The drying up of blockbuster drug pipeline and lower R&D productivity of Big Pharma may start impacting domestic generic companies, forcing them to look at alternative research models and focus on emerging markets for growth. The lucrative opportunity due to blockbuster patent expiries and rich pickings from regulatory Para–IV filings (a generic drug application challenging a valid patent) in the US have been on a decline, forcing domestic drug majors to adopt a diversified R&D model and work on complex, high–value generics. Already, the opportunity size of Para–IV filings has declined from a peak of $24 billion in CY2007 to $3 billion in CY2012.

Companies like Dr Reddy’s, Ranbaxy, Glenmark and Zydus Cadila have readied a strategy to counter the scenario, which is set to become challenging, in order to sustain their earnings from US that continues to be the biggest money spinner for generic firms. Analysts say the decline in Para–IV filings has been driven by the sagging innovator pipeline (particularly blockbuster drugs), which is also reflected in regulatory approval trends in the US. The macro environment for filings is set to turn more challenging and the impact on Indian generics will play out with a lag, they add.

Agrees Ajit Mahadevan, partner, Ernst & Young, "The writing’s on the wall… It’s been clear that Para–IV is not a jackpot for generic companies. But the decline will not have an impact in the short term. Companies like Dr Reddy’s and Ranbaxy have remodeled their pipeline therefore to develop complex super–generics, nanotech and new drug delivery systems (NDDS) drugs, which face less competition and command a high value in the US market. The focus now in regulatory filings in the US is on value as against volume."

In addition to blockbusters (annual sales of over $1 billion in US of a drug brand), a similar trend is seen in molecules with brand size between $500 million and $1 billion – the opportunity size peaked in 2007 and has been declining since then. While 2012 has been a particularly weak year, analysts expect the next leg of Para–IV filings to be focused on molecules with brand sales of under $500 million.

Says Satish Reddy, MD and COO, Dr Reddy’s, "The attractiveness of Para–IV landscape as well as the number of mega patent expiries will decline over 2013–14. However, Dr Reddy’s diversified its business opportunity irrespective of this decline to focus on limited competition products, differentiated formulations and biosimilars. We have also tied up with GSK to market a pipeline of products for emerging markets." The trend in Para–IV filings needs to be viewed along with new drug approvals by the FDA in earlier periods. "We believe the decline in Para–IV opportunity is strongly correlated to the waning of discretionary NCE (new chemical entity) filings. The scheduled filings (NCE–1) have largely remained on track. We view the decline in discretionary NCE filings to be a structural issue due to higher competition and lower R&D productivity for innovators. The low–hanging fruits within the NCE space have been exhausted with incremental filings being targeted at more complex drugs," a Kotak Institutional Equities note says.

Domestic companies have been targeting niche segments, products with higher level of complexity, technology and delivery system–based products that will enable them to build a sustainable US portfolio.Says Glenn Saldanha, CMD, Glenmark Pharma, "Even with the impending patent cliff, Glenmark is confident of continuously growing its US business. The company has focused on differentiated products like dermatology and oral contraceptives. Most importantly, all products have been developed from our in–house R&D. Further, the company continues with its strategy of niche filings and in this year has initiated filing for oncology injectables in the US market."