Pricing Stress may Weigh on Generic Drugmakers Ahead of Q2 Earnings
Ahead of second quarter earnings, the generic pharmaceutical sector is still feeling the pricing pressure that caused companies like Endo Pharmaceuticals (ENDP) - Get Report and Teva (TEVA) - Get Report to see first quarter lows.
"I think there's persistent concerns about pricing pressure," analyst David Amsellem of Piper Jaffray said of the industry. "That hasn't gone away and nor should it. I think it's something that's pervasive across the space."
Consolidation in the market, as well as pressure from politicians to keep prices low enough for consumers has lead to recent price erosion in the generics drug business.
However, the sector has seen a small uptick in recent weeks, according to analyst Randall Stanicky of RBC Capital Markets.
"With the generic mid/large cap sector up 17% since post 1Q-lows (still -24% year-to-date), we have taken a closer look at current set-up as we approach 2Q," Stanicky wrote.
He noted that RBC has lower-than-consensus estimates for companies like Endo, Teva and Perrigo (PRGO) - Get Report ahead of the second quarter.
"We continue to believe that consensus gross margin assumptions are aggressive and represent a meaningful risk to forecasts," Stanicky wrote in a note.
He added that RBC expects generics companies to have a similar sentiment during the second quarter as they did last. He expects the companies to express caution on the business to investors, and doesn't anticipate seeing huge successes this quarter.
Amsellem agreed. He added that companies with greater exposure to a lower margin and commoditized assets will be particularly hard hit.
"Endo is a prime example of how a lower quality, lower margin business can suffer when you see pressure on price ratcheted up," Amsellem said.
That said, there are a few generics businesses that could do well in second quarter earnings.
"I think the generic companies that have significant exposure to nontraditional dosage forms are better positioned," Amsellem said.
According to Amsellem, this includes companies like Akorn (AKRX) - Get Report and Amphastar Pharmaceuticals (AMPH) - Get Report .
Stanicky sees an upside to Allergan's (AGN) - Get Report generics business ahead of the closure Teva's $40.5 billion acquisition of the company, announced last year. However, he favors Akorn as well.
"Relative to our top longs within specialty, AGN remains our favored name within specialty and in our view has dis-intermediated as a competition to the group (post generics spin) while we see AKRX estimates as most defendable near-term among generics," Stanicky wrote.
Teva will report earnings on August 4. Perrigo is expected to report on August 3, Endo on Aug. 8 and Amphastar on Aug. 10. An expected date for Akorn has yet to be set.