An analysis of 582 drugs sold in the US by six leading Indian pharmaceutical companies shows that about 86% of these drugs did not register any change in price during calendar years 2013 and 2014, according to a report by Morgan Stanley.
The global financial services firm analysed the drug prices of six companies: Aurobindo Pharma, Cadila Healthcare, Dr Reddy’s Laboratories and Lupin, apart from Ranbaxy and Sun Pharmaceutical Industries, which are on the way to be merged.
This indicates that pricing power of Indian drug companies is now getting restricted more in the conventionally more lucrative US market, where many of them earn more than half their revenue from, than the local market.
Although drug price regulation exists in India, it covers only over 20% of the market where prices are capped but inflation-adjusted price increases are allowed. In the larger unregulated segment, annual price increase of up to 10% is taken for granted. Of course, drug prices are much cheaper in India than in the US — in the generics segment, US prices are 5 to 10 times that of India across product categories, while in case of patented products, the price difference is even larger.
The US revenue for Indian pharmaceutical companies will have jumped nearly 33% in the five fiscal years ending March 2015 to R30,500 crore, analysts said, annualising the numbers for the first half of FY15 to represent the entire financial year.
In CY13, US prices of drugs from Indian firms witnessed a weighted average decline of 0.2%, driven mainly by a higher number of new entrants to the market, supply chain consolidation and the regulatory action seen against Wockhardt and Ranbaxy by the US Food and Drug Administration.
“The US market showed deflationary pricing trends during the last decade, driven by new generic entrants (several from India),” the analysts wrote. “As a result, there were a higher number of players per product, which led to a multi-year pricing decline in the US generic market.”
This decline was further emphasised by consolidation in the supply chain as seen with the deals between AmerisourceBergen and Walgreens as also CVS and Caremark. “These alliances bargained for better pricing terms with generic manufacturers over the last 18 months,” the report said.
The impact of channel consolidation continued in the early part of CY14, but Indian companies were seen to have squeezed in some price hikes subsequently. The net weighted average price change for Indian companies was 4% in CY14. Dr Reddy’s and Lupin were the key beneficiaries, followed by Cadila and Aurobindo.
“In terms of number of products for which prices changed, relatively small portions of the portfolio were affected. However, the per product price changes were significant,” Morgan Stanley analysts wrote.
The analysts added that price changes were, however, “sharp” in case of very small products, with a price fall of 75% witnessed for some and a jump of 400% in the case of one drug. “This indicates that the inflationary price trend in the US is not pervasive and is limited to products or players,” the report said.
In October, US senator for the state of Vermont Bernie Sanders said that the US Congress is investigating alleged soaring generic drug prices in the country.
The US subsidiaries of Dr Reddy’s, Sun and Cadila are among the 14 companies that received notices from a Senate healthcare subcommittee. However, the companies said the information provided in the notice might be erroneous.
“We don’t know why they are doing this. We are not selling pravastatin (a lipid-lowering drug) in the US market. We launched divalproex in August 2013 and till date we have not raised the prices,” Kedar Upadhye, in charge of investor relations at Dr Reddy’s, had said at the time.
The company said the data mentioned in the letter show that the average market price for a class of drugs has been considered. Some of the competitors took a price increase, which is reflected in the data, Upadhye added.
“We believe (the price increase) is driven by supply shortages in specific products (due to FDA action), reaction to 2013 erosion due to channel consolidation and revenue mix (brands and niche products),” the analysts remarked. They said generic pricing in the US market in CY15 will be driven by potential USFDA regulatory action, improvement in approvals of generic drug applications or ANDAs, product mix of companies and negotiations with supply chains.
More significantly, pricing will be determined by the presence of low-competition products in a company’s portfolio and the brand owned by the company. “These will give the company an inherent advantage in increasing prices (or insulating against deflation),” the analysts wrote.