Bhuma Shrivastava & Suveen K Sinha: Lost in diagnosis

Damn Dr Reddy's! Don't get us wrong, the company has done phenomenally well for its stakeholders. It's just that its stupendous result in the October-December quarter "" a 1,470 per cent rise in net profit to Rs 62.8 crore along with a 25 per cent rise in total income to Rs 590 crore "" has robbed us of our last hope to find the thread that binds pharmaceutical companies' results in the quarter. Of course, that Dr Reddy' made an unusually low profit of only Rs 4 crore in the same quarter last year, helps reduce our discomfiture slightly.

First, we thought the companies following a strategy of confrontation and litigation related to patent challenges were the only ones doing badly. This idea was bolstered by Ranbaxy reporting a 57 per cent decline in net profit. The company, which has been making news over the world over "" well, at least in Austria, the UK and the US "" by its challenge to Pfizer's patent over Atorvastatin (sold by the innovator company as Lipitor and generating $12 billion in annual sales) has a host of more challenges in the works.

But then came Nicholas Piramal's announcement of a 70 per cent decline in net profit. The Mumbai-based company is the quintessential collaborator, focusing on custom research and manufacturing for the big pharma companies of the world.

We then thought that the companies focused on the overseas market "" such as Ranbaxy and Nicholas "" were facing rough weather.

Then came the dampener "" for the theory "" in the form of Cipla's nearly 40 per cent rise in net profit. The company has ruffled quite a few feathers by marketing its cheap AIDS medicines overseas.

Finally, we were hoping to establish that size was all that mattered "" against the companies' interests. The bigger, the worse. The theory got a shot of growth hormone from biopharmaceutical behemoth Biocon reporting a 22 per cent dip in net profit, apart from the sharp fall in Ranbaxy and Nicholas' net.

On the other hand, the relatively small ones "" Alembic, Jubilant Organosys, Indswift and Torrent Pharmaceuticals "" reported good growth. It seemed that the big companies, which grew rapidly in their first phase, were struggling to come to terms with their evolved models, that it was the small companies' turn in the limelight.

And then came the Dr Reddy's antidote.

Even the analysts seem befuddled. The more numbers they crunch, the more patterns they lose. This page's editor, in fact, gave us a wake-up call to ask if the article was still valid.

It is. While there may not be a pattern in the last quarter's performances, there may well be one in the numbers coming out in future. The companies that are more nimble than the others are more likely to do better.

"The new torch bearers of the industry would be those that can successfully reinvent themselves. The question is not one of competition or collaboration. Both have to coexist. One cannot extrapolate yesterday's models into tomorrow's strategies," says ChrysCapital managing Director Sanjiv Kaul.

The re-orientation must begin with the companies' play in the US market, which remains the biggest in the world, accounting for 40 per cent of the global total of $550 billion. But it has also suffered deep erosions "" up to 95 per cent "" in prices in the last year or so. Resident companies, most of which are also big innovators and patent holders, have devised newer ways to ward off the generic threat. Having for long dismissed Indian companies' as copycats "" our boys have made a living out of the oxymoron, branded generics "" the US giants have responded with authorised generics, in which they license another company, often a subsidiary, to make a patented drug.

We can, thus, expect a lot of geographical hedging of risk. "We are looking at Japan in a big way, which is the second largest pharma market in the world. Even Europe and Latin America have emerged as important second engines of growth for us," says Malvinder M Singh, chief operating officer and managing director of Ranbaxy, which derives 36 per cent of its revenues from the US.

There may also be a rethink on the litigation-happy approach. Lately, confrontation has cost Indian companies dear. Dr Reddy's has lost patent challenges to Pfizer on Zoloft (Sertraline) and Norvasc (Amlodipine besylate). Ranbaxy lost to Pfizer's on Diflucan (Pfluconazole), apart from Lipitor.

"Patent challenges will remain the game for big fish but these have to be backed by an adequate flow from the generics pipelines," said D S Brar, chairman, GVK Biosciences.

The signs are already there. While Ranbaxy is locked in battle over Nexium with Astrazeneca, it recently settled out of court with Cephalon Inc over psychostimulant Provigil (Modafinil) tablets. This was the first settlement of its kind by an Indian pharma company.

Dr Reddy's has hedged its risk by setting up Perlecan Pharma "" devoted to new drug discoveries. That came after two of the company's molecules were taken off clinical trials in its joint development programme with Novo Nordisk and Novartis.

There is another dimension. Industry analysts are keeping an eye out for small companies, several of which are unlisted. According to the latest IMS-ORG data, Mankind Pharma, Intas and Emcure top the sales growth charts.