Now These Copycats Have To Discover New Drugs

How Delhi's pledge to honor patents will remake an industry

For years, Indian pharmaceutical manufacturers have been well-known in the global drug industry, but for all the wrong reasons. Major European and U.S. drugmakers never knew when they would discover knockoffs of their products in India, where the government actively encouraged domestic pharmaceuticals to copy drugs to ensure a supply of cheap medicine for the masses. Indians found customers abroad in loosely policed markets in Africa and the former Soviet bloc. The result was a $2.5 billion sector made up of hundreds of small companies churning out copycat goods.

But now, the best Indian pharmaceutical companies are on a mission to transform themselves from intellectual-property thieves into respectable global competitors. That means doing original research, forming legitimate joint ventures with international drug giants, and coming up with compounds that sell both at home and abroad. K. Anji Reddy, for example, founded Dr. Reddy's Laboratories Ltd. 12 years ago and expanded his company rapidly by copying such drugs as Merck & Co.'s hypertension reliever methyldopa and Glaxo Wellcome's anti-ulcer drug Zantac. Now, Reddy is spending $7 million to build research laboratories. "We were called pirates," he says. "I want to prove to the world we are capable of drug discoveries."

The Indians want respect now because they must make the best of threatening new developments. The Indian government has finally buckled to pressure from the General Agreement on Tariffs & Trade (GATT) and agreed to sign international mandates protecting patents by 2005. That will force Indian companies to compete legitimately. "The industry has to use this time to reposition itself," says D.S. Brar, president of New Delhi-based Ranbaxy Laboratories Ltd., whose $250 million in sales makes it one of the largest Indian producers.

Many Indian companies will not survive because they don't have the critical capital needed to fund research, development, and marketing. Yet the big companies, such as Dr. Reddy's, Ranbaxy, and Bombay-based Cipla, will likely come through profitably. One reason is India's low costs. Analysts figure a new drug can be developed in India for about $90 million, far less than the estimated $300 million it costs in the West. India's highly trained, English-speaking scientists earn one-fourth the salaries of their counterparts in developed countries. "We have the technical manpower," says Vipul Dalal, director of Bombay-based Alpic Securities Ltd. "All we need is funds."

TIGHT PRICE CAP. The country's large, ethnically diverse population also offers fertile ground for testing new drugs. "You have all kinds of patients available just for the asking," says Reddy. And the country's weak liability laws, while more dangerous to patients, benefit companies trying to get drugs to market quickly. "We can afford to play with people's health because we won't be made to pay," says Sandip Basu, director of the government-run National Institute of Immunology. "Animal tests are easier here, too." Nonetheless, claims Dr. B.N. Saxena of the Indian Council of Medical Research: "Nobody is a guinea pig."

One continuing disadvantage is the tight cap the government puts on retail drug prices in India, which keeps margins low. To escape those constraints, industry leaders are boosting exports. The Indian Drug Manufacturers Assn. is projecting $973 million worth of pharmaceutical exports this year and says foreign sales could reach $2.2 billion within four years. Most exports are bulk medicinal ingredients, sold to foreign manufacturers who package them for resale.

The lure of new export markets is prompting a burst of spending. Most Indian companies previously spent around 1% of sales on research. Now, several companies have hiked research spending to around 4% to 5% of sales. That's still way below the 15% typical of Western powerhouses. Ranbaxy, which had $250 million in sales last year, now funnels 20% of its research dollars to a two-year-old center dedicated to discovering new drug compounds. Dr. Reddy's, with $62 million in annual sales, allocates two-thirds of its $4.2 million annual research budget for original R&D.

PUSHING AHEAD. Multinational companies are also looking to India as a potential research-and-manufacturing base. Hoechst and Bayer plan to set up wholly owned subsidiaries. Giant Eli Lilly & Co. has started a $60 million joint venture with Ranbaxy to research, develop, and manufacture off-patent generics such as anti-biotics, and the two companies have launched a joint $30 million marketing company in the U.S. to sell the products. The head of Pfizer Inc.'s central research department visited India in January to discuss collaborating with Indian research labs. "If companies are sure their research is not going to be stolen, India could be put on the map as one of the centers where research is done," says a senior Pfizer executive based in Bombay.

Hazards remain. D.B. Mody, president of the Indian Drug Manufacturers' Assn., complains that Indian producers should be allowed to charge more so they can boost research spending. "Price controls should be scrapped," he says. Some Indian authorities worry that outlawing knockoffs will just increase the cost of drugs for consumers and drive small manufacturers out of business. Skeptics also question to what extent India will be able to police its tougher patent laws, which have yet to be passed by Parliament.

Yet companies such as Dr. Reddy's keep pushing ahead. Dr. Reddy's agreed Mar. 1 to give Denmark's Novo Nordisk exclusive world rights to its own anti-

diabetes and obesity drugs. So it has good reason to want its drugs protected at home. "The world's property should be protected here," says Reddy. "Otherwise, we will lose face." And India could lose a rare opportunity for a first-class industry.

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