Generic drug companies are standing on the cusp of a once-in-a-lifetime opportunity.#-ad_banner-#

In the next five years, a total of $290 billion in prescription drug sales are expected to lose patent protection, making brand-name pharmaceutical companies vulnerable to generic competition. The effect this so-called “patent cliff” will have on the generics space cannot be overstated.

Take cholesterol blockbuster Lipitor for example, which peaked with annual sales of $13 billion in 2006. In spite of Pfizer Inc.’s (NYSE: PFE) greatest efforts to hold market share and protect its crown jewel, sales of Lipitor fell by 50% the first week it went off patent in late December 2011. But for Ranbaxy Laboratories, it was a watershed moment, reaping $500 million in sales for its generic version of Lipitor in just the first six months the drug had gone off patent protection.

The generic space is littered with success stories just like this.

Activis Inc. (NYSE: ACT), which has rolled out a series of copycat drugs in the past year that includes authorized versions of Lipitor and Johnson and Johnson’s (NYSE: JNJ) attention deficit hyperactivity disorder drug Concerta, saw its share price jump 44% in 2012.

Take a look at the big jump below…

Dr. Reddy’s (NYSE: RDY) has also been a winner, scoring big on generic versions of Pfizer’s $1.8 billion stomach drug Protonix and an anti-psychotic pill from Eli Lilly (NYSE: LLY) called Zyprexa. Analysts expect Dr. Reddy’s to grow at an annual pace of 25% in the next five years, almost twice the industry average of 14%.

The patent cliff is sure to produce big gains for the entire generic industry, but my favorite pick from the group is a company that’s already off to a great start, up a market-smashing 190% in the last five years. But looking forward, there are more than a few reasons why this is a great stock to cash in on the patent cliff.

Mylan Inc. (NYSE: MYL) is an established leader in the generics space, operating in more than 150 countries across the world, with a market cap of $12.5 billion. In addition to generics, Mylan also has a branded drug division, through which it sells active pharmaceutical ingredients (API) to other drug companies.

The company boasts a very deep pipeline of generic drugs. At the end of 2012, it had 178 abbreviated new drug application (ANDA) in line for Food and Drug Administration approval, targeting more than $80 billion in annual branded drug sales. Mylan says that 35 of these are “first-to-file” applications, meaning it’s the first company to file for FDA approval to develop generic versions of the drug. This would represent more than $21 billion in annual sales. With total revenue of $6.7 billion in 2012, the scale of this opportunity for Mylan is massive.

With its deep pipeline of generic competition in tow, Mylan is squarely focused on high-growth emerging markets where leading brands are less established and consumers are more price-sensitive.

The company made a bold move in this direction with its recent acquisition of Merck KGaA’s generics business and Matrix Laboratories, a maker of pharmaceutical ingredients for generic drugs. This provides Mylan with instant access to a global network of more than 150 countries. Mylan also announced on Feb. 14 a partnership with India’s Biocon to develop generic versions of three of its insulin blockbusters that currently generate more than $11 billion in annual sales. Two days later, Mylan announced it had bought a $30 million manufacturing plant from Unichem Laboratories, another company located in India, that will help strengthen the company’s push into that lucrative emerging market.

The best news for investors is that despite all the good news, Mylan is still undervalued, with a forward price-to-earnings (P/E) ratio of just 11, a sharp discount to its 10-year average of 14 and peer average of 16.

Risks to Consider: The generics market is ultra-competitive, with new many leaders scrambling to capitalize on the biggest branded drug expirations. Emerging markets are also particularly vulnerable to fluctuations in global economic growth.

Action to Take –> The generic drug industry is being presented with an unbelievable opportunity in the next five years as more than $290 billion in branded drugs are scheduled to lose patent protection. Many generic drug companies will see big gains, but my favorite pick from the group is Mylan.

The company has a deep pipeline of generics and is focused on high-growth emerging markets. If Mylan were to trade with the same valuation as its peers, then shares would jump to $69, a nice 60% premium from current levels. If the company’s deep pipeline comes to fruition, then I can see shares easily doubling.