Health-care investing used to be straightforward -- used to be. Just buy a basket of the largest pharmaceutical players and you could sleep well at night, knowing these firms were recession-proof and had a solid, enduring path to profitability, given the patent protection on their drug portfolios.
Unfortunately, that lazy approach officially petered out earlier this decade. Perusal of stock charts over the past five years is telling -- while the market, as measured by the S&P 500 index, returned in excess of 20%, Eli Lilly
Blazing a new health-care trail
A number of major European pharma providers have outperformed their U.S.-based rivals by diversifying their revenue bases. A focus on international markets has certainly helped, as has a growing focus on generics, which used to incur the wrath of companies spending billions of dollars to develop new drugs.
Novartis
The name of the game is ... generics
A recent Financial Times article pegged the current generics market at about $70 billion, which puts it at just more than 10% the size of the total market for patented drugs. But given the snowballing trend toward patent expirations, as well as the growing sophistication with which generics firms are bypassing patent protections, generic alternatives will only become more influential in the global market for medicine.
With that, here are some mostly pure-play generic opportunities for your health-care portfolio. Teva Pharmaceuticals
Company |
Ticker |
Market Cap (in billions) |
P/E |
Net Profit Margin |
---|---|---|---|---|
Teva Pharmaceuticals |
TEVA |
$35.8 |
20.5 |
20.7% |
Par Pharmaceutical |
PRX |
$0.6 |
50.9 |
6.5% |
Dr Reddy's Laboratory |
RDY |
$2.6 |
24.2 |
8.8% |
Watson Pharmaceuticals |
WPI |
$3.1 |
20.9 |
5.6% |
Barr Pharmaceuticals |
BRL |
$7.0 |
46.4 |
5.1% |
Mylan |
MYL |
$4.0 |
-- |
-- |
Information courtesy of Capital IQ. Profit margins are for last fiscal year.
Long-term looks good
Even the most stubborn and storied pharma providers have begun to embrace the move to generics. That's because the generics industry is growing fast, is consolidating even faster, and can be quite profitable. Teva is a case in point -- it has a goal of doubling sales and earnings by 2012 through organic growth and acquisitions, and it posts net profit margins close to 20% thanks to the sales of a few key branded products. Investors should take note -- it could be quite healthy for your portfolio over the long haul.