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G. Madhan

DESPERATION triggers innovation. That seems to be the message from the sharp step-up in expenditure made by major pharma companies on research & development (R&D) in 2002 vis-à-vis 2001.

Large pharma companies (Rs 500 crore and above) have, on an average, witnessed 56 per cent increase to their R&D expenses. As a percentage of sales turnover also, it has risen from 3.7 per cent to 4.4 per cent.

Mid-sized companies (Rs 200-500 crore) on the other hand have witnessed 41 per cent growth to their research expenditure. However, as a share of these expenses as a percentage of sales, it has come down by 0.7 percentage points to 3.6 per cent.

The increase in the R&D expenses holds significance because of two reasons. First, the lucrative returns in the emerging generics market, and second, the product patent regime which will take effect from 2005.

At the current juncture, the companies are keen on the generics market, especially Western Europe and North America. This is primarily because of the returns that could be obtained by catering to these markets.

For instance, for Fluoxetine, a 40 mg anti-depressant formulation, Dr Reddy's Labs challenged the existing patent and obtained six-month marketing exclusivity in the US from the US Food and Drug Administration. This product contributed 21 per cent of the total sales of the company in 2001-02.

However, entering the highly regulated generic markets, which have high entry barriers due to the stringent regulatory norms, is possible only if the companies have research capabilities and production facilities that have the endorsement of regulatory bodies of the respective countries.

Besides, strong R&D skills also improve their competitiveness to produce high-quality non-infringing bio-equivalent generic drugs that could be sold in these markets.

Hence, the increase in the R&D expenditure of large pharma companies, which includes the expenses involved in developing a novel process, legal expenditure, etc., assumes significance.

The impending product patent regime in 2005 has also pushed the pharmaceutical industry to spend more on R&D.

The obligation to fulfill WTO's norms by honouring product patents from 1995 onwards also appears to have induced them to spend more on research.

In other words, these companies cannot replicate and sell molecules that have been patented after January 1, 1995. Hence, creating something at the proprietary level becomes key to survival.

Some of the major companies have already started inventing new chemical entities and licensing them out for clinical trials.

Increasing emphasis on R&D skills has also helped these companies in other ways.

For instance, some firms develop novel drug delivery systems (NDDS) for the existing molecules - to control the rate at which a drug dissolves in the blood - and out-license the same to the original patent holders.

NDDS help the originators extend the life of the existing product patents and in return, more money to the company that develops the same.

For instance, Ranbaxy is receiving milestone payments ever since it out-licensed Ciprofloxacin NDDS to Bayer AG, a modification of the German major's Ciprobay. If the product is successfully commercialised, Ranbaxy will also get royalties.

The sops provided by the Budget also appear to augur well for companies inclined towards research.

Measures such as tax holiday for R&D, exemption of drugs and materials used in clinical trials from customs or excise duty and reduction of duty on import of reference standards from 25 per cent to five per cent are expected to boost basic research.

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