The best part of a buffet is usually the dessert. So, imagine the frustration if an eager diner lines up for it, only to find that the best dessert has gone missing.
Ranbaxy Laboratories Ltd’s shareholders must be experiencing similar emotions, as US company Mylan Inc.has sued the US Food and Drug Administration (FDA) for an injunction on the launch of Ranbaxy’s cholesterol treatment drug, Atorvastatin, a generic version of Pfizer Inc.’s Lipitor.
Also see | Regulatory Concerns (PDF)
Ranbaxy was to reap a windfall in 2012 from the launch of generic Lipitor. Pfizer’s cholesterol-lowering drug earned about $5 billion (Rs22,550 crore today) in revenue in the US market in 2010. Global revenues were $10.7 billion. Pfizer had allowed Ranbaxy to launch this product from 30 November 2011.
Since Ranbaxy also had the first-to-file status on this drug, it would get a six-month window, known as the 180-day exclusivity period, to sell this drug. In this period, Pfizer’s Lipitor drug, Ranbaxy’s generic product and an authorized generic from Watson Pharmaceuticals Inc. would be the only products in the market.
An authorized generic is one where the innovator company gives the generic company a licence to sell the drug and also supplies the product. In return, it gets a share of revenue. It also limits the windfall for the generic challenger—Ranbaxy in this case.
Estimating how much Ranbaxy’s sales and profits would increase is difficult to estimate, as it will depend on the three players’ pricing strategy. Still, with a base of $5 billion to work with, assuming significant price erosion, and a slender market share for Ranbaxy, there will be enough left to give a big boost.
Margins during the exclusivity period also tend to be high. In the March 2010 quarter, for example, Ranbaxy reported revenue from the sale of generic Valtrex in the US market. This drug earned about a £1 billion (Rs7,310 crore today) in annualized revenue for GlaxoSmithKline Plc in 2009 (based on sales in the first three quarters, when the patent was in force).
Ranbaxy’s US market sales rose by 266%. Net profit, excluding foreign exchange losses at the company level, was $143 million, compared with a loss of $5 million in the year-ago period.
The Indian drug maker’s near-term performance will get a boost as it has launched generic Aricept, a $2.6 billion drug, in the US market in end-November. The company will report a full quarter of revenue from this drug, when it reports its March quarter performance. That should give its overseas performance a boost, and its Indian operations, too, are expected to do much better in 2011.
Also, Mylan’s contention in its lawsuit seems to be based on the regulatory issues faced by Ranbaxy, according to a Bloomberg report. Two of its factories were found to be non-compliant with FDA rules. But Ranbaxy has launched products in a similar situation from alternative sites. It is unlikely that FDA would have allowed it to do so, without an established and legal procedure.
Shareholders definitely need to track this case, and more specifically, how strongly FDA defends its right to allow the Indian drug maker to launch the drug from an alternative site. They should also be concerned about the uncertainty brought about by this litigation, but a 7% fall in the company’s share price seems an overreaction, especially if it continues.
Graphic by Yogesh Kumar/Mint
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