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Who Will Feel The Pain From Generic Drug Price Inflation?

Wayne Duggan

A recent Morgan Stanley report presented analysts’ case for why they believe that generic drug prices will be on the rise in the near future.

Reasons for generic drug price inflation include increased FDA regulatory obstacles, consolidation of generic drug producers, and increasing complexity of generic drug production.

Since 2011, the FDA has issued 60 warning letters to domestic and international drug manufacturers related to violations of its Good Manufacturing Practices. If this pattern continues in 2015, import bans and factory shutdowns could play a role in rising generic drug prices.

Analysts predict that an increase in FDA presence in India could lead to more prohibitory action there in 2015. Several recent news reports have noted the increase in surprise FDA inspections in India. The cost of any supply disruption due to FDA action will likely be passed on to consumers in the form of higher prices.

After an astounding recent period of consolidation, analysts estimate that over 90 percent of generic drug purchasing is controlled by only three groups:

  • AmeriSourceBergen Corp. (NYSE: ABC)/Walgreen Company (NYSE: WAG)
  • Cardinal Health Inc (NYSE: CAH)/CVS Health Corp (NYSE: CVS)
  • McKesson Corporation (NYSE: MCK)

An increase in purchasing power from the consolidations led to a 7 percent to 10 percent slash in manufacturer pricing. However, analysts believe that manufacturers may soon push back to regain lost pricing power.

Morgan Stanley’s Ricky Goldwasser predicts that an inflationary environment in generic drug prices will put pressure on drug retailers, such as CVS. “For Walgreens, we estimate each incremental 2% in generic inflation is a ~$0.01 to $0.02 EPS headwind.”

Morgan Stanley predicts mid-single-digit price inflation for generic drugs over the next 12-18 months.

Latest Ratings for ABC

Date Firm Action From To
Nov 2014 FBR Capital Downgrades Outperform Market Perform
Nov 2014 Credit Suisse Maintains Outperform
Nov 2014 Barclays Maintains Overweight

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