The US Congress has decided to undertake an unprecedented probe into the pricing practices of 14 generic drug companies, including Indian companies such as Sun Pharma , Dr Reddy's and Cadila , after prices of several drugs were increased sharply recently.
The probe was initiated at the request of a pharmacists association, which alleged that in cases of 10 drugs, prices of had been increased by 390-8200 percent over the past year or so, which was making it difficult for patients to procure them.
Accordingly, the Congress had sought details from the firms including on revenues earned from the drugs, their cost, factors that had led to the price rises as well as the names of company officials who set drug prices.
The news of the probe sent stocks tumbling over 4 percent as a probe into pricing of generic drugs, which are usually unregulated, had never been initiated into before.
However, according to a note by JM Financial, not much may come of such a probe.
"Sharp price increases especially for a short period of time is not a new phenomenon," the note by JM analysts Anmol Ganjoo and Kunal Randeria said, noting that prices of some drugs were increased sharply due to either shortage or lower number of players in markets made completely unattractive by the steep pricing erosion.
After drugs go out of patent, their prices fall by as much as 90 percent in many cases, when generic companies enter the fray. However, in many cases, prices sometimes go to such levels where many generic companies are then forced to leave the segment. If this coincides with a sudden increase in demand for a particular drug due to an event, sudden price swings can be seen.
The JM note said that the probability of any major action against the pharma companies was extremely low.
This view, it said, was supported by several factors: one, such an investigation has been called for in the past; two, there is uncertainty about the quantum of actual price increases (a Dr Reddy official, for instance, was quoted as saying the company does sell one of the drugs it had been named for while it had not increased prices of the other); and three, the charge of cartelization may be difficult to prove.
However, even if some action is taken, it would not have much impact on the Indian companies named in the probe.
"I do not see it having a significant impact because the businesses of these companies are far more diversified both in terms of geographies and in terms of what they do in US," Axis Mutual Fund Head of Equity Pankaj Murarka told CNBC-TV18 in an interview .
"In case of a product recall (low probability) or mandatory price cuts, Dr. Reddy's and Cadila will be more impacted than Sun," JM said. "Divalproex sodium ER (one of the drugs named) generates about 3-4 percent US sales for Dr. Reddy's and generates USD 15-25 million per quarter, or 15-20 percent, of Cadila's US sales. On the other hand, the price increase in doxycycline (sold by Sun Pharma) in FY 2013-14 due to shortage of the drug had reversed post more competition coming in."
Cadila Health stock price
On October 09, 2014, at 14:15 hrs Cadila Healthcare was quoting at Rs 1350.00, up Rs 32.35, or 2.46 percent. The 52-week high of the share was Rs 1373.20 and the 52-week low was Rs 650.00.
The company's trailing 12-month (TTM) EPS was at Rs 37.15 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 36.34. The latest book value of the company is Rs 177.28 per share. At current value, the price-to-book value of the company is 7.62.
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