The US healthcare supply chain industry continues to consolidate aggressively to take advantage of an impending cycle of branded drug patent losses and to gain critical mass. The healthcare supply chain includes pharmacy benefit managers (PBMs), drug distributors, hospitals and retail pharmacies. PBMs and pharmacy chains have been notably active as drugs worth USD60bn will be going off-patent over the next four years and generic utilisation is likely to surge to 80% in CY12 from the current 76%. Though consolidation in the supply chain industry will put pressure on generic manufacturers in the near term because of vendor consolidation and increased pressure from third party payers (PBMs), increase in generic penetration will drive growth over the long term.
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PBMs continue to consolidate to gain efficiencies of scale
Consolidation continues in the pharmacy benefits management industry as companies work to enhance market shares. Following the Express Scripts-Medco merger and the pending SXC-Catalyst deal, the PBM industry has two mega companies (Express Scripts and CVS Caremark) and several mid-sized PBMs such as Prime Therapeutics, MedImpact and UnitedHealth Group's captive companies. More consolidation is likely as smaller companies seek critical mass.
Patent cliff will drive generic usage to 80% in CY12
Huge Patent Cliff opportunity will drive generic penetration in the US. According to Medco Health, almost USD60bn of US branded drugs will lose patent protection from 2012-15. PBMs' margins benefit because they realize higher spread in generic drugs compared to branded drugs. CVS Caremark highlighted in its 2011 Drug Trend Report that generic dispensing rates could exceed 80% in 2012, about 4% higher than projected 2011 levels. Higher generic utilization boosts profitability for the health care supply chain as well as generic manufacturers.
Consolidation has shifted bargaining power in hands of retailers
Pharmacy consolidation in the retail chain has shifted bargaining power in the hands of large pharmacy retail chains such as Walgreen, CVS Caremark, Rite Aid, among others. Pressure from PBMs of signing new contracts at lower margins and huge upfront investment in infrastructure are adding to pressure on retail chain margins, and they in-turn are driving hard bargains with generic manufacturers directly. Further, vendor consolidation is also impacting generic players in the US.
Higher generic penetration may offset short-term margin pressure
Owing to consolidation in the healthcare supply chain industry and increased bargaining power in the hands of retail chains, we believe margins for generic manufacturers will remain under pressure. We highlight that Dr. Reddy’s has indicated this trend in its recent concall. We believe in the short run, margins are likely to remain under pressure for Indian generic companies. However, higher generic penetration may offset this pressure in the long run.
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