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Published on 16/05/2019 11:23:30 AM | Source: Motilal Oswal Securities Ltd

Healthcare Sector - Lawsuit on US generic pricing intensifies By Motilal Oswal

Posted in Broking Firm Views - Sector Report| #Motilal Oswal #Sector Report #Health

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Lawsuit on US generic pricing intensifies

Investigation into suspicious pricing gets more comprehensive

* Post initiation of investigation into companies conspiring to fix prices for certain generic drugs in Jul’14, there has now been an increase in the number of products and companies under dispute.

* Further, the investigative action expanded to include 48 state attorneys of the US now from 20 in 2016.

* The case document provides a company-wise list of products that have come under collusion allegations. Sales contribution from these products for companies under our coverage was in the range of 5% to 54% in CY14 – minimum for Aurobindo Pharma (ARBP) and maximum for Glenmark Pharma (GNP).

* It is important to note that the investigation has been ongoing since 2014 and the verdict is yet to come. As of now, the financial impact for companies involved is minimal. However, given intensifying competition due to faster ANDA approvals and regulatory headwinds, the litigation raises the risk associated with the US generics business for companies involved in the litigation.

 

The case background:

The State Attorney of USA has alleged that the generic pharmaceutical industry has operated with the understanding of non-competing with each other and have instead settled on ‘fair share’ for all. This, according to the case document, restricts competition among generic manufacturers, and in turn, devoids customers of the price benefit. The document also highlights that ‘fair share’ was the result of specific discussions, negotiations and collusion among industry participants over the course of years.

 

The status now:

The State of Connecticut had initiated a non-public investigation into suspicious price increases for certain generic pharmaceuticals. The investigation has progressed over the years, with the list of drugs now expanding to 300 and the number of companies involved increasing to 16. Notably, the allegations are supported by information, evidence, review of documents of generic companies, phone-call database and unidentified co-operating witnesses who are directly involved in the conduct alleged. There is also allegation that defendants reduced price increases dramatically after government intervention commenced so as to avoid further attention to them.

 

Company-wise impact:

We tried to analyze the list of products in the case document for the companies under our coverage. Annual sales for products under dispute have varied from ~USD36m for ARBP to ~USD250m for SUNP/LPC as of CY14. Also, the contribution of these products to company sales is in the range of 5% to 54% – minimum for ARBP and maximum for GNP (refer Exhibit 3-13). The case is ongoing and defendants would respond to the complaints against them. Also, there is no clarity on calculation of penalty on companies if the allegations are found to have merit. Given the scenario of intensifying competition due to faster ANDA approvals and regulatory headwinds, the litigation raises the risk associated with the US generics business for companies involved in the litigation.

 

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