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: That six-month opportunity… - Views on News from Equitymaster
  • MyStocks


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

Pharma: That six-month opportunity…
Sep 29, 2006

Considering the severe pricing pressure that generic players are facing in the US, companies are increasingly looking to challenge patents and garner the lucrative 180-day exclusivity period. In 1984, the US government introduced the Hatch-Waxman Act to encourage generic versions of patent protected drugs. The idea of granting the 180-day exclusivity in the event of successfully challenging a patent was to provide an incentive to generic companies to reap tangible as well as intangible benefits, considering the huge costs involved in litigation. Besides the significant contribution to revenues, this six-month period also enables a company to establish a strong reach in the US generics market, which is critical for the success of a generic product. Some key successes
As far as Indian companies are concerned, Dr.Reddy’s and Ranbaxy have been aggressive in making Para-IV filings against innovator companies in the US market. After winning the 180-day exclusivities for ‘Prozac’ (Dr.Reddy’s generated revenues to the tune of US$ 67 m) in FY02 and ‘Ceftin’ (Ranbaxy) in CY03, there had been no success on this front for both the companies until 2006. In, June 2006, both these companies once again tasted success when Ranbaxy received the exclusivity period for ‘Zocor 80 mg’ and Dr.Reddy’s capitalised on its authorised generics deal for ‘Proscar’ and ‘Zocor’. Sun Pharma’s subsidiary Caraco also received the 180-day exclusivity period for ‘Ultracet’ in 2006.

Challenges and risks
While opportunities exist for domestic pharma majors in the global generics market, there are inherent risks associated with the same, which are enumerated below:

High litigation costs: Patent challenges generally entail huge litigation costs, which mean that companies need to have stable revenue streams and strong cash flows to venture into this field. The success ratio generally depends upon the type of patent challenge. For instance, Para IV filings challenging the ‘composition of matter’ patent generally have a bleak chance of achieving success. Case in point is Ranbaxy’s Para IV filing challenging the patent of the basic compound ‘Atorvastatin’, which the company lost in the US courts. Success, if any, is more plausible in the case of challenging ‘method of use’ patents. It must be noted that huge litigation costs tend to dent the operating margins and bottomline of the company and the impact is higher if the company loses the case and does not get the exclusivity period. Besides, once the exclusivity period gets over, the prices erode by a huge 90%, consequently impacting revenues. To put things in perspective, one of the reasons why Dr.Reddy’s performance in FY04 and FY05 was affected was due to the lack of success on the Para IV front after the initial success with ‘Fluoxetine’.

Presence of authorised generics: The rationale behind the Hatch Waxman Act was to maintain inducements necessary for companies to research and develop new drugs and at the same time, enable lower cost generic products to reach the market. However, the law did not prevent innovator companies from launching authorised generics (i.e. a drug manufactured by the innovator and marketed as a generic by the generic partner under a private label). An authorised generic eats into the market share of a generic competitor thus prohibiting the latter from enjoying the benefits of the exclusivity period.

Also, it must be noted that an authorised generic stands to earn more revenues than the generic competitor as the product, though a generic, is associated with the ‘trusted’ brand of the innovator company. During the exclusivity period, with only one generic company present generally about 30% to 35% price erosion takes place. However, with the presence of an ‘authorised generic’, price erosion could be higher at about 50% to 60%. With no relief available, generics companies have no option but to accept authorised generics as a fact of life. For instance, despite receiving the exclusivity period for ‘Ultracet’, Sun Pharma has had to contend with the presence of Par Pharmaceuticals and an authorised generic. Similarly, for ‘Simvastatin 80 mg’, Ranbaxy has had to compete with Dr.Reddy’s, the latter being the authorised generic for Merck for this drug.

Drastic price cuts by innovators: When Merck’s blockbuster drug ‘Zocor’ went off patent in June 2006, the company slashed the prices of the branded drug by an unprecedented 60%, consequently pressurising Teva Pharmaceuticals, Ranbaxy and Dr.Reddy’s to price their product lower than the branded drug. This was the first time that an innovator company had undertaken such drastic price cuts and highlights the intent of global pharma companies to fight off the challenge posed by generic companies. Whether other companies will undertake such price cuts in the future during the exclusivity period remains to be seen. While the ‘Zocor’ price cut seems to be a one-time event, the possibility of such an event occurring in the future cannot be entirely ruled out.

What about patent settlements?
In the global generics market, Apotex had entered into a settlement with the innovators Sanofi-Aventis and Bristol Myers Squibb (BMS) for the latter’s blockbuster drug ‘Plavix’. Similarly, Ranbaxy, in CY05, entered into its first out-of-the-court settlement with Cephalon Inc. with respect to the latter’s sleep disorder drug ‘Provigil’ (generic name: ‘Modafinil’). It must be noted that generic companies such as Teva, Ranbaxy and Apotex have entered into settlement agreements to balance out the risks and costs of litigation, considering how difficult it is to successfully challenge a patent. That said, these settlements cannot be effective unless a clearance is received from the US Federal Trade Commission (FTC), which has expressed concerns in the past that such settlements may hamper competition. In fact, in recent developments, the settlement deal between BMS and Apotex for ‘Plavix’ was not cleared by the FTC.

To sum up…
In this competitive generics environment, Para IV filings in a way have become necessary despite increased challenges. 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. 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 in the future.

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


Feb 21, 2018 03:23 PM