To OTC Journal Members:
 
 

Who Wins When 35 Blockbuster Drugs Lose Patents in 2011 and 2012?

On Saturday I urged you to check your inbox after the market closed today for a new trading idea. As promised, here it is.... I think you'll see why I was so empathic about you being ready. And, I'm equally confident you'll agree this stock is something worth owning beginning tomorrow, and at least through the better part of 2011. 

The underlying attraction to this small cap is real simple - the revenue lightswitch is being flipped on this very quarter. Ergo, a stock that has largely been on the shelf for quite some time is now being dusted off and put into action by the investor community. 

Veteran traders will immediately recognize the kind of upside potential this story has. In the same sense that the market loves turnaround stories and drives a stock's price higher once the corner has been turned, when the 'pre' is dropped from a pre-revenue company, investors often go hog-wild. You know how this is likely to go though - every day you wait to step in puts you further down on the list of any rally's biggest beneficiaries. 

The company is Genmed Holding Corp. (GENM), and if you haven't heard of it yet, just wait - fireworks are about go off, and you'll want to be around for them. 
 

Overview

Genmed is, or soon will be, a generic drug distributor. This company has been outwardly on hold for the last couple years while waiting for approval from the European medical community. Though the only thing they initially requested distribution approval for was paracetamol - or acetaminophen - it's still an amazingly long process. More important, that license was awarded in December. 

Inwardly though, Genmed has spent the last couple of years preparing to hit the ground running when this day finally came. 

Just to drive home the 'ready to roll' point that current shareholders are going to enjoy, Genmed has already inked a five year distribution deal with one of the largest pharmaceutical distribution networks in the UK. The pain-killer and fever reducer will be pushed out to the distributor's network of more than 1200 pharmacies and 150 hospitals sometime in Q3 of this year. The follow-up deal with the same distributor led to the funding of an advertising budget that will put Genmed's products in the distributor's marketing materials. 

Just to put the pace of the company's efforts into perspective, all this happened within just a month of paracetamol being approved in most of Western Europe. 

Other distribution channels are currently being negotiated, but given how fast the first one materialized, others can't be too far down the road. 

And here's the thing to chew on that the rest of the market isn't yet.... the seven European countries where paracetamol is currently approved aren't the only potential market for Genmed's drugs, nor is paracetamol the only drug Genmed is seeking approval for. There are actually seven generic drugs the company is currently interested in, and technically speaking, the only geographical boundaries Genmed has to contend with are approvals to market these drugs on those countries. The company has already said Spain is the next target market though, with other markets in its sights. 

In other words, the potential growth and profit trail that GENM investors could follow here has no immediate end in sight. 

But wait - it gets even better. 
 

Scope of the Opportunity

I don't know how closely you've been following this slow (but accelerating) expiration of patents for some major drugs over the last few years, but 2011 and 2012 may be the watershed year that makes the generic drug industry the norm, and the branded-drug industry the minority. Well, Genmed is poised perfectly for that brewing storm.

The turning of the tide over the next couple of years will be driven by 35 major drugs losing their patented status, including Viagra, Zyprexa, Singulair, and Lexapro just to name a few. Any and all of those 35 names could be a generic drug opportunity for Genmed. 

There's one data nugget, however, that really drives home just how big the paradigm shift could be for generic drug makers and distributors like Genmed. What's that? Goldman Sachs thinks the 'innovator' drug market could lose as much as 49% of tits business to the generic drug market by 2015. 

All told, by 2014, the global generic drug market could be worth $130 billion (yes, with a 'b'). By 2015, some experts think it could be worth as much as $150 billion. 

Wow. 

Now compare that to Genmed's mere $70 million market cap. How little of that total $130 billion market will the company need to capture to become a smashing success? A mere 1.0% of that total translates into $1.3 billion. Let's be even more conservative than that though. Let's just say Genmed only captures 0.25% of that total generic market early on. That's about $325 million per year versus that $70 million market cap. 

See where this is going? Teva is currently priced at 3 times annual sales. Mylan is priced at 1.3 times its annual revenue. Dr. Reddy's currently trades at 3.8 times its annual top line figure. Assuming a P/S ratio of 3.0 is the 'right' number, and conservatively assuming that Genmed can capture just 0.25% of the globe's total generic market, you could make the case the GENM should almost be a billion dollar company ($325 million x 3.0). 

Will it get there tomorrow? No, but that's why I said you'll want to start owning tomorrow but simultaneously be willing to hold it at least through the end of the year. See, as investors start to crunch these same numbers, I think it will start to accelerate toward that level of valuation, doling out the biggest rewards to the stock's earliest investors. The longer you own it, the more time Genmed has to capture market share by adding more generic drugs to its stable, and tapping more markets. 

Make no mistake though - the genesis of these potential gains is now, and based on the volume swell over the last few weeks, the market's starting to nibble. If you want a shot at making the most money with this idea from here, you'll want to be in a position before the numbers behind this story spread any further.