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3 Generic Drug Stocks to Watch Amid COVID-Related Recovery

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Generic drugmakers are likely to face some residual impact of the COVID-19 pandemic during the first half of 2021. The severity of impact had declined during the second half of 2020. Meanwhile, pricing pressure in North American and European markets has stabilized. Launch of new products has driven revenues of major generic drugmakers higher, which will likely continue in 2021. Companies including Bausch Health (BHC), Dr. Reddy's Laboratories (RDY) and Amphastar Pharmaceuticals (AMPH), are poised to beat the COVID-19 challenge on the back of gradual recovery of economies in some countries, new product launches and other 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. 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 helps them tap a higher-margin market. A prominent stock in this industry is Teva (TEVA).

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 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. 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.

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. However, the pricing environment showed signs of stabilization in 2020. Price stabilization along with the launch of new generic/biosimilar products has strengthened businesses of major generic drugmakers amid the coronavirus pandemic. However, the coronavirus crisis may drive costs of materials higher for industry players.

Patent Settlements: Successfully resolving patent challenges continues to be an important catalyst for growth of generic drugmakers as these can lead to new 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 Bullish 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 #95, which places it in the top 37% of the 254 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.

However, the industry’s earnings estimates for the current year have gone down 14.5%, since April 2020.

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 S&P 500 but Beats Sector

The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector but lagged the S&P 500 Index so far this year.

The industry has gained 1.8% over this period against the broader sector’s 3.1% decrease. Meanwhile, the S&P 500 has risen 10.5% in the said time frame.

Year-to-Date 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 1.07X compared with the S&P 500’s 4.78X and the Zacks Medical sector’s 2.65X.

Over the last five years, the industry has traded as high as 1.57X, as low as 0.75X, and at the median of 1.04X, as the charts below show.

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


3 Generic Drug Stocks to Keep an Eye On

Dr. Reddy's Laboratories: The company enjoys a strong position in the generics market. During the last four quarters, the company is estimated to have launched approximately 30 new products in North America. Approval of new generics should further bolster its portfolio. The company is also working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology. Moreover, the company is divesting non-core assets to channelize its sources to increase profitability. 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 risen from $2.43 to $2.47 over the past 30 days. The company has a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bausch Health: The company develops, manufactures and markets a wide array of branded, generic and branded generic pharmaceuticals, over-the-counter (OTC) products. The recent drug approvals should fuel the top line. Moreover, the company’s results in the second half of 2020 demonstrated recovery from the COVID-19 impact.

The consensus estimate for 2021 has been stable at $4.91 per share over the past 30 days. The company has a Zacks Rank #3. The stock has gained 44% so far this year.

Amphastar: The company develops, manufactures, and markets generic and proprietary injectable, inhalation, and intranasal products, as well as insulin active pharmaceutical ingredient. The company is developing several generic drugs and a few are under review with the FDA. Its products have shown mixed impact of COVID-19 where demand of some drugs has been hurt while that of others has risen. However, full-year sales were up year over year in 2020 amid COVID-19 related restrictions. With the impact of COVID-19 anticipated to recede in 2021, the company may have a promising year going forward.

The company has a Zacks Rank of 3. The consensus estimate for 2021 has decreased from $1.08 per share to 98 cents over the past 30 days. The stock has declined 14.9% so far this year.

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