America’s best-selling drugs are going on sale.
It’s not because healthcare companies (Big Pharma) want to lower prices on their signature drugs.
In fact, those drugs are rising at eight times the rate of inflation …
Instead, these drugs are going on sale because their patents are expiring.
A patent gives a company the right to exclude its competitors from selling a product for 20 years. Once this patent expires, the company no longer has the right of exclusion.
Patent expiration (also called patent cliff) has been a hot topic over the past few years.
In fact, I wrote about this trend in 2012, highlighting how Big Pharma was about to lose hundreds of billions of dollars as patents on their signature drugs were about to expire.
And my favorite way to play the trend then is still at the top of my list today …
My favorite play on this trend was Mylan (MYL). This generic drug company is allowed (by law) to make identical drugs once these patents expire.
Since most of these drugs have been developed and marketed over the past 20 years, Mylan is able to sell its new copycat version at a steep discount.
Mylan was trading under 10 times earnings when I recommended the stock in June 2012. That was a significant discount to the overall market.
Plus, the company had huge growth potential, with dozens of blockbuster drugs coming off-patent in the years ahead.
Since my call, Mylan has risen 160%. It’s been one of the biggest beneficiaries of the patent cliff megatrend.
However, this run is not over. Based on my analysis, Mylan could double again from current levels.
While the patent cliff has been headline news over the past few years, it’s far from over.
According to research firm EvaluatePharma, $214 billion in worldwide drug sales are at risk over the next six years (from 2015 to 2020) due to patent expiration.
Before I go further, it’s important to understand that most Big Pharma companies have been bracing for this risk.
• They have invested big money in biotech companies in hopes of finding the next blockbuster drug.
• They also used their cash hoards to raise dividends and buy back stock.
• Plus, most analysts have already lowered their earnings estimates on Big Pharma stocks.
After all, it’s no secret when these patents on their signature drugs will expire (each drug has a 20-year patent).
In short, this patent risk is priced into most large-cap healthcare stocks.
However, generics companies like Mylan will continue to benefit.
For example, most generics companies charge up to 60% less for a brand-name drug. This saves thousands of dollars in prescription costs each year for customers.
Applying this 60% price cut to the $214 billion in sales that will be exposed to generics … amounts to $85 billion.
In short, $85 billion will be up for grabs over the next six years for generics companies.
That’s a lot of money considering Mylan only generated $7 billion in sales over the past 12 months.
However, Mylan is not the only generic company. Teva Pharmaceuticals (TEVA) and Actavis plc (ACT) are major players as well.
However, Mylan has much more upside based on my analysis.
In July, Mylan bought Abbott Labs’ (ABT) Generic Drug division for $5.3 billion. Abbott has a portfolio of more than 100 specialty generic drugs. This adds to the 1,000-plus drugs/medicines that Mylan markets to its customers.
This acquisition increased Mylan’s international exposure. The company will be able to sell its massive portfolio of drugs in Europe, Japan, Canada, Australia and New Zealand.
Not only that, but Mylan was able to change its headquarters from Pennsylvania to the Netherlands. That will result in a much lower tax rate for the company going forward.
Despite the huge run-up, Mylan is still a cheap company.
The stock trades at just 12 times forward earnings. That’s a 25% discount to the S&P 500. Plus, the company is expected to grow earnings at 15% annually over the next three years.
To put this in perspective, the average company in the S&P 500 is growing earnings in the low-single-digits today.
Mylan has huge upside potential from these levels. The stock is dirt- cheap and is in great position to take advantage of the potential $214 billion in sales that will be exposed to generic drugs over the next six years.
Remember, before making any investments, be sure to do your due diligence. But if you like this stock, I wouldn’t wait too long to buy it.
Good Investing,
Frank Curzio
