MNCs may benefit from reduced DPCO coverage

By Ramnath Subbu

MUMBAI, MARCH 10. Even though the Government has proposed a reduction in the coverage of the Drug Price Control Order (DPCO) that now accounts for 40 per cent of the pharmaceutical industry in terms of value encompassing 70 drugs, there is only conjecture as to the extent of reduction. According to the industry, it could be between 30 and 50 per cent. Further, the thrust given to research and development (R&D) in this sector will give a fillip to local and multinational players here.

The multinational companies are the ones most likely to benefit from a reduced DPCO regulation. These include Merck (with 70 per cent of its products under DPCO), Hoechst Marion Roussel (65 per cent) and Glaxo SmithKline (60 per cent). Among domestic players, only Ranbaxy and Cipla have a DPCO coverage of more than 30 per cent.

While the proposed reduction in coverage may not be sizable, there is a possibility that there will be a phased scrapping of the DPCO over three to four years. There is a greater chance of removing those drugs from DPCO where already competition exists due to several players being present as in vitamins and anti- infectives.

The Finance Minister's statement of a `substantial' reduction in the span of the DPCO comes long after a committee and a taskforce have submitted their recommendations. The span of control essentially refers to the percentage of total domestic formulations turnover that is now governed by the DPCO which is now at 40 per cent. Thus, if the total value of the formulations market is taken at Rs. 14,000 crores, the value of drugs under DPCO is Rs. 5,600 crores.

The taskforce set up by the Prime Minister in 2000 recommends controlling prices of only those drugs that have a high level of market penetration. This has been defined as a single brand having more than 40 per cent market share in a sub-therapeutic category or top three players with more than 75 per cent market share.

Also recommended is pricing freedom for companies that meet the `Gold standards' laid down by the Mashelkar Committee. Bulk drugs and over-the-counter (OTC) medicines should be out of the price control.

The budget has also extended the weighted deduction of 150 per cent to research and development (R&D) in biotechnology, filing of patents and obtaining regulatory approvals. The impact of these is expected to be noticeable only in the medium term.

Most Indian companies fall in the lower tax bracket due to tax exemptions from exports and operations in backward areas, benefits will be incremental in the short term. But tax exemption from exports is being phased out over a five year period. Therefore, with R&D spending going up over the long term, the extended weighted deduction will benefit Indian companies in a big way.

But it is expected that MNCs will benefit only marginally from this as their R&D in India is limited. The weighted deduction has been extended to clinical trials and until recently, these were restricted to developed countries. In the future, companies can consider India as a location to conduct these trials given the sops available (including 100 per cent foreign direct investment and lower costs).

Also, the liberalisation on GDRs/ADRs will allow companies to invest up to $100 million or 10 per cent of exports, whichever is higher, in R&D outfits abroad. This will benefit companies such as Ranbaxy Laboratoris and Dr. Reddy's Laboratories which only recently exited their joint ventures with Schein Pharma. Dr. Reddy's Laboratories has also announced its plans to tap the ADR market in the near future.

R&D efforts

A look at some of the R&D efforts of leading players. Ranbaxy Laboratories is set to grow on the strength of its R&D initiatives and overseas expansions. It is one of the largest Abbreviated New Drug Application (ANDA) filers in the country and is now focussing on the novel drug delivery system (NDDS) with a focus on oral controlled release delivery systems. The company's other focus is new drug discovery research (NDDR) with an emphasis on anti-infectives, cardiovasculars and anticancer drugs.

Cipla has a wide distribution network and it is strong in marketing. The company stands second only to Glaxo SmithKline in terms of prescription drugs market share. Cipla boasts one of the best R&D facilities in the country and is into chiral chemistry - the process of producing a superior version of an existing drug. Its R&D is in the second stage of screening eight new molecules and a number of products belonging to different therapeutic segments such as anti-HIV, epilepsy and psychiatry are in the pipeline. The company has filed for ANDAs for eight formulations including for asthma, cardiovascular and cancer. Besides, the company is the leader in the domestic antibiotic segment. Cipla produces around 50 bulk drugs mainly for export.

Dr. Reddy's Laboratories (DRL) was a pure bulk drug company but for the last four years has been involved in formulations. In 2000, the company launched 10 brands and many extensions. The company has acquired American Remedies and also brands from companies such as Dolphin Labs and Pfimex Pharmaceutical.

The company has emerged as a major R&D player and filed 35 patents in anti-diabetic, anti-bacterials, anti-cancer and anti- ulcer drugs in the U.S. and received approval for about a dozen. Last year, its R&D wing received approval from the Drug Controller General of India to conduct phase-I trials on its anti-cancer compound - DRF 1042.

Sun Pharmaceuticals India Ltd. (SPIL) has been aggressively launching new products and last year, the company added 27 new products to its portfolio. It has also launched three more products with novel delivery system. The company is focussed on the domestic formulation market and export of bulk drugs. It has a presence in high growth segments such as psychiatry, neurology, cardiology, gastroenterology and orthopaedics. In each of the segments, the company has molecules from the generic to new generation formulations.

The company has drawn up plans to export new generic drugs to the developed markets. These drugs have higher profit margins than the older formulations and there are also few suppliers of such products. The company's recently acquired firm in the U.S., Caraco, will help it increase its presence there.

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