Divergence in pharma earnings presaged

The financial performance of India's drugmakers is in for a major change "" while the big players are likely to face margins pressure, overseas growth will provide the booster shot for the small and medium companies.

According to analysts, among the frontline companies, Dr Reddy's (DRL) and Ranbaxy are expected to witness a decline in margins, but Cipla is likely to record an increase.

The decline in margins in Ranbaxy is expected on account of the loss of exclusivity for cefuroxime axetil, while high material cost is likely to put pressure on DRL.

"Smaller companies are likely to witness an improvement in margins led by increasing contribution from the overseas market," an analyst with a leading Mumbai-based brokerage said. Unlike the industry bigwigs such as Dr Reddy's and Ranbaxy, mid-sized and smaller companies such as Lupin, Aurobindo, JB Chemicals, Glenmark are expected to post healthier margins led by increased participation in the export market.

The trend can be spotted in the January-March quarter, but it is likely to be more pronounced in the current financial year. While Dr Reddy's net profit margin stood at 24.53 per cent for FY04 against 29.36 per cent in the previous year, Ranbaxy's net profit margin was 21.64 per cent for the year ended December 2003 against 21.58 per cent in the previous year.

Dr Reddy's' faced a setback with an adverse judgment on amlodipine maleate (AmVaz), while Ranbaxy lost exclusivity on cefuroxime axetil"" the generic equivalent of GlaxoWellcome's Ceftin.

The court decision prevented Dr Reddy's from launching its own version of Pfizer's hypertension drug-Norvasc, which commands annual revenue of around $2 billion worldwide. The company had in the past evinced confidence in the product launch to such an extent that it had already set up infrastructure in the US to launch the hypertension drug.

Since the filings of these companies are mostly linked to patent challenges, the launch of their products in the US is very time consuming apart from being expensive. For instance, Dr Reddy's wants to enter the high margin US market by challenging patents for existing drugs. According to analysts, Dr Reddy's has a relatively weak product pipeline for the US market.

The small and mid-cap companies, on the other hand, have started making deep inroads into the regulated markets such as the US and Europe from domestic and non-regulated market players.

Lupin has tied up with the US-based Baxter for marketing ceftriaxone and with Allergan Inc for marketing Zymar (gatifloxacin ophthalmic solution).

The company recently launched its first branded product 'Suprax' (anti-infective oral suspension) in the US market. Glenmark has signed a $80 million manufacturing and licensing deal with the US based KV Pharmaceuticals.

Aurobindo Pharma received UK MCA approval for its active pharma ingredient (API) facility. JB Chemicals, which received US FDA approval for its manufacturing unit, will start selling cefuroxime axetil in the US market in FY05. Glenmark will start selling amiordone while Orchid Chemicals and Aurobindo Pharma are slated to launch cephalosporin products in the regulated markets. Wockhardt is entering the US market through Ranbaxy.