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Cover Story

Does R&D Really Pay?

Issue Date - 03/02/2011
The Indian pharmaceutical industry has been growing at a rate of 13%-14% in the past five years, a significant increase compared to 9% growth witnessed between 2000 and 2005. And although there are few in number, some companies are truly experimenting with a greater R&D play, and also making it work for them.

In financial year 2009-10, Aurobindo Pharma invested about Rs.1.8-2 billion in R&D. “Our company’s R&D strengths are developing intellectual property in the area of non-infringing processes and resolving complex chemistry challenges. We are also focusing on developing new drug delivery systems, new dosage formulations and introducing new technology for better processes,” says a spokesperson of Aurobindo Pharma. The company, traditionally a strong player in semi-synthetic penicillins (SSP) and cephalosporins, has built up its strength in the formulations business too. From just about 11% in FY 2005, the formulations business now accounts for more than half the sales revenue pie. Aurobindo Pharma, which has 800 scientists in its team, has created around 2,000 drug muster files (DMFs) of suitability for various markets. Further, it markets over 200 APIs (Active Pharmaceutical Ingredients) and 300 formulations.

Sun Pharma is also making confident strides into research. Last fiscal, it had invested Rs.2.24 billion for the purpose. Not only this, it has spent more than Rs.60 million to pay its research team. The firm started investing a proportion of its turnover in R&D activities in 1993. Sun Pharma has a range of APIs including complex actives like anti-cancer, steroids, peptides and hormones which are manufactured in dedicated areas that follow international norms for systems and processes. In July 2010, Ranbaxy’s NDDR was transferred to Daiichi Sankyo India Pharma Private Limited. “Within Ranbaxy, research of generic drugs will now get appropriate focus, as the company is increasingly working on specialist areas,” admits a Ranbaxy official.

One of the most significant challenges is manpower, particularly at the senior levels. As a report by the Korn/Ferry Institute points out, finding people competent enough for the position of Chief Scientific Officers has been an onerous task since years. Mid-career expats have been hired by companies, but they lack managerial experience. Moreover, Indian firms lack considerably in terms of experience and gumption to undertake R&D like its counterparts in the west, and the recent quality issues faced by some drug companies have not helped its cause. Ashish Singh, MD, Bain & Co. India and his colleague Karan Singh advocate riding on three successive waves of opportunity. In the first wave, it is about “faster & cheaper” drug development that involves chemistry research, clinical trials & manufacturing. The second will leverage on “more complex manufacturing of injectables; targeted and cutting-edge clinical trials, and more-sophisticated biology-based research platforms.” The third opportunity, which they expect to come by 2013-15, is when Indian drug manufacturers may start manufacturing “biologics (recombinant proteins) and offer cutting-edge disruptive R&D platforms such as pharmacogenetics and cheminformatics.” In the beginning, they have the unique opportunity of tying up with global players for understanding their R&D processes and steadily developing robust and profitable R&D ventures on their own. And hopefully, they should be able to make them more sustainable than their western counterparts.

By Deepti Singh & Ridhima Chugh

COMMENTARY : Prof. Arthur A. Daemmrich, Harvard Business School
Vicious and Virtuous Cycles in Research & Development!
Prof. Arthur A. Daemmrich of Harvard Business School, talks about the declining investments in R&D in the chemical industry and the after-effects of such strategies....

The chemical industry has a rich history of innovation. While its origin dates back to firms that extracted and purified metals and inorganic compounds in the mid-nineteenth century, the modern chemical enterprise took shape with the mass production of synthetic organic dyes and the founding of industrial research laboratories between 1870 and 1900. Since then, chemical firms have expanded their activities around the globe and their outputs have helped change nearly every facet of people’s lives. Research labs in the chemical industry generated more than patents and consumer products. They also spun off entirely new business sectors. The pharmaceutical, aerospace and electronics industries, all have their roots in inventions and discoveries made by scientists at chemical companies. Yet, the core chemical industry sometimes seems unchanged by these offshoots: plastics, synthetic fibers, ethylene and other commodity products dominate the chemical trade press even as electronics, biotechnology and nanotechnology capture the public’s imagination.

Nevertheless, the chemical industry has undergone significant changes in recent years. A wave of mergers since the 1980s consolidated the industry and led to research on a scale unimaginable to the scientists who worked for Bayer, Hoechst, DuPont, and other firms in the late 19th century. While the size of firms have increased in the past two decades, the funding dedicated to R&D has suffered under stringent cost-cutting measures and restructuring. In recent years, business analysts and industry commentators have noted that the industry appears to be both rudderless and out of ideas for new products. Describing the funding available for industrial research as flat or even declining, one headline states “R&D environment looks tough.” Other commentators have suggested that innovation may have hit a limit in delivering growth to an industry dominated by the production of commodities. Product lines remain unchanged, while the manufacturers merge or go out of business. As a result: “During the last decade, only one major chemical had to disappear from the top twenty highest volume chemicals produced in the United States to make room for another new chemical product. During that same period, however, at least half of the top twenty global players in the chemical industry have either disappeared from the top twenty list or have transformed their portfolio beyond recognition.”

Innovation involves bringing novel concepts and new products and processes into widespread use. An innovation that never reaches the market remains a clever invention, little more. At the same time, the process of bringing products to a successful market position is laborious, expensive, and fraught with points of likely failure that include the laboratory, regulatory review, scale-up to mass production, and response by global markets. So why do firms invest resources and take on the risks of failure? Do the motivations for investing in R&D change over time? Is support for R&D cyclical, like demand and production of commodity chemicals?


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