Generic drug company stocks have been all over the map this year, with companies like Teva (Nasdaq:TEVA) struggling, companies like Watson (NYSE:WPI), and the likes of Mylan (NYSE:MYL) and Impax (Nasdaq:IPXL) falling somewhere in between. While the sector is still broadly benefiting from popular branded drugs going off patent, pressures from large buyers like AmerisourceBergen (NYSE:ABC) and Cardinal Health (NYSE:CAH) and declining patient-doctor visits are making for a more challenging operating environment.

TUTORIAL: The Industry Handbook: Biotechnology

Mylan - Good Here, Not So Good Over There
Mylan reported 15% revenue growth (10% in constant currency), with North American sales rising over 27%. Asia-Pacific sales also grew by 17%, but Europe was flat as reported and down double-digits on a constant currency basis due in part to government-mandated price cuts in many European markets.

Profitability was solid as well, as gross margin improved three points and GAAP operating income jumped 44%. (The biotechnology sector is very exciting and can be very rewarding for investors. For more, see The Ups And Downs Of Biotechnology.)

Teva - Flip It
Teva reported similar top-line growth of nearly 11%, but had a much different make-up. North American revenue fell 15% on a 40% drop in U.S. generic sales - a drop fueled in part by a dearth of major launches making for a very unsatisfying comp. On the flip side, European sales were up 82% as Teva doesn't seem to be getting hit to the same degree by pricing challenges in European markets.

Profitability was not nearly so strong, however. Gross margin fell by more than three points (due at least in part to a product mix shift, as well as some amortization), while reported operating income fell close to 45% and non-GAAP operating income dropped about 9.2% on higher SG&A expenses. (For related reading, see Understanding The Income Statement.)

Big Unknowns For the Future
The generic space is going to be getting more interesting soon and "interesting" is almost never good for shareholders. For starters, while there are still a few major drugs due to go off patent in the next couple of years, the tide is receding and generic companies are going to find relatively few whales to hunt. Now, moving into biosimilars could change this outlook, but there are still a lot of uncertainties there and potential competitors like Momenta (Nasdaq:MNTA), Hospira (NYSE:HSP), and Protalix (AMEX:PLX).

The bigger threat could be the intended merger between Express Scripts (Nasdaq:ESRX) and Medco (NYSE:MHS). AmerisourceBergen, Cardinal Health, and McKesson (NYSE:MCK) are hard enough to deal with as they push generic makers for better pricing. With a combined ESRX-MHS, though, there will be a new major buyer and one that will have some real muscle when it comes to negotiating drug prices.

This new world may push Mylan to consider more deals - either a merger of near-equals like Watson, the acquisition of a smaller name like Impax or Hi-Tech Pharmacal (Nasdaq:HITK), or maybe one of the biosimilar plays. At the same time, maybe Mylan takes a page from Teva and considers entering the branded drug market with select acquisitions. For its part, Teva continues to be a busy buyer, soon to be adding Cephalon and Japan's Taiyo to the fold. (For related reading, see A Primer On The Biotech Sector.)

The Bottom Line
I have been skeptical on Teva for a while and the year-to-date downward chopping in the stock price seemed to back that up. At this point, though, it is worth wondering how much more downside is left. True, the company's MS franchise is facing some uncertainties (and makes up nearly a quarter of sales), but this is still a cash-generating leader in its industry. Now may not be a bad time to think about buying these shares.

At the same time, while Mylan shares have been stronger than Teva, they too look modestly underpriced. Mylan should be in good shape to weather the challenges in the generics industry - either by selling to a large drug company that lacks exposure to generics (say, Johnson & Johnson (NYSE:JNJ)), or by being an acquirer and consolidator. Neither of these stocks are so cheap as to be can't-miss prospects, but investors tired of the turbulence in tech and industrial, and resource names may find some value and relative stability here. (For related reading, see Pharmaceutical Sector: Does The FDA Help Or Harm?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center