The generics business

Vivek Kaul Tuesday, February 07, 2006 22:08 IST
The performance of the Indian pharma industry in calendar year 2005 clearly showed the impact of pricing pressure in the US generics market. With an increasing number of players competing in the US generics market, competition in the generic space has heated up for even smaller drugs with sales of around $100 million, leading to a profit squeeze for these companies. Further, innovator companies have been using the authorised generics route to reduce the attractiveness of six month exclusive marketing rights as well as create strong entry barriers for follow-on generics.
But things are set to improve this year for the generics market, especially in terms of volume growth. With the expiry of patents of some mega drugs in the US, the generics market is expected to improve from the June quarter of this year.
This trend could continue, since around $45 billion of blockbuster drugs in the US will go off patent between 2006 and 2008. Even after factoring in price erosion and the fact that some people will still continue to buy the original drug, the incremental opportunity for the Indian generic companies is huge. Besides, non-US generic markets are also well placed to grow strongly, and given the pricing pressure in the US market, concentrating on these markets seems to be a good idea.
The other positives in store include the upside from the contract research manufacturing space and the potential of the Indian market with the start of the IPR regime. But most of these positives seem captured in top pharma stocks, which trade at an average multiple of around 15 times two-year forward earnings.
In case there’s news of further pricing erosion in generics going forward, pharma stocks could continue to underperform the market. Of course, there are exceptions like Cipla and Sun Pharma which demand high valuations because of their consistent earnings growth records.