Molecular Boomtime

ANDA, or Abbreviated New Drug Application, is the new buzzword in the boardrooms of Indian pharma companies. In fact, ANDAs are the core strategy for most of them, influencing their profitability, stockmarket valuations and topline growth rates. And only companies that can manage their ANDAs are likely to have the right chemistry to woo their shareholders.

But before we prove that, a few words on ANDAs, which are applications filed with the US Food and Drug Administration (USFDA) to sell drugs that will go off patent in the near future. An approval gives a six-month exclusive marketing right in the US to the company and helps it to earn profit margins of 30-90 per cent depending on the drug. The reason: the market for each patented drug can be a few billion dollars in the US and it's invariably priced high. But once the exclusive period ends, new competitors enter the arena with a vengeance and drive down the prices.

So, the trick is to be the first to get the ANDA, make your money fast and then get on to the next ANDA. As long as the firm's ANDA pipeline is full, huge profits can be made quarter after quarter. The reverse happens when the original patent holder legally blocks the ANDAs. Just consider two examples. Last quarter, Ranbaxy Laboratories' topline grew by 49 per cent, while net profits zoomed by 79 per cent. And analysts predicted that the company's profitability could witness a whopping 230 per cent growth this fiscal.

Ranbaxy's quarterly financials were boosted by exclusive rights on cefuroxime axetil (a version of the patented Ceftin) that contributed $38 million to its topline. Sales of cefuroxime, which started this March, formed nearly a quarter of the company's total revenues and margins on it are estimated at 40-50 per cent. In contrast, Dr Reddy's Laboratories' financials were adversely impacted last quarter, as net profits slumped by over 60 per cent. In this case, the company's exclusive marketing rights for another drug, fluoxetine, where margins were reported to be 90-95 per cent, had expired.

Obviously, the markets take into account the state of the ANDAs while evaluating scrip prices. For example, consider a US federal court ruling in mid-October this year. The court said that the ANDAs of three firms, including Dr Reddy's and Andrix (with whom Cipla had a tie-up), had infringed on the rights of the original patent holder AstraZeneca over the latter's blockbuster drug, Prilosec, which enjoys a $4-billion market in the US. The next three days, the Cipla stock dropped by nearly six per cent, before rebounding back to its near-original level. And Dr Reddy's was down Rs 30 to Rs 744.

Similarly, when Pfizer, the world's largest pharma company, sued Dr Reddy's for infringing on the patent of its hypertension drug Norvasc, the latter's stock dropped 3 per cent in five trading days. Pfizer went to court after the Indian firm received an "approvable" letter for amlodipine (a generic version of Norvasc) from the USFDA. The stakes in this game can be high: the Prilosec version could have boosted Cipla's revenues by $30-40 million in the 180-day exclusive period with profit margins of 50 per cent.

So investors, especially the big institutional ones, are getting excited about ANDAs. For one, says Shahina Mukadam, an analyst with Motilal Oswal Securities, "the returns are phenomenal" and ANDAs are changing the "whole trajectory of pharma balance sheets". Analysts like her are watching firms with long-term ANDA plans to smoothen the quarter-to-quarter fluctuations in their financials. Given this state of affairs, valuations are driven by "ANDA-event-related risks".

Even managements realise that. A few weeks ago, Dr Reddy's ceo G.V. Prasad told a TV channel that his company would continue to play this "patent challenge" game.He is reported to have said that "we will win some and lose some, but it's an attractive game and is a core strategy for Dr Reddy's". For the larger players like Ranbaxy, it's only a critical strategy as it helps earn bonuses over and above the traditional revenues. More importantly, it's a game that Indian companies have no option but to play.

Here's why. Post-2005, India is committed to changing its patent regime from process-oriented to a product one. This means that domestic firms can no longer resort to reverse engineering to sell versions of patented drugs. The only alternatives are either to discover new molecules, become an outsource researcher for global giants, or aggressively enter the generics segment that offers an opportunity to sell off-patented drugs. Being an original discoverer is a long-term strategy that requires huge investments. Becoming an outsourcer ensures one always remains a second-rung player. So, it's generics where rewards are huge and immediate. Plus, India's low-cost advantage can further improve the already-high margins.

Talk to senior pharma managers and they will easily admit a bulk of their time is spent on the US generics market. Says D.S. Brar, ceo and MD, Ranbaxy: "Our sales in the US are now reaching the desired critical mass required for the next horizon of growth." Adds a Dr Reddy's spokesperson: "The US generics business will help fulfil our vision of becoming a global player." And Morepen Laboratories' Sushil Suri explains "the new theory is if you (foreign MNCs) come to my market with expensive (patented) products, we'll go to yours with cheap (generics) ones."

Get this straight. A new strategic wave has gripped the Indian pharma sector. With margins shrinking at home, companies have their eyes set on the world's biggest and most lucrative US market which, they feel, will be their playground for the future. Leading companies like Ranbaxy, Dr Reddy's, Cipla, Wockhardt, Cadilla, Morepen and Sun Pharma have all pointed their guns towards the US market.

After all, the US market accounts for 53 per cent of the total global pharma sales of $320 billion. Of this, nearly $40 billion worth of drugs are estimated to go off patent in the US market by 2005. Of this, the window of opportunity for Indian companies could be as high as $10-15 billion. That's bigger than the current annual revenues earned by the Indian industry. Even if the domestic firms get a 25 per cent slice of the latter figure, the impact on toplines and bottomlines will be immense. That explains predictions that the revenues of India's pharma industry could quadruple to $25 billion in the next 10 years.

No wonder that pharma firms have made a beeline for ANDAs. Over 200 applications have been filed by them in the past couple of years. In the first nine months of this calendar year, Ranbaxy filed 12 ANDAs and received approvals for eight taking the cumulative number of approved ANDAs to 55. It's followed by Dr Reddy's with 17 approved ANDAs. Morepen is in the initial stages of filing applications for drugs like pioglitazone hydrochloride and atirvastatin calcium. Others like Wockhardt, Sun Pharma, Cipla and Cadilla have either obtained ANDAs or are in the process of filing them.

But there are huge risks associated with the rewards. For one, it's not easy to enter the US generics market. A number of procedures are required before one can set foot on US pharma soil. It starts with identifying the drugs that are going off patent. Then, one has to identify a manufacturer, whose manufacturing facilities have the USFDA clearance. This is followed by the filing of the ANDA. The entire process could take anything between two and four years. And if one gets stuck because of legal hassles, you could coolly lose a million dollars, forget the opportunity to earn mega bucks.

Still, analysts feel the next five years will belong to generics. Says a Mumbai analyst: "Going forward, we expect margins and profitability to improve dramatically with the launch of complex, difficult-to-copy products with limited competition." In the '90s, we saw Indian firms make a name in the US software sector. The first decade of this century could well see the same happening in the US generics market.