The “Patent Cliff” Is Here

The “Patent Cliff” Is Here

Editor Sara Nunnally

The pharmaceutical industry is in free fall. Over the past two years, patents on 10 of the best-selling brand-name drugs have expired.

Some $30.5 billion in sales were dangled out over the patent cliff. Drugmakers like AstraZeneca, Merck, and Pfizer were losing ground as patents for big-name drugs like Lipitor, Plavix, and Singulair expired and generic versions hit the market.

But it's not over yet.

Get this, from The Scientist:

The next five years will see the patent expiration for drugs that currently bring in about $255 billion each year in global sales, according to London research firm EvaluatePharma.

The generic drugs that will pop up as the big name patents expire will mark an unprecedented change in the market.

Over the next 10 years, 120 brand-name drug patents will expire, and generics will step in and save the consumer between 20% and 80%.

That's why generic drug makers are outperforming brand-name producers over the past two years. Take a look:

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This is my favorite generic drug company, Watson Pharmaceuticals, Inc. (WPI:NYSE), versus Pfizer, Merck and AstraZeneca.

You may remember me talking about WPI over the past few months as it catapulted into the world's third-largest generic drug manufacturer with its acquisition of Actavis. Shares are up more than 31% since I first recommended the company to my Macro Trader readers.

But here's the thing... Generic drug companies are tied to the brand-name companies. And the brand-name companies are going to have a rough couple years.

Terry Hisey, a consultant at Deloitte, says, "The profit dollars that companies used to reinvest in innovation are no longer going to be coming."

Brand-name drug companies need to have a pipeline full of new drugs ready to come to market in order to keep the money flowing. And that's just not happening. At least, not as much as in the 1990s – the wave that caused the patent cliff in the first place.

That means fewer "blockbusters" from the big guys, and eventually fewer patents to poach for the generics.

In other words, we have a five- to 10-year window where we can take advantage of this patent cliff.

I've already told you that WPI is my favorite generic drug company, but it's certainly not the only one in the game.

Most of us have heard of or even invested in Teva Pharmaceuticals (TEVA:NYSE). This company is the biggest name in the generics game. WPI has outperformed it by a wide margin over the past two years. But there are a few more in the barrel worth looking at.

One of them is Mylan (MYL:NASDAQ).

This is no shot-in-the-dark small biotech company. It actually has a bigger market cap than WPI.

It's EPS, revenue, and EBITDA are all better than WPI, and yet, shares haven't kept up with the big run WPI has had.

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I think there's an opportunity here.

Both Moody's and S&P have upgraded Mylan's bonds, and analysts have been upgrading the stock too. But there's another reason why Mylan could tick higher. The company is looking for an acquisition. It wants access to fresh markets, and it's waving some $4 billion in the air to get it done. Look for something to happen in this department next year.

In all, things are looking good for Mylan, even with its own pipeline. From the company's news reel:

Currently, Mylan has 178 ANDAs pending FDA approval representing $80.1 billion in annual sales, according to IMS Health. Thirty-five of these pending ANDAs are potential first-to-file opportunities, representing $21.2 billion in annual brand sales, for the 12 months ending June 30, 2012, according to IMS Health.

Those first-to-file ANDAs (abbreviated new drug applications) could mean first access to patent expirations, and a lot of money.

Cha-ching...

Shares are up 39% over the past year, and trending higher. Indeed, shares are pushing into new territory, and with the billions in potential sales already in the pipeline, Mylan will keep making fresh highs.

Happy Investing,

Sara

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