The future is bright for pharma firms

Mumbai: The Indian pharmaceutical sector is poised for a bullish phase in the near future. According to an analyst tracking the sector, the prospects of domestic pharma companies are improving in view of the international business, especially in the US market. The impending expiry of a large number of patents will also present increasing opportunities for Indian companies.

Companies like Dr Reddys and Ranbaxy that had made inroads into these markets will gain in the next couple of years. With their cost advantages mainly stemming from lower labour costs and the availability of trained workers, Indian companies are in a position to take advantage of the global markets higher prices and, thus, would improve their profitability.

The US, the largest generic market in the world, will open a flurry of opportunity for Indian companies. In order to tap this market, Indian companies have been investing in the manufacturing and marketing infrastructure over the past few years.

For instance Ranbaxy have made investments in the US in the recent past. It operates in the US through two subsidiaries Ohm Labs and Ranbaxy Pharmaceuticals (both 100-per cent owned). It has a 50-per cent partnership with Schein in Ranbaxy Schein.

In the US Ranbaxy has achieved revenues of $65 million and has broke even for the first time in 2000. Till recently, the Ranbaxy management had faced criticism for investing in US operations without any returns. This has begun to change with it getting approval for cefuroxime.

Ranbaxy's cefuroxime has recently received US pharmacopoeia approval, and a US appeals court has overturned an injunction granted to Glaxo, stopping the marketing of generic cefuroxime in the US. From being producers of broad-range generics, Indian companies have moved into a position where they can use the US patent challenge law to gain exclusivity.

Latin America and European markets are smaller and do not have specific measures such as patent challenge rules to promote generic drugs. However, Indian companies are entering these markets, as it is easier to enter Latin America or have higher profitability potential due to lower competition in Europe.

After scaling back their operations in CIS countries following the currency crisis in 1998, Indian companies are showing renewed interest on the back of improving economic conditions. African and Asian countries have lower purchasing powers, but sales in these markets help Indian companies improve their volumes. A recent offer for cheap Aids drugs from Cipla is likely to increase sales to Africa.

Indian pharmaceutical producers began R&D efforts in the mid-nineties following Indias entry into the WTO. For the first few years, this impacted on profits, but now income streams are becoming visible. Realising that they do not have enough resources to take any NCE/NDDS (new chemical entities / new drug delivery systems) through all stages of development, Indian companies are entering into alliances and co-development arrangements that lead to milestone payments while research continues.

The analyst says: "We expect this trend to gather momentum in two ways. Firstly, the product pipelines of early entrants (Dr Reddys Labs and Ranbaxy) are starting to generate more molecules and more therapeutic segments; and secondly, smaller Indian companies like Glenmark and Torrent are expected to follow this trend, spurred on by the success of bigger companies."

Say company sources: "The domestic market will cease to be the earnings driver for large companies in the next couple of years." This does not mean that the Indian market lacks profit potential. Focusing on chronic segments can deliver high returns for the domestic market. Anti-diabetes, cardiovascular and central nervous system related products would experience sharp growth rates for the next few years, though they currently account for only a small part of the market, the analyst said.

The advantages of these segments are high brand loyalty, limited promotional expenses after the initial expenses of creating brand awareness, and better profitability as price controls do not apply to many of these products.