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3 Generic Drug Stocks to Watch Amid Improving Market Prospects
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Toward the end of 2023, the economy started showing signs of stabilization and easing inflationary pressure as the Fed finally decided to keep interest rates unchanged. This is likely to benefit generic drugmakers like Amphastar Pharmaceuticals (AMPH - Free Report) , Teva Pharmaceutical (TEVA - Free Report) and Dr. Reddy’s Laboratories (RDY - Free Report) , who can potentially benefit from declining costs in the long run.
These drugmakers are also focusing on new product launches or existing products with high gross margins to support their top and the bottom line. To expand market share further, generic drugmakers have also started exploring strategic collaboration with regional and global players.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents, providing exclusivity to branded drugs, expire. These drugs can be divided into generic and biosimilar categories based on their composition. The generic segment is controlled by a few large drugmakers and generic units of large pharma companies. Several smaller companies also develop generic versions of branded drugs, significantly cheaper than the original drugs. Competition in this segment is stiff, resulting in thin margins for manufacturing companies. A few companies in this industry have some branded drugs in their portfolio, helping them to tap a higher-margin market.
3 Trends Shaping the Future of the Generic Drugs Industry
Loss of Patent Exclusivity of Branded Drugs: Generic drugmakers mainly rely on the loss of patent exclusivity of branded drugs. They apply to the FDA to have their generic or biosimilar version of branded drugs approved, which have lost patent protection. Patent loss of blockbuster drugs like AbbVie’s Humira provided significant opportunities for generic drugmakers last year. Several companies like Amgen and Sandoz have already launched their Humira-biosimilars.
A company may launch an authorized generic version of a branded product, gaining exclusivity over other generic versions of the same drug for several months. Although developing biosimilars is complex, the generic players have already launched a few. These generic drugmakers may have to face litigation to market the generic version of these drugs.
Stiff Competition: The generic drug industry competes with original branded drugs. Once a branded drug loses patent exclusivity and generic versions of the same are available in the market, it induces competition as competitors set generic prices well below the brand price. The competition among multiple generic drugmakers to market the same drug pulls prices down, benefiting the consumer. As a result, drugmakers aim for the medicines' first-to-file (FTF) status. The current generic market is already crowded, with many drugmakers having several generic filings pending before the FDA. With several biosimilar drugs set for launch over the next couple of years, the top line of these firms is likely to improve significantly.
Patent Settlements: The successful resolution of patent challenges continues to be an essential catalyst for the growth of generic drugmakers. The settlement of these challenges accelerates the availability of low-cost generic products and removes uncertainties associated with litigation. However, active patent challenges require litigation, leading to higher costs.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Medical – Generic Drugs industry is a small 14-stock group housed within the broader Zacks Medical sector.
The group’s Zacks Industry Rank is the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #99, which places it in the top 39% of the 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Against this backdrop, we will present a few noteworthy stocks. But before that, it’s worth looking at the industry’s stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector and the S&P 500 Index in the past year.
The industry has risen 27.4% over this period compared with the broader sector’s 0.3% growth. Meanwhile, the S&P 500 has risen 20.3% in the said time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
The Industry's Current Valuation
Based on forward 12 months price-to-earnings (P/E F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 11.24X compared with the S&P 500’s 20.31X and the Zacks Medical sector’s 22.89X.
Over the last five years, the industry has traded as high as 13.31X, as low as 7.02X, and at the median of 9.30X, as the charts below show.
Price-to-Earnings Forward Twelve Months (P/E F12M) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Generic Drug Stocks to Keep an Eye On
Amphastar: The company develops, manufactures, and markets generic and proprietary injectable, inhalation, and intranasal products, as well as an insulin-active pharmaceutical ingredient. The company is focused on expanding its portfolio of generics and biosimilars. As of Sep 2023-end, the company has three generic drugs under review with the FDA. It is also developing three biosimilar and six generic drugs with significant market opportunities.
The company is also focused on selling higher-margin products, including new product launches of vasopressin and ganirelix. Following the discontinuation of branded glucagon products by competitors Lilly and Novo Nordisk in 2022, Amphastar more than doubled the sale of its glucagon products in the first nine months of 2023.
The stock has surged 78.7% in the past year. The consensus estimate for 2024 earnings has increased from $3.72 to $3.77 per share in the past 60 days.
Teva: Teva is the world’s largest generic drug company in total and has new prescriptions. The company is seeing the continued growth of its new branded drug, Austedo’s prescriptions and market share growth for another newer medicine, Ajovy. Generic revenues are improving in Europe and international markets. Teva is currently focused on saving costs and improving margins through the optimization of operations for efficiency while also lowering the debt on its balance sheet. The company might register better growth in a few years with improving operational efficiencies and significant debt reduction. The company expects to achieve gross margins of up to 67% in the long term.
The consensus estimate for 2024 has remained consistent at $2.39 per share in the past 60 days. The stock has risen 17.4% in the past year. TEVA carries a Zacks Rank #2 (Buy).
Price & Consensus: TEVA
Image Source: Zacks Investment Research
Dr. Reddy's Laboratories: The India-based company enjoys a strong position in the U.S. generics market. Dr. Reddy’s also markets its products in countries like the U.K., Germany, Russia, Venezuela, Romania and South Africa. To ensure steady growth in these markets, management is focused on accelerating the development of its complex generics portfolio. RDY is also making efforts to ensure that the approvals come in time through appropriate risk management and proactive measures to deal with possible deficiencies.
As of Sep 2023-end, cumulatively, 79 generic filings were pending approval from the FDA (75 abbreviated New Drug Applications [ANDAs] and four new drug applications).
The consensus estimate for the fiscal 2025 (year ending March 2025) earnings has dropped from earnings per share of $4.09 to $4.07 in the past 60 days. The stock has gained 34.3% in the past year. Dr. Reddy's has a Zacks Rank #3 (Hold).
Price & Consensus: RDY
Image Source: Zacks Investment Research
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3 Generic Drug Stocks to Watch Amid Improving Market Prospects
Toward the end of 2023, the economy started showing signs of stabilization and easing inflationary pressure as the Fed finally decided to keep interest rates unchanged. This is likely to benefit generic drugmakers like Amphastar Pharmaceuticals (AMPH - Free Report) , Teva Pharmaceutical (TEVA - Free Report) and Dr. Reddy’s Laboratories (RDY - Free Report) , who can potentially benefit from declining costs in the long run.
These drugmakers are also focusing on new product launches or existing products with high gross margins to support their top and the bottom line. To expand market share further, generic drugmakers have also started exploring strategic collaboration with regional and global players.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents, providing exclusivity to branded drugs, expire. These drugs can be divided into generic and biosimilar categories based on their composition. The generic segment is controlled by a few large drugmakers and generic units of large pharma companies. Several smaller companies also develop generic versions of branded drugs, significantly cheaper than the original drugs. Competition in this segment is stiff, resulting in thin margins for manufacturing companies. A few companies in this industry have some branded drugs in their portfolio, helping them to tap a higher-margin market.
3 Trends Shaping the Future of the Generic Drugs Industry
Loss of Patent Exclusivity of Branded Drugs: Generic drugmakers mainly rely on the loss of patent exclusivity of branded drugs. They apply to the FDA to have their generic or biosimilar version of branded drugs approved, which have lost patent protection. Patent loss of blockbuster drugs like AbbVie’s Humira provided significant opportunities for generic drugmakers last year. Several companies like Amgen and Sandoz have already launched their Humira-biosimilars.
A company may launch an authorized generic version of a branded product, gaining exclusivity over other generic versions of the same drug for several months. Although developing biosimilars is complex, the generic players have already launched a few. These generic drugmakers may have to face litigation to market the generic version of these drugs.
Stiff Competition: The generic drug industry competes with original branded drugs. Once a branded drug loses patent exclusivity and generic versions of the same are available in the market, it induces competition as competitors set generic prices well below the brand price. The competition among multiple generic drugmakers to market the same drug pulls prices down, benefiting the consumer. As a result, drugmakers aim for the medicines' first-to-file (FTF) status. The current generic market is already crowded, with many drugmakers having several generic filings pending before the FDA. With several biosimilar drugs set for launch over the next couple of years, the top line of these firms is likely to improve significantly.
Patent Settlements: The successful resolution of patent challenges continues to be an essential catalyst for the growth of generic drugmakers. The settlement of these challenges accelerates the availability of low-cost generic products and removes uncertainties associated with litigation. However, active patent challenges require litigation, leading to higher costs.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Medical – Generic Drugs industry is a small 14-stock group housed within the broader Zacks Medical sector.
The group’s Zacks Industry Rank is the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #99, which places it in the top 39% of the 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Against this backdrop, we will present a few noteworthy stocks. But before that, it’s worth looking at the industry’s stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector and the S&P 500 Index in the past year.
The industry has risen 27.4% over this period compared with the broader sector’s 0.3% growth. Meanwhile, the S&P 500 has risen 20.3% in the said time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
The Industry's Current Valuation
Based on forward 12 months price-to-earnings (P/E F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 11.24X compared with the S&P 500’s 20.31X and the Zacks Medical sector’s 22.89X.
Over the last five years, the industry has traded as high as 13.31X, as low as 7.02X, and at the median of 9.30X, as the charts below show.
Price-to-Earnings Forward Twelve Months (P/E F12M) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Generic Drug Stocks to Keep an Eye On
Amphastar: The company develops, manufactures, and markets generic and proprietary injectable, inhalation, and intranasal products, as well as an insulin-active pharmaceutical ingredient. The company is focused on expanding its portfolio of generics and biosimilars. As of Sep 2023-end, the company has three generic drugs under review with the FDA. It is also developing three biosimilar and six generic drugs with significant market opportunities.
The company is also focused on selling higher-margin products, including new product launches of vasopressin and ganirelix. Following the discontinuation of branded glucagon products by competitors Lilly and Novo Nordisk in 2022, Amphastar more than doubled the sale of its glucagon products in the first nine months of 2023.
The stock has surged 78.7% in the past year. The consensus estimate for 2024 earnings has increased from $3.72 to $3.77 per share in the past 60 days.
Amphastar flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: AMPH
Image Source: Zacks Investment Research
Teva: Teva is the world’s largest generic drug company in total and has new prescriptions. The company is seeing the continued growth of its new branded drug, Austedo’s prescriptions and market share growth for another newer medicine, Ajovy. Generic revenues are improving in Europe and international markets. Teva is currently focused on saving costs and improving margins through the optimization of operations for efficiency while also lowering the debt on its balance sheet. The company might register better growth in a few years with improving operational efficiencies and significant debt reduction. The company expects to achieve gross margins of up to 67% in the long term.
The consensus estimate for 2024 has remained consistent at $2.39 per share in the past 60 days. The stock has risen 17.4% in the past year. TEVA carries a Zacks Rank #2 (Buy).
Price & Consensus: TEVA
Image Source: Zacks Investment Research
Dr. Reddy's Laboratories: The India-based company enjoys a strong position in the U.S. generics market. Dr. Reddy’s also markets its products in countries like the U.K., Germany, Russia, Venezuela, Romania and South Africa. To ensure steady growth in these markets, management is focused on accelerating the development of its complex generics portfolio. RDY is also making efforts to ensure that the approvals come in time through appropriate risk management and proactive measures to deal with possible deficiencies.
As of Sep 2023-end, cumulatively, 79 generic filings were pending approval from the FDA (75 abbreviated New Drug Applications [ANDAs] and four new drug applications).
The consensus estimate for the fiscal 2025 (year ending March 2025) earnings has dropped from earnings per share of $4.09 to $4.07 in the past 60 days. The stock has gained 34.3% in the past year. Dr. Reddy's has a Zacks Rank #3 (Hold).
Price & Consensus: RDY
Image Source: Zacks Investment Research