Large Generic Drug Cos Benefiting From Price Stability
08 October 2009 - 4:54AM
Dow Jones News
Quality control issues and shortages at several smaller generic
drug makers have brought increased price stability for the larger
players in the industry and a possible short-term boost to
earnings.
The industry remains fragmented, with competitive pricing and
thin profit margins, but the largest players - Mylan Inc. (MYL),
Teva Pharmaceutical Industries Ltd. (TEVA) and Watson
Pharmaceuticals Inc. (WPI) - have gained a market advantage. But
price increases are generally limited to individual products and
may be short-lived as competition remains strong and their customer
base shrinks.
"Our analysis indicates that a favorable competitive dynamic
persisted through [the third quarter], with Teva, Mylan and Watson
all seeing less than average incremental competition to base
business products than in recent years," JPMorgan analyst Chris
Schott wrote recently.
Schott notes that the factors, including increased regulatory
scrutiny of smaller companies, may allow the current stability to
continue into 2010.
Smaller generic makers have been hit with a number of
quality-control issues in the past year, including K-V
Pharmaceuticals Co. (KVA), Caraco Pharmaceutical Laboratories Inc.
(CPD) and Canada's Apotex Inc. Those issues, which often involved
massive recalls of multiple products, allowed the bigger companies
to grab market share and provide assurance to customers who've had
to pull products from shelves and deal with shortages.
"We've gotten a lot of business offered to us," Teva's North
America Chief Executive William Marth said last month.
Marth notes that Teva's customers are asking "not just about
price and availability, but now they're talking about quality,
price, and availability, and I think that's a very important
change."
Acquiring more market share is important, but it is more
important to also be able to raise the price while there are fewer
competitors on a product, RBC Capital Markets analyst Adam Greene
said.
During the third quarter, Mylan has increased the price on a
number of products by as much as 10%, Greene said, and Teva
increased the generic price of Roche Holding AG's (RHHBY) Accutane
acne treatment by 95% after the Swiss drug maker stopped making
it.
"It has to be about pricing in order for it to make a difference
because so many of these products are really low margin," Greene
said.
Analysts warn that price change information can be hard to gauge
in an industry that operates under secrecy for competitive reason,
and changes are often product specific.
Overall, JPMorgan has estimated that generics pricing for the
major companies would drop 10% during the third quarter, but that
the increased pricing stability could moderate that move for the
larger companies.
Indeed, Mylan's Chief Executive Robert Coury recently said its
customers are changing suppliers less often due to incremental
price differences, because they are realizing that the
administrative costs of switching make it less beneficial.
Although the market may be more stable, it is unlikely to remain
that way for the long-term. Despite continuing consolidation, the
generic drug industry remains very fragmented with a low barrier to
entry.
Furthermore, the number of customers is getting increasingly
fewer, said Adam Fein, president of Pembroke Consulting, a
pharmaceutical-supply-chain consulting firm.
His research shows that the top six dispensing pharmacies
accounted for 60% of U.S. pharmacy dispensing revenue in 2008, and
he expects that to rise.
"In general, the tide is going against generic drug
manufacturers," Fein said. "The core business is highly
commoditized...there is very little opportunity for
differentiation."
-By Thomas Gryta, Dow Jones Newswires; 212-416-2169;
thomas.gryta@dowjones.com