Why pharma companies must take the lawsuit seriously
The pharma stocks had a bad week with the pharma index down by over 4% in the first day of the week itself. It all started with a Reuters news item stating that 44 states in the US had decided to file a lawsuit against 20 generic drug manufacturers, which included 7 Indian companies. The principal case was against Teva Pharmaceuticals but the lawsuit also indicted 19 other generic manufacturers for colluding with Teva for price fixing and artificially inflating prices of essential drugs. How serious could these charges really be?
Charges are serious
The charges are serious because the US continues to be India’s largest target market. The US allows generic drug makers to sell in the US so as to reduce the healthcare costs for Americans. If what the lawsuit alleges is true then Teva and 19 other companies have colluded to hike the prices of some of the essential drugs by up to 1000% in a short span of time. Of course, at these prices, the drugs were still cheaper but then the lawsuit alleges that these kinds of practices defeat the very purpose of allowing generics to function in the US. The seven Indian companies named in the lawsuit include Wockhardt, Reddy Labs, Aurobindo, Glenmark, Lupin, Cadila Healthcare and Taro. Now, Taro happens to be a subsidiary of Sun Pharma so effectively the entire India pharma industry comes under a cloud. The US takes these charges seriously!
How could it impact pharma?
As we have seen in the past, the US has been quite ruthless when it comes to handling cases of corporate frauds, price fixing and artificial inflating of prices. While the damages are hard to ascertain at this point of time, conservative estimates put out by Reuters pegs these penalties could be as high as $2 billion which will include disgorgement of gains and additional penalty imposed as a deterrent on these pharma companies. This needs to be seen in the light of the stringent norms that the US FDA is already applying on Indian facilities under Form 483 investigations. All this comes at a time when the industry margins are diminishing, competition is hotting up and US pharmacies are consolidating their business better.
It may boil down to politics!
When Trump was elected, Indian pharma had breathed a sigh of relief. That is because Hilary Clinton had actually pledged to take on generic pharma companies and force them to cut prices. But recent actions of Trump have shown that he may not be too far behind when it comes to an opportunity at putting America first. We saw that in the case of China. For the Indian pharma industry, the message is quite clear. There is a long road ahead to redemption. Valuations and margins are unlikely to improve in a hurry. Investors must factor this into their strategy!