Courtroom lottery

It is not easy to be a big-bulge pharmaceutical company. The US District Court's recent ruling against Ranbaxy Laboratories for marketing a generic version of Pfizer's atorvastatin (Lipitor brand), a cholesterol-lowering drug, has put the Indian company in the spotlight once again. For Ranbaxy, this is its biggest failure so far, as a lot of expectations were pinned on the success of atorvastatin. The company plans to go in appeal to the higher court, as the stakes are high. Lipitor is one of the largest-selling drugs in the world, and if the case goes in Ranbaxy's favour, the company will get six months of exclusive marketing in the US in 2007. If it fails, the drug goes off patent only in 2010.

The district court's rejection was not unexpected as a UK court had also ruled against Ranbaxy's marketing the generic drug in that country. The other big generics player, Dr Reddy's, has also met with two shocks in the past""when Novo Nordisk suspended the clinical trials of ragaglitazar in 2002 and when the US federal drug administration ruled against the company launching the generic version of the anti-hypertension drug, Norvasc, in 2004. That inevitably raises the question: is this a viable strategy for such companies?

Litigation is of course part and parcel of a generic company's thrust into the US market. And no company can hope to win them all. Other global companies like Teva and Ivax have had their share of failures in the past. Ranbaxy, having taken the generics path to become a global player, may not be deterred from continuing the quest for more approvals in the US. But with successive setbacks, an alternative route for a company like Ranbaxy would be to enter into collaborative research with other companies. Dr Reddy's, for instance, has already hived off its clinical research and out-licensing of new chemical entities (NCE) into Perlecan Pharma, with investment from Citigroup Venture Capital and ICICI Ventures.

The stock markets tend to price in these developments very early. Even in 2003, analysts had valued the Lipitor opportunity at about 25 per cent of the then stock price. The markets are about discounting the future, and with hindsight, this was a long shot. It is also worth keeping in mind that when a company fails to get approval for its drug, there is not just the loss in revenues and profits, there is also the hit on the bottom line because of the costs of drug development and the ensuing litigation. A company with the size of Ranbaxy can withstand the shock and hope to continue the fight, plus take on the market with other generic products. But for stock market investors, betting on generics is fraught with risks that are not unlike a lottery. Nothing is more illustrative of this than the fact that while Ranbaxy has fallen 6 per cent after the announcement, Pfizer shot up 10 per cent on Friday.