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A drug where Ranbaxy scores over Dr Reddy's - Views on News from Equitymaster
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  • Jul 5, 2013

    A drug where Ranbaxy scores over Dr Reddy's

    Given the growing competition in the US generics market, it has become increasingly important for companies to launch products that are niche and have relatively higher entry barriers. This helps in the form of low competition and thereby lesser price erosion. One such drug that domestic pharma companies had been focusing on was Isotretinoin. In this article, we shall take a look at this drug and the increasing competition that players who have launched this drug there are facing.

    It has been a year now since Ranbaxy got approval for Absorica, a type of Isotretinoin drug. Some time back even Dr Reddy's had announced the launch of the Isotretinoin based drug Zenatane in the US. Isotretinoin is the generic version of Roche's Accutane. The approval for this drug seems to be faster than expected given the high stringent approval process and distribution program.

    Whenever a new generic company enters the market, competition intensifies and the same is expected to happen for Isotretinoin. That said, one company has an edge over the other players and this is Ranbaxy with its drug Absorica (generic name CIP Isotretinoin). Ranbaxy's drug has a different feature than the other existing drugs. Let's take a deeper look.

    Facts about Isotretinoin

    The total market size of Isotretinoin in the US is approximately US$ 309 m for 12 months ending January 2013. The drug is used to cure skin problems widely known as acne. The Isotretinoin based drugs are used for treatment and prevention of various types of acne, ideally for nodular acnes (a type of acne). However, there are various safety issues pertaining to Isotretinoin and thus these drugs are distributed through special restricted distribution program approved by the FDA called Ipledge program in the US. One of the biggest risks is that severe birth defects can occur during pregnancy while taking Isotretinoin in any amount, even for short periods of time.

    Thus a special restricted distribution program approved by the FDA was instituted for Isotretinoin based drugs, in order to reduce birth defects. This is by preventing pregnant women from being prescribed or exposed to the drug. All the companies selling this drug fall under this program. Hence any approval of this type of drug is done with due diligence. And this acts as entry barrier for new approvals.

    Other than Dr Reddy's, there are four players in the market viz., Mylan, Ranbaxy, Teva and Douglas selling Isotretinoin based drugs. All their drugs viz., Claravis by Teva, Myorisan by Douglas Pharma, Zenatane by Dr Reddy's, Amnesteem by Mylan and Absorica by Ranbaxy fall under this program. Roche was the innovator of Isotretinoin and it was marketed under the brand Accutane. However, the drug was discontinued by Roche long time back.

    How is Ranbaxy's drug different?

    Among the various versions of Isotretinoin, Ranbaxy's drug Absorica (the drug was developed by Cipher) has better absorption quality compared to other versions. Normally, Isotretinoin based drugs should be taken with a high-fat meal to ensure consistent absorption. As acne normally occurs in teenage population, the eating habits of this group are typically irregular compared to working-age adults. Absorica has been proven to provide better and consistent absorption after meals and even when fasting as compared to existing Isotretinoin products. The drug is generically known as CIP-Isotretinoin, and can be taken either with or without food.

    In 2008, Ranbaxy entered into an agreement with Cipher to market its drug (CIP Isotretinoin). In May 2012, USFDA approved Absorica, which is currently manufactured by Cipher and marketed by Ranbaxy since November 2012. Ranbaxy has made some milestone payments and will be making royalty payment on net sales. However, other terms of settlement remains undisclosed.

    Our View

    The approval of Dr Reddy's Zenatane will certainly bring in the competition in the Isotretinoin market, impacting the overall revenues of the existing players. The overall market is expected to erode further and this will impact current market shares. Currently, Dr Reddy's has approx 1.5-2% market share for this drug.

    However Cipher's drug (Ranbaxy's Absorica) has a differentiating factor, which will help Ranbaxy take superior market share going forward. Currently Ranbaxy's market share is approximately 9%. But one should note that that Ranbaxy will have to share some part of its revenues with its partner Cipher. As per the terms of agreement, Cipher will receive a royalty percentage in the mid-teens on net sales. Thus the overall benefit to Ranbaxy will come down by the shared amount. Further, the product requires a dedicated sales force in order to promote it. This also puts pressure on the margins of both Ranbaxy and Dr Reddy's.

    As per our communication with Dr Reddy's, the product will take time to contribute to its bottom line. However, if the company's market share goes up, it will be able to witness ramp up in its bottom line as well.

    Having said that, the other challenge for both the companies is that Teva's drug has the largest market share of approximately 40%. And despite the launches made by Ranbaxy and Dr Reddy's, Teva's market share has not been impacted so far.

    In nutshell, Ranbaxy has been able to garner better market share compared to Dr Reddy's, given that the company's launch was quite earlier than the latter's. Plus, based on the Ranbaxy's drug profile and current market share, we believe Ranbaxy will continue to fetch better market share than Dr Reddy's. But one should also note, the revenues from the drug will be shared with Cipher. Not just that, as Teva dominates large part of the market, both Dr Reddy's and Ranbaxy will need to make a dent in Teva's share if they have to considerably increase sales from the drug going forward.

      Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.



    Equitymaster requests your view! Post a comment on "A drug where Ranbaxy scores over Dr Reddy's". Click here!

    2 Responses to "A drug where Ranbaxy scores over Dr Reddy's"

    Vishal Manchanda

    Jan 3, 2015

    Would you be able to throw some light on RDY biosimilar initiative in the US. Will it be an early entrant. They have started pretty early in India, can they make it in the US. A recent article on seeking alpha discusses about the same.


    Yatin Parikh

    Sep 20, 2013

    This is the reason why the american company paid the US FDA to sabotage Ranbaxy's image in that country by "fixing" their manufacturing plant in India.
    The company needs to get its act together. and fast.

    Like (1)
    Equitymaster requests your view! Post a comment on "A drug where Ranbaxy scores over Dr Reddy's". Click here!

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