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Pharma: Are generics still ailing? - Views on News from Equitymaster
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  • Feb 20, 2006

    Pharma: Are generics still ailing?

    The year gone by (2005) will be a year that Indian pharma companies will want to forget, but will not be able to do so. Besides VAT-related concerns, what really plagued the domestic companies was the unprecedented pricing pressure witnessed in the key generics markets of the US and Europe. The generics market a couple of years back was a lucrative one for Indian companies such as Ranbaxy and Dr.Reddy's, which were one of the earlier entrants in the market, besides global majors like Teva (Israel) and Sandoz. However, since then, the dynamics of the global generics industry has witnessed a sea change.

    The existing major players that had captured a significant market share a couple of years back, are today struggling to hold on to the same. This is because the next generation of pharma companies is jumping the generic bandwagon in a bid to boost revenues. These companies can only hope to capture a certain portion of the market by offering products at a lower price than the existing ones, leading to a downward spiral in overall price realisations. Add to this, the problem of 'authorised generics', which diffuse to a large extent, the benefits that a challenging generics company would have enjoyed had it been the only player in the market during the exclusivity period. So, what is it that will enable companies to establish a stronghold over the generics market and sustain revenues? We feel that a combination of these four factors will play a crucial role in maintaining a competitive advantage in the generics industry.

    Scale: Growth through the inorganic route is the fastest way of acquiring scale, especially in markets in which a company's presence is minimal. Teva's acquisition of Ivax and Dr. Reddy's recent acquisition of Betapharm are testimony to this fact. This alleviates the need to make investments in the region right from scratch. At the same time, in the generics environment, the right acquisition target would be that company, which has a significant presence in more than one market, a deep product pipeline and an established marketing network. Currently, consolidation in the generics space is heating up in a bid to boost revenues and maintain margins. However, on the flipside, expensive valuations are an area of concern to be kept in mind.

    Increased product launches: With increased competition, a large number of blockbuster molecules are facing price erosion upto as much as 90%. Even smaller molecules are facing the heat. However, despite this, launching of new products assumes importance to counter this pressure. While existing products will continue to face erosion, launch of new products will help maintain the balance. In 2005, a dearth of new product launches and price erosion of existing products contributed to the decline in revenues of domestic companies, chiefly Ranbaxy and Dr. Reddy's. Foraying into niche areas like injectables and biogenerics (Wockhardt and Biocon), where the competition is relatively lesser, is also another strategy to drive growth.

    Cost competitiveness: The first rule to be followed by any generics company is to become cost competitive. While the scramble to capture market share intensifies the extent of erosion and puts a squeeze on margins, keeping a tight leash over costs will help maintain margins. India, being a low cost country, has that edge over its peers. However, global companies are aware of this fact and are increasingly shifting their base to Indian shores. Therefore, domestic companies cannot afford to lose out on the low cost advantage that India enjoys.

    Geographical reach: In FY05, while Dr. Reddy's' US and European businesses witnessed a decline, it was the Russian markets that kept the company's ship from completely sinking. Similarly, in Ranbaxy's case, while the US business continues to remain a laggard, the European region and the semi-regulated markets of Russia, China and the like have contributed to revenues. Different countries have different competitive and regulatory environments. In such a scenario, geographical reach assumes importance, as difficult conditions in one particular market can be offset by a healthy performance in other markets.

    What to expect?
    Despite the difficult conditions faced by the Indian generics players, we believe that a significant number of patent expiries in the coming couple of years will drive growth in the generics market. Volumes rather than realisations will most likely drive this growth. While pricing pressure is expected to continue, the fundamentals driving this industry as such remain strong. However, while still a long-term play, a focus on developing proprietary drugs will also go a long way in easing the pressure. Teva's first proprietary drug generating revenues just under US$ 1 bn is a case in point. From a long-term perspective, we believe that domestic companies that besides generics, also focus on R&D, will be in a position to be a part of the big league. Thus, despite mounting pressures, we believe that the generics story is still not over!



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