The generic drug market has become an increasingly large part of the overall Pharmaceutical business in recent years. The trend has continued to accelerate in the past couple of years, with an influx of new generic releases including versions of many blockbuster drugs. The expanded assortment has been met with an increased appetite from consumers for cheaper, private label alternatives, which has boosted utilization. Indeed, generic growth has continued to outperform the broader industry, remaining solid even as branded counterparts lagged. Investors have had success riding the initial generic wave, but some of the stocks have begun to face pressure, while others have continued to climb. The sector continues to evolve, with companies expanding into new geographic and business markets. However, the generic Rx prescription business remains at the core of the industry.
Although there are numerous competitors within the segment, it is really dominated by a single player, Teva Pharmaceuticals (TEVA). The company’s total generic prescriptions reached 611 million in 2010, accounting for 21% of U.S. volume. The U.S. generic market is the largest in the world, but TEVA also has a strong global presence. The company maintains an aggressive R&D strategy to stay ahead of competitors and ensure that it is the first to introduce generic products to market. In addition to actively reviewing pharmaceutical patents to gauge future opportunities, TEVA looks for ways to legally circumvent existing patents or even invalidate them. FDA regulations require companies to submit abbreviated new drug applications (ANDAs) for generic approval. The combination of filing the first ANDA, along with a paragraph IV certification, can lead to obtaining 180-day exclusivity. Importantly, the period of exclusivity has a major impact on the generic product’s success, as it helps capture substantial market share, while the relative pricing power afforded by the lack of competition boosts margins.
While prescription generics represent Teva’s core business, the company has solid diversity across a number of complementary units. The company has a sizable branded products business, which includes the Multiple Sclerosis (MS) drug Copaxone, and a Parkinson’s disease treatment called Azilect. Teva has expanded its branded product segment through innovation and acquisitions to include areas like respiratory and women’s health products, as well as an increased focus on biopharmaceuticals, particularly biosimilars. Yet, ironically, it’s been the smaller branded drug business that has weighed on the Teva share price.
TEVA has been an incredible growth stock since the early 1990s. However, it has faced pressure over the past year amid investor concerns about competition for its leading MS drug, Copaxone. The branded drug faces competition from Novatis AG’s (NVS) FDA-approved alternative, Gilenya. This treatment offers the convenience of oral administration, compared to Copaxone, which is injected. Meanwhile, generic competition is also anticipated, once regulatory approval is granted. Teva has countered in various ways, including developing its own oral version, Laquinimod, while working on additional Copaxone formulations to extend the franchise.
Although the Copaxone competition is clearly an issue, Teva’s strong generic drug pipeline, coupled with increased portfolio and geographic expansion, should provide the necessary diversifications to offset slower Copaxone sales. As of February, the company had over 200 product applications pending FDA approval, of which the branded versions generated annual U.S. sales of $121 billion. Notably, the pipeline includes 134 paragraph IV filings and 80 first-to-file products, which should result in numerous exclusivity opportunities. Meanwhile, the company has remained an aggressive acquirer, with M&A playing a large role in long-term growth plans. Teva has used acquisitions to expand into new geographic regions, and broaden its product portfolio and overall business mix. Indeed, the company recently announced the blockbuster $6.8 billion acquisition of Cephalon. That deal would help significantly expand Teva’s branded product portfolio, representing a combined $7 billion in annual sales. Moreover, it would provide long-term diversification for the segment, with a strong pipeline of more than 30 late-stage compounds.
The outlook for the generic business remains highly favorable, with the upcoming wave of patent expirations over the next few years, along with the likelihood of increased generic utilization internationally. And Teva is uniquely positioned to capitalize on the strong trends. Although the shares may continue to face some pressure from the Copaxone concerns, they appear attractive at the recent price level. Indeed, the current valuation doesn’t seem to appropriately reflect a company that is positioned for continued double-digit top- and bottom-line growth. In fact, Teva, which has historically been priced as a growth stock, has become more of a value stock, with an attractive risk/reward profile. The stock should appeal to investors who are looking for exposure to the generic business.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.