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

Stocks to Ride the Covid-19 Rebound podcast (Views On News)

May 29, 2020

The Covid-19 crisis could be the best investing opportunity in a decade in small-cap stocks, for discerning investors, when the market rebounds.

What You Should Know About the India Vix (Fast Profits Daily)

May 29, 2020

The India Vix is one of the most commonly tracked numbers in the stock market. But what does it mean and how can you use it? In this video, I'll show you what the Vix is all about...

The Locusts Are Coming! Are You Buying the Right Stocks? (Profit Hunter)

May 29, 2020

The locust swarm has produced winners in the stock market. Read on to know more...

These Stocks Can Make You Incredibly Rich in 2020 and Beyond podcast (Views On News)

May 28, 2020

Good quality stocks do not give good long term returns all the time. We take a look at the important factor that influences stock market returns other than business quality.

Why Aditya Birla Sun Life Mutual Fund Stopped Accepting Fresh Investments In Its Two Debt Schemes... (Outside View)

May 28, 2020

This Daily Wealth Letter, explains the key reasons why Aditya Birla Sun Life Mutual Fund has temporarily suspended in two debt schemes -- Aditya Birla Sun Life Medium Term Fund and Aditya Birla Sun Life Credit Risk Fund.

More Views on News

Most Popular

6 Charts Showing the State of Indian Financial Markets in 2020 (Sector Info)

May 26, 2020

Six charts showing how Indian financial markets have performed in 2020 so far...

This 'Essential Product' Smallcap is a Must Have for a 'Covid-19' Immune Portfolio (Profit Hunter)

May 19, 2020

This smallcap company needs no stimulus measures to do well in the long term.

What the RBI's Rate Cut Means for Options Traders (Fast Profits Daily)

May 25, 2020

The RBI governor has cut the repo rate to 4%. What does this mean for options traders? Find out in this video.

Which Stocks Should You Buy, Sell, and Hold in the Market Today? (Profit Hunter)

May 21, 2020

The coronavirus led uncertainty refuses to go away from the markets. Here's what retail investors should do with their stocks...

More

India's #1 Trader
Reveals His Secrets

The Secret to Increasing Your Trading Profits Today
Get this Special Report, The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


May 29, 2020 (Close)

MARKET STATS