Generic drug makers are gearing up for a big year as blockbuster brand-name medicines such as Zocor, Zoloft, Pravachol and Ambien are set to lose U.S. patent protection, but analysts warned that stocks in producers of cheaper versions of those drugs are not sure bets.
Many stocks in generics already had a strong 2005 ahead of the opportunity, namely Teva Pharmaceutical Industries Ltd., Ivax Corp. and Barr Pharmaceuticals Inc.
Analysts also said that some companies are in better shape than others to pounce on the wellspring of patent expirations through their size or ability to ward off competition.
"It's not nearly as simplistic as saying 2006 will be a big year," Ken Cacciatore, an analyst with SG Cowen, said. "You need to look within each company's pipelines and see which companies are best-positioned to capitalize."
Merrill Lynch analysts estimated that drugs with more than USD 22 billion in annual U.S. sales could face first-time competition from generics in 2006, about double that of 2005.
Competition is seen for some of the most popular medicines, including cholesterol-fighters like Merck & Co.'s Zocor and Bristol-Myers Squibb Co.'s Pravachol, as well as Pfizer Inc.'s antidepressant Zoloft and Sanofi-Aventis' sleep aid Ambien, among others.
Teva seen as investor favorite
Investors may have already missed the boat. Susquehanna Financial Group analyst Amy Stevens said that historically generic drug stocks rise the year before a peak period for patent expirations - in this case 2005 ahead of 2006.
Stevens projects that generic drug stocks may outperform the broader market over the first half of next year, but then "people are going
to want to move out of the space" as they note 2007 will be a down year in terms of patent expirations compared to 2006.
By being first to file patent challenges to branded drugs, generics makers can gain 180 days where they are the only generic seller in the market once the patent expires. Otherwise, many generics sellers can rush in upon patent expiration.
Israel-based Teva, one of the largest generic drug makers, stands to gain many of the 180-day rights in part through its USD 7.4 billion acquisition of Ivax, expected to close January 12.
Teva is expected to have these rights for Pravachol, Zoloft and the prostate drug Proscar. Ivax is waging a court battle with the U.S. Food and Drug Administration that will determine whether it gets the exclusivity rights to Zocor generics in most dosages.
Teva following the Ivax acquisition "seems the best-positioned to capture the large opportunities in 2006," SG Cowen's Cacciatore said.
Teva is also seen as well-placed for the 2006 opportunity through its size, which gives it negotiating leverage to gain contracts with the big purchasers of generic drugs, such as drug-store chains and pharmacy benefit managers, which broker deals with manufacturers for their customers.
Stevens also likes Teva's solid branded business specializing in neurological drugs and notes the drug maker is well-prepared for the potential surge of so-called generic biologic drugs, such as growth hormone and anemia treatments.
However, Teva already has proven to be an investor favorite. Its shares have climbed 45 percent this year on the Nasdaq, and were down 3 cents at USD 43.25 on Friday.
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