Mint Explainer: Why Indian pharma is spooked by Trump’s latest drug policy
Summary
US President Donald Trump plans to slash prices of prescription drugs in the country by 30-80%. How will this impact Indian drugmakers, who mostly ship relatively inexpensive generic medicines to the US? Mint explains.
US President Donald Trump has decided to slash the prices of prescription drugs in the country by 59% through an executive order. As per his plan, the US will pay the same price for a prescription drug as the nation that pays the lowest price for that drug anywhere in the world. What does this mean for Indian pharmaceutical companies, which count the US as their largest market?
For now, experts are unsure of the potential impact of Trump’s decision on Indian drug exporters, who mostly ship relatively inexpensive generic drugs to the US. But they acknowledged that Trump’s latest decision adds to the volatility already injected by his looming threat of additional tariffs on India’s drug exports to the US.
Mint decodes Trump’s latest drug price policy and what it means for Indian pharma companies.
Why is the US government intervening on drug prices?
Prices of prescription drugs in the US, particularly of branded or patented specialty medicines, are the highest when compared with that of similar medicines in other parts of the world.
According to a report last year by US-based policy think tank RAND Corporation, prices of prescription drugs in the US were in general 2.78 times higher than in 33 other Organisation for Economic Co-operation and Development (OECD) nations selected for the study. The gap was even wider for branded drugs, with US prices averaging 4.22 times higher than in other nations.
Branded medicines account for 91% of the US drug market by value. Hence, a reduction in the prices of branded medicines would save US consumers more than $85 billion over seven years, according to a 2020 report published by Trump’s previous administration.
According to the RAND study, the US spends 10% of its healthcare budget on retail prescription drugs, with this spending increasing by 91% between 2000 and 2020. It expects the US’s prescription drug bill to rise 5% annually through 2030. Ergo, Trump is determined to bring the global pharma industry to heel for charging exorbitant prices to US consumers.
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Why are US prescription drug prices in the US high in the first place?
Branded drug producers often cite high research and development costs for charging higher prices to US consumers. “The US healthcare system is exposed to a lot of innovative drugs every year from branded players in critical therapy areas like oncology, arthritis or psoriasis. Hence, these drug makers charge a premium for innovation," said Tausif Shaikh, Indian pharma and healthcare analyst at BNP Paribas.
Moreover, the US grants long periods of patent protection and exclusivity for brand-name drugs, which delays the introduction of cheaper generics and biosimilars in the market. Pharmaceutical companies also use tactics such as evergreening, where they make minor changes to extend patent lives to prolong exclusivity and high prices.
A generic drug is similar to a branded drug in safety, efficacy and other characteristics, and is typically manufactured after the patent of a branded drug expires. Similarly, a biosimilar resembles an approved biologic drug that is produced from living organisms or their components. Both generic and biosimilar drugs are cheaper than their branded counterparts.
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Prashant Nair, lead pharma and healthcare analyst at Ambit Capital, said the US healthcare system is quite opaque, which leaves a lot of room for pricing inefficiencies of prescription drugs. Pharmacy benefit managers (PBMs), insurers, wholesalers, and pharmacies all play a role in the drug pricing chain.
Most branded drugs in the US are available to consumers through the government-run Medicare or Medicaid programs. However, PBMs negotiate rebates and discounts with pharma companies for adding their products in these programs but often do not pass on the savings to consumers, resulting in higher prices for consumers.
Has the US government taken similar action earlier?
The first Trump administration tried to implement a similar policy in 2020. But global pharma players thwarted his attempt by challenging his decision in court, arguing that lower prices would discourage innovation. The ruling went in their favour.
On a separate pricing-related issue, another federal appeal court ruled that the Trump administration lacked legal authority to force drug companies to disclose prices in TV advertisements.
Nair of Ambit Capital expects Trump will meet with heavy resistance this time around as well.
What does this all mean for Indian pharmaceutical companies?
Several listed Indian pharma companies sell cheaper generic versions of off-patented branded drugs in the US. The RAND study found that prices of unbranded generic drugs—which account for about 90% of the prescription drug volume in the US—were about 67% cheaper on an average in comparison with that of comparable branded drugs.
While there might be negligible impact of Trump’s latest move on generic drugmakers, companies that sell specialty medicines in the US might face challenges if the policy is implemented, said Shaikh of BNP Paribas.
Sun Pharmaceutical Industries Ltd, India’s largest drugmaker, derives 15-17% of its revenue from branded speciality medicines in the US. Its shares were the hardest hit following the news, dropping 3.15% on NSE on Monday. The broader Nifty Pharma index remained almost unchanged.
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