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Stock Strategist Industry Reports

Are Generics Back in Vogue?

Stabilizing pricing and improved efficiencies should lead to steady gains and needed debt repayments for the generic drugmakers.

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Generic drug companies are not for faint-of-heart investors, given the elevated uncertainty, but their overall importance in the healthcare system and the potential to reduce debt-heavy balance sheets are often overlooked. The two largest generic companies, Teva Pharmaceutical (TEVA) and Mylan (MYL), have evolved with the drastic changes in the market, but they continue to make the necessary investment to leverage scale and come out ahead, all against the backdrop of ongoing litigation.

There have been notable changes to the North American generic market, with increasingly rapid U.S. Food and Drug Administration approvals and consolidation of sourcing entities that now manage over 90% of North American drug volume. The combination of these events has accelerated competition and temporarily increased pricing transparency for distributors through integration of pricing lists of acquired entities. This change in market dynamics caused a double-digit U.S. pricing decline in 2018 as well as a shift of mature volume to international manufacturers, which predominantly compete on price. This imbalance exposed the lack of operational integration and drew scrutiny to the significant debt balances incurred from the rapid race to gain share over the last decade. Although we do not anticipate the presourcing consolidation market environment to return after the pandemic, we believe the generic market has stabilized and the continued investments and focus on efficiency will benefit the leading manufacturers.

Soo Romanoff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.