When US President-elect Donald Trump in his first press conference yesterday railed against local pharmaceutical companies, drug firms back home felt a chill. Shares of Sun Pharmaceutical, Dr Reddy’s Laboratories, Aurobindo Pharma, among others were down in the range of 1-2 percent on the BSE today.
However, Wockhardt Chief Habil Khorakiwala says that Indian generic companies as a whole belong to a competitive industry in the US and therefore there is no scope for government intervention there.
What Trump is saying implies to generic companies that have a single source of supply, he said.
Speaking on the impact of Trump's comments on pharma companies, Anmol Ganjoo, Director, JM Financial said that the important factor is the potential price bidding. If the target happens to be the inflation in overall healthcare spends, then Indian companies like Wockhardt should be a net beneficiary, he said.
He also said that if there is a consistent move to bring down drug prices then it would mean faster approval processes by way of US FDA which again should help the Indian generic companies.
Trump's campaign platform also included allowing the Medicare healthcare programme to negotiate with pharmaceutical companies. Khorakiwala says as per the American law, the government cannot negotiate with the pharmaceutical industry for the drug which is under patent.
Below is the verbatim transcript of Habil F Khorakiwala and Anmol Ganjoo's interview to Ekta Batra and Prashant Nair on CNBC-TV18.
Ekta: Can we look at it with the glass half full that maybe if drug prices would be lower in the US markets it could actually benefit in terms of volumes for Indian generic companies?
Khorakiwala: Let me clarify to you that Indian generic company as a whole is a competitive industry in US and therefore there is no really a scope for government intervention there. However, some of the generic companies have a single source supply. All controversy which we are hearing is because of that. In such scenario it is quite possible that what president elect is saying that is what it implies to them basically.
Ekta: One of the things that we might in fact see sooner than later is that Medicare which is the insurance company in the US could actually negotiate directly with pharmaceutical companies there. Your sense in terms of how that could impact the generic as well as the innovative market?
Khorakiwala: There is law in America that government cannot negotiate with the innovate pharmaceutical industry and in particular the drug which is under patent, innovation drug. This is fundamentally because to encourage research. What he is implying that they would negotiate with the pharma industry where there are new drugs introduced. Historically, this policy of the government has meant that the prices are higher in the US compared to other countries.
However, more importantly, the research and innovation has spurned up in last 20 years in America. So, most of the new drugs have come out of United States. Therefore, it has become very important and there is a consequences in terms of cost of medicine on one hand and the environment for new drugs innovation is the other one it is the balance the US government has to arrive at.
Ekta: You don’t think that there should be much of an impact to the pharmaceutical market, the Indian pharmaceutical companies on account of what Donald Trump said?
Ganjoo: There are a couple of things, in terms of what president elect Trump outlined, there were three things which came out. The only big variable was on potential price bidding. By the way of detail, very little was provided but I think it is fair to assume that if the target happens to be the inflation in overall healthcare spends, then Indian companies like Wockhardt, all other companies should be a net beneficiary.
We don’t know how this exactly is going to shape up, but the biggest contributor to US overall healthcare bill doesn’t happen to be Indian generic pharmaceutical companies, in fact they are a part of the solution, not as much a part of the problem.
Prashant: Would you say as a percentage of Indian pharmaceutical industry revenues, the percentage which is sold to the US government and US government programs is actually miniscule; most of the sales actually happen to distributers in the US, right?
Ganjoo: That is absolutely correct. However, you have to bear in mind that if there is headline pressure on prices, then it has a way of finding itself through to the overall pricing landscape. This also happens in the backdrop of a situation where there is a lot of discussion around the price gouging debate, etc. So, I think the leeway that pharmaceutical companies typically have to take advantage of market situations for short periods of time, goes away.
However, it is very early days to figure out how exactly this landscape will pan out because if there were to be kind of consistent move to bring down prices, then it would also mean that you would have faster approval processes by the way of US FDA which again should help the Indian generic companies. So, net-net, I won’t be surprised that as oppose to the initial reaction if all this dynamic plays out to the advantage of Indian generic pharmaceutical companies and not the other way round.
Prashant: What Trump was referring to was most likely government programs, I mean better negotiations, tenders etc being introduced there. Do these programs largely buy from original drugs or the generic forms of those original drugs?
Ekta: Just a quick addition to that question the veteran army issue where there could be possible negotiation which could take place or maybe some changes on the veteran army contracts, your sense in terms of how that could impact Indian companies considering that currently we can only procure drugs from companies that manufacture them in the US when it comes to veteran army contracts?
Khorakiwala: There are two questions basically, the first one you are referring to the Medicare. Now generally Medicare currently supplied via the wholesalers, but it is quite possible that government may want to contend the cost, enter into a direct negotiation with the company. If that happens that would be beneficial to Indian companies mainly because we could be more competitive and there would be a stability of demand and therefore, so that is one positive.
As far as veteran army and veteran supplies are concerned, veterans are covered under Medicare. But, army supply there is a law as you rightly said that they have to buy only from the companies manufactured in America. That is where the Indian companies who have a manufacturing base in America would benefit because currently these are not really tendering it is simply supplying one on one negotiations. So, this will open up to a more competitive environment and that could benefit the Indian companies.
Prashant: Even though some of these things which we have discussed may actually turn out in the margin to be slightly positive for Indian generic companies over a period of time. With all the news flow which is expected to remain quite thick around the sector do you see stocks being under pressure, sideways at best?
Ganjoo: The question is that if the US Healthcare Index does continue to be under pressure then certainly Indian pharma stocks from a multiple stand point start looking more expensive. However, we can say with some reasonable degree of confidence that as far as earnings are concerned there is a fair amount of cautious optimism already built in them from US stand point. So, to answer your question the stocks could be under some kind of pressure, but we are not changing our sectors stance on the back of this and downward pressure if any should be used as buying opportunities for the sector for quality franchises.