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Generic drug companies are some of the best investments in the world. I think this sector will continue to grow in profitability. Everyone needs drugs, and everyone wants to keep health care costs down. Generic drugs are one of the most effective ways of controlling costs.

If you’re not familiar with generic drugs, it’s very simple. Once a major drug company loses its patent on a drug, a generic can make a cheap knock-off. For example, Ivax just started selling a version of OxyContin, which is also known as Hillbilly Heroin. No word if they’ll use Courtney Love or Rush Limbaugh in their ads. If it were up to me, I’d go for it.

The pressure on prices is intense. Whenever there’s pricing pressure in an industry, there’s “consolidation.” In English, this means that everyone is merging with everyone else. Novartis, a Swiss company, bought Hexal and Eon Labs. Last year, Teva bought Sicor. Mylan Labs made a play for King Pharmaceuticals. One small problem. King restated their financials and Mylan got cold feet. But you get the idea.

Now Teva is going to buy Ivax. This is a huge deal. It will make Israel-based Teva the largest generic drug company in the world. It’ll also be one of the largest stocks on the NASDAQ. I think Teva is probably paying too much ($7.5 billion, about a 14% premium), but the payoff could be enormous. Teva is definitely worth owning.

Posted by edelfenbein at July 25, 2005 9:56 AM