Generics: Is it there to stay? - Views on News from Equitymaster

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Generics: Is it there to stay?

Jun 18, 2004

“Generics is an opportunity in waiting for the Indian companies to exploit” was what the markets were abuzz with a few days back. Is that opportunity gone or is it still there. We have analyzed this and we are firm that this opportunity is there for the Indian companies. Let us understand what are generic drugs in the first place. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs, typically sold under their generic chemical names at prices below those of their brand-name equivalents. These drugs are required to meet similar governmental standards as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. Generic drugs may be manufactured and marketed only if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired, been challenged and invalidated, or otherwise validly circumvented.

As always happens in the markets where ‘irrational exuberance’ prevails over rationality, the generics opportunity was overstated by the markets. According to the industry sources, in next three to five years, drugs with sales worth US$ 60 bn will become off patent. This was the opportunity everybody was waiting for. But to what extent it is true is to be seen.

Looking at the past record of the drugs that became off patent, prices fell drastically (as high as 90% in some cases). Just to put things in perspective, Ciprofloxacin, which went off patent recently, was priced at US$ 4 as compared to US$ 32 when it was branded. So, there is no surprise about the magnitude of fall anyway. The market size will be divided amongst various players (like Ciprofloxacin recently). This will impact margins. But this is not the end of the story. What is important to understand is that there are companies, which will survive and flourish even in this environment.

Generics, by nature are a commodity business, where entry barriers are low as far as manufacturing is concerned. One who wants to survive in this business has to be cost-competitive. Here, Indian companies have an advantage (India has maximum number of USFDA approved manufacturing units outside US). But the story does not stop here. Since generics are sold by the name of the molecule (in some cases there are branded generics), selling and distribution skills could provide some competitive advantage.

How does Indian companies fare in all this?

There are two Indian companies, which can take advantage of the opportunity on their own. Ranbaxy and Dr Reddy’s can leverage their strong presence to their advantage. These companies have achieved a critical mass in terms of sales Ranbaxy, which has sales of about US$ 412 m, is best placed to take advantage. It has a strong distribution network and is already selling about 70 products in the US markets. It has a strong sales force or more than 600 sales representative generating sales of US$ 0.7 m per employee. The company has a tentative approval for 14 other drugs, which they can launch. Similarly, Dr Reddy’s is in the process of strengthening its franchise.

All said and done generic opportunity is here to stay. We have always been positive about the Indian pharma sector. But yes, there is a need to exercise caution. But don’t be swayed by the news. The ground realities from a three to five year perspective are different.

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