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3 Top Generic Drug Stocks to Consider Buying Now

By Brian Feroldi - Dec 20, 2017 at 7:33AM

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Want to cash in on the pharmaceutical boom? Generic drugs add to the arguments for giving Pfizer, Novartis and Mylan a closer look.

Brand-name drugs tend to capture all the headlines, but did you know that nine out of every 10 prescriptions filled in the U.S. each year are generic? When added together, Americans spend spent about $116 billion on generic drugs in 2016, according to Statista. The numbers get much larger when you zoom to include the rest of the world.

Given the size of the market, it should come as no surprise to see that scores of pharma companies want a piece of the action. Here's a list of 10 publicly traded companies that are major competitors in the generic drug space.

Company Market Cap
Pfizer (PFE -0.23%)
$218 billion
Novartis (NVS -0.20%)
$200 billion
Sanofi (SNY 1.96%)
$109 billion
Mylan N.V. (MYL) $21 billion
Teva Pharmaceuticals (TEVA 4.92%)
$15 billion
Perigo Company (PRGO 1.11%)
$12 billion
Dr. Reddy's Laboratories (RDY 0.81%)
$6 billion
Akorn (AKRX)
$4 billion
Mallinckrodt (MNK)
$2 billion
Lannett (LCI -3.46%) $1 Billion

Table Source: Yahoo! Finance

But which of these pharma companies are worthy of an investment today? Here's a look at my three favorites.

Pfizer

Most investors know Pfizer as the giant behind blockbuster drugs like Lipitor, Lyrica, and Viagra. However, the company has transformed itself into a major player in generic drugs, too. That's largely attributable to the company's 2015 acquisition of Hospira, which added a number of generic sterile injectables to its portfolio. It also instantly made the company a player in the growing market for biosimilars -- essentially, generic versions of biologic drugs.

Ben Franklin on hundred dollar bill surrounded by pills

Image source: Getty Images.

How important are those generic sales for its investment thesis? While teasing out exact numbers is tricky, we do know that Pfizer's "essential health" business segment -- which includes generics and biosimilars, among other things -- currently supplies about 40% of total revenue. This business is also poised for long-term growth thanks to favorable demographics and the huge expected growth in biosimilar sales.

However, one reason that I think Pfizer stands above the crowd is its fast-growing "innovative health" business. This segment is a catch-all category for the company's fast-growing branded drugs. Winners in this portfolio include breast cancer drug Ibrance, prostate cancer drug Xtandi, and anticoagulant Eliquis, among many others. 

When added together, Pfizer offers investors a cash-cow generic drug business and a broad portfolio of fast-growing branded drugs. That should drive modest net income growth over the long term. And for investors today, its current dividend yield of 3.5% will be icing on the cake.

Mylan

While Mylan sells more than 7,500 products, it got itself into a heap of trouble in 2016 from just one: EpiPen. The media and progressive politicians put Mylan under scrutiny after consumers got their attention about just how aggressively the company had flexed it pricing power over the years. In 2009, an EpiPen cost about $100. Mylan repeatedly hiked the price to the point where the life-saving injectors cost over $600 last year. Understandably, a public relations nightmare ensued.
The fallout was brutal. Mylan ended up paying $465 million in a settlement fee to the U.S. government and launched a generic version of its own drug. That move put a lot of pressure on margins and profits, causing shareholders to get crushed

Thankfully, the EpiPen fiasco appears to be firmly in the company's rear view mirror. The company is planning on focus on what it does best -- launching generic versions of hit drugs. Recent wins include its generic  of Teva's top-selling multiple sclerosis drug Copaxone. Upcoming decisions are expected on a long-acting insulin, and a generic version of asthma and COPD treatment Advair. The company also has a burgeoning biosimilar program. What's nice about biosimilars is that they're complex and hard to manufacture, which should help keep a lid on competition.

Overall, Mylan's troubles look to be in its past, its pipeline remains packed with potential, and it still has plenty of financial firepower to make acquisitions. That sounds like a winning formula for patient investors.

Syringe in a vial pulling out fluid

Image source: Getty Images.

Novartis

Like Pfizer, Switzerland-based Novartis is also best known for its branded drug portfolio. The company has launched a number of blockbuster drugs over the years such as the blood cancer drug Gleevec, the hypertension drug Diovan, and the wet-AMD treatment Lucentis.

While branded drugs comprise the majority of its revenue, the company's generic drug division, Sandoz, pulls in about $10 billion in revenue per year. That makes Novartis one of the largest producers of generic drugs.

We're not just talking small-molecule generics, either. Sandoz was actually the first company to win FDA approval for a biosimilar drug. The company took home that honor in 2015 when it got the green light for Zarxio, a biosimilar of Amgen's blockbuster Neupogen. It scored another big regulatory win a year later with the approval of a biosimilar version of Amgen's Enbrel. Future targets include other blockbuster drugs like AbbVie's Humira, Roche's Rituxan, and Johnson & Johnson's Remicade. 

Looking beyond generics and biosimilars, Novartis' branded drug portfolio is also looking strong. Sales of the autoimmune disease drug Cosentyx and heart failure medicine Entresto are growing fast. Kymriah, which is the first ever CAR-T cancer therapy to win FDA approval, also stands a good chance of exceeding the $1 billion annual sales mark.

On the flip side, Novartis is also dealing with generic competition for its own branded drugs, so investors shouldn't expect eye-popping growth numbers anytime soon. Still, it has a solid lineup and isn't shy about spending big on R&D. That should enable mid-single-digit profit growth over the long term. When potential share price gains are combined with the company's dividend, currently yielding 3.2%, investors in Novartis today should enjoy strong total returns.

The Foolish bottom line

With baby boomers hitting retirement age in droves, demand for prescription drugs should continue to tick higher for years to come. That fact should put a nice tailwind behind nearly every generic drug market. While the ride certainly won't be smooth, I think that they odds are favorable that all three of these companies will thrive over the long term.

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Stocks Mentioned

Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$52.31 (-0.23%) $0.12
Novartis AG Stock Quote
Novartis AG
NVS
$84.36 (-0.20%) $0.17
Viatris Inc. Stock Quote
Viatris Inc.
MYL
Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
$7.89 (4.92%) $0.37
Sanofi Stock Quote
Sanofi
SNY
$51.01 (1.96%) $0.98
Perrigo Company plc Stock Quote
Perrigo Company plc
PRGO
$41.02 (1.11%) $0.45
Roche Holding AG Stock Quote
Roche Holding AG
RHHBY
$42.01 (0.72%) $0.30
Amgen Inc. Stock Quote
Amgen Inc.
AMGN
$245.55 (0.93%) $2.25
AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$153.80 (0.42%) $0.64
Akorn, Inc. Stock Quote
Akorn, Inc.
AKRX
Dr. Reddy's Laboratories Limited Stock Quote
Dr. Reddy's Laboratories Limited
RDY
$55.84 (0.81%) $0.45
Lannett Company, Inc. Stock Quote
Lannett Company, Inc.
LCI
$0.56 (-3.46%) $0.02
Mallinckrodt Public Limited Company Stock Quote
Mallinckrodt Public Limited Company
MNK

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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