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Most investors who follow pharmaceuticals here at Seeking Alpha focus on branded drugs. They pore through drug trials, they look for new hits, and they speculate on the value of new cures.

But there's another way to play. That is to follow the global trend in pharmaceuticals, which favors generic drugs over branded ones. And one of the big winners there has been Watson Pharmaceuticals Inc. (WPI).

From a trough of $21 per share in late 2008, WPI has risen to $74, and earned a PE multiple of 34, more than twice as high as rival Mylan (MYL) and almost three times more than Teva (TEVA). It's now the third-largest generic maker on the planet, having bought Actavis in April.

What makes Watson interesting, despite its high multiple, is its global growth story. Global demand is shifting, with the big growth coming in emerging markets like Brazil, Russia, Argentina and Mexico, where generics represent the bulk of the market.

But there's another shift coming, which also benefits Watson. As U.S. insurers move from fee-for-service to fee-per-patient, with incentives to cut costs, they will increasingly favor generics over branded drugs. It won't be exclusive, but generics will gain a bigger share of the U.S. market over time.

This will make our market more like Canada, Japan, and western Europe. There, drugs have to be proven cost-effective before they are covered, and generics have an even bigger share of the market.

To that we can add the much talked-about "patent cliff," a host of currently patented medicines generic makers will be able to start making over the next few years. These include the arthritis drug Celebrex, whose patent expires in 2014, the high blood pressure medicine Diovan, whose patent expires this year, and the heartburn drug Nexium, whose patent also expires in 2014.

The total size of the pharmaceutical market is going to grow from $950 billion this year to $1.2 trillion in 2016, according to IMS Health and generics are going to earn a rising share of that growth over time. Watson is currently selling $4.6 billion/year, and thanks to Actavis it's nearly doubled in size since 2008.

Profits are thinner in this market than in the branded market, but they do exist. CEO Paul Bisaro remains interested in growth in the higher-margin branded area.

You want to pick it up on any weakness and right now it's as weak as it's going to get.

Source: Global Trends Favor Watson Pharmaceuticals