India's pharma companies are moving beyond generics to set their sights on the research and development of new drugs, but the risks are many
For years, Indian pharmaceutical companies were renowned—or, depending on your point of view, notorious—for their copycat expertise in generic drugs. But with New Delhi enacting tougher patent protection in 2005, and with America's Big Pharma turning up the heat by filing more litigation against the Indians while also launching more authorized generics of their own, many Indian drugmakers have been focusing on boosting their own drug discovery efforts rather than just reengineering products made by others. Their goal: compete with companies like Merck (MRK), Eli Lilly (LLY), and GlaxoSmithKline (GSK).
Whether Indian drugmakers are up to the challenge, though, is an open question. Research and development for new drugs costs lots of money. Developing a new drug for commercial use takes years, and costs anywhere from $800 million to $1 billion. India's big pharmaceutical companies typically spend about 7% of sales on R&D, far less than what Western counterparts spend. Big Pharma's R&D outlay is between 10% and 15% of sales. And since the American and European companies have much larger revenues, that 10% to 15% dwarfs the spending of the Indians.
The appreciation of India's currency against the dollar hasn't helped, either. The 11% rise in the rupee in the last year has eroded Indian pharma's cost advantage over Western rivals to about one-fourth the prices of U.S. drugs, compared with nearly a tenth just a few years ago, industry experts say.
There are plenty of other risks involved in new-drug discovery, as Indian companies are learning the hard way. Last year one of the most prominent Indian companies, Dr. Reddy's Laboratories, abandoned plans to develop a drug to treat diabetes and obesity after disappointing results in early clinical trials. And while many companies are hopeful about their new-drug discovery efforts, even in the best-case scenario products under development by Dr. Reddy's and other companies won't be available until at least 2011.
That's one reason India's drugmakers have adopted a new strategy: spinning off their drug-discovery units as separate companies. On Jan 1, Ranbaxy Laboratories approved a spin-off plan. Sun Pharma was the first to list its drug-discovery entity in early 2007. Several others, including Nicholas Piramal and Glenmark Pharmaceuticals, have announced plans to spin off their drug-discovery businesses, too. Devoting resources to drug discovery "is a capital-intensive, long-term business and doesn't reflect in our market capitalization," says Malvinder Mohan Singh, the chief executive officer of Ranbaxy. "So we have to hive it off."
Dr. Reddy's pioneered the trend of delinking drug discovery from the generics business. The Hyderabad-based company set up Perlecan Pharma in 2005 for new drug discovery along with venture-capital firms ICICI Ventures and Citigroup Ventures. Some experts see these spin-offs as signs that Indian companies are doing what's necessary to make strides in new-drug discovery. "Indian pharma has always adapted quickly to changing situations," says Kavita Thomas, vice-president of research at Mumbai-based First Global Securities.
Companies have interesting R&D projects in the works. Glenmark has high hopes for a new anti-asthmatic molecule. Likewise, Nicholas Piramal is working on a promising anticancer treatment and Ranbaxy Laboratories is developing an antimalarial medicine. All told, local drugmakers have 60 new compounds in the pipeline in various stages of development. "India has created an opportunity for itself. That's a sweet spot," says Hitesh Gajaria, executive director at consulting firm KPMG.
Not Going It Alone
In addition to separating its R&D unit from its generics business, Mumbai-based Glenmark has focused on other ways to reduce the risks involved in drug discovery efforts. Eight years ago the company was among the first to focus on R&D for new drugs. Glenmark separated its generics business from its R&D efforts last November and now plans to list its generics arm in the next six months. But Glenmark also recognizes that it can't handle the task of developing new drugs by itself. It works on molecules in the preclinical stages, but when it comes time to begin testing on people, it then licenses its discoveries to global pharma companies such as Eli Lilly and Forest Laboratories.
Last October, Glenmark signed an agreement to license a painkiller molecule to Eli Lilly. The company has also received $150 million from Forest and Japanese drugmaker Teijin to develop the Oglemilast respiratory molecule, scheduled for a 2011 launch. Forest won approval from the U.S. Food & Drug Administration to start clinical trials. Glen Saldanha, Glenmark's CEO, claims the drug could earn upwards of $800 million on potential milestone payment and royalties. "We want to capitalize on both low-cost medicine and high-end innovation," says Saldanha.
Contract research and manufacturing services (CRAMS) of drugs, which began a couple of years ago in India, is also gaining momentum. In a report from last November, 2007, KPMG pegs the CRAMS market opportunity in 2010 at $31 billion, up from $20 billion currently. A key player is Mumbai-based Nicholas Piramal, which has grown through acquisitions. The company partners with global innovators from contract research and manufacturing, with facilities in India and Britain.