Pie in the sky? Trump’s executive order on pharma unlikely to see the light of day: N Jayakumar

N Jayakumar, MD, Prime Securities, views the US executive order on pharma prices as unrealistic. He anticipates legal challenges. He highlights the dominance of large pharmacy chains and their markups on generic drugs. He suggests the core issue is inefficient distribution, not price control. He believes reducing distribution costs is key.


What are you making of Trump's announcement that he is going to sign this executive order that is going to reduce prescription drug and pharma prices? You have been pretty vocal about this.
N Jayakumar: Before I even get to the markets, just a moment of a collective bow, if you will, for the Indian armed forces. We are all here continuing with business as usual principally and only because of them, the unsung heroes of those who have been protecting us for the last decades and decades especially for the last few days and also for the scientists and technologists at DRDO, ISRO, and BEL, HAL, etc.

The fact that both technology and the Indian defence have come of age has never been more exemplified than in the last few days. I would mention that this would be remiss if I did not do it before we start the process of market discussions. So, coming to pharma itself, first of all, in Hindi they call it khayali pulao and in English it would be called a pie in the sky. This kind of an executive order to control free market prices in the US, is littered with litigation. This executive order to my mind will be challenged in courts almost instantly.

The real issue which has been missed out in this is that the US pharma distribution is being done through three or four very large pharmacy or distribution chains like the CVS, the Boots equivalent in the UK, US, etc. So, these two or three control virtually the entire retail, 80% of the retail distribution of pharma products. The mom-and-pop shops by the way and there have been videos on this on the doge site which indicate that the mom and pop shops still sell drugs far-far more reasonably than these three or four very large distributors and the unholy alliance if you will, has been that much of that money, the margins, goes into campaign funding which has been alluded to in that tweet of Donald Trump.

You must understand that if generics are sold at $1 in the US, gets marked up to $4 or $5 when it finally hits the consumer as generics purchasers, whereas the patented equivalent may be selling at $10 to $15, so that is the markup that is being consumed by the middleman. If that $5 were to come down to $2 or $3, the end result is that consumers will get drugs far, far cheaper. This is not an issue of more control or price control, this is actually eliminating if not improving the distribution chains in the US, that is the problem. And there is in any case no way that in a free market an executive order can be passed to reduce prices and everybody sort of agrees to it, will not happen, and the most important thing again is the US needs more generics, not less generics and that is the important thing here.

We have seen that these intermediaries or insurance companies are the ones who are calling the shots. We have seen that earlier also that they really squeeze it out when it comes to the suppliers and the generic companies. If their margins are slashed, why cannot they squeeze it down further with the generic and with the producers?
N Jayakumar: The $1 in any case has a 20% markup, which means that if you had 80 or 82 going to $1, 0.82 going to one and one going to five, you figure it out for yourself where the margins will get slashed. First of all, even as a thought this is alien to a free market and the epitome of free market, if you will, that prices will get slashed through executive orders. If there were sort of structural issues that could be addressed in terms of distribution and to make sure that prices that generics companies are getting is close to what the end consumer is paying, there is some sense in this.

Frankly, this administration is running on executive orders as if everything in life is an emergency based situation. Far from people coming to the conclusion that these will have an impact tomorrow morning, I do not think this will have any impact because this cannot even be implemented.

So, today pharma stocks fall, then logically one should actually be buying them because today they will fall?
N Jayakumar: I mean, logically the lowest cost producer in the world has to be bought into. Now, between the lowest cost producer in India and in China, if there are higher tariffs on China compared to India, logically the Indian generics manufacturer is on a better footing than this Chinese equivalent. But there are no arguments in this point that between India and China we produce the lowest cost drugs in the world, the equivalent of the patented products, the generic equivalents if you will and to go after those to try and reduce their costing is not going to give you any great savings. The big problem is that generics once they land in the US are not selling at $1, going to $1.2 or $1.5, but at 4x and 5x and that is the problem.

Within the pharma space, there is generic, there is injectable or broadly prescription and non-prescription. How does it work for India? What is prescription as a percentage of the total market? What is non-prescription because for non-prescription nothing changes here?
N Jayakumar: These are terms that are loosely used. My own personal feeling is that I do not think this tweet has been timed. I do not think this is being thought through. The problem is the prescription is just what your clinician or your doctor would prescribe, which could be either the patented product or is generic equivalent. So, the issue is not about prescription, the issue is the concept itself. If you want to bring down product prices, you need to slash the distribution costs and that brings you to a more fundamental issue, that doing business in the US whether distributing pharmaceuticals or producing anything through a manufactured setup is extremely expensive.

It is the most expensive in the world and that is why the US has been forever focusing on exporting of services and importing of manufactured products, that is the way trade is, that is you lean upon somebody who is more equipped to produce something.

So, if there is technology, entertainment, IP around financial services, those are the exports that they are able to do compared to what the rest of the world can do which is largely the emerging markets, which is stuff like textiles or pharmaceuticals or gems and jewellery or whatever because that is where the manufacturing costs are lower.

Now, it is not about one category vis-à-vis the other, I am fundamentally saying that for people to jump to conclusions that this is going to bring cost down by 80%, is a pie in the sky. This is not going to happen and I do not think this will see the light of day.