Just a day after the first charges were filed by the U.S. Department of Justice (DoJ) Antitrust Division in an investigation related to generic drug pricing (Read more: Generic Stocks Feel Pricing Heat, 1st Charges Filed in DoJ Antitrust Probe), New York Attorney General (A.G.) Eric T. Schneiderman joined 19 other state attorneys general in filing a federal lawsuit against several generic drug-makers including big names like Mylan N.V. and Teva Pharmaceutical Industries Limited (TEVA Quick QuoteTEVA - Free Report) .

According to the lawsuit, the companies indulged in a widespread illegal conspiracy to reduce competition and artificially hike and manipulate prices of generic prescription drugs. The drugs in question are doxycycline hyclate delayed release, an antibiotic used for a range of conditions including respiratory tract infections, and glyburide, an oral diabetes medicine.

The companies named in the lawsuit are Heritage Pharmaceuticals, Inc., Aurobindo Pharma USA, Inc., Citron Pharma, LLC, Mayne Pharma (USA), Inc., Mylan Pharmaceuticals, Inc. and Teva Pharmaceuticals USA, Inc.

Investigation Started a Couple of Years Back

Generic drugs are basically cheaper copy-cat versions of branded drugs that have lost exclusivity -- these drugs are sold at huge discounts to the branded drugs and usually capture major segments of the branded drug’s market immediately after launch. Generics save consumers and the healthcare system tens of billions of dollars annually as they introduce competition into a market where none previously existed.

However, over the years, the price dynamic for a large number of generic drugs changed with the prices of some drugs skyrocketing for no apparent reason. This led to major outrage among officials, payers and consumers whose costs doubled, tripled or in some cases increased up to 1,000% or more. Given the growing outrage, the State of Connecticut started its investigation in Jul 2014, which was followed by a Congressional inquiry and a reported criminal grand jury investigation by the DoJ Antitrust Division. Companies that have reportedly received subpoenas under the antitrust probe include Mylan, Teva, which recently acquired the generics business of Allergan, Lannett Company, Inc. , Impax Laboratories Inc. , and Endo International plc among others.

Although generic drug manufacturers argued that the significant price increases were due to several factors like industry consolidation, FDA-mandated plant closures, or elimination of unprofitable generic drug product lines, the investigation indicates that collusion among generic drug competitors is the key reason behind this.

The ongoing investigation, which covers other generic drugs as well, provided evidence of a well-coordinated and long running series of conspiracies to fix prices and allocate markets for certain generic drugs in the U.S.

According to the lawsuit filed yesterday, the misconduct was conceived and carried out by senior company executives and their subordinate marketing and sales executives. Moreover, the lawsuit alleges that the schemes were regularly coordinated through direct interaction with competitors at industry trade shows, customer conferences and other events, as well as through direct email, phone and text message communications with some of the evidence of communication being destroyed.

An Overhang for Generic Stocks

Generic drug sales in 2015 were estimated to be $74.5 billion in the U.S. with the industry currently accounting for about 88% of all prescriptions written in the U.S. In this scenario, staggering price hikes for generic drugs will have a significantly harmful impact on the country’s healthcare system -- such hikes will not only affect consumers, hospitals and home health agencies, they will also pressurize the budgets of Medicare, Medicaid, the Department of Defense and the Department of Veterans Affairs.

While a couple of former senior executives, Jeffrey Glazer, the erstwhile CEO of Heritage, and Jason Malek, the former president of the same company, have been charged by the Antitrust Division for their roles in conspiracies to fix prices, rig bids and allocate customers for certain generic drugs, Mylan and Teva could find themselves under fire for their alleged roles in the price fixing controversy. Mylan has already faced a lot of flak for raising the price of its life-saving combination drug, EpiPen. While Mylan and Teva are both Zacks Rank #3 (Hold) stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Drug pricing is a populist issue and with President-elect Donald Trump vowing to bring down drug prices, the issue is here to stay. The investigation into generic drug prices will remain an overhang and a headline risk in the near future.

Medical - Generic Drugs Industry 5YR % Return

Medical - Generic Drugs Industry 5YR % Return

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