Sunday, December 30, 2007


New R&D units in Pharma

Gauri Kamath

Leading Indian companies have spent hundreds of crores in their quest for a new drug. Yet, 14 years after the first investment, India has not given the world a proven new drug. That is not unexpected. Estimates suggest it takes 12-14 years on average, sometimes 20. But investors who bought into the generics story with alacrity seem to be running out of patience. “The stockmarket is short-term focused,” says Glenn Saldanha, CEO and managing director of Mumbai’s Glenmark Pharmaceuticals. “What analysts value today is the cash flows that come from licensing out of these drugs. They will never value my entire R&D pipeline.” Licensing is essentially the handing over of an unproven drug candidate for human trials to another company with the resources and the skills to do them in exchange for licensing fees. Glenmark is the only Indian drug maker to have earned as much as $100 million in such fees.

With Glenmark’s exception, companies still get revenues from copycats. Shareholders are questioning rising R&D spends and no matching income. “We have to grow generics, continue to make investments in new drug R&D, and keep growing earnings per share,” says Malvinder Mohan Singh, CEO and MD of Ranbaxy. “That’s too many balls in the air.”

The R&D demerger is a response to this. These new entities can raise capital on better terms from investors such as Wicki who are willing to go the long haul. The separation should help attract and retain the best talent by using incentives such as stock options. This should translate into more and better research, and new drugs on the market in the next five years.

Why Now

In 2001, Boston’s Tufts University estimated that it takes nearly $1 billion for a new drug to move from the lab to the market in the West. In India, it may take far less. Still, four in every five drugs that enter human trials do not make it. This makes R&D a long-term play. By contrast, launching copies takes a couple of years and a few hundred thousand dollars of investment.

In parallel, new drug R&D costs have shot up. More drugs are moving from the lab to the clinic for human trials, which, according to Tufts, are more than half the cost of bringing a drug to market.

By separating generics and R&D, companies insulate generics from the costs and risks of R&D. Ranbaxy, Nicholas and Sun Pharma will collectively save over Rs 200 crore in the first year of separation. Following its board’s approval to demerge the R&D unit in February 2006, Sun Pharma’s stock gained about Rs 100. Ranbaxy and Nicholas also saw a spurt in share prices. If market cap improves, companies can use stock as currency to make large generics acquisitions. They force their R&D wings out of the shadow — and protection — of the generics business as well.


Every company is turning over a chunk of cash to the new R&D entity. But once this is used up, they are pretty much on their own. By then, two things might happen. One, some of the drugs that are currently in early trials should reach a point where they are shown to work in human beings. This validation of their research — called ‘proof of concept’ — should trigger licensing deals with western companies. As Glenmark has shown, this cash can sustain the activity.

Two, Big Pharma may pick up minority stakes as part of a larger agreement involving joint R&D. Piramal says this would help raise money, and get a partner from whom it can learn. Take Millennium Pharmaceuticals, a US biotech company. It raised over $300 million from German drug maker Bayer in 1998 for a 14 per cent stake and rights to some new biological targets for drugs, an area where Bayer considered itself weak. Bayer eventually sold its stake for a profit, while Millennium gained experience in drug discovery and development. It also got to keep rights to most of those targets.

Three, investors such as OrbiMed or Indian private equity firms such as ICICI Venture may plough money into a focused R&D company.

Four, these companies could also make a fresh offering of shares. The same institutions that invested in generics could invest under a different scheme or fund in R&D. Other innovative models could involve a mix of these.


When time comes to raise capital, owners may be called upon to dilute their stake. What if an outside investor had to be brought in to raise capital? As a minority shareholder, it may have little say in the running of the company. “It would not be a truly independent situation,” says Wicki of HBM. Going back to the mixed bag quandary, the investor may believe that a drug or research programme has to be killed to funnel more resources into something that is showing more promise. But it may have little control on where funds are allocated. “If he wants to raise capital, the promoter has to be willing to lose control.”

But will they? Take Glenmark. Whatever he may think about the secondary market’s ability to value R&D, Saldanha is living with it. Instead, he has transferred the generics business to a subsidiary that will list on BSE. Glenmark will raise money by selling some of its stock in this new company, Glenmark Generics. That way Saldanha retains control on both. Others such as Zydus Cadila and Lupin have yet to separate the two.

It is too early for companies to have all the answers. They have a lot in their favour. Unlike traditional start-ups, these R&D units have been incubated by cash-rich generics companies. They have had time and the best infrastructure at their disposal. Money too may come. But that won’t be enough. In the late 1990s, biotech companies raised billions of dollars. Yet in 2006, US public biotech companies netted losses of $3.5 billion as many promising advances got delayed or canned.

A lot now depends on how these new R&D companies perform going forward.

Pharma Innovation

Funding Pharmaceutical Drugs Research

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