Generic-Drug Stocks Still Under the Weather

Laegeler says Par is in the midst of a risky strategy of expanding its development of brand-name drugs. These products have higher profit margins than do generics, but they're more expensive to make and market.

With a market cap of $634 million, Par is making a decision that is creating uncertainty in the minds of investors and analysts. Thomson Reuters reports five analysts are neutral and one has a sell rating.

Teva, Barr and Watson make some brand-name drugs; Mylan tried to do so, but it has decided to focus on generics. Sell-side analysts support Teva, and they still like Barr and Mylan. Thomson Reuters says each company has more buy ratings than the combined neutral and sell ratings. Watson has few buy ratings, with most analysts neutral.

Morningstar assigns its top, 5-star rating for Barr, Mylan and Watson. Based on their fundamentals, they are trading so far below their fair values that Laegeler says they're worth buying. Teva earns four stars, and Par gets two.

Forecasting a Comback

For investors with short-term outlooks, Barr has been the biggest disappointment. Its stock plunged from $49.65 on May 7 to $38.10 the next day after Barr issued first-quarter results that fell below expectations and lowered its full-year earnings forecast.

Barr blamed weaker U.S. generic results, higher R&D expenses and under-performance by Plan B, the emergency contraception pill. Barr promised the second half of 2008 would be better.

Merrill Lynch and Goldman Sachs cut their ratings to neutral from buy, and Zacks Investment Research dropped its rating to sell from hold. However, S.G. Cowen raised its rating to outperform from market perform.