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3 Generic Drug Stocks to Watch Amid COVID-Induced Uncertainty

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Generic drugmakers focusing primarily on the U.S. and European markets continue to reel under the adverse impact of the COVID-19 pandemic. Although pricing pressure in North American markets has stabilized, it continues to impact sales of these companies. However, launch of new products helped offset loss in sales to some extent. Meanwhile, generic drugmakers are witnessing a gradual recovery in market demand across India, Russia and other markets due to lower COVID-19 related disruptions compared to western markets. However, the rise in daily new cases in the United States and Europe does not bode well.

Nonetheless, some companies from the generic industry are poised to beat the COVID-19 challenge on the back of gradual recovery of economies in some countries, new product launches and other macro factors. These companies include Bausch Health (BHC), Viatris (VTRS), and Dr. Reddy's Laboratories (RDY). These companies have given industry-beating returns so far this year and are expected to continue the momentum.

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 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 Teva (TEVA).

3 Trends Shaping the Future of the Generic Drugs Industry

Loss of Patent Exclusivity of Branded Drugs:Generic drug companies mainly bank 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. Meanwhile, patent litigations increase costs.

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 part 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 Gloomy Prospects

The Zacks Medical – Generic Drugs industry is a small 22-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 #178, which places it in the bottom 30% 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2019, the industry’s earnings estimates for the current year have gone down 10.7%.

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 0.1% over this period against the broader sector’s 1.8% increase and S&P 500’s rise of 12.7%.

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 8.81X compared with the S&P 500’s 22.5X and the Zacks Medical sector’s 22.83X.

Over the last five years, the industry has traded as high as 10.53X, as low as 5.91X, and at the median of 8.13X, as the chart below shows.

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. In the second quarter of 2020, the company launched nine 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 pricing pressure since the last few quarters.

In the last three months, the company’s stock price has risen 10.5%. The consensus estimate for fiscal 2021 earnings has risen from $1.90 to $2.07 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 third-quarter results demonstrated recovery from the COVID-19 impact.

The consensus estimate for 2020 has increased from earnings of $3.63 per share to $3.72 per share over the past 30 days. The company has a Zacks Rank #3. The stock has gained 16.7% in the past three months.

Viatris: The company is a newly formed entity through merger of Pfizer’s generic unit, Upjohn and Mylan completed in November 2020. Viatris will expand the geographic reach of Mylan’s existing broad product portfolio and future pipeline — including significant investments in complex generics and biosimilars — into new growth markets where Upjohn has existing sales infrastructure and local market expertise. With brands like EpiPen, Lipitor and Viagra in its portfolio, the company expects to generate revenues between $19 billion and $20 billion, annually.

The company has a Zacks Rank of 3. The stock has gained 10% in the past three months. The consensus estimate for 2020 has moved up from earnings of $4.47 per share to $4.66 per share over the past 30 days.

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Viatris Inc. (VTRS) : Free Stock Analysis Report
Teva Pharmaceutical Industries Ltd. (TEVA) : Free Stock Analysis Report
Dr. Reddys Laboratories Ltd (RDY) : Free Stock Analysis Report
Bausch Health Cos Inc. (BHC) : Free Stock Analysis Report
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