Anji Reddy: Will his bets
|DR. REDDY'S LAB:
Its strategy of challenging patents has yielded dividends.
But for how long can lawyers drive a pharma company's growth?
are getting their fix from drug companies. And it's not a recent
addiction. For a while now pharmaceutical companies have been the
cynosure of investors-the big boys like FIIs and Indian institutions
as well as the retail investor. A quick glance through the BT 500
proves that. Ranbaxy slots in at No. 6, Dr. Reddy's Labs (DRL) comes
in at No. 10. Cipla, Sun, Wockhardt, Lupin, Nicholas Piramal, Cadila,
Pfizer, Aurobindo, Aventis, Novartis, Divi's Labs, Matrix Labs,
all feature in the top 100.
True, some of these companies may be the Indian
arms of foreign companies, but a good many of them are homegrown
start-ups that were little more than a spark in their promoter's
minds less than 10 years ago. Though some might argue that these
companies have been helped in their rise up the charts by 'stolen'
patented technology, that would be an unfair statement to make today.
The Big Push
Several of these companies are now in the midst
of cutting-edge R&D, developing drugs not just to address the
grand-daddy of all drug markets, the US (in value terms over one-third
of the $450-billion global pharma market exists in North America,
talk about a pill-popping culture!), but also coming out with new
formulations and delivery techniques to address the local market.
Desh Bandhu Gupta, MD of
Lupin, feels that the 'Go West!' cry that seems to have been adopted
by most Indian pharma companies is the biggest reason for their
success. "Prices and volumes, even for generics in the US,
are very high, so even if the market is competitive, there are significant
opportunities for companies like ours," he says. In fact, with
almost $80 billion (2002 sales) worth of blockbuster drugs coming
off patent protection within the next five years, he believes that
Indian companies are sitting on a potential goldmine.
Shahina Mukadam, Pharma Analyst, Motilal Oswal
Securities, also believes that pharma is the sector for investors
to keep their eye on. "The market for generics is expanding
fast, with a number of blockbuster products losing patent protection
in the next five years. The US FDA is also determined to facilitate
the launch of generics to reduce the cost of medicines. And Indian
companies are now well-positioned to capitalise on this." Quite
right. Lupin, for instance, has got three new approvals this year.
Aurobindo Pharma, based in Hyderabad, has already started reaping
the benefits of its investments in China and from next year expects
European and US markets to contribute significantly to its revenues.
But it is not just in producing the finished,
packaged product, Indian pharma companies are also getting into
outsourcing. Every drug produced has an Active Pharmaceutical Ingredient
(API), which is usually its most expensive chemical component. Indian
companies are able to produce APIs for several blockbuster drugs
at considerably lower costs. Sameer Narayan, Pharma Analyst at ENAM
Securities, believes the IT outsourcing story can now be repeated
in pharma. "Our pharma exports of $1.6 billion (Rs 7,250 crore)
are still low if we look at the global API outsourcing market of
around $30 billion (Rs 1,35,900 crore), over two-thirds of which
is in the US. The shift will be aided by the pro-generics environment
prevailing at the policy level in the US." He cites the fact
that Indian pharma companies have applied for 58 Drug Matter Files
(DMFs) for bulk drugs to the US Food and Drug Administration (FDA)
in the first half of the calendar year, nearly double the number
of filings in the corresponding period last year.
Indian pharma companies have adopted different
kinds of strategies to crack into the lucrative western (read US)
markets. Ranbaxy, for instance, has already established itself as
one of the top 10 US generic companies. Others like Sun Pharma have
followed the conservative approach of sticking to regular products
like generic anti-diabetics. But some others, like DRL, are aggressively
pursuing the game of patent challenge, which is a high-risk but
high-return strategy where Indian companies apply for patenting
their products, taking on existing multinational giants. Yet others,
particularly second-tier drug companies, have lined up a large number
of Abbreviated New Drug Application (ANDA) filings for generics.
D.S. Brar: Consolidating
gains through R&D
has broken into the echelons of the top generics manufacturers.
But to become a truly big player, its new molecules research
needs to pick up.
Although it is risky-it can lead to expensive
litigation without an assurance of success-the patent challenge
approach has potential, particularly with affordable healthcare
becoming a major issue in the US. Most drugs are protected by patents,
which, on an average, are valid for seven to 12 years. However,
there are provisions in the US law that allow patents to be challenged.
Any successful challenger has a one-year exclusive period to manufacture
the generic product. DRL's first successful challenge was on Eli
Lilly's mega-blockbuster, the anti-depressant Prozac. In August
2001, DRL launched Fluoxetine 40 mg capsules.
The great thing about the Indian pharma industry
is that it is still in a stage where-from the investors' point of
view-it is still a story that is unfolding. Unlike in infotech,
where the outsourcing story has been played out and margins are
under pressure, in pharmaceuticals, the take-off run is just beginning.
Says Jigar Shah, Head of Research, KRC Research: "The Indian
pharma story is sustainable. In fact, it will only accelerate in
the coming years. And with this, the Indian companies will have
a large marketshare in the newly opening regulated markets."
Indian companies have already made their moves.
Besides the biggies like Ranbaxy and DRL, many others too have set
up their marketing infrastructure in the US and have applied for
licences. There has been a spate of DMF filings from India this
year and even small players are now getting into the value- added
(ANDA) segment. In addition, large MNCs have begun outsourcing to
reduce costs by using the crams (contract research and manufacturing)
model in India.
A Tough Act To Follow
The lodestar that a host of Indian companies
want to follow is the sixth ranker on BT 500. Yes, Ranbaxy. Last
year, overseas sales comprised 72 per cent of total revenues, making
it a truly international company.
But it is an act that may not be easy to follow.
There are currently more than 20,000 pharma companies in the highly
fragmented market. Given that the domestic market is valued at Rs
30,000 crore, a shakeout is inevitable. Ranbaxy itself believes
that there will be shift back in the marketplace towards the Original
Research Companies (ORCs) and that growth will come from new products.
Consequently, those that are not into basic research-an expensive
proposition if you are a small or medium company-will face pressures
as margins for generics will get squeezed further.
Also in a post-trips environment, everybody
expects the MNC pharma companies to come back into India in a big
way. A Ranbaxy spokesperson believes that "they will spend
money in amounts no one has ever heard of before". Satish Reddy,
coo, DRL, feels that times would be tough looking forward, "MNCs
will get back into the country to launch proprietary products either
through their own arms in India or licence them to partners with
strong marketing and distribution networks."
Lab's M.K. Divi: Setting
a scorching pace
It has emerged as one of the biggest API exporters in a
short time. Will the outsourcing model's success in IT be repeated
in pharma too?
To prevent being caught out in the race for
new products, and trying to stand above the 'generics gang', both
Ranbaxy and DRL have invested heavily on research. Reddy points
out the importance of this. "Indian companies with research
in their portfolio will continue to grow as they adopt alternative
strategies of introducing products such as acquiring brands and
in-licensing products." DRL has eight molecules in clinical
trials, including one in Phase-III US FDA trials and Ranbaxy has
seven molecules in its drug research pipeline.
But basic research costs money and takes time.
The cost of developing a drug can run into tens of millions of dollars.
Pharma majors estimate that it costs over $500 million to develop
a drug. Drug development can also take time-sometimes up to two
decades. However, if a drug is successful the rewards can be tremendous,
in the first nine months on offer, erectile dysfunction drug Viagra
totted up $790 million (Rs 3,578.7 crore) in sales. Pfizer's biggest-selling
drug Lipitor targeting fat-control is worth an estimated $6 billion
(Rs 27,180 crore) a year, and in the eight-plus years it has been
on the shelves, has totted up sales of over $35 billion (Rs 1,58,550
So do the Ranbaxys and DRLs have it in them
to match an AstraZeneca, a Pfizer or a Glaxo-SmithKline? It may
be unfair to compare them. For one, MNC pharma companies have hundreds
of molecules under research or trial at any given point in time;
all put together, Indian companies may be developing fewer molecules
than the number of fingers on your hands. Plus there's the small
matter of size.
The combined market cap of all the pharma companies
on the BT 500 sounds like an impressive Rs 62,324 crore, with net
profits for the last fiscal touching Rs 3,043 crore, which works
out to $13.76 billion and $672 million, respectively. Compare that
to Pfizer's market cap of $240 billion, or Rs 1,087,200 crore, and
net income of $9.1 billion (Rs 41,223 crore). It spent seven-and-a-half
times the combined profits of all Indian pharma companies on R&D
Sensibly, Indian companies don't want to take
on giants like Pfizer. Instead, their strategy attempts to leverage
technical skills instead of trying to match the global giants' financial
muscle. Ranbaxy, for instance, focuses on increasing productivity
and shortening the development timeline. Its edge: Ranbaxy has already
entered the highest echelons of generic drug makers in the US and
has in place a competent marketing structure.
Analysts and investors alike might be gung-ho
on pharma. But while the small and medium sized companies try to
emulate the biggies like Ranbaxy and DRL, not everyone may be able
to grow that big. The alternative is the infotech model, where India
leverages its low costs and high skills to become the world's back
office. But that model, as Indian it companies without proprietary
offerings are increasingly beginning to realise, has its downsides,
namely, declining margins and an excessive dependence on their customers'
fortunes. Does the pharma industry really want to copy such a strategy?