Dr. Reddy''s Laboratories Ltd''s decision to stop outlicensing compounds that complete the preclinical stage and proceed into the first two stages of clinical trials has evoked mixed reactions from the industry and analysts.

An industry source said the DRL decision appears to be sound. "If any company wishes to earn more money out of the basic research it does, it is only appropriate that they outlicense the compound at a stage later than the preclinical. The royalty amount grows several fold when this is done. If a company is earning enough from other businesses like generics, then there is nothing wrong in investing that money here."

According to a senior analyst, every Indian company has to grow further in terms of outlicensing stages. The commercial implication is definitely the higher royalty amounts. If the first phase outlicensing gives a 10 per cent royalty on the compound, the same could be 30 per cent if outlicensed in the third phase of human trials. Remember there is no risk-free business in pharma.

Another analyst says it won''t be a risky affair as it is the phase three trials that are the most expensive. DRL has enough money to take the compounds into phase two trials with the chests of cash lying idle. This will at least increase the productivity of the company, he said.

The fears are that should the next few compounds also lose their way in various stages of human trials as the current ones, then there is very little hope of investor benefit from the basic research business. The company has decided to double its research spending from four per cent of sales to eight per cent. A major chunk of this allocation may invariably move into the development of novel chemical entities. This will be a substantial amount. This, however, need not scare away the investors as there is a generics business which is fast growing.

While the licensee has suspended trials of one anti-diabetes compound, another compound is struggling to clear phase two trials. Arguably, India''s most respected pharma research and development company, DRL received a jolt after all clinical trials of its high profile dual-acting insulin sensitiser research compound Ragaglitazar (DRF 2725) was suspended by Novo Nordisk in July while it was in phase three human trials. This happened as urine bladder tumours were detected in one mouse and a number of rats treated with Ragaglitazar. It will take at least a year before NN is in a position to review its current decision, which if it does would stand to DRL''s benefit.

DRL has a total of nine compounds in various stages of development. Dr Reddy''s had out-licensed in 1997 DRF 2593, an anti-diabetic compound, the first Indian compound to get the distinction, to the Swedish company and DRF 2725 (NN622) to the same company in the subsequent year.

According to DRL, DRF 2593 is in late phase two trials with Novo Nordisk and the data is yet to come out.

DRF-4158 (DRF-MDX8), a compound for metabolic disorders (Insulin resistance and associated disorders) has been licensed to Novartis. Another compound, DRF-NPPC diabetes (insulin sensitizer but non-PPAR mechanism) has completed preclinical stage and is waiting to be outlicensed.

The suspension of Ragaglitazar trials has impacted Indian basic research companies, a top industry source said recently. Most of them are wondering whether they will be able to haggle with buyers as hard as before when they put their new compounds on the table.

The adverse development also took the steam out of Dr Reddy''s tall claims that they were able to develop a new compound at a miserably low cost of Rs 30 crore whereas multinationals spend around $ 200 million to take a new compound into human trials.

The basic research programme of Dr. Reddy''s focuses on cancer, diabetes, bacterial infections and pain management.

Says an analyst, "If the current set of NCEs does not have a great future and no one is willing to inlicense them, then one cannot make such a statement, but state that will carry out some more studies and then only outlicense. They may or may not spend more money on these compounds. At an appropriate time (when they discover another new and high potential compound and outlicense it), they can state that the current set of NCEs is in the back burner. Hence I believe that the decision to outlicense only in phase 2 is a diplomatic way of stating things."

A few queries were sent to Satish Reddy but he did not answer. However, a DRL spokesman said, "It has been the company''s stated strategy since the ADR listing in April 2001, to take the compounds on a case-to-case basis up to Phase II a stage (proof of concept in humans stage). Earlier we were outlicensing after establishing proof of concept in animals, ie., after completion of preclinical trials. The strategy is to move up the drug discovery value chain. Licensing at a later stage also adds more value to the licensing deal than at an earlier stage.

"As far as risks are concerned, we need to understand that there are always inherent risks to a drug discovery program and it is the question of how a company manages the risk as it evolves into a discovery led company. Dr. Reddy''s is very much aware of the risks and it calibrates its investments for R&D accordingly," adds the DRL spokesman.

DRL develops, manufactures and markets a wide range of pharmaceutical products in India and overseas. Dr. Reddy''s produces finished dosage forms, active pharmaceutical ingredients, diagnostic kits, critical care and biotechnology products.