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Pharma: Looking through the lens - Views on News from Equitymaster

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Pharma: Looking through the lens

Sep 22, 2006

We had mentioned in our last article (read Pharma Summit: Key takeaways) that the key opportunities for Indian pharma companies lies in generics, CRAMS, biotechnology and R&D. In this article, we shall take a look at which companies are expected to benefit in each of the four areas going forward. Generics: In the generics space, we believe that Ranbaxy and Dr. Reddy’s are the major players amongst domestic pharma companies. While the difficult pricing conditions in the highly competitive US market have played spoilsport to the fortunes of both these companies, the scene is expected to improve with an increase in the number of product launches in this market (This is courtesy an increase in the number of patent expiries in the US market over the next five years). Both these companies have been focusing on largely launching products through the Para III and Para IV route and have lately tasted success on the Para IV front, with Ranbaxy getting the 180-day exclusivity for ‘Simvastatin 80 mg’ and Dr. Reddy’s being the authorised generic for ‘Simvastatin’ and ‘Finasteride’.

In the European market, both these companies are scouting for acquisitions to drive growth (Europe has of late been a focus area for most of the Indian companies considering the intense competition in the US). Case in point is Dr. Reddy’s acquisition of ‘Betapharm’ in Germany and Ranbaxy’s acquisition of ‘Terapia’ in Romania. These acquisitions are expected to strengthen the product portfolio and the reach in the European region. As of now, Ranbaxy is ranked amongst the top ten generic companies in the world. That said, considering the strength of global generic companies such as Teva (Israel) and Sandoz (Switzerland) in the generics market, Ranbaxy and Dr. Reddy’s have significant ground to cover in the future. Besides this, price erosion will continue to remain a cause for concern as competition intensifies.

CRAMS: Increasing R&D costs, low R&D productivity, impending patent expirations and at the same time, pressure to reduce healthcare costs have propelled global pharma majors to cut costs and improve overall profitability. This is expected to translate into a huge outsourcing potential for low-cost manufacturing destinations like India and China. The focus of Indian players in the contract manufacturing space is of two types (1) contract manufacturing for global generic players and (2) contract manufacturing for global innovator companies.

Cipla is a major Indian player focusing on contract manufacturing for global generic majors. Cipla has entered into partnerships for 123 products with five companies in the US and a recent strategic alliance to develop over 50 generic products for the generics major Teva/Ivax. The company also has an alliance with other US generics companies - Watson, Eon, Morton Grove and Pentech Pharma for a range of products. We believe that this low-risk global strategy will result in exports growing at a compounded annual growth of 30% in the next three years. As far as contract manufacturing for global innovator companies is concerned, Nicholas Piramal has the edge over its domestic peers. The company has already secured five custom manufacturing agreements with global innovator companies and acquired the UK-based CMO, Avecia and Pfizer’s manufacturing facility in the UK, Morpeth to further boost its custom manufacturing business. We expect this business to contribute 40% to Nicholas Piramal’s total revenues by FY09.

Biotechnology: Wockhardt and Biocon have an edge over their domestic counterparts in the biotechnology space. Given the fact that the regulatory guidelines have yet to make a significant headway in the US or Europe, at present, both Biocon and Wockhardt are focusing on India and the semi-regulated or less regulated markets in the medium term. For instance, Wockhardt’s revenues from Rest of the World (ROW) region i.e., excluding US, Europe and India, recorded a 25% YoY growth in CY05 largely driven by its biotechnology business. The company has received 26 approvals in 18 countries and has over 60 registrations pending. Similarly, Biocon has made progress in insulin with increased sales in both the domestic and exports markets. The product is under registration in over 25 countries in Asia and Latin America. Also, the company recently launched its monoclonal antibody ‘BIOMAb EGFR’ for the treatment of head and neck cancer in the domestic market. As far as the regulated markets are concerned, only Europe has come out with draft guidelines for the launch of four ‘biosimilars’. Both Biocon and Wockhardt are gearing up for these opportunities in the European region. While Wockhardt’s focus is insulin and EPO (erythropoietin – used in kidney related applications), Biocon’s area of focus is insulin and GCSF (helps in the production of white blood cells). That said, new product launches in Europe is unlikely before 2008.

R&D: In anticipation of the product patent law 2005 onwards, domestic pharma companies such as Ranbaxy, Dr. Reddy’s, Glenmark Pharma, Biocon and Wockhardt began focusing on building an R&D programme from the mid 1990s. However, the programmes of these companies are still in the nascent stages in comparison to their global counterparts. The riskiness for domestic companies is also higher, as they have only four to five molecules in the pre-clinical stages, which is considerably lesser than their global peers. For example, as on February 2006, Pfizer Inc had 235 projects under development out of which 152 were NCEs. As against this, Dr. Reddy’s, as of March 2006, has 7 projects in various stages of clinical trials. Considering the resource crunch that domestic companies face in conducting R&D right from the discovery of the molecule to the three stages of clinical trials, they are adopting strategies such as out-licensing (case in point: Glenmark has out-licensed its asthma/COPD molecule ‘Oglemilast’ to US-based Forest Labs in return for milestone payments of US$ 190 m, depending upon the progress of the molecule) and co-development and partnership (both Ranbaxy and Dr. Reddy’s have entered into co-development agreements with global companies for their lead molecules ‘RBx11160’ and ‘Balaglitazone’ respectively). Besides this, Dr. Reddy’s and Sun Pharma have formed separate companies for conducting clinical R&D.

We believe that R&D is a long-term strategy and 2009 or 2010 could be the year when an NCE is likely to be filed by domestic companies if all goes well. The key molecules to watch out for, going forward, would be Dr. Reddy’s anti-diabetic molecule ‘Balaglitazone’, Glenmark’s asthma/COPD molecule ‘Oglemilast’ and Ranbaxy’s anti-malarial molecule ‘RBx 11160’.

Looking ahead…
While each of these four business models provide significant growth opportunities going forward, we advise investors to give due consideration to valuations, which may not be favourable even if the growth is visible. On the whole, our top picks in the Indian pharma sector are Ranbaxy and Wockhardt in the domestic pharma space and Aventis and Pfizer in the MNC pharma space.

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