INSIGHT: A novel formulation

A novel formulation

Dr Reddy’s Laboratories has entered into an agreement with Merck to sell authorised generics of the cholesterol drug, Zocor, and the prostate drug, Proscar, once they are off patent. This, of course, is subject to the condition that another generic company is granted a 180 days exclusive marketing period for the two drugs after the patents on the drugs expire. This is a first of its kind agreement between an Indian generic company and an American drugmaker, and could boost Dr Reddy’s profit if the deal finally come through.

Zocor’s sales stood at $4.4 billion worldwide in the year 2005, making it one of the largest selling drugs in the Merck stable. The drug goes off patent in the US in June 2006. As pointed out earlier, Dr Reddy’s will be authorised to sell an authorised generic version of this product if the federal drug authority in the US awards an exclusive marketing right (EMR) to a generic manufacturer. In Zocor’s case, Ranbaxy has the first to file status. But given the low success rate generic players like Ranbaxy have had in terms of winning legal battles against global drug makers, the chance of an EMR being awarded is bleak.

In Proscar’s case, which had sales of $741 million in 2005, generic drug maker IVAX (recently acquired by Teva) has the first file to status. Analysts point out that the chances of an EMR being granted in this case are greater. This, in turn, means that Dr Reddy’s would be able to launch its authorised generic version. If the deal fructifies, it would help Dr Reddy’s reverse the weak performance of its US business, which has been hit by the pricing pressure in the US market. The markets seem quite hopeful that the deal would benefit Dr Reddy’s financials, considering that stock rose by 5.2% on Wednesday, after news of the agreement hit the market.

Bajaj Auto pips Hero Honda again

Two wheeler stocks, Bajaj Auto and Hero Honda, were among the few large cap companies that stayed in positive territory on Wednesday. Bajaj Auto reported a 32% increase in motorcycle sales for the month of January, more or less in line with the 31% increase in sales seen in the nine-month period between January and December 2005. Considering that motorcycle sales growth stood at 16% in the quarter ended December, the higher growth recorded in January is welcome.

In Hero Honda’s case, however, sales growth dropped to 8%, from 15% in the nine month period and 12% in the December quarter. The stock markets’ reaction, in that context, is surprising. Hero Honda’s share price rose 0.9% on Wednesday, while Bajaj Auto saw a mere 0.3% rise in its share price. The chart alongside shows that Hero Honda’s stock performance has been more or less in line with that of Bajaj over the past six months. This, despite the fact that Bajaj Auto’s performance throughout this year has been way ahead of Hero Honda’s. Operating profit of Bajaj Auto’s core auto business has risen by 40% in the first nine months of this fiscal, while Hero Honda’s operating profit rose by just 15% in the same period.

Hero Honda’s neck-and-neck with Bajaj Auto even in terms of valuations. The former currently trades at 19 times trailing 12-month earnings, almost exactly the same level as Bajaj Auto, stripped of the value of its investments and its insurance business. Going by the performance of the two stocks, it seems the markets believe that growth of the two companies may converge going forward. But some analysts beg to differ, pointing out that the main reason Bajaj Auto has outperformed Hero Honda this year is because it has finally had a success in the executive segment through the ‘Discover’. Since most of Hero Honda’s sales come from the executive segment, it’s easy to understand why its sales growth has been lagging that of Bajaj Auto. This factor is expected to continue working in Bajaj’s favour even this year, given that sales of ‘Discover’ have increased to about 60,000 units currently, from less than 40,000 units on an average in 2005. The company plans to increase its capacity for this product to 75,000 units.

Going by Bajaj’s projections for the next year, total motorcycle sales are expected to grow by nearly 30% next fiscal. On the other hand, there’s hardly any reason to believe that Hero Honda’s volume growth next year would be substantially higher than current levels of 14%.