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3 Generic Drug Stocks to Watch Amid Pandemic & Pricing Pressure

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The adverse impact of the COVID-19 pandemic continued for Medical - Generic Drugs players in the first half of 2021. Uncertainty still lingers with the prevalence of the Delta variant in the United States and other important markets. Although pricing pressure in North American and European markets is stabilizing, it is still hurting the top line of generic drugmakers.

A recovery is expected in the second half of 2021, primarily owing to the easing of prior restrictions and ramped-up vaccinations. Product launches have been driving revenues of major generic drugmakers higher, which will likely continue in the second half. Teva (TEVA - Free Report) is a prominent stock in this industry. Companies like Dr. Reddy's Laboratories (RDY - Free Report) , Bausch Health (BHC - Free Report) and Amphastar Pharmaceuticals (AMPH - Free Report) are poised to beat the COVID-19 challenge on the back of gradual economic recovery in some countries, product launches and other favorable macro factors.

Industry Description

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 drugs. 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 help 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 for approval of their generic or biosimilar version of branded drugs, which have lost patent protection. Patent loss of blockbuster drugs like AbbVie’s Humira provides significant opportunities for generic drugmakers. However, these companies 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, the generic players have already launched a few.

Stiff Competition and Pricing Pressure: The generic drug industry faces stiff competition and pricing pressure. The market is already crowded and faster approval by the FDA will bring in more generic drugs. Although the pricing environment showed some signs of stabilization in 2020, it continued to hurt sales of several players in the first half. Meanwhile, the launch of generic/biosimilar products should strengthen businesses of major generic drugmakers amid the coronavirus pandemic. However, the coronavirus crisis may continue to drive costs of materials higher.

Patent Settlements: Successfully resolving patent challenges continues to be an important catalyst for growth of generic drugmakers as these can lead to product launches. Settlement of these challenges accelerates the availability of low-cost generic products and also removes uncertainties associated with litigation. However, active patent challenges require litigation, thereby leading to higher costs.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Medical – Generic Drugs industry is a small 18-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 #215, which places it in the bottom 15% of the 254 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.

The industry’s earnings estimates for the current year have gone down 7.5% since August 2020.

Against this backdrop, we will present a few noteworthy stocks. But before that, it’s worth taking a look at the industry’s stock market performance and current valuation.

Industry Underperforms S&P 500 but Beats Sector

The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector but lagged the S&P 500 Index in the past year.

The industry has gained 3.8% over this period against the broader sector’s 2.8% decrease. Meanwhile, the S&P 500 has risen 33.5% in the said time frame.

One-Year 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 1.01X compared with the S&P 500’s 4.59X and the Zacks Medical sector’s 2.72X.

Over the last five years, the industry has traded as high as 1.47X, as low as 0.75X, and at the median of 1.02X, as the charts below show.

Price-to-Sales Forward Twelve Months (F12M) Ratio


3 Generic Drug Stocks to Keep an Eye On

Dr. Reddy's Laboratories: The company enjoys a strong position in the generics market. During the last few quarters, the company is estimated to have launched approximately 30 new products in North America. Approval of new generics should further bolster its portfolio. The company is also working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology. The company is divesting non-core assets to channelize its sources to increase profitability. However, its North America base business is witnessing incremental competition but less pricing erosion.

The consensus estimate for fiscal 2022 (year ending March 2022) earnings has declined from $3.20 to $2.84 over the past 30 days. The company has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bausch Health:The company develops, manufactures and markets a wide array of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products. The recent drug approvals should fuel the top line. Moreover, the company’s second quarter of 2021 results reflected positive impacts of the recovery from the COVID-19 pandemic.

The consensus estimate for 2021 has been stable at $4.24 per share over the past 30 days. The company has a Zacks Rank #3. The stock has gained 32.3% so far this year.

Amphastar:The company develops, manufactures, and markets generic and proprietary injectable, inhalation, and intranasal products, as well as insulin active pharmaceutical ingredient. The company is focused on expanding its portfolio of generics and biosimilars. Currently, the company has five generic approvals under review with the FDA. It is also developing three biosimilar drugs and seven generic drugs with a market size of approximately $23 billion. It is also developing multiple proprietary products with injectable and intranasal dosage forms. Its products have shown mixed impact of COVID-19 where demand for some drugs has been hurt while that of others has risen. However, full-year sales were up 20% year over year in the first half of 2021 amid COVID-19 related restrictions. With the impact of COVID-19 anticipated to recede in the second half of 2021, the company may have a promising second half.

The company has a Zacks Rank of 3.The consensus estimate for 2021 has been stable at $1.02 over the past 30 days.