X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma: Analyzing generics! - Views on News from Equitymaster
StockSelect
  • MyStocks

MEMBER'S LOGINX

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

Pharma: Analyzing generics!
Aug 31, 2005

The share of generic drugs in the total global pharmaceutical market has been on the rise and constituted about 40% of the pharma volumes in the US, Germany, Canada and the UK in CY04 (Source: Ranbaxy annual report). In this article, we have done a SWOT analysis of the generics industry with focus on the Indian pharma industry in particular. Strengths

Low cost advantage: India enjoys the distinction of being one of the low cost producers of drugs in the owing to low development and labour costs. Indian drug manufacturers can produce at 40% to 50% of the cost incurred by the rest of the world. This is one of the biggest advantages for Indian pharma companies, which is essential for surviving in this increasingly competitive generics market.

US FDA approved facilities: One of the pre-requisites to compete in the generics space, especially in the US, which is the largest pharma market in the world, is to comply with the United States Food & Drug Administration (US FDA) regulations. The US FDA has already approved about 60 manufacturing plants in India, which is higher than any other country except than in the US itself. This provides a competitive edge to Indian companies in the regulated markets. This has also induced global generic companies to enter into alliances with domestic companies (having the approved facilities) for the purpose of sourcing bulk drugs.

Chemistry and synthetic skills: Before the advent of the product patent law in India, Indian pharma companies adopted reverse engineering methods to manufacture drugs. This has enabled them to manufacture generic versions of patent-protected drugs using non-infringing processes, which has also given them a head start in developing new methods of production and launching the product in the market very rapidly.

Weaknesses

Marketing & distribution network: While Indian pharma companies have been focusing on building a strong marketing and distribution network in the international markets, especially the US, the fact is that they are still lagging behind global generic behemoths like Teva, Watson, Ivax, Mylan whose products have higher brand recall owing to better penetration. For example, while Ranbaxy’s efforts to build a marketing network have reaped benefits (it is ranked 12th in the world in the prescription market), the fact that it still continues to face a decline in revenues in the US markets is a cause for concern.

Opportunities

Pressure to reduce healthcare costs: In the last decade, with the increasingly stringent US regulations pertaining to launching of new drugs, the R&D costs of major global pharma companies have bloated leading to increased prices of patented products. While the global pharma companies are averse to curtail their R&D budgets, governments, insurers and healthcare organizations in developed countries are under pressure to reduce public expenditure on healthcare. This has resulted in greater acceptance of generic versions, thus paving the way for generic companies including Indian pharma heavyweights like Ranbaxy, Dr,Reddy’s, Biocon, Wockhardt to capitalize on the same.

Blockbuster drugs to go off patent: With a large number of blockbuster drugs going off patent by 2008, the global generics market is estimated to be worth US$ 55 bn, which will provide a huge opportunity to a large number of generic companies to introduce new products. Some of the major drugs going off patent by 2008 include cholesterol-reducing drug ‘Zocor’ (US$ 5.9 bn in CY04), hypertension drug ‘Norvasc’ (US$ 4.8 bn revenues in CY04) amongst others. Besides this, the door to bio-generics markets in the European Union has opened up on the back of issuance of guidelines by the European markets regarding the same. This is likely to prove beneficial to Indian companies focused on biotechnology such as Biocon and Wockhardt. Thus, Indian companies too are in a position to capitalize on this huge generic potential going forward.

Threats

Severe price erosion: Over the years, severe price erosions due to intense competition have plagued generic markets, as more and more players have entered the generics arena. While the extent of price erosion depends upon the product and its revenue generating potential coupled with the number of players competing in the market, the fact is that the price erosion could be as severe as 90%. Also, the number of companies making day 1 launches has increased over the last few years leading to a further fall in earning revenues. Therefore, while declining realisations will lead to thinning margins, volumes will be the key to sustaining growth.

Patent and litigation costs: Generics markets are fraught with regulatory risks. The extent of these costs depends upon the type of ANDA filings made. While it is easier to receive approval in the case of Para II and Para III filings, the most tedious of the lot is Para IV filings. Challenging patents is becoming an increasingly tough proposition involving huge R&D and a significant legal war chest and even then there is no guarantee of an approval. This severely dents the profitability of companies. A case in point is Dr.Reddy’s, whose patent challenges (with the exception of ‘fluoxetine’) have been a string of failures, severely impacting its profitability in FY05.

Dwindling pipelines: The 1990s was considered to be the golden decade in the history of the global pharmaceutical industry as the number of products in the pipeline was anywhere between 40 and 45 on an annual basis. However, in the current decade, the number of new drug launches has slowed down considerably (between 25 and 30 on an average). This is owing to various factors, one of them being the increase in the drug development period on the back of stringent regulations by the US FDA. It must be noted that generic companies thrive on the patented products of innovator companies. Therefore, any fall in the patented products introduced by the latter is most likely to impact the generic companies as well. While the period between 2006 and 2008 holds huge promise, the fact is that the number of drugs going off patent post 2008 is likely to significantly witness a decline. This is a cause of concern for Indian companies as well.

To conclude…

The advent of the product patent law in India has heralded an era of innovation and creativity for Indian pharma companies. In response, domestic pharma majors have already started gearing up their R&D activities and launch patented products of their own. However, it must be noted that new drug discovery requires significant investment and as such, no patented products will be launched by these companies in the next 3 to 4 years. Therefore, in the meantime, these companies will look to capitalize on the huge generics potential to drive growth and use this opportunity to invest in new drug research for the long-term. Therefore, despite hiccups, generics will remain a key growth driver in the near to medium term.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE HEALTHCARE


Feb 23, 2018 (Close)

S&P BSE HEALTHCARE 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS