Dr. Reddy’s: Lessons from Omeprazole - Views on News from Equitymaster

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Dr. Reddy’s: Lessons from Omeprazole

Nov 20, 2001

Yesterday, Dr. Reddy’s ADR was down by around 18% on the NYSE following withdrawal of tentative Omeprazole approval which seems to have worked as a major anti-climax for investors. Whether the fall was justified or the market overreacted to the news is a different story but the point here is investors need to understand the nature of generic business before investing. Apart from the company’s capability, what matters is the timing, patience, skills and financial muscle to fight legal battles. This is all the more true in case of Para IV applications. A Para IV application is one in which a generic company challenges a patented product to prove that the generic version can stand the same test of efficacy. Further, to get six months marketing exclusivity the company also needs to be the first to file this application.

Now, the cream for the original innovator of the drug is the period the drug remains under patent, as it charges a hefty premium for it innovation and monopoly. Off course, the innovator would try to prevent the entry of a generic product and to do so various legal provisions; loopholes and financial muscle are used as war tactics. It is after all this legal drama that the generic drug enters a regulated market. Now, one can understand the degree of uncertainty, which precedes and follows launch of a generic product.

Let us consider a recent Bristol Myers, BuSpar case to understand the complexities. BuSpar is Bristol Myers multi-million anti-anxiety drug. After its patent expiry, a lower court in the US gave the green signal for entry of two generic copycats (from Watson and Mylan). However, months after the lower court gave this decision, US Court of Appeals reversed the earlier decision stating the lower court had no power to order US FDA to overlook the patent and pave the way for generics.

To conclude, there is a big opportunity waiting for Indian generic companies who are geared to latch on to that market. However, the road ahead would not be smooth and there would be negative surprises along the way. It would be advisable for investors in domestic pharma companies not to build expectations and factor in growth numbers either from generics or from R&D potential till clear earnings visibility arises on that front.

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