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The Generics Roller Coaster

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Talk about a strong second half. Generic-drug maker Mylan (Nasdaq: MYL  ) recorded adjusted earnings of $0.73 per share in the first half of the year but earned $0.43 per share in the third quarter and is looking for adjusted EPS as high as $0.49 in the fourth quarter.

Much of that growth can be traced back to sales of generic drugs in the U.S., which for the third quarter increased 17% year over year. Generic-drug makers the size of Mylan, Watson Pharmaceuticals (NYSE: WPI  ) , or Dr. Reddy's Laboratories (NYSE: RDY  ) can benefit nicely from launches of generic drugs with limited competition. The lack of competition benefits the companies because they can capture most of the market, but it also allows them to price the drug at close to the brand-drug price, increasing margins and allowing more to flow to the earnings line.

For Mylan, three drugs -- generic versions of Boehringer Ingelheim's Catapres-TTS, Astellas' Prograf, and Medicis Pharmaceutical's (NYSE: MRX  ) Solodyn ER -- faced limited competition in the third quarter.

Unfortunately, all good things come to an end. This time last year, Mylan was raving about its generic version of Abbott Labs' (NYSE: ABT  ) Depakote ER, but Mylan characterized this year's sales as "significantly lower" than last year. This year's Cinderellas may follow the same fate.

The solution, of course, is to just keep launching new drugs, which is a little easier said than done. Mylan has a good track record, which investors should take into account, but ultimately they should be prepared for the potential of unsteady earnings.

If you can't handle the roller coaster, consider investing in a larger generic-drug maker like Teva Pharmaceutical (Nasdaq: TEVA  ) or Novartis (NYSE: NVS  ) , which have a larger revenue base to even out the inevitable increases and decreases in individual products.

Fool analyst Jim Mueller recently picked Teva for our 11 O'Clock Stock series.

Novartis and Dr. Reddy's Laboratories are Motley Fool Global Gains picks. The Fool owns shares of Teva Pharmaceutical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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