As the dust settles down over the Daiichi Sankyo-Ranbaxy Laboratories deal, Indian pharmaceutical majors are quietly revisiting their labs to weigh their IP assets and assess their research pipeline. While pharma biggies are busy calculating the potential market size these molecules are intended for, grapevine is already rife with rumours that some big names with weak R&D portfolio could sellout soon. Clearly, the spotlight is moving away from generics and research arms are the new hot entities.
Do Indian labs have what it takes to create a blockbuster? For starters, the top 12 Indian companies are learnt to have 60 new molecules or compounds, under various stages of development. However, this number is miniscule considering that the global pharmaceutical giants like Pfizer and GlaxoSmithKline have about 140 molecules each under development. Insiders, however, seem convinced that even a single blockbuster could change the game in India?s favour. Shareholders response to the hived-off units also seems to have added to the enthusiasm. The hived-off drug research business of India?s top 10 pharma companies could independently be worth $120 billion in market cap by 2015, according to some industry estimates.
Creating a blockbuster drug, however, is no easy task. Bringing a new drug into the market still takes about 10-12 years and can cost anything between $1-1.2 billion. And, the average spend of a domestic pharmaceutical major on R&D is around 10-12%, compared to 15-18% spent by their global counterparts on R&D.
After Matrix Laboratories and Ranbaxy, rumours are rife that second-tier companies such as Dr Reddy?s, Aurobindo Pharma, Natco, Sun Pharmaceuticals, Orchid Chemicals, and many more are on the target list. A possible reason, analysts feel, is that Indian pharmaceutical companies still maintain the low-cost advantage alongside their vast knowledge pool. Global companies are eyeing research-driven companies as takeover targets to make their discovery pipeline stronger.
?While the multinationals are finding it difficult to meet the soaring R&D costs, it has made them look at growing companies, which are working on basic discovery research. In fact, the global interest is making the domestic pharmaceutical industry grow stronger in research, although the discovery research needs to be improved from the current status,?? informs an investment banker. Domestic pharmaceutical majors like Dr Reddy?s, Zydus Cadila, Biocon, Nicholas Piramal, etc, have undertaken the collaboration route and tied up with other specialist research companies for the development of new drugs on areas like cancer, diabetes, metabolic and nervous system disorders.
?Innovation is the ultimate key and there is a need to create a research atmosphere in the industry. Drug discovery can change the way diseases are treated at present,?? says K Anji Reddy, founder and chairman, Dr Reddy?s Laboratories, which is among the top 15 generics players in the world.
The company has seven new chemical entities, of which five are in clinical development and two at a pre-clinical stage. Buoyed by its successes, it has increased its outlay for drug discovery from $2 million to $20 million over a period of time. ?Our aim is to become a Merck or Pfizer from India,?? he adds.
Ironically, very few molecules have entered the phase III; none have reached the phase IV level. This means that the earliest a molecule can hit the market is after two to three years, provided there are no safety issues and all regulatory approvals are in place. ?It is still early days to decide. The first drugs from Indian labs are slated to come out only by 2009-end or early 2010. A lot depends on their fate in the market, says Sujay Shetty, associate director, PricewaterhouseCoopers.
Quite a few analysts are betting on Dr Reddy?s to produce India?s first blockbuster molecule. The molecule, called Balaglitazone, has diabetes as its therapeutic area and has entered the final phase of clinical development. Indian pharmaceutical companies have started on the riskier route to innovation by investing in basic research. Their rationale: novel molecules would only fuel sustainable growth in the future. While it is too early to comment whether the pharmaceutical companies are doing the right things in terms of allocation of capital and their drug discovery strategy, the good news is that a beginning has been made in the drug discovery arena, says Utkarsh Palnitkar, head?life sciences practice, Ernst & Young.
A case in point is that of Sun Pharmaceuticals, which has demerged its entire innovative business into a separate company, Sun Pharma Advanced Research Company Ltd. The company spends about 14% of the total net sales?claimed to be highest in the sector?and has over seven new chemical entities, which are in different phases of clinical trials. Another example could that be of Glenmark, which has a strong drug discovery pipeline with 13 research programmes underway.
With fewer new drug molecules in the market place, the pipeline is nearly drying up, point out analysts. Going forward, the predominantly generics-driven domestic pharmaceutical industry is bound to grow into a discovery-led industry.
?The survival for generic firms will be tough in the next four to five years. Globally, the pharmaceutical industry is witnessing stagnating R&D pipelines and a generic erosion on big pharma?s revenues by as much as 30-40%. Most exposed are Pfizer, Lilly, BMS and Astra Zeneca,? says Sujay Shetty.
A question arises: Is the generic industry fading away? Satish Reddy, managing director, Dr Reddy?s Laboratories, says that the Indian model has not failed. ?However, one needs to understand that growth, beyond a limit, can come only from innovation and discovery of new molecules. New product development will not be easy in the initial stages. One has to go through the low-cost base generic business and then go up the value chain,? he adds.
After all, Indian pharmaceutical companies had begun to make footprints in the international markets, including acquisitions of reasonable-sized generic companies, over the last few years. ?Indian pharmaceutical companies are on the cusp of a great opportunity?to make a positive change in global health by creating novel medicines. In some cases, this will call for a sale of stake. In others, it will call for increased partnership and collaboration with research-based global MNCs,?? says Ranjit Shahani, vice-chairman and managing director, Novartis India.
Going forward, analysts are unanimous in their view that the Indian pharmaceutical industry will see consolidation?not just between domestic and their global counterparts, but also between domestic companies. This is likely to propel the Indian pharmaceutical industry into the major league, given the market opportunities wherein, $100-billion worth of products are going off-patent by 2015. Also, collaborative research alliances are bound to bring down the cost of R&D, he opines.
?The future for generic companies is quite good, based on increasing disease profiles. Going ahead, companies that would be able to differentiate their brands and manage costs across the value chain, and also ensure their product rollouts across a large number of markets, would do well,?? inform Sun Pharmaceutical officials. Generic players will continue to gain revenues from the currently marketed products driven by the growth in therapy areas.
Cost cutting, increasing the research opportunities, maximising the value of the pipeline across markets, creating intellectual property?this is the path that offers the highest value addition. And, Indian pharmaceutical companies will build a business model that is tailored to their ambition and internal strengths, say analysts.
In addition, industry insiders consider a negation of the cost advantage within the next 10-15 years. Not surprising, they are preparing for the next logical step in the evolutionary ladder: progression up the value curve. They need to make high investments in innovation to help drive future growth, without compromising on short term revenue growth, in order to partake the high-risk drug development market. And as they await the real test?when drugs from Indian labs come out in the market?they need to find ways to strike a balance between the two.