3 Generic Drug Stocks to Watch

By Markets Fool.com

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Every health insurer under the sun wants you to choose these types of product. So does every pharmacy benefits manager around. And going with them can save you plenty of money. What are these popular items? Generic drugs.

Where there's lots of attention, there are investing opportunities. That's definitely true for the generic drugs market. Here are three generic drug stocks investors might want to watch closely.

1.Lannett CompanyIf you're looking for impressive numbers in a generic drug stock, look no further than Lannett. The company made nearly $274 million in revenue with over $57 million going to the bottom line last fiscal year. Lannett's return on equity stands at 40% -- a figure that would bring smiles to the faces of most investors.

Lannett boasts a lineup of generic drugs across a broad range of indications. Thyroid deficiency medications account for the largest sales volume, followed by gallstone and cardiovascular drugs. Lannett's plan, though, is to shift more to controlled substance drugs, particularly pain management medications, that carry higher gross margins. The company hopes to receive at least 50% of total revenue from controlled substance drugs within five years.

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Shares dropped 12% in early May after the drugmaker reported third quarter revenue of $99.4 million, lower than the $100.7 million expected by Wall Street. However, Lannett beat earnings estimates and raised its full-year guidance.

Thanks to this revenue miss, Lannett looks like an attractive bargain now even though shares are still up almost 30% year-to-date. Its earnings multiple of 15 seems relatively inexpensive, especially considering that the company should see solid percent earnings growth over the next several years.

2.Sagent Pharmaceuticals
Sagent's niche is injectable drugs with a focus on anti-infective, critical care, and oncology drugs. Unlike Lannett, Sagent's numbers probably won't impress anyone. The stock is down 11% so far in 2015. The company lost $1.9 million last quarter. On top of all that, Sagent is also looking for a new CEO, as the company's previous CEO retired in March.

So why is Sagent a generic drug stock to watch? Because things could easily get much better in the not-too-distant future.

That first quarter loss wasn't because of revenue problems; sales actually increased nearly 17% year-over-year. The culprit was increased spending, over $3.3 million of which was related to its management transition and another $1.2 million on acquisition activities.

With a market cap in the $700 million range, Sagent could be on the short list of targets for larger generic drugmakers looking for acquisition opportunities of their own. An analyst pointedly asked company president Michael Logerfo during the company's last earnings call if a sale could be in the cards. That question wasn't answered directly, but sometimes silence speaks volumes. It wouldn't be surprising to see Sagent attract buyout interest.

3.Actavis plc
When it comes to acquisitions, few generic drugmakers have been as busy as Actavis. Most recently, Actavis gobbled up Allergan in a $70.5 billion transaction that closed in March. Last year, Actavis bought out Forest Laboratories, Furiex Pharmaceuticals, and Durata Therapeutics.

All this activity allows Actavis to claim around 250 generic drug product families on the market, including Lidocaine andTelmisartan. With the Allergan purchase, Actavis also now has blockbuster brand drugs Botox and Linzess.

Actavis sports a forward earnings multiple of 14. That's not bad at all -- and looks even better factoring in the company's expected earnings growth over the next several years. It's entirely possible that Actavis isn't through with its buying frenzy. However, the company is leveraged quite a bit now, so I wouldn't expect any huge deals on the immediate horizon.

Best of the bunch
Of these three generic drug stocks to watch, I'd contend that Lannett deserves the most attention. The stock's sell-off in early May appears to be overdone in my opinion.

Lannett has solid financials and a smart business strategy in targeting the controlled substance market. The consensus analysts' view is that shares will rise by 17% over the next year. I suspect their projections are on track. Keep your eyes on Lannett.

The article 3 Generic Drug Stocks to Watch originally appeared on Fool.com.

Keith Speightsowns shares in Lannett Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.