Pharma – Future Diagnosed - Views on News from Equitymaster

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

  • MyStocks


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

Pharma – Future Diagnosed

May 31, 2003

The Indian pharmaceutical industry has come a long way since 1970 when the government introduced regulation in the pharmaceutical industry in the form of Drug Price Control Order (DPCO) and more recently, through the price-monitoring agency-National Pharmaceutical Pricing Authority (NPPA). These regulations were essentially to control the prices of drugs in the domestic market. This has helped the industry in providing quality drugs at reasonable prices. But with India now required to comply with the WTO regulation of providing product patents by 1st January 2005, the face of the Indian pharmaceutical industry is about to change in the coming future. Indian companies have traditionally concentrated on low priced generic drugs. They were thus not able to obtain critical size and hence restricted their research expenditure to low cost research activities such as reverse engineering of patented products. The R & D expenditure in India as a percentage of sales was only 2% in FY00 as against 15% for the global pharmaceutical majors. However, after 1st January 2005, Indian companies will not be able to reverse-engineer patented products and will have to increasingly invest in research to develop new products. There is hence an apprehension that Indian companies might find it difficult to survive in the post-patent period. In this scenario, let us analyse the various avenues open to Indian companies once the patent regime comes into effect.

Licensing out an NCE:
Indian companies could use their expertise in chemistry and process development to develop New Chemical Entities (NCE). NCE is a chemical molecule developed by the innovator company in the early drug discovery stage, which after undergoing clinical trials could translate into a drug that could be a cure for some disease. Synthesis of NCE is the first step in the process of development of a drug. Once the synthesis of the NCE has been completed, Indian companies have two options before them. They can either go for clinical trials on their own or license the NCE to another company. In the latter option, Indian companies can avoid the expensive and lengthy process of clinical trials, as the licensee company would be conducting further clinical trials and subsequently launching the drug. Companies adopting this model of business would be able to generate high margins as they get a huge one-time payment for the NCE apart from entering into a revenue sharing agreement with the licensee company.

For example, Dr Reddy’s Laboratory has licensed its NCE for diabetes DRF 2725 to Novo Nordisk and received a milestone and upfront payment of Rs 334 m and its NCE for Type 2 diabetes DRF-4158 to Novartis Pharma AG for Rs 55 m during the financial year 2002. The following table shows the major drugs licensed by Indian companies.

Innovator Company Licensed to Name of the NCE Segment
Dr. Reddys Laboratory Ltd. Novartis Pharma AG DRF-4158 Anti-Diabetes
Dr. Reddys Laboratory Ltd. Novo Nordisk DRF-2725 Anti-Diabetes
Dr. Reddys Laboratory Ltd. Novo Nordisk DRF-2593 Anti-Diabetes
Ranbaxy Ltd. Bayer AG CiproXR Anti-Infective

However, there is a risk of failure of the drug at any of the phases of the clinical trials and could adversely affect the performance of the company. For instance, the phase 2 clinical trials of Dr. Reddys Laboratory’s NCE DRF-272 (Ragaglitazer), being carried out by Novo Nordisk, were suspended resulting in a loss of huge potential revenues for the former, had it reached the commercial stage.

In the other option, Indian companies could instead of licensing out the NCE, carry out the entire process of clinical trials, obtain the required regulatory approvals and launch the drug in the market. The company would have the patent for such a drug and hence be able to enjoy marketing exclusivity for a long period, in which time they are able to generate large revenues. The margins in this kind of initiative are also comparatively large. Ranbaxy Ltd. has taken lead in this field. Phase 2 clinical trials for its first NCE for curing Urological disorders, RBx-2258 is being carried out at different centers in India. Another molecule RBx-6198 is in its’ early discovery stage.

However, passing of the NCE through various phases of clinical trials takes atleast 8-10 years and entails huge R & D expenditure. It is estimated that on an average, development of a new drug costs around US$ 400 m. Moreover, risk of the new drug failing at any of the different stages of clinical trial is also extremely high and the company could loose the entire R & D investment made by it on the failed NCE.

Contract Research:
The availability of highly skilled and low cost research specialists and scientists makes India an ideal destination for many MNCs for outsourcing their research activities. Indian companies could thus act as Contract Research Organisations (CRO) and carry out research on behalf of the MNCs. Nicholas Piramal India Ltd. has recently established a CRO, called Wellquest, for conducting research on behalf of foreign companies as well as for generic research for Indian companies. Many bulk drug producers like Morpean and Suven Pharma are also evaluating the possibility of venturing into this field, as the margins are high.

Contract Manufacturing:
India has a cost advantage in the manufacture of drugs. The cost of setting up an FDA approved plant in India is almost half of that in the USA. With the government now allowing 100% FDI, many foreign companies are planning to outsource the manufacture of their off patent drugs to Indian companies and concentrate more in the development of new products. For Indian companies, this is an area of large potential. Indian companies have already started capitalizing on this opportunity. Nicholas Piramal Ltd. has recently entered into an agreement to manufacture various Allergen Inc products.

One of the major plus points of the Indian pharmaceutical industry is its’ well established marketing and distribution network. For a commission, Indian companies can capitalize on their existing distribution network and enter into marketing agreements with other companies that have a product but do not have the sales force required to market the same. Wockhardt has entered into a marketing agreement with Bayer AG for the marketing of the anti-diabetic drug Acarbose.

Finally the Indian companies can continue to specialize in generic drugs and formulations. A company can wait for the patent of a drug to expire and bring out the generic version of the same. It is estimated that 15 of the 35 block bluster molecules will be off patent by 2005. Moreover, there is increasing pressure on the US government to reduce healthcare expenditure by enabling a faster generic entry in the markets. This gives the generic companies the opportunity to flood the US markets with quality generic drugs at competitive prices. The generic drugs business is, however, characterised by low pricing and hence the margins are bound to be low. The following graph indicates the value of the drugs likely to go off patent by 2005. However, it should be noted that the generics sales would not increase by such high amounts as the generics are sold at much lower prices as compared to their patented counterparts.

Indian pharmaceutical industry is highly fragmented with 23,000 players and no company enjoys more than 7% market share. However, with the introduction of product patents, many companies have started going in for Mergers and Acquisitions and thus gain synergies in research and development, cut costs, sustain revenues and increase market share. This will also help the companies in being better prepared once the product patent is introduced. Recognizing this, Nicholas Piramal India Ltd. acquired Rhone Poulenc in FY02 and the pharma business of ICI (India) Ltd. and Global Bulk Drugs and Fine Chemicals Ltd. in FY03.

From this article, we see that there is a wide range of business models that Indian companies can adopt in order to survive the post 2005 era. Thus companies that are able to recognize their strengths and capitalize on the same are the ones that will survive. Many Indian companies have realized this and are in the process of identifying the business line that would yield optimum returns. From here on, success for Indian companies in the pharmaceutical industry will be a factor of viable long-term strategies.

Equitymaster requests your view! Post a comment on "Pharma – Future Diagnosed". Click here!


More Views on News

LAURUS LABS LTD Share Price Down by 5%; BSE HEALTHCARE Index Down 1.0% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

LAURUS LABS LTD share price is trading down by 5% and its current market price is Rs 1,347. The BSE HEALTHCARE is down by 1.0%. The top gainers in the BSE HEALTHCARE Index are APOLLO HOSPITALS (up 5.2%) and SYNGENE INTERNATIONAL (up 3.5%). The top losers is LAURUS LABS LTD (down 5.3%)..

NARAYANA HRUDAYALAYA LTD Share Price Down by 8%; BSE HEALTHCARE Index Down 1.6% (Market Updates)

Sep 24, 2020 | Updated on Sep 24, 2020

NARAYANA HRUDAYALAYA LTD share price is trading down by 8% and its current market price is Rs 302. The BSE HEALTHCARE is down by 1.6%. The top gainers in the BSE HEALTHCARE Index is SANOFI INDIA (up 1.6%). The top losers is NARAYANA HRUDAYALAYA LTD (down 7.8%)..

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


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


Sep 24, 2020 (Close)