This week, some interesting news came out from Bristol-Myers (BMY), Eli Lilly (LLY), and Johnson & Johnson (JNJ). This interesting news pushed me into buying call options in Mylan (MYL), with an expiration dating out to January 2011. Mylan, a manufacturer and distributor of generic pharmaceuticals, seems only poised for significant upside coupled with minimal risk.
Consider the following:
- Bristol-Myers gave a 2013 forecast rather early to comfort investors who have been worried about generic competition. This primarily stems from its bread-winner, PLAVIX, which the patent will expire for on November 17, 2011. PLAVIX earned BMY $1,627 million for the 2010 quarter ending June 30.
- Sales in Eli’s GEMZAR decreased by 17% in its most recent quarter from the same quarter last year due to the influx of generic competition. GEMZAR’s patent just expired on May 15, 2010. The patent for CYMBALTA, another top earner for LLY, will expire on June 11, 2013. The company referenced their pipeline to make up for lost revenue. However, this soon to be lost revenue will be found elsewhere – in the generics.
- Johnson & Johnson cut its 2010 profit forecast over recalls. I think this forecast cut also has to do with generic competition. In a JNJ press release, the company did say that sales results in RISPERDAL and TOPAMAX were negatively impacted because of ongoing generic competition. The patents to RISPERDAL and TOPAMAX expired on December 29, 2007 and September 26, 2008, respectively.
Clearly, BMY, LLY, and JNJ are worried about generic competition. Generic drug companies such as Mylan and Teva Pharmaceuticals (TEVA) are thus poised for significant upside due to patent expirations and to add, healthcare reform, which will prohibit medical companies from canceling coverage for ill patients and grant more individuals with health coverage from the insurers.
Once investors catch on to this all, shares of generic drug companies should appreciate. I also feel that Mylan is a solid takeover candidate. Larger drug companies should consider such an acquisition if revenues dwindle as a result of generic competition. From a risk management perspective, if larger drug companies begin to rely on their pipelines to make up for lost revenue, what will happen if a clinical problem occurs or a drug is denied approval? The shares of those companies will be simply more susceptible to depreciation (and volatility).
Click here for the source that contains drugs’ patent expiration dates.
Disclosure: Long MYL calls at time of writing.
