Some of the Best Pharma Stocks to Buy Now Are in This Overlooked Sector

When looking for the best pharmaceutical stocks to buy, investors often search for companies making breakthrough discoveries, completing expensive drug trials, or receiving massive cash influxes through initial public offerings.

stocks to buy

But according to Money Morning's BioScience Investment Specialist Ernie Tremblay, there is an extremely profitable, and simple, way to play the pharmaceutical industry - a play that that often goes overlooked.

He's talking about generics. These are drugs - as defined by the U.S. Food and Drug Administration (FDA) - that are "copies of brand-name drugs and are the same as those brand name drugs in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use."

Generics may be just copies of brand-name drugs, but they still face a tough approval process. The FDA makes sure these generics have the same therapeutic effect as name brand drugs, work in the same time frame, and don't have any additional side effects.

"Generic drugs don't get off scot-free from FDA scrutiny just because they're copies," Tremblay said. "The manufacturer has to prove they're good copies, that is, that they're bioequivalent to their brand-name doppelgangers. They have to absorb, distribute, metabolize, and excrete in the same way (equivalent pharmacokinetics) as the original brand."

In many cases, the only thing that separates generics from their brand-name equivalent is their price - both to consumers and manufacturers...

According to Forbes, it costs $4 billion on average to develop new drugs, and the process of companies to complete clinical trials can often take between 10 and 15 years. More expensive drugs can run developers up to $11 billion. And much of the money spent goes to research and development (R&D).

Producers of generics, however, skip that R&D process almost entirely.

"Of course, before they can legally replicate a drug, the patents (and any marketing exclusivity granted by the FDA for drugs in certain categories) on the target brand medication have to expire," Tremblay said. "Normally, that takes about 20 years, but patents are often filed at the beginning of clinical trials, and by the time the drug actually gets to market, there may be only 10 years of protection left."

And when these patents expire, generic drug companies swoop in and begin making massive revenue totals.

"The compound annual growth rate for the generics industry - depending upon which report you read - lies between 11.5% and 15%," Tremblay said. "Well over 80% of all prescriptions in the United States are currently filled with generics. That's a lot of revenue."

For investors, that bump in revenue can create excellent profit opportunities, if you know where to look...

Stocks to Buy to Cash In on Generics

One stock that Tremblay has been recommending is Lannett Co. Inc. (NYSE: LCI), a generic drug developer whose product portfolio includes 25 compounds. LCI currently has an additional 19 products that are pending FDA approval.

"It isn't just Lannett's remarkable product portfolio that makes this company low-hanging fruit for investors - incredible financial performance is also in the mix," Tremblay said. "Over the past two years, LCI's price per share (PPS) has grown over 1,000%."

LCI has reported earnings growth for seven consecutive quarters, and in the last three quarters the company has seen sales jump 105%.

Recently, LCI stock received a 99 Composite and Relative Price Strength Rating in its industry, which is the highest rating possible. Additionally, LCI was added to the S&P SmallCap 600 in early June. That's helped increase LCI's exposure in the past month.

LCI stock has already posted some impressive gains, up 56% year to date and 311% in the last 12 months. But even though the stock has soared recently, it still has room to run.

"With a current mid-range market cap of $1.71 billion, Lannett is in a great position to continue its expansion - and raise its valuation - through the foreseeable future," Tremblay said. "In short, it's a terrific opportunity for investors."

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