Health Care Reform To Boost Generic Drug
Stocks
The Dynamic Wealth Report
September 17, 2009
Big Growth Ahead For Generic Drug Stocks
by Robert Morris, Editor
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.
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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.
The iPath DJ AIG Natural Gas ETN (GAZ) is jumping on
surging natural gas prices. After hitting an all time low two weeks ago,
prices have moved up an amazing 56%. GAZ is a great way to
profit from rising natural gas prices. It tracks the price movement of
Henry Hub Natural Gas Futures traded on the NYMEX. GAZ is now up 34% in
the past two weeks.
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