US big 3 look for new Indian drug suppliers

Generic drug sales in the US, that power the business of such leading Indian drug manufacturers as Ranbaxy, Dr Reddy's, Sun Pharma, Lupin and Zydus Cadila, will face competition soon, as big US wholesalers decide to outsource their requirements from upcoming Indian manufacturers.

According to informed industry sources here in India, at least ten tier-II and tier -III Indian pharmaceutical companies with plants in Mumbai, Ahmedabad and Hyderabad that are approved, or may be approved by the US Food and Drugs Administration, are on the radar of the big three Fortune 500 distributors, McKesson Corporation of San Francisco ($93 billion), Cardinal Health of Dublin ($87 billion), and AmerisourceBergen of Chesterbrook ($66 billion).

These three wholesalers control almost the entire drug distribution market in the US.

Over the past few months, McKesson and Cardinal Health have sent executives to India to assess the capabilities of these companies, the sources said.

"It is difficult for any Indian company to do business with the US without the big three who control over 90 per cent of the US drug market," said Sujay Shetty, associate director, PricewaterhouseCoopers.

"India has the maximum US FDA approved plants outside the US and it is natural for them to look at India for new opportunities."

India has a share of around 23 per cent in the total abbreviated new drug applications (ANDA) approvals and 48 per cent of the drug master filing (DMF)s with the US FDA, according to a recently published KPMG-CII pharma report.

The US is the largest generics market, with 28 per cent of global generic sales. This is expected to touch $94 billion by 2010 and drugs worth $65-70 billion are going off-patent in the next 4-5 years, according to research reports by Crisil Research and SSKI Investment.

The move by wholesalers comes in the context of tighter margins in the US market and is aimed at tapping cost-effective generic manufacturers directly, increasing the supply base across the world.

The wholesale drug business in the US is driven by high volumes on thin profit margins of about one per cent of revenue. Supply agreements with new players will help the distributors bargain for products at prices up to almost 20 per cent cheaper than what they are getting from existing Indian suppliers.

The sources said McKesson and Cardinal Health have been keen to get into direct contract manufacturing to protect margins.

"Cardinal Health was actively looking at India for some time. A change in the dynamics of the US generics business is bound to happen," said Rajendra Gupta, former chief executive officer of Medicine Shoppe India, the retail drug chain business of Cardinal Health.

E-mails sent to the corporate communication departments of the big three US distributors did not receive a reply.