The medical sector has largely had a pretty good year in 2013. That is because many companies in the space have fought through Obamacare worries, and have adapted to life with this new law.
While the rules might have a short term negative impact on companies in the health insurance space, for example, those in the drug production market could see a boost. That is because firms here are expected to see a surge in demand for their products by people who now have medical insurance, potentially boosting drug company bottom lines.
Although a play on any number of drug companies might be a solid idea, a focus on low-cost generic producers could be the way to go. After all, generics are going to be in high demand with the new law in the U.S., especially from insurance companies trying to keep costs down.
Global Market
Meanwhile, in key emerging markets, many consumers are now in the middle class and can, thanks to generics, afford a variety of new drugs. As more of these consumers reach this plateau, drug demand could rise once again, suggesting companies that have exposure to both American and emerging market consumers may be top picks.
One such company that might thrive in this environment, and also be able to play off of trends in emerging markets as well as U.S. ones, is Doctor Reddy’s Laboratories (RDY).
RDY in Focus
Doctor Reddy’s Labs is based in India, but it has a global presence including operations in the U.S., Europe, and Australia/New Zealand. The drug producer has 50 products under its Dr. Reddy’s label, and it has a solid pipeline as well, suggesting more growth could come for this company.
And investors, or users of the company’s drugs, should rest assured that it has 8 API facilities which are FDA-inspected, as well as 4 FDA-approved finished dosage facilities serving the U.S., so quality concerns shouldn’t be an issue.
Investors should also note that the company is doing pretty well in terms of filling its drug pipeline, as it has 76 ANDAs (Abbreviated new Drug Applications) pending, including 40 so-called paragraph IV certifications which look to make generic versions of branded drugs already on the market. So clearly, there is plenty of room for RDY to grow, especially as more drugs come off patent and become ripe for being turned into generics.
RDY Earnings
Thanks in part to these trends, some analysts have been moving their estimates higher for RDY in the past few weeks. Growth is now expected to be about 6% for the current year, while next year’s growth rate looks to ramp up to 15.14%. In other words, RDY is hitting its stride and looks to really grow in the months and years ahead.
In fact, both of the most accurate earnings estimates for RDY are above the full consensus, suggesting that the latest estimates—those with the most up-to-date information—are the most bullish on the company. It also doesn’t hurt that the latest earnings report crushed expectations, putting the firm on pretty solid footing heading into 2014.
So with all of these positives, and especially the rising estimates and strong long term outlook, it is easy to see why RDY has earned itself a Zacks Rank #1 (Strong Buy). Given this top rank, which is only assigned to the best 5% of companies, more good days could be ahead for this surging drug producer.
Bottom Line
Thanks to trends both in the American and the global markets, a play on generic drug makers could be an excellent idea. Not only will demand continue to rise for their products, but the industry rank for the segment is actually in the top 15%, suggesting broad strength.
One company that really stands out though is Dr. Reddy’s Labs. This top ranked stock appears well positioned to benefit from both changes in the U.S. health care system, and surging incomes abroad, so consider taking a closer look at this firm for 2014 if you are seeking more health exposure in your portfolio.
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