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Morningstar | Generic Drug Companies Hit With Legal Challenge on Potential Pricing Collusion

More than 40 states have filed a price-fixing lawsuit in federal court against several generic drug manufacturers, including Teva and Mylan, but we don't expect any major changes to our fair value estimates based on the legal action because the potential range of outcomes is fairly large and difficult to predict. We continue to rate Mylan and Teva with uncertainty ratings of very high and extreme, respectively, partly related to the high debt levels these firms carry. The increased legal concerns stemming from the litigation announcement further supports the larger uncertainty around the fair value estimates for these companies. Further, we continue to believe these companies have no moat, given the high degree of competition in their key markets.

The core allegation in the lawsuit revolves around collusion in setting up higher-than-normal pricing, and we expect a lengthy trial will ensue later in the year. Typically, generic drugs are fairly commoditized products, where prices are eroded as a result of competition that can relatively easily move in and out of markets depending on the demand and pricing. However, regulation can play a role in keeping some firms off the market longer than normal. The U.S. Food and Drug Administration needs to approve new generic drugs, and several years ago a backlog of generic drug filings with the FDA did delay some new entrants. We would expect the generic firms to use the regulatory process, complexities in manufacturing some drugs, and raw supply issues as rationales for changes in generic drug pricing. Overall, we don't expect major changes in the U.S. drug pricing landscape without major regulatory reforms.