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Family-owned Indian drug factories erode US generic prices

[MUMBAI] The most recent earnings reports across the generic drug industry have read like dispatches from the front lines of a price war.

This month, the world's largest copycat drugmaker, Israel's Teva Pharmaceutical Industries Ltd, slashed its dividend; US giant Mylan NV lowered its profit target; and India's Sun Pharmaceutical Industries Ltd reported its first quarterly loss in at least 12 years.

The source of the pain? At least some of it can be traced to the global ambitions of a growing constellation of family-owned drug factories in India. Their expansion is boosting competition in the US, where mergers among pharmacy chains and pricing wars between drugmakers had already been driving down the cost of generics.

"The assumption was there would be a step-down, but nobody expected it would be this bad," said Ronny Gal, an analyst at Sanford C Bernstein & Co.

As the smaller Indian manufacturers are growing stronger, the US Food and Drug Administration is working to boost competition by handing out approvals at a record pace. The agency has said it will specifically favor generic drug applications for products that have few competitors as a way to drive down prices further.

India was already the world's largest exporter of generic drugs, with US$16.4 billion sold abroad last year. In the first half of 2017, Indian firms got about 40 per cent of new US approvals for generics, up from 35 per cent just a year earlier, and with a wider base of companies than ever before taking part, according to FDA data analysed by Bloomberg News.

"With more and more companies in the fray, the competition has intensified," Pankaj Patel, chairman of Ahmedabad-based Cadila Healthcare Ltd, said in an email. The company's main US subsidiary has received 27 approvals this year through July, compared with eight last year. "The pure generics sphere has seen price erosion."

India is home to about 6,000 drugmakers, according to its government's estimates, members of a cutthroat market characterised by price controls, limited insurance levels and low patient incomes. That makes the US look like easy pickings, according to Surajit Pal, an analyst at Prabhudas Lilladher Pvt Ltd in Mumbai.

Instead of introducing a generic product and then lowering the price when forced to, many of the Indian companies will play a far more brutal game, Mr Pal said.

"The US business is basically icing on the cake, so they don't mind giving you a 90 per cent discount on the very first day," Mr Pal said. "The US will get cheaper products going forward. The US will get more competition from Indian guys."

Thirty-two different Indian firms received US approvals to sell new generics in the first half of this year - almost double the number from two years ago. The approvals came as India's top 10 drugmakers grew their share of the US generics market from 14 per cent in 2010 to about 24 per cent today, according to Bernstein's Gal.

Among the leaders in approvals were Hyderabad-based Aurobindo Pharma Ltd and Cadila, two of India's biggest drugmakers who have only turned their attention to the US more recently. The companies, controlled by their founding families, are worth US$6.8 billion and US$8.2 billion respectively on the local stock exchange.

Smaller Indian firms that previously had little presence in the US are also seeing approvals surge.

Mumbai-based Macleods Pharmaceuticals Ltd, a closely held company that came onto the US scene in 2012 with 12 approvals, has been one of India's most prolific filers every year since. It's gained approvals for eight new drugs this year to treat conditions including pain, high blood pressure and depression. Ajanta Pharma Ltd, a US$1.6 billion public firm that's been operating in India since 1973, only had two US approvals to its name until 2014. Last year, it had nine new approvals.

Or Alkem Laboratories Ltd, also operating in India for nearly fifty years. Alkem had been chugging along with about two or three US approvals a year since 2009, but this year it's received six.

Aurobindo, Macleods, Ajanta and Alkem didn't respond to requests for comment.

With so many rivals in the generics space, Cadila's pipeline needs to broader, said MrPatel, whose father founded the company.

"It will be crucial to look beyond pure generics at specialty products if we need to stay ahead of competition," said Mr Patel. "We have a large pipeline of products which are under approval, and the attempt has been to create a judicious mix of generics, specialty and niche products." Successful drug makers will be ones who can develop complex technologies to deliver drugs and new formulations to create a specialty niche portfolio with less competition, he said.

Shares of Sun Pharmaceutical declined 0.9 per cent as of 10:02am in Mumbai. Cadila Healthcare fell 0.4 per cent, Cipla Ltd dropped by 0.7 per cent, Alkem Laboratories dropped 0.8 per cent and Ajanta Pharma advanced 0.6 per cent. The benchmark S&P BSE Sensex Index fell 0.2 per cent.

In the US, falling prices are sweeping across the industry. Mylan's revenue growth has slowed in part by pressure on generic-drug prices, prompting the company to try to stave off the damage through acquisitions and new products. Teva said it was in danger of breaching covenants on its debt amid a drop in cash flow that's forcing it to cut jobs and exit markets. When Swiss giant Novartis AG reported earnings results in July, it said US generics sales were down 15 per cent, driven largely by price pressure.

Overall, US generic drug prices fell 8 per cent last quarter compared with a 4 per cent increase in sales volume, according to Bloomberg Intelligence.

It's not just the drugmakers that have been suffering. McKesson Corp and other major wholesalers that distribute about US$400 billion worth of drugs each year cited generic pricing as a reason for their shrinking margins.

McKesson and Mylan declined to comment.

While prices of some specialty medicines have surged in recent years, such increases are harder to pull off amid greater political scrutiny and a wide-ranging US Justice Department investigation that is looking into possible price collusion in the US generics industry.

The deep discounts offered by the new Indian players to gain market share force the incumbent players to match them. That can cut the total value of the market by as much as half, said Kumar Saurabh, an analyst at Motilal Oswal Securities Ltd.

While Indian companies have drawn scrutiny from US regulators over manufacturing quality in recent years, curtailing some of the biggest players' ability to win approvals, other firms have stepped in.

Cipla, which research firm Quintiles IMS Holdings Inc says is the third-biggest player in India's pharmaceutical market, aims to increase its own US presence. And both Mumbai-based Sun Pharma and Dr Reddy's Laboratories Ltd, another of the first Indians to move into the US market, have a backlog of applications that have been held up by regulatory troubles which could start flowing if their factories get clearance from regulators.

"The competition has become more cutthroat," Mr Saurabh said.