Generics win on Big Pharma's woes
Party continues for generic drug makers in 2006, but it probably won't be a rager.
NEW YORK (CNNMoney.com) - Big Pharma's bad news will continue to mean big bucks for generic drug makers in 2006, and possibly longer.
Generic drug makers outperformed many of their branded rivals in 2005, and analysts believe that the trend will continue through 2006, but at a reduced rate of enthusiasm because much of the industry's good news has already been priced in.
Even though the party isn't over, generic stocks probably won't repeat the heady gains of 2005, when Ivax (up $0.10 to $31.65, Research) stock doubled in anticipation of a takeover from Teva Pharmaceuticals (up $0.33 to $43.99, Research), which saw its own stock price jump by about 50 percent. Barr Laboratories' (up $0.57 to $66.96, Research) stock price increased by about two-thirds in 2005, while Mylan Laboratories' (up $0.19 to $20.96, Research) stock rose by one-fourth.
The Teva/Ivax takeover, originally scheduled for Thursday, has been postponed.
"[The generic drug industry] has some room to grow but it would be naive to think we'll have the same type of growth we had in 2005," said Ken Cacciatore, analyst for SG Cowen & Co.
The most obvious driver for generic companies in the next five years is the $100 billion in name-brand drugs expected to go off-patent. In 2006 $21 billion worth of name brand drugs are expected to lose their patents according to Andrew Forman, analyst for WR Hambrecht & Co. But generic companies will see just a fraction of this revenue, because drug prices typically drop 50 to 80 percent when drugs go generic.
Generic drug makers who win exclusivity of a branded drug have the right to produce that drug after it loses patent protection without competition from other generic drug makers for six months. When a branded drug goes generic, the drug typically loses 40 percent of its sale price. After that, it's open season, and the drug price typically plunges again as other generic companies begin to produce it.
Cacciatore, the SG Cowen analyst, said the most obvious winner among the generics will be its biggest drug maker, Teva Pharm, which won the legal right to produce two blockbusters expected to lose patent protection this year: Pravachol, the cardiovascular treatment from Bristol-Myers Squibb (down $0.30 to $22.54, Research) that totaled $2.6 billion in 2004 sales, and Zoloft, the Pfizer (down $0.50 to $24.35, Research) antidepressant with $3.4 billion in 2004 sales. For six months following the loss of patent protection, Teva will produce these drugs as generics without competition from other generic drug makers.
Merck's (down $0.43 to $33.23, Research) Zocor, a statin that totaled $5.2 billion in 2004 sales, is expected to lose patent in June. Ivax, which is in the process of being acquired by Teva, has staked its claim as the patent exclusivity front-runner for Zocor, said Cacciatore, but this has not been resolved.
Analysts also mentioned the following generic drug makers as potential winners in 2006: the Novartis (down $1.12 to $53.35, Research) subsidiary Sandoz, Watson Pharmaceuticals (up $1.66 to $35.21, Research) of Pennsylvania and Dr. Reddy Laboratories (down $0.54 to $23.08, Research) of India.
The impact of the new Medicare plan is uncertain, said Richard Watson, analyst for William Blair & Co., who noted that patients are slow to sign up so there won't be any effect at all for some time.
"Medicare, that's the wild card for 2006 and 2007," said Watson. "Near term, the impact might not be huge, but it could in the long term help the generics."
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