Product launches have been driving revenues of major generic drugmakers higher, which will likely continue in 2022. Companies like Dr. Reddy's Laboratories, Teva Pharmaceutical and Amphastar Pharmaceuticals are poised to beat the COVID-19 challenge on the back of 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. Several smaller companies also develop generic versions of branded drugs. Generic 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, helping them 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 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 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. Moreover, approval to more biosimilar products will help generic drugmakers accelerate their top-line growth, as biosimilars will likely have less competition due to development complexity leading to higher price realization.
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 has hurt sales of several players so far in 2021.
Meanwhile, the launch of generic/biosimilar products should strengthen 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 their potential to attract higher prices.
Patent Settlements: Successful resolution of patent challenges continues to be an important catalyst for the 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 Sunny 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 #108, which places it in the top 43% 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 and the S&P 500 Index in the past year.
The industry has declined 24% over this period compared with the broader sector’s 10.7% decrease. Meanwhile, the S&P 500 has risen 29% in the said time frame.
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 1.02X compared with the S&P 500’s 5.19X and the Zacks Medical sector’s 2.73X.
Over the last five years, the industry has traded as high as 1.49X, as low as 0.64X, and at the median of 1.1X.
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. Amphastar is focused on expanding its portfolio of generics and biosimilars. Currently, the company has five generic approvals and one branded product under review with the FDA. It is also developing three biosimilar drugs and 13 generic drugs with significant market opportunities.
Amphastar products have shown a mixed impact of COVID-19 where demand for some drugs has been hurt while that of others has risen. Total sales were up almost 25% year over year in the first nine months of 2021 amid COVID-19 related restrictions. Although COVID-19 infection cases are rising rapidly, the company’s commercial portfolio seems insulated as evident from its performance in the first nine months of 2021. We expect strong sales growth momentum to continue in 2022.
The consensus estimate for AMPH’s 2022 earnings per share has improved from $1.42 to $1.46 over the past 60 days.
Amphastar sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Teva: The company is a leading generic drugmaker globally, generating the majority of its revenues from the United States and Europe. During the third quarter, lower sales from generic drugs in North America were offset by higher sales in Europe. Teva also develops, manufactures and markets an array of branded and over-the-counter (OTC) products.
Although rising COVID-19 infection cases globally may hamper fourth-quarter sales, stabilizing generic drug prices will help boost Teva’s top line once cases start to recede amid the availability of COVID-19 vaccines and oral drugs. Moreover, the company’s two key branded products — Ajovy and Austedo — are also driving Teva’s top line with encouraging year-over-year growth in sales.
The consensus estimate for 2022 has been stable at earnings of $2.68 per share over the past 60 days. The company has a Zacks Rank #3 (Hold).
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.
In the second quarter of fiscal 2022, Dr. Reddy's witnessed healthy growth across its global generics markets, especially in Europe and India. The company’s COVID portfolio and new product launches have been driving the annual growth. We expect the trend to continue going forward.
Dr. Reddy's is also working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology. 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 $2.53 to $2.41 over the past 60 days. Dr. Reddy's has a Zacks Rank #3.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Dr. Reddy's Laboratories, Teva Pharmaceutical and Amphastar Pharmaceuticals
For Immediate Release
Chicago, IL – December 30, 2021 – Today, Zacks Equity Research discusses Generic Drugs, including Dr. Reddy's Laboratories Limited (RDY - Free Report) , Teva Pharmaceutical Industries Limited (TEVA - Free Report) and Amphastar Pharmaceuticals, Inc. (AMPH - Free Report) .
Link: https://www.zacks.com/commentary/1844777/3-generic-drug-stocks-to-watch-amid-stabilizing-pricing-pressure
Product launches have been driving revenues of major generic drugmakers higher, which will likely continue in 2022. Companies like Dr. Reddy's Laboratories, Teva Pharmaceutical and Amphastar Pharmaceuticals are poised to beat the COVID-19 challenge on the back of 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. Several smaller companies also develop generic versions of branded drugs. Generic 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, helping them 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 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 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. Moreover, approval to more biosimilar products will help generic drugmakers accelerate their top-line growth, as biosimilars will likely have less competition due to development complexity leading to higher price realization.
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 has hurt sales of several players so far in 2021.
Meanwhile, the launch of generic/biosimilar products should strengthen 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 their potential to attract higher prices.
Patent Settlements: Successful resolution of patent challenges continues to be an important catalyst for the 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 Sunny 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 #108, which places it in the top 43% 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 and the S&P 500 Index in the past year.
The industry has declined 24% over this period compared with the broader sector’s 10.7% decrease. Meanwhile, the S&P 500 has risen 29% in the said time frame.
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 1.02X compared with the S&P 500’s 5.19X and the Zacks Medical sector’s 2.73X.
Over the last five years, the industry has traded as high as 1.49X, as low as 0.64X, and at the median of 1.1X.
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. Amphastar is focused on expanding its portfolio of generics and biosimilars. Currently, the company has five generic approvals and one branded product under review with the FDA. It is also developing three biosimilar drugs and 13 generic drugs with significant market opportunities.
Amphastar products have shown a mixed impact of COVID-19 where demand for some drugs has been hurt while that of others has risen. Total sales were up almost 25% year over year in the first nine months of 2021 amid COVID-19 related restrictions. Although COVID-19 infection cases are rising rapidly, the company’s commercial portfolio seems insulated as evident from its performance in the first nine months of 2021. We expect strong sales growth momentum to continue in 2022.
The consensus estimate for AMPH’s 2022 earnings per share has improved from $1.42 to $1.46 over the past 60 days.
Amphastar sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Teva: The company is a leading generic drugmaker globally, generating the majority of its revenues from the United States and Europe. During the third quarter, lower sales from generic drugs in North America were offset by higher sales in Europe. Teva also develops, manufactures and markets an array of branded and over-the-counter (OTC) products.
Although rising COVID-19 infection cases globally may hamper fourth-quarter sales, stabilizing generic drug prices will help boost Teva’s top line once cases start to recede amid the availability of COVID-19 vaccines and oral drugs. Moreover, the company’s two key branded products — Ajovy and Austedo — are also driving Teva’s top line with encouraging year-over-year growth in sales.
The consensus estimate for 2022 has been stable at earnings of $2.68 per share over the past 60 days. The company has a Zacks Rank #3 (Hold).
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.
In the second quarter of fiscal 2022, Dr. Reddy's witnessed healthy growth across its global generics markets, especially in Europe and India. The company’s COVID portfolio and new product launches have been driving the annual growth. We expect the trend to continue going forward.
Dr. Reddy's is also working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology. 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 $2.53 to $2.41 over the past 60 days. Dr. Reddy's has a Zacks Rank #3.
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.