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P.T. Jyothi Datta

NEW DELHI, May 6

IT is a healthy route ahead for the Indian pharmaceutical industry, with exports set to be the key-driver in the forthcoming year. But the road overseas is not without its risks, cautions an industry report by ICRA Information, Grading and Research Service.

"Quite a few pharmaceutical companies have established their presence in the generics markets of developed countries and some have effectively tapped export opportunities in the relatively unregulated markets. However, even as Indian companies increase their exposure to the developed markets, the business risks are set to rise," the report observes.

"Risk of litigation and product liability are higher in the highly regulated developed markets... Risks also emanate from the strategy of Indian companies to realise higher profits from generics in the US market," the report says.

"The observation is particularly true in the case of companies like Dr Reddy's Ltd (DRL), whose strategy involves Para IV filings with the US regulatory authority. This filing involves a patent challenge on the drug going off patent and if the regulator gives the challenging company a green signal, the latter gets a 180-day marketing exclusivity, for an innovation done by it. The strategy involves litigation, as the original patent holder tries to stop the generic product in its tracks and litigation further pushes up the cost," elaborates an industry analyst.

The ICRA report, however, adds that despite higher risks, the increasing share of pharmaceutical exports to developed markets is likely to help domestic pharma companies improve their financial performance in the short to medium term - or a period between one and three years. Investments in research and development are beginning to bear fruit, but the risks associated with higher investments in R&D are also expected to increase.

"New drug discovery is highly capital intensive and risky, given that only one out of 5,000-10,000 molecules screened actually reaches the market." To cushion themselves against such risks, drug majors like DRL, Ranbaxy and Torrent Pharmaceuticals have out-licensed their molecules at the clinical trial stage.

The high risk of failure is borne out by the fact that in 2002 clinical trials on two of the molecules out-licensed by DRL were discontinued by its international partners, the report observes.

"In this case, DRL did get its two milestone payments and there is an inflow of cash, however it has its uncertainties," the industry analyst said. To further mitigate the risk factor, companies are also getting into in-licensing niche drugs, to strengthen their own product portfolios.

Meanwhile, the first nine months of the fiscal 2003, domestic drug companies have indicated an improvement in margins following a decline in material costs and overheads. "With the expected improvements in profits and returns during the current fiscal, the outlook for the industry remains positive," the report said.

And while the industry's medium term performance is likely to be bolstered by better realisation from exports and higher capacity utilisation, this is also likely to be translated into profitability, according to the report.

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