The consolidation of pharmaceutical supply chains in the US, by which wholesale and retail drug suppliers have teamed up to procure generic
medicines, is starting to hurt revenues of Indian generics players, whose sales come mainly from the US market.
Abhijit Mukherjee, COO, Dr Reddy’s Laboratories, told analysts on a call recently, “Without giving you exact figures, I think this has been one of the most brutal years of price erosion as channel consolidation has been heavy in the US.”
Most of the expected consolidation in the US drug supply chain, Mukherjee said, had happened and while the firm had been able to counter the impact, partly through an increase in market share, it had not been able to do so completely.
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The Hyderabad-headquartered firm and India’s largest pharmaceutical company by revenue, reported an 8% year-on-year growth in North America sales to Rs 1,430 crore in the July-September period. This was much lower than the 42% growth clocked in the corresponding period of FY14.
The management of Sun Pharmaceuticals also confirmed US generic sales had been hurt. Revenues from US formulations grew 13% year-on-year to Rs2,912 crore in the September quarter, way below the 95% growth the company clocked in the corresponding period of FY14.
Chief financial officer Uday Baldota recently observed that channel consolidation in the US continued to impact generic companies putting pressure on pricing. “However, we are not changing our revenue guidance for now,” Baldota said.
Glenmark Pharmaceuticals confirmed the consolidation had impacted his company’s US top line by around 10%. Glenn Saldanha, Glenmark’s chief executive, said “the 10% was the cost of consolidation, which every single pharma company is taking if it has to continue holding its market share”. The president of the company’s North American operations, Robert Matsuk, however, believes the worst may be over.
In the US, drug distributors, also referred to as pharmacy benefit managers (PBMs) – CVS Caremark, Cardinal Health and AmerisourceBergen – purchase drugs from manufacturers, and sell them to retail drugstore chains like Walgreen, Alliance Boots, Rite Aid and Shoppers Drug Mart.
Since 2012, there has been extensive consolidation between pharmacy managers and retail chains –16 mergers and acquisitions were reported in 2012 and 10 in the following year.
This included CVS Caremark, the largest supplier of prescription drugs in the US, acquiring 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 worth $11-12 billion for the US market.
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While the number of players in the wholesale and retail space has fallen, their bargaining power has risen. In reports issued by HSBC and JPMorgan earlier this year, analysts indicated such deals could squeeze margins for makers of generic drugs.
“The top five dispensing pharmacies accounted for approximately 65% of 2013 US prescription dispensing revenues versus 60% for the top six in 2008,” JPMorgan analyst Neha Manpuria, wrote in a report dated April 22. However, the pace of consolidation has picked up over the last year with the recent M&A/JV announced creating mega generic buyers. Manpuria added that this was likely to have an impact
on the upcoming negotiations of generic sourcing deals from FY15.