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      Drugs race for Indian firms

      Posted AtThe Standard

      Four years ago, Anji Reddy came tantalizingly close to realizing his life's ambition: discovering a blockbuster drug.

      In late 2001, Dr Reddy's Laboratories, the company founded in 1984 by the chemist-turned-entrepreneur, had a promising new compound that would treat diabetes in the obese by simultaneously lowering glucose and lipid levels in the body.

      In July 2002, the Indian dream came crashing down.

      Danish company Novo Nordisk, which had licensed the compound from Dr Reddy's to conduct clinical trials, aborted the project at the penultimate stage of the US approval process when laboratory rodents developed bladder cancer.

      With that setback, it appeared that the Mumbai and New York-listed Dr Reddy's was doomed to remain a "copycat," the Western media's less- than-flattering label for Indian drugmakers.

      Indian imitators are adept at making generic copies of branded drugs. According to Goldman Sachs Group, Indian companies filed a quarter of applications for licenses to sell duplicate versions of approved drugs in the United States last year.

      It's easy to figure why. Universities in India graduate 12,000 PhDs in chemistry, six times as many as in the United States, annually. Thanks to an abundant supply and a reasonable cost of living, organic chemists in India come for a third of what they would cost in most developed countries.

      Original research, by contrast, requires more than cheap chemists, Bunsen burners and a battery of copyright lawyers. Finding a blockbuster means spending 10 years or more sifting between 5,000 and 10,000 compounds. And even then, after sinking US$800 million (HK$6.24 billion) in the project, success is not guaranteed.

      In 2002, Ranbaxy, India's biggest generic drugmaker, licensed out to Germany's Schwarz a prostate drug it was hoping would do great things for the company.

      Schwarz halted development work on the compound in the second stage of clinical trials last November.

      Not surprising then that only a third of Indian drugmakers' measly US$170 million research budget is dedicated to so-called new chemical entities, according to Goldman Sachs.

      That's going to change rapidly because of what Plato said about necessity being the mother of invention.

      The need in this case is coming from the increasing uncertainty of the generic business.

      The transformation, already under way, presents a good opportunity for investors with a strong appetite for risk. In the past two years, Ranbaxy and Dr Reddy's have been the worst performers on the 30-strong Bombay stock exchange's Sensitive Index, losing more than a quarter of their values.

      The pessimism may be nearing its end. In the past month, Dr Reddy's shares have risen 10 percent, while the Ranbaxy stock has gone up 7.5 percent, without a whiff of good news about the generic business.

      Dr Reddy's hasn't overturned a blockbuster patent in the United States since it successfully challenged Eli Lilly's best-selling antidepressant, Prozac.

      That was in 2001.

      Being the first to knock down a patented drug gives the challenger a six- month window to sell its copy exclusively in the world's biggest pharmaceutical market. But, once other imitators enter the market, prices slump so rapidly that it gets extremely tough to make money even with a high market share.

      Ranbaxy has 19 molecules in which it has been the first to file patent challenges. As much as 57 percent of this US$22.7 billion pipeline is under litigation, chief executive Brian Tempest told investors.

      A new, more stringent patent law that came into force this year in India has added to the urgency for homegrown drug firms to start inventing.

      Several global drug companies are now expected to invest in their own research facilities in India, something they've been reluctant to do in a lax copyright regime.

      That will push up wages for chemists and put further strain on research budgets of domestic companies that are still searching for their first blockbuster.

      Ranbaxy now has an anti-malaria drug in the second stage of clinical trials. Mumbai-based Nicholas Piramal is testing a cancer drug in Canada. Reddy has his hopes pinned on a drug that might stop - even reverse - plaque formation in blood vessels.

      If the treatment works, heart patients can get their clogged vessels cleaned up in weeks rather than the years it takes to do the same by giving up smoking and cheeseburgers.

      Pfizer's 12,500 scientists had a budget of US$7.9 billion last year, all paid for by revenue from just one drug - Lipitor, the cholesterol fighter. Reddy has a budget of US$20 million and 300 chemists working for him at Atlanta and Hyderabad, the company's home base in southern India.

      What makes Reddy think he stands a chance?

      "It's absolute nonsense," he said, "to think that productivity in science is directly proportional to money."

      Money, nonetheless, plays an important part. Dr Reddy's has transferred four of its new chemical entities to Perlecan Pharma, a company it recently set up with initial equity of US$52.5 million provided by the venture capital units of Citigroup and ICICI Bank, India's second-biggest lender.

      The deal has reduced research costs for Dr Reddy's, playing a part in boosting second-quarter profit by 72 percent.

      Indian drugmakers are getting both savvier and more serious about research. Being a copycat is losing its charm. Investors might do well to take notice.

      November 28, 2005


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