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Published: November 20, 2009
Some things are universally true. No one
ever went broke taking a profit, for instance.
Also: Companies that offer lower costs always have a significant
competitive edge.
This is becoming especially true for companies in the
health-care field as cost becomes an ever more important element
of patient choice. Companies that can offer such an advantage to
consumers will be the winners in the debate over health-care
reform, regardless of which bill gets passed when.
Case in point: Despite a -1.3% drop in consumer prices,
brand-name prescription drugs prices have risen by about +9%
this year. Generic drug prices, on the other hand, have fallen
by about -9%. As a result, members of Congress have asked for
two separate investigations of drug pricing.
Large drug companies are facing tough challenges. Several major
drugs -- such as Pfizer's (NYSE: PFE)
cholesterol-lowering Lipitor, the No. 1 selling drug in the
world -- are scheduled to lose patent protection soon. An
estimated $137 billion of drug sales will lose patent protection
within the next five years, according to IMS Health, which
provides sales analysis and medical audits to the pharmaceutical
industry. The problem is so severe, the industry has termed it
the "patent cliff."
Once a drug loses patent protection, it becomes vulnerable to
generic competition. Generics count for about 70% of
prescriptions in the United States, and patients are
increasingly using them as a less expensive alternative to
name-brand pharmaceuticals.
It's not hard to see why: The average generic drug costs $34.34
compared with $119.51 for a brand-name equivalent. Generic
medicines saved the American health care system more than $700
billion between 1999 and 2008.
The future for generic drug companies is bright. Here are some
of the beneficiaries:
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In this case, the clear leader is already at the top of the
list: Teva Pharmaceuticals (Nasdaq: TEVA). Headquartered
in Israel, Teva is the world's largest generic drug company. It
sells about 470 generic drugs, which brought in $11 billion in
revenue last year. As the market leader in an industry that will
directly benefit from big pharma's woes and the American
consumer's increasing need for cheaper medication, Teva is in an
enviable position.
Teva recently bought Barr Pharmaceuticals, another generic drug
maker, for $7.6 billion. This deal will only solidify Teva's
position as the market leader in generic drugs.
Teva is expected to deliver annual sales growth of +18% within
the next five years. The company's shares are trading at less
than 12 times forward earnings, a significant discount to its
peers in the table above. As the world-class leader in an
industry expected to grow +8% annually, the shares look to be a
bargain.
Brad Briggs
Staff Writer
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