Pharma: Finding the right dose... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Pharma: Finding the right dose...

Mar 27, 2006

The introduction of the product patent law has heralded an era of innovation and discovery-led research. This has resulted in Indian pharma majors stepping up R&D activities. At the same time, investments in patent challenges have also gained ground in a bid to survive the intense competition and brutal price erosion in the global generics space. In this context, the million-dollar question is "Should Indian pharma majors focus more on NCE research or patent challenges?" This question assumes importance because success in NCE research will result in exclusive revenues for ten years, while a successful Para-IV filing will provide exclusivity for six months! Each has its share of risks and rewards.

Patent challenges (Para IV filings)
Rationale: Though the generics industry has been growing, competition has led to severe price erosion, as major players are scrambling to hold on to their market shares. The extent of price erosion is close to 90% in most of the products on Day 1 itself. As a result, the 180-day window that a generic company obtains while successfully challenging patents has begun to find a lot of takers. This can be evinced from the fact that even Indian players such as Ranbaxy and Dr. Reddy's, along with their global counterparts, have increased the pace of these filings.

Rewards: The 180-day exclusivity not only enables a generic company to generate substantial revenues, but also provides a platform to gain significant market share. It also enables the company to strengthen its customer reach and brand value.

Risks: The risks include high litigation costs (will dent bottomline if unsuccessful) and the presence of authorised generics (both these factors reduces the revenue and profitability potential). Also, global innovator companies are becoming increasingly resilient in defending their turf, thus making the whole process all the more difficult and challenging.

NCE Research
Rationale: NCE research is construed as the backbone of the global pharma industry. Not only does a successful drug addresses unmet needs of patients around the world, but also considerably boosts the overall performance of a pharma company.

Rewards: The benefits can be huge depending upon the how well the drug is received in the market. To cite an example, the top five drugs of Pfizer Inc. contributed to around US$ 24 bn in revenues to the total sales of US$ 51 bn. Also, today, the top ten-pharma companies in the world are innovator companies. Teva Pharmaceuticals (the largest generic pharma company in the world) is ranked between 15th and 20th!

Risks: It takes around ten years for a drug to reach the market before revenues start kicking in. Also, the entire R&D process, on an average, involves a steep cost of around US$ 1 bn. At the same time, there is no guarantee of success. To put things in perspective, for every 10,000 molecules screened, an average of 250 enter pre-clinical testing, 10 make it through to clinical trials and only 1 is approved by the US FDA (Source: The Economist).

The right combination
Both NCE research and Para-IV filings require significant investments and resources. The kind of R&D investment required in NCE research is by no means small for any Indian company. As a result, companies such as Ranbaxy, Dr. Reddy's and Biocon have to complement the same with a steady revenue stream (i.e. generics and the domestic market). In this competitive generics environment, Para-IV filings have become necessary, despite increased challenges. However, it is imperative to have a healthy balance between these filings. Having said that, from a long-term perspective, NCE research has to be the focus area of any company to boost overall performance and cement its position in the global pharma industry.

To give an example, Ranbaxy and Dr.Reddy's have been pioneers of R&D as far as Indian companies are concerned. Both these companies have had a tough time in the last five years but have not compromised on their R&D expenditure, which is a very encouraging sign. While there could be volatility in performance, it is the name of the game. But like it is said, Rome was not built in a day! Investors need to have a long-term horizon while investing in pharma stocks.

Equitymaster requests your view! Post a comment on "Pharma: Finding the right dose...". Click here!

  

More Views on News

Follow the HDFC Bank Template for Investing in Smallcap Stocks (Profit Hunter)

Oct 29, 2020

The two main traits of HDFC Bank that smallcap investors need to follow.

Stocks or Index: Which is Better for Trading? (Fast Profits Daily)

Oct 28, 2020

As a trader, which is better for you to trade, the benchmark indices or individual stocks? Find out in this video...

ESG Investing Is Gaining Preference Among Investors. Should You Invest? (Outside View)

Oct 28, 2020

ESG being a niche segment in the Indian mutual funds industry consists of only a handful of funds at present.

Why the Kotak Bank - IndusInd Bank Merger Should Interest You (Profit Hunter)

Oct 28, 2020

106%, 71%, 114% are the kind of returns banks have generated immediately after a virtuous merger.

The Real Upside in Kotak - IndusInd Bank Merger podcast (Views On News)

Oct 28, 2020

Why the proposed Kotak IndusInd merger has merit and urgency.

More Views on News

Most Popular

My View on ITC (Fast Profits Daily)

Oct 23, 2020

What do the charts say about ITC?

PSU Banks Will Move Up Again (Profit Hunter)

Oct 27, 2020

My charts tell me PSU banks are set for a rebound.

One of the Best Investment Opportunities in the Market Right Now (Fast Profits Daily)

Oct 16, 2020

The one sector that you should be looking at to make good profits.

Why India's Drone Revolution is a 4x Profit Opportunity (Profit Hunter)

Oct 16, 2020

My research on India's leading defence companies brought me to one major player in drone manufacturing.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Oct 29, 2020 10:12 AM

MARKET STATS