The growth of investments in Research and Development activities of 25 pharmaceutical companies remained under pressure during the year 2007-08 on account of lower than expected returns, cost cutting measures and rupee appreciation in the second half of 2007-08. Further, a few major companies de-merged their R&D business into separate entities to reduce the cost burden on profitability and to give special focus on development of New Chemical Entities (NCEs). The study showed that the R&D expenditure as percentage of net sales of 25 companies continuously declined for last three fiscal years from 8.78 per cent to 8.11 per cent to 7.60 per cent in 2007-08.

The R&D expenditure of 25 companies has gone up by 8.4 per cent during 2007-08 as against 15 per cent in the 2006-07. The growth is restricted as the R&D spend of Ranbaxy Laboratories, Sun Pharma, Wockhardt, Ind-Swift Labs, Piramal Healthcare and Dabur Pharma declined during the year ended March 2008. The R&D spend of Ranbaxy, Sun and Piramal declined mainly due to de-merging of their R&D business into separate companies. Similarly, Glenmark Pharmaceutical also diverted its investment in R&D by forming a new company.

Indian majors like Sun Pharma, Piramal Healthcare, Ranbaxy, Glenmark Pharmaceuticals and Dr Reddy's Laboratories have decided or already de-merged their R&D activities into a new company. A few more companies may also consider same course of action. The Indian companies are getting more and more approvals from regulatory bodies of regulated as well as emerging markets. Indian companies are introducing cost effective new products in the international market.

Considering the new opportunities in the global generic market with expiration of patents, implementing of new patent law in the country and stiff competition in generics in the regulated markets, investment in R&D is vital for the survival for existing players. With the stringent approval norms it is difficult day by day to get approval and many drugs have failed in phase-III.

Sun Pharma has de-merged its R&D activities into new company called - Sun Pharma Advanced Research Company Ltd (SPARC), with registered office at Vadodara in Gujarat. SPARC has two research centres - Vadodra and Mumbai. The new R&D based company received the entire innovative business comprising of research projects for new molecules and new delivery systems, scientists and intellectual property. The company is planning to invest $60 to $75 million in next three year for research projects.

Piramal Healthcare (formerly known as Nichiolas Piramal India Ltd - NPIL) has de-merge its NCE Research Unit into a separate company with effect from April 1, 2007. The listing of new company will be from June 2008 and it will take 2-3 years to generate revenue. Piramal Healthcare incurred an R&D expenditure of Rs 39.67 crore in the second quarter of 2008. The NCE programme has a pipeline of 13 compounds in Oncology, Inflammation, anti-diabetes and anti-infective segments. Four of these compounds are in clinical trials and other are at different stages. The new product is likely to be introduced in 2011. Currently, 400 people are working in R&D activities and the company is spending around 5 per cent of total revenue. Thus, the investors will have to wait for three-four years for any returns from this new venture.

Ranbaxy Laboratories has d-merged its drug discovery research operations to use its present strengths more effectively. Ranbaxy has state of the art Research infrastructure and a highly skilled scientific talent pool. The proposed de-merger of DDR arm will provide greater flexibility and impetus to its DDR programmes while unlocking significant value for the company and its shareholders.

Dr Reddy's Laboratories (DRL) is increasingly focusing on NCE pipeline and pursuing collaborative strategies to accelerate the development of new molecules. It has finalised four key collaborative deals for discovery during last couple of years with Perlecan, Rheosciennce, Argenta and ClinTec International.

DRL received Rs 98.5 crore during the year ended March 2005, of which Rs 45.3 crore was recorded as a reduction in the R&D expenses in 2006-07 - compared to Rs 38.4 crore recorded in previous year. As the terms of the R&D agreement with Perlecan Pharma Private Ltd during 2005-06, DRL received Rs 37.3 crore towards the reimbursement of expenses incurred by it in the development of NCEs assigned to Perlecan.

Glenmark Pharmaceuticals is spinning off its generic business and incorporating a wholly owned subsidiary called Glenmark Generics Ltd (GGL). The main objective is to build end to end integration, scale and capabilities in pursuing a generic business and to build global capabilities. The company is planning IPO and resources will be used to further expand GGL's generic footprint globally through acquisitions, expansion of generics and focus entering into other niche segments.

Thus more and more companies are likely to restructure their R&D and try to reduce burden on bottom line. The new strategy may help them in short term with higher net profit and earning per share, but it may backfire if the outcome from R&D fail to achieve targets. As some analysts pointed out, the best option for Indian companies in a situation like this is to enter into R&D partnership with the multinational companies.
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