicated by other manufacturers. This not only reduces overall cost, but also allows manufacturers to continually expand product lines, which increases a company's overall value.

Second, generic drugs don't undergo the same rigorous testing and clinical trials that brand name counterparts do by generic drug manufacturers. This means generic drugs are typically available for public use in less time, barring any patent infringement or other types of lawsuits.

And while the FDA approval process is similar for generic drugs as it is for brand name drugs, manufacturers of generic drugs do not have to seek patent approval, which can take 12 months or more depending on the complexity of the drug. Generic drug manufacturers must show that their version is the same as the brand name version, meaning it contains the same active ingredients, dosage strength, and dosage form (liquid, tablet, etc.). The package labeling must also be similar.

A third advantage from an investment standpoint is that most generic drugs perform just as well or better than brand names, especially if the brand name drug was popular with patients and medical professionals. For the long term investor, generic drugs can become a profitable anchor in a stock portfolio.

To further this point, The Generic Pharmaceutical Association (GPhA) released a report at the end of 2011 that highlights the savings potential of generic drugs for patients, health insurance companies and other medical professionals. The GPhA commissioned IMS Health and the IMS Institute for Health Care Informatics to conduct a study that showcased 10 years of cost-savings (2001-2010) to those using generic drugs over brand name counterparts. The study shows, for example, that in 2010, $158 billion was saved in health costs simply by switching to generic drugs.

For investors, the generic drug market will continue to grow, especially as the health care system continues to look for new ways to cut costs while providing quality care to patients. Though generic drugs are not the most exciting or thrilling market to invest in, when it comes to reliability and stability, this market continues to perform.

The need for generic drugs is what will ultimately drive the market and help it remain profitable for a prolonged period of time. This need by patients that cannot afford brand name drugs and the need by the health care industry in general to cut costs and help patients are two very powerful reasons why investing in pharmaceutical companies that manufacture generic drugs is a great idea for long term investment returns and security.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.