For the millions of Americans who suffer from high cholesterol,
Nov. 30 will be a big day. That's when
blockbuster drug Lipitor will lose patent protection, promising
massive savings for high-cholesterol patients. The $7 billion drug
(according to projected 2011 sales) also represents a big deal for
firms that make and distribute generic drugs. In fact, these firms
are lining up for a banner year in 2012, because a whole host of
other drugs are also on the verge of losing patent protection.
Here are a few:
Bristol-Myers Squibb's (NYSE:
Plavix, a blood thinner that treats patients with high risk for
heart attacks, will lose patent protection next May. It is
projected to bring int $6.6 billion in sales this year.
Forest Labs' (NYSE:
Lexapro treats anxiety disorders and is slated to go off-patent
in February 2012. It generates about $2.3 billion in annual
Seroquel, a schizophrenia drug, loses patent protection in March
2012. The psychiatric medication brings in $3.9 billion in annual
Singulair, used for the treatment of asthma, goes generic in
August 2012. It makes $3.6 billion in annual revenue.
Takeda Pharmaceutical Co.'s
diabetes drug Actos will also lose patent in August 2012. The
drug generates about $3.1 billion in revenue.
Diovan/HCT, for hypertension, hits the generic
a year from now. Diovan generates about $2.2 billion in yearly
These names are just a partial list. Citigroup figures the
entire list of drugs that will lose patent protection next year
accounts for $33 billion in sales, which will be a little more than
double from this year. Keep in mind generic drug prices will be
lower, so these generic equivalents will ultimately represent
closer to $10 billion in sales once price discounts have fully
This generic tidal wave is likely to prove to be a real boon for
generic drug makers. Trouble is, it's hard to handicap which firms
will get which contracts. The Food and Drug Administration (FDA)
grants a 180-day exclusivity period to a select number of
generic-drug makers that are able to dispute the patents
successfully. This is usually when the drug price drops by 30-40%.
Once this six-month period ends and other generic-drug makers enter
the market, prices decrease to about 10% to 20% of the original
branded prices. Profits from the manufacture of generic drugs are
attractive for the drug makers, but really attractive for the drug
distributors, as I'll explain in a moment.
So far, the best guess is that
Watson Pharmaceuticals (NYSE:
and India's Ranbaxy will share the exclusive upfront window for the
production and distribution of generic Lipitor. For legal reasons,
the FDA won't grant the 180-day exclusivity for Bristol-Myers's
Plavix. As a result, the drug may immediately be subject to broad
competition among generic-drug manufacturers.
But while we can't quantify how the generic bonanza will affect
specific pharmaceutical companies in 2012, we can surmise the
biggest players will also get their share. In order of size, the
top five generic-drug producers in the United States are:
Teva Pharmaceuticals (Nasdaq:
Mylan Labs (NYSE:
, Sandoz (which trades in its native Germany), Watson
Pharmaceuticals Inc., privately-held Greenstone Generics LLC (a
subsidiary of Pfizer). Other public generic-drug makers include
Par Pharmaceutical (NYSE:
Dr. Reddy's (NYSE:
. All of these companies are well positioned to take advantage of
Analysts at Citigroup are considering a different investment
approach. They say investors should focus on drug distributors that
will benefit from lower purchasing costs, because so many drugs are
slated to go generic. In this light, they cite
Cardinal Health (NYSE:
as the best investment vehicles. These two firms control,
respectively, 36% and 37% of the wholesale drug distribution market
controls the other 25%).
These distributors deal directly with drug manufacturers and garner
best-in-industry pricing, thanks to their sheer size. Pharmacy
chains such as
for example, buy directly from these wholesalers, not the drug
makers. So while Cardinal and McKesson will probably see lower
revenue when prices of brand-name drugs fall, their margins are
likely to expand, since as they would be getting better profit
spreads on generics. "Within the customer base that buys generics
from the wholesalers, generic drugs can be three to 20 times as
profitable as their branded drug counterparts," note Citigroup's
Regarding Cardinal Health in particular, Citigroup has just boosted
earnings per share (
forecasts to $3.28, slightly ahead of the consensus. The analysts
will rise from a current $42 to $51 by next year (a 21% gain).
Their outlook for McKesson is even more
, predicting the company will likely earn $6.34 a share in 2012 --
the highest forecast in the consensus, while also predicting shares
could move up to $101 from a current $73 (a 38% gain.
Most importantly, this positive outlook doesn't depend on the
health of the U.S.
, because drug sales are rarely affected by external economic
forces. If anything, the switch to generics could be a boon for
cash-strapped consumers. The typical branded drug sells for an
average of $170, while the typical generic sells for $50.
Risks to Consider:
Although the switch to generics represents major cost savings
for the entire health care system, reimbursement pressures remain
quite strong as Washington seeks further savings. Any major changes
could reduce the buying power of senior citizens, who are the
largest consumers of prescription drugs.
Action to Take -->
The generic revolution has been underway for quite some time, and
many have profited from this theme before. But 2012 represents a
whole new set of opportunities for generic-drug makers and for
firms that distribute these drugs. McKesson and Cardinal Health
look like sensible plays on the trend. It's also worth taking a
deeper look at generic drug makers such as Teva and Mylan. They
both have been trading well off their highs and have been sporting
extremely low price-to-earnings (P/E) ratios in relation to
projected 2012 profits.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.