While pharma companies seem to have left the demons of the past year well behind them, challenges still abound in the global generics arena, in the domestic market and even in discovery research. And this is due to changing fundamentals and business dynamics of the sector. One is the introduction of the product patent law. The other is the increased competition and brutal price erosion in the generics market.
Keeping this in mind, pharma companies are looking to forge alliances with global innovators in various aspects of business, be it research, generics or new product launches. In fact, even the stock markets have perceived these 'partnerships' in a favourable light. In this write-up, we shall attempt to find out why.
Alliance with global pharma majors in...
Discovery research: Considering that discovery research is a high-risk, high-return business, Indian pharma companies have been collaborating with global pharma companies in light of the huge investments involved and uncertainty in the outcome. To cite examples, Ranbaxy's anti-malarial molecule, which is currently undergoing Phase II clinical trials, is being developed in collaboration with Medicines for Malaria Venture. Out-licensing of molecules in return for milestone payments is also another commonly followed approach to mitigate the high costs involved in NCE (new chemical entity) research. Also, Glenmark, whose molecule 'Oglemilast', which the company out-licensed to the US-based Forest Labs, has generated considerable interest on the bourses in the past one year. Dr. Reddy's formation of a separate company for carrying out clinical trials has also been touted as a smart move and is expected to contribute to margin expansion going forward.
Contract research: Contract research is also tipped to gain ground in India after the introduction of the product patent law. With considerable pressure on global pharma majors to cut back their R&D costs, a majority of them are looking to shift some of their R&D work to low-cost destinations like India. For example, Biocon has forayed into the custom research business with the formation of two subsidiaries, Syngene and Clinigene. While the contribution of this business to overall revenues (12%) is smaller in comparison to its biopharmaceuticals business (77%), it clocked an impressive 69% YoY and 47% YoY growth in FY05 and 9mFY06 indicating the potential for growth in this field.
Generics: While much as been said about authorised generics and the bane it is to generic companies aiming for that increasingly elusive 180-day exclusivity period, there is also a silver lining. This holds true if it is an Indian pharma company authorised to sell the generic version. Dr. Reddy's has entered into an authorised generics deal with Merck for the latter's drug 'Simvastatin' and will benefit immensely on the revenue front if the exclusivity period is granted to the challenging company.
Contract manufacturing: While Ranbaxy and Dr. Reddy's are directly competing in the global generics market, Cipla has entered into alliances with global generic majors such as Ivax, Watson and Mylan to capitalise on the huge generics opportunity in the coming years. In this case, the company is providing low cost bulk drugs to these generic companies and is at the same time obviating any need in incurring expenses in filing ANDAs. This has ensured a relatively stable revenue stream for Cipla as compared to either Ranbaxy or Dr. Reddy's.
New product launches: In the product patent era, in-licensing agreements with global pharma companies is beneficial in stepping up new product launches in the country. Players such as GSK Pharma, Ranbaxy, Nicholas Piramal, which have a strong marketing and distribution network have an edge over their peers in bagging such deals. Such deals also enable players to widen their product portfolio and consequently boost topline growth.
To sum up...
In our view, willingness of Indian pharma companies to bring outside expertise to the table should be construed as a positive step to stabilise revenues and profitability. However, there is also a catch to the situation. This is because as revenues have to be 'shared', the potential upside gets capped. However, considering the volatile performance of some of the domestic pharma majors over the past few years, stability in business has assumed paramount importance. At the end of the day, a solid foundation is what will pave the way for a higher growth and consequently rewarding returns for investors in the long run.