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Pharma: Finding the right dose... - Views on News from Equitymaster
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  • Mar 27, 2006

    Pharma: Finding the right dose...

    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.



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