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Drug discovery in India—Trends and challenges
Research
Buoyed by India's recent laws recognising international
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pharmaceutical patents, more than a dozen Indian companies
Healthcare have launched new drug discovery programs or reinvigorated
Services existing ones. The key to the future of India's pharma industry
will depend on its ability to scale back its reliance on low-cost
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Appointments and challenges in the past few years
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Drug discovery research and development in
India comprises collaborative research, basic
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drug discovery and development and contract
Network Sites services. Due to increasing cost of developing a
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new drug and risks involved in the process,
companies are looking to mitigate risks involved.
CIO Decisions
One of the recent trends is the de-merger of R&D
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units to unlock values.
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For Indian life sciences companies engaged in basic pharma
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research, the year 2007 was a year of filing patent applications.
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Most of the filings came from companies from Mumbai,
Express Textile Hyderabad and Bangalore which are engaged in chemical and
Group Sites biotechnology-based research of new medicines. The trend in
patent applications is a pointer to India's growing stature,
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wherein Indian companies that were once cautious have proved
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themselves well versed in the game of innovation.
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Demerging of R&D Units

A recent trend of de-risking the business model along with

unlocking value from the drug discovery program has started
making headlines. Drug majors including Ranbaxy Laboratories,
Sun Pharmaceuticals and Nicholas Piramal India Limited (NPIL)
have already hived off their R&D divisions into separate entities.
Even Dr Reddy's Laboratories (DRL) has followed the same path,
but in a slightly different manner. The drug maker has floated
Perlecan Pharma in collaboration with ICICI Venture and CVC to
take care of its novel drug business. The reasons are many and
interlinked and the benefits that research driven companies are
seeking by de-merging their R&D arm are noted below in brief.

This is a move intended to boost investor sentiment as by

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life sciences
carving out the expenditure related to new drug R&D, the market research
custom medtech
balance sheet looks much better. Through the current de-
advisory
merger initiatives, pharma companies can reduce R&D www.clearstate.com
costs and improve margins of their standalone business

In all the cases, companies have restricted the hive off to
new chemical entities (NCEs) only. However, the drug
delivery system clinical and the generic part will remain Laboratori
intact with the parent (Glenmark Pharma is an exception). Alchemia
Active ingredients
The rationale is that generic and innovation are two totally
manufacturer
different businesses, with different time frames, certainty Pharmaceutical
profiles and investments. The approach to the projects that intermediates
scientists need to take is also entirely different. De- www.laboratorialchemia.i
mergers will provide greater flexibility and impetus to the
drug discovery research programme while unlocking
significant value for the company and its shareholders

Furthermore, costs escalate as new drug candidates
mature (proceed to advanced stages of clinical trials) and
hence, funding becomes an important issue. New drug
research activity does not form part of the core operations
of pharma companies, which is why it becomes difficult to
solely focus available resources and energy on it

A significant advantage is that promoters of these firms
can sell either part or whole of their stakes in the de-
merged entities to raise funds for new R&D ventures or
simply to even recover their capital. Listing on stock
exchanges also gives them better visibility and helps to
command better valuations. Of the de-mergers that have
happened so far, DRL has kept Perlecan Pharma unlisted
and has licensed out four products to a company for clinical
development. SPARC is a full-fledged research company
that discovers and develops new drugs/delivery systems

And last, creation of a separate company is an innovative
way to mitigate risks involved in the drug discovery
business where, despite years of expensive research, the
success ratio is still small.

Partnering for drug discovery

Many Indian pharma companies have partnered for R&D and

include large names like Zydus Cadila, DRL, Ranbaxy, NPIL,
Biocon, to name a few. Most companies have tied up with other
specialist research companies for development of new drugs on
disease areas like cancer, diabetes, malaria and nervous system
disorders.

Similarly, DRL has partnered with ClinTec International for

clinical trials and co-development of its anti-cancer drug. ClinTec
International will possess the marketing rights for European
markets while the commercialisation for the rest of the world and
US markets would be retained by DRL. It has also tied up with
Torrent Pharma for the exclusive marketing rights of its two
hypertension drugs in Russia, where Torrent has a strong market
hold.

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Business strategies comprising collaborative approach for drug

discovery, strategic sourcing and divesting of manufacturing
assets with a buyback business are some of the strategies
increasingly used to work along with Indian MNCs. Co-opetition,
denoting collaboration and competition, whereby companies
collaborate in identifying best practices and sharing various steps
in drug discovery to competing on generics, has been identified
by all leading MNC players and their Indian counterparts. To cite
an example, GSK and Ranbaxy have set up an early-stage
partnership in drug research, under which GSK will provide the
Indian firm with leads, Ranbaxy will conduct lead optimisation
and animal trials, and GSK will take the drug through human
trials. GSK will have exclusive rights to sell any resulting product
in developed-world markets, and the two firms will co-promote it
in India.

Challenges

Challenges facing the industry revolve around manpower and

early stage funding. There is severe paucity of trained personnel,
the only solution being recruiting fresh graduates and training
them on the job. Such a situation leads to rampant poaching of
trained people from other companies.

R&D in the pharma industry is multi-faceted and draws upon the

expertise of molecular biologists, synthetic and analytical
chemists, genomics and proteomics specialists, pharmacologists
and medical practitioners. Closely associated with these are
regulatory and quality assurance functions. However, according
to industry sources, pharma companies find a huge dearth of
skilled resources in the critical areas of early stage drug
discovery as compared to chemistry or analytical chemistry
wherein the talent is easily available.

A considerable challenge faced by the industry is venture capital

(VC) funding, which in India is severely limited. Funding pertains
to private equity (PE) players that invest when the candidate
reaches the development phase. The focus is more towards the
'D' rather the 'R' in R&D. Most venture capitalists are unwilling to
invest in biotech R&D. Rather, they want to fund companies
whose products and markets are clearly identified or
commercialisation of technologies already developed.

Government funding

Government grants are available, but they tend to be small and

typically targeted to government institutions or research bodies.
There is little government support for private sector R&D outside
of that available from the Technology Development Fund, which
finances CSIR-approved projects. However, many state
governments are setting up biotech development funds of their
own and earmarking significant amounts to invest in companies
located within their boundaries. An example is Gujarat Biotech
Venture Fund (GVFL), whose first investment under its biotech

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fund was providing an early stage funding of Rs 2 crore to

Ahmedabad-based Celestial Biologicals, promoted by the Intas
Group. GVFL, formerly known as Gujarat Venture Finance
Limited, is widely regarded as the pioneer of venture capital in
India.

The Small Business Innovation Research Initiative (SBIRI) set up

in 2005 is the new scheme launched by the Department of
Biotechnology (DBT) to boost public-private-partnership effort in
the country. The distinctive feature of SBIRI is that it supports
the high-risk pre-proof-of-concept research and late stage
development in small and medium companies led by innovators
with science backgrounds. The scheme covers all areas in
biotechnology related to healthcare, agriculture, industrial
processes and environmental biotechnology and biomedical
devices and instruments.

The New Millennium Indian Technology Leadership Initiative

(NMITLI) is the largest public-private-partnership effort
undertaken by the Government of India. In the six years of its
existence the programme has evolved 42 R&D projects covering
diverse areas and involving 287 partners (222 in the public
sector and 65 in the private sector) with an estimated outlay of
Rs 300 crore. The role played by NMITLI is best illustrated by
Bigtec. In March 2008, NMITLI came in the news for funding
Bigtec (a biotechnology start-up) that had developed a hand-held
diagnostic device. The Rs 6 crore NMITLI grant helped the
Bangalore-based Bigtec to miniaturise advanced medical
technologies to create a so-called lab-on-a-chip where biology,
chemistry, electronics, optics, micro fluidics and software
converge in a hand-held device that can diagnose a pathogen in
a fraction of the time taken by a conventional system.

Way ahead

As per Ernst & Young's Global Pharmaceutical Center Thought

Leadership Report, Progressions 2006, India has been identified
as an emerging hub for collaborative and outsourced R&D.
According to the report, many global companies are confronted
by a value crisis as they try to sustain a business model based on
high costs of manufacturing, R&D, marketing and sales,
increasing regulatory scrutiny and reimbursement pressures.
Countries that can combine lower cost manufacturing with
adequate regulatory protection of intellectual property are well
positioned to attract large pharma companies, India being a
prime example.

Industry insiders consider a negation of the cost advantage

within the next ten to fifteen years and are preparing for the
next logical step in the evolutionary ladder—progression up the
value curve. The enabling environment for innovation being put
in place and a proactive government doing its utmost to promote
this sector, has formed a unique spiraling effect.

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To thrive in the long term, Indian companies will need to make

the transition towards innovative R&D-driven enterprises and will
need to find creative solutions around challenges such as
insufficient VC and indifferent PE markets. Indian companies
would need to find ways to strike a balance between making high
investments in innovation to help drive future growth, while still
generating short term revenue growths, in order to partake the
high risk drug development market. This would result in more
collaborative drug discovery and development deals with
innovator companies across the value chain.

(The author is Partner and Industry Leader, Health Sciences Practice, Ernst &
Young. The views expressed herein are the personal views of the author and do
not necessarily represent the views of Ernst & Young Global or any of its member
firms)

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