The most recent earnings reports across the generic drug industry read like dispatches from the front lines of a price war, with their U.S. businesses among the biggest casualties.
This month, the world's largest copycat drugmaker, Israel's Teva Pharmaceutical Industries, slashed its dividend; U.S. giant Mylan lowered its profit target; and India's Sun Pharmaceutical Industries reported its first quarterly loss in at least 12 years.
The source of the pain? At least some of it can be traced to the global ambitions of a growing constellation of family-owned drug factories in India. Their expansion is boosting competition in the U.S., where mergers among pharmacy chains and pricing wars between drugmakers had already been driving down the cost of generics.
"The assumption was there would be a step-down, but nobody expected it would be this bad," said Ronny Gal, an analyst at Sanford C. Bernstein & Co.
As the smaller Indian manufacturers are growing stronger, the U.S. Food and Drug Administration is working to boost competition by handing out approvals at a record pace. The agency has said it will specifically favor generic drug applications for products that have few competitors as a way to drive down prices further.
India was already the world's largest exporter of generic drugs, with $16.4 billion sold abroad last year. In the first half of 2017, Indian firms got about 40 percent of new U.S. approvals for generics, up from 35 percent just a year earlier, and with a wider base of companies than ever before taking part, according to FDA data analyzed by Bloomberg News.
"With more and more companies in the fray, the competition has intensified," Pankaj Patel, chairman of Ahmedabad-based Cadila Healthcare, said in an email. The company's main U.S. subsidiary has received 27 approvals this year through July, compared with eight last year. "The pure generics sphere has seen price erosion."
India is home to about 6,000 drugmakers, according to its government's estimates, members of a cutthroat market characterized by price controls, limited insurance levels and low patient incomes. That makes the U.S. look like easy pickings, according to Surajit Pal, an analyst at Prabhudas Lilladher in Mumbai.
Instead of introducing a generic product and then lowering the price when forced to, many of the Indian companies will play a far more brutal game, Pal said.
"The U.S. business is basically icing on the cake, so they don't mind giving you a 90 percent discount on the very first day," Pal said. "The U.S. will get cheaper products going forward. The U.S. will get more competition from Indian guys."
And they are, according to their most recent earnings reports. Teva said it experienced "accelerated price erosion and decreased volume mainly due to customer consolidation, greater competition as a result of an increase in generic drug approvals by the U.S." Mylan told investors that its U.S generics business "experienced price erosion in the mid-single digits." And Sandoz, Novartis AG's generic unit, said increasing volumes were offset by 8 percentage points of price erosion, "mainly in the U.S."
Thirty-two different Indian firms received U.S. approvals to sell new generics in the first half of this year -- almost double the number from two years ago. The approvals came as India's top 10 drugmakers grew their share of the U.S. generics market from 14 percent in 2010 to about 24 percent today, according to Bernstein's Gal.
Among the leaders in approvals were Hyderabad-based Aurobindo Pharma and Cadila, two of India's biggest drugmakers who have only turned their attention to the U.S. more recently. The companies, controlled by their founding families, are worth $6.8 billion and $8.2 billion respectively on the local stock exchange.
Smaller Indian firms that previously had little presence in the U.S. are also seeing approvals surge.
Mumbai-based Macleods Pharmaceuticals Ltd., a closely held company that came onto the U.S. scene in 2012 with 12 approvals, has been one of India's most prolific filers every year since. It's gained approvals for eight new drugs this year to treat conditions including pain, high blood pressure and depression. Ajanta Pharma, a $1.6 billion public firm that's been operating in India since 1973, only had two U.S. approvals to its name until 2014. Last year, it had nine new approvals.
Or Alkem Laboratories Ltd., also operating in India for nearly 50 years. Alkem had been chugging along with about two or three U.S. approvals a year since 2009, but this year it's received six.
Aurobindo, Macleods, Ajanta and Alkem didn't respond to requests for comment.
With so many rivals in the generics space, Cadila's pipeline needs to broader, said Patel, whose father founded the company.
"It will be crucial to look beyond pure generics at specialty products if we need to stay ahead of competition," said Patel. "We have a large pipeline of products which are under approval, and the attempt has been to create a judicious mix of generics, specialty and niche products."
Successful drug makers will be ones who can develop complex technologies to deliver drugs and new formulations to create a specialty niche portfolio with less competition, he said.
Shares of Sun Pharmaceutical declined 0.6 percent at the close in Mumbai. Cadila Healthcare fell 0.9 percent, Cipla Ltd. rose 1 percent, Alkem Laboratories climbed 1.2 percent and Ajanta Pharma was little changed. The benchmark S&P BSE Sensex Index advanced 0.3 percent.
In the U.S., falling prices are sweeping across the industry. Mylan's revenue growth has slowed in part by pressure on generic-drug prices, prompting the company to try to stave off the damage through acquisitions and new products. Teva said it was in danger of breaching covenants on its debt amid a drop in cash flow that's forcing it to cut jobs and exit markets. Overall, U.S. generic drug prices fell 8 percent last quarter compared with a 4 percent increase in sales volume, according to Bloomberg Intelligence.
It's not just the drugmakers that have been suffering. McKesson Corp. and other major wholesalers that distribute about $400 billion worth of drugs each year cited generic pricing as a reason for their shrinking margins.
McKesson and Mylan declined to comment.
While prices of some specialty medicines have surged in recent years, such increases are harder to pull off amid greater political scrutiny and a wide-ranging U.S. Justice Department investigation that is looking into possible price collusion in the U.S. generics industry.The deep discounts offered by the new Indian players to gain market share force the incumbent players to match them. That can cut the total value of the market by as much as half, said Kumar Saurabh, an analyst at Motilal Oswal Securities Ltd.
While Indian companies have drawn scrutiny from U.S. regulators over manufacturing quality in recent years, curtailing some of the biggest players' ability to win approvals, other firms have stepped in.
Cipla, which research firm Quintiles IMS Holdings Inc. says is the third-biggest player in India's pharmaceutical market, aims to increase its own U.S. presence. And both Mumbai-based Sun Pharma and Dr. Reddy's Laboratories Ltd., another of the first Indians to move into the U.S. market, have a backlog of applications that have been held up by regulatory troubles which could start flowing if their factories get clearance from regulators.
"The competition has become more cutthroat," Saurabh said.