Teva: A bet on biosimilars

These generic biologic drugs will get a big boost from Obamacare.

By TheStockAdvisors Jun 5, 2013 9:47AM

Droplet Falling from Pipette into Test Tube © Andrew Douglas, Radius Images, Getty ImagesBy Andy Crowder, Daily Profit

Regardless of one's views about Obamacare, the truth is that some companies will benefit immensely when it is fully implemented. If you're an investor, you need to consider the profit potential of this huge government program.

One sector that will thrive as a result of industry changes, is generic drug makers. And one sub-sector of the generics market will thrive more than any other: biosimilars. Biosimilars are the generic equivalent of name-brand biologics, which are name-brand products created by biologic, rather than chemical, processes.

Biologics are heavily used in the treatment of various cancers, rheumatoid arthritis and adverse cardiovascular conditions.

Through the Patient Protection and Affordable Care Act, generic drug companies will be allowed to create an equivalent to the branded biologic.

Prior to healthcare reform, branded biologics had 20-year data-exclusivity patent protection. Under the new legislation, these name-brand products will have only 12 years of data exclusivity, which will certainly speed up the approval process for biosimilars. The new law will bring in more competition, and more importantly will create a new multibillion-dollar market.

Currently, there's one major player in the biosimilar space -- Teva Pharmaceutical (TEVA), the world's largest generic drug manufacturer and the 15th-largest pharmaceutical company.

The generics industry provides a relative safe haven in an uncertain global economy. And Teva, in particular, is the company best positioned to succeed over the long term in the generic pharmaceutical space.

Strong growth opportunities exist for Teva all over the globe, especially in Japan and the emerging market countries of Brazil, Russia and Latin America. Additionally, the generic market is only now maturing and represents just a modest slice of the global drug industry.

While the drug sector is prone to regulation challenges and costly research expenses, it is a relatively safe industry for investors. In fact, generic substitutes become popular alternatives in tougher economies, such as we're currently experiencing.

Furthermore, many drug companies trade at incredible discounts. Teva is growing its earnings by roughly 11% each year, but the stock doesn't even trade at 10 times forward earnings per share. Best of all, Teva is a shareholder-friendly company that currently pays a nice 2.8% dividend.

Last year we saw the largest ever impact of patent expirations, or what has come to be known as the patent cliff. Drug companies whose patents expired in 2012 collectively suffered a revenue loss amounting to $28.9 billion; for 2013, the revenue loss on account of patent expirations is expected to be in the range of $29 billion.

Given Teva's position in the generic drug market, the stock is a great play for anyone looking for an incredible value investment in the healthcare sector.

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