No matter exactly what health care reform bill (even no bill) emerges from Congress this year, the pressure to get costs out of the healthcare system is just going to get more intense. (For why see my October 13 post, http://jubakpicks.com/2009/10/13/losers-and-5-winners-from-health-care-reform-and-why-well-be-fighting-over-who-pays-for-a-decade/ )
In that effort requiring that health plans replace proprietary drugs with generics is an easy way to cut costs (or to look like you’re cutting costs).
So generic drug makers win once, because any legislation will expand the number of insured able to afford drugs, and twice, because economics will continue to move patients, doctors, and health care bill payers to generics.
No wonder that Teva Pharmaceutical Industries (TEVA) is guiding Wall Street to 30% earnings growth in 2010.
Teva is the world’s largest generic drug maker. In generic drugs bigger is better since it allows a company to spread development, manufacturing, and marketing costs over a larger customer base. So, for example, the company’s 2008 acquisitions of Barr, the #4 generic drug company, and Bentley Pharmaceuticals, added market share in Europe, which in 2008 accounted for just 28% of the company’s sales.
In the longer range—say five years out or so—Teva looks to be one of the best-positioned generic companies to tackle the new market for biogenerics. These drugs are generic versions of the drugs developed by biotech companies. So far this market has been extremely limited in size by the lack of an appropriate regulatory framework for ruling on what constitutes a safe generic version of a biotech drug. Legislation is likely this year or next and Teva is one of a small number of generic companies with the financial resources to tackle this new market. The company estimates that it will cost about $100 million to $150 million per drug to reverse engineer a biosimilar drug from a biotechnology company versus about $10 million to $15 million to reverse engineer a conventionally small molecule drug.
As of October 13, 2009, I’m adding Teva Pharmaceutical Industries to Jubak’s Picks with a target price of $61 a share by October 2010. That values Teva at about 14 times my estimate of 2010 earnings of $4.35 a share. As of October 13, the stock traded at 14.25 times Standard & Poor’s estimate of 2009 earnings.
Full disclosure: I do not own or control shares of any company mentioned in this post.