Hyderabad-based Dr. Reddy’s Laboratories has grown nearly tenfold to over $215 million in annual revenues, since Anji Reddy founded it in 1984 with just $40,000. It recently romped home with $55 million when it licensed DRF 4158, a novel insulin sensitizer, to Novartis Pharma AG. Dr. Reddy’s success is emblematic of a surging India-based pharma industry.
S. Brar, chief executive of Ranbaxy Labs, started in the same year as Dr. Reddy’s, has spring in his step since he licensed Ciprofloxacin NDDS (Novel Drug Delivery System) to Bayer in August 1999, for $65 million. Delhi-based Ranbaxy, with a sales presence in 40 countries and five manufacturing locations outside India, calls itself the world’s 11th largest generics company.
Yusuf K Hamid’s Cipla shot to fame early last year when it offered to supply AIDS drugs to poor countries for 90 percent less than the biggest drug makers and patent holders, who were charging between $10,000 and $15,000 per patient, per year. Cipla’s fiscal 2001 revenue was $230 million while its net profit rose 39 percent. Although AIDS drugs constitute barely 2 percent of the company’s sales and products, the cascading effect of Cipla’s aggressive pricing is still giving indigestion to drug majors.
Interestingly, so far no Indian pharmaceutical company has developed a drug from end to end, although many claim to be in advanced trials. Satish Reddy, Anji Reddy’s son and CEO of Dr. Reddy’s Labs, says, “Since the cost of developing a drug is very high, we prefer to stop at the pre-clinical stage, and license the molecule to a foreign drug company to take it through the three stages of clinical trial.”
Dr. Reddy’s major triumph has been research on diabetes. If its insulin sensitizer, which is in the initial stage of clinical trials, hits the market in the form of a drug, Dr. Reddy’s could take home as much as $1 billion, against relatively low research and development costs of $2.8 million. Dr. Reddy’s licensed DRF 2593 molecules in March 1997, and its second, DRF 2725 in August 1998, to Novo Nordisk. If these molecules, which are in the final stages of clinical trials, clear the decks, Anji Reddy will garner more than $18 million in royalties.
These developments mark a major change in orientation for India’s pharmaceutical industry.
Cash Cow
India’s drug industry was built on “reverse engineering” — polite jargon for copying drugs launched internationally by other companies — which is permitted in India by the government’s refusal to recognize foreign product patents until at least 2005, when the government has stated it will enforce international patent law. Thanks in large measure to the government’s policy, Dr. Reddy’s, Cipla, Ranbaxy and others have made a large chunk of money through “copycat” generics.
Certainly, the Indian pharmaceutical industry wouldn’t be where it is today without its generics business, and the government’s decision to ignore international patents made a lot of sense for a developing nation. Amar Lulla, co-managing director of Cipla, says, “It was all for the good of the country, since drugs are sold at much cheaper price in India than in any part of the world. I have done my bit to help the poor people.”
But now, with international patent enforcement looming on the near horizon, India’s pharmaceutical companies are gearing up to shift their focus from copycat generic drugs to end-to-end drug development. Indian drug companies are motivated by more than the “stick” of patent enforcement. There is big carrot out there as well — a $350-billion global market opportunity that has prompted industry executives like Reddy to step up R&D and focus on discovering new molecules that can be licensed to global drug majors.
Research
Anji Reddy is a man obsessed with his research now. “Basic research is an arduous task and is said to be expensive. The statistical data from Western countries are frightening,” Reddy told the Indian Pharmaceutical Congress recently. “[Developing a drug] is estimated to cost anywhere between $100 and $200 million, but it is my considered opinion that in the Indian context such an endeavor may be accomplished within $20 million or so. Expenditure of this magnitude is within the reach of some companies in India.”
“We have been investing heavily into molecule discovery, of late,” says Satish Reddy. “In 2000-01, we invested about seven percent of our $215 million turnover in R&D. That figure has gone up after the ADS (American Depository Shares) issue.”
There is enormous potential for profit in drug discovery. But there is also tremendous risk Companies spend an average of $500 million and take 10 years to discover a new molecule. The success rate is low. Only one in 10,000 molecules makes it to market. So not all of India’s pharmaceutical firms can take on the challenge of drug discovery. The major players still base their business on generics.
Sun Pharma has been investing about 4 percent of revenues in both generics and non-generics R&D on an ongoing basis since 1993. “In the generics projects, we have pumped in more than $17 million so far,” says Dilip Shanghvi, Sun Pharma chairman and managing director. Mumbai-based Wockhardt has invested about $32 million in both generics and non-generics R&D in the last three years. “We have about 300 scientists working and have filed 30 patents so far,” says general manager Oves Cassubhoy.
Small Players
Small generic drug producers in India are facing problems. The Indian pharmaceutical heavyweights are squeezing the domestic generic formulations and bulk drugs markets.
Small generic houses like Natco Pharma Ltd ($25 million in annual revenues) and Aurobindo Pharma, which are typical of India’s 1,500 small pharmaceutical firms, still feel that the domestic generic formulations market can be lucrative.
“There is neck-and-neck competition in the domestic generic formulations and generic bulk drugs,” says Rajeev Nannapaneni, business development manager of Natco Pharma Limited. “The bulk drug business is very risky since the price falls every three months. That’s the reason why most of the domestic generic bulk drug businesses are not doing well.” He predicts a lot of consolidation in the market.
Challenges
India’s big pharmaceutical firms still have two frontiers to crack: the U.S. and European regulated markets, and drug discovery. It is possible for Indian companies to legally enter the U.S. market for generic drugs, since patents on drugs expire. Dr. Reddy’s has had some success penetrating the U.S. market in this manner. In August last year, Dr. Reddy’s obtained a 180-day “exclusive period” from the U.S. FDA to sell the 40-milligram generic version of Eli Lilly’s Prozac, which had just come off patent. It has been a major money-maker.
“Doing business in the U.S. is not easy since the Indian companies have to undergo a series of stringent regulatory procedures,” says Natco’s Nannapaneni. “Moreover, the marketing dollars there are very high. It makes sense for the Indian companies to collaborate with the U.S generic firms, which can take care of the legal procedures.”
Sun Pharma’s Shanghvi says about 68 percent of his generic bulk actives are exported to end-users in Europe and Latin America, and his formulations are exported to traditional markets in the Southeast Asia, Africa and Middle East.
“Applying the same strategy for the U.S. market through our associate company Caraco Pharm labs, we have received FDA approval letters for six generics with four more products awaiting approval,” Shanghvi says.
Are Indian drug companies ready for the international patent regime that they grew to maturity by largely ignoring? “We are ready for it,” says Satish Reddy. Most Indian pharmaceutical CEOs seem to believe that the dynamics of the market will not change until there are clear rules about patents and IPR. India will not become really attractive to global pharmaceutical companies until there is some patent protection from the government. Drug multinationals would like to conduct basic drug research In India, but are hesitant.
“Once the new patent regime comes into force, there will be more investments coming into India,” Satish Reddy predicts “There are good scientists and technical people who work for much lesser cost than U.S counterparts. In India, a chemist with a Ph.D. can be easily hired for $10,000, versus $100,000 in the U.S. All these factors taken together make India an attractive market in the long run. In the next few years, more than 10 Indian companies would transform themselves from change-followers to change-leaders offering high quality drugs to the world. That’s the road ahead to discovery.”
In the meantime, despite promising research efforts, what excites Indian pharmaceutical companies is the prospect that patents for about four billion drugs, worth $50 billion, are due to expire in the next 10 years. The CEOs of India’s generic drug companies hope to capture at least five to 10 percent of this pie.
si
