|Generic Drugs as Market Disruptors: Why CVS, Perrigo Will Benefit|
The market players who are positioned to lead a new surge in generic drug sales are making huge strides.
When people are tasked with envisioning life's "big-ticket" items, they typically default to homes, cars, vacations, or jewelry. More and more, however, they are adding the hefty cost of health care and medication to the list.
While the Affordable Care Act brought preventive care into the spotlight, the emphasis on affordable health care became a higher priority years earlier. When the recession hit consumers across the US, patients sought alternatives to branded medications and high-priced treatment options.
The recession is cooling, and consumers are now accustomed to more affordable options as the system is better primed for lower cost generic drugs. Market players positioned to lead this surge are making huge strides in the current environment.
We at my firm are particularly interested in CVS Caremark Corporation (NYSE:CVS) and Perrigo Company (NYSE:PRGO), two companies that stand out as leaders in the space.
CVS can't seem to stay out of the headlines with its transformation from a convenience store to a fully equipped care center. The company has focused on satisfying the needs of customers who are looking to receive a diagnosis for routine ailments, receive preventive treatment, and purchase medication without high costs and long wait times.
CVS Minute Clinics, which offer walk-in care for minor ailments, could help address "the shortage of primary care physicians," according to the company. CVS continues to grow the practice and now has 800 clinics across 28 states. The model has enjoyed significant success, strongly overcoming the initial concern that primary caregivers and hospitals would push back.
Preventive care is also gaining popularity as it leans on the little things that make a big difference. CVS's robo-call program automatically reminds customers to pick up prescriptions; the seemingly small measure has been an extremely effective tool to keep people on their medications.
As investors who are perpetually seeking companies geared for the long term and capitalizing on market disruption, we like CVS: It is supplying effective generic drugs, effective treatment options, and effective medication distribution processes to people on a growing scale.
We also track developments at Perrigo -- one of the behind-the-scenes players that make success possible for companies like CVS.
Perrigo manufactures more than 1,000 store-brand (or generic) medications, including analgesics, and allergy and cold medications.
Perrigo's products contain the same active ingredients as brand-name products such as Excedrin (NYSE:NVS), Nicorette (NYSE:GSK), and Tylenol (NYSE:JNJ), but they are labeled with the contracting retailer's name and logo. Many of the generic drugs found in stores such as CVS, Walgreen (NYSE:WAG), and Wal-Mart (NYSE:WMT) are manufactured by Perrigo -- in fact, the company controls approximately 70% of the world's generic OTC drug manufacturing. It stands to benefit even more as the population ages and continues leaning towards lower cost solutions.
Perrigo's success has been intrinsically tied to the growth plans of consumer-facing companies like CVS. Those points of purchase saw significant margin growth as they increased sales of generics over branded drugs. That lift continues to gather momentum; as CVS (and others) see their margins improve, they market the generics more aggressively, consumers respond, and the upward spiral continues.
Improvements in preventive care and medication are an imperative piece of evolving global health-care culture. We feel we have an opportunity to gain from these advances made by companies like CVS and Perrigo as we continue to watch for other industry players that are making headway.
Reynders, McVeigh Capital Management, LLC ("RMCM") does not directly or indirectly beneficially own any of the securities identified in this video and article.
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