US pricing pressure shows signs of easing as drug makers prune loss-making portfolios

"We have seen number of companies exit portfolios suggesting that they are down to their pain threshold, which is very healthy sign for the industry. We have seen some level of stabilization in our own portfolio as the pricing goes," Gupta said.

Around 37 percent of Lupin's sales of Rs 15,804 crore in FY18 came from US alone.

Kedar Upadhya, Global Chief Financial Officer at Cipla, concurred with Gupta. "The price erosion sort of stabilised. It ranges from product to product. But we factor in between 6 and 10 percent," Upadhye told Moneycontrol.

The US market accounted for around 17 percent of Cipla's sales of Rs 15,219 crore in FY18.

The US generics market, which is characterized by buying in bulk volumes at lower prices, has historically witnessed a price erosion of 5-6 percent a year. However, in the last two years, this number has worsened to between the high single-digits and the low teens, primarily because of increased competition and a consolidation of the big drug-purchasing groups.

The US generics market had shrunk 10.5 percent to $68 billion in 2017 from $76 billion in 2015.

Portfolio rationalization

To beat the pricing pressure and maintain profit margins, large generic drug makers have responded by slashing their generic pipelines and cut ANDA filings.

Israeli drug maker Teva, which is the largest drug maker in the US by prescriptions, is pruning around 80 percent of its products that have been identified as unviable.

"It's unsustainable to supply products that do not make a profit. And we have left a small portion of the market to other competitors who are willing to supply. We wish them good luck, but it's not a business that we intend to be in," said Kare Schultz, Teva's Chief Executive Officer, in a recent earnings call.

Teva is not alone. Mylan, the second largest generic drug maker in US, indicated that it had discontinued certain commodity products, and that it had moved some of its other products to sites that brought down the manufacturing costs.

Endo, another large generic drug maker, said earlier this year that it had stopped making 85 products, including its top-selling Lisinopril, as it was no longer making enough money from the blood pressure medication.

Sandoz, the generic unit of Swiss pharmaceutical giant Novartis, sold a significant part of its US generics business, consisting of around 300 products including projects in development as well as commercial and manufacturing capabilities, to Indian drug marker Aurobindo Pharma for $900 million.

The generic portfolio of Sandoz had sales of $1.2 billion.

Price stabilization

All these efforts have started showing an impact on price erosion.

As at the end of September, as per the US' National Average Drug Acquisition Cost (NADAC) list, the average pricing pressure for generics in the US market has been stable at 9 percent.

But analysts says that while pricing pressure is stable, it has still hasn’t shown signs of abating as yet.

"Though the erosion in prices has not worsened, it has remained sticky below 10 percent," brokerage IIFL said in its report.

"This is likely to pressurize the earnings of companies in the remainder of FY19. For generic companies to see favourable prices, we may have to wait more as USFDA continues to see a higher number of ANDA (abbreviated new drug applications) submissions as well as approvals," IIFL said.

In 2017, the USFDA approved more than 1,000 ANDAs or generic drug applications, which was a record, and the regulator said it is well on track for similar success in 2018.

The regulator also brought down the approval timeline from 3-5 years to 10 months to bring about some competition and reduce prices of drugs.