US DoJ last week filed the first charges in the drug pricing probe. We expect this to be the first of many a investigation to span most of the sector. Companies will likely pay fines commensurate with the benefits earned. Sun Pharma is the most at risk in our view. The investigations will also have significant impact on the sector over the medium term, with price hikes highly unlikely going forward and possibly increased price competition.
The US department of justice filed charges against two ex-executives of Heritage Pharma, an Emcure Pharma arm. The charges allege collusion in pricing of two drugs — doxycycline hyclate and glyburide. In addition, 20 state attorney generals have also filed cases against five companies — Mylan, Teva, Citron Pharma, Heritage Pharmaceuticals and Aurobindo Pharmaceuticals — for the same drugs.
The DoJ has been investigating 20+ drugs and 12+ companies for price collusion. The companies that have received subpeaons include Sun Pharma, Dr Reddy’s, Aurobindo, among others. We expect DoJ to file cases for most of the drugs and expect most generic players to be named. Along with these, states will likely file civil charges similar to that in the Heritage Pharma case. We estimate Sun Pharma to have earned c$1.2bn over FY13-16 from price hikes. If it has to pay fines of 1x profit, it will imply R28 impact per share.