Credit rating agency ICRA said that Indian pharmaceutical companies face 10-12% price erosion in comparison with Us generic market so it’s going to more challenging for Indian drug makers.
According to ICRA report the revenue growth rate for the US market was negative for the last three-quarters Q4FY2017, Q1FY2018 and Q2FY2018 at -16.0 percent, -18.8 percent, -14.7 percent respectively which causes an impact of price erosion on the revenues.
Although the US has been a significant contributor to growth and profitability to Indian generic companies over the last decade, the US generic business has faced slowdown over the last couple of years and registered a decline over three quarters ending September 2017, led by increased competitive intensity resulting in steep pricing pressure.
ICRA said the sustained pressure is likely to be credit negative for companies that are facing headwinds in the form of regulatory action for manufacturing deficiencies or weak pipeline of ANDAs inhibiting ability to launch new and profitable drugs to counter it.
The US generic markets characterized the price erosion historically by buying bulk volumes at lower prices.
“However, pricing pressure on the US generic business has intensified over the last 12 months. The yearly price erosion which stood at approximately 5-7 percent during Q2FY2017 for our sample companies has gradually increased to low teens in Q2FY2018 contributed by the consolidation of distribution supply chain (trade partners) and faster ANDA approvals by USFDA post implementation of Generic Drug User Fee Act (GDUFA),” Jain said.
Over the last one and a half years, there have been two major announcements that led to consolidation in the US distribution supply chain with 85 percent of the generic pharma drug purchases controlled by three large buying consortiums.
In May 2016, Mckesson (a wholesaler) and Walmart (a retailer) announced their joint purchasing arrangement, while in May 2017, the tie-up between Walgreen Boots Alliance Development GmbH (WBAD) and Econdisc Contracting Solutions (Group Purchasing Organisation) took effect.
“The Mckesson-Walmart tie-up impact on prices has started to reflect in FY2018, though the impact of WBAD-Econdisc is expected to be fully reflected in FY2019 which will further lead to pricing pressure and keep the generic drugs prices down,” the ICRA note said.
“Consolidation of distribution supply chain has also led to the loss of market share in few products for companies on account of aggregation of demand by such purchasing consortiums or lack of economic viability for manufacturers to supply at reduced prices for larger volumes,” the rating agency added.
The ICRA report also blamed faster ANDA approvals leading to higher price erosion.
“While the lower growth is also attributed to limited first to file (limited competition) opportunities for US market, pricing pressure has been one of the key factors for such steep decline in revenues,” the report added.
The pricing pressure on the US generic business has also impacted the sector’s overall operating margins. ICRA’s sample set of companies’ operating margins fell from around 26-27 percent till Q3FY2017 to their current 18-19 percent, despite various cost control initiatives undertaken by companies.
While ICRA expects the pricing pressure to sustain over the next 12 months, a significant reduction in prices will render the US generic business unattractive for many players enabling stabilization and positive price changes in the medium term.
Before other complex generics entry intensify pricing pressure Indian companies will benefit from a faster approval cycle and higher margins.