Investment Outlook for Generic Drug Companies

The aging of the baby boomer generation has given way to an undeniable long-term trend in the growing demand for healthcare and healthcare related products. With the generation's large population size creating an abnormal market pressure in light of relatively steady supply, the entire sector stands to benefit through the surge over the horizon. Yet in a coincidental moment of timing, the patent protection for many brand-name drugs will also be expiring. In the next five years alone, nearly $100 billion in global drug sales will be derived from sales of patent-expired drugs. This stands as a considerable portion of the total sales in the market given that in 2006 global drug sales had only reached $643 billion.

The intersecting trends of the two markets provide a unique opportunity for market leaders who are likely to profit the most. Barr Pharmaceuticals (BRL) stands as the leader in pure-play generic drug companies in respects to size. With a valuation of $5.1 billion, Barr stands a head over its competitors Mylan, Inc (MYL) and Watson Pharmaceuticals Inc. (WPI) with a market cap of $3.4 billion and $3.0 billion respectively.

One of the advantages of a generic drug company lies in its approval process with the FDA. Where a new novel branded drug may take years to research, test, and produce after an average $800 million expense it is then still left open to possible FDA rejection over safety concerns. Generic drug companies on the other hand need only require a few cheap clinical trials that vindicate relative equivalency to its branded counterpart. Because of this shorter process, large pharmaceutical companies like Barr are able to get dozens of drugs approved over the course of a given year unlike parent manufacturers who typically get a couple drugs approved at most.