Indian drug makers feel the pressure as US pharmacies consolidate

Mumbai: Consolidation among US buyers of generic drugs is turning up the heat on the world’s smaller generic drugmakers such as India’s Lupin Ltd. and Dr. Reddy’s Laboratories Ltd.

A handful of retailers including CVS Health Corp. and Walgreens Boots Alliance Inc. control most generic purchasing in the US, and consolidation and alliances among them are changing the industry’s competitive landscape. Dr. Reddy’s has lost market share in generic Lipitor this year, data from Symphony Health Solutions show, while Mylan NV and Apotex Inc. sold a bigger share of the cholesterol lowering drug. Lupin saw average price erosion of about 12% in 2014 in the US.

When customers consolidate, “their bargaining power goes up,” said G.V. Prasad, chief executive officer (CEO) of Dr. Reddy’s. “When three companies own 80% of the market, one of them can make a huge shift to your business.”

Dr. Reddy’s share in generic Lipitor dispensed by US retailers dropped to 13% in July, from 17% in January, according to prescription data from Symphony Health Solutions. Prasad said the company has seen pricing pressure in the class of cholesterol medicines called statins and in other commoditized products as competitors get “aggressive” to win over buyers.

“Generic drug prices on the whole are on a downward trend” in response to buyer consolidation and US congressional probes into price inflation, said Elizabeth Krutoholow, an analyst at Bloomberg Intelligence.

Product range

Drugmakers with a wider range of offerings are benefiting because they simplify the sourcing of products for large pharmacy chains, she said. The most commoditized drugs are the most susceptible to price declines, while specialty generics like injectables tend to be more insulated.

To counter the effects of customer consolidation, Dr. Reddy’s plans to “further enhance the mix of complex molecules and operate by design in the space of difficult-to-develop and manufacture portfolio,” the company said in e-mailed answers.

Larger generic drugmakers are also feeling the pressure on pricing, resulting in deals. Allergan Plc’s CEO Brent Saunders has said that buyer consolidation helped persuade the company to sell its generic division to Teva Pharmaceutical Industries Ltd.

Price erosion

Lupin and Dr. Reddy’s are among the Indian companies that have seen price erosion, while smaller drugmakers like Cadila Healthcare Ltd. may also be feeling the effects, said Nimish Mehta, director of Research Delta Advisors. Indian generic drugmakers saw price declines of 5% to 10% for older products in the US in the quarter ended June, estimates Surya Patra, an analyst at PhillipCapital India Pvt. in Mumbai.

Dr. Reddy’s draws 27% of its revenue from commoditized generic products, while Lupin gets about a quarter from such medicines, Research Delta estimates. Both companies have sought to invest in complex injectables and niche products, where lower competition helps companies hold prices steady and sometimes raise them. Spokespeople for Cadila and Lupin didn’t respond to calls and e-mails seeking comment.

Cholesterol-reducing drugs like Lipitor, also known as atorvastatin, and Zocor, also known as simvastatin, are among the most commonly prescribed drugs in the US. Dr. Reddy’s share in simvastatin dispensed dropped to 1.8% from 6.6% at the start of the year, according to the Symphony data.

US Sales

In spite of pressure on such products, Dr. Reddy’s was able to raise North America generic sales by 14% to ₹ 18.5 billion ($280 million) in the quarter ended June, because of its investments in injectable drugs and other products with less competition.

Lupin reported its US sales declined 31% in the same quarter. Sales slid due to price erosion and a lack of new approvals from the Food and Drug Administration, Spark Capital said in a 27 July research note. Lupin is the biggest supplier of simvastatin in the US, and according to the Symphony data its share was largely unchanged at about 40% from January to July.

To be sure, price erosion is part of the business of selling generic drugs in the US, where new competitors can enter after a six-month exclusivity period that protects the first drugmaker to get FDA approval. The deals in the pharmacy chains are adding to those pressures.

Supply Chain

A small set of buyers now controls much of the generic purchasing in the US: McKesson Corp.; CVS through its partnership with Cardinal Health Inc.; Walgreens Boots Alliance Inc. through its arrangement with AmerisourceBergen Corp.; and Wal-Mart Stores Inc.

McKesson bought Celesio AG for about $5 billion in 2014 to gain influence in drug distribution, while CVS and Walgreens made their respective deals the previous year. CVS this year struck a deal to buy Target Corp.’s pharmacies and clinics.

There is consolidation in other parts of the US supply chain as well, including wholesalers and distributors, said Dilip Shanghvi, managing director of Sun Pharmaceutical Industries Ltd., in a call with analysts on 11 August. Sun Pharma didn’t respond to an e-mail seeking further comment.

“There is a significant consolidation of the distribution channel now,” Shanghvi said on the August call. “To an extent where I think four customers represent in excess of maybe 80% of the market. So, it does create a situation where you have limited number of potential customers that you have to sell to.”