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Pharma: R&D pipeline, future lifeline!
Jul 6, 2005

FY05 has been a year full of upheavals for the Indian pharmaceutical industry. VAT and MRP based excise related concerns have hit the pharma majors hard, denting the topline and bottomline picture. However, it has not deterred the domestic pharma majors from heavily investing in R&D activities in a bid to remain competitive in the wake of the new product patent era. In this article, we take a look at the R&D initiatives taken by the domestic pharma majors to survive post the product patent regime.

Why the need for R&D?
India, prior to January 2005, had been recognizing only process patents, which encouraged Indian pharma companies to resort to ‘reverse engineering’ on a large scale. Reverse engineering also enabled the companies to obviate the need to invest heavily on R&D. However, the scenario has now changed, as India began to comply with the WTO norms. With this, the limelight is now on R&D and as the scale of product launches decline in the short term, increased R&D initiatives resulting in new product launches is the key to survival in the long term.

Also, domestic pharma majors will face increased competition from MNC pharma companies, whose parent companies are innovators with an enviable product pipeline. Initially, these MNCs were reluctant to launch patented products from their parent’s portfolio citing India’s unfavourable patent laws. However, this is all set to change. Though there may not be significant launches in the next 2 years or so, the pace is likely to pick up 2007 onwards.

R&D spend of top domestic companies
(% sales) FY02 FY03 FY04 FY05 CAGR (%)
Ranbaxy 2.4% 4.3% 5.0% 6.2% 72.7%
Dr. Reddy's 6.6% 8.8% 11.5% 14.7% 32.8%
Wockhardt 5.5% 5.3% 6.4% 7.6% 32.9%
Biocon 4.3% 4.0% 4.3% 5.0% 67.5%
Nicholas Piramal 1.6% 1.8% 2.3% 3.9% 56.6%

How are the domestic pharma majors coping up?
We take a look at what initiatives are being undertaken by the top domestic pharma companies on the R&D front.

Ranbaxy:  In line with its strategy to become a global company, Ranbaxy has stepped up its R&D expenditure over the last few years in a big way. The R&D expenditure has grown at a CAGR of 73% between CY01 and CY04 and now constitutes 6% of the total revenues of the company. On the NCE (new chemical entity) front, its bronchial asthma molecule RBx 7796 and its Urology-BPH molecule RBx 2258 are undergoing Phase II clinical trials. Besides this, the company has 6 to 8 molecules in various stages from early discovery to Phase I. The company is also exploring in-licensing deals and has formed collaboration with Glaxo SmithKline for drug discovery and clinical development.

On the generics front, the company has filed 151 ANDAs, with 52 pending approval. The company is also awaiting decision on the ‘Lipitor’ case filed by Pfizer, decision of which is expected in the latter half of CY05. It must be noted that ‘Lipitor’ earns Pfizer revenues to the tune of US$ 10 bn annually and a decision in Ranbaxy’s favour will provide a substantial upside to its revenues.

Dr. Reddy’s:  Dr. Reddy’s had a very disappointing FY05. Despite the dismal performance, the company has not curbed its R&D expenditure, which constituted 15% of consolidated revenues in FY05, which is more or less in line with global trends. The company’s strong focus on R&D can be gauged by the fact that since FY02, this expenditure has grown at a CAGR of 33%.

On the generics front, the company has been aggressively following the strategy of Para IV filings, which despite providing a substantial boost to the topline on receiving six-month exclusivity for ‘Fluoxetine’, has not otherwise yielded any significant results. Therefore, to create a more balanced portfolio, the company is planning to focus on non-Para IV filings. 45 ANDAs so far are pending approval (29 Para IV), which address a potential market of US$ 25 bn (as per IMS, a global pharma audit agency). 12 out of these include first-to-file opportunities.

On the NCE front, its DRF 2593 and DRF 10945 molecules (both for metabolic disorders) have completed Phase II and Phase I clinical trials respectively. Recently, in a bid to mitigate its R&D risk, the company entered into a US$ 56 mn deal with ICICI Venture, whereby the latter will fund the company’s ANDA filings.

Wockhardt:  To highlight Wockhardt’s seriousness towards bringing in new innovations to grow the product portfolio, the R&D spend has clocked a CAGR of 33% since CY01. On the ANDA front, from 2 filings in the US in CY02, the company has increased its filings to 9 in CY04. The company’s R&D focus on the diabetology folio can be gauged by the fact that it plans to introduce a new offering ‘Glargine’ in CY06.

Biocon:  Biocon’s R&D expenditure has increased at a CAGR of 68% between FY01 and FY05. The company intends to follow a three-pronged strategy by focusing on generics R&D in the short term, in-licensing opportunities in the medium term and new drug discovery research in the long term. As far as generics R&D is concerned, focus will be on the blockbuster drugs scheduled to go off patent post 2006 (especially ‘Simvastatin’ and ‘Pravastatin’.) The company expects revenues for the next 3 to 5 years to be generated by generic products. The idea is to fund long-term discovery research through short-term generic strategy.

Nicholas Piramal:  On the R&D front, Nicholas Piramal's oncology molecule is currently undergoing Phase-I clinical trials, which are likely to be completed in FY06. It has decided to concentrate on new discoveries in the diabetes, oncology and anti-infectives segment. The company has also set up a new facility in suburban Mumbai, which is an integrated R&D center. The company has also been majorly focusing on securing contract manufacturing deals.

What lies ahead?
The R&D spends of global pharma majors constitute above 15% of sales. Indian pharma companies still have a lot of ground to cover in this regard, though Ranbaxy and Dr. Reddy’s have already started taking major strides in that direction.

Though no significant benefits will accrue from new drug discovery research in the short term, we believe that from a long-term perspective, these initiatives will bear immense benefits for the innovator companies. However, till such time, generics will drive growth for most of the domestic pharma companies. With a large number of blockbuster drugs going off patent post 2006, the generics market is estimated to be worth US$ 55 bn and companies who have aligned their R&D thrust accordingly are most likely to benefit.

It must be noted that new drug discovery research involves a huge R&D war chest, which may not be a viable option for all domestic pharma companies. Therefore for such companies, alliances with global major generics companies for either contract research or contract manufacturing is the key for future growth.

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