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Family-owned drug factories in India erode US generic prices

LiveMint logoLiveMint 31-08-2017 Ari Altstedter

Mumbai/New Delhi/New York: The most recent earnings reports across the generic drug industry have read like dispatches from the front lines of a price war.

In August, the world’s largest copycat drugmaker, Israel’s Teva Pharmaceutical Industries Ltd, slashed its dividend; US giant Mylan NV lowered its profit target; and India’s Sun Pharmaceutical Industries Ltd reported its first quarterly loss in at least 12 years.

The source of the pain? At least some of it can be traced to the global ambitions of a growing constellation of family-owned drug factories in India. Their expansion is boosting competition in the US, where mergers among pharmacy chains and pricing wars between drugmakers had already been driving down the cost of generics.

“The assumption was there would be a step-down, but nobody expected it would be this bad,” said Ronny Gal, an analyst at Sanford C. Bernstein & Co.

As the smaller Indian manufacturers are growing stronger, the US Food and Drug Administration (USFDA) is working to boost competition by handing out approvals at a record pace. The agency has said it will specifically favour generic drug applications for products that have few competitors as a way to drive down prices further.

India was already the world’s largest exporter of generic drugs, with $16.4 billion sold abroad in 2016. In the first half of 2017, Indian firms got about 40% of new US approvals for generics, up from 35% just a year earlier, and with a wider base of companies than ever before taking part, according to FDA data analysed by Bloomberg News.

India is home to about 6,000 drugmakers, according to its government’s estimates, members of a cutthroat market characterized by price controls, limited insurance levels and low patient incomes. That makes the US look like easy pickings, according to Surajit Pal, an analyst at Prabhudas Lilladher Pvt. Ltd in Mumbai.

Instead of introducing a generic product and then lowering the price when forced to, many of the Indian companies will play a far more brutal game, Pal said.

“The US business is basically icing on the cake, so they don’t mind giving you a 90% discount on the very first day,” Pal said. “The US will get cheaper products going forward. The US will get more competition from Indian guys.”

Thirty-two different Indian firms received US approvals to sell new generics in the first half of 2017—almost double the number from two years ago. The approvals came as India’s top 10 drugmakers grew their share of the US generics market from 14% in 2010 to about 24% today, according to Bernstein’s Gal.

Among the leaders in approvals were Hyderabad-based Aurobindo Pharma Ltd and Ahmedabad-based Cadila Healthcare Ltd, two of India’s biggest drugmakers who have only turned their attention to the US more recently. The companies, controlled by their founding families, are worth $6.8 billion and $8.2 billion respectively on the local stock exchange.

Smaller Indian firms that previously had little presence in the US are also seeing approvals surge.

Mumbai-based Macleods Pharmaceuticals Ltd, a privately held company that came onto the US scene in 2012 with 12 approvals, has been one of India’s most prolific filers every year since. It’s gained approvals for eight new drugs so far in 2017 to treat conditions including pain, high blood pressure and depression. Ajanta Pharma Ltd, a $1.6 billion public firm that’s been operating in India since 1973, only had two US approvals to its name until 2014. In 2016, it had nine new approvals.

Or Alkem Laboratories Ltd, also operating in India for nearly fifty years. Alkem had been chugging along with about two or three US approvals a year since 2009, but in 2017 so far, it’s received six.

Aurobindo, Cadila, Macleods, Ajanta and Alkem didn’t respond to requests for comment.

US industry

In the US, falling prices are sweeping across the industry. Mylan’s revenue growth has slowed in part by pressure on generic-drug prices, prompting the company to try to stave off the damage through acquisitions and new products. Teva said it was in danger of breaching covenants on its debt amid a drop in cash flow that’s forcing it to cut jobs and exit markets. When Swiss giant Novartis AG reported earnings results in July, it said US generics sales were down 15%, driven largely by price pressure.

Overall, US generic drug prices fell 8% last quarter compared with a 4% increase in sales volume, according to Bloomberg Intelligence.

It’s not just the drugmakers that have been suffering. McKesson Corp. and other major wholesalers that distribute about $400 billion worth of drugs each year cited generic pricing as a reason for their shrinking margins.

McKesson and Mylan declined to comment.

While prices of some specialty medicines have surged in recent years, such increases are harder to pull off amid greater political scrutiny and a wide-ranging US Justice Department investigation that is looking into possible price collusion in the US generics industry.

The deep discounts offered by the new Indian players to gain market share force the incumbent players to match them. That can cut the total value of the market by as much as half, said Kumar Saurabh, an analyst at Motilal Oswal Securities Ltd.

While Indian companies have drawn scrutiny from US regulators over manufacturing quality in recent years, curtailing some of the biggest players’ ability to win approvals, other firms have stepped in.

Cipla Ltd, which research firm Quintiles IMS Holdings Inc. says is the third-biggest player in India’s pharmaceutical market, aims to increase its own US presence. And both Mumbai-based Sun Pharma and Dr. Reddy’s Laboratories Ltd, another of the first Indians to move into the US market, have a backlog of applications that have been held up by regulatory troubles which could start flowing if their factories get clearance from regulators.

“The competition has become more cutthroat,” Saurabh said. Bloomberg

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