3 Generic Drug Stocks to Watch Amid Improving Market Prospects
Despite the top line suffering due to macroeconomic headwinds like price erosion, the rising volume of existing generic drugs continues to benefit generic drugmakers like Dr. Reddy’s Laboratories RDY, Amphastar Pharmaceuticals AMPH and Sol-Gel Technologies SLGL. This trend is expected to continue in subsequent quarters.
To further expand market share, the generic drugmakers have also started exploring strategic collaboration with regional and global players to expand their market share. These drugmakers are also focusing on new product launches or existing products with high gross margins to support their top and 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 generic and biosimilar categories based on their composition. The generic segment is controlled by a few large drugmakers and generic units of large pharma companies. Several smaller companies also develop generic versions of branded drugs, significantly cheaper than the original drugs. Competition in this segment is stiff, resulting in thin margins for manufacturing companies. A few companies in this industry have some branded drugs in their portfolio, helping 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 provided significant opportunities for generic drugmakers in 2023. Several companies like Amgen and Sandoz have launched their Humira-biosimilars this year. Many other companies are also expected to launch their 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 competes with 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, drugmakers aim for the medicines' first-to-file (FTF) status. 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 significantly.
Patent Settlements: The successful resolution of patent challenges continues to be an essential catalyst for the growth of generic drugmakers. 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, 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 the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #76, which places it in the top 30% 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 and S&P 500
The Zacks Medical – Generic Drugs industry has outperformed the broader Zacks Medical sector and the S&P 500 Index in the past year.
The industry has risen 10.3% over this period against the broader sector’s 13.7% fall. Meanwhile, the S&P 500 has risen 8.1% in the said time frame.
One-Year Price Performance
Image Source: Zacks Investment Research
The Industry's Current Valuation
Based on 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 8.58X compared with the S&P 500’s 17.50X and the Zacks Medical sector’s 20.88X.
Over the last five years, the industry has traded as high as 13.31X, as low as 7.02X, and at the median of 9.26X, 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
Dr. Reddy's Laboratories: The company enjoys a strong position in the generics market. During the second quarter of fiscal 2024, Dr. Reddy's witnessed higher North America and Europe revenues due to growing momentum in its core portfolio and favorable forex, which more than helped mitigate the impact of pricing erosion. North America sales registered a 13% year-over-year growth, while Europe sales grew 26%.
Dr. Reddy’s also launched four new products in North America during the same quarter. As of Sep 2023-end, cumulatively, 79 generic filings were pending approval from the FDA (75 abbreviated New Drug Applications [ANDAs] and four new drug applications).
The consensus estimate for fiscal 2024 (year ending March 2024) earnings has increased from earnings per share of $3.79 to $3.80 in the past 30 days. The stock has gained 25.7% year to date.
Dr. Reddy's has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: RDY
Image Source: Zacks Investment Research
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. As of Jun 2023-end, the company has three generic drugs under review with the FDA. It is also developing three biosimilar and six generic drugs with significant market opportunities. The company is also focusing on the sale of higher-margin products, including new product launches of vasopressin and ganirelix. It is also trying to expand market share for its glucagon generic products following the discontinuation of branded glucagon products by competitors Lilly and Novo Nordisk.
The stock has surged 59.3% year to date. The consensus estimate for 2023 earnings has remained consistent at $2.72 per share in the past 30 days. Amphastar carries a Zacks Rank #3 (Hold).
Price & Consensus: AMPH
Image Source: Zacks Investment Research
Sol-Gel: It is a dermatology company engaged in developing novel and generic topical drug products to treat skin diseases. Sol-Gel’s recently approvedtwo proprietary skin treatment drugs have shown robust uptake. It also sold its rights to certain generic collaborative programs for which it will be eligible to receive royalties. As of Jun 2023-end, Sol-Gel believes that its cash resources will fund its operational and capital expenditure requirements into second-half 2025.
The consensus estimate for 2023 loss per share has remained consistent at a loss of $1.10 per share over the past 30 days. The stock has plunged 70.8% year to date. Sol-Gel carries a Zacks Rank #3.
Price & Consensus: SLGL
Image Source: Zacks Investment Research
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Dr. Reddy's Laboratories Ltd (RDY) : Free Stock Analysis Report
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Sol-Gel Technologies Ltd. (SLGL) : Free Stock Analysis Report
