US reinsurers wary of Indian pharma firms

A defeat for Dr. Reddy's Laboratories in a US patent battle and Pfizer India's recall of all dosage forms of its liquid Gelusil are likely force Indian pharmaceutical companies to think about the lack of insurance cover for their domestic as well as international business deals.

According to industry observers, pharmaceutical companies that are planning to go for acquisitions, new formulations and re-engineered drugs in US and other regulated markets will face high risk factors such as political risk and other product liability insurance issues in the coming years. Reinsurers have already halved their per-company limits for product liability insurance to $700 million following a spate of claims.

Last Friday's court ruling, which overturned a lower court verdict allowing Dr. Reddy's to sell amlodipine maleate, its version of Pfizer Inc's anti-hypertension drug, Norvasc, lead to the Indian company's shares to decline by over 18 per cent down, wiping out $400 million in market value.

So far, the risks for Indian pharma companies have been limited because their area has been cheap generic drugs — formulations that have been tried and test in the markets for long and are no longer subject to patent rights. But when it comes to re-engineered drugs — those that are manufactured by tweaking molecules of existing formulations, the risks could be higher.

According to Hodgikinson, regional director, Aon Asia, a reinsurance broking firm, there have been 14,428 cases of infringements for pharmaceutical products and nearly half of these have led to payment of damages or withdrawal of drugs by their manufacturers. This has made insurers nervous and compelled them to reduce their exposure. Hodgikinson specialises in helping the Indian pharma sector explore business opportunities with overseas pharma companies.

He said that his firm has started advising the Indian subsidiaries of E-Merck, Astra Zeneca and Johnson and Johnson and is in talks with various others.

Some of the exporters, he said, had no idea of the liability cover they would need in the US and were looking at covers of $500,000. "Half a million would cover lawyers' fees for half a day," Hodgikinson. said.

It may be noted that Dr Reddy's legal, selling and administrative costs have been rising steadily in recent quarters as the company has been itching to get out copycat drugs and head for more research-oriented work. According to Sahina Mukadam, pharma analyst with HDFC Securities:" Playing the high-stakes legal game is challenging and it is going to be an issue for ambitious firms that want to go beyond waiting for patents to expire."