Yahoo Finance 3 Generic Drug Stocks to Watch Amid Macro Headwinds
Despite rising volume of existing generic drugs, generic drugmakers continue to suffer due to macroeconomic headwinds like price erosion and inflation. Consequently, generic drugmakers like Amphastar Pharmaceuticals AMPH, Dr. Reddy’s Laboratories RDY and Teva Pharmaceutical TEVA have started focusing on new product launches or products with high gross margins to support the top and the bottom line.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents, providing exclusivity to 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 drugmakers and generic units of large pharma companies. However, several smaller companies also develop generic versions of branded drugs, which are significantly cheaper than original drugs. Competition in this segment is stiff, resulting in thin margins for 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 to approve 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 in 2023. Several companies like Amgen, Biogen and Novartis have already received FDA approvals for a Humira-biosimilar. In January 2023, Amgen commercially launched Amjevita, the first U.S. biosimilar to Humira biosimilar. Like Amgen, many other companies are also expected to launch their own Humira biosimilars at various times this year per settlement agreements with AbbVie.
A company may launch an authorized generic version of a branded product, gaining exclusivity over other generic versions of the same drug for several months. Although developing biosimilars is complex, the generic players have already launched a few. These generic drugmakers may have to face litigation to market the generic version of these drugs.
Stiff Competition: The generic drug industry provides stiff competition to the original branded drugs. Once a branded drug loses patent exclusivity and generic versions of the same are available in the market, it induces competition as the competitors set generic prices well below the brand price. The competition among multiple generic drugmakers to market the same drug pulls prices down, benefiting the consumer. As a result, the drugmakers eye for first-to-file (FTF) status for the medicines. The current generic market is already crowded, with many drugmakers having several generic filings pending before the FDA. With several biosimilar drugs set for launch over the next couple of years, the top line of the industry players is likely to improve greatly.
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 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 15-stock group 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 #101, which places it in the top 40% of the 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 looking at the industry’s stock market performance and current valuation.
Industry Outperforms Sector but Underperforms S&P 500
The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector but underperformed the S&P 500 Index in the past year period.
The industry has risen 0.4% over this period against the broader sector’s 8.3% fall. Meanwhile, the S&P 500 has risen 7.0% in the said time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
The Industry's Current Valuation
On the basis of forward 12 months price-to-earnings (P/E F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 8.11X compared with the S&P 500’s 18.68X and the Zacks Medical sector’s 22.62X.
Over the last five years, the industry has traded as high as 13.40X, as low as 7.16X, and at the median of 9.44X, as the charts below show.
Price-to-Earnings Forward Twelve Months (P/E F12M) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
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 three generic drugs under review with the FDA. It is also developing three biosimilar drugs and six generic drugs with significant market opportunity. The company is currently focused on the sale of higher margin products, including new product launches of vasopressin and ganirelix. The company targets to acquire the market share for its glucagon generic product following the discontinuation of branded glucagon products by competitors Lilly and Novo Nordisk. Last month, the company signed an asset purchase agreement to acquire Lilly’s Baqsimi, the first and currently the only nasally administered glucagon for treating severe hypoglycemia in people with diabetes. The transaction is expected to be completed by third-quarter 2023.
The stock has gained 30.4% in the year so far. The consensus estimate for 2023 earnings have been increased by one cent to $2.04 per share in the past 30 days.
Amphastar carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: AMPH
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Dr. Reddy's Laboratories: The company enjoys a strong position in the generics market. During the fourth quarter of fiscal 2023, Dr. Reddy's witnessed higher North America revenues due to the launch of new products, which helped to partially mitigate the impact of pricing erosion. During the same quarter, Dr. Reddy’s also launched six new products in North America. As of Mar 2023-end cumulatively, 86 generic filings were pending approval from the FDA (81 abbreviated New Drug Applications [ANDAs] and five new drug applications). During fourth quarter 2022, the company also registered a 32% year-over-year growth in revenues from India.
The consensus estimate for fiscal 2024 (year ending March 2024) earnings has declined from earnings per share of $3.58 to $3.40 in the past 30 days. The stock has declined 4.2% in the year so far. Dr. Reddy's has a Zacks Rank #3 (Hold).
Price & Consensus: RDY
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Teva: Teva is the world’s largest generic drug company in total and new prescriptions. The company is seeing the continued growth of its new branded drug, Austedo’s prescriptions and market share growth for another newer medicine, Ajovy. Generic revenues are improving in Europe and international markets. With improving operational efficiencies and significant debt reduction, the company may see better growth in a few years. In January, Teva announced that it intends to move forward with its nationwide settlement agreement to resolve opioid-related claims and litigation. Management confirmed that 49 out of 50 states have settled and the sign-on process for the state subdivisions is progressing well. Based on this encouraging support, Teva is hoping to make the first settlement payment in the second half of 2023.
The consensus estimate for 2023 declined from earnings per share of $2.41 to $2.38 in the past 30 days. The stock has declined 5.9% in the year so far. TEVA carries a Zacks Rank #3.
Price & Consensus: TEVA
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Amphastar Pharmaceuticals, Inc. (AMPH) : Free Stock Analysis Report
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