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180-day exclusivity: Lucrative anymore? - Views on News from Equitymaster

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180-day exclusivity: Lucrative anymore?
Jun 28, 2006

The recent 180-day exclusivity received on the blockbuster drug 'Simvastatin' has been a major event for the Indian pharma industry and the Indian pharma sector in particular. That said, the price erosion during this period has also been severe, which leads us to examine whether these exclusivity periods, for which pharma companies spend millions of dollars on litigation, are lucrative anymore. The 'Simvastatin' story
'Zocor' (Simvastatin) is the US$ 4.5 bn anti-cholesterol drug belonging to the innovator company Merck. While Teva (Israel) claimed exclusivity on the 5 mg, 10 mg, 20 mg and 40 mg strengths, Ranbaxy was aiming for the exclusivity on the 80 mg strength. At the same time, Dr. Reddy's has entered into an authorised generics deal with Merck for the same drug. In the days leading to the patent expiry of the drug (June 23 2006), 180-day exclusivity on the same was shrouded in uncertainty and legal tangle as Merck de-listed the patents and consequently the US FDA denied exclusivity on the same. However, with the recent US court decision favouring Ranbaxy and Teva, all the three companies have now launched the generic version of the drug in the market, which is expected to give a boost to the topline.

That said, the downside has been to the extent of price erosion. On Day 1 of the launch itself, prices have eroded by as much as 60% with only three players present! One of the reasons attributed to the same was the tactic adopted by Merck to blunt the onslaught of generics. In a contract with two managed healthcare companies, Merck reduced the offer price of the branded drug by as much as 60%, spiraling the price erosion. This has been an unprecedented step taken by a global pharma major and it remains to be seen whether it will be the norm in the future in the generics industry.

One likely positive as far as 'Simvastatin' is concerned is the likely surge in volumes. This is because major pharmacies and distributors in the US may look to switch over from Pfizer's patented 'Lipitor' to cheaper versions of generic 'Zocor' in a bid to reduce costs and this could also explain the reason behind Merck's move.

Is the scene that bad?
However, we believe that the overall scenario as far as 180-day exclusivities are concerned may not be that bad. For instance, as far as Pravastatin is concerned, where Teva has received the 180-day exclusivity, there have not been indications of a sharp drop in prices. Similarly, in the recent 180-day exclusivity awarded to Teva for Merck's drug 'Proscar' (Dr. Reddy's is also the authorised generic here), the price erosion does not seem to be that severe and, in fact, Dr. Reddy's has stated an increase in market share. Thus, there is a possibility that this could likely be a one-time event. That said, it is difficult to predict whether other global pharma majors will take a leaf out of Merck's books in the future. One thing is certain - with many other players waiting in the wings to launch their own generic versions of the drug, prices are most likely to erode by as much as 90% to 95% once the exclusivity period ends.

Investment in pharma stocks
While garnering 180-day exclusivities is a high-risk, high-reward game, success or failure of one particular drug should not be construed as the primary reason for investment in pharma stocks. Investors need to put in their money in those companies, which have sound managements and are able to continuously keep the new product launches flowing in the domestic and international markets. After the recent meltdown witnessed in the Indian stock markets, we believe that valuations of certain pharma stocks (which were stretched before May 22) appear reasonable at the current juncture. While we are positive about the growth prospects of the sector as a whole, we advise investors to adopt a stock-specific investment strategy while investing in the sector. The trick lies in identifying the right one!

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