The forecast calls for pain. After a recent spate of judicial and regulatory decisions, generic drugmakers face higher legal, regulatory and insurance costs. And that’s not all. Smaller players are expected to find it more difficult to compete and the combined circumstances suggest that consolidation is going to accelerate, according to a report from Moody’s Investor Service.
One key development was a recent ruling by the US Supreme Court that drugmakers can face lawsuits over so-called pay-to-delay patent settlements (more here). As a result, Moody’s expects more anti-trust scrutiny by the Federal Trade Commission as these deals are reviewed on a case-by-case basis, as well as additional class action lawsuits and the resumption of litigation that had been on hold prior to the decision.
The potential exists for large liabilities, Moody’s writes in a new report. If anti-competitive behavior took place, purchasers such as wholesalers, pharmacies, unions, insurers and federal and state government agencies can be expected to seek to recover alleged overpayments. Last week, Teva Pharmaceuticals agreed to settle antitrust litigation over one such deal and took a $485 million charge.
These deals are also being scrutinized by European regulators. Recently, the European Commission fined Lundbeck and four other drugmakers for reaching agreements to block entry of generic versions of the Celexa antidepressant. Lundbeck was fined $125.6 million, while the others - including Ranbaxy Laboratories - paid a total of nearly $70 million (read here). More such fines are expected.
Beyond litigation costs and hefty fines, the ambiguity and scrutiny is a credit negative, Moody’s analysts write, because these variables only increase uncertainty about some product launches. And that, of course, can crimp cash flow.
Another issue, however, is a move by the FDA to revise rules to allow generic drugmakers to update labeling after being alerted to side effects. Current regulations prevent such updates, even if generic drugmakers become aware of a potential risk. By contrast, brand-name drugmakers can update warnings before obtaining FDA approval. The change will likely spur more product-liability litigation (back story).
“Ultimately, depending on the final FDA rules, such a change may also alter the way generic companies choose which branded drugs to commercialize,” Moody’s writes. Generic drugmakers “may need to be more concerned with the safety profiles of the drugs they attempt to copy and spend more time and money investigating adverse event reports” before they assume the risk of making a copycat medicine.
Beyond these changes, Moody’s notes that generic drugmakers “continue to face greater pricing pressure from customers and rising regulatory and quality scrutiny from the FDA. Together, these factors will pressure industry profitability, elevate event risk and possibly alter the way companies conduct their business,” the investor service writes.
There are other variables to consider, of course. There are fewer huge blockbuster drugs losing patent protection compared with the past few years, suggesting fewer opportunities to make a killing. The era of biosimilars is nearing, but to make such treatments requires significant investment. And there are added costs, notably the user fees now charged by the FDA.
None of these developments – notably the legal and regulatory decisions – are expected to have an immediate and significant impact on credit ratings, but Moody’s analysts believe the long-term implications are real, especially since generic drugmakers typically have lower cash-to-debt ratios than brand-name drugmakers and will need more liquidity if litigation risks and costs rise substantially.
To cope, the biggest generic players – Teva, Actavis (ACT), Mylan (MYL) and Novartis (NVS), by way of its Sandoz unit – are expected to further emphasize higher-margin drugs and those pose more barriers to rivals. And lowering tax rates is also seen as crucial. Both Actavis and Perrigo, in fact, announced recent acquisitions of companies based in Ireland so they can benefit from lower corporate tax rates (see here and here).
http://www.pharmalive.com/generic-drugmakers-face-an-increasingly-uncertain-world-moodys
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