Will Par Stay in the Fairway?

• Email
• Share
• Print

Even though the generic drug industry can look, well, generic to some outsiders, there are meaningful differences between the players. One of the keys to successful long-term investing here is to identify which of those differences really matter. With that in mind, is Par Pharmaceutical (NYSE: PRX) a bargain, or rightly discounted?

Par didn't really surprise anybody with its first-quarter results. Sales were up 78%, while income from continuing operations more than tripled. Gaudy as those numbers may seem, that's not the real talking point; the more interesting number was the gross margin line, which dropped nearly nine full points to less than 32%.

The reason behind this margin drop also ties in to an important aspect of this company. Simply put, the margin suffered from the impact of higher sales of authorized generics like Flonase (authorized from GlaxoSmithKline (NYSE: GSK)).

If you haven't heard a lot about authorized generics, that's probably about to change. In fact, I'd suggest that this could be the next major battleground between the drug industry and government, with folks with a vested interest in patient choice and medical-cost containment chiming in as well.

Authorized generics are usually a compromise between a drug company and one or more generic companies. The drug company gives out the right to manufacture a generic drug in exchange for the generic company dropping legal attempts to overturn certain patents. For the drug company, it generally provides a few more years of market exclusivity (and high profits), while the generic company often gets a leg up on its competitors. Some think this is an abuse of the system that could ultimately harm the generics industry and keep drug costs higher than they would otherwise be. I'm sure we'll all be hearing more about it in the months and years to come.

In Par's case, the company is trying to recover from poor past performance, even as it becomes a hybrid branded drug/generic drug company like Teva (Nasdaq: TEVA) and Barr Labs (NYSE: BRL). That's all pressuring results in the short term. If Par can bring margins back closer to industry standards and steer clear of the authorized generics controversy-to-be, this might yet be a stock that's worth a look.

For more non-generic Foolishness:

• Glaxo's Story Still Worth Reading
• A More Realistic Bar for Barr Labs
• Still Waiting for Teva to Tumble

GlaxoSmithKline is a Motley Fool Income Investor recommendation. To discover more promising stocks with dynamic dividends, sign up today for a free 30-day guest pass .

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).