The Medical-Generic Drugs industry recovered somewhat in 2018 after a rough 2017, gaining from stabilization in U.S. generic drug pricing. This fact was reiterated by industry leaders on their respective earnings call.

The Generic Drugs industry has declined 25.4% so far this year compared with a fall of 7.6% in the broader S&P 500.

Lower drug prices in the United States have been a constant drag on revenues of industry players. Moreover, accelerated FDA approvals to generic drugs and ongoing customer consolidation have intensified competition, putting further pressure on drug prices. Several large companies in the industry are restructuring or exploring strategic alternatives as safeguard against the macro challenges.

However, the stability in the industry sets the stage for players to get back on growth track. Several blockbuster drugs from big pharma companies have lost or are set to lose patent protection. This creates a significant opportunity for generic drugmakers with billions of dollars in sales up for grabs.

Performance of Industry Leaders

A look on the performance of the top three players in the industry shows a recovering trend.

Teva Pharmaceutical Industries Ltd. TEVA has been facing significant challenges. This includes accelerated generic competition for its blockbuster multiple sclerosis drug, Copaxone; new competition for branded products, pricing erosion in the U.S. generics business and a massive debt load of approximately $30 billion.However, Teva undertook some strategic and restructuring initiatives in 2018 to revive growth.

Teva has a new organizational structure in place, is closing plants, cutting down its generics portfolio, divesting non-core assets, eliminating low-value R&D projects, and is reducing global workforce to revive growth. Its financial position also seems more stable in 2018 than before as it is regularly paying down debt.

Its newest drugs, Austedo and Ajovy, could emerge as significant contributors to long-term sales growth.

In fact, Dr. Reddy's Laboratories Ltd RDY also has strong generic approval applications pending FDA approval. The company is also undertaking initiatives to enter the biosimilar space. This will create a pathway for it to enter the lucrative cancer market as current major therapies are made of biologics. The company’s strategic initiatives are promising as evident from the fact that its shares have recovered after remaining in the negative territory for most of 2018.

Mylan’s MYL Generics segment has been performing impressively and it is also progressing well with its biosimilar pipeline. Thus, Mylan is also set to grow once it overcomes issues with EpiPen and its restructuring efforts show results.

3 Prominent Picks for 2019

Importantly, the Zacks Medical - Generic Drugs industry features in the top 13% of the 257 Zacks-ranked industries, suggesting growth going forward.

Here, we discuss three Generic drug stocks, which carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed positive estimate revisions in the past 60 days. These stocks also have the potential to rise in 2019. You can see the complete list of today’s Zacks #1 Rank stocks here.

Dr. Reddy's Laboratories

Shares of Dr. Reddy’s have been flat so far this year against the industry’s decline of 25.3%. Moreover, the company currently carries a Zacks Rank #2. The company enjoys a strong position in the generics market. At the end of third quarter, Dr. Reddy’s had 113 generic filings pending FDA approval. Of these filings, 63 were Para IV filings and 32 have first-to-file status. The company is also working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology. In July, Dr Reddy’s had launched a biosimilar of Roche’s HER2-positive cancer drug, Herceptin, in India.

The company has plans to modernize some of its infrastructure, implement a quality management system and automate some of the critical manufacturing and quality related processes.

The Zacks Consensus Estimate for earnings has increased 2.4% for 2019 in the past 60 days.

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Bausch Health Cos Inc. BHC

Bausch’s stock has declined 10.7% so far in 2018. The company has a diversified commercial portfolio consisting of medical devices, branded as well as generic drugs. Currently, it is focused on selling its non-core assets to streamline its product portfolio and focus on dermatology. The company has a Zacks Rank of 1.

The Zacks Consensus Estimate for earnings has moved up by 5.8% for 2019 in the past 60 days. The company surpassed earnings estimates in three of the past four quarters with average beat being 83.24%.

Bausch Health Cos Inc. Price

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Acasti Pharma, Inc. ACST

Although Acasti’s shares, which are down 26.8% in 2018, have underperformed the industry, the company’s loss estimates for the next fiscal year has narrowed over the last two months.

The Zacks Consensus Estimate for loss has narrowed 29.7% for the fiscal year ending March 2020 in the past 60 days. The company delivered average earnings beat of 4.76% in the trailing four quarters.

Acasti Pharma, Inc. Price

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