April 3, 2013
If I had to name one recession-proof industry, generic pharmaceuticals would be it. In fact, generic drugs is forecast to be the single fastest-growing industry for the next several years.
With the average American spending $758 out of pocket on prescription drugs (a 12% increase over 2011), generic versions are becoming more and more attractive to consumers. And this is terrifying the traditional pharmaceutical companies. As we speak, AstraZeneca is fighting tooth and nail to stop Actavis from introducing its generic version of Pulmicort RESPULES, a popular asthma treatment.
But it looks like big pharma is fighting a losing battle. According to market research firm Lucintel, the worldwide market for generic drugs is expected to reach $335 billion by 2017. The way I see it, generic drugs companies are a win-win for patients and investors alike. So today I'm going to cover three companies that are profiting from this powerful trend that you should take a closer look at.
Let's start with the company that is grabbing headlines today:
Actavis Inc. (ACT) is one of the world's largest generic drugmakers. For the better part of the past three decades, this company was known as Watson Pharmaceuticals (WPI), but the company rebranded itself just a few months ago. With a portfolio of over 190 pharmaceutical product families, Actavis has its name on everything from antibiotics to contraceptives to smoking cessation treatments. 2012 was a record year for Actavis, but going forward the company's prospects remain as bright as ever. This quarter, analysts forecast 29% sales growth and 13% earnings growth.
One of the most exciting things in the works at Actavis is generic versions of biologic drugs, which are created by biological rather than chemical processes. The generic, potentially cheaper, versions of biologic drugs are called biosimilars, and to date they're not available in the U.S. So right now there is a race between biotechs to develop and get their biosimilars approved. Considering that the global market for biosimilars is forecast to be between $11 billion to $24 billion by 2020, this is a lucrative opportunity, and I look forward to seeing where Actavis goes with this. ACT is a B-rated Buy.
Mylan Inc. (MYL) is another global generic pharmaceuticals company; with customers in more than 150 countries, Mylan has a product portfolio of 1,100 separate products and a manufacturing capacity of more than 45 billion doses. Outside of generics, Mylan also produces active pharmaceutical ingredients (APIs) and specialty pharmaceuticals, particularly those that treat respiratory diseases, psychiatric disorders and severe allergic reactions.
Like Actavis, Mylan has robust growth prospects thanks to its strong pipeline: The company currently has 182 generics awaiting final approval for use in the U.S. On top of this, the company has been ramping up operations in the world's fastest-growing economies. In February the company bought out Agila Specialties Private Ltd., an Indian marketer of generic injectable products, for $1.6 billion.
This quarter, the consensus calls for 7% sales growth and 19% earnings growth. Given this stock's tendency to hop after earnings, I'm looking forward to its next earnings announcement, which is due out at the end of the month. So while the stock has consolidated over the past month, I consider this pullback a good buying opportunity. MYL is also a B-rated Buy.
Along with the two drug makers above, the generics boom has also prompted me to take a look at another company, this time a retailer:
Costco Wholesale Corp. (COST) is the largest wholesale club operator in the country. What sets Costco Wholesale apart from other big box stores is its sales growth, which currently trumps the growth we're seeing from Target and Wal-Mart. By selling a wide range of merchandise at wholesale prices, Costco offers a wholly unique shopping experience to customers.
What makes Costco our "Wild Card" is that when it comes to generic prescription drugs, no one stocks them for cheaper. At least, that is what a recent study by Consumer Reports concluded. Apparently a single month's supply of generic Lipitor costs $17 at Costco…while it cost upwards of $150 at CVS, Rite Aid and Target! Costco can get away with rock-bottom prices because this tactic helps pull in customers who will spend money on other higher margin items.
So its small wonder that the company is headed towards double-digit earnings growth through the end of 2014 while other big box retailers are headed towards just single-digit earnings growth. COST is a B-rated Buy.