Thursday, August 17, 2017 1:04:51 PM
https://ih.advfn.com/p.php?pid=nmona&article=75390167
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 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 another 11% Friday.
As of Friday afternoon, 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.
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