A clean room at a Teva Pharmaceuticals plant.
Photograph by Uriel Sinai/Getty ImagesShares of generic drug makers have been pounded in recent years, pressured by lawsuits over the opioid crisis, falling prices for medicines, and other worries. But in a note Tuesday morning, SVB Leerink analyst Ami Fadia argued that the Covid-19 pandemic could, paradoxically, bring some relief to the sector in the long term.
Fadia argued that generic-drug pricing could rise in the short term due to scarcity created by supply-chain disruptions, and that in the long term, consumers might be willing to pay higher prices for a more secure supply. To that end, she argued, the Covid-19 crisis could result in generic drug makers bringing manufacturing back to the U.S. from India and China, where it is heavily concentrated.
“The concern about the dependency of the US supply chain on nations such as China has been known about for some time, but COVID-19 has illuminated the risks of this dependency at a whole new level,” Fadia wrote. “The reverberating impacts of COVID-19 may compel the government to assist pharma companies to take the steps necessary to bring manufacturing of essential drugs back to the US for the prospect of greater control and assurance of the supply chain.”
Shares of Teva Pharmaceutical Industries (ticker: TEVA) are down 3.5% so far this year, while the S&P 500 is down 17%. Shares of other generic drug makers have performed worse in 2020, including Amneal Pharmaceuticals (AMRX), which is down 34.9%; Endo International (ENDP), which has fallen 31.6%; and Mallinckrodt (MNK), off 48.8%.
In her note, Fadia wrote that prices for generic drugs will rise in the near term as companies seek to maintain their supply chains amid challenging circumstances. Those price bumps won’t necessarily last. But Fadia argued that, in the long term, companies with more robust risk mitigation built into their supply chains could be in a position to negotiate for higher prices.
As for a shift of manufacturing back to the U.S., Fadia wrote that crisis has highlighted the risks inherent in the industry’s choice to move manufacturing overseas. That has manifested in worries about drug shortages due to the concentration of active pharmaceutical ingredient manufacturing in China, and in limitations that Indian authorities have imposed on the export of certain drugs, including hydroxychloroquine.
Fadia wrote that drug making had been outsourced for environmental reasons and because of costs, and said there could be “meaningful hurdles precluding large-scale repatriation” of the manufacturing processes. But at the same time, she said, the effects of the crisis could, in the longer term, force the government to help the industry bring at least some manufacturing back to the U.S.
Shares of Teva were up 2.1% in early trading on Tuesday.
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
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