Generic Pharma Companies To Watch

Includes: AGN, HITK, MYL, TEVA
by: Shankar N

If there is a bright spot in the pharma industry, then it definitely belongs to the generic drug manufacturing companies. While big pharma companies are fighting patent cliffs, generic drug manufacturing companies are growing at a faster clip. Some companies have even doubled their revenue in the last five years. Here is a small list of generic drug manufacturing companies that are on the top of the growth chain.

Mylan, Inc. (NASDAQ:MYL)

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Mylan 2006 2011 CAGR
Revenue(Mil) 1257 6130 37.29%
Net Income(Mil) 185 537 23.75%
EPS 0.79 1.22 9.08%
COGS (% of Sales) 50.08 58.18
Operating Margin 22.86 16.4
Net Margin 14.68 8.76
Debt to Equity 0.87 1.28

Data: Morningstar

The 18,000-employee strong Mylan operates in two segments, Generics and Specialty. It sells more than 900 products to 140 countries. Mylan has an Indian subsidiary that supplies active pharmaceutical ingredients for its own products.

Mylan is trading at a forward P/E of 9.2, thanks to the growth it achieved in the last four quarters. It has been growing at a scorching pace since 2006, but the low net margin numbers indicate that it hasn't been able to convert much of the growth into increasing profits. Mylan's debt level (1.28) is also something that we need to watch out.

Hi-Tech Pharmacal Co. Inc. (NASDAQ:HITK)

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Hi-Tech 2006 2011 CAGR
Revenue(Mil) 78 191 19.62%
Net Income(Mil) 11 41 30.10%
EPS 0.85 3.19 30.28%
COGS (% of Sales) 45.93 43.63
Operating Margin 20 33.8
Net Margin 14.68 21.72
Debt to Equity 0 0.01

Data: Morningstar

The prescription and over-the-counter drug manufacturer is a bit smaller than other companies on this list, but it's growing at 20% CAGR since 2006 and pretty much has no debt. Hi-Tech has $92 million in cash and $30 million in properties versus a total liability of $33 million. The margins are also on the higher side, averaging more than 15% in the past three years. At a forward P/E of 7.0, Hi-Tech looks a bit cheap for what it can offer.

The pharma stock pared some of the gains it made recently as it missed analyst estimates in the latest quarter. Net revenue fell by 8% compared to prior quarter.

Watson Pharmaceuticals, Inc. (WPI)

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Watson 2006 2011 CAGR
Revenue(Mil) 1979 4584 18.29%
Net Income(Mil) -445 261
EPS -4.37 2.06
COGS (% of Sales) 62.32 55.95
Operating Margin -21.33 11.7
Net Margin -22.48 5.69
Debt to Equity 0.67 0.24

Data: Morningstar

Watson is one of the few generic drug companies that has been in the business for more than 25 years. Watson has three business segments, Global Generics, Global Brands and Distribution. Though the company operates all over the world, it makes most of its money by selling generics in the United States. The $10.45 billion generic manufacturer doubled its revenue in five years, growing at a CAGR of 18.29% between 2006 and 2011.

Watson trades at a forward P/E of 11.5 making it a bit more expensive than some of the other companies in the list. Watson's top management definitely has some work to do if they want to improve its net margin, which is hovering around 6% for the past three years.

Teva Pharmaceutical Industries Ltd. (NYSE:TEVA)

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Teva 2006 2011 CAGR
Revenue(Mil) 8408 18312 16.84%
Net Income(Mil) 546 2759 38.26%
EPS 0.69 3.09 34.97%
COGS (% of Sales) 49.35 48.04
Operating Margin 9.53 16.98
Net Margin 6.49 15.07
Debt to Equity 0.41 0.46

Data: Morningstar

Any article discussing top generic companies would be incomplete without including the poster boy of generic drug industry, Teva Pharmaceuticals. With $34 billion market cap, Teva 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 forward P/E of 6.8 is significantly lower than some of its peers and it indicates market's nervousness about Teva's growth prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.