Teva's New CEO Brings No Relief: Generic Drugmakers To Dump

Teva Pharmaceutical Industries Limited (NYSE:TEVA) on Monday announced that it has hired H. Lundbeck’s (OTC:HLUYY) chief Kåre Schultz as its new CEO. The appointment ended Teva’s more than six-month long search for a permanent CEO after Erez Vigodman stepped down in February this year.

Israel-based Teva has been facing tough times. A challenging environment in the U.S. generics business and the continued deterioration in Venezuela have been hurting its sales. Meanwhile, delay in the launch of some new generic drugs and fierce competition for some others is also hurting Generic segment sales. Teva is also facing several other challenges in the form of generic competition for branded multiple sclerosis drug, Copaxone, its key revenue generator, new competition for branded products, a high cost base and debt load.

It remains to be seen if Schultz can use his 30 years of extensive global pharmaceutical experience to help the world’s largest generic drugmaker regain lost ground. Schultz will be tasked with increasing sales and reducing debt for the generic drugmaker. It is worth mentioning here that Schultz joined Lundbeck in 2015 when the company was struggling due to loss of patents for key drugs and helped the company to turn around, backed by significant restructuring initiatives.

Meanwhile, the huge development at Teva has once again shifted focus to the Generic Drug industry, which is presently facing several challenges

Generic Drug Industry in Doldrums

The Generic Drugs industry has a Zacks Industry Rank #246 (bottom 7% of the 250 plus Zacks industries). The industry has declined 15% year to date (YTD), significantly less than a return of 11.2% for the S&P 500.

The U.S. generics industry is facing significant competitive and pricing pressure. The ongoing consolidation of customers in the industry has led to increasing price erosion and decreasing volume. The consolidation in the industry has increased the ability to negotiate lower prices for generic drugs.

A sharp decline in generic drug prices is proving to be a major challenge for generic drugmakers as well as drug distributors. Moreover, the FDA is speeding up the approval of generic drugs, which means more competition, increasing price cuts and decreasing volume.

3 Stocks to Dump

With the generic pricing erosion expected to continue this year, we recommend investors to dump three of the biggest names in this industry, including Teva.

Teva

Teva has a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Following its disappointing second-quarter results and trimmed view in August, the Zacks Consensus Estimate for 2017 and 2018 earnings declined by 12% and 13.5%, respectively over the last 60 days. On a YTD basis, Teva has lost 49% of its value compared with the 15% decline of its industry.

Mylan N.V. (NASDAQ:MYL)

Mylan’s second-quarter results were dismal as the company missed on both earnings and sales estimates due to challenges in the U.S. generic drug industry. The cut in annual guidance was also disappointing. Contributions from new product launches in the United States were one of the lowest in the second quarter. The generic maker also saw increased competitive pressure for its existing generic products, as the FDA approved more generics through accelerated approvals.

Ongoing challenges in the United States and uncertain regulatory environment in the region have led the company to defer all major launches from 2017 to 2018 including generic Advair and generic Copaxone.

Meanwhile, sales from Mylan’s key branded product, EpiPen continue to decline due to increased competition and the impact of the launch of the authorized generic. We note that Mylan has been under immense pressure since August last year when the company came under the spotlight for an increase in EpiPen price, drawing immense criticism from lawmakers, consumers and the common people alike.

Mylan is also a #5 Ranked stock. Mylan’s stock has declined 13.4% this year so far.

Its earnings estimates for 2017 and 2018 have declined 12.6% and 10.8%, respectively over the past 60 days.

Dr. Reddy's Laboratories Limited (NYSE:RDY)

This Indian generic drugmaker has a Zacks Rank of 4. Like its larger peers, Dr Reddy’s also suffers from drug price erosion, fierce competitive pressure and lower contribution from new product launches in the United States. In addition, the implementation of general sales tax (GST) in India is also hurting its topline to an extent.

Dr Reddy’s earnings estimates for 2017 and 2018 have declined almost 19% and 9.3%, respectively over the past 60 days. Dr Reddy’s stock has declined 25.1% this year so far.

Conclusion

While Teva’s shares were up close to 20% on Monday, Mylan and Dr Reddy’s also shared some of the positive momentum as their shares rose almost 3% and 1.7%, respectively. The positive share price movement came after a long time for these generic makers.

However, the relief is probably temporary as the companies have a daunting task ahead of countering the broader market challenges.

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