Search for new drugs is taking a fresh turn. The likes of Biocon, Ranbaxy, Sun Pharmaceuticals and Nicholas Piramal have hived off their research and development (R&D) units into separate entities. Dr Reddy?s too has followed a similar path but in a slightly different manner. The drug maker has floated Perlecan Pharma Pvt Ltd in collaboration with ICICI Ventures to take care of its drug development business. The demerger mania is not restricted to pharma and biotech biggies alone. Several others are waiting in the wings for an opportune time to spin off their R&D units into dedicated and specialised entities.

The reasons for this emerging trend are many and interlinked. For one, the risk and reward attached to drug discovery are immense. This move insulates them from the regular pharma business and has the impact of strengthening the balance sheet of the parent as well. Through the current demerger initiatives, pharma companies can reduce the R&D costs and improve the margins of their standalone business, informs Brijesh Regal, CEO of Apothecaries Lab, which runs clinical trials for large pharma firms.

Secondly, in all the cases, the companies have restricted the hive off to new chemical entities (NCEs). However, the drug delivery system, clinical and the generic parts will remain intact with the parent. The rationale is that the generic business and innovation are two totally different busi- nesses, with different time frames, certainty profiles and investments. Scientists need to take an entirely different approach to the projects. Therefore, the de-merger will provide greater flexibility and impetus to the drug discovery research programme, while unlocking significant value for the company and its shareholders. Says Apurva Shah, managing director, Veeda Clinical Research, ? I feel demergers are being done because the industry recognises that research is a business unit in itself and should be treated so.?

Furthermore, costs escalate as new drug candidates mature ?proceed to advanced stages of clinical trials?and hence, funding becomes an important issue. New drug research activity does not form part of the core operations of pharma companies, which is why it becomes difficult to solely focus on available resources and energy on it, informs Utkarsh Palnitkar, head of health sciences, Ernst & Young India.

Another advantage is that the promoters of these firms can sell either part or whole of their stakes in the demerged entities to raise funds for new R&D ventures or simply to even recover their capital. Listing on the stock exchanges also gives them better visibility and helps to command better valuations. Of the demergers executed so far, Dr Reddy?s has kept Perlecan Pharma unlisted and has licensed out four products to a company for clinical development. Sun Pharmaceutical Industries? Sparc is a full-fledged research company that discovers and develops new drugs and delivery systems.

And lastly, creation of a separate company is an innovative way to mitigate the risks involved in the drug discovery business where, despite years of expensive research, the success ratio is still small. ?Completely separating the drug discovery unit into a new company and away from generics is something we at Sun Pharma started and several others have followed suit. Our rationale was simple: these two businesses are very different and hence need to be run independently,? says Uday Baldota, vice-president (investor relations), Sun Pharmaceutical Industries. The com- pany?s arm, Sun Pharma Advanc-ed Research Company (Sparc), has four projects each in NCE and NDDS in the pipeline and Phase III clinical trials of three of its new drugs are likely to be concluded in 2009.

Contract work coming to India in basic research is slowly evolving from low-end to more value-added high-end research. Since 2005, the interest in India-based contract research organisations (CROs) has dramatically increased. Indian CROs are no longer simply catering to domestic pharmaceutical companies. For instance,

Biocon?s subsidiary, Syngene conducts high value R&D in early stage drug discovery and development for a diverse global clientele that includes Bristol-Myers Squibb, Innate Pharmaceuticals and many more. Syngene?s alliance with Innate Pharmaceuticals AB, Umea, Sweden is aimed at jointly developing, manufacturing and marketing virulence blockers to counteract bacterial diarrhoeal disease. Virulence blockers are a new class of drugs that could become an alternative to antibiotics.

Another example is the recent venture by Nicholas Piramal which would assist Merck in creating new drugs for two of the chosen oncology targets, in a deal worth up to $175 million per target in milestone payments, as well as royalties on any product sales.

A recent report by Ernst & Young aptly projects the changing landscape, which includes service-based and partnership-led collaborative alliances in contract services. Some of the recent partnership models include Ethical Clinical Research and Matrix, Parexel acquiring interest in Synchron Research, Eli Lilly and Suven Life Sciences, GSK and Ranbaxy, to name a few. The report highlights that approximately 30-40% of the R&D activity in India is essentially contributed by Phase III clinical trials?a strong case for contract research work coming to India.

Yet another report by McKinsey projects that the Indian pharma market is expected to touch $20 billion by 2015, from the present $7 billion. While this would include manufacturing, there is a big window of opportunity for contract research. In this, about 80% form the clinical services and the rest form medicinal chemistry and other allied services. The market for outsourcing drug discovery activities will be $7billion to $8 billion by 2009.

Says Venkat Jasti, CEO, Suven Life Sciences, which has a tie up with Eli Lilly, ?Contract research work in basic research is mainly low-end like full-time equivalent (FTE) worker, fee for service (FFS) where not much innovation is happening. At the same time, collaborative research partnerships (CRP) are evolving wherein, innovation and value addition for both the parties are happening. However, Indian CROs are not really attracting high-end value-added innovative research activities, but only FTE and FFS and without any specifics to disease category, but for all therapeutic indications for small molecules.?

It is notable that globally, the total spend on CROs is pegged at $15 billion and a growth rate of 15% is expected over the next seven years. Within the sector, there would be lot of phase IV activity which is expected to be the fastest growing clinical subsection. Of this, phase III captures the largest portion with 24%, preclinical phase II and phase IV are equally split at 20% each, while the least amount (15%) is spent on phase I, says a recent report by Frost & Sullivan.

As per estimates, Indian CROs are currently enjoying a meagre share of 2-3% of the global market and have been aspiring to reach a billion dollar size by 2010. ?In order to promote Indian CROs, we have to adopt the best practices without compromising on the quality, build global standards to enable global acceptance of data and promote brand India in the field of contract research services,? says SP Vasireddi, chairman of Vimta Labs. He adds: ?Indian contract research businesses have come to the forefront in the recent years to support the domestic and global pharmaceutical and biotech sectors in drug development. The advantage is in terms of quality and cost effective talent pool, assimilated information technologies, accessible patient population, etc.?

While dealing with complex products, the consensus among drug majors pertained to the prevalent notion that drug discovery and development is a risky business.

Naturally, it makes sense for them to optimise operational costs, balance profitability and investments.