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Pharma: Is the battle worth it? - Views on News from Equitymaster
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Pharma: Is the battle worth it?
Aug 26, 2005

Generics are and have been very lucrative for Indian pharma companies such as Ranbaxy and Dr Reddy’s, which have capitalized on this opportunity. However, price erosion has been on the rise in this extremely competitive generics market. Also, challenging patents of innovator companies is proving to be a tough nut to crack. In this article, we take a look at some of the patent challenges made by India’s 2 leading pharma companies, Dr.Reddy’s and Ranbaxy, and what is the status on the same.

The ultimate challenge
When making a Para IV filing, a generic company claims that its product does not infringe upon the existing patent of the innovator company or that the patent of the innovator’s product is invalid thereby striving to win an exclusivity of 180 days. A Para IV win provides a substantial boost to the revenues, which can be invested by the company to move up the value chain i.e. drug discovery, R&D and acquisitions. It also helps in strengthening the marketing and distribution network in the US markets. However, the flipside is that it is the most cumbersome of the ANDA filings as it involves huge R&D and requires a significant legal war chest. And of course, despite all this, there is no guarantee of an approval on the same.

Dr.Reddy’s and Ranbaxy: Any headway?
Amongst the Indian pharma companies, Dr.Reddy’s and Ranbaxy, both of whom have a strong focus on the generics markets, have been in the limelight as far as patent challenges are concerned.

Dr.Reddy’s: Dr. Reddy’s has followed a risky strategy of aggressively making Para IV filings. The company received its first 180-day exclusivity period for marketing ‘Fluoxetine’ (generic version of Eli Lilly’s anti-depressant drug ‘Prozac’) in the US markets in FY02. This product helped Dr.Reddy’s garner revenues to the tune of US$ 67 m, contributing 21% to the total turnover. However, since then, the scene has been bleak for the company, as ‘fluoxetine’ began to be bogged by severe price erosion post the 180-days exclusivity period as more generic players entered the fray.

Since the ‘fluoxetine’ success, Dr.Reddy’s has not been successful on subsequent high profile patent challenges. The company had filed for a new drug application for ‘AmVaz’ (amlodipine maleate) in 2001, which was challenged by Pfizer on the grounds that it was infringing on the latter’s patents for the blockbuster hypertension drug ‘Norvasc’ (US$ 4.8 bn revenues in CY04). In 2004, a US court dealt a blow to Dr.Reddy’s challenge. To cite more instances, Dr.Reddy’s recently lost the patent challenge over Eli Lilly’s anti-psychotic drug ‘Zyprexa’ (US$ 4.8 bn revenues in CY04), when a US court found the patent to be valid. Currently, another patent challenge on the anvil is over Sanofi-Aventis and Bristol Myers Squibb’s anti-clotting drug ‘Plavix’ (US$ 5 bn revenues in CY04), the court decision of which is still expected.

After a dismal FY05 performance, the company decided to change, to some extent, its strategy of aggressively filing Para IV's and is now working towards creating a more balanced portfolio to deliver a consistent year-on-year growth. With this aim in mind, the company is planning to increase Para III and Para II filings. Also, in a bid to mitigate the risks of high R&D expenditure and litigation costs, the company has entered into a US$ 56 m agreement with ICICI Venture for the development and commercialization of ANDAs to be filed in FY05 and FY06. Under the terms of the agreement, ICICI Venture will fund US$ 22.5 m in the first phase with an option to invest an additional US$ 33.5 m in the second phase. On the commercialization of these products, Dr. Reddy's will pay ICICI Venture royalty on net sales for a period of 5 years.

Ranbaxy: Ranbaxy has been active on the patents challenge front too. The company’s challenge to Pfizer’s blockbuster cholesterol reducing drug ‘Lipitor’ (Atorvastatin) is considered to be the mother of all patent challenges. It must be noted that ‘Lipitor’ generated revenues to the tune of US$ 12 bn in 2004 accounting for 23% of Pfizer’s revenues and has the distinction of being the pharmaceutical industry’s first US$ 10 bn product. While the court decision is expected in the latter half of this year or early next year and the result is uncertain, the fact is that a loss for Pfizer is likely to send shockwaves across the global pharmaceutical industry. Having said that, one of the many reasons for Ranbaxy’s dismal performance in 2QCY05 was the rising ‘atorvastatin’ expenses (related to R&D) incurred by the company and consequently, if the decision goes against Ranbaxy, it will prove detrimental to the company.

Recently, the US court brought an injunction against Ranbaxy and Teva Pharmaceuticals, stopping them from marketing ‘Quinapril’, which is a generic version of Pfizer’s drug ‘Accupril’. This has also hampered Ranbaxy’s 1HCY05 performance. However, Ranbaxy has a more stable product portfolio as compared to Dr.Reddy’s as the former, besides making Para IV filings, has been consistently filing and receiving approvals for non-Para IV filings as well.

Looking ahead…
In recent times, challenging patents has become an increasingly tough proposition for generic companies as more often than not, the advantage lies with the innovator company to ultimately prevail in a legal battle. For a challenge to be successful, the skills of a generic company’s legal team are as crucial as its heavy investment in R&D. Also, innovator companies are fiercely looking to guard their turf and are adopting various strategies to protect their patents. These strategies include ‘authorising’ another company to manufacture and market its patented product, thereby preventing the challenging company from garnering substantial revenues during the exclusivity period. Another strategy adopted by these innovators with the aim of extending the patent life is the introduction of combination drugs. While a patent challenge does have the lure of earning significant revenues, a prudent strategy would be to have a healthy balance of Para IV and non-Para IV filings, which will ensure a steady revenue stream.

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