The Hindu Business Line : Hike in R&D spends eats into pharma cos' profits

IT may seem to be like walking on a double-edged sword. Increased research and development (R&D) by pharmaceutical companies such as Ranbaxy Laboratories, Dr Reddy's Ltd and Lupin Ltd seems to have taken a toll on its net profits.

Dr Reddy's, for instance, has increased R&D investments by 37 per cent to Rs 70.5 crore during October-December 2004 as against Rs 51.6 crore during the same period the previous year. However, net profits fell by 90 per cent to Rs 4 crore from Rs 59.2 crore.

Ranbaxy doubled R&D expenditure from $13 million (Rs 56.5 crore) in October-December 2003 to $26 million (Rs 113 crore) in the same period in 2004, while net profit stood at Rs 156.5 crore down from the previous year's Rs 175.80 crore.

Lupin Ltd too raised its R&D spends from Rs 9.9 crore to over Rs 18 crore, while net profits dipped from Rs 40 crore to R 24.5 crore.

But even as analysts acknowledge that R&D could be a risky affair, the gains on a successful development could be significant. "Investment by Indian pharmaceutical companies is just about 4 per cent of their sales. While internationally, big pharma companies spend 12-15 per cent of sales on R&D. Some of the large companies are trying to increase it to 8-12 per cent of sales," said Mr Alok Gupta, Country Head, Life Sciences and Biotechnology, Yes Bank.

However, he too said that whether these investments would result in huge success or not remains to be seen. "But going by the Indian companies track record and the kind of success that they have achieved with low investment in research, I am optimistic," he added citing the example of Glenmark Pharma. The company created news by entering into a $190-million (Rs 826. 5 crore) deal with Forest Labs to further develop its prospective asthma drug.

Also analysts feel that the returns would depend on the kind of risks companies are willing to take. If companies are involved in development of new chemical entities, the risks are higher compared to chemical processes.

The Managing Director and CEO of Ranbaxy, Dr Brian Tempest, said that the company was looking at R&D in both NCEs and NDDS (novel drug delivery system). The cumulative product filings with the FDA have reached 146 with 96 approved and 50 awaiting approval.

Dr Reddy's has 39 pending ANDAs (Abbreviated New Drug Approvals), 63 DMFs (Drug Master Files) and more than 30 projects under development as well as 6 NCEs and a niche US specialty portfolio.

Large generic companies are also investing in R&D as a large number of molecules are expected to go off patent in the US between 2007-2010.

A DSP Merill Lynch report estimated drugs facing patent expiration in 2005 to be worth $9 billion (Rs 39,150 crore) in annual sales, with another $19.5 billion (Rs 84,825 crore) worth going off patent in 2006.

Also, with the Government bringing an Ordinance for introducing a product patent regime, it has become all the more essential for companies to focus on research, said a Mumbai-based analyst.

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