Moneycontrol Pro Panorama | Reforming US pharma will not be easy for Trump

Pharma (Representative image)

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US President Donald Trump signed an executive order aimed at lowering prices of prescription drugs for Americans. The President directed his officials to communicate price targets to pharma companies, in line with those paid by other countries. Signing the executive order Trump deplored that the US, with less than 5 percent of the world’s population, generates the vast majority of global pharma’s profits.

Indeed, the US is the world’s largest pharma market. High profit margins and protection for patents give US patients access to the most coveted drugs and treatments. The country spends significantly larger amounts of money on medicines than any other country in the world and is in an important position to negotiate prices.

However, whipping producers alone will not yield the desired results. The country also needs to reform how it procures and distributes medicines.

The US has a complex distribution chain where intermediaries such as Pharmacy Benefit Managers (PBMs) and insurance companies play a vital role in procurement and disbursement of drugs.

Often, these intermediaries extract rebates from drug producers. However, those gains in procurement costs are not always transferred to end users, who shell out more money from their pockets to access medicines.

“The US is the only country in the world that lets PBMs, insurers and hospitals take 50 percent of every dollar spent on medicines. The amount going to middlemen often exceeds the price in Europe,” complains Pharmaceutical Research and Manufacturers of America, an industry group.

Another reason why drugs cost more in the US is regulatory and compliance expenses. As Anubhav Sahu of our Research Team points out, on an average, it is 15 percent more expensive to launch a patented drug in the US compared to Europe. Even though US’s manufacturing compliances are considered to be gold standard, the Trump administration would do well to simplify regulatory and distribution practices.

Even so, emphasis on immediate results means drug manufacturers and investors should prepare for high-handed decisions by the Trump administration. Pharma companies that sell innovative and branded products are feared to be at risk of price cuts. These products are generally priced higher.

Most Indian companies with the exception of Sun Pharmaceutical Industries sell post patented generic drugs in the US and are seen to be less vulnerable to new US policy directives. Even then, investors cannot breathe easy.

A systematic reduction in prices can lower the overall market opportunity for Indian exporters. Note that Indian companies are climbing the value chain and are increasingly looking to sell high value medicines to overcome the steady price erosion in the base generic drug business. Also, the Trump administration is trying to increase domestic manufacturing and step up scrutiny on overseas production facilities.

“The long-term revenue growth and capital allocation strategies may be impacted, given the opportunity size may shrink as the generic business derives their market potential from the sales of prescription products,” say analysts at India Ratings and Research.

Still, much depends on the final policy outcome — what drugs and products from which countries the US administration plans to target. Recent management commentaries indicate stable and low price erosion in the US generic business. With Indian exports already priced competitively, any imposition of additional taxes or price cuts can place both the buyers and manufacturers in a tough place.