Health Care Reform To Boost Generic Drug Stocks

| September 17, 2009 | 0 Comments

Emotions are running high over healthcare reform.  We all saw the fiery confrontations at this summer’s town hall meetings.  Ordinary citizens going toe-to-toe with their elected representatives.  It was quite a show.

And, emotions didn’t cool off any when Congress returned to Washington.

An esteemed member of Congress is the latest to let his emotions get the best of him.  I’m talking about Rep. Joe Wilson calling Obama a “liar” during his recent healthcare speech from the House floor.  (At least Wilson had the good grace to apologize for the outburst later.)

While the debate continues to rage on, one thing is clear.  Generic drugs will play a larger role in any future healthcare system.

Here’s why.

Skyrocketing prescription drug costs are a big contributor to the rising cost of healthcare.  Prices for prescription drugs are rising twice as fast as prices for other goods and services.  In fact, the average cost of a prescription drug has doubled in the last ten years.

What’s behind this ominous trend?

Quite simply, it’s more patients buying more prescriptions.  The elderly segment of our population is growing faster than the overall population.  And, older folks tend to take more prescription drugs than younger people.

This trend is not about to change anytime soon.

The U.S. population is growing older due to a powerful demographic trend… the aging of the Baby Boomer generation.  This means prescription drug purchases and prices will continue rising ever higher.

One solution to this problem is greater utilization of generic drugs.

You see, generic drugs are significantly less expensive than their brand name counterparts.  A brand name drug generally costs 50% to 70% more than the generic equivalent.

By buying more generics, Americans can save a lot of money on their prescription drug costs.  Right now just two out of three prescriptions are for generics.  But, even at that rate Americans are saving $8 to $10 billion a year.

I think it’s safe to say any healthcare reform will place a heavy emphasis on increasing the use of generic drugs.  This bodes very well for the generic drug industry.

But, that’s not all.

One other important trend should provide a big boost to the industry.

I’m talking about patent expirations.  Some $70 billion worth of name-brand drugs will lose their patent protection by 2012. Generic drug makers are chomping at the bit to develop generics of these cash cows.

The generic drug industry is in the early stages of what should be a multi-year boom.  And, any healthcare reform legislation is likely to add fuel to the fire.

Right now industry watchers are expecting double-digit growth through 2011.  That’s faster than both the biotech and pharmaceutical industries.  At that rate, the generic drug industry should hit $69 billion in annual sales.

So, how do you take advantage of this fantastic opportunity?

The three largest generic drug companies are Teva Pharmaceuticals (TEVA), Mylan (MYL), and Watson Pharmaceuticals (WPI).  All three have large generic drug portfolios, strong pipelines, and five year projected growth rates of 15% to 17% annually.  Their shares also offer decent value with PEG ratios of 0.89, 0.77, and 0.94 respectively.

There’s one smaller generic drug company I like even more…

That company is Hi Tech Pharmacal (HITK).

HITK actively markets 37 approved generic drugs for a variety of health conditions.  These drugs (and other healthcare products) generated $108 million in revenue for the fiscal year that just ended in June.  A whopping 75% jump from the prior year’s figure.

And, their product portfolio is about to get even bigger.

The company has 12 new generics currently awaiting FDA approval.  These drugs are targeting generic and name-brand drugs with $500 million in annual global sales.  In addition, HITK is actively developing 20 other generic drugs targeting brands with annual sales of over $20 billion.

Earnings growth is off the chart.

Last year the company earned $9.8 million, or $0.84 per share. That compares with a loss of $5.1 million, or $0.45 per share, in the prior year.

This strong growth is continuing…

For the quarter ending in July, revenue nearly tripled to $43.5 million.  And, earnings grew almost six-fold to $8.7 million, or $0.73 per share.  That beat estimates by an amazing 170%!

As you can imagine, the stock soared on the news.  It jumped more than 30% to a high of $22.65.

I recommended HITK to subscribers of my Penny Stock Breakouts advisory service back in March.  At that time, the stock was trading at just $5.17.  After the stock’s recent jump, I recommended they sell half their position to book gains of over 300%.  Not a bad return in just six months time.

And, I still see bigger gains ahead.

Revenue is expected to grow 22% this year to over $133 million. And, earnings are projected to skyrocket 129% to $1.42 a share.

Despite HITK’s robust growth and surging share price, the stock is still misvalued by the market.  Its P/E ratio is just 13.5.  And, its PEG ratio is a low 0.68.

Now’s a great opportunity to buy these shares.

The generic drug industry offers terrific growth potential over the next few years.  Don’t miss out on what should be a highly profitable trend.  Take a closer look at the companies mentioned above for your own portfolio.  And, don’t be surprised if HITK blows the larger competition away.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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