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Stock Strategist Industry Reports

Generic Drug Industry Headwinds Lead to Moat Downgrades

Fear could create opportunity, but we advise investors to proceed with caution.

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The generic drug industry has recently faced a number of challenges thanks to greater-than-expected pricing pressure, unfortunate capital-allocation decisions, increasing financial leverage, and concerns about collusion charges. Although fewer small-molecule patent expirations, increased competition in complex product categories, and increased consortium buying power are likely to make historical growth and profitability difficult to sustain, we think the recent accelerated pace of price erosion will diminish as the Food and Drug Administration backlog normalizes.

We advise investors to proceed with caution in the space, and we’ve shifted our economic moat ratings for all generic manufacturers we cover to none as the industry remains a low-barrier-to-entry market with relatively commoditized products and increasing competition from emerging-market players.  Teva Pharmaceutical (TEVA) and  Mylan (MYL) look better positioned to overcome industry challenges thanks to their more diversified operations, first-to-file pipelines, and more complex manufacturing capabilities, even though they face headwinds from generic versions of Copaxone and EpiPen, respectively.  Endo International (ENDP) looks undervalued, but the stock carries our very high fair value uncertainty rating as a result of high debt leverage and product risks.

Michael Waterhouse does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.