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NEW YORK A rash of U.S. manufacturing setbacks for some significant generic drugmakers stands to benefit large rivals such as Teva Pharmaceutical Industries Ltd (TEVA.TA) and Mylan Inc (MYL.O) by reducing competition.
Teva, Mylan and Watson Pharmaceuticals WPI.N, three of the top four U.S. generic drugmakers, could see better pricing in the cutthroat generic industry -- that is, if they themselves keep from running afoul of standards.
Manufacturing violations that cause firms to stop production also may lead to opportunities of limited or no competition on select products. Watson already gained from such a scenario when a rival was forced to back out of markets for a blood-pressure drug and a potassium supplement.
"It's a boon to the generic industry," said Caris & Co analyst David Moskowitz. "It's part of the reason why we're seeing prices firm in the U.S. generic market."
More limited competition should keep momentum going for the shares of large generic drug companies -- one of the rare healthcare industries in favor on Wall Street this year amid President Barack Obama's health reform push.
As low-cost versions of brand-name drugs, generic drugs offer a way to cut healthcare costs -- a major priority of the new administration.
Mylan, Watson and Teva shares have already outperformed the broader drug industry and the S&P 500 index .SPX this year.
"It's a defensive earnings stream. It's immune to political risk," said Collins Stewart analyst Louise Chen. "If you want to cut costs what are you going to use more than generics?"
In the past year, Actavis, KV Pharmaceutical Co KVa.N, Caraco Pharmaceutical Laboratories CPD.A and Sandoz, the generic drug unit of Novartis NOVN.VX, have all been cited for problems by the U.S. Food and Drug Administration.
Some have been particularly severe: KV was forced to stop manufacturing and selling products at all its facilities until satisfying conditions under a consent decree with the FDA. The FDA also halted reviews of drug applications from Ranbaxy Laboratories' RANB.BO Paonta Sahib plant in India after saying the drugmaker falsified data and test results.
After enduring criticism last year about its inspections over tainted supplies of the heparin blood thinner, the FDA has done thorough examinations of compliance "and they're starting to find some issues," said Roy Sturgeon, president of Lachman Consultants, a pharmaceutical consultant firm.
"I think there's been additional scrutiny that's been applied," Sturgeon said.
"We've seen a number of firms both within the U.S. borders and outside that have come under a lot more scrutiny than they did in the past," Sturgeon said. "I think a lot of firms, because of their desire to get product out the door, have forgotten to take a look at the basic system and controls that make those drug products."
The manufacturing problems have led to shortages of certain drugs, including narcotics and analgesics, Sturgeon said.
An FDA spokesman said frequent regulatory inspections and resulting actions are sometimes the result of industry misconduct, but he did not have any specific information that the agency has ramped up inspections recently on generic manufacturing plants.
One would expect more actions against generic manufacturing plants than ones that make brand drugs, simply because there are more generic producers, the spokesman said.
"We try to be consistent in the toughness of our regulatory program," FDA spokesman Christopher Kelly said.
Moskowitz, the Caris analyst, said drugstore chains, wholesalers and other customers can play generic companies off one another to ensure lower prices, but when companies endure supply problems, "that allows certain manufacturers to raise price on products."
Large companies such as Teva and Mylan also can scale up manufacturing, positioning them to benefit when others falter, analysts said.
Teva and Mylan stand out as having "fairly pristine manufacturing track records in the past," said Natixis Bleichroeder analyst Corey Davis. "You may see some of the lower-tier generic companies also fall victim to this."
Gabelli & Co analyst Kevin Kedra pointed to Teva as a beneficiary.
"For the most part, the companies that have a strong history of quality manufacturing, those are the companies probably worth investing in," Kedra said.
Some analysts say the benefit from supply issues are relatively minor because many manufacturers remain, keeping prices low and competition fierce. Also, continued negative news about manufacturing problems among generic drugmakers could lead to doubts about generics and cast a pall over the entire sector.
Even weighing potential concerns raised over the supply, Kedra said the situation represents a "net positive" for companies that stay on the straight and narrow.
"It's a silver lining for the ones that aren't running afoul," Kedra said.
(Editing by Matthew Lewis)