By Joseph Walker
U.S. generic-drug prices are falling at the fastest rate in
years, eating into the profits of pharmaceutical wholesalers and
manufacturers alike and erasing billions of dollars of their market
value in recent days.
The three largest U.S. drug wholesalers, which warehouse and
distribute some $400 billion of pharmaceuticals annually, have been
competing aggressively to win business among independently owned
pharmacies, largely by agreeing to cut prices on generics. In turn,
the wholesalers are squeezing drugmakers for better prices.
The trend has been good for the employers and government
programs that ultimately pay for drugs, and for independently owned
pharmacies, the mom-and-pop operators that compete with national
chains. But it is taking a hard toll on wholesalers and
generic-drug makers.
Shares of Teva Pharmaceutical Industries Ltd., the world's
largest seller of generic drugs, fell 24% on Thursday in New York
Trading after the company's quarterly revenue and profit fell short
of analysts' forecasts, driven by a 6% decline in generic product
prices from the same period last year. The Israeli company said the
pricing pressure on generics won't ease soon, and expects deflation
to accelerate in the second half of the year. Teva's stock dropped
an additional 13% Friday.
Through the close of regular trading on Friday, shares of some
of the largest generics companies, including Mylan N.V., Perrigo
Co. PLC, and Endo International PLC had declined 10% or greater
since Monday. The firms are scheduled to report earnings next
week.
AmerisourceBergen Corp., the second-largest U.S. wholesaler,
said Thursday it continued to expect generic prices to decline by a
range of 7% to 9% annually in its current fiscal year. The trend
contributed to a 8.7% decline in operating profit in its
pharmaceutical distribution unit, and sent shares down 10.5%. The
company's largest competitors, Cardinal Health Inc. and McKesson
Corp., also recently reported persistent generic pricing pressure
as a factor behind their declining profits.
"There's no doubt that when you have a key product category with
a 9% deflation rate, that's a headwind you're getting," AmeriSource
CEO Steve Collis said in an interview. "Some of the benefits we've
been getting from buy-side generic contracts have been eliminated
or cut back -- that's why you've seen our growth rates
moderate."
Wholesalers, which make money in part by selling generic and
brand-name drugs to pharmacies at a markup, have also recorded
moderating profits on some branded drugs. That is because some
pharmaceutical companies are raising branded prices at a slower
rate than in previous years to avoid sparking further scrutiny from
lawmakers in Washington, where concern about rising drug costs runs
high.
Generic drugs are cheap copies of medicines that have lost
patent protection. Prices tend to fall dramatically when a drug
loses patent protection and multiple companies begin producing it.
But in recent years, prices for many generics increased --
sometimes dramatically -- because of market disruptions that
decreased competition.
Some manufacturers stopped making certain drugs because of
manufacturing and quality-control problems, and the Food and Drug
Administration fell behind on approving new market entrants. In
some cases, according to allegations by state and federal
prosecutors, some generics companies and executives conspired to
fix prices of certain generics.
Now, the trend has reversed, and prices are falling faster than
their historical averages, according to an analysis by Raymond
James & Associates Inc.
"There was this egregious pricing, and it was a windfall" for
some generic drugmakers and wholesalers, said John Ransom, a
Raymond James analyst. "These guys were over-earning with the
pharma pricing bubble," he says.
Cardinal Health CEO George S. Barrett said a handful of drugs
were responsible for driving overall generic inflation higher in
previous years, but that the sudden downturn caught some companies
by surprise.
"We've returned to more normal patterns -- [but] the shift was
rather rapid, which was jarring to the system," Mr. Barrett said in
an interview.
At McKesson, generic price deflation contributed to a 43%
decline in profit in the most recently completed quarter.
"There are more approvals in some of these [generic] categories
and more supply has led to more competition," pressing down prices,
CEO John H. Hammergren said in an interview. The company, whose
shares have dropped 20% over the past 12 months, is taking steps to
reduce its exposure to pricing slowdowns on brand-name drugs, he
said.
The generic pricing downturn began in 2016, when AmeriSource,
based in Chesterbrook, Pa., ignited a price war among wholesalers
to win business from independently owned pharmacies. Such small
pharmacies are among the most profitable customers for wholesalers
because they have traditionally had less purchasing power than
national chains.
Independently owned pharmacies typically purchase drugs through
group-purchasing organizations, or GPOs. Early last year,
AmeriSource gave generous pricing terms on a nine-year contract
with a group-purchaser representing more than 1,000 pharmacies.
As word spread in the industry of AmeriSource's new contracting
terms, other GPOs began seeking better pricing from their own
wholesalers, said Donald Anderson, CEO of Independent Pharmacy
Cooperative, a GPO that has about 2,800 primary pharmacy members
and renegotiated its contract with McKesson earlier this year.
Wholesalers were also compelled to cut prices because pharmacies
were increasingly seeking lower generics prices from suppliers
other than their primary wholesaler, he said. IPC, for instance,
increasingly purchases generics directly from manufacturers and
sells them to pharmacies from its own warehouses. The cooperative
sold $1.3 billion in medicines last year, up from about $500
million eight years earlier, Mr. Anderson said.
"The three wholesalers probably had gotten to a point that their
pricing was not competitive in the marketplace," Mr. Anderson said.
Now, "they've become much more aggressive" on pricing, he says.
Wholesalers are using their own purchasing alliances to squeeze
drug manufacturers for better prices. AmeriSource purchases
generics through a partnership with retail pharmacy giant Walgreens
Boots Alliance Inc., which was recently joined by Express Scripts
Holding Co., a pharmacy-benefits manager. Cardinal Health is allied
with CVS Health Corp., and McKesson has joined forces with Wal-Mart
Stores Inc.
The three purchasing groups combined will represent 80% of all
generic purchases in the U.S. this year, according to estimates by
Adam Fein of Pembroke Consulting Inc., which tracks drug
distribution.
Teva on Thursday pointed to the consolidation of its customer
base into purchasing groups as a key factor driving its
disappointing quarterly performance. The groups have accelerated
the frequency and scope of new contracting proposals in the past
six to nine months, Dipankar Bhattacharjee, president of Teva's
generic medicines group, said on a conference call with
analysts.
In July, Novartis AG said generics prices fell 8% in the second
quarter, driving a 15% sales decline in its U.S. generics
business.
"The whole sector in generics is feeling pricing pressure in the
U.S.," Richard Francis, who heads Novartis's generics business,
told analysts on the company's July earnings conference call.
Write to Joseph Walker at joseph.walker@wsj.com
(END) Dow Jones Newswires
August 04, 2017 18:29 ET (22:29 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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