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Uncertainty Looms Large Over Generic Drug Industry Players
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The Medical - Generic Drugs industry comprises companies, which develop and market chemically/biologically identical versions of a brand-name drug once patents providing exclusivity to the branded drugs expire. These drugs can be divided into two categories — generic and biosimilar — based on their composition.
The generic segment is controlled by a few large generic drugmakers and generic units of large pharma companies. However, several smaller companies also develop generic versions of branded drugs. Generic/biosimilar drugs are significantly cheaper than the original drug. However, competition in this segment is stiff, which results in thin margins for the manufacturing companies. A few companies in this industry also have some branded drugs in their portfolio, which helps them tap a higher-margin market. Prominent stocks in this industry are Mylan and Teva (TEVA - Free Report) .
Let’s take a look at the industry’s three major themes:
The generic drug industry faces stiff competition and pricing pressure. However, the pricing environment showed signs of stabilization in 2019, which has continued in 2020. Price stabilization along with launches of products has strengthened businesses of major generic drugmakers.
Generic drug companies mainly bank on the loss of patent exclusivity of branded drugs. They may have to face litigation to market the generic version of these drugs. A company may launch an authorized generic version of a branded product, gaining exclusivity of several months over other generic versions of the same drug. Although the development of biosimilars is a complex process, these companies have already launched a few. Meanwhile, patent litigations are increasing expenses.
Generic drugs increase competition in the market as these are available at a significantly lower price and are accessible to a wider patient population. In contrast, some branded drugs have sales running into billions of dollars. Although generics have thin margins, their high sales volumes help generic drugmakers reap significant profits. Meanwhile, the government is focusing on instilling competition in the pharma space with faster approval to generic/biosimilars. This will boost the companies’ prospects as many blockbusters drugs are set to lose patent protection in the coming years.
Although pricing is stabilizing in the United States, the prospects of the generic drug industry in the near term remain clouded by the coronavirus pandemic. However, the industry enjoys strong fundamentals.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Medical – Generic Drugs industry is a small 22-stock group, which is housed within the broader Zacks Medical sector.
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #177, which places it in the bottom 30% of the 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2019, the industry’s earnings estimates for the current year have gone down 10.7%.
Before we present a few generic drugmaker stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock-market performance and its current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Medical – Generic Drugs industry has lagged the broader Zacks Medical sector as well as the S&P 500 Index so far this year.
The industry has declined 5.1% over this period against the broader sector’s 1.7% increase and S&P 500’s rise of 1.4%.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of forward 12 months price-to-sales (P/S F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 0.9X compared with the S&P 500’s 3.61X and the Zacks Medical sector’s 2.87X.
Over the last five years, the industry has traded as high as 3.9X, as low as 0.72X, and at the median of 1.22X, as the chart below shows.
Price-to-Sales Forward Twelve Months (F12M) Ratio
Bottom Line
Stable prices of generic drugs will help industry players enjoy steady revenues in the days ahead. Product launches are bringing in significant revenues and the trend is expected to continue in the remainder of 2020. Moreover, the launch of biosimilar drugs, which especially target oncology indications, should boost revenues.
Several players believe the second-quarter results to reflect the maximum impact of the pandemic due to lockdowns across countries. Moreover, the effect of stockpiling by customers in March may also have impacted demand in the second quarter. However, the majority of generic drug makers have stated that there will be no supply-side disruptions and have maintained their guidance for 2020. But the uncertainty related to the impact of the coronavirus looms.
Meanwhile, competition in the generic market is intensifying. The market is already crowded and faster approval by the FDA will bring in more drugs. The first company to launch a generic version of a branded product, which has lost exclusivity, is likely to capture significant market share. Hence, companies with a strong pipeline of generic drugs and a large portfolio of abbreviated new drug applications are likely to reap substantial profits. Moreover, coronavirus crisis may also drive costs of materials higher for industry players.
Moreover, some companies have a huge debt burden, which may compel them to keep away from acquisitions and deals. Pipeline or regulatory setbacks can delay generic launches, which may deal a severe blow to prospects.
In the Generic Drug industry, no stock currently sports a Zacks Rank #1 (Strong Buy), while two companies have a Zacks Rank #2 (Buy) and several companies carry a Zacks Rank of 3 (Hold).
Here we present three stocks from the industry with that investors may consider adding to their portfolios or retaining.
Mallinckrodt public limited company ): The Zacks Consensus Estimate for this Ireland-based drugmaker’s earnings per share for 2020 has moved north by 0.7% over the past 60 days. Mallinckrodt has a Zacks Rank #2.
Price and Consensus: MNK
Acasti Pharma, Inc. (ACST - Free Report) ): The Zacks Consensus Estimate for this Canada-based drugmaker for 2020 has narrowed 9.8% over the past 60 days. Acasti currently carries a Zacks Rank #2.
Price and Consensus: ACST
Supernus Pharmaceuticals, Inc. (SUPN - Free Report) ): The Zacks Consensus Estimate for this Rockville, MD-based drugmaker for 2020 has increased 5.1% over the past 60 days. Supernus currently carries a Zacks Rank #3.
Price and Consensus: SUPN
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Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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Uncertainty Looms Large Over Generic Drug Industry Players
The Medical - Generic Drugs industry comprises companies, which develop and market chemically/biologically identical versions of a brand-name drug once patents providing exclusivity to the branded drugs expire. These drugs can be divided into two categories — generic and biosimilar — based on their composition.
The generic segment is controlled by a few large generic drugmakers and generic units of large pharma companies. However, several smaller companies also develop generic versions of branded drugs. Generic/biosimilar drugs are significantly cheaper than the original drug. However, competition in this segment is stiff, which results in thin margins for the manufacturing companies. A few companies in this industry also have some branded drugs in their portfolio, which helps them tap a higher-margin market. Prominent stocks in this industry are Mylan and Teva (TEVA - Free Report) .
Let’s take a look at the industry’s three major themes:
Although pricing is stabilizing in the United States, the prospects of the generic drug industry in the near term remain clouded by the coronavirus pandemic. However, the industry enjoys strong fundamentals.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Medical – Generic Drugs industry is a small 22-stock group, which is housed within the broader Zacks Medical sector.
The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #177, which places it in the bottom 30% of the 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2019, the industry’s earnings estimates for the current year have gone down 10.7%.
Before we present a few generic drugmaker stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s stock-market performance and its current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Medical – Generic Drugs industry has lagged the broader Zacks Medical sector as well as the S&P 500 Index so far this year.
The industry has declined 5.1% over this period against the broader sector’s 1.7% increase and S&P 500’s rise of 1.4%.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of forward 12 months price-to-sales (P/S F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 0.9X compared with the S&P 500’s 3.61X and the Zacks Medical sector’s 2.87X.
Over the last five years, the industry has traded as high as 3.9X, as low as 0.72X, and at the median of 1.22X, as the chart below shows.
Price-to-Sales Forward Twelve Months (F12M) Ratio
Bottom Line
Stable prices of generic drugs will help industry players enjoy steady revenues in the days ahead. Product launches are bringing in significant revenues and the trend is expected to continue in the remainder of 2020. Moreover, the launch of biosimilar drugs, which especially target oncology indications, should boost revenues.
Several players believe the second-quarter results to reflect the maximum impact of the pandemic due to lockdowns across countries. Moreover, the effect of stockpiling by customers in March may also have impacted demand in the second quarter. However, the majority of generic drug makers have stated that there will be no supply-side disruptions and have maintained their guidance for 2020. But the uncertainty related to the impact of the coronavirus looms.
Meanwhile, competition in the generic market is intensifying. The market is already crowded and faster approval by the FDA will bring in more drugs. The first company to launch a generic version of a branded product, which has lost exclusivity, is likely to capture significant market share. Hence, companies with a strong pipeline of generic drugs and a large portfolio of abbreviated new drug applications are likely to reap substantial profits. Moreover, coronavirus crisis may also drive costs of materials higher for industry players.
Moreover, some companies have a huge debt burden, which may compel them to keep away from acquisitions and deals. Pipeline or regulatory setbacks can delay generic launches, which may deal a severe blow to prospects.
In the Generic Drug industry, no stock currently sports a Zacks Rank #1 (Strong Buy), while two companies have a Zacks Rank #2 (Buy) and several companies carry a Zacks Rank of 3 (Hold).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Here we present three stocks from the industry with that investors may consider adding to their portfolios or retaining.
Mallinckrodt public limited company ): The Zacks Consensus Estimate for this Ireland-based drugmaker’s earnings per share for 2020 has moved north by 0.7% over the past 60 days. Mallinckrodt has a Zacks Rank #2.
Price and Consensus: MNK
Acasti Pharma, Inc. (ACST - Free Report) ): The Zacks Consensus Estimate for this Canada-based drugmaker for 2020 has narrowed 9.8% over the past 60 days. Acasti currently carries a Zacks Rank #2.
Price and Consensus: ACST
Supernus Pharmaceuticals, Inc. (SUPN - Free Report) ): The Zacks Consensus Estimate for this Rockville, MD-based drugmaker for 2020 has increased 5.1% over the past 60 days. Supernus currently carries a Zacks Rank #3.
Price and Consensus: SUPN
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>