The Hindu Business Line : Pharma research: The long and slippery road

When Ranbaxy’s Chief Executive Officer and Managing Director, Mr Malvinder Singh, was asked in February last year whether he would demerge research from the rest of the business, he had held his cards close to his chest and parried the query for another day.

In October this year, the company’s board did indeed give its approval to demerge its drug discovery programme into a different entity. But by the time Ranbaxy placed its cards on the table, investors were already familiar with the game-plan of spinning-off innovative research into a separate entity, as drug-makers such as Sun Pharmaceuticals and Nicholas Piramal had unravelled similar plans.

In a similar yet different league, Dr Reddy’s Laboratories, had also sought to de-risk its business, but tackled the unique challenges of drug research through a different strategy.

Research is the key

Research is increasingly on the minds of more domestic pharmaceutical companies, so much so that the industry grape-vine is abuzz with the names of other drug companies looking to spin off their research.

Of course, there were a fistful of drug-makers who were aiming to become global players and so were beginning to talk of innovative research in the past, as compared to merely making generic similars. But the compelling need to look at innovative research was largely triggered after India brought in the product-patent regime in January 2005.

Respecting product patents meant that companies would not be able to make generic copies of new, patent-protected drugs. As a result, the trickle is turning into a rivulet with more companies focusing on developing new drugs. Companies are now looking at difficult-to-make medicines, innovative delivery systems, controlled-release or extended release products — where the medicine is gradually released in the body, and so on.

Large and mid-sized drug-makers have increased their spend on research to 7-10 per cent of their sales to bring innovative products into the market. This is however, a far cry from what Pfizer spent on research — $7.6 billion in 2006, roughly equal to the size of the Indian domestic finished drugs market!

Drug discovery

Drug research is a long and slippery road that does not always lead to the desired goal. Industry estimates put the cost of developing a medicine — from a lead in the laboratory, through trials on animals followed by studies on humans — at $1.2 billion. And the process could take about 10 years.

In fact, companies arrive at the decision to focus on a specific lead only after they have sifted through and evaluated several others. International law mandates that the promising molecule is then tested on small and large animals before it is introduced to humans. Several molecules are rejected at this stage, the company deciding not to follow through on a molecule if it does not have the desired impact on the animal.

A lead molecule that goes through animal trials successfully then gets set for Phase I trials on humans, when the promising medication is given its first ever exposure to humans. And depending on the results that the molecule shows on humans, it proceeds to Phase II and III, where the sample size is increased and the medicine is given to patients with the targeted illness.

The tests help refine the dosage and safety profile of the proposed drug but the trial could fall through at any of these stages, in spite of the best trial procedures.

De-merger rationale

Given this treacherous research path, drug companies in India have devised different ways to deal with the high cost of bringing a drug into the market. First off the block was Dr Reddy’s Laboratories that roped in ICICI Venture in early 2005 to support research and litigation costs. Later that year, it created Perlecan Pharma, an entity to which it moved some of its innovative drugs to fast-track research.

In 2006, Sun Pharma became a trend-setter of sorts when it decided to de-merge its innovative research and list it on the stock exchange. The reason being that innovative research had a different risk profile and the return on investments would take more time given the long gestation period for novel research.

Sun Pharma’s research entity listed on the stock exchange this July, with a couple of promising new drugs and drug-delivery systems in its kitty.

In August 2007, drug-maker Nicholas Piramal India Ltd (NPIL) announced its decision to demerge research from the rest of the business to cushion against risks and bring in funds as more drug molecules entered clinical trials.

NPIL’s business strategy in the past has been to make products for overseas customers, thereby steering clear of litigious and expensive patent challenges with innovative companies. NPIL’s new research company has 13 prospective drug molecules, beside two recently added cancer-leads that the company is working on for Merck.

Later in the year, Glenmark Pharmaceuticals reorganised its generics business into a different entity, while it kept innovative research and its supporting business under the parent company. The company sought to follow the path taken by Novartis, where the innovative business was under its umbrella, while the generics business was taken care of by Sandoz.

The company has till date exhibited its skills in research by licensing out prospective asthma, diabetes and pain drugs developed by it to deep-pocketed multinationals for further development till it could be marketed. But Glenmark’s move to split the business right through the middle gives the company a foot-hold in both the generic and the innovative businesses, both respectively supported by research, marketing, and so on.

This is, in a sense, different from other drug companies that separated just the innovative research component from the main business.

Generic opportunity

Drug companies keep one foot firmly in the business of making off-patent generic drugs, as an estimated $ 65 billion worth of drugs are expected to go off patents in the next five years. Also, as much as innovative drug-makers may like to wish away the generics business, governments across the world are increasingly sourcing generic drugs as they are priced lower than the original medicine, thus helping keep healthcare costs under control.

And since a good generic drug is chemically similar to the original innovative medicine, there is usually no worry on that count. The generics business is an over $60-billion opportunity, and the US accounts for half this market.

Investor take

So, when generics give investors the immediate high returns that they are looking for, will they find the dynamics of specialty research that require time and money for uncertain returns, attractive?

Are drug companies de-merging innovative research to streamline focus and cushion against risks, or are they merely improving the valuations of their pharma businesses?

Is it sensible to demerge just research, as this entity too would require marketing support, etc., at a later date, when it has a saleable drug molecule?

Or is splitting the business completely through generics and innovative work a safer bet? It is early days yet for clear answers to any of these.

Made in India?

But nothing succeeds like success. With over 60-odd new chemical entities reportedly at different stages of clinical trials in the country, industry representatives are optimistic that the next couple of years will see a handful of innovative drugs out in the market.

At any rate, it may well be worth waiting to see if a Made in India drug is indeed round the corner.

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