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Generic-Drug Stocks Get Healthier

17 August 2013 in Trading Ideas

Despite increased judicial and regulatory scrutiny making their longer-term prospects somewhat uncertain, makers of generic pharmaceuticals have recently been treating their shareholders well.

The Drug-Patent Cliffs motif has gained 4.0% in the past month. During the same period, the S&P 500 lost 1.3%. For the year to date, the motif is up 28.5%; the S&P 500 has increased 14.8%.

Shares of Mylan, which have an 18% weighting in the motif, have jumped nearly 15% in the past month, in part because of the company’s profit report on Aug. 1, which revealed that quarterly net income rose 28%. However, the stock really took off after Mylan told investors that it expected its annual earnings per share to double by 2018 on yearly revenue growth of about 13%.1

That revelation prompted Morgan Stanley analyst David Risinger to upgrade Mylan shares, and declare that the stock could double over the next four years if investors have faith in the company’s outlook.

drug-patent cliffs motif Similarly, Actavis, which has a 20% weighting in the Drug-Patent Cliffs motif, has seen its stock surge more than 9% on the strength of its July 25 earnings report, which included a quarterly operating profit that beat Wall Street expectations on revenue that rose nearly 47%.2

And Wall Street has obviously been watching. As Investor’s Business Daily recently found, 70 mutual funds reported picking up Actavis shares for their porftolios in their latest reporting periods, spending an estimated $818 million.

Actavis’ imminent merger with Warner Chilcott is expected to close in the fourth quarter. It creates a combined company of $11 billion in annual revenue and increases Actavis’ branded drug business to 25% from 7% of total revenue.

Ironically, perhaps, the complexity of future mergers by generic drugmakers could work to hinder their operating and share-price performance after a recent Supreme Court decision that opens the way to more lawsuits from so-called pay-to-delay patent agreements. According to Moody’s, this could result in increased antitrust scrutiny from the Federal Trade Commission, and possibly, a higher degree of uncertainty surrounding certain future product launches.3

However, those concerns do not appear to be hindering the current rally in many generic-drug stocks.

1Associated Press, “Mylan rises as company details its guidance,” Aug. 2, 2013, http://finance.yahoo.com/news/mylan-rises-company-details-guidance-185237259.html, (accessed Aug. 14, 2013).

2Doug Rogers, “Top Funds Pick Up Generic Maker Actavis,” Investor’s Business Daily, Aug. 5, 2013, http://news.investors.com/investing-mutual-funds/080513-666422-top-stock-funds-buy-actavis-shares.htm?ven=yahoocp,yahoo, (accessed Aug. 14, 2013).

3Ed Silverman, “The Uncertain Future Facing Generic Drugmakers,” Forbes.com, Aug. 7, 2013, http://www.forbes.com/sites/edsilverman/2013/08/07/the-uncertain-future-facing-generic-drugmakers/?partner=yahootix, (accessed Aug. 14, 2013).