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3 Generic Drug Stocks to Watch Amid Challenging Market Prospects
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A major metric of competition in generic business is pricing, which continues to face downward pressure. Apart from intense regulatory pressure on drug quality and manufacturing, the generic drugs industry also faces cut-throat competition stemming from the presence of numerous drugmakers. The only respite available to such drugmakers is a first-to-file or first-to-market opportunity wherein they enjoy exclusivity for a limited period.
Companies like Teva Pharmaceuticals (TEVA - Free Report) , Dr. Reddy’s Laboratories (RDY - Free Report) and Viatris (VTRS - Free Report) are poised to beat the macroeconomic headwinds on the back of continued demand for their existing products, new product launches and cost optimization policies.
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 have their generic or biosimilar version of branded drugs approved, which have lost patent protection. Patent loss of blockbuster drugs likeAbbVie’s Humira provided significant opportunities for generic drugmakers last year. Several companies like Amgen and Sandoz have already launched their Humira-biosimilars.
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 competitors set generic prices well below the price of the branded drugs. 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 these firms 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 Gloomy Prospects
The Zacks Medical – Generic Drugs industry is a small 12-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 #160, which places it in the bottom 36% 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 Outpaces 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.
The industry has risen 21.2% over this period against the broader sector’s 2.6% fall. Meanwhile, the S&P 500 has risen 22.3% 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 9.29X compared with the S&P 500’s 20.53X and the Zacks Medical sector’s 22.26X.
Over the last five years, the industry has traded as high as 12.39X, as low as 6.25X, and at the median of 8.65X, 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
Teva: Teva is the world’s largest generic drug company. The company enjoys a leading position in the United States, which is the world’s largest generic market. Teva commands a share of around 8% in the U.S. generic market. Around 50% of Teva’s generics business is outside the United States, in Europe, and in emerging markets, where the company is seeing continued growth. Teva regularly pursues first-to-file and first-to-market opportunities and seeks approval for complex generics, which are likely to face less competition. This should help the company maintain its strong position in the global generics market. Teva expects to launch 13 complex generic products between 2024 and 2025. Management is currently focused on saving costs and improving margins through the optimization of operations for efficiency while also lowering the debt on its balance sheet.
The consensus estimate for 2024 has remained consistent at $2.37 per share in the past 60 days. The stock has risen 55.2% in the past year.
Dr. Reddy's Laboratories: The India-based company enjoys a strong position in the U.S. generics market. Dr. Reddy’s also markets its products in countries like the U.K., Germany, Russia, Venezuela, Romania and South Africa. To ensure steady growth in these markets, management is focused on accelerating the development of its complex generics portfolio. RDY is also making efforts to ensure that the approvals come in time through appropriate risk management and proactive measures to deal with possible deficiencies.
As of December 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 the fiscal 2025 (year ending March 2025) has increased from earnings per share of $3.92 to $3.96 in the past 60 days. The stock has gained 18.3% in the past year. Dr. Reddy's has a Zacks Rank #3.
Price & Consensus: RDY
Image Source: Zacks Investment Research
Viatris: Viatris’ generics business includes diversified product forms, such as extended-release oral solids, injectables, transdermals and topicals, that have been performing than than expectations, driven by higher demand in North America. The launch of generic Restasis and generic Revlimid and the full FDA approval of generic Symbicort (Breyna) have boosted the company’s top line and should accelerate growth. While the company’s generics business was flat in 2023, it is expected to show a slight improvement in 2024. The company’s branded business comprises two-thirds of its portfolio, driven by brands like Yupelri, Lipitor and Dona.
The stock has risen 12.9% in the past year. The consensus estimate for 2024 earnings per share has risen from $2.79 to $2.80 in the past 60 days. Viatris carries a Zacks Rank #3.
Price & Consensus: VTRS
Image Source: Zacks Investment Research
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3 Generic Drug Stocks to Watch Amid Challenging Market Prospects
A major metric of competition in generic business is pricing, which continues to face downward pressure. Apart from intense regulatory pressure on drug quality and manufacturing, the generic drugs industry also faces cut-throat competition stemming from the presence of numerous drugmakers. The only respite available to such drugmakers is a first-to-file or first-to-market opportunity wherein they enjoy exclusivity for a limited period.
Companies like Teva Pharmaceuticals (TEVA - Free Report) , Dr. Reddy’s Laboratories (RDY - Free Report) and Viatris (VTRS - Free Report) are poised to beat the macroeconomic headwinds on the back of continued demand for their existing products, new product launches and cost optimization policies.
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 have their generic or biosimilar version of branded drugs approved, which have lost patent protection. Patent loss of blockbuster drugs likeAbbVie’s Humira provided significant opportunities for generic drugmakers last year. Several companies like Amgen and Sandoz have already launched their Humira-biosimilars.
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 competitors set generic prices well below the price of the branded drugs. 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 these firms 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 Gloomy Prospects
The Zacks Medical – Generic Drugs industry is a small 12-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 #160, which places it in the bottom 36% 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 Outpaces 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.
The industry has risen 21.2% over this period against the broader sector’s 2.6% fall. Meanwhile, the S&P 500 has risen 22.3% 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 9.29X compared with the S&P 500’s 20.53X and the Zacks Medical sector’s 22.26X.
Over the last five years, the industry has traded as high as 12.39X, as low as 6.25X, and at the median of 8.65X, 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
Teva: Teva is the world’s largest generic drug company. The company enjoys a leading position in the United States, which is the world’s largest generic market. Teva commands a share of around 8% in the U.S. generic market. Around 50% of Teva’s generics business is outside the United States, in Europe, and in emerging markets, where the company is seeing continued growth. Teva regularly pursues first-to-file and first-to-market opportunities and seeks approval for complex generics, which are likely to face less competition. This should help the company maintain its strong position in the global generics market. Teva expects to launch 13 complex generic products between 2024 and 2025. Management is currently focused on saving costs and improving margins through the optimization of operations for efficiency while also lowering the debt on its balance sheet.
The consensus estimate for 2024 has remained consistent at $2.37 per share in the past 60 days. The stock has risen 55.2% in the past year.
TEVA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: TEVA
Image Source: Zacks Investment Research
Dr. Reddy's Laboratories: The India-based company enjoys a strong position in the U.S. generics market. Dr. Reddy’s also markets its products in countries like the U.K., Germany, Russia, Venezuela, Romania and South Africa. To ensure steady growth in these markets, management is focused on accelerating the development of its complex generics portfolio. RDY is also making efforts to ensure that the approvals come in time through appropriate risk management and proactive measures to deal with possible deficiencies.
As of December 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 the fiscal 2025 (year ending March 2025) has increased from earnings per share of $3.92 to $3.96 in the past 60 days. The stock has gained 18.3% in the past year. Dr. Reddy's has a Zacks Rank #3.
Price & Consensus: RDY
Image Source: Zacks Investment Research
Viatris: Viatris’ generics business includes diversified product forms, such as extended-release oral solids, injectables, transdermals and topicals, that have been performing than than expectations, driven by higher demand in North America. The launch of generic Restasis and generic Revlimid and the full FDA approval of generic Symbicort (Breyna) have boosted the company’s top line and should accelerate growth. While the company’s generics business was flat in 2023, it is expected to show a slight improvement in 2024. The company’s branded business comprises two-thirds of its portfolio, driven by brands like Yupelri, Lipitor and Dona.
The stock has risen 12.9% in the past year. The consensus estimate for 2024 earnings per share has risen from $2.79 to $2.80 in the past 60 days. Viatris carries a Zacks Rank #3.
Price & Consensus: VTRS
Image Source: Zacks Investment Research