US antitrust probe singes India's pharmaceutical firms; Sun Pharma falls 9%

Representative image
Share prices of some leading domestic pharmaceutical companies, led by Sun Pharmaceutical Industries, fell 4-9 per cent on Monday, after being named in a price-fixing lawsuit in the US.

The biggest loser was Sun Pharma, whose stock tanked as much as 20 per cent intraday in late afternoon trades, but recovered to close 9.4 per cent lower on the BSE. Sun Pharma, which is India’s largest pharma company by sales, is already under a cloud over corporate governance issues and is facing Sebi probe on charges of funds diversion. It did not respond on the sharp fall in its stock price, but has denied charges of price fixing.

Twenty drugmakers have been accused of collusion to inflate prices of drugs by up to 1,000 per cent in the lawsuit filed by 44 US states in a district court in Connecticut on Friday. 

Teva Pharmaceutical Industries, which is the world’s largest generic drugmaker, is accused of orchestrating the scandal which includes seven Indian drugmakers, including Aurobindo Pharma, Dr Reddy’s Laboratories, Glenmark Pharmaceuticals, Lupin, Wockhardt, Cadila Healthcare (Zydus), and Taro Pharmaceutical Industries (a subsidiary of Sun Pharma).  Executives of Lupin, Aurobindo, and Glenmark, too, have been named as accused in the case.

The latest lawsuit is a result of a countrywide probe into unfair trade practices, which commenced in Connecticut in 2014 and expanded to other states. Lawsuits against companies have been filed in other states, too, in 2016 and 2018 and the scope was expanded to cover more drugs.

According to the court documents, the alleged collusion impacted the prices of more than 100 drugs, including those used to treat HIV, cholesterol, anti-depressants, asthma, and other ailments. According to Bloomberg, the complaint puts Teva at the centre, saying it colluded with a core group of competitors to follow each other’s price increases. During a 19-month period, Teva significantly raised prices on about 112 generic drugs and colluded with its competitors on at least 86 medicines, the states said. 

“Prices of many generic pharmaceuticals were and remain artificially inflated through collusive bid rigging and market allocation agreements designed to prevent price wars from occurring when key competitive opportunities arise in the marketplace,” the complaint said. The company executives named in the case have been accused of exploiting their various interactions at industry events and coordinating anti-competitive agreements at parties and golf events, among others. Teva has denied charges and said it would contest the charges. 

A Sun Pharma spokesperson said, “We believe the allegations made in these lawsuits are without merit and we will continue to vigorously defend against them.” Dr Reddy’s Laboratories said it would not comment on an ongoing litigation.

Analysts say the litigation is negative for domestic drugmakers whose profitability has been impacted due to price erosion and consolidation in the US. They say this will further subdue investor sentiment though some believe that the impact on companies due to penalties and fines would not be significant. 

The lawsuit has added a new overhang for the Indian pharmaceutical companies in the US, and will have an additional impact on Street sentiment, said Ranjit Kapadia at Centrum Broking.  The companies are likely to face penalties and their operating costs will increase in the near term on account of ongoing as well as future possible litigations, said Purvi Shah, analyst at Sharekhan. “In our opinion, the US pharma market is getting stringent in terms of pricing environment coupled with regulatory compliance,” she said.

Surajit Pal, senior analyst with Prabhudas Lilladher, observed that many of the drugs mentioned in the lawsuit are old and their contribution to the revenue and profit is minimal. “In case companies are found guilty and fined on the basis of profit on these drugs, the impact on companies would be marginal,” he said.

Indian pharma companies are already facing heat on pricing pressure in the US, which has led to impact on their earnings. Though earlier it was largely due to increasing competition on the back of more new product approvals and consolidation at dealer level, the charges on pricing cartel will lead to further stress on pricing environment and add a fresh overhang on pricing. The Street already remains cautious towards players with US focus. The litigation costs, which already remain high, are likely to only increase. 

Manufacturers such as Dr Reddy’s, Lupin, Cadila, Wockhardt, etc are trying to resolve issues due to warning letters for their manufacturing facilities from the US drug regulator. 

For Sun Pharma, which has responded to observations from the US Food and Drug Administration recently, will continue to see some overhang till it receives clearance. Meanwhile, Sebi is examining whistle-blower complaints and Sun Pharma has responded to the regulator. With Taro, its US subsidiary, being included in the list of firms facing lawsuit, another overhang has come in the stock.

The case

Twenty drugmakers, including seven from India, are facing charges of price fixing in a lawsuit in the US state of Connecticut. The lawsuit covers over 100 drugs whose prices were allegedly kept high by the drugmakers. The case is a result of a countrywide probe which began in 2014

The impact

Stocks of pharmaceutical companies reacted negatively on reports of the antitrust investigation in the US. While the overall market fell 0.99%, the BSE Healthcare Index dropped 3.5% on Monday

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel