First, the good news. There’s been a recent stock market rally for generic drug manufacturers. The bad news, even after the rally, shares for Teva Pharmaceutical Industries are down nearly 70% from a 2015 high. Mylan shares are down about 50% since then. The hopeful news, as reported in today’s Wall Street Journal, is that management teams at generic drug companies have responded well to the challenges besetting the industry in the last few years.
Those challenges include a slew of FDA approvals for new generics. This has been egged on by the Trump administration, which sees this as a way to bring drug prices down. “Through July, the Food and Drug Administration approved 666 applications in the current fiscal year, which ends in September,” the WSJ reports. “The agency approved 763 and 651 applications last year and in 2016, respectively.”
This created a supply/demand problem. One generic on the market will be slightly lower than the branded drug. But three or four on the market can make prices decline by 90% or more. Also, more approvals equal the possibility of more launches, and that can increase pricing pressure and alarm stockholders.
An investigation of price fixing in the industry by the Department of Justice didn’t help matters either. In 2016, as the WSJ reported, the DOJ subpoenaed several generic drug manufacturers about product pricing and communications with competitors.
Another culprit, in the generic drug companies’ eyes, is the consolidations among the companies that buy the drugs, while the largest drug manufacturers made acquisitions.
But the response by the generic drug manufacturers should pay off for them; they shut down unprofitable drug production in the U.S. and started using free cash flow to pay down debt.
“For starters, three of the five largest U.S. generic drug companies will reduce their leverage to less than three times earnings before interest, taxes, depreciation and amortization by the end of next year, according to Randall Stanicky at RBC Capital Markets,” the WSJ reports. “That is important for investors; consider that Teva trades at less than 8 times forward earnings.”