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Price Stabilization Leads to Generic Drugs Industry's Recovery
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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 higher, 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 tap a higher-margin market.
Let’s take a look at the industry’s three major themes:
The generic drug industry faces headwinds like competitive and pricing pressure. However, the industry is showing signs of stabilization since the start of 2019. Generic drugmakers showed signs of recovery in the first quarter of the year. Meanwhile, the ongoing consolidation of customers in the generics industry and patent litigations are driving competition and expenses, respectively.
Generic drug companies depend 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, giving them exclusivity of several months over other generic versions of the same drug. Although development of biosimilars is complex, a few companies have already forayed into the segment.
Generic drugs increase competition in the market as they bring down prices significantly and are easily accessible to a wider patient population. Several branded drugs have sales running into billions of dollars. Although generics have thin margins, their high sales volumes help generic drugmakers reap profits. Meanwhile, the government is focusing on raising competition in the pharma space with faster approval to generic/biosimilars. This will boost the prospects of these companies as many blockbusters drugs are set to lose patent protection in the coming years.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Medical – Generic Drugs industry is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #102, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. 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.
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 risen 3.9% over this period compared with the broader sector and S&P 500’s rally of 8% and 18.1%, respectively in the said time frame.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 1.52 compared with the S&P 500’s 3.35 and the Zacks Medical sector's 3.
Over the last five years, the industry has traded as high as 5.27X, as low as 1.17X, and at the median of 2.39X, as the chart below shows.
Price-to-Sales Trailing Twelve Months (TTM) Ratio
Bottom Line
Stabilization of prices in the generics market in the United States has benefited generic drug makers in the first quarter of 2019. Stable prices for generic drugs will help the industry players to enjoy steady revenues going forward. A strong first-quarter performance allowed the industry players to maintain their revenue guidance for the year. Moreover, product launches are expected to bring in significant revenues for these drugmakers in 2019.
However, competition in the generic market is intensifying. The market is already crowded and faster approval by the FDA will bring more drugs into the fray. The first company to launch a generic version once a brand product loses exclusivity is likely to capture significant market share. Hence, the companies with strong pipeline of generic drugs and a large portfolio of abbreviated new drug applications are likely to reap profits.
Meanwhile, some companies have a huge debt burden, which may compel them to avoid prudent acquisitions and strategic deals. Moreover, pipeline or regulatory setbacks will delay generic launches, which may be a severe blow to the companies’ prospects.
In the Generic Drugs universe, no stock currently sports a Zacks Rank #1 (Strong Buy), while three companies have a Zacks Rank #2 (Buy). Most of these companies have witnessed positive earnings estimate revisions in the past 60 days.
Bausch Health Cos Inc. (BHC - Free Report) ): This Canadian drugmaker has seen 39% increase in its share price so far this year. The Zacks Consensus Estimate for this #2 Ranked stock's 2019 earnings has been revised 6.3% upward over the past 60 days.
Price and Consensus: BHC
Adamas Pharmaceuticals, Inc. ): The Zacks Consensus Estimate for this Emeryville, CA-based drugmaker’s loss per share for 2019 has narrowed 8.9% over the past 60 days. Adamas has a Zacks Rank #2. However, the stock has declined 30% so far this year.
Price and Consensus: ADMS
Acasti Pharma, Inc. (ACST - Free Report) ): Shares of this Canada-based drugmaker has surged 63.5% so far this year. However, the Zacks Consensus Estimate for this Zacks Rank #2 company’s loss per share for 2019 has widened 20% over the past 60 days.
Price and Consensus: ACST
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Price Stabilization Leads to Generic Drugs Industry's Recovery
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 higher, 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 tap a higher-margin market.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Medical – Generic Drugs industry is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #102, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. 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.
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 risen 3.9% over this period compared with the broader sector and S&P 500’s rally of 8% and 18.1%, respectively in the said time frame.
Year-to-Date Price Performance
Industry’s Current Valuation
On the basis of trailing twelve months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 1.52 compared with the S&P 500’s 3.35 and the Zacks Medical sector's 3.
Over the last five years, the industry has traded as high as 5.27X, as low as 1.17X, and at the median of 2.39X, as the chart below shows.
Price-to-Sales Trailing Twelve Months (TTM) Ratio
Bottom Line
Stabilization of prices in the generics market in the United States has benefited generic drug makers in the first quarter of 2019. Stable prices for generic drugs will help the industry players to enjoy steady revenues going forward. A strong first-quarter performance allowed the industry players to maintain their revenue guidance for the year. Moreover, product launches are expected to bring in significant revenues for these drugmakers in 2019.
However, competition in the generic market is intensifying. The market is already crowded and faster approval by the FDA will bring more drugs into the fray. The first company to launch a generic version once a brand product loses exclusivity is likely to capture significant market share. Hence, the companies with strong pipeline of generic drugs and a large portfolio of abbreviated new drug applications are likely to reap profits.
Meanwhile, some companies have a huge debt burden, which may compel them to avoid prudent acquisitions and strategic deals. Moreover, pipeline or regulatory setbacks will delay generic launches, which may be a severe blow to the companies’ prospects.
In the Generic Drugs universe, no stock currently sports a Zacks Rank #1 (Strong Buy), while three companies have a Zacks Rank #2 (Buy). Most of these companies have witnessed positive earnings estimate revisions in the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Bausch Health Cos Inc. (BHC - Free Report) ): This Canadian drugmaker has seen 39% increase in its share price so far this year. The Zacks Consensus Estimate for this #2 Ranked stock's 2019 earnings has been revised 6.3% upward over the past 60 days.
Price and Consensus: BHC
Adamas Pharmaceuticals, Inc. ): The Zacks Consensus Estimate for this Emeryville, CA-based drugmaker’s loss per share for 2019 has narrowed 8.9% over the past 60 days. Adamas has a Zacks Rank #2. However, the stock has declined 30% so far this year.
Price and Consensus: ADMS
Acasti Pharma, Inc. (ACST - Free Report) ): Shares of this Canada-based drugmaker has surged 63.5% so far this year. However, the Zacks Consensus Estimate for this Zacks Rank #2 company’s loss per share for 2019 has widened 20% over the past 60 days.
Price and Consensus: ACST
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +98%, +119% and +164% in as little as 1 month. The stocks in this report could perform even better.
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