New Delhi: The debate on the safety of Avandia, an anti-diabetes drug of Glaxosmithkline Plc’s, is finding repurcussions in the Indian pharmaceuticals industry. Worries have surfaced on the business viability of Dr Reddy’s Laboratories Ltd’s challenge of the patent on Avandia in the wake of a study that said the Glaxosmithkline drug raised the risk of death caused by heart attacks and stroke by nearly two-thirds.
Analysts predicted an adverse impact on Dr Reddy’s depending on how US drug regulators treat the study. The diabetes drug which has annual sales of $2 billion (Rs8,200 crore) in the US alone, “is a potentially large opportunity for DRL, if it prevails in the litigation but any erosion in Avandia’s franchise or a global withdrawal would have an adverse impact on DRL,” Citigroup sector analyst Prashant Nair said in a report published on Wednesday, but thought the risk was not high enough to change a ‘buy’ recommendation he has on the stock.
Patent challenges, costing millions of dollars at times, are a common practice among generic companies to get a toehold into lucrative pharma markets such as the US and Europe before the patent runs out or be granted exclusive access to the market for a few months after patent-expiry.
The Citigroup report said Dr Reddy’s has a ‘first to file’ privilege in its patent challenge on Avandia and enjoys shared exclusivity with Israel-based generics drug major Teva. Avandia is a $3.1 billion drug worldwide and is under fire after the safety debate began with a research paper published by the New England Journal of Medicine on its website that raises doubts on the safety data of Avandia.
Casting a bigger shadow over the business outlook for Dr Reddy’s is that a key drug—balaglitazone—it is developing and is headed to final stages of human testing belongs to the same class of medicines as Avandia.
Citigroup has factored in value of Rs6 per share on balaglitazone’s potential success in its target price of Rs803 for Dr Reddy’s. “The other question is whether the problems apply only to Avandia or other drugs using the same pharmacological mechanism (glitazones). If yes, this may include balaglitazone,” says Nair in his report.
Dr Reddy’s does not reveal how much exactly it has spent developing balaglitazone, but has said it spends about $20 million every year on drugs research. Balaglitazone was expected to enter the commercial market by fiscal 2011. Codenamed ‘DRF-2593’, the drug is expected to improve glucose and cholesterol control in patients with type II diabetes, a disorder that shows up as poorly controlled blood sugar levels. As many as nine in 10 diabetics have type II diabetes. The global anti-diabetic drug market, estimated at $20 billion today, is expected to increase to $30 billion by 2014.
Dr Reddy’s recently became the largest Indian pharmaceutical company when late last week, it announced revenues of $1.51 billion for the year ended 31 March, overtaking the $1.34 billion sales of Gurgaon-based Ranbaxy Laboratories Ltd. The performance, however, has failed to impress the investors with the share price slipping by 3.37% on the Bombay Stock Exchange since the results were announced. The scrip closed at Rs655 on Wednesday on the exchange, slipping again 1.08%.
G.V. Prasad, chief executive of the company, declined to comment on the share price movement. When asked if the Avandia safety debate robbed Dr Reddy’s of a possible lucrative limited competition period, if it managed to break the patent, Prasad said: “We have 18 such opportunities and it is just one of them. The data pertains to only one specific drug and doesn’t extend to the entire class of drugs”
Mumbai-based Angel Broking House’s drugs analyst Sarabjit Kour Nangia felt that patent challenges ought not to be factored in unless the company is successful, but conceded that it could have had an impact on the company “purely in terms of sentiment.” “In this fiscal, the company will not have the upside from successful patent challenges that yield exclusivities and authorised generics deals. As such, performance is going to be subdued,” said Nangia, who has reduced the earnings per share estimate to Rs43 this year from Rs59 in fiscal 2007.
A third factor adding to the negative sentiment on the Dr Reddy’s counter is the company’s German acquisiton of Betapharm Arzneimittel GmbH which posted sales of Rs800.4 crore in 2006-07. Trouble has been brewing over the biggest ever buyout by an Indian drug maker as the German government has undertaken two rounds of price cuts for generic drugs, squeezing the profit margins.
Dr Reddy’s has said that with product launches picking up and manufacturing being shifted to India, benefits from Betapharm will begin to flow in second half of the year.