3 Beaten-Down Generic Drugmakers to Buy

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Earlier in November, some of the largest firms in the generic drugs firm space received subpoenas from the U.S. Justice Department. The Justice Department is alleging that certain generic drugmakers may have engaged in colluding to control prices they charge to hospitals, patients and others in the healthcare system.

3 Beaten-Down Generic Drugmakers to Buy

For prospective investors, negative news events, including somewhat significant ones such as these, can prove to be buying opportunities. The stocks of many of the largest players in the space fell between 7% and 20% following news the subpoenas were sent out.

This investigation has been going on for a couple of years now, and right now it’s hard to say if any of the allegations will turn out to be true. It’s also unknown who might be affected and how high any fines might be for the impacted pharma stocks.

One benefit is the political changing of the guard in Washington, D.C. This could dampen the seriousness of any charges, as well as regulation to reign in what has been seen as overly rapid price increases for branded and generic drugs. The DOJ allegations also stem from certain drugs, meaning the fines could be based off only a few product segments.

Below are three beaten-down firms that make generic drugs that have decent growth prospects over the long haul. More conservative investors might want to wait until any formal DOJ charges are submitted or publicized. But overall, it’s difficult to see that these firms will be ruined, though any convictions or admissions of guilt would certainly necessitate removing management teams and employees that were responsible.

Generic Drugmakers to Buy: Teva (TEVA)

TEVAShares of Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) are down 46% from their 52-week high of over $66 per share. Now at around $36, they now trade at an unseemly bargain-basement forward price-to-earnings ratio of 7. This is based off the average analyst earnings projection of $5.13 for 2016. This expected to jump to $5.51 per share by the end of next year.

Teva is busy digesting the acquisition of Actavis Generics, the generics arm of pharmaceutical firm Allergan Plc (NYSE:AGN). The purchase helped boost third-quarter sales by 15% to $5.6 billion. Management expects full-year sales will grow 9% annually through 2019 to as high as $28 billion.

Earnings could grow 14% annually over this period on the back of cost savings from folding in Actavis Generics and other organic growth. Combined with solid free cash flow generation (management expects as much as $7 per share this year), Teva offers a compelling combination of growth at a very reasonable price (namely, the low P/E ratio).

Generic Drugmakers to Buy: Mylan (MYL)

Generic Drugmakers to Buy: Mylan (MYL)Mylan NV’s (NYSE:MYL) stock is also beaten down and 35% below its highs for the year. The forward P/E is also low, at about 7, based off the $4.75 in earnings analysts expect this year.

In addition to the collusion worries, Mylan has gotten itself into hot water and received lots of negative press through the high and increased pricing of its EpiPen, a device that can provide a shot of epinephrine and save lives during a severe allergic reaction.

This, as well as the overall negative sentiment against the industry, have sent MYL’s valuation to roughly a quarter of its five-year average P/E level of 25. Earnings are expected to jump 14% by 2017 to $5.38 per share.

Mylan is also growing through acquisitions. Last year, it acquired a portfolio of both branded and generic drugs from pharma giant Abbott Laboratories (NYSE:ABT). The purchase helped boost third quarter sales up 13% to $3.1 billion.

Mylan’s valuation is also compelling, but it has more questionable growth prospects over the long haul. Its sales are less diversified than rivals and makes it more susceptible to lower-priced competitors. It is looking to boost branded drugs and more complex ones on patent, though.

Generic Drugmakers to Buy: Novartis (NVS)

Generic Drugmakers to Buy: Novartis AG ADR (NVS)Novartis AG (ADR) (NYSE:NVS) is one of the largest pharmaceutical companies in the world. Housed in its corporate structure is Sandoz, the second-largest generics drug provider in the world.

Sandoz sold an estimated $10 billion in generic drugs and related products last year. By investing in Novartis, analysts also gain exposure to a pharma giant boasting in excess of $50 billion in annual sales.

Novartis’ forward P/E is higher than Teva and Mylan above, but it offers less exposure to the generic space. This could prove beneficial should the collusion allegations prove more serious than they look.

It also lets investors get paid for exposure to generic pharma stocks. Novartis’ dividend yield is close to 4%. Free cash flow generation is robust — Novartis recently reported around $4 in cash flow generation. This leaves ample room to support the dividend and buy back stock.

As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/12/generic-drugmakers-pharma-stocks-tev-myl-nvs/.

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