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Generic Drugmakers Tumble as Perrigo Discloses DoJ Search

Arpita Dutt

Generic drugmakers saw their shares tumbling yesterday following news that search warrants were executed at the corporate offices of Perrigo Company plc PRGO in connection with an ongoing investigation by the U.S. Department of Justice (DoJ) Antitrust Division. The investigation is regarding drug pricing in the pharma industry.

Perrigo’s shares were down 5% on the news. Year-to-date, the company has underperformed the Zacks-categorized Medical Products industry with shares declining 13.1% while the industry is up 15.4%.

Generic Companies under Drug Pricing Heat

While branded drugmakers have been under focus for quite some time due to the drug pricing controversy, generic drugmakers have also fallen under the ambit of drug pricing scrutiny with the DoJ investigating price fixing. Generic drugs are basically cheaper copy-cat versions of branded drugs that have lost exclusivity. They are sold at huge discounts to the branded drugs and usually capture major segments of the branded drug’s market immediately after launch. Generics save consumers and the healthcare system billions of dollars annually as they introduce competition into a market where none previously existed.

However, over the years, the pricing dynamic for a large number of generic drugs changed with the prices of some drugs skyrocketing for no apparent reason.

In 2014, Sen. Bernie Sanders and Rep. Elijah E. Cummings had called on the Obama administration to address “staggering increases” in generic drug prices. The lawmakers had pointed out that the price hikes would not only affect consumers, hospitals and home health agencies, they would pressurize the budgets of Medicare, Medicaid, the Department of Defense and the Department of Veterans Affairs.

According to a report issued by the U.S. Government Accountability Office (GAO) in 2016, more than 300 established generic drugs had an extraordinary price increase from 2010 to 2015 with these increases moderating generic drug price declines.

Although generic drug manufacturers attributed the significant price increases to several factors like industry consolidation, FDA-mandated plant closures, or elimination of unprofitable generic drug product lines, the investigation indicates possible collusion among generic drug competitors as the main reason behind this.

Quite a few generic companies have disclosed in SEC filings that they received subpoenas from the Antitrust Division seeking information relating to the marketing, pricing, and sale of certain generic products as well as any communications with competitors about such products. Some also said that search warrants were executed.

Impact on Stocks

Teva Pharmaceutical Industries Limited TEVA, Mylan N.V. MYL, Impax Laboratories, Inc. IPXL and Endo International plc ENDP were among the generic stocks that saw their shares slide yesterday. While Teva and Mylan were down 4.3% and 2.7%, respectively, Impax and Endo lost 6.3% and 6.5%, respectively.

Lannett Company, Inc.’s LCI shares also declined yesterday though this was mainly due to the company’s earnings results.

Both Teva and Mylan are Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investigation Will Remain An Overhang

Given the increasing focus on drug pricing, healthcare investors will remain jittery and the DoJ antitrust probe will remain an overhang for generic drugmakers. YTD, the Zacks-categorized Medical-Generic Drugs industry has underperformed the S&P 500 with the industry declining 1.1% compared to the overall market gain of 7.1%.

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Perrigo Company (PRGO): Free Stock Analysis Report
Endo International PLC (ENDP): Free Stock Analysis Report
Lannett Co Inc (LCI): Free Stock Analysis Report
Impax Laboratories, Inc. (IPXL): Free Stock Analysis Report
Teva Pharmaceutical Industries Limited (TEVA): Free Stock Analysis Report
Mylan N.V. (MYL): Free Stock Analysis Report
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