While 2025 began on a positive note for the pharmaceutical industry, things have taken a sharp turn amid escalating fears of a global trade war. While Trump had initially exempted pharmaceuticals from proposed tariffs, he recently mentioned at an event that he will soon announce a ‘major’ tariff on pharmaceutical imports, adding uncertainty to the sector.
Trump’s push to bring drug manufacturing back to the United States has sparked concerns across the industry, particularly for generic drugmakers already operating under tight margins. If implemented, these tariffs could further squeeze profitability as these companies rely heavily on overseas production.
In response, generic drugmakers like Dr. Reddy’s Laboratories RDY, Sandoz SDZNY and Teva Pharmaceuticals TEVA are likely to focus on grasping the opportunity to be the ‘first to market’ their generic drugs. This allows them to enjoy market exclusivity for a limited period and generate profits. These firms are also undertaking cost optimization policies to improve margins and increase the efficiency of available resources.
Industry Description
The Medical - Generic Drugs industry comprises companies that develop and market chemically/biologically identical versions of a brand-name drug once patents expire, providing exclusivity to branded drugs. These drugs can be divided into generic and biosimilar categories based on their composition. The generic segment is controlled by a few large drugmakers and generic units of large pharma companies. Several smaller companies also develop generic versions of branded drugs, significantly cheaper than original drugs. Competition in this segment is stiff, resulting in thin margins for manufacturing companies. A few companies in this industry have some branded drugs in their portfolio, helping them tap a higher-margin market.
3 Trends Shaping the Future of the Generic Drugs Industry
Loss of Patent Exclusivity of Branded Drugs: Generic drugmakers mainly rely on the loss of patent exclusivity of branded drugs. They apply to the FDA for the approval of their generic or biosimilar version of branded drugs, which have lost patent protection. A company may launch an authorized generic version of a branded product, gaining exclusivity over other generic versions of the same drug for several months. This is advantageous to generic players, especially in the case of complex generics, which require significant R&D investments and expertise compared with traditional generics. These generic drugmakers even face litigations to market the generic version of the branded drugs.
Key generic launches this year include that of Stelara biosimilars by generic drugmakers like Amgen and Teva. Biosimilar versions of blockbuster drugs like Amgen’s Prolia/Xgeva and Regeneron’s Eylea are also expected throughout this year.
Stiff Competition: The generic drug industry competes with original branded drugs. Once a branded drug loses patent exclusivity and generic versions of the same are available in the market, it induces competition as opponents set generic prices well below that of the branded drugs. As a result, drugmakers aim to achieve the medicines' first-to-file (FTF) status. The current generic market is already crowded, with many drugmakers having several generic filings pending before the FDA. With several generic/biosimilar drugs set for launch over the next couple of years, the top line of these firms is likely to improve.
Patent Settlements: The successful resolution of patent challenges continues to be an essential catalyst for the growth of generic drugmakers. The settlement of these challenges accelerates the availability of low-cost generic products and removes uncertainties associated with litigation. However, active patent challenges require litigation, leading to higher costs.
Zacks Industry Rank Indicates Sunny Prospects
The Zacks Medical – Generic Drugs industry is a small 11-stock group housed within the broader Zacks Medical sector.
The group’s Zacks Industry Rank is the average of the Zacks Rank of all the member stocks. The Zacks Medical – Generic Drugs industry currently carries a Zacks Industry Rank #49, placing it in the top 20% of the 246 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Against this backdrop, we will present a few noteworthy stocks. But before that, let’s look at the industry’s stock market performance and current valuation.
Industry Versus Sector & S&P 500
The Zacks Medical – Generic Drugs industry underperformed both the broader Zacks Medical and the S&P 500 Index year to date.
The industry has plunged 26% over this period compared with the broader sector’s 5% decline. Meanwhile, the S&P 500 has lost 9%.
YTD Price Performance
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The Industry's Current Valuation
Based on forward 12-month price-to-earnings (P/E F12M), which is a commonly used multiple for valuing generic companies, the industry is currently trading at 8.43X compared with the S&P 500’s 19.71X and the Zacks Medical sector’s 18.90X.
Over the past five years, the industry has traded as high as 11.64X, as low as 6.51X, and at the median of 9.04X, as the charts below show.
P/E F12M Ratio
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3 Generic Drug Stocks to Keep an Eye On
Dr. Reddy's Laboratories: The India-based company enjoys a strong position in the U.S. generics market. Dr. Reddy’s also markets its products in countries like the U.K., Germany, Russia, Venezuela, Romania and South Africa. To ensure steady growth in these markets, the company is focused on accelerating the development of its complex generics portfolio. RDY is also making efforts to ensure that the approvals come in time through appropriate risk management and proactive measures to deal with possible deficiencies.
As of 2024-end, cumulatively, 79 generic filings were pending approval from the FDA (75 abbreviated New Drug Applications [ANDAs] and four new drug applications).
The consensus estimate for fiscal 2026 (year ending March 2026) earnings per share (EPS) has remained unchanged at 82 cents in the past 30 days. The stock has lost about 8% in the past year.
Dr. Reddy's has a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: RDY
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Sandoz: This Swiss-based generic drugmaker used to be a subsidiary of Novartis before being spun off in 2023. As of 2024-end, Sandoz was one of the top three biosimilar providers in the United States.
In its first full year as an independent entity, Sandoz reported strong financial results. The company achieved net sales of $10.4 billion in 2024, up 9% year over year. This growth was mainly driven by the strong double-digit performance of its biosimilars business and new launches in the United States and Europe. Per Sandoz, Hyrimoz is currently the leading Humira-biosimilar in the U.S. market. The core EBITDA margin improved to 20.1% in 2024, up 200 basis points from last year, reflecting enhanced product mix and operational efficiencies.
Looking ahead, Sandoz expects continued momentum in 2025, with plans to launch Pyzchiva, Tyruko and Wyost in the United States, which are biosimilars to Stelara, Biogen’s Tysabri and Amgen’s Xgeva, respectively. It expects net sales to grow by a mid-single-digit percentage and aims to achieve a core EBITDA margin of around 21%. This guidance, which includes the impact of potential U.S. tariffs on its business, reflects confidence in its expanding biosimilars portfolio.
The stock has risen nearly 31% in the past year. The consensus estimate for 2025 EPS has increased from $3.14 to $3.18 in the past 30 days. Sandoz carries a Zacks Rank #3 at present.
Price & Consensus: SDZNY
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Teva: This Israel-based company is the world’s largest generic drug company. It enjoys a leading position in the United States, which is the world’s largest generic market. Teva commands a share of around 7% in the U.S. generic market. More than 60% of Teva’s generics business is outside the United States, in Europe, and in emerging markets, where it is seeing continued growth. Teva regularly pursues FTF and first-to-market opportunities and seeks approval for complex generics, which are likely to face less competition. This should help the company maintain its strong position in the global generics market.
Teva has a decent pipeline of biosimilars, with some being developed in partnership with Alvotech. Biosimilar versions of Amgen’s Prolia, Regeneron’s Eylea and J&J’s Simponi are currently under review. The company already markets biosimilar versions of AbbVie’s Humira and Stelara under the names Simlandi and Selarsdi. Teva expects to launch seven biosimilars in the United States and four in Europe between 2025 and 2027.
The consensus estimate for 2025 EPS has increased from $2.53 to $2.55 in the past 30 days. The stock has gained 4% in the past year. TEVA currently carries a Zacks Rank #3.
Price & Consensus: TEVA
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