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Pharma: Is US attractive any more? - Views on News from Equitymaster
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  • Apr 3, 2006

    Pharma: Is US attractive any more?

    While a lot has been discussed about the stock market movement, we intend to take break from the same and rather focus on the pharma sector, which attracted significant buying interest last week. The focus of this article is on the US generic market. While it helped create India's billion-dollar pharma company Ranbaxy (who along with Dr.Reddy's capitalised on the early mover advantage), it is now proving to be a tough market to grow. In this article, we shall find what makes this market attractive. Considering the tough environment in the market, is the US story over?

    The drivers...
    Huge market size: The US pharma market is the largest pharma market in the world with revenues to the tune of US$ 236 bn accounting for nearly 50% of the global pharma market. Not surprisingly, it also enjoys the distinction of being the largest generic market in the world with the highest generic penetration at around 40% (in volume terms). No wonder then that this market continues to be an attractive destination for companies wanting to capitalise on the generics opportunity. While Ranbaxy and Dr.Reddy's were amongst the early entrants in this lucrative market, smaller Indian players are also now eyeing the market to propel their revenue growth.

    Growing ageing population: In the US, the ageing population (as a percentage of regional population) is expected to rise from the current 16% to around 25% by 2025 (Source: Ranbaxy presentation). This is expected to put a strain on the healthcare budgets paving the way for faster entry of generics in the US market.

    Regulatory boost: The R&D war chest of global innovator companies has significantly increased over the years. As a result, with healthcare costs now constituting around 15% of USA's GDP, the government is under pressure to reduce these costs. Hence, the increased focus on generics. Generics gained momentum in the US after the Congress enacted the Hatch-Waxman Act. The intention of this Act was to maintain inducements necessary for the innovator companies to research and develop new therapies and enable lower cost generic products to reach the market. Besides Para-I, Para-II and Para-III filings, the Act also introduced the concept of Para-IV. If a company is successful in a Para-IV filing, it gives the company the immensely lucrative 180-day exclusivity period. It must be noted that this provision is unique only to the US markets.

    Patent expiries: While the number of drugs going off patent slowed to a trickle in CY05, denting the performance of companies like Ranbaxy and Dr.Reddy's, the scene is set to change in CY06 and CY07. Between CY06 and CY10, drugs worth US$ 65 bn in innovator sales are scheduled to go off patent, highlighting the potential of growth for Ranbaxy, Dr.Reddy's, Wockhardt, Sun Pharma and also Cipla.

    The challenges...
    Intense competition and pricing erosion: Lately, with many players looking to make an entry into the US market, severe price erosion has become the name of the game. On an average, the extent of price erosion on new products has been as severe as 90% and the number of players making Day-1 launches has also increased. In fact, in CY05, the situation further deteriorated when companies faced 20% price erosion on their base business!

    Authorised generics: Authorised generics have become a regular feature in the global generics arena, as global innovator companies look to fiercely protect their blockbuster drugs and arrest further revenue decline. These authorised generics take the sheen off the otherwise lucrative 180-day exclusivity period. Having said that, most Indian companies have accepted the presence of these generics as a fact of life and are even looking to forge alliances with the innovators. Merck's authorised generics deal with Dr.Reddy's for the former's blockbuster statin 'Zocor' (Simvastatin) and 'Proscar' is a case in point.

    To sum up...
    Due to the huge opportunity in the coming years on the back of an increase in patent expiries, most of the Indian pharma companies have identified US as their key market in driving the generics business. That said, the tough US environment has also compelled companies to focus on the relatively stable and faster growing European markets. The recent spate of acquisitions by Ranbaxy (Allen SpA in Italy, Terapia in Romania and Ethimed in Belgium) and Dr.Reddy's (Betapharm in Germany) is testimony to the fact. While the US market still does hold potential for growth going forward, we believe that a de-risked business model (i.e. a widespread geographical reach) will be the key to sustain growth and profitability in the long term.



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