Over the past month, Ranbaxy Laboratories agreed to be acquired by Daiichi Sankyo and then settled outstanding patent litigation with Pfizer over the Lipitor cholesterol pill. In response, The Business Standard spoke with Davinder Singh Brar, who led the generic drugmaker for several years until 2004 and now heads GVK BioSciences, a contract research organization, about the viability of the generic model.

Standard: Is the Ranbaxy sale the way ahead for Indian pharmaceutical firms?
Singh Brar: Most Indian companies have followed the business model that was evolved by Ranbaxy in the mid-1990s. After the Waxman-Hatch Act was registered in the US, there was a lot of growth in the generic business there. In some countries like India, product patents were not implemented and this led to the growth of domestic companies. Between the two there was no link. Ranbaxy became one of the few companies to provide this link.

This model needs a change now as prices have fallen, costs have risen and global regulatory standards have been tightened. So pure commodity generic market where the price erosion is (tremendous) within two days of generic launch no longer looks a sustainable business model. The second model was within the generic space - how do you create windfall profits through fighting patents, where to find a loophole and then create your own platform to invalidate that loophole. Dr Reddy’s, Ranbaxy and Sun Pharma have followed that model.

Standard: Does the model work any more? Ranbaxy, after all, settled out of court with with Pfizer for Lipitor.
Singh Brar: This model is undergoing a change. More and more firms which are listed are now valuing the pros and cons of having such litigation or giving more stability or certainty to their revenues by settling the challenge with the patent holder.

There is a growing trend if you see of the settlements that Ranbaxy, Teva and Dr Reddy’s have reached. These are all listed companies and, therefore, I think one of the pre-occupations in the minds of these companies is should they litigate for windfall gains or should they give more stability to their earnings by making a settlement. It is also becoming attractive for originators because the pipeline of new drugs is coming down. The number of new products getting approved is dropping. From 30-35 per annum, it has come down to 18- 20. So, for the originators also it is becoming very important to extend the life cycle of their existing products. So, the two forces which were earlier opposing each other are now in a way conciliatory.

Standard: But are generic companies getting a fair share in the deal?
Singh Brar: I am not aware of the settlement terms of Lipitor. But, it is a question of finding a balance between uncertainty and litigation. Sometimes, a generic company is confronted with the option of launching its product at a risk. This becomes a matter of choice or decision – whether the company is able to risk it and if it is able to risk it, is it able to sustain its business if triple damages are invoked by the originator if the patent gets eventually validated instead of getting rejected.

Standard: Should one follow the GVK Bio model or the Ranbaxy one today?
Singh Brar: You can start a generic company even today, but the chances of building a successful company are onerous. I will not say it is an impossible task. Why would you want to be the 500th company to start a generic business when the generics model as I said needs fine-tuning? You can be a product company which brings innovative products or be a contract manufacturer. You can also develop your own research products that can be commercialized through someone else.

Even there, others will catch up. Teva, for instance, last year produced 33 billion doses of tablets and capsules. To produce it in hundreds and thousands of product packs and distribute it over 100 countries in a supply chain which is not bloated is an enormous task. If you can do that, you have a competitive edge and that’s the reason why Teva is the leader in generics. Now it wants to combine that with an innovative piece of business – innovative drugs. So it has very selectively invested in innovative R&D.

Similarly, when the Ranbaxy-Daiichi deal was announced, it combined the best of generics with a very successful innovative pharmaceutical firm. Daiichi can see a huge expansion of business through acquisition of Ranbaxy, which is present in 60 countries where Daiichi did not have a presence. So I see this trend emerging.

Standard: Is the Lipitor settlement a case of deferred payments?
Singh Brar: To me, it is all about bringing certainty to earnings. And Daiichi being an originator company, certainly the deal must have been a factor for the decision. In pure financial terms, it was a deferred payment. Ranbaxy has stated that it will now be in the market by 2011. From that perspective, it is a case of deferred payment.