Improving Prices Spur Hope of Recovery for Generic Drug Stocks

(Bloomberg) -- Generic drugmakers are finally starting to see the light at the end of the tunnel as copy-cat drug prices rise for the first time in two years, according to SVB Leerink.

The firm’s analysis of price trends from the Centers for Medicare & Medicaid Services’ National Average Drug Acquisition Cost database suggest that generic inflation in June turned positive after a prolonged period of declines that has lasted since August 2016.

"We are encouraged by this trend as it could mean bottoming of the generic pricing headwinds, a positive for not only generics but also distributor and retailer stocks," analyst Ami Fadia wrote in a note on Tuesday. A basket of specialty and generic drugmakers rose as much as 1.6% intraday, halting a two-day slide as broader markets churned.

If sustained, rising prices would be a big tailwind for beaten-up generic drug stocks which have been plagued by price fixing and opioid litigation overhangs. While that’s expected to continue to loom over the sector, improving pricing dynamics could allow for multiple expansion, Leerink says.

Fadia recommends buy-rated Mylan NV among drugmakers, and is more bullish on AmerisourceBergen Corp, Cardinal Health Inc., McKesson Corp. and Walgreens Boots Alliance Inc. within the drug supply chain. Other sell-side analysts have been warming up to distributors recently, with Baird naming McKesson its latest “bullish fresh pick.”

"Any positive commentary on pricing on the distributors’ C2Q earnings calls could drive a favorable shift in sentiment for the group," SVB Leerink’s Fadia wrote. McKesson is set to kick off this quarter’s reports with numbers due on July 31 followed by AmerisourceBergen and Cardinal Health at the start of August.

To contact the reporter on this story: Tatiana Darie in New York at tdarie1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Bailey Lipschultz

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