Minor short term glitches: Indian pharma, Dalal St shouldn't worry about US inspections

In its latest assault on generic drug manufacturers, the US has started a probe into pricing of products by 14 generic manufacturers, including Sun Pharmaceutical, Dr Reddy’s Laboratories and Cipla.

A press release from House Committee on Oversight and Government Reformsaidits ranking member Elijah E. Cummings and Senator Bernard Sanders have asked the companies to give them “information about the escalating prices they have been charging for generic drugs”.

The development is significant not because of its likely impact on the Indian companies and their share prices (they fell yesterday up to 5 percent), but because it explains the rationale behind the slew of actions the US has been taking against Indian pharma companies.

According to a report by India Ratings published in May 2014, the US Food and Drug Administration’s inspections on Indian pharma have been increasing over the years. From 45 in 2010, they increased to 121 in 2012. The report has said there were 55 such inspections in just nine months in 2013.

Meanwhile, the number of units by Indian pharma companies that got registered with the US FDA has also increased exponentially - 523 as of March 31, 2014 from below 100 in 2008. India now has the highest number of such units for any country outside the US, the Indian Ratings report says.

Along with this, the US healthcare’s dependence on generics has also increased.

Let’s look at the data by IMS Health, a company that provides healthcare information, services and technology. According to a report by IMS Health, total US spending on medicines increased from $319.1 billion in 2012 to $329.2 billion in 2013.

The report notes that the reason for the overall spending increase in 2013 is largely the lower patent expiry than in 2012, and also higher contribution from brand price increases. So, economically, it makes sense to increase the dependence on generics. This also explains why generics constituted 86 percent of dispensed prescriptions in 2013 and also why the spending in this segment grew by $5.8 billion.

According to the letter sent by the senators, the prices of generic drugs have increased exponentially. The price of doxy cycline hyclate, an antibiotic, increased by a whopping 8281 percent in just seven months over October 2013 to April 2014. Albuterol sulphate, meanwhile, saw a price rise of about 4,000 percent.

These price surges are sure to impact the overall healthcare spending in the country, given the dependence of the US on generics. And this dependence is only bound to increase for the following reasons:

Over the last few years, Indian pharma companies’ exports to the US have witnessed a surge. The India Ratings report notes that Indian pharmaceuticals exports to the US more than doubled during 2008-13 with an annual growth rate of more than 20 percent.

In 2013-14, Dr Reddy’s US sales stood at Rs 6,212 crore, which is about 47 percent of its overall sales of Rs 13,217 crore. For Sun Pharma, which has also come under US FDA scanner recently, the share was a larger 61 percent at Rs 9,784 crore of the total sales of Rs 16,004 crore. For Cipla, the share is comparatively smaller 7 percent of total.

According to a report by Emkay Global, Indian companies are likely to make bigger inroads into the US market.

“The generic market of US has evolved over the last 5 yearsfrom a plain vanilla market to a specialty market. We believe Indian players have created specialized spaces for themselves (Cipla for respiratory, Glenmark for dermatology, Cadila for transdermals) and are poised to maximize returns from the opportunity,” a research report by the brokerage says.

India Ratings too concurs with the view. Also, it feels, along with the increase in the Indian pharma companies’ role, the number of inspections is also likely to grow.

“…The continuously increasing number of approved manufacturing facilities and products increases the potential for Indian imports into the US. Moreover, the negative press that the Indian pharmaceutical manufacturers have been facing since early 2013 has increased the sensitivity of the US public towards drugs imported from India. Consequently, the frequency and quantum of FDA inspections are bound to increase,” it says.

It also says despite the more intense regulatory oversight, actions are likely to subside. The reason could be that the companies will prepare themselves to deal with the situation by cleaning up their act.

The bottomline is that Indian pharma companies and investors need not worry about be the US inspections and price actions. These are minor short-term glitches and in the long run, they will only gain thanks to access to the US market.

With inputs fromKishor Kadam