Here's the Barron's generic drug article. It does not mention WPI, but it does talk about the coming boom:
As Patents Drop, Generics' Shares Could Rise
By Lawrence Strauss
Companies like Teva Pharmaceutical Industries and Mylan Laboratories
make their money by substituting generic products for brand-name drugs.
Unfortunately for them, Wall Street has treated their stocks like cheap
knockoffs. Generic drug stocks, which historically have traded at a premium
to the S&P 500's multiple, now sell at a nice discount to the market.
But bulls on the sector believe these stocks are worthy of
more respect, thanks to a surge in patent expirations
between now and 2005. The bulls also note that generic
drug prices have firmed as a result of consolidation; that the
rate at which physicians prescribe generic drugs rather than brand names,
currently estimated in the mid-40% range, should pass 50% by 2002, and that
managed-care providers, under pressure to cuts costs, are filling more orders
with generics.
If the sales projections pan out, there should be plenty of room for earnings
growth and P/E multiple expansion in the sector, the bulls argue. One fan is
Linda Peterson, co-portfolio manager of American Century Heritage, whose
holdings include a stake in Mylan. "You have all these different drivers going
forward that will increase market share for the generic drug manufacturers,"
she says.
U.S. generic sales totaled an estimated
$10.6 billion in 1998, and they're
expected to climb to $11.7 billion this
year, according to SG Cowen and IMS
Health, which compiles market research
data on the pharmaceutical industry.
Cowen projects those sales will rise to
$16 billion in 2002. The key factor
driving those optimistic estimates: patent
expirations. Drugs accounting for about
$15 billion of 1998 sales will come off
patent between now and 2002,
according to Cowen.
Among the big-name drugs whose patents will expire in 2000 are two Merck
products, each generating more than $1 billion in annual sales--Vasotec, which
is used to treat hypertension, and Pepcid, an ulcer treatment.
These expirations should allow generic competitors to enter the market with
their own versions, which are typically priced at least 30% below the
brand-name originals. In 1998, Mylan received U.S. Food and Drug
Administration approval for a dozen such products. It recently introduced a
generic version of Dilantin, a drug used to treat epileptic seizures.
Sanderson says Mylan is best positioned to exploit the wave of upcoming
patent expirations, because "they have the deepest pipeline in the industry."
Another favorable trend for generic drug makers is pricing. In the mid-1990s,
a dry period for patent expirations, price wars waged between rivals. But
now, as a result of consolidation, generic drug companies apparently
command more pricing power: Generic drug prices were flat in 1998, while
they actually fell in previous years. Sanderson expects prices to rise by 1% to
2% in each of the next three to four years.
And compared with the brand-name drug companies, the generic group looks
fairly cheap. As of Friday's close, generic companies traded at just under 24x
estimated 1999 earnings, compared with nearly 37x for the brand names,
according to CIBC Oppenheimer. The S&P 500 is changing hands at around
26x 1999 earnings estimates, according to First Call Corporation. SG Cowen
projects that the companies it tracks in the generic drug group will rack up an
average long-term growth rate north of 20%, compared with 8% for the S&P
500, Sanderson says.
Among individual issues, Sanderson rates
Mylan a Strong Buy, with a 12-month
price target of 38 to 40. He thinks that the
company's operating margins, currently in
the upper-20% area, will increase to the
mid-30% range by 2003, powered by
generic drug sales and by adding some
brand-name products to its mix.
Mylan, whose market capitalization is
around $3.4 billion, closed Monday at 26
¼, down 5/16 for the day and about 27%
below its 52-week high of just under 36, set in November. The stock was
changing hands at around 18x the $1.47 a share analysts expect it to earn in
the fiscal year ending in March 2000, according to First Call. That's a discount
to both its estimated earnings growth rate of 22.5% and to its projected
long-term growth rate of 20%. Mylan shares also are trading at around 20x
1999 earnings estimates, below the group average of 23.8x, according to
CIBC Oppenheimer.
(All's not rosy for Mylan, though. In December, the Federal Trade
Commission accused the company of violating antitrust laws over the sale of
two antianxiety drugs. "It's a concern," acknowledges Peterson. But she and
others point out that the drugs in question probably don't account for much
more than ten percent of total sales.)
Among generic drug makers, Teva Pharmaceutical Industries ranks first in the
U.S. market for new prescriptions filled, says Wilbur. Teva closed Monday at
43 1/4, up 1 1/8 for the day and about 8% off its 52-week high of 46 11/16
set last month.
As of Monday's close, the stock was changing hands at about 20.6x
consensus 1999 earnings of $2.10 a share, according to First Call. That's a
discount to both its projected 1999 growth rate of 32% and its long-term
growth rate of 22%. Teva, an Israeli company whose market capitalization is
about $2.5 billion, makes products such as anti-infectives, heart drugs, and
pain relievers.
One recent addition to Teva's arsenal is a generic substitute for Cataflam, an
anti-inflammatory drug whose sales have been strong since its introduction last
September. Wilbur rates the stock a Buy, with a year-end price target of 50.
And it's trading at around 20x 1999 earnings estimates, below the group
average of 23.8.
Generic drug stocks may never reach the lofty multiples of a Pfizer or an Eli
Lilly. But the bulls are betting that as patents expire and prices firm, generic
drug stocks will be less run of the mill on Wall Street.
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