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Nath Balakrishnan

There are reasons to be sanguine of the pharma industry's prospects over the longer term.

AFTER having been relatively insulated from the stir seen at the market in the aftermath of the election verdict, it appeared that stocks in the pharma sector had well and truly stood up to the tag of being defensives. Subsequently, however, amidst reports that the sector's prospects were not going to be as attractive as was initially made out to be, on account of certain risks — structural and otherwise — pharma stocks have been distinctly trending lower.

This is a near-term blip; there are reasons to be sanguine of the prospects of the industry over the longer term. Key factors for the success in the global marketplace continue to remain in place: compliance with stringent regulation, established skill-sets in chemistry, competitiveness on the cost front, and, finally, an encouraging pipeline of launches, especially among the majors, in the remunerative US market.

Arguably the biggest challenge that Indian pharma majors will have to contend with in the US market would be the launch of "authorised generics," a mechanism which the innovator authorises the launch of a generic drug usually after another firm gets a 180-day exclusivity to market the drug. The existence of the "authorised generic" mechanism does, to an extent, diminish the financial rewards of being the lone generic in the market, as there is bound to be an erosion in pricing.

However, in the case of a big-ticket launch, the upside for the actual generic could still be substantial. Outfits such as Dr Reddy's and, to a lesser extent, Ranbaxy have a US market strategy that is predicated on busting patents held by innovators to secure exclusivity. Should they succeed in a patent litigation on a molecule that is a blockbuster (annual sales in excess of $1 billion), even the presence of an authorised generic may not be able to prevent an order-of-magnitude leap in their earnings stream.

Admittedly, getting to launch a generic with a period of exclusivity attached to it does entail having to engage the innovator in protracted litigation, and the costs associated with it. However, the rewards at the end of it all, would continue to remain substantial, the threat of the "authorised generic" notwithstanding.

Further, companies that are a rung below the majors are crafting innovative strategies to prise open the US market. Constrained as they are by limited resources, spreading themselves thin is something they would want to avoid at all cost. Hence, they have preferred to use the collaboration route for market entry. Why, even one of the frontline firms, Cipla, has tie-ups/alliances with a clutch of US firms. Such an arrangement may not have the same kind of pay-off an aggressive posture adopted by the likes of Dr Reddy's provides, but it also is inherently less riskier.

The geographical expansion that Indian pharma companies have undertaken should also act as a source of comfort. Realising that an over-dependence on the US market could be counter-productive, Indian firms have targeted markets in Europe, South America and Africa. While there is no debate on the relative attractiveness of the US market, the potential, especially in European countries, such as France, Germany and the UK, is something that cannot be overlooked. Here again, both the frontline companies and those from the next tier have made significant strides.

A few companies have also tailored their business models in a manner that they do not come into conflict with their customers. Companies such as Biocon, Matrix Labs, Divi's Labs and Shasun in the bulk drug space and Nicholas Piramal (for contract manufacturing of formulations) are cases in point. If the nature of work that these companies undertake for their customers (which include both innovator as well a top-tier generic companies) is any pointer, it is not only a reflection of the trust that has been reposed in them by their global counterparts, but, at a larger level, does augur well for the industry as a whole.

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