The failure of its lung molecule at the second phase of human trials is surely a setback for Glenmark, but that is unlikely to change the way Indian companies monetise their drug research and development. Glenmark shares were hammered on Wednesday on the stock exchange, falling more than 14%, as brokerage firms said they were removing the value of the company?s R&D assets from the valuation of the target price of its stock. The shares did not recover on Thursday either, sliding close to 4% to Rs 215.65. However, for Indian pharmaceutical companies that need to generate cash to fund their R&D programme, outlicensing will continue to be a model to follow for a long time.

Drug molecules failing to get through human trials are nothing new for Indian pharma companies. Dr Reddy?s had the bitter experience as early as 2003, when Ragaglitazar, its first anti-diabetic molecule outlicensed to Novo Nordisk much ahead of its peers, failed in human trails and had to be dropped. Despite this, several other frontline Indian pharma companies including Ranbaxy, Sun Pharma, Nicholas Piramal and Wockhardt have forayed into drug discovery and development of their own molecules or new chemical entities (NCEs). With the new patent regime coming into force in India, domestic companies have to innovate, and innovation is a high-risk, high-reward business. High-risk since the average cost of taking a drug molecule through the preclinical and clinical stages is pegged conservatively at $800 million (Rs 4,000 crore). However, the success rate, where all trials are successfully completed and the drug is approved for commercial use, is said to be not more than 2%. But the reward for innovation is huge, as the newly developed drug gets patent protection and companies are able to charge a premium price for such products.

The trouble for Glenmark, according to analysts, was that there was a lot of visibility on its income from R&D, and these numbers were built into the valuation of its target price. No wonder than that Glenmark ranked in the top 10 of Indian pharma companies in terms of market capitalisation. But when the bad news came, the downside was factored in the valuation and the stock prices crashed. ?What the issue also demonstrates is also the lack of depth in the research pipelines of Indian companies,? says Sarabjit Kaur Nangra, vice-president (research) at Angel Broking. The number of NCEs under development are very few. For instance, Glenmark has seven molecules under development. Sun Pharma, in 2007, made public that it was working on four NCEs and products based on four new drug delivery platforms. Ranbaxy has said it has 4-6 molecules in the pre-clinical stage and an anti-malarial drug in clinicals. When Piramal Healthcare hived off its innovative R&D into a separate firm in 2007, it said it had seven molecules in clinical stages. Compare this with an MNC like Pfizer, which had 100 new drug projects in different stages of development as on March 2009, even after discontinuing 26 of them over a period of six months. A deeper pipeline inevitably broadens the risk associated with the drug discovery and development process.

Glenmark has been fairly successful in generating upfront payments for its outlicensing programmes. It has already received $35 million from Forest Labs of the total deal size of $190 million. Says its CEO & MD Glen Saldanha, ?We have been successful in receiving over $115 million (over Rs 500 crore) in upfront and milestone payments and have ploughed back these funds back into the discovery programme. Glenmark is probably the only Indian company that has managed to monetise its discovery research program consistently.? The company has also made clear that it will continue its pursuit to discover ?best-in-class and first-in-class? molecules, take them through trials, and then explore outlicensing. Analysts say that despite initial setbacks, Indian companies have to keep on monetising their R&D to fund research and that looks like a real practical approach for many.