Report from: India - Pharmaceutical Technology

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Report from: India
With rising drug deveopment costs and burdensome clinical trials, Indian-based firms are transferring their research departments to other entities in hopes of saving cash, mitigating risk, and ultimately, buying back the rewards.

Pharmaceutical Technology

Although Hyderabad-based Dr. Reddy's took the lead in this regard when it formed India's first integrated drug development research company in 2006—Perlecan Pharma, Sun Pharma Advanced Research Company (SPARC) became the first pure research company to be listed on the Indian stock exchange. SPARC was created when Sun Pharma transferred its innovative R&D development undertaking, including new drug delivery systems, to a separate company.

Other firms such as Hyderbad's Aurobindo Pharma, Ahmedabad's Zydus Cadila, and Mumbai's Lupin have either deployed or are thinking of deploying similar de-risking strategies. Analysts maintain that this initiative can help reduce pharmaceutical companies' R&D costs and improve the margins of their standalone business by as much as 3–4%.

They also argue that the move may fetch greater returns in the long run. "Once [the transferred companies] start developing innovative products, the management may choose to unlock the value of these separated entities. The [combined] market value of these companies will be higher than the book value in the years to come and consequently, the parent companies can make money by diluting stake to strategic investors like private equity firms and venture capitalists. They can easily recoup the initial investments for the new R&D ventures," says Sadashiv Gopalan, senior pharma analyst at a foreign institutional brokerage house in Mumbai.

Kiran Mazumdar Shaw, chairman and managing director of Biocon, ruled out the possibility of raising funds by diluting a stake in the new arm. "The motive behind the hive-off strategy is to minimize the increasing tax burden to the company caused by our R&D activities," she said. The new arm is to be set up this year.

In 2007, Biocon sold its enzyme business to Danish firm Novozymes for $115 million. The company has various molecules under development, including a molecule for Type II diabetes, rheumatoid arthritis, psoriasis, and non-small cell lung cancer. Taking these drugs to Phase III trials would be an expensive proposition.

There could be some dropouts too. Perlecan Pharma, the integrated drug-development company set up by Dr. Reddy's Laboratories in September 2005, has dropped a second blockbuster candidate from its drug-development portfolio. "Two new chemical entities have been dropped and work on two more is going through some processes," G.V. Prasad, CEO and vice-chairman of Dr. Reddy's, said. Work on a cardiovascular drug has been discontinued, as has a molecule to treat diabetes and obesity.

For some firms, separation angst appears to have worked. Kotak Private Equity Group, part of the financial services firm Kotak Mahindra, and MPM Capital, the US-based global investment management firm focused solely on healthcare investing, are reportedly in talks with Piramal Healthcare to acquire a minority stake in its recently sold R&D arm, Piramal Life Sciences.

Kotak and MPM are eyeing a 10% stake in the R&D arm. Financial research firms have valued Piramal Life Sciences between $480 million and $540 million. Piramal's R&D arm has 14 compounds in its research pipeline in various areas such as cancer, diabetes, inflammation, and infectious diseases. Global investor groups such as Carlyle and Blackstone are also said to be interested in claiming a stake.

Firms such as Wockhardt and Panacea Biotec, however, are not even open to the transferral option. Says Wockhardt Chairman Habil Khorakiwala, "Our board of directors has never considered this option." Adds joint managing director of Panacea Biotec, Rajesh Jain, "Our core strength is R&D and the products the company innovates would help growth."

A. Nair is a freelance writer based in Mumbai, India.


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