Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma: Hiving off R&D... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Pharma: Hiving off R&D...

Sep 4, 2007

The introduction of the product patent law in the country has compelled domestic pharma companies to increase their focus on R&D - to counter the likely slowdown of reverse engineered products in the future. Having said that, given that R&D is a high risk, costly and time consuming affair, many domestic pharma companies are adopting a host of strategies to mitigate the risks involved in the same. The most recent trend that has been observed is the hiving off of the new chemical entity (NCE) research into a separate company. In this article, we shall take a look at the rationale for this strategy and how does it benefit the investors going forward. Rationale for the hive off
The entire drug discovery process is time-consuming, expensive and risky. With molecules becoming more complex and approval criteria becoming more stringent, the cost incurred to develop a drug right from its inception to commercial launch has risen sharply to around US$ 1 bn, which is by no means a small sum for domestic pharma companies. Besides this, clinical trials form a larger chunk (around 43%) of the total R&D investment putting a strain on the profitability of the companies.

Hence, in a bid to mitigate the high risks involved in discovery research and at the same time keep the discovery programme intact, domestic pharma companies are looking to hive off the NCE R&D business into a separate company. This also helps the companies focus on their core business, which is relatively less risky and perk up margins going forward.

Companies at the forefront
Dr.Reddy's took the lead in this regard when it formed India's first integrated drug development research company in FY06 - Perlecan Pharma Pvt. Ltd - by roping in Citigroup Venture Capital and ICICI Venture Capital and transferred 4 NCE assets for clinical trials to Perlecan. Dr. Reddy's currently holds 14% stake in Perlecan and will gradually hike it to 62% depending upon the success of certain research and development milestones. Perlecan reimburses Dr.Reddy's for the clinical costs incurred for these 4 NCE assets.

Similarly, Sun Pharma hived off its innovative R&D business into a separate listed company called Sun Pharma Advanced Research Company (SPARC) in a bid to unlock value from its R&D assets and enable the former to concentrate on its core generics business, which has a relatively stable revenue stream. The most recent company to take this route has been Nicholas Piramal, which last week, announced its plans to list its R&D business by forming a separate company in a bid to secure finding for the same in the longer term.

It must be noted that since the molecules are yet to be commercialised, these de-merged R&D companies would report losses in the initial years, as there are no revenues to offset the R&D expenditure. Thus, while in the initial phase, the respective pharma company would infuse capital into the de-merged company, the latter is expected to generate resources either by out-licensing the molecules or roping in strategic investors after a certain time. Another point to be noted is that Dr.Reddy's and Nicholas Piramal, for instance, have continued to retain a stake in the de-merged R&D companies to capitalise on any upside potential from the molecules in the longer term.

What's in it for investors?
While Perlecan Pharma formed by Dr.Reddy's has not been listed on the bourses, both Sun Pharma and Nicholas Piramal have hived off their NCE R&D into separate listed entities. This provides an exit option for the investors if they do not want to invest in this high risk-high reward business. This also provides some semblance of certainty to the overall business of the domestic pharma companies, leads to margin improvement and enables them to deploy the cash generated into growing their respective core businesses.

At the end of the day, considering that Indian companies do not have the resources and the money required to invest in the entire stage of development of the molecules, we remain positive on the partnership strategies followed by these companies, despite the fact that the upside, if any, will have to be shared.

Equitymaster requests your view! Post a comment on "Pharma: Hiving off R&D...". Click here!


More Views on News

Aster DM Healthcare (IPO)

Feb 10, 2018

Should you subscribe to the IPO of Aster DM Healthcare Ltd?

Dr Reddy's: Milestone Payment Drives Sales (Quarterly Results Update - Detailed)

Feb 9, 2018

US business was hit by pricing pressure although there was growth sequentially led by new product launches.

Lupin: US market Declines Due to Higher Base Effect of FY17 (Quarterly Results Update - Detailed)

Feb 9, 2018

Price erosion in generic US drugs continues but seems to be bottoming out.

The Power of 5 Minutes (The 5 Minute Wrapup)

Jun 16, 2017

Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

More Views on News

Most Popular

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.

A Simple 3-Point Investing Manifesto for You the Indian Investor(The 5 Minute Wrapup)

Apr 11, 2019

A must have checklist for every investor in the Indian stock market.

My Master Series on How to Trade Election 2019(Profit Hunter)

Apr 16, 2019

For 30 years he has watched how elections impact the markets, and practiced how to profit from it. Now he is here...telling you everything. Read on...

Election Series: Follow the World's Biggest Traders To See Where the Money Flows(The 5 Minute Wrapup)

Apr 17, 2019

20% of all the traders bring in 80% of the money. Watch these 20% and you get a working idea of which way the wind is blowing.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Apr 24, 2019 (Close)