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Generic Drugs Industry Turns the Corner on Price Stabilization

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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. A prominent stock in this industry is Mylan.

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 has shown signs of stabilization in 2019. Price stabilization along with product launches is strengthening businesses of major generic drugmakers. Meanwhile, consolidation among customers in the generics industry is intensifying competition while patent litigations are bumping up expenses.
     
  • 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.
     
  • Generic drugs aggravate competition in the market as they slash prices significantly and are 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 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.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Medical – Generic Drugs industry is a small 26-stock group which is housed within the broader Zacks Medical sector. It carries a Zacks Industry Rank #105, which places it in the top 42% 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 declined 0.2% over this period against the broader sector and S&P 500’s gain of 1.5% and 22%, respectively. However, the industry has performed impressively in the past three months.

Year-to-Date Price Performance

Industry’s Current Valuation

On the basis of forward 12 months price-to-sales ratio (P/S F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 1.46 compared with the S&P 500’s 3.24 and the Zacks Medical sector’ 2.67.

Over the last five years, the industry has traded as high as 4.31X, as low as 1.14X, and at the median of 1.98X, as the chart below shows.

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

 

Bottom Line

Stable prices for generic drugs will help industry players enjoy steady revenues in the days ahead. An encouraging performance so far in 2019 has helped industry players nearly maintain their revenue guidance for the year. Moreover, product launches are bringing in significant revenues. This trend is expected continue as several products were introduced in the second half of 2019 and are also slated to be launched soon. Moreover, launch of biosimilar drugs, which especially target oncology indications, will boost revenues.

However, 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 brand 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.

Meanwhile, some companies have a huge debt burden, which may compel them to keep away from acquisitions and deals. Moreover, pipeline or regulatory setbacks will delay generic launches, which may deal a severe blow to prospects.

In the Generic Drug indutsry, no stock currently sports a Zacks Rank #1 (Strong Buy), while five 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.

Here we present three stocks from the industry with a favorable Zacks Rank that investors may consider adding to their portfolios.

Bausch Health Cos Inc. BHC):This Canadian drugmaker has seen a 46.2% increase in its share price so far this year.  The Zacks Consensus Estimate for this #2 Ranked stock's 2019 and 2020 earnings have been revised 4.1% and 2.5%, respectively, upward over the past 30 days.

Price and Consensus: BHC

Zynerba Pharmaceuticals, Inc. ZYNE): The Zacks Consensus Estimate for this Devon, PA-baseddrugmaker’s loss per share for 2019 and 2020 has narrowed 10.3% and 5.4%, respectively, over the past 60 days. Zynerba has a Zacks Rank #2. The stock has rallied 119.9% so far this year.

Price and Consensus: ZYNE

Akorn, Inc. ): Shares of this Lare Forest, IL-baseddrugmaker has gained 23.6% so far this year. The Zacks Consensus Estimate for this Zacks Rank #2 company’s loss per share for 2019 has narrowed 35.3% and earnings per share has moved up 11.5% for 2020, over the past 30 days.

Price and Consensus: AKRX

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