The Hindu Business Line : Are investors willing to bite the research bullet?

Research moves
Drug discovery is risky business requiring deep-pockets and a long gestation time.
The success rate for innovative research is lower than the generics business and this attracts a different kind of investor.

P.T.Jyothi Datta

Mumbai, Oct. 16 Is the investor mature enough to understand the risk-reward profile of a speciality pharmaceutical company focused entirely on research? That is the acid test facing drug companies who are hiving-off their research to cushion against the inherent risks of drug discovery.

Drug discovery is risky business requiring deep-pockets and a long gestation time. It takes about 10 years for a company to develop a promising molecule (if indeed the company has identified one) from the lab-stage to being a marketable medicine. So is research a bullet that the investor is ready to bite?

FIIs present in India are the same ones that invest in pharma research and biotech companies globally, said a Sun Pharma representative, indicating there is no shortage of expertise. “Investors who understand pharma-research still do not come here looking for the next blockbuster. But this might change,” the company official added, pointing to investors attracted to the ‘India growth story’ or the ‘India cost advantage’.

Lower success rate

Sun Pharma Advanced Research Company Ltd (SPARC), the de-merged innovative research entity was the first domestic research company to get listed on the Indian stock-exchange. The demerger rationale being that the risk-profile and skill-sets were different in an innovative business.

The success rate for innovative research is lower than the generics business and this attracts a different kind of investor, says Mr Aluri Srinivasa Rao, Director-Investments with ICICI Venture. Generic research involves less investment and has less risk compared to innovative research. That is because generic companies make medicines that are identical in quality, safety etc to an already existing drug.

Investor maturity

It is difficult to value the underlying potential of promising molecules, but such investor maturity will eventually come, he observes. ICICI Venture was roped in by Dr Reddy’s Laboratories to support its litigation-ridden drug research initiatives. Later, to further fast-track drug development, DRL formed an integrated drug development company Perlecan Pharma Pvt Ltd.

Mr Rajesh Vora, Vice-President of ICICI Securities, points out that the critical part of research is its substance and content, the quality of the product pipeline, the company’s ability to manage risk etc.

Investors may not have the maturity to assess a speciality company, but 10 years ago they did not understand benefits of selling in the US either, he said. His reference is to the host of local generic companies selling in the US generics market, which accounts for half the global generics market.

Last month, drug-maker Nicholas Piramal India Ltd (NPIL) announced its decision to separate innovative drug research from the rest of the business. NPIL’s Dr Swati Piramal says that investor perceptions are changing. And there is a new class of investors who are not risk-averse and do want to invest in research-driven companies in the hope of large rewards later.

Government-funded research engines, scientist entrepreneurs and big pharma would be interested in picking up equity in speciality companies, she said. “It will take only one or two successes for more investment in research. India has around 60 NCE’s (new chemical entities) in the clinic today which may mean at least six-seven drugs being launched in the next few years. If these are covered by global patents, each could become billion dollar drugs!” she observes. And with Ranbaxy, Aurobindo, Lupin and Cadila also reportedly evaluating similar research options, investors certainly have something to chew on.