The Hindu Business Line : Drug cos hiving off R&D units

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Home Page - Pharmaceuticals
Corporate - Research & Development
Drug cos hiving off R&D units

A scientist in action at a pharmaceutical lab

Meera Mohanty

New Delhi, Oct. 14 The hived-off new drug research business of India’s top ten pharma companies could independently be worth $120 billion in market cap by 2015, according to some industry estimates.

Analysts, however, are watering down the excitement with their reservations over the generic-skewed pharma industry’s capacity of discovering the next big drug, or New Chemical Entity (NCE).

Several players, big and small, following Sun Pharma, Dr Reddy’s and Nicholas Piramal’s examples, are reportedly considering hiving-off their NCE or research units. One such player is said to be Shasun Chemicals and Drugs. Ranbaxy is also looking at various restructuring models for its NCE R&D, and expects to finalise one by the year end or early next year.

Dr Swati Piramal, Director-Strategic Alliances and Communications, Nicholas Piramal India Ltd, who has asked her scientists to suggest a name and logo for the company’s new R&D business, is upbeat about the move.

Nicholas Piramal is to follow the Sun Pharma Advanced Research Company (SPARC) route, and expects to list its new R&D company by mid next year. The company has about a dozen NCEs in the pipeline, 7-8 of which should reach human clinical trial stage by March 2008.

With pipelines drying up worldwide, the company expects private equity activity in Indian R&D to fly off soon.

And unlike others who’ve chosen to out-license their NCE early, the company plans to stay with the drug as long as possible.

Maintaining that innovation is the truly sustainable value creator for pharma companies, private equity heads like Mr Sanjiv Kaul, Managing Director, Chrys Capital are, however, showing less enthusiasm. “R&D is not a natural forward progression of a strong generic player,” he says.

“Of the $150 million invested in R&D, only about $120 million was in innovation. Take the acquisitions made during the past 12 months, not one was in the R&D business,” he adds to substantiate his point about the generic mindset.

According to Mr Kaul, allowing for a few exceptions, such independent R&D businesses are more attractive to venture capitalists than private equity.

Indian industry has not been valued for its pipeline so far and R&D has only been an expenditure pitted against the bottom line, complain the companies. The independent New Chemical Entity businesses are expected to attract strategic investors, like in the case of Perlecan Pharma, in which Dr Reddy’s continues to hold stake with investment from ICICI Venture and Citigroup Venture.

Mr Rajiv Shukla, Executive Director, Avendus Advisors, believes that demerging to focus on core business is fundamentally a solid idea.

However, companies delisting their research business should not focus on valuations alone, he warns.

“Valuations unlike diamonds are not for ever. They might be up today, but three months down the line they will adjust to the current value of the pipeline.”

Public investors may be more aggressive but will also walk off on bad news, he says. “Companies must look for investors, who while being a little cautious on valuations, bring the requisite long-term orientation, experience and networks to take the drug through clinical development and eventual launch,” adds Mr Shukla.