Trump's drug proposals mean status quo for Indian cos, but may have implication for India-US trade relations

Shares of Indian drug makers, who derive large part of their sales from US, gained on Monday - more in relief - as US President Donald Trump's speech on drug pricing eventually turned out to be more rhetorical than substantive.

Stocks of Sun Pharma, Lupin, Dr Reddy’s, Aurobindo Pharma and Cadila Healthcare saw gains on Monday.

US is an important market for Indian drug makers constituting about 40.6 percent of the total USD 16.8 billion exports to that country in FY17.

Indian drug makers who sell copycat drugs are facing heat in US due to steep competition and pricing pressure and were keenly watching Trump’s speech – who earlier accused the pharmaceutical industry “getting away with murder” and threatened “sweeping action”.

But Friday speech provided some reprieve as most of the proposals Trump was talking about aren't new. Trump, during his Friday speech, unveiled for the first time a blueprint to lower drug prices and reduce out-of-pocket costs for US consumers.

“We will have tougher negotiation, more competition and much lower prices at the pharmacy counter. And it'll start to take effect very soon,”

Trump said in his speech at the Rose Garden of the White House.

But the blueprint did not call for Medicare to negotiate lower prescription drug prices, an idea the Indian industry had feared all along.

Medicare is a national health insurance program administered by the US federal government.

Trump also promised to increase competition and take steps to prevent manufacturer gaming of regulatory processes and also implement measures to promote innovation and competition for biologics.

Focus on middlemen

Most of Trump’s proposals in Friday speech focused on the middlemen who negotiate drug costs on behalf of insurance companies.

“We're very much eliminating the middlemen. The middlemen became very, very rich, all right?," Trump questioned.

"Whoever those middlemen were - a lot of people never even figured it out - they're rich. They won't be so rich anymore," he added.

The  middlemen Trump was referring to are pharmacy benefit managers (PBMs) or third party administrators that implement pharmacy program for insurance company or employer.

They negotiate rebates with drug manufacturers, and then they take a share of it. PBMs are alleged for keeping the drug prices higher, while not passing on the rebates to patients.

Trump's proposal hints at eliminating the whole rebates system and bring more transparency to drug pricing.

Three major PBMs — CVS Caremark, Express Scripts, and Optum Rx — control more than 80 percent of prescriptions dispensed in America.

The focus on PBMs is a good news for Indian drug makers.

Indian drug makers allege that the consolidation of PBMs has led to steep pricing pressure that ranges anywhere between high single digit and low double digit.

"The prices of generic drugs have already bottomed out in US and there isn't anything in the Trump's blueprint that Indian drug makers should be rattled about, " said said Amey Chalke, pharma analyst with HDFC Securities.

The proposals like increasing competition in complex and biosimilars should be seen as positive, Chalke added.

Implication on India

Trump in his speech hit out at foreign governments alleging free-riding off of American investment in innovation.

"As we demand fairness for American patients at home, we will also demand fairness overseas. When foreign governments extort unreasonably low prices from US drug makers, Americans have to pay more to subsidise the enormous cost of research and development," Trump said.

The blueprint says that Trump administration is investigating tools to address foreign government threats of compulsory licensing or

intellectual property (IP) theft that may be harming innovation and development, driving up US drug prices.

Trump directed US Trade Representative Robert Lighthizer to take up with all countries on the fixing of prices of American pharmaceuticals and medical devices.

Trump's new policy actions on lowering drug prices, could have implications on US-India bilateral trade relations.

India has been pursuing a policy of price controls of drugs and medical devices.

Indian courts and patent office in the past have invalidated or rejected patents of some important drugs like hepatitis-C drug Sovaldi and cancer drug Gleevac and have once used compulsory licensing to allow generic competition.

Sovaldi made by US-based Gilead Sciences in US sells costs about USD 1000 per single pill, while in India - the generic version costs about four dollars.

Last month India was added to the USTR's priority watch list - that consists of countries that have "serious intellectual property rights deficiencies."

There is growing clamor in US from lobby groups of multinational medical device makers to review trade concessions given to India under US Generalized System of Preferences (GSP).

GSP is program to encourage economic development by offering poor countries a patchwork framework to export tariff-free into the U.S. market.

"US has highest healthcare costs in the world and US needs to study German , UK & Scandinavian(relatively lower cost) healthcare models to drive down Healthcare in USA and not blame it as a cost of cross subsidising other developing countries healthcare costs," said  Rajiv Nath, Forum Coordinator of AiMeD - the trade body of Indian medical devices companies.

"India needs to encourage its own indigenous manufacturing of Medical Devices to reduce dependency and withstand monopolistic threats by US industry lobbying via US Government as a long term strategy but now on war footing and PM Modi needs to convince President Trump of dire needs of Indians to affordable healthcare and steps needed to ensure this," Nath added.