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3 Generic Drug Stocks to Watch Amid Continued Pricing Pressure

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Sales of several generic drug makers are likely to decline in 2022. However, a recovery in demand, especially in the United States and Europe, following the easing of restrictions, can provide some top-line support. Product launches have been driving revenues of major generic drugmakers higher, which will likely continue in 2022. Moreover, approval of more biosimilar products will help generic drugmakers accelerate top-line growth, as biosimilars will likely have less competition due to development complexity leading to higher price realization.

A residual impact of the COVID-19 pandemic is likely to continue for the Medical - Generic Drugs industry in 2022, hurting revenue growth. Although demand for cough and cold products is recovering, uncertainty lingers with the rise in COVID-19 infection cases in some countries. Physical distancing amid strong lockdowns in several parts of China may hurt demand for cough and cold products in the country. Meanwhile, pricing pressure is easing in North American and European markets but it continues to hurt the top line of generic drugmakers. The consolidation of the volume of drugs among different players in this segment is also hurting the top line of individual generic drugmakers.

Companies like Bausch Health (BHC - Free Report) , Amphastar Pharmaceuticals (AMPH - Free Report) and SolGel Technologies (SLGL - Free Report) are poised to beat the COVID-19 challenge on the back of continued demand for their existing products, product launches and other favorable macro factors, including price stabilization.

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 the 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 and may have to wait for several years before being able to launch an approved generic drug. A company may launch an authorized generic version of a branded product, gaining exclusivity for 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 the last two years, it continued to hurt sales of several players during the past few quarters. The trend is likely to continue in 2022 as well. Meanwhile, the launch of generic/biosimilar products should strengthen the businesses of major generic drugmakers amid the coronavirus pandemic. With several biosimilars set for launch in 2022, the top line of the industry players is likely to improve greatly due to the potential of attracting higher prices.

Patent Settlements: The successful resolution of patent challenges continues to be an important catalyst for the growth of generic drugmakers as these can lead to product launches. The 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 Dull Prospects

The Zacks Medical – Generic Drugs industry is a small 17-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 #206, which places it in the bottom 19% of the 253 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.

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 and Sector

The Zacks Medical – Generic Drugs industry has underperformed the broader Zacks Medical sector as well as the S&P 500 Index in the past year.

The industry has declined 40.6% over this period compared with the broader sector’s 19.1% decrease. Meanwhile, the S&P 500 has decreased 1.8% in the said time frame.

One-Year Price Performance

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 0.76X compared with the S&P 500’s 4.01X and the Zacks Medical sector’s 2.09X.

Over the last five years, the industry has traded as high as 1.27X, as low as 0.76X, and at the median of 1.02X, as the charts below show.

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

Industry valuation versus S&P500

Industry valuation versus Medical sector

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. Currently, the company has five generic drugs and one branded product under review with the FDA. It is also developing three biosimilar drugs and eight generic drugs with significant market opportunity. The company plans to launch a new drug, Vasopressin, in the third quarter of 2022. Meanwhile, the sales of several key products demonstrated a recovering trend from the unfavorable impact of COVID-19 during the second half of 2021. We expect the recovery in sales growth momentum to continue in 2022.

The consensus estimate for 2022 has improved from earnings per share of $1.46 to $1.62 over the past 60 days.

Amphastar carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Consensus chart AMPH

Bausch Health: The company develops, manufactures and markets a wide array of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products. The new drugs should continue to fuel the top line. Several key products gained market share in 2021, which is likely to improve revenues in 2022. The company’s plans to divest its eye health and Solta Medical businesses into a separate publicly trading company through an initial public offering will enable it to pay down its huge debt levels.

The consensus estimate for 2022 has been stable at $4.50 per share over the past 60 days. The company has a Zacks Rank #3.

Price Consensus chart BHC

SolGel: It is a dermatology company engaged in developing generic topical drug products for the treatment of skin diseases. The company recently received FDA approval for two proprietary skin treatment drugs. It also sold its rights to certain generic collaborative programs. The company believes that its cash resources will enable funding of operational and capital expenditure requirements through the end of 2023.

The consensus estimate for 2022 earnings has narrowed from 75 cents to 63 cents over the past 60 days. The company has a Zacks Rank #3.

Price Consensus chart SLGL

In-Depth Zacks Research for the Tickers Above

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Amphastar Pharmaceuticals, Inc. (AMPH) - free report >>

Bausch Health Cos Inc. (BHC) - free report >>

Sol-Gel Technologies Ltd. (SLGL) - free report >>

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