Pharma: The Dark Horse

30 Apr 2024 , 06:03 PM

How US drug shortages may benefit Indian generic pharma companies?

In recent years, there has been a sharp increase in drug shortages around the world. The Covid-19 lockdown restricted the spread of seasonal illness. This led to the weakening of the immune system. This led to a subsequent surge in outbreaks of seasonal illness. The uptick in demand for medicines to cure these illnesses has exceeded the typical annual averages since then. The pharmaceutical companies, which are typically constrained by limited excess capacity to control costs, struggled to meet the unforeseen demand. The Russia-Ukraine war continues to affect the supply chains. This has hit the generic drug manufacturers hard. Also, when a drug shortage is announced, consumers tend to stockpile the drug for future consumption. These are some of the reasons why some countries are witnessing drug shortages.[1]

US active drug shortages have further increased, after stabilizing at 300-310 drugs in CY23, to 323 drugs in 1QCY24 (as per ASHP data). Such high shortages were last seen almost a decade back in 3QCY14, when the active drug shortages in the US were at 320 drugs. 1QCY24 active drug shortages are also at the highest level since ASHP began tracking this data in 2001. Although US drug shortages have been for several years, the situation has worsened over the past 2-3 years with active drug shortages steadily increasing from 271 drugs in 1QCY21 to 323 drugs in 1QCY24. Continued high shortages will give further respite to manufacturers, as the US generic pricing environment will continue to remain benign. A broken US pharma supply chain has made it difficult for generic drug manufacturers to make profits in commoditized oral-solids portfolio and stay in the business. As a consequence, few US based drug manufacturers have shut down the business. Key global generic players like Teva have re-evaluated their product portfolios by launching new strategic framework and shifting away from commodity generics to complex generics. USFDA plant crackdowns have led to increased shortages.

During FY22/23, US generic market faced high-single-digit to low-double-digit price erosion coupled with high API prices due to supply chain disruptions from China. This made it challenging for generic players to continue supplying drugs at rock bottom prices. This has impacted the financial health of generic players in the industry. This in turn has driven rationalization of product portfolios. Ramp-up of inspections by USFDA post the pandemic has led to increase in new drug shortages, from 129 drugs in CY20 to 160/156 drugs in CY22/23 and 192 drugs on an annualized basis in 1QCY24 (as per ASHP data).

UK is also facing record drug shortages. The European Union, in order to safeguard its drug supplies, has decided that the 27 member countries would work together to secure reliable supplies of over 200 medications such as painkillers, antibiotics and vaccines. They will also stockpile key medicines. This has given the region huge buying power.  However, this has left the UK at a risk of drug shortages. The country is now isolated from this system due to Brexit. Britain is facing record drug shortages of more than 100 including for treatments like diabetes, cancer and motor neuron diseases. [2]

The US could also start to stockpile key medicines. This could be a strategic decision as they are dependent on Key Starting Materials (KSMs) and Active Pharmaceutical Ingredients (APIs) on China. China is US’ largest economic competitor who also is military threat. The US Government has a history of stockpiling materials which are deemed necessary for national security.[3] Earlier in April’24, the Biden administration laid out a plan to address the current market failure on drug shortages. There is no government entity currently in US that’s held accountable for pharma supply chain and drug shortage situation. The Biden plan calls for hospitals to pay more (higher prices) for reliable supplies of high-quality medicines. Centre for Medicare & Medicaid services would then make payments to hospitals that meet performance metrics or penalize those that don’t meet the desired performance standards on procurement of pharma supplies. This information could be used by other hospitals while making purchase decisions. This plan will cost the US government as much as USD 5bn over 10 years. It can help to bring in more stable pricing for the generic manufacturers.

We believe that export-focused Indian generic companies are likely to benefit from this situation. Our analysis suggests that among the Indian generic players – Aurobindo, Sun Pharma and Gland have the highest exposure to products under shortage in the US. Aurobindo’s US injectables sales (generic & branded) account for 25- 26% of its US sales and 12-13% of its overall sales. 36 injectable products of Aurobindo are currently under short supply in the US and Aurobindo is currently supplying 15 of these products. Out of these 15 products for Aurobindo, 8 products are under essential products list for hospitals and 2 are oncology related products. Aurobindo’s injectable sales has grown by 21% in 9MFY24 driven by new launches and favorable pricing environment. Gland’s US revenue accounts for ~50% of its overall sales. Out of the 14 short supply products that Gland is currently supplying to the US, 10 products are under essential products list for hospitals. Sun Pharma’s 9 products, out of the 15 short supply products which Sun is currently supplying, are under essential products list for hospitals.

- By Jayesh Bhanushali, AVP, Research & Products, IIFL Securities