Indian drug firms may lose out as US pharma supply chain consolidates

Written by Pallavi Ail | Mumbai | Updated: Mar 3 2014, 06:52am hrs
PharmaThe pharma supply space has seen a fair bit of consolidation in 2012 with 16 deals in the drug supply chain
Consolidation in the pharmaceuticals supply chain in the US will weigh on the bargaining power of Indian drug firms in that market, top Indian players apprehend. A spate of acquisitions and joint ventures 16 in 2012 and 10 in 2013 has resulted in fewer suppliers of prescription drugs, which might work against the interests of Indian firms.

Lupin CEO Vinita Gupta acknowledged there will be pricing pressure because of the mergers in the supply chain space. Speaking to analysts after the Q3FY14 results announcement, Gupta observed, The challenges arising from the consolidation of our customers are significant and there is a lot of pressure on pricing. But the Walgreen consolidation happened well before the CVS-Cardinal (deal) and so far, we have survived it. Weve been able to manage pretty well.

Abhijit Mukherjee, president and head of global generics segment, Dr Reddys Laboratories, also agreed, on a call with analysts, that there could be some impact of the changes in the US supply chain environment. There have been some mergers between wholesalers and retailers and depending on how many customers a company has in each segment, there will be an impact, Mukherjee said, adding that his firm had factored the changes into its plans. While there will be an impact, its a part of the erosion in the generics business, he said.

Sun Pharmaceutical Industries CEO Dilip Shanghvi recently said it was clearly becoming increasingly difficult to find a way to negotiate effectively. There would be increasing pressure on manufacturers, Shanghvi noted.

In a recent report, HSBC Global Research said the CVS-Caremark, Medco-Express Scripts and Walgreen-Alliance Boots mergers have increased the purchasing power of distributors and retailers.

The higher power of PBMs (pharmacy benefit managers) may result in downward pressure on drug prices and consequently hurt margins of most drug companies in the US market, the HSBC Global Research note highlighted.

Indian companies have indicated some volume-price trade-off given the product mix and given that they are the top suppliers of several products. Large generics players believe they are better placed given their relationships with global supply chains and the capacity to meet large volumes, JPMorgan analyst Neha Manpuria said.

The pharma supply space has seen a fair bit of consolidation in 2012 with 16 deals in the drug supply chain. In 2013, there were 10 acquisitions and in November. CVS Caremark the largest supplier of prescription drugs in the US bought Coram, a specialty infusion service provider, for $2.1 billion. In December 2013, CVS Caremark and its peer Cardinal Health decided to create a joint venture to source generic drugs for the US market. Scheduled to take off in July, the venture will procure generics worth $11 billion to $12 billion. The deal was announced nine months after US distributor AmerisourceBergen announced an agreement with retail drugstore operators Walgreen and Alliance Boots in March 2013, signalling a tie-up in the retailer-wholesaler chain. Another US distributor, McKesson, announced it will buy a majority stake in German drugs wholesaler Celesio for about $5.4 billion, adding the German market to its portfolio. Already, in 2014, two deals have been announced.

Analysts say the segment has not seen the last of consolidation. Charles Rhyee at New York-based brokerage Cowen and Co recently observed, We have now seen some of the largest generic purchasers combine to form partnerships, and we expect the trend to continue. In addition, we think other large direct purchasers of generics may look to join the various coalitions.

In the US, distributors also referred to as PBMs such as CVS Caremark, Cardinal Health, AmerisourceBergen, McKesson, Express Scripts purchase drugs from manufacturers that are then sold to operators of retail drugstore chains like Walgreen, Alliance Boots, Rite Aid and Shoppers Drug Mart.

HSBC analysts tracking the pharmaceutical market said the share of Indian companies in the generic US prescription market rose from approximately 12% in 2008 to about 26% in 2013, while generic drug penetration has jumped to more than 85% over the last five years mainly due to significant patent expiries, which hints at the potential market Indian generic drug companies can take advantage of.