CEO Brian Tempest: Last year, the UK-born Tempest succeeded D.S. Brar, a man as much credited for Ranbaxy's success as Parvinder Singh himself

On the sixth of this month, Ranbaxy's corporate headquarters moved from the congested business district of Nehru Place in South Delhi to a spanking new building in the satellite town of Gurgaon. Spread over three floors and 130,000 sq. ft., the new state-of-the-art office would bring all corporate departments under one roof, besides offering improved facilities. But that's not what has Ranbaxy's British CEO Brian Tempest excited. A doctorate in chemistry from Lancaster University, the 57-year-old is kicked about the proximity the new corporate HQ affords to the company's R&D labs-it's barely a five-minute drive by car, compared to the hour-long ride from Nehru Place. "I am part of the R&D community," says Tempest. "We have four R&D buildings (in Gurgaon) and I spend at least two days a week in the labs."

Tempest's enthusiasm for R&D is neither solitary nor atypical. For all effective purposes, R&D is what drives the global pharma industry and, therefore, Ranbaxy. Not surprisingly, it's something nobody in the company is allowed to forget. When Business Today asked Tempest and his No. 2 and scion of the Ranbaxy-promoter family, Malvinder Mohan Singh, to pose for a photograph, they chose the labs for a locale. Earlier, Tempest had held a meeting on-try and beat this-corporate governance at one of the labs, and Singh, President and in charge of international operations, prefers to be debriefed by his country managers at the R&D centre too. "It gives them a first-hand experience of what the company is about," says the 32-year-old Singh.

He can say that again. Launched in 1952, Ranbaxy remained until the early 90s, a small manufacturer of bulk drugs. And it was Parvinder Singh who, impatient with the pace and strategy, wrested control from his founder-father Bhai Mohan Singh and made Ranbaxy focus on R&D and international markets for generics, which are off-patent drugs and hence open to all to manufacture. Ranbaxy spent the 90s beefing up its R&D and distribution abroad. More importantly, it learnt how to navigate the complicated world of global regulations and patent rules. Says Rajiv Gulati, CEO of Eli Lilly in India and a former Ranbaxy hand: "Dr. Singh was at least three years ahead of others in the industry."

Malvinder and Tempest: Grooming the Ranbaxy scion to become the CEO is one of Tempest's responsibilities. Making Ranbaxy the #5 generics player, another

For instance, he was the first to exploit the Indian Patents Act of 1970 (it legalised manufacturing copycat drugs through different processes) by bringing in new molecules; Torrent and Cadila followed later. Singh was the first to invest in a bulk drug plant in Mohali while others were still importing it. Being ahead of the curve has more than paid off. By February 2004, Ranbaxy had crossed $1 billion (Rs 4,500 crore at the then exchange rate) in revenues, compared to the Rs 334 crore it racked up as recently as 1992. Says Ranjit Shahani, Vice Chairman and Managing Director, Novartis India: "I remember meeting Dr. Parvinder Singh around the same time the $1-billion target was set. The visionary zeal I saw in his eyes will stay with me forever."

Today, Ranbaxy is the world's eighth largest generics manufacturer and the only $1-billion plus Indian pharma company. It is targetting $2 billion (Rs 8,800 crore) revenues by 2007 and by $5 billion (Rs 22,000 crore) by 2012. Few doubt Ranbaxy's ability to meet those targets. It is already the third-largest filer of ANDAs (abbreviated new drug applications for generics) with the US Food and Drug Administration. In the past decade, it filed 146 ANDAs, 96 of which have been approved and 50 pending. To keep up the flow of ANDAs-crucial to maintaining growth of its bread-n-butter generics business-Ranbaxy plans to hike its R&D budget from 6 per cent of revenues to 10 per cent by 2007. "The idea is not to lose sight of the long-term goals," says Singh, who may take over from Tempest when his term ends in 2007.

High Stakes Game

While launching copies of branded drugs seems like a fairly easy thing to do, the fact is it is not. It has its fair share of R&D challenges, but the biggest challenge is timing. You simply have to be the first to hit the market as soon as the branded drug loses its patent protection. Why? Typically, as more and more copycat manufacturers enter the fray, the market price of the drug crashes. Therefore, the timeframe within which a manufacturer must sell at prices close to that of the branded drug is small. That means, a company like Ranbaxy needs the generic copies to keep flowing year round to tot up sizeable revenues.

There is another strategy that a drug maker can adopt to beat the generics price competition. Take an existing drug and make significant value addition either to its efficacy or delivery. In the industry parlance, it's referred to as Novel Drug Delivery System (NDDS), a route that Ranbaxy has increasingly adopted. The innovation not only fetches price premium but also patent protection. Take the breakthrough Ranbaxy managed with Bayer-patented ciprofloxacin. To be effective, Bayer's drug needed to be taken several times a day. Ranbaxy, however, came up with an improvement that cut the required dosage to once a day with the same effect. It not only out-licensed the technology for a cool $65 million (Rs 286 crore) to Bayer, but also earned royalties on resulting sales.

Eventually, though, Ranbaxy would want to be in a position to launch new drugs on its own. That's what global giants like Pfizer do, and that's also what fetches them billions of revenues. Ranbaxy wouldn't talk about its new drug discovery research (NDDR), except to say that half of its R&D is now spent on it. Already, there's promising result to show for it. It claims to have made "some headway" with three new chemical entities (NCEs) in the areas of asthma, urology, and malaria. These are at various stages of clinical development. There are seven others that have been identified and also in the development pipeline.

However, there's one NCE that Singh is willing to talk about. It is for malaria, and has entered phase two of clinical trials. The molecule is aimed at mainly the underdeveloped countries, and could fetch as much as $400 million (Rs 1,760 crore) a year if launched. Even if the molecule fails at the final phase three of trials, Ranbaxy is taking it as an opportunity to go through the entire grind of drug discovery and development, which includes everything from understanding the chemistry of diseases to managing clinical trial data to getting regulatory approvals.

No drug company, no matter how big or how deep its R&D pockets, can claim mastery over drug research. It's a business fraught with risks. It takes about a billion dollars and a dozen years to bring a drug from the labs to the marketplace. Ranbaxy was reminded of its perils recently. In 2002, it had out-licensed an NCE, codenamed RBX 2258 (for treating the enlargement of the prostate gland in people above 50 years), to Germany's Schwarz Pharma for further development and clinical trials. But Schwarz had to abandon trials in late phase two due to a lack of desired results, measured in terms of safety, efficacy and superiority.

BEST PRACTICE

R&D @ work: A potent mix If innovation is what drives Ranbaxy, then how does it keep the R&D engine humming? It uses the same strategy that it employs to market drugs: Give people targets and motivate them. For example, it targets to have one NCE (new chemical entity) in the market by 2012, and several others in the developmental pipeline. Starting 2007, it plans to have four IND (investigational new drug) applications in the pipeline. There's a formal mechanism to reward employees for new ideas. It has launched a project called crusoe that works on improving operational efficiencies. Under this project, employee suggestions are not only captured, but encouraged via contests. CEO Brian Tempest himself spends two to three days in a week visiting labs and talking to scientists. Ranbaxy's research and innovation edge owes a lot to its late Chairman and Managing Director Parvinder Singh. He was one of the brightest doctoral students at the chemistry department of the University of Michigan. After he joined his father Bhai Mohan's business in India in 1967, Singh had a different vision for the company. He nurtured the dream of making Ranbaxy, a research-based pharmaceuticals firm rather than a plain manufacturer of bulk drugs and formulations. Says Ranjit Shahani of Novartis India: "Ranbaxy has strong contours of a company that is innovative with a strong entrepreneurship and perseverance. I am sure it has not been easy to struggle with the international image which has collectively labelled the India pharma industry as trespassers of intellectual property rights." As a drug-maker with limited means and unlimited ambition, Ranbaxy couldn't have asked for a better compliment from Big Pharma.

If the trials had been successful, both Ranbaxy and Schwarz could have had a go at the prostate drug market worth $2.2 billion (Rs 9,680 crore). But that's part of the game. Only one out of 10 new molecules hits the market, and if the trend at Big Pharma is anything to go by, that number is only coming down. So, as for NCEs, Ranbaxy is in for the long haul and will not be a Pfizer or an Eli Lilly for some time to come. Says Habil Khorakiwala, Chairman of Wockhardt: "Ranbaxy has had its share of successes and failures. But it has still gone ahead and invested in research."

In the generics space, it hopes to become the fifth largest player in the world by 2012. Once again, that may not be an impossible target. It has a presence in 125 countries across the world, and 47 of them have country managers (mostly non-Indians) directly responsible for performance. Now, Singh says, he wants to enter a new market every month. "Maybe 20 years hence, we will have more than 100 country managers." The numbers themselves don't reveal Ranbaxy's strategy behind it, which is to understand each and every market independently and collectively. Says Tempest: "We see ourselves as a global pharma company and so have to make sure that we have people, say, in the us who understand the Indian scenario and people in India who understand the us scenario."

Each country manager thinks like an entrepreneur and has a free hand to do things required to grow the market. Some critics, however, argue that Ranbaxy risks putting its "entrepreneurs" ahead of processes. "Sometimes managers tend to be overprotective about their turfs," says one old-time Ranbaxy watcher. Singh counters that saying the company tries to strike a balance between entrepreneurial spirit and rigid processes. "We are too large to have a single model," he says.

In any case, the key risk ahead of Ranbaxy is not competition among its managers. Rather, it is of innovation. The generics business tends to be lumpy (there's a spike in sales when a branded drug goes off patent, and subsequently revenues fall sharply), and to move into the more profitable and longer-lasting segment of patentable drugs, it will have to gun its R&D engine and prepare to fight expensive and long legal battles across countries.

Its current battle against Pfizer is typical of that. Ranbaxy has challenged a couple of patents held by Pfizer for its cholesterol-lowering drug, Lipitor. Analysts widely expect the Indian company to win its challenge in Europe (a decision is expected in April this year), but the one in the US may carry on for sometime (it may go up to the Federal court, so a decision is expected only by mid-2006). Of the $10 billion (Rs 44,000 crore) Lipitor fetched worldwide last year, $1.1 billion (Rs 4,840 crore) came from Europe. So that's a whole lot of money that Ranbaxy is chasing. In fact, some analysts expect a Lipitor win to boost Ranbaxy's stock by Rs 350.

Even if the courts send Ranbaxy reeling down to the mat, don't expect Tempest and Singh to hang up their gloves. More likely, they'll wipe the blood off their noses, dust their clothes, and head right back into their R&D labs. It's that doggedness which has got them this far-and what will take them farther.