Why you should care

Because generics are cheap alternatives to lifesaving drugs … and they are on the ropes. 

The Next Recession: Consequences of the next economic slowdown.The Next Recession: Consequences of the next economic slowdown.

Nine out of 10 people getting prescriptions filled in America — and around most of the world — rely on generic drugs to treat their medical conditions, from pain relievers like Vicodin to antibiotics like Amoxicillin. Yet these lifesavers are on ventilators themselves because pharmaceutical Goliaths have been brought to their knees in recent months by a combination of scandals, policy shifts and political opposition. But an unlikely cure may be on the horizon: a global economic downturn.

Over the past year, investors have turned cold on the world’s biggest generic pharmaceuticals firms as the prices of these drugs have crashed. That’s partly because of the Trump administration’s decision to expedite FDA approvals of new manufacturers, which has added competition and reduced margins. Pill distributors — known in the industry as pharmacy benefit managers — have banded together like never before, buying medicine as a block to negotiate lower costs. Then in May, these firms saw their shares sink in a day after 44 states brought lawsuits against the world’s top generic drug manufacturers, alleging price-fixing. Shares of Israel-based Teva fell by 13 percent, shares of Pennsylvania-based Mylan by 10 percent and shares of India’s Sun Pharmaceutical Industries by 21 percent, all within 24 hours. At the same time, the rowdy class of Democratic presidential candidates has routinely used the limelight to bash pharma’s role in feeding the opioid epidemic.

An economic recession — widely anticipated over the next couple of years — would normally sink already struggling industries. But growing evidence suggests it could instead help firms manufacturing generic drugs. In late April, global ratings agency Moody’s reported that generic drugs could “benefit” as laid-off patients, and their doctors, turn to them in greater numbers — a shift that would drive demand even more and attract funding again. Investment advisers such as Zacks are predicting that, amid fears of an economic slowdown, the generic pharma sector could outperform the market over the next six months.

[During a slowdown,] doctors and patients would likely be more willing to use generic alternatives to more expensive branded medicine.

Morris Borenstein, Moody’s

Independent studies back up these assessments. India is the world’s largest supplier of generic medicines and was expected by many to suffer during the last international slowdown. But it saw its pharma exports to Greece, Spain, Portugal, Italy and Ireland — the European countries worst affected by the last financial crisis — go up between 2010 and 2012, faster than its sales to less-affected countries such as the U.K., Germany, the Netherlands, France and Belgium, according to 2017 research led by Arundhati Sarkar Bose, a professor at India’s XLRI business school. And generic drug manufacturer Watson (now Activis) saw its shares rise 40 percent between November 2008 and February 2009, the height of the worst global dip since the Great Depression. Armed with that success, it was able to buy off a major rival, the Arrow Group, for $1.75 billion in June 2009.

“When patients lose their jobs or medical coverage, doctors and patients would likely be more willing to use generic alternatives to more expensive branded medicine,” writes Moody’s senior analyst Morris Borenstein.

While much of the world is willing it to never come, a recession can’t arrive soon enough for the generic pharma industry. Last year, Teva cut 14,000 jobs globally. Sun Pharma closed down its Cranbury, New Jersey, manufacturing plant, firing more than 100 people. Mylan laid off more than 500 workers in West Virginia. Novartis closed eight facilities and axed more than 2,000 jobs. The markets are abuzz with rumors that it may sell off its generic pharma arm, Sandoz, soon.

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Growing evidence suggests an economic recession could help firms manufacturing generic drugs.

Source GERARD JULIEN/AFP/Getty

Yet if the industry can make it to the next recession, the clouds that appear dark for others might offer the generics sector a peek at a rainbow, say analysts and researchers. During a recession, where incomes are typically low, demand for the less-pricey alternatives should increase. Drugs, after all, are a “necessity,” says Sarkar Bose. Growing demand would compensate for the increase in competition sparked by the Trump administration’s policy moves and once again attract investors, while driving up stocks. For countries like India — which counts on the sector for 20 percent of its exports — the likely expanded sales of these medicines could counteract the expected loss in other trade during a recession. The country has faced criticism in the past for focusing on generics instead of on high-end specialty medicines. But the country’s increased sales to badly hit European nations during the last recession suggests “India’s long-term policy to concentrate on generic drugs was right,” says Sarkar Bose.

Just how much different manufacturers benefit will depend on where and how fast the next slowdown spreads. More than 50 percent of sales for Teva and Mylan are outside the U.S., for instance. They also have the most diverse product mixes in the U.S., Borenstein notes, which would seemingly bolster them against market volatility.

For sure, there could be some storm clouds even generics wouldn’t be able to avoid. Generic drug makers heavily rely on patent expirations to drive profits, a process that can be tricky to navigate as political or regulatory changes are instituted. Some patients in hardship could even choose to forgo necessary drugs, although that is likely a small population. Another twist? If the Donald Trump-led economic sanctions against China and India drag on into the next downturn, the generic medicines predominantly developed in Asia could be “under heavy tariff,” adds Sarkar Bose, which may lead to the sector underperforming.

And for billions of people around the world, a global recession would be devastating. Still, if generic pharma survives and recovers thanks to a slowdown, that might be one good thing to come out of that pain.

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