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.
Jun 02, 2008
By A. Nair
Volume 32, Issue 6

Jonathan Evans/Getty Images
Bangalore-based biotech firm Biocon is the new kid on the block with a plan to transfer its research and development (R&D) arm to a new company. Biocon is reportedly transferring all of its molecules under development into a firm that will serve as a wholly owned subsidiary.

Transferral trends

Biocon joins the list of luminaries such as Mumbai-headquartered Sun Pharma, Wockhardt, and Piramal Healthcare, and Delhi-based Ranbaxy, who have divested their R&D business into new companies to attract strategic investments in the high cost-burden drug development sector.

In India, this trend has been gaining momentum as a strategy to de-risk the core business model, secure funding via the demerged R&D entity, and thereby unlock value for shareholders. With the introduction of the product patent law in 2005, several domestic pharmaceutical companies have been compelled to increase their R&D focus to counter the likely slowdown of reverse-engineered products (Before the patent law was enacted, companies were allowed to copy new medicines to produce generic drugs. Today, the creation of new processes to produce generic versions of drugs is allowed, but companies cannot simply copy the drug product).

Rob Colvin/Getty Images
However, the huge cost involved to bring a new molecule to market is daunting. The Tufts University Center for the Study of Drug Discovery recently estimated that it costs an average of $900 million to bring a new drug to market. A biotech drug costs even more, $1.2 billion on average, and typically takes 12–15 years to get approved.

Because Indian pharmaceutical firms do not have this kind of access to funds, many have latched onto the transferral strategy to de-risk their business. R&D firms can then focus on basic research and raise funds through private equity or venture capital, or by way of an independent listing. The interests of shareholders who may be risk-averse are protected, while options are provided to those with a larger-risk appetite.

The numbers game

Indian drug companies typically invest 7–9% of annual revenue in new drug research, well below the international average of 14%. A KPMG study pegs R&D investment by Indian companies at $500 million in 2010 and $1.2 billion by 2015.

Some analysts, however, are watering down the excitement with reservations over the generic-skewed pharma industry's capacity of discovering the next big drug, or new chemical entity (NCE). (The fact that India has still not launched its first NCE has led many industry experts to be skeptical of the trend of transferring R&D units. Companies such as Mumbai-based Glenmark Pharma have divested their generics business instead, and retained the R&D business, expecting better valuations.)

Although there are no clear-cut solutions, Poonam Bhana, an analyst at ValueNotes, a leading provider of business intelligence and research, believes that demerging R&D units is a judicious decision. It gives shareholders of the existing company an option to exit the risky R&D business while unlocking value of the R&D pipeline in the new company and also attracting investors that are prepared for a long wait before revenues flow in.

Others allude to the fact that if India's top 10 pharmaceutical firms transfer their R&D divisions, the collective market capitalization of new research entities is expected to touch $120 billion in less than a decade.

Apoorva Shetwankar, group managing director of Veedra Sciences, a clinical research organization based in Mumbai, says selling off R&D is also being done because companies recognize that "research is a business in itself and should be treated so. It's not a bottomless pit. One has to invest in R&D and only then you can expect results that are measurable in financial terms."

lorem ipsum