Devangshu Datta: Pharma power

BEATING THE STREET

Ranbaxy has just run into a sterling £100 million (Rs 850 crore approximately) lawsuit in the UK, where it faces allegations of price-fixing and overcharging on an ulcer drug.

Dr Reddy's Laboratories has fought several battles in US courts versus Pfizer, Glaxo Smithkline, etc, on issues related to release of various generics. Cipla is emmeshed in a fight to get its cheap AIDs cocktails onto the market, especially in poor third-world countries.

The Indian pharma industry will win some of those legal battles and lose some of them. Each individual victory or defeat will be reflected in shareprice fluctuations as investors adjust revenue expectations accordingly. However, the very fact that the industry is involved in global litigation leads one to be very upbeat about its future.

These courtroom battles are a coming-of-age ritual. The industry has grown very fast given that India moved to implement WTO norms regarding patent protections only recently. The legal challenges indicate Indian pharma has leveraged its competitive advantage to an extent where it forces entrenched MNCs to enter the courtroom.

It's an interesting progression. For over 30 years, Indian pharma was completely insulated. Patent norms offered only process-protection; if a company could find a different way to manufacture a patent drug, it could launch that drug in India. The domestic market will move from process to product patents only in 2005.

Process-patents encouraged a certain kind of secondary research "" Indian companies concentrated on cheaper, quicker ways of making drugs. They didn't do primary research at all. There was no point; any new drug would be re-engineered cheaper by someone else!

WTO norms don't allow release of re-engineered drugs while the product is under patent protection. But every year, drugs come off patent. Indian companies have used their re-engineering skills to launch cheaper versions of those generics quickly.

Indian companies still don't do much primary research although some new drugs have been launched. Over the next 5 years, drugs worth $60-70 billion will come off patent in the US alone. So, growth should be a given even with the generics re-engineering model.

Cheaper is a relative word. A cost advantage of say, 10 per cent to 15 per cent can be neutralised by good branding and distribution /marketing networks. But the Indian versions of generics are often 80-90 per cent cheaper and, given those differentials, MNCs can't compete.

As in IT/ ITES, the pharma industry possesses a competitive advantage in a large, scientifically-trained population, prepared to work for relative pittances. There is a second advantage in a large population prone to many diseases. India has huge numbers of TB, diabetes and AIDS patients, which make clinical trials easy to conduct.

As a result, Indian pharma companies have achieved impressive volumes quickly. Dr Reddy's ($450 million sales in 2003-04) and Ranbaxy ($1.1 billion) are small in comparision to MNCs like Pfizer ($45 billion in 2003). But they are growing twice as quickly and with better margins.

In the IT industry, Infosys ($1 billion) and Wipro ($1.2 billion) are similarly dwarfed by Microsoft ($34 billion) Oracle ($9.6 billion) and IBM ($89 billion).

But the pharma industry got into the game some 10 years later than the software guys and in that sense, it's played catch-up brilliantly.