The entry made by Ranbaxy Laboratories Limited (RLL) into the tough Japanese market with the help of a tiny local company, has been rated as positive development for the Indian generics major. Japan has a small generics market, but the local government has decided to encourage the generics business to reduce national medicare expenses. This will naturally boost RLL''s growth chances.

It may be recalled that Ranbaxy and Nippon Chemiphar Co.Ltd. (NC), and Nihon Pharmaceutical Industry Co.Ltd. (NPI) (a subsidiary of NC) based in Tokyo, Japan, announced a business alliance agreement for the US $ 50 Bn (JPY 600 billion) pharmaceuticals market in Japan on September 26, 2002.

Ranbaxy through its wholly owned subsidiary Ranbaxy (Netherlands) is acquiring from NC a 10% equity stake in NPI. The alliance envisages Ranbaxy and NC group working together to launch Ranbaxy''s ethical and Drug Delivery System based products and generic products in Japan and to manufacture and launch NC''s existing products in overseas markets by leveraging R&D capabilities and sales and distribution network of both the groups.

Ranbaxy already has a large basket of approved products (i.e. library of a large number of dossiers as per US, UK and Brazil laws) and approved manufacturing facilities by regulatory bodies of US, UK, Australia etc.

With the help of NC, Ranbaxy can easily update these dossiers in Japanese language and as per the requirements of the Japanese pharma regulators. It may also require to have its facilities approved by Japanese drug regulators. It can then export these products to NC for distribution there.

According to an analyst, the just announced alliance with a small generic company in Japan by Ranbaxy is quite positive for Ranbaxy. "The investment by Ranbaxy will be quite small. An early entry into various global markets has been quite a fruitful for Ranbaxy. Hence despite Japan being a very difficult market specially for generics, we expect significant potential over the long term in this huge market."

NC is a small generic pharma group in Japan. It has a market capitalization of USD 155m. It reported sales of USD 147m, 143m and 124m in year to March 2000, 2001 and 2002 respectively and profits of USD 0.92m, -6.8m and 0.82m respectively. Thus it is much smaller company as compared to Ranbaxy (market capitalisation of USD 2.2bn and sales & profit of USD 425m and USD 46m for last calendar respectively).

NC markets ethical and branded generic pharmaceuticals in Japan and has a presence in the segments of central nervous system, cardiovascular and gastro-intestinal. While NC, the parent is engaged in active R&D, manufacture and sale of ethical drugs, NPI focuses on generic drugs business under support from its parent.

While Nippon group has a small generic business (USD 48m as per Bloomberg) and Japan is a very difficult market for generics, the attractiveness of the Japanese market is on account of the following factors: Japan is the 2nd biggest pharma market with sales of USD 47bn. However, the generic market currently is very small. Changing demographics, i.e. an aging population, that requires more drugs.

This has resulted in the Japanese government offering incentives to promote the use of generic drugs since April last. Thus over the longer term, the Japanese government can be expected to aggressively promote generics. This offers great potential for generic companies.

Thought the company has not revealed anything about the profit sharing deal, it is likely that it will be in favour of the Indian company as Ranbaxy''s contribution to this deal is significant (product dossiers, export of manufactured products, etc) as compared to NC (expertise on Japanese market and distribution network).

However upsides will take some time. Going all alone, it took Ranbaxy a gestation period of over 7 years to make profits in the US market and around three years to make profits in UK. It is the acquisition in Germany that allowed Ranbaxy to make profits in the first full year of launch. A large government boost to generics in Brazil allowed Ranbaxy to make profits in the first full year after entering the Brazilian market.

The early entry in various global markets has improved the business prospects of the company significantly. Hence RLL is making an early entry into Japan.

As Japanese market is much more difficult, it will take some time for Ranbaxy to generate profits here (a small contribution in CY 2004 is possible). However, as Ranbaxy and its peers were expected to target Japan only after 2004, this early entry will enable Ranbaxy to make profits in this market much earlier than expected.

This indicates that Ranbaxy prefers to spread its wings into more markets (current major markets are US, India, CIS, Brazil, UK, Germany, etc). This not only offers higher upsides (able to make more profits from the existing pool of product dossiers and plant approvals), but also reduces overexposure to any single large market.

It also reflects the depth of Ranbaxy management - exposure to multiple markets requires more senior people.

Ranbaxy can fruitfully utilise the large profits derived from US markets in next couple of years to increase their R&D spend, target more ANDA and DMF filings across markets and entry into new markets (gestation period post entry into any new market is around 2 years). Hence, while upsides from Japanese market will take time, the movement in the right direction is quite positive.