Innovation drives pharmaceutical business. Research and development (R&D) is the lifeblood of pharmaceutical industry. Pharmaceutical companies have discovered 1,400 new chemical entities in the last three decades. Indeed pharmaceutical business is more R&D-intensive than other industries.
Globally, pharmaceutical companies invest about 12-16 per cent of their total sales on research and development compared to 10.5 per cent by computer software and services industry. Innovation enables companies survive and grow in the world of pharmaceuticals. But research and development demands long-term planning and the willingness to take risk in terms of cost and time.
Furthermore, uncertainty of outcome is the inherent risk involved in this business. Yet it is the most lucrative segment of the entire value system due to its high-risk and high-return proposition.
A recent study shows that the profit margins of drug companies are four times the median rate for Fortune 500 companies. Successful R&D provides a competitive advantage to companies. Finally, for all its risk and complexity, R&D is an activity that humankind undertakes to conquer deadly diseases.
Huge reward is only one side of the story. Huge cost and time are key issues on the darker side. Companies have to invest money in R&D on a continuous basis over a long period without any tangible benefit, which may pressurize the bottom line in the short run. The survival of the company may be threatened in the long-run if the outcome is adverse. For every drug successfully brought to market, there are 5,000-10,000 unsuccessful compounds. About 250 compounds may even undergo pre-clinical testing. Only two per cent of projects in the pre-clinical phase are expected to make it to phase-I testing and, of these only one in five is likely to be approved.
The cost of a successful therapy to market also includes costs of these failed projects. In addition, longer process together with ever-increasing approval complexities has made drug discovery more expensive and time consuming. Currently, it takes 10 to 12 years and US$800 million to US$900 million to take a drug to market compared to US$ 230 million in 1987.
India, known for inadequate protection to patented molecules, has now emerged as a favored destination for basic as well as applied scientific research. India offers advantages that few other countries can match-abundant availability of scientific talent, skilled labor, world-class academic institutions dedicated to science and technology, entrepreneurial culture and globally-competitive costs.
Introduction of product patents has infused a fresh vigour into the country's drug discovery research. With the product patent era in force, not only the top notch firms in India, but a good number of mid-cap players also have made a strong foray into drug discovery and related research disciplines by raising their R&D outlays considerably.
The focus is to meet future challenges of globalization and patent regime by concentrating more on research and development activities. The investment in R&D will accelerate move towards development of new chemical entities, new drugs delivery system and generics products. To overcome the stiff competition in the international as well as domestic market, Indian companies have started investing in basic research.
The government is also helping pharmaceutical companies by offering several concessions. The department of Chemicals and Petrochemicals is planning to set up a National Mission to boost R&D activities and exports of pharmaceutical segment. This will help Indian pharmaceutical companies to turn India into a global research and development hub. The department of Science and Technology has announced allocation of annual R&D fund of Rs 159 crore in place of the existing Rs 150 crore corpus -- Pharmaceuticals Research and Development Support Fund (PRDSF). Further, Commerce and Industry ministry has also identified pharmaceutical sector as a thrust area.
R&D Spending in India
Private sector has shown little interest in investing in R&D in India. The government continues to bear most of the burden, with industry chipping in with 10 to 12 per cent. The average R&D expenditure is around 2 per cent of the turnover as per a study covering 150 companies.
Investment in pharmaceutical R&D has been rising steadily. From Rs 220 crore in 1997-98, R&D expenditure rose to Rs 260 crore in 1998-99 and Rs 320 crore in 1999-2000. This figure is projected to jump up to Rs 1,500 crore by 2005.
R&D is increasingly becoming an area of focus for Indian pharmaceutical companies and most of the big players are spending about 6-7 per cent of their revenue on R&D activity. This is low as compared to a global average of 12-16 per cent.
Focus Areas
The research focus at present is on three aspects: new drug delivery systems, development of generic products for the regulated world and contract research such as developing non-infringing processes in the area of Active Pharmaceutical Ingredient (API) manufacture for MNCs. However, basic research may not be a thrust area for some Indian companies, though bigger companies such as Ranbaxy, Dr. Reddy's Labs, Glenmark Pharmaceuticals and Transgene Biotech have made some headway.
Companies that invest in R&D choose specific therapeutic areas based on their strengths in the market, and the commercial potential. The therapeutic areas, which are being addressed by select companies in India include infectious diseases, diabetes, cancer, obesity, dislipidemia, cardiovascular diseases, benign prostatic hypertrophy, CNS disorders, leishmaniasis and fertility. In biotechnology, attempts are being made to develop technologies for already marketed recombinant proteins such as hepatitis-B vaccine, interferons, granulocyte macrophage colony stimulating factor (GMCSF), erythropoietin and human growth hormone.
Issues & Challenges
R&D is a high-risk and high-return activity. It involves huge costs to discover a molecule and bring it to market. The launch of a new molecule in India can be done at around US$250 - US$300 million but still it is a big amount. It must be noted that since Indian companies are operating at the lower end of the value chain, they cannot afford higher R&D expenses. Apart from this, bottlenecks that hinder Indian pharmaceutical industry to become a full fledged R&D driven industry are
-- Infrastructure
-- Regulatory Environment
-- Intellectual Property
-- Academia and Industry
-- High Failure Rates
-- Manpower
Trends in R&D
Indian as well as overseas investors are bullish about India's potential to blossom as a regional hub for research in life sciences. Some of the trends witnessed in the research and development area are:
-- With intense demand for low-cost R&D to fuel innovation, India's developing skills and infrastructure in R&D phases of drug development are providing an enticing proposition for both global pharmaceutical companies and investors. More than 100 international companies including Fortune 500 companies have set up research and development centers in India in the last five years. In June 2003, Swedish pharmaceutical company, AstraZeneca, opened new laboratories at their facility in Bangalore, dedicated to finding a new treatment for tuberculosis-the single largest cause of death (adults) from infectious disease in the world. The scientists in Bangalore also work closely with AstraZeneca's infection research center in Boston and academe.
-- Indian companies are entering into R&D alliances with international pharmaceutical majors as well as domestic research-based companies. Ranbaxy is having an alliance with Glaxo SmithKline relating to a drug discovery and clinical trial deal. This deal provides Ranbaxy access to large database of drugs of Glaxo as well as critical technologies for drug discovery, while Glaxo benefits from Ranbaxy's drug discovery and early product development strength. In May 2004, Cipla partnered with Avesthagen, a biotechnology company based in Bangalore, India, to develop biopharmaceuticals and targeted therapies. The partnership will initially develop products for auto-immune disorders and will subsequently include other areas such as cardiovascular disease and cancer. Avesthagen will perform the initial development functions, while Cipla will provide scale-up, production, and marketing.
-- New models of R&D funding are gaining a foothold in the industry. Venture funds are now betting on the R&D efforts of Indian pharmaceutical companies. The participation of venture capital companies in pharmaceuticals is relatively a new phenomenon in India, largely because innovation-driven new projects are rare in the context of low R&D investments in the country. Dr Reddy's Laboratories has entered into a US$56 million (Rs 246 crore) agreement with ICICI Venture Funds for the development and commercialization of Abbreviated New Drug Applications (ANDAs) to be filed in 2004-05 and 2005-06.
-- R&D is a high risk-high return business and Indian companies do not have the deep pockets to deliver start-to-finish new chemical entities. Hence, they out license molecules beyond a certain stage of development to a third party. The licensing deals, which have taken place in the past few years, show the innovative ability of Indian pharmaceutical companies. While generics continue to be the growth driver in the near to medium term, companies that invest in R&D will do well in long-run.
-- Compiled by Cygnus Business Consulting & Research Team, Hyderabad