German govt ruling forces generics cos to cut prices

MUMBAI: Last month, the German government announced its decision to change rules to induce drugmakers to charge less for their products. The move, effective from June 1, resulted in a spate of price reduction announcements by German generics majors like Stada and Novartis’ two German units — Sandoz and Hexal.

The reductions were to the tune of over 20%. The cumulative impact is likely to cause a reduction in margins for all generics players, affecting Indian pharma companies operating in the $26.7-bn German market.

This could give Indian companies like Dr Reddy’s Laboratories, Ranbaxy Laboratories, Wockhardt and Torrent a feeling of deja vu. Many of them have had a tough time in the US, the world’s largest pharmaceutical market, where they’ve had to fight increasing competition and rapidly eroding margins.

Of all the Indian companies, Dr Reddy’s has the maximum exposure in the German market with the company’s recent acquisition of leading German generic player, betapharm.

“Yes, there is a change in the reference pricing with the government encouraging the use of lesser-priced drugs,” said VS Vasudevan, president, CFO & Europe geography head, Dr Reddy’s Labs.

“While we are likely to get impacted by the reduction in prices, manufacturers will be compensated by the government’s mandate to not give any free goods to the trade,” he said.

The management of Dr Reddy’s Labs recently told investors that about 40% of its product portfolio is likely to be affected. A report by equity research firm JM Morgan Stanley said “This is negative news for the industry.

Among Indian companies, Dr Reddy’s Labs has the largest exposure (roughly 25% of consolidated sales) to Germany since its recent acquisition of betapharm.”

Dr Reddy’s Labs reiterated that the move is not likely to have a significant impact on sales and that projections remain unchanged. “On the face of it, we see this as an opportunity to increase volumes as patients are now encouraged to buy generics,” Mr Vasudevan said.

Wockhardt, the other Indian player in the German generics market, doesn’t expect much change in revenue. “Revenue from our German business is currently at $20m. We don’t expect this to change significantly,” said Habil Khorakiwala, CMD, Wockhardt.

While Ranbaxy and Torrent officials could not be reached for comment on how this reduction would affect their businesses, Dr Reddy’s Labs said that it will review the impact over the next quarter. German drug major Stada is one of the few to have given some guidance on this saying the price reductions will have an expected impact on annual sales of about $41m.

Though it may be some time before companies can estimate the damage to their businesses, it is becoming increasingly clear that the sheen of the world’s third largest pharmaceutical market may begin to wear off a bit.