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TheStreet Open House

Par Pharmaceuticals: Buried in Generic-Drugs Battlefield

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Generic pharmaceuticals as an industry has very favorable demand dynamics. Several secular trends are converging that will benefit this market. For one, governments and health care insurers around the world and especially in the U.S. are aggressively seeking out ways to reduce skyrocketing health care costs.

Since 1960, health care spending has expanded from 5% of GDP to more than 17% in 2009. Prescription drugs account for about 10% of all health care spending, so this is an obvious area to target. Generic versions of branded drugs generally sell for half to one-third of the price. Given this, health care payers have often limited reimbursement to generic versions of certain treatments, raising the demand for them. From 2004 to 2009, generics market share rose from 56% of prescription dollars to nearly 75%.

One of the 2010 health care bill's main goals was to increase access to the roughly 15% of Americans with no health insurance. By eliminating insurance denials due to existing conditions, preventing the dropping coverage for sick patients, and offering incentives to small businesses providing coverage, more people will be insured -- and more people will be able to purchase prescriptions.

Finally, there is demographics. The number of Americans over 65 will increase 3% a year over the next 10 years, an additional 14 million people entering Medicare. Naturally, older folks generally require more medical care, including prescription drugs.

Put it all together and the picture is bright for generics. This trend is set to accelerate over the next few years. Six of the top 20 bestselling branded drugs are set to lose patent protection in 2011 and 2012, with two additional drugs that have over $1 billion a year in sales expiring in 2012. That's an astounding $43 billion dollars in branded drug sales that will be open to generic competition.

So it would seem to be a slam dunk to recommend generics maker Par Pharmaceuticals (PRX) as an attractive Magic Formula stock. Par generates 90% of its sales from generics, and all of its profits.

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