ChangeWave's Generic Favorite

09/11/2002 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

ChangeWave Investing, edited by Tobin Smith, focuses on isolating stocks that will benefit from changes in long-term trends. One such trend is the move towards generic drugs. Here’s Tobin’s latest beneficiary of this “ChangeWave” trend.

“There is a great deal of confusion in the current market. Yet, within this confusion there are market segments led by stable, honest companies that are likely to grow even in a double-dip recession. Generic drug manufacturers are likely to be stock pickers’ favorites in an unstable market. The baby boomers are aging and everyone, including the government wants cheaper drugs. Meanwhile, the patents of some 23 blockbuster drugs are expiring within two years. Overall, the landscape is looking better for generic drug companies.

Teva Pharmaceutical (TEVA NYSE), a leader in the generic sector, is a great example of the kind of stock that can lead the next bull market. The long-term shift from brand name to generic drugs is about to explode. We expect new regulations out of Congress that will shorten brand name drug patent extensions, which will light a fire of new demand market share growth for generics.

Teva reported a 44% rise in second quarter earnings to $0.68 a share, exceeding the consensus by six cents. The strong results were driven by higher growth margins (43.2% versus 39.9%) due to successful price increases on several older generic products. Yet perhaps most importantly, management guided higher going  forward. Teva has grown earnings by 40% on average over the past three years, which makes its three-year projected compound annual growth rate of 20% to 25% appear well grounded in reality.”

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