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Generic Drugmakers Are Shopping for Popular Brands

15 October 2014 in Trading Ideas

Investors in generic drug stocks may have another reason to believe that the sector is expanding its footprint: makers of generics are shopping for the world’s most famously known drugs.

As described in a Reuters article last week, if Actavis proceeds with a purchase of Botox maker Allergan in a deal worth more than $60 billion, it will represent the biggest bet yet by a traditional generic drugmaker on the upside potential of expanding into branded drug holdings.1

For Actavis, the acquisition would make it one of the biggest players in the specialty pharmaceuticals industry. On a larger scale, industry experts told Reuters, the move would further break down distinctions among the traditional generics, biotechnology and pharmaceutical divisions.

“Biotech is becoming even more complex, while Big Pharma is now where biotech was 10 years ago in terms of what they’re looking for with cancer and orphan drug indications,” said Sanford Bernstein analyst Ronny Gal. “And the generics are pushing into where pharma used to be.”

With more than 80% of US prescriptions now going for cheap generic drugs, the business is becoming saturated, Reuters said. As a result, manufacturers are turning their attention to higher-profit branded medicines.

The pursuit by Actavis has been warmly received by investors, who have bid the stock nearly 5% higher in the past month — a period which has seen the S&P 500 drop by 5.6%.

Actavis shares have a weighting of more than 20% in the Drug-Patent Cliffs motif, which has fallen 2.2% in the past month.

In 2014, the motif has gained 20.7%; the S&P 500 has risen 3.1%.

Actavis, which has already beefed up its specialty pharmaceutical business with its $25 billion purchase of Forest Labs this year and an $8.5 billion acquisition of Warner-Chilcott in 2013, isn’t alone in this relatively new strategy. As Reuters pointed out, Teva Pharmaceuticals, which has the world’s largest generic drug offerings, makes most of its profit from its Copaxone branded multiple sclerosis drug, and added to its arsenal a $6.8 billion purchase of Cephalon in 2011.

Meanwhile, generic drugmaker Mylan, whose shares have an 18.8% weight in the motif, sells the popular EpiPen for severe allergic reactions, as well as other branded respiratory drugs.

However, adding Allergan would offer Actavis more than a run-of-the-mill branded drug. Botox delivers much of Allergan’s annual $2.2 billion in sales from the anti-wrinkle business, and Actavis would also reap the benefits of the compound’s growing medical uses, including for migraines, overactive bladder and upper limb spasticity, as well as a lucrative stable of ophthalmology drugs.

Botox is also a very complex molecule that is extremely difficult to replicate, according to Reuters, and so is in no imminent danger of facing generic competition of its own.

As long as this trend continues, it could be a welcome irony for generic drug investors that their companies are now big enough to reap the benefits from the world’s top pharmaceutical brands.

1Bill Berkrot, “Actavis deal for Allergan would be huge bet for branded drugs,” Reuters, Oct. 9, 2014, http://www.dailymail.co.uk/wires/reuters/article-2786401/Actavis-deal-Allergan-huge-bet-branded-drugs.html, (accessed Oct. 13, 2014).