Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 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.
R&D or bust! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Nov 26, 1999

    R&D or bust!

    The second quarter financial year 2000 results of most pharmaceutical companies have been pretty lukewarm. That is mainly why Indian fund managers have given pharma stocks the boot, and have replaced them with more economy-related (cement, metals) stocks. Pharma stocks may have gone into comatose for the time being, but no one is willing to write off Indian pharma companies as yet.

    By any standards, the Rs 168 billion ($ 3.9 billion) Indian pharma segment has done well for itself, clocking 16 percent compounded annual growth (CAGR) over the past decade. But the market is still puny, accounting for a mere 1.1 percent of the global market, despite the country accounting for 16 percent of the global population.

    Historically, the domestic pharma market was dominated by the MNCs, who controlled close to 90 percent of the market till the 60s. That changed radically when the Indian government launched the Drug Price Control Order (DPCO) in 1963 with the objective of providing drugs to Indian masses at affordable rates. The price controls deterred MNCs from making fresh investments, and introducing new products. However, the DPCO gave the necessary fillip to domestic manufacturers to start producing mass consumption drugs like anti-tuberculosis and anti-malarial at low rates. Over the years, the DPCO has worked to the detriment of many pharma companies (local and MNCs), who at times are forced to sell products without even being able to cover their cost of production.

    The Indian Patent Act made its debut in 1970. Unlike the General Agreeement for Trade and Tariffs (GATT) agreement, the Indian Patent Act refused to acknowledge product patents and only recognised process patents. Process patents allow the manufacture of patented products by altering the process of production, such as temperature, raw materials and cycle time. Domestic manufacturers took refuge under this anomaly, and flooded the market with internationally acclaimed patented drugs with minor improvements in processes. Domestic manufacturers came to dominate the market and market share of MNCs slumped to about 40%.

    The tide turned against the domestic manufacturers in 1995, when the Indian government became a signatory to the GATT agreement. As per the agreement, India will have to recognise product patents (and not process patents) after a transition of 10 years. The fallout of this condition is that after 2005, Indian companies will no longer have the liberty to shell out patented products with minor changes in the manufacturing process. Moreover, patents will last a lot longer - 20 years, and not 7 years as was the case under the Indian Patents Act.

    So where does this leave Indian pharma companies post-2005? Quite simply, there is only one way out for Indian companies - to access new products through intensive R&D. Of course, there is always the other option of entering into marketing alliances with patent-holding MNCs. Both these options require a certain level of sales and profitability, something very few Indian companies can boast of at current levels.

    So far only a handful of Indian companies have shown the stomach and commitment for R&D. Indian R&D costs are really low (20% of those in developed countries) largely due to cheap, albeit skilled manpower. Ranbaxy, Dr Reddy's and Cipla have been in the vanguard of Indian R&D, with the former already having developed a product and has licensed the same to Bayer AG in a landmark deal.

    Post-2005, India will witness a major shakeout in the pharma sector, with increasing mergers and acquisitions. Cut-throat competition will see a lot of companies closing shop. To quote Darwin 'Only the fittest (in R&D) will survive'.



    Equitymaster requests your view! Post a comment on "R&D or bust!". Click here!


    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 03:37 PM