IPRs and business strategy options

Parikshit Bansal and Anand Sharma examine the strategy of two leading pharma companies as case studies on business strategy options in a changed global scenario where IPRs are dictating survival of the pharma industry Parikshit Bansal and Anand Sharma

The Intellectual Property Rights (IPRs) are powerful tools which not only influence profits, but are affecting the very existence of pharmaceutical companies. The impact of IPRs is all the more significant following the TRIPs agreement and the establishment of WTO. The Indian pharmaceutical industry is globally recognised for cheap manufacturing facilities and world-class medicinal chemistry skills.

In the changed global scenario, what are the options before the Indian pharma industry — should it focus on generics or on new innovations? Or a mix of both? The present paper examines the strategy of Dr Reddy’s Labs and Orchid Pharmaceuticals as case studies on business strategy options for Indian pharma firms in a changed global scenario where IPRs are dictating survival of the pharma industry.

Case study: Dr Reddy’s Labs

Dr Reddy’s Labs (DRL) was founded by a scientist-turned-entrepreneur, Dr Anji Reddy. Basic philosophy of the company is to be a discovery-led global pharmaceutical company. Right from the beginning the company focused on new drug discovery, investing heavily in research, something which even India’s largest pharmaceutical company, Ranbaxy (annual turnover Rs 4,500 crores!) did not try.

New discoveries, innovations and initiatives -The advantages

• Exclusive Rights: The Intellectual Property Protection (IPP) gives the inventor exclusive rights, in recognition of the original effort put in. In case of drugs, IPP is through patents or through ANDAs.
• Long ‘profit period’: These IPRs confer tremendous advantages on the patent holder — exclusive rights for 20 years! Also, provision for further extension, as under the Hatch-Waxman Act.
• High Profits: ‘Copying’ known drugs or ‘manufacturing generic drugs’ is safer — sales and profits are assured but are less compared to new discoveries. API (active pharmaceutical ingredients), formulations and generics offer assured profits — 33 per cent (in case of APIs) and 66 per cent (in case of formulations). However, in case of new discoveries leading to exclusive rights, profits are a closely guarded secret. Margins may go as high as 1000 per cent!
• Exclusivity under ANDA for generic drugs: The six-month exclusivity period granted under the Hatch-Waxman Act can be a booster for any company interested in profits. In August 2001, DRL won a six-month exclusivity for Fluoxetine which netted $70 million for the company.
• Enhanced investor confidence: Leading to easy availability of funds to invest in further research. Investors get encouraged to invest more, on account of higher returns on new investments, because of new discoveries/initiatives. The flouoxetine success encouraged investors. DRL also carried out a Para IV ANDA filing for AmVaz, challenging the patent issued to Pfizer. Success in a lower court encourages investors.

New discoveries - The disadvantages

• Getting patent not easy: However, getting a patent is not easy. Considerable expense and time is involved — satisfying an examiner in case of controversies may delay approval upto four years! In addition, maintaining a patent and dealing with associated legal expenses can be quite costly. In case of a patent challenge (ANDA Para IV filing), all the work and effort put in goes waste, resulting in loss of money for the inventors/investors (Ref. seretide drug case of GSK). IPR expenses start from day one without any immediate returns in sight.
• IPRs can be withdrawn too: IPR failures can be costly (Ref. DRL AmVaz case). A negative IPR ruling can wipe off the investors wealth (DRL lost Rs 5000 crore over a seven-month period as a result of crashed stock prices because of negative ruling in AmVaz case) and in some cases threaten the very existence of a company.
• R&D reduces profits: Also, R&D soaks up money — though DRL generates gross profits of 53 per cent, high selling, general and administrative expenses, R&D related expenses etc. leaves it with operating margins of just 10 per cent. In contrast, Ranbaxy Laboratories’ gross profit is 58 per cent and operating margin 20 per cent. DRL spending on R&D is same as that of Ranbaxy which is India’s largest pharmaceutical company and almost double in size as compared to DRL.

Strategy of DRL — a mix of the old and new

New discoveries are important — there is no doubt, but will they lead to profits? DRL firmly believes they will. In fact its basic philosophy is that IPRs are the single important factor influencing profits. Obviously, the thrill and associated profits of new discovery fuels the drive of companies (to invest in research) and investors (to invest in the company).

The mistakes

DRL focused heavily on new drug discoveries and initiatives for manufacturing generic drugs. Its para IV filings in the US were the highest after Teva which is the largest manufacturer of generics in the world. However, it suffered heavy losses relying on this strategy.

• Drug failure: Ragaglitazar — a new molecule ‘discovered’ by DRL was out-licensed to Novo Nordisk in August 1998. In the summer of 2002, adverse effects appeared during clinical trials and Novo abandoned research on the molecule, thus leading to a total loss of money spent on researching the molecule.
• IPR strategy failure: DRL sought to seek benefit of the six-month exclusivity period for generic manufacture of AmVaz, a drug patented by Pfizer. Though it won in a lower court, ultimately DRL lost the case and could not manufacture the molecule. It suffered losses on two fronts — heavy litigation costs and loss of the profits which would have come if it had won the battle, estimated at around $200 over three years. These two setbacks made DRL realise the inherent risks in its policy.

Lessons learnt

• Need for a new business strategy: The single most important lesson which these failures taught DRL was that a new strategy had to be devised in which the losses and risks associated with R&D failures could be minimised.
• No need to panic and stop drug discovery efforts: It is significant to note that the company did not panic or shift its focus away from drug discovery. A reason could be that the innovation approach is in the DNA of the company, founded as it was by a scientist. According to him ‘‘The no. 1 generics company in the world is 26th in the world order and will remain so in a 100 years, unless it spends on original R&D.’’

Parikshit Bansal is with IPR Cell (email-pbansal@niper.ac.in) and Anand Sharma is with Deptt. of Pharmaceutical Management at National Institute of Pharmaceutical Education & Research, Sector 67, S A S Nagar, Punjab, India-160062