Investors in Indian pharma companies may have become tolerant of the patent law suits and FDA clampdowns, but there is a steadily emerging set of law suits – class action suits, anti-trust suits and whistle-blower suits – that threaten to exponentially increase the risk in investing in pharma stocks. Price collusion, pay-for-delay arrangements and manufacturing malpractices are the issues that potentially invoke litigations involving these companies.
At least five Indian pharma companies — Aurobindo Pharma, Dr Reddy’s Labs, Emcure, Glenmark and Zydus — have been named in the anti-trust law suit in the US against 18 generic pharma companies alleging price cartelisation. It is touted to be the largest cartel case in the history of the US. As per a report by Bloomberg Intelligence, the drug pricing battleground in the US has shifted from Washington DC to include the 50 states. For instance, the new governor of California is making drug pricing a key issue.
Till now, there has been limited material impact of litigations on Indian pharma companies but the cost and settlement of such a litigation has the potential to be a key factor impacting the companies’ bottom line going ahead. In the past, European and American drug firms have paid significant amounts towards damages or settlement of similar suits. As Indian firms increase their business stakes in the world’s largest drug market and the most litigious one, the legal ramifications are also likely to increase. Price fixing is a criminal offence and can result in huge punitive costs for the implicated companies.
According to a report by global investment research network SmartKarma, while there is not enough information to apportion potential liability of a company, among the Indian drug firms — Dr Reddy’s Labs, Aurobindo Pharma, Cadila Healthcare and Glenmark Pharma — have the highest risk based on their market caps and exposure to the US market. It is suggested that the defendant companies’ aggregate liability could exceed $6 billion, the largest previous settlement on record.
Unprecedented increases in drug prices prompted state investigations into the practices of generic pharma companies. It has led to anti-trust suits by the states as well as class-action suits by patient groups against the drug companies in the US. The US FDA through its whistle blower policy too offers generous incentives to employees of pharma companies for revealing malpractices in their companies to the regulator. Investors in Indian pharma are in for a surge in their risk appetite.
