"Analysts estimate the worldwide market for generics will increase from $75 billion to $125 billion by 2012," says Michael Shulman.
In his ChangeWave Biotech Investor he states, "The key question for us is: Who is going to make the most money from these expirations? And the 800-pound gorilla in this market is our long-time holding, Teva Pharmaceuticals (NASDAQ: TEVA).
"Teva is the largest and best generics company in the world with $9.4 billion in sales in 2007 and the gap between it and its competitors is growing. Teva has 331 products on the market, 65% more than its closest competitor.
"More importantly, based on its business model of a mix of proprietary and generic drugs, the company's operating margins are 10 points higher than competitors and that gap is widening. In fact, in the United States, the number of prescriptions filled with Teva generics is 50% more than its closest competitor.
"Be clear on this point: When it comes to generics, size does matter. The more a company sells, the more profit and cash it has available to do research and acquire more generics to add to its product list -- and the beat goes on.
"A critical component of generic success is something called 'first to file.' That means the first company to file for generic approval with the FDA gets a six month window of exclusivity to sell the drug.
"Teva is first to file on at least 49 new generic drugs now pending approval. It's a pipeline that equals two-thirds of current sales of prescription drugs -- or a whooping $180 billion opportunity at current drug prices.
"Teva is also far ahead of the industry in preparing for legalization of generic biologics. These are new versions of biologic drugs created after the patent for the original biologic drug expires. They are stuck in FDA limbo in the US, but they are making headway in Europe.
"Teva's is the first generic biologic to receive a positive opinion from the European Union (EU), and the EU is expected to grant full approval and marketing authorization for TevaGrastim for treating a side effect of chemotherapy.
"Teva's growth -- which should take the company from an 18% share to a 30% share in the US in four to five years -- is fueled by a mixed business model that uses the very high profit margins from Teva's proprietary drugs to fuel rapid development of new generics.
"The bottom line is that TEVA will likely have serious double-digit growth in revenues and profits for as far as the eye can see. And this success, along with the full impact of the tidal wave of patent expirations, is not yet priced into the stock.
"Regardless of who gets elected president in the United States, the Medicare prescription program is going to change. Costs are going to be squeezed out of the system and the use of generic drugs is going to increase.
"Many analysts still shun generics companies because those companies thrive through execution, not intellectual property. Many analysts still don't understand or appreciate that Teva does both. But as the generic movement washes over the Street like a tidal wave, Teva's multiple will expand as analysts' horizons are expanded. It's going to happen sooner rather than later, so get ahead of it while you can."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
