Last Updated: 2008-09-22 11:00:38 -0400 (Reuters Health)

Wachovia Capital Markets raised the U.S. generic drug sector to "overweight" from "market weight," saying positive drivers like growing generic drug penetration and strong patent expiration remained intact.

Analyst Michael Tong said generic drug companies with high volume manufacturing and a broad pipeline would gain from consolidation among pharmacies and high volume requirements.

Tong also upgraded Israel-based Teva Pharmaceutical Industries Ltd and Watson Pharmaceuticals Inc. to "outperform" from "market perform."

"Its [Teva’s] global geographic footprint positions it well to capitalize on international growth opportunities, especially after completing the Barr Pharmaceuticals acquisition," Tong said in a note to clients.

He added that the company, the world’s biggest generics drugmaker, has the broadest and deepest pipeline in the U.S. generic industry.

Tong said Watson could be an attractive asset for a non-U.S. generic company. "We expect to see gradual margin expansion over the next several quarters," the analyst said.

Regarding the overall sector, Tong said nearly $70 billion worth brand sales was exposed to generic drugs from 2009 to 2012 and generic substitution rate could rise up to 70 percent from nearly 65 percent.

"We believe there is a high likelihood for Congress to act on generic biologics legislation in 2009," said Tong. The analyst said the creation of a regulatory pathway should heighten investor interest in companies that have biologics capability.

Tong said the generics sector would benefit irrespective of the election outcome as the need for health care cost control was likely to compel the next U.S. president to act.