India's Little Drugmakers That Could

The country's scrappy industry is making big Western outfits sweat

It sounded like an offer no sensible executive could refuse: H. Lundbeck, a Danish pharmaceutical company, told Indian drugmaker Matrix Laboratories Ltd. that it would hand over more than $40 million for the rights to a manufacturing process Matrix had developed to make the key ingredient of Lundbeck's antidepressant Cipramil. That's more than the Indian company grossed from all of its drug sales last year. But Matrix Chairman N. Prasad said no, citing commitments to his customers -- makers of a generic version of Cipramil -- and the potential of building a business selling compounds to generic drugmakers worldwide. "There is a very, very big opportunity for us," Prasad says.

Lundbeck isn't alone in getting a touch of indigestion from the aggressive tactics of India's scrappy drugmakers. From niche players like Matrix to major drugmakers such as Ranbaxy Laboratories and Dr. Reddy's Laboratories, Indian pharmaceutical companies have taken a page from the country's thriving software industry. They are using India's low-cost but highly skilled workforce to build up their exports and challenge the giants of the drug business. Some, like Matrix, are selling ingredients to other drugmakers. Some are producing complete generic versions of blockbuster drugs. A few are even trying to develop their own name-brand medicines. Overseas sales of Indian pharmaceuticals surged 14% last year, to $2.1 billion, or 4% of India's total exports. This year, they're expected to grow an additional 25%, estimates the Organization of Pharmaceutical Producers of India (OPPI).

Sure, India's drugmakers aren't about to challenge industry giants by developing blockbusters like Lipitor, Prozac, or Viagra. But they are becoming players in the $27 billion global market for generics. And there's plenty of room to grow: Current branded drugs with $80 billion in annual sales will lose their patent protection between now and 2007, according to OPPI.

To really succeed, the subcontinent's drugmakers will need to shake their image as industry mavericks. India has some of the loosest patent protections in the world, and for decades local pharma companies have produced cheap copies of big-name medicines and sold them in India and other developing countries long before their U.S. and European patents expired. Savvy Indian engineers "can knock off any patented molecule in three to six months," says Ajit Dangi, OPPI's director general. Once the research is done, he says, Indian companies can take advantage of manufacturing costs that are one-fifth those in the U.S.

Now, India's government is poised to kick-start the industry into respectability. New Delhi plans to tighten its patent laws by 2005, bringing them into line with World Trade Organization regulations and making it harder for companies to reverse-engineer drugs. So Indian pharma execs are increasing their research and development outlays -- not only to make better generics but also to develop new compounds. "If you want to be a serious pharmaceutical company, you have to play in drug discovery," says G.V. Prasad (no relation to the Matrix chairman), chief executive of Dr. Reddy's Laboratories (RDY ). To make that transition, Hyderabad-based Dr. Reddy's has formed partnerships with global giants Novartis and Novo Nordisk to develop new medicines. And to bolster its generic business, Dr. Reddy's bought British generic maker BMS Laboratories Ltd. for $14 million in March.

India's biggest drugmaker, Ranbaxy Laboratories, is headed in the same direction. In January, it became the first Indian company to start earning royalties from licensing its own discovery when Bayer started selling a Ranbaxy-developed version of antibiotic Cipro that only has to be taken once a day. Now, New Delhi-based Ranbaxy is working on five more innovative compounds. Still, even with tighter patent laws at home, Ranbaxy thinks the big money is in generics. Already, 38% of its sales are in the U.S. -- thanks largely to its versions of popular drugs such as GlaxoSmithKline's (GSK ) antibiotic Ceftin and Eli Lilly & Co.'s (LLY ) Ceclor.

There's more expansion to come. Ranbaxy had planned to file 15 applications a year for generic drugs with the U.S. Food & Drug Administration, but now the company says it can easily make 20. "Our pipeline is getting stronger," boasts Brian W. Tempest, president of Ranbaxy's pharmaceuticals division. In January, the company announced that 2002 sales had grown 39%, to $764 million, and profits soared 131%, to $125 million.

Still, the Indians face a host of challenges. Even at $60 million a year, Ranbaxy's R&D budget is a fraction of the $5 billion Pfizer Inc. (PFE ) spends annually on developing new drugs. So it's unlikely to play in the major leagues anytime soon. And Dr. Reddy's suffered a setback in January when Novartis (NVS ) stopped its development of a diabetes drug licensed from the Indian company. While CEO Prasad says that "this is a normal thing in the world of drug discovery," investors have been less understanding: They have sent Dr. Reddy's stock down 10% since mid-January.

Hurdles aside, Indian companies are growing, and so are their exports. That means that Western pharmaceutical makers will continue reaching for the antacid as more and more pharmacies worldwide carry drugs that, whether the consumer knows it or not, are made in India.

By Bruce Einhorn in Hong Kong, with Manjeet Kripalani in Bombay and Kerry Capell in London

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