However, with India set to make the transition to a product patent regime from January 1, 2005, the MNCs have come back with a bang, after languishing for much of the past three years.

The new regime will provide adequate protection to the original patent-holder and will deter the cheaper imitations in the domestic market. This has led to expectations of MNC majors slowly unveiling new products, drawn from their global parent's pipeline.

This has provided a fillip to both operating margins as well as earnings. In Aventis, a sharp focus on its key brands addressing the cardio-vascular segment resulted in earnings growing by over 20 per cent in the April-June quarter.

The other path to growth

With pharma MNCs training their guns on the Indian market, home-bred companies have adopted exactly the opposite strategy: they have been targeting regulated markets such as the US and Europe in their quest for revenue growth and better profitability.

Launching products in regulated markets is a protracted process, with companies having to obtain a clutch of approvals from the authorities concerned. But it is worth the effort, as realisations in such markets are superior to those in the domestic market.

Frontline Indian companies such as Ranbaxy and Dr Reddy's have increasingly become export-oriented. Ranbaxy derives about a third of its revenues from export markets; in Dr Reddy's, the figure is at about 65 per cent.

Their export drive has received a further boost with the opening up of the generics (drugs going off patent) market in the US, with drugs worth $40 billion expected to go off patent in the next few years. If this was not good news enough, regulators in the US decided to facilitate faster entry of generics into their market, owing to pressure from healthcare authorities to reduce costs.

However, going forward, it is only the frontline companies that can capitalise on this opportunity. For one, high costs are involved in going through the process of securing regulatory approval for a launch in the US.

If the launch of a drug calls for litigation in American courts (as in the case of a Para-IV filing, under which a company challenges an existing patent), the costs could run into millions of dollars.

Therefore, a company's financial muscle would play as pivotal a role as its strengths in analytical chemistry. Companies such as Dr Reddy's and Ranbaxy are better placed than their peers to make sustained efforts at securing market access for a variety of generics that could provide critical revenue mass.

Outsourcing opportunity

A strategy aimed at launching formulations (drugs in finished form) through a patent challenge is a high-risk, high-return one; companies such as Dr Reddy's and Ranbaxy have demonstrated recently that the financial upside with such launches can be immense.

Bulk drug players such as the Hyderabad-based trio of Divi's Labs, Matrix Labs and Aurobindo Pharma, and the Chennai-based Shasun Chemicals have focussed their efforts on supply of bulk drugs (which go into the final formulation) to generic players.

As generic players target the US market, they will be looking at those suppliers who are not only competitive on price but can also develop products using processes that are non-patent-infringing. Indian bulk drug players provide them both the benefits.

Admittedly, being a supplier of only bulk drugs might not be as financially lucrative as getting to launch the formulation itself in a regulated market. But once deals are struck with generic manufacturers, they tend to be typically long-term, and guarantee a steady revenue stream.

Further, in such supplies, pure bulk drug plays (those that do not have a portfolio of formulations) might hold an edge over their counterparts that are into both bulk as well as formulations.

The reason: Generic players are more comfortable with sourcing bulk from a player that they know for certain will not launch a formulation with the same ingredient.

For instance, Teva (a leading generic player from Israel) might prefer to source bulk from, say, either Divi's or Matrix, rather than Dr Reddy's. They would prefer to collaborate with only those companies that they believe will not metamorphose into competitors (which Ranbaxy or Dr Reddy's might) in course of time. The outsourcing opportunity is not confined to manufacturing alone; undertaking contract research as well as conducting clinical trials for molecules in the testing stage are areas that hold out promise.

As global pharma majors focus on their efforts on bringing a new molecule into the market in the shortest possible time-frame, associated activities such as testing would be farmed out. With several diseases of wide-ranging nature being prevalent in India, it also provides a conducive environment for clinical trials to be conducted.

Stocks such as Suven Pharma and Vimta Labs, which specialise in the contract research and clinical trials respectively, have seen their stocks sizzle, with the latter's price posting close to a four-fold jump in 2003. And those such as Elder Pharma and Neuland Labs, representing small-cap companies, have notched up impressive gains in the ongoing rally.

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