Things have gone from bad to worse for the generic drug industry just as its biggest players are set to report earnings. The latest sign came late Tuesday. Embattled drugmaker Perrigo said that federal agents executed search warrants at company headquarters, as part of a wide-ranging investigation into price collusion in the generics industry. ...Several other companies have received subpoenas as part of this investigation.
True, a high standard of proof is required in collusion cases. Many federal inquiries end without charges or penalties. And generic drug stocks generally trade for very low earnings multiples. Those facts could give hope to investors when the largest generics companies report earnings next week.
While the investigation could weigh on long-term price increases for generics, there is a more immediate concern; generic drug prices are falling at an accelerating rate. Two small drugmakers joined the parade that has included big pharma companies and drug distributors who are seeing bigger declines in prices.
Lannett cited generic pricing pressure to explain subpar results on Tuesday. Shares fell by 16% on Wednesday. Australian generics company Mayne Pharma Group, which has a large U.S. business, said during its investor day earlier this week that increased pressure from buyers is driving down prices and predicted that declines in the second half of the year could reach as high as 15%.
The latest warnings come after bigger players gave pessimistic forecasts. Novartis said last month that its generic unit experienced price deflation of about 8% in the first quarter. Drug distributor Cardinal Health said last month it expects prices of generics to fall by a low double-digit percentage for the fiscal year ending in June.
Being able to raise prices is particularly important for many drugmakers right now. A slew of deal-making in the sector during the now-distant good times of 2014 and 2015 means companies levered up their balance sheets at the worst possible moment. Heavily indebted Perrigo, to name one example, is down more than 60% over the past two years.
There is no reason to believe that gloomy backdrop will show signs of improvement by next week.