The $500 billion pharmaceutical industry is taking its knocks. Concerns over marketing tactics, drugs' efficacy, and safety are weighing on large caps such as Pfizer (PFE) and Merck (MRK), which fell 30% in 2004 and pulled the Amex Pharmaceutical Index down by 8%. The outlook for generic producers, which live off the misery of big developers by capitalizing on brand-name patents that expire, looks far brighter, says Nick Colas of New York's Rochdale Securities.
More than $30 billion in patents will elapse by the end of 2007, which spells new potential for generics, of which Barr Pharmaceuticals (BRL) is Colas' favorite. Some 70 generic products make up three-quarters of Barr's $1.24 billion in annual sales. The Woodcliff Lake (N.J.) company is also the biggest producer of birth-control drugs, with more than a third of the U.S. market. With Barr's solid pipeline, the stock, at 46, is a bargain, he says. (It trades at a p-e of 19 times 2005 earnings.) "The market is assigning no value to future growth," says Colas, whose six-month price target is 54. Barr has $448 million in cash and a debt-to-capital ratio of less than 3%. Based on the company's guidance, Wall Street expects Barr to expand earnings by 8% to 13% in its fiscal year ending June, 2005, and 18% in 2006. Adam Greene of First Albany rates the stock a "strong buy." On Dec. 21, he raised his 2005 earnings estimate from $2.37 a share to $2.40.
Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
By Mara Der Hovanesian