Less competition, demand-supply gap push US drug prices

Even as the US legislature has initiated a probe against several leading generic drug makers, including three Indian companies, for the extent of price increases, industry officials say several factors have led to the significant increase in prices of medicine in America.

Competition in the US pharmaceutical market swelled in recent years, with increasing generic penetration. This had many companies opting out of low-margin segments, as competition resulted in lower prices. This created a gap between demand and supply. "Such unusual price hikes take place when there is withdrawal of some of the key competitors, which leads to demand override and as a consequence prices start soaring in a free-pricing market. But despite these hikes, the generic drug still would be cheaper than the original patented drugs," said an executive from a domestic drug firm. In the latest letter to generic drug manufacturing companies, the US legislature, the Congress, has pointed to 390-8,200 per cent of price rises across 10 products.

PRICES GOING NORTH

• Competition in the US pharmaceutical market swelled in recent years due to increasing generic penetration
• Rise in compliance cost and levying of hefty user fees in end-2012 are also responsible for the significant increase in prices of medicines in the US
• Unlike India, the US is a free market for pharma pricing

Beside competition, industry executives emphasised recent increases in compliance cost and levying of hefty user fees in end-2012 as factors for the significant increase in prices of medicines in the US. The US Food and Drug Administration (FDA) introduced a generic drug user fee in 2012. According to this rule, companies will have to pay a fee while seeking approval for its generic products in the US.

The regulator also increased and tightened its inspections of foreign manufacturing plants, prompting companies to raise investment in compliance.

Of late, Indian drug makers have been facing stringent enforcements in the US, the world's largest pharma market. Several manufacturing plants of leading domestic companies, including Ranbaxy, Sun Pharma, Wockhardt and Strides Arcolab, have come under the FDA scanner for compliance-related issues. "Apart from the demand/supply issue, the import alerts and plant shutdowns also play their bit. Due to these, there is some amount of shortage, which propels companies to raise prices to keep the accounts in check," said Saion Mukherjee of Nomura Financial Advisory and Securities (India).

Unlike India, the US is a free market for pharma pricing. Drug prices in the US are essentially governed by competition, though insurance companies do negotiate with companies for prices.