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3 Generic Drug Stocks to Watch Amid Improving Market Prospects
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Despite the top line suffering due to macroeconomic headwinds like price erosion, the rising volume of existing and new generic drugs continues to benefit generic drugmakers like Amphastar Pharmaceuticals (AMPH - Free Report) , Teva Pharmaceuticals (TEVA - Free Report) and Viatris (VTRS - Free Report) .
To seek solace from pricing pressure, these generic drugmakers are focused on grasping the opportunity to be the ‘first to market’ their generic drugs. This allows them to enjoy market exclusivity for a limited period and generate profits. These firms are also undertaking cost optimization policies to improve margins and increase the efficiency of available resources.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents expire, providing exclusivity to branded drugs. 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 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 expiry of blockbuster drugs, like AbbVie’s Humira, which happened last year, provided significant opportunities for generic drugmakers like Amgen and Sandoz, who have already launched their respective Humira-biosimilars. Another blockbuster drug set to face patent loss next year is J&J’s Stelara, which is approved in multiple immunology indications.
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. This is advantageous to generic players, especially in the case of complex generics, which require significant R&D investments and expertise compared with traditional generics. These generic drugmakers even have to face litigation to market the generic version of the branded 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 Sunny Prospects
The Zacks Medical – Generic Drugs industry is a small 11-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 #86, which places it in the top 34% of the 250 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 & S&P 500
The Zacks Medical – Generic Drugs industry outperformed the broader Zacks Medical and the S&P 500 Index in the past year.
The industry has risen 30.9% over this period compared with the broader sector’s 6.3% growth. Meanwhile, the S&P 500 has risen 27.0% 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 9.80X compared with the S&P 500’s 21.91X and the Zacks Medical sector’s 23.13X.
Over the last five years, the industry has traded as high as 11.60X, as low as 6.55X, and at the median of 8.66X, as the charts below show.
P/E F12M Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Generic Drug Stocks to Keep an Eye On
Amphastar: The company is focused on expanding its portfolio of generics and biosimilars. In May, the company received FDA approval to market a generic version of Teva’s ProHair HFA inhaler. Management plans to launch this generic product in the third quarter of 2024. As of May 22, 2024, the company has three generic drugs under review with the FDA. It is also developing three biosimilar and four generic drugs with significant market opportunities.
The company is also focused on selling higher-margin products, including diabetes drug Baqsimi, which it acquired from Eli Lilly last year.
The stock has lost 32.8% in the past year. The consensus estimate for 2024 earnings has increased from $3.81 to $3.86 per share in the past 60 days.
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.
During the first half of 2024, Teva managed to secure FDA approvals for two key drugs, namely Simlandi and Selarsdi, which are biosimilar versions of blockbuster immunology drugs Humira and Stelara, respectively. While the Humira biosimilar was commercially launched in May, the Stelara biosimilar will be launched next year in February. Management expects to launch six biosimilars by 2027.
Management expects its newer drugs, Austedo, Uzedy and Ajovy, as well as a stable generics business, to help revive top-line growth in future quarters.
The consensus estimate for 2024 earnings has increased from $2.41 to $2.45 per share in the past 60 days. The stock has surged 94.5% in the past year. TEVA carries a Zacks Rank #3.
Price & Consensus: TEVA
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 better than expectations, driven by higher demand in North America. The launch of generic versions of Restasis and 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 improve in 2024 slightly. Management has secured several first-to-market generic product opportunities, such as Ozempic, Wegovy, and Abilify Maintena.
The company’s branded business, which comprises two-thirds of its portfolio, is also doing well, with brands like Yupelri, Lipitor, and Dona driving the company’s top line.
The stock has risen 5.4% in the past year. The consensus estimate for 2024 earnings per share has remained consistent at $2.76 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 Improving Market Prospects
Despite the top line suffering due to macroeconomic headwinds like price erosion, the rising volume of existing and new generic drugs continues to benefit generic drugmakers like Amphastar Pharmaceuticals (AMPH - Free Report) , Teva Pharmaceuticals (TEVA - Free Report) and Viatris (VTRS - Free Report) .
To seek solace from pricing pressure, these generic drugmakers are focused on grasping the opportunity to be the ‘first to market’ their generic drugs. This allows them to enjoy market exclusivity for a limited period and generate profits. These firms are also undertaking cost optimization policies to improve margins and increase the efficiency of available resources.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents expire, providing exclusivity to branded drugs. 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 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 expiry of blockbuster drugs, like AbbVie’s Humira, which happened last year, provided significant opportunities for generic drugmakers like Amgen and Sandoz, who have already launched their respective Humira-biosimilars. Another blockbuster drug set to face patent loss next year is J&J’s Stelara, which is approved in multiple immunology indications.
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. This is advantageous to generic players, especially in the case of complex generics, which require significant R&D investments and expertise compared with traditional generics. These generic drugmakers even have to face litigation to market the generic version of the branded 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 Sunny Prospects
The Zacks Medical – Generic Drugs industry is a small 11-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 #86, which places it in the top 34% of the 250 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 & S&P 500
The Zacks Medical – Generic Drugs industry outperformed the broader Zacks Medical and the S&P 500 Index in the past year.
The industry has risen 30.9% over this period compared with the broader sector’s 6.3% growth. Meanwhile, the S&P 500 has risen 27.0% 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 9.80X compared with the S&P 500’s 21.91X and the Zacks Medical sector’s 23.13X.
Over the last five years, the industry has traded as high as 11.60X, as low as 6.55X, and at the median of 8.66X, as the charts below show.
P/E F12M Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Generic Drug Stocks to Keep an Eye On
Amphastar: The company is focused on expanding its portfolio of generics and biosimilars. In May, the company received FDA approval to market a generic version of Teva’s ProHair HFA inhaler. Management plans to launch this generic product in the third quarter of 2024. As of May 22, 2024, the company has three generic drugs under review with the FDA. It is also developing three biosimilar and four generic drugs with significant market opportunities.
The company is also focused on selling higher-margin products, including diabetes drug Baqsimi, which it acquired from Eli Lilly last year.
The stock has lost 32.8% in the past year. The consensus estimate for 2024 earnings has increased from $3.81 to $3.86 per share in the past 60 days.
Amphastar carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: AMPH
Image Source: Zacks Investment Research
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.
During the first half of 2024, Teva managed to secure FDA approvals for two key drugs, namely Simlandi and Selarsdi, which are biosimilar versions of blockbuster immunology drugs Humira and Stelara, respectively. While the Humira biosimilar was commercially launched in May, the Stelara biosimilar will be launched next year in February. Management expects to launch six biosimilars by 2027.
Management expects its newer drugs, Austedo, Uzedy and Ajovy, as well as a stable generics business, to help revive top-line growth in future quarters.
The consensus estimate for 2024 earnings has increased from $2.41 to $2.45 per share in the past 60 days. The stock has surged 94.5% in the past year. TEVA carries a Zacks Rank #3.
Price & Consensus: TEVA
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 better than expectations, driven by higher demand in North America. The launch of generic versions of Restasis and 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 improve in 2024 slightly. Management has secured several first-to-market generic product opportunities, such as Ozempic, Wegovy, and Abilify Maintena.
The company’s branded business, which comprises two-thirds of its portfolio, is also doing well, with brands like Yupelri, Lipitor, and Dona driving the company’s top line.
The stock has risen 5.4% in the past year. The consensus estimate for 2024 earnings per share has remained consistent at $2.76 in the past 60 days. Viatris carries a Zacks Rank #3.
Price & Consensus: VTRS
Image Source: Zacks Investment Research