If you can‘t beat ‘em, join ‘em.
After years of worry that generic drug makers were going to destroy the profits of big U.S. drug makers, Big Pharma has figured out a solution: Buy them. Especially if the generic maker has big market share in a rapidly growing market such as India.
The latest deal has Abbott Laboratories (ABT) buying Piramal Healthcare’s generics business. The deal will make Abbott the largest drug maker in India. India is the second fastest growing drug market in the world, behind China. Piramal sells 350 branded generics in India. Annual revenue from that business is about $500 million annually and has been growing at about 20% a year.
The Indian market for drugs, now $8 billion, is projected by IMS Health to grow by 16% a year through 2014. The $300 billion U.S. market is projected to grow at a 3% annual rate.
Abbott isn’t alone. Japan’s Daiichi Sankyo (DSKYY) bought 64% of Ranbaxy Laboratories (RBXLF), India’s largest drug maker in 2008.
But the company seems almost uniquely determined to break into generics among U.S. drug makers. In March Israel-based generics superpower Teva Pharmaceutical Industries (TEVA) beat out Pfizer (PFE) to buy Ratiopharm , Germany’s second largest maker of generic medicines—and the sixth largest generic drug company in the world. The German market is the second-largest market for generics in the world next to the United States.
The advantage that an Abbott, Daiichi or Teva has over the biggest of U.S. Big Pharma is size.
Abbott’s sales were just $31 billion in 2009. Just? Sell, yes in comparison to Pfizer’s $56 billion that year. Teva is an even “smaller” with 2009 revenue of $14 billion. Daiichi Sankyo’s fiscal 2009 revenue was $11 billion. Buying a business with $500 million in revenue like Piramal’s generics unit is a more significant addition to growth at a smaller drug maker than at a Pfizer. Revenue from Piramal’s generics unit is 1.6% of Abbott’s total revenue and 3.6% of Teva’s revenue. It would be just 0.8% of Pfizer’s.
That doesn’t mean that Pfizer can’t pursue a generics strategy—just that it isn’t as motivated as an Abbott or a Teva or A Daiichi. When push comes to shove, because the deal is more important, Teva beats out Pfizer for Ratiopharm by paying more. Abbott is paying $3.7 billion, roughly a 50% premium, for Piramal.
Of course, a generic company is even more worth the price if it’s part of a strategy for a company transformation. Teva doesn’t need an overhaul—it discovered generics long ago and it’s doing very well, thank you very much.
But Abbott has recent embarked on a series of deal that has radically changed the company’s source of future growth. It bought the drug unit of Belgium’s Solvay Group in a $6.6 billion deal that closed in February. Much of the drug units $3 billion in annual sales is fast-growing emerging markets in Eastern Europe and Asia.
On May 11 Abbott also agreed to license 24 generic drugs from India’s Cadila Healthcare for sale in emerging markets.
I don’t think the stock market has yet fully valued generic drug companies. Pfizer, which grew revenue at just 0.4% a year over the last five years, trades at a P/E ratio of 14. Teva, which grew revenue by 24% a year over the last five years, earns an only slightly higher PE ratio of 16.
And I don’t think investors have caught on to Abbott Laboratories transformation at all. The shares sell at a price-to-earnings ratio of just 14.
You may not want to pick up shares of Abbott Laboratories or Teva or Daiichi now in the midst of what some days seems like a very serious correction. But keep them in mind. These generic drug stocks are where the growth is in the sector. (For more on how to handle this drop, see my post https://jubakpicks.com/2010/05/21/sell-sure-but-try-to-do-it-on-the-fundamentals-and-not-in-panic/ )
Full disclosure: I own shares of Teva Pharmaceutical Industries in my personal portfolio.
In some respects the generics manufacturers seem like the value players in the sector, where are the growth stories? Development of ‘blockbuster’ drugs just doesn’t happen every year, and bio-similars are a not the kind of products that can explode into a market void. While big pharma and generic manufacturers are generally in good shape, their product pipelines are not exactly overflowing. The growth side is generally in biotech and ‘small pharma’. In the spirit of community I’ll just toss out a couple unsolicited symbols from my watch list. One of the most profitable pharmaceuticals of all is VRX, which has pulled back a bit from it’s steady trajectory. I agree that GILD has become more attractive lately. Among small firms looking for big pharma partnerships/buy-outs, the fastest rising star right now may be AMRN, who is testing a first-in-class omega-3 therapy for hyper- and dislipidemias. There IS a void in the US for such a therapy and the phase III trials are underway with full funding in place. Results not expected until next year, but if you can take the risk, reward could be stellar (I own it). Other growth prospects include: ARRY, ARQL, and if it drops still further, maybe VPHM.
Cheers!
Jim;
Do you think any war between Isreal and Iran will turn TEVA into a downward rocket? I am worried about the mid-east war than the Korean war. Because none can control Iran, while China and Russia maybe able to control N Korea.
Jim:
Many buy ABT as dividend play. Do you think its recent $3 billion debt sales will hurt its dividend payout?
Anyone have any thoughts on Gilead Sciences (GILD) – a Jubaks Pick way back in the day? It has grown earnings consistently while share price has stayed relatively confined to a narrow range until recently when it has taken a big hit.
Great part of TEVA revenue (25 percent or so) comes from Copaxone (glatiramer acetate), which is their original drug against multiple sclerosis. At present FDA reviews 2 applications for generic Copaxone. TEVA arguments that Copaxone is a kind of complex mixture which is difficult to mimic, so those other generic glatiramers (glatiramer-likes?) should be clinically tested to show equivalency. I do not believe this kind of argumentation at all, how TEVA is able to prove that every batch is perfectly the same? Moreover one of the companies pushing forward the generic is leading expert in complex mixture analysis… As far as I know, TEVAs earnings projections do not account for those generics in the market starting 2014…. Maybe it is worth to wait till TEVA gets beating after FDA approves one of those generics.
Teva is the 800 pound gorilla in the group. Think of walmart. I would not bet on any other generic manufacturer and generic is the only way to invest.
I think ABT is on a very short list of stocks that every long term portfolio should include. I received it as a gift about 25 years ago and have never once thought about selling it. It has paid a healthy div every year since 1926 and has increased its div for 38 consecutive years!!! Just as good as the Ensure drink they make 🙂
BTW, why are some of you suggesting that you’re waiting for a higer yield? That doesn’t make much sense given the company’s perfect record of raising their div. By the time you wait, you could have made the equivalent of your targeted div plus some. And that’s assuming the share price even falls to your desired div…which is extremely unlikely for a div aristocrat such as ABT.
I have owned PFE, MRK, and ABT[and others] in the past, for the dividend usually, and have done…all right. None have become the long-term div grower I would like to find. So I have lately been looking at SNY and AZN; they seem fine except for the Euro probs in SNY case [nonetheless an excellent company, IM not so HO.] I can discount these probs some with the right price.
But I have no idea about their generics business. Jim makes a super point here- I will be looking into this aspect of anything I add from now on. And I WILL take a second look at some of his suggestions.
I sold ABT few months ago and had decent gain. I am looking to buy back, hopefully no less than 4% yield.
Both NVS and TEVA are kind of frustrating stocks. They don’t deliver as ABT.
Shares of Watson Pharmaceuticals (WPI:$42.61,00$-0.26,00-0.61%) were flat in after-hours trading after the company received word from the U.S. Food and Drug Administration that it approved the abbreviated new drug application for generic Valtrex.
http://www.boomwin.blogspot.com
How about Novartis? They have a multi-line business model. Generics are one of those businesses. I think they look attractive at $45. Anyone have an opinion?
I own Abt. The dividends seem very secure, and they have been paying dividends for years. Abt. has been branching out quite a bit with recent acquistions, so it is becoming more diversified and less susceptible to patent expirations. I think it is the top holding in the Jenson Fund, and glad to see Jim’s discussion about it. They also make quite a few nutritional products.
I already have a small piece of Abbott, mostly for the dividends. I’ve owned it a little over a year and am very close to even on stock price. If it goes much lower, I’ll feel the need to buy some more. Kind of holding out for a 4% yield.