Generic pharmaceutical companies offer an attractive investment opportunity currently within the health care industry and have greatly benefited from the large roster of blockbuster drugs that underwent patent protection expiration. In particular, Dr. Reddy's Laboratories (NYSE:RDY) is a well-run generic drug maker based in India that offers a high projected growth rate and is an attractive acquisition target.
Generic drug makers are profiting from Big Pharma's woes
Generic drug makers profit when patent protection expires on branded drugs. And in the current environment of payer austerity, generics offer a compelling opportunity for governments and insurers to reduce their expenses. So it's an interesting sector for investors to watch.
There are many players in the generic drug sector and some, like Sandoz (acquired by Novartis), have recently been acquired by big pharma. Of these, the Indian generic drug makers offer the best value proposition. Overall, the Indian pharmaceutical market is currently valued at $13 billion and is expected to grow to $55 billion by 2020 . In addition to the attractive growth prospects for generic drug makers in general, Indian generic drug companies offer: 1) easy access to a population that is 1.2 billion strong with a 1.3% annual population growth and a 20% increase in disease prevalence by 2020; and 2) preferential relationship with the Indian government, which is vested in ramping up its health care infrastructure and in providing low-cost generic drugs to many citizens.
Dr. Reddy's Laboratories: Exciting growth prospects
Dr. Reddy's aggressively pursues filing generics. For example, last year alone, the company filed 18 ANDAs (applications for generic drug approvals) in the U.S., bringing the total number of ANDAs pending approval to 65. Of these, 8 were expected to have first to file status, which grants them a higher profit margin for a 6 month period before competitors are allowed on the market.
According to S&P Capital IQ, analysts are estimating that revenue will grow from $2.2 billion in FY 2014 to $3.4 billion in FY 2018, an impressive 55% increase in revenue in only four years. That's exciting growth. And, as a generic drug maker, Dr. Reddy's has an R&D budget of around 6% of revenue, much lower than most big pharmas. That means that a higher percentage of revenue will flow through to the bottom line than with a traditional big pharma -- money that can be plowed into other opportunities (or returned to shareholders via dividend increases). For example, Dr. Reddy's is also launching generic ibuprofen in the U.S. under the 'Dr. Reddy's' brand name and is planning to market more products this way.
Of course, all companies come with risks. And Dr. Reddy's recently had a concerning development -- It recently announced a recall for over 13,000 bottles of a hypertension drug that failed to meet FDA standards. Indian pharmaceutical companies have faced heavy fines and manufacturing bans for poor manufacturing practices in the past, and many have been in the spotlight recently. If quality control issues continue to plague Dr. Reddy's, then growth and profitability are likely to be negatively affected.
But overall, I like the opportunities for Dr. Reddy's -- generics are a huge potential area of growth in health care spending. It is well managed by a team recognizing that investment is needed for building innovation in complex generics and for developing a well-recognized generics brand name to secure its long-term future.
Amit Shah has no position in any stocks mentioned. The Motley Fool owns and recommends shares of Valeant Pharmaceuticals. 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. The Motley Fool has a disclosure policy.