Refreshing Our Generic Drug Manufacturer Valuations and Competitive Analysis

Following an extensive review of the generic drug manufacturers under our coverage, we have revised our fair value estimates to better align with our expectations for revenue growth and margin erosion over the next five years. We are lowering our fair value estimate for Viatris to $14 per share from $25, lowering our fair value estimate for Teva Pharmaceutical to $9 per share from $20, and are raising our fair value estimate for Dr. Reddy’s Laboratories to $60 per share from $49. The shares of all three appear fairly valued in the market today. We are maintaining our no-moat rating and stable moat trend assessment for Viatris and Teva, as we believe heavy exposure to the U.S. and other pure generic markets where small-molecule generic drugs are highly commoditized will continue to pressure returns, despite the companies’ burgeoning investments in relatively more differentiated areas like complex generics and biosimilar drugs. We believe Dr. Reddy’s comparatively more differentiated approach lends itself to a narrow moat rating, with higher exposure to emerging markets (particularly India) where brand recognition translates to market power and stable pricing.