Generic drug manufacturers are out of favor. Endo International (NASDAQ: ENDP), Valeant Pharma (NYSE: VRX), and Teva Pharmaceuticals (NYSE:TEVA) continue to drift lower as markets worry over the risks of medicare reform in the U.S. Chances are good that the government will intervene to encourage lower drug pricing. This could give TEVA shareholders more pain in the short-term.
The government’s medicare reform aims to cut health costs. Lowering generic drug prices will help achieve that goal, albeit slowing innovation. The lower profitability for generics will give less funds available for R&D work. Still, patients benefit from the lower costs, assuming the middle-man does not take a cut at each level to keep health costs high.
Lower FDA stringencies to speed up approval of drugs will create natural competition for generic drugs. Teva’s Copaxone generic will now hurt the company’s profitability sooner than thought. Mylan (NASDAQ: MYL) won approval to make the generic. MYL stock erased more than half its losses for the year and still trades at single-digit forward P/E multiples.
When Mylan reports results on November 6, management may forecast Copax generic drug sales estimates. Teva will lose at least $0.25 a share on the competition but it is not sitting idly by. It has a massive portfolio of drugs awaiting approval. As it pushes out new products at high, initial prices, Teva may still generate positive cash flow needed to pay off interest expenses.
