Generic Drug Makers May Get a Boost in Market
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This has been a lackluster year for the stocks of generic drug makers, but that’s about to change.
In the next five years, drugs representing more than $100 billion in U.S. sales will lose patent protection. A generic drug may be sold once the original manufacturer’s patent expires. The first company to market a generic equivalent typically gets six months’ sales exclusivity.
The drug maker in the best position to benefit from these changes is an Israeli company called Teva Pharmaceutical Industries. Founded in Jerusalem 104 years ago to distribute imported drugs, Teva is now the largest seller of generic pharmaceuticals in the United States, with a 13 percent market share.
Teva’s market share will approach 20 percent once it completes its proposed acquisition of U.S. generics maker Ivax. That $7.4 billion cash-and-stock deal, announced in July, should close late this year or early next. With a market capitalization of $21 billion, Teva is the largest company on the Tel Aviv Stock Exchange and trades on Nasdaq as symbol TEVA.
Teva is seeking approval for versions of 140 existing brand-name drugs, including 37 that would qualify as first-to-market products. Ivax adds another 65 applications, although some overlap Teva’s, plus generic versions of the antidepressant Zoloft and prostate treatment Proscar that will launch next year with six months’ sales exclusivity.
Generics account for about 54 percent of all U.S. drug sales. Investment bank SG Cowen expects that to rise to 58 percent after the new Medicare drug program launches in January. The plan will allow seniors to purchase prescription-drug coverage from private insurers, which are expected to push generic drugs aggressively to keep costs down.
Fears that a price war will trim profit margins have been a drag on shares of generic-drug manufacturers. Although Teva’s stock is up 11 percent this year, to $33 in mid-August, its price-earnings ratio of 23—based on the previous four quarters of profits—is near an all-time low, says analyst Richard Watson of investment bank William Blair. He says that Teva shares could trade closer to $40 next year once those fears subside.
“I think a lot of the concern that the party will be spoiled in ‘06 and ‘07 is overdone,” Watson says.
Teva trades at 21 times the average of analysts’ 2005 earnings estimates of $1.56 per share, according to Thomson First Call.
Source: Deseret News (Salt Lake City)
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