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Pharma: Global opportunity beckons

Jul 11, 2006

The product patent law has prompted domestic pharma companies to focus attention on the global generic markets in a bid to augment revenue streams in the medium term. This focus is also part of the strategy to fund the R&D initiatives undertaken by companies to keep up the flow of product launches in wake of the new patent regime. Besides this, governments of various countries across the globe are looking to reduce healthcare costs by encouraging the use of relatively cheaper generics, which provides a further impetus to companies such as Ranbaxy, Dr. Reddy’s, Wockhardt, Cipla and the like to establish a presence across geographies. Here is our take on the opportunities and challenges of operating in various global markets. The US: Since the US is the biggest pharma market in the world (revenues to the tune of US$ 266 bn accounting for 47% of the global pharma market), every company wanting to capitalise on the generics opportunity is looking to corner a slice of this market. The US also has the highest generic penetration at around 40% (in volume terms). Entry of generics into the US market took shape in the form of the Waxman Hatch Act introduced in 1984 by the then US government. This act allows companies to launch generics by making either of the four filings (Para I, II, III and IV).

One of the unique features of the US market is that companies can challenge the validity of the innovator’s patent by making a Para IV filing. A success on this front results in the challenging company being awarded the lucrative 180-day exclusivity period. It must be noted that 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 downside is that since most of the pharma companies are scrambling to gain a foothold in the market, the competition has intensified resulting in severe price erosion (prices erode by as much as 90% on Day 1 of the launch itself). This has put pressure on not only the realisations but also the operating margins. Also, generic companies have to contend with the presence of authorised generics as innovator companies look to fiercely defend their drugs and arrest sales decline. Besides this, the recent strategy of Merck, wherein the company drastically slashed the prices of ‘Zocor’ is likely to be a cause for concern going forward as other innovator companies could also follow suit.

Japan: Japan is the second largest pharmaceutical market in the world, controlling 11% of the global business. Generics, though present in Japan, have a low profile and enjoy a poor reputation, as the Japanese tend to view generics as ‘inferior’ to branded (read patented) products. This is further highlighted by the fact that generics account for 16% of the Japanese market in volume terms and a very low 5.2% in value terms. However, considering the rise in the aged population in Japan, the government in this country has also slowly started paving the way for generics in the market. At present, amongst Indian companies, only Ranbaxy and Lupin have made a foray into this market. Ranbaxy has formed a 50:50 joint venture with the Japanese company Nippon Chemiphar and has identified Japan as a long-term growth strategy. The Japanese generics market is in its nascent stages and it will be a while before this market actually starts contributing significantly to the revenues of Indian pharma companies. Therefore, even if the opportunity does not materialise in the medium term, those companies enjoying the first mover advantage will benefit in the long-term.

Europe: While the US is a homogeneous market, Europe is a heterogeneous market with different countries having its own regulatory environment. For instance, in countries, where the prices of branded drugs are high, generic drug prices also tend to be high as is the case in Germany and UK. In these two markets, the generic penetration is 31% and 38% respectively (in volume terms). By contrast, in low-price countries, like France, Spain and Italy, generic drugs command a minor share of the total market. However, generics are expected to catch up in these countries due to government cost-containment measures. Pricing pressure remains an area of concern in the European markets too. For example, Germany is a relatively attractive market as branded generics are allowed in this region. But once again due to the new German law introduced (which makes a 30% price cut on generic drugs mandatory), realisations in this market are expected to be impacted upto a certain extent. Similarly, the UK market has been facing severe pricing pressures as generics in this region have become commoditised.

Central and Eastern Europe (CEE) and semi-regulated markets: These countries are one of the fastest growing pharma markets in the world and the market conditions are more or less similar to that in India. For instance, generic drugs in these regions can be branded as they are in India, which is not possible in the regulated markets. To give an example, Romania is the fastest growing pharmaceutical market in the Central & Eastern European (CEE) region with an approximate annual growth of 34% from 2002 to 2005 as against the 24% growth for the region. Similarly, strong growth rates have also been posted by Indian pharma companies in the semi regulated markets of Russia, CIS, Africa, Asia and the Middle East. In fact, companies are increasingly following a three-pronged strategy wherein, first they launch products in the domestic market, then the semi-regulated markets and then the regulated markets of US and Europe. As drugs can be branded, margins also tend to be relatively higher in these markets.

To sum up…
The importance of geographical reach has become more pronounced in the past one year on the back of the difficult conditions witnessed in the US markets. This has led the Indian companies to focus on the relatively stable European and semi-regulated markets to offset the pricing pressures in the US market. It must be noted that at the end of the day different countries have different competitive and regulatory environments. In such a scenario, having a widespread geographical reach is one of the effective ways of de-risking the business model, as difficult conditions in one particular market can be offset by a healthy performance in other markets.

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