The drug world thought Daniel Vasella was crazy…
As CEO of Swiss drug giant Novartis, Vasella crossed enemy lines. In 2005, he acquired two leading generic drugmakers and bundled them together to create the world’s second-largest generic-drug company… under the Novartis roof.
The industry doubted lucrative brand-name drugs and cheap generic knock-offs could coexist at one company. But last year, Novartis’ generics division brought in about $8 billion, growing sales 25% per year.
Every year, the generics market snowballs bigger. About $12 billion of brand-name sales were lost to generics in 2006… $14 billion in 2007… and $23 billion in 2008. Over the next four years, half of the drug industry’s 60 top-sellers will succumb to generic copycats. That represents a colossal $200 billion in sales.
Simply put, the generics business is booming. Now, most of the Big Pharma CEOs that once called Vasella nutty want a piece of the action…
At the head of that pack is Pfizer. Pfizer already manufactures generic versions of its own off-patent drugs. But last October, the world’s largest drugmaker created an "established products" division to crank out knock-offs of competitors’ drugs. Pfizer estimates the worldwide generics industry could top $500 billion by 2012 and projects its division sales will exceed $1 billion by then.
Johnson & Johnson and Schering-Plough also run small generics subsidiaries. But other drugmakers are just buying their way into the business…
Early last summer, Japan’s Daiichi Sankyo scooped up a majority stake in India’s largest generics player, Ranbaxy, for $4.6 billion. France-based Sanofi-Aventis recently secured a stake in the growing Eastern European market with its $2 billion bid for generics maker Zentiva, based in the Czech Republic. The acquisition will make Sanofi’s generics subsidiary a major global player.
Even GlaxoSmithKline, which claims it has "no interest in generic drugs," is reportedly considering a $1.5 billion bid for Piramal, another Indian generics company.
The next generics buyout will likely be Actavis of Iceland. Taken private by an Icelandic private-equity group now desperate for cash, Actavis may draw bids from fellow generics player Teva or household Big Pharma names like Pfizer, Sanofi-Aventis, and GlaxoSmithKline. It could fetch as much as $5 billion in its auction.
Generic drugs are the biggest trend in medicine today. If Pfizer’s right, there’s $500 billion at stake. This is a trend we can’t ignore.
One easy way to profit on this trend is by owning Swiss drug company Novartis (NVS). As I outlined above, its generics division is one of the industry’s top-five players. Generics sales contribute about 20% of the health care conglomerate’s business.
Today, Novartis sells patented drugs, eye-care products, vaccines, and generic drugs. I think it’s the only drug company that has successfully hedged against the downfall of brand-name drugs’ biggest sellers. You can expect steady returns for the next few years as the generics trend plays out.
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