Par Passes the Generic Bar

Before they are allowed to begin marketing a generic version of a drug, generic drugmakers often have to prove that their product is equivalent to the drug they are making a generic of, in terms of dosage form, safety, and efficacy. Sometimes this requires more than just a simple study showing that the generic is similar to its branded counterparts. In addition, generic drugmakers often have to go through years of patent litigation to bring their products to market. All this complexity means that this is not an industry for the weak of heart. To compensate for all these potential pitfalls, the rewards for being the first to market a generic equivalent of a drug can be lucrative.

Shares of Par Pharmaceutical Companies (NYSE: PRX  ) were up more than 11% yesterday after it received approval from the FDA to market a generic version of Wyeth's (NYSE: WYE  ) hypertension and angina treatment, Inderal. As reported by Par, sales of the extended-release version of the beta-blocker Inderal are approximately $215 million annually in the United States.

The good news for Par shareholders is that, since the company is the only generic manufacturer selling a version of this drug, it should be able to charge a relatively high price and still capture a large chunk of the Inderal market. In fact, research from the FDA shows that when a generic product is only competing against the branded drug, the generic's average price is 94% of the branded product's price. With Par's generic price likely close to the branded drug's price, Par's gross margins on sales of generic Inderal should be much closer to the 70%-and-up margins that are seen on branded drug sales.

Par has had a string of other successful generic approvals with the FDA lately, including gaining six months of marketing exclusivity for some forms of the $300-million-a-year Zofran. Par is also beginning sales of pravastatin, a blockbuster statin.

Normally, a string of these types of generic product successes would draw more investor interest. However, since last July, Par has been involved in a lengthy process of restating its earnings going all the way past 2004. In December, Par updated investors as to the magnitude of the restatements, but still hadn't finished the process. Since Par's financials are unreliable at this point, it's hard to make any accurate judgments as to its valuation. Regardless, investors should pay attention to how this proceeds; people sometimes shy away from a company that has fallen on its sword in the past, and this can then be a great opportunity for less risk-averse investors.

Check out our Motley Fool CAPS investor community today. It's fun and free, and could make you a better investor.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.

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