Corporate Front: Strategy [Can the Chemistry Change at Dr Reddy's?]

With Novo Nordisk licensing one of DRL's molecules, it is making a historic shift to a research-based strategy.

It was a rain-cheque-turned-multi-million-dollar deal for the Rs 335-crore Dr Reddy's Laboratories (DRL). On February 23, 1996, researchers from the $2.20-billion Novo Nordisk -- who were in Hyderabad to attend a seminar on diabetes -- drove 20 km north-west out of the city to Dr Reddy's Research Foundation (DRF) at Ameerpet. It was a casual visit: the Danish scientists had heard about DRF filing a patent for a new molecule belonging to the thiazolidinedione class.

DRF had claimed that this molecule lowered insulin-resistance and, hence, was a significant breakthrough in the search for a cure to diabetes. The Danes were impressed, and asked the foundation to continue its tests. In March, 1997, they returned. This time, to sign a $3.25-million licensing-deal with DRL. For the first time, an analogue, dubbed DRF 2593, developed by an Indian company will be put into clinical trials by a global drug major.

Says Kallad Anji Reddy, the 57-year-old chairman of DRL: ''Survival in the new regime depends not just on size, but also on the discovery of new molecules.'' Adds A.R. Mashelkar, 55, director-general, Centre for Scientific & Industrial Research: ''I have always believed that India can become a global platform for pharma r&d. And Anji Reddy has proved that.''

Indeed. In 1991-92, most of DRL's sales came from bulk drugs; by 1997-98, it had fallen to 38 per cent -- and Reddy plans to slash DRL's dependence on bulk drugs to 30 per cent by 2001. Just as well: overcapacity is squeezing margins. Of the 600 bulk-drug manufacturers in Hyderabad alone, 200 have been forced shut down in the last five years. Says D.S. Patel, 49, president, India Drug Manufacturers' Association: ''There are no margins in bulk drugs today. For most manufacturers, it is a lose-lose situation.''

For years, DRL built on its ability to quickly copy and launch a drug in the local market at a price lower than its international price. Explains Satish Reddy, 30, managing director, DRL: ''Most of our competitors lacked speed and range, and that's where we focused ourselves.'' He's right; the company has developed 27 generic brands since 1989.

Consider, for instance, Omez, an omeprazole-based anti-ulcerant. Within two years of the molecule's launch in the US in 1989, DRL introduced Omez at a price of Rs 6 per tablet. Today, the drug has a 29.50 per cent share in the anti-ulcerant market, amounting to 19.40 per cent of DRL's sales. Says Jignesh Bhate, 27, analyst, WI Carr: ''DRL has successfully managed its formulations brands. In future too, that will determine its profits.''

This strategy also helped Reddy arrest the fall in DRL's Earnings Per Share (EPS), which plummeted from Rs 31.30 in 1991-92 to Rs 16.10 in 1994-95. This fiscal, the EPS has gone up, albeit marginally, to Rs 18.42. Clearly, the results are beginning to manifest themselves after two years of stagnation.

In 1993-94 and 1994-95, DRL's formulations-sales stayed at Rs 48 crore, thanks, in part, to a top-end clogging in its three-tier marketing channel. Once the pipeline was decongested by replacing DRL's super distributor with a consignment agent, formulations sales picked up. And by 1997-98, formulations contributed Rs 136 crore to DRL's turnover. Says DRL's Satish: ''To be big in formulations, we had to achieve critical mass in terms of turnover.''

However, over the last five years, DRL has complemented its withdrawal from bulk drugs with huge investments in fresh capacities for formulations and R&D. In fact, between 1992-93 and 1996-97, DRL's gross block rose from Rs 33.76 crore to Rs 109.15 crore. The logic: reengineering of formulations -- or branded generics -- would be possible only till 2005. After that, India would move from a regime of process patents to product patents, thus making it illegal for companies like DRL to copy drugs patented after 1995.

That left DRL with two options. First, attain a critical mass attractive enough for an inventor company to tie up with DRL for marketing rights. Second, discover new drugs by itself. In terms of basic research, DRL's R&D arm is focused on anti-diabetes and anti-cancer molecules. So far, it has filed for 21 patents, and has obtained one on troglitazone polymorphs -- an analogue based on the troglitazone molecule developed by scientists at a Japanese R&D company, Sankyo.

Anji Reddy explains DRF's limited brief: ''It is important to be focused, and to have a good starting- point. Since diabetes and cancer are areas of growing concern here, we decided to focus on them.'' Already, in anti-diabetes, DRF has synthesised more than 200 compounds belonging to the thiazolidinedione class of compounds.

While this is creditable, it does not a drug discovery make. On an average, it costs $500 million and eight to 10 years to develop a molecule into a successful drug. For instance, the $8.51-billion Eli Lilly's annual expenditure on R&D is a staggering $1.50 billion (Rs 6,000 crore) -- which is more than half the Indian pharma industry's turnover. In realistic terms, DRL's Holy Grail is limited to discovering a compound that is fit to be put into clinical trials.

If, and when, a successful compound -- say, DRF 2593 -- becomes a $200-million drug, it could earn its discoverer $20 million in royalties over a 20-year patented lifetime. ''I am more than confident that DRF can do it. In fact, I expect to launch at least one major compound every year,'' says Anji Reddy, adding that the foundation will announce a major anti-cancer molecule analogue later this year.

Meanwhile, to keep his R&D engine humming, Anji Reddy will have to make sure that his formulations business continues to earn fat margins. He has one advantage: 99 per cent of the products in DRL's portfolio lie outside the purview of the Drug Price Control Order. But, if DRF 2593 is any indicator, DRL's future could well lie in developing its presence on the global pharma map.

THE DISCOVERY

Discovering effective new chemical entities takes thousands of man-hours, tonnes of dedication and, of course, a wee bit of luck. Apparently, DRF has been blessed with all three.

The R&D foundation developed DRF 2593 -- the compound finally accepted by Novo Nordisk -- in just 500 days. Cost of discovery: Rs 11.80 crore. The pay-off: $3.25 million (Rs 13 crore).

The molecule class to which DRF 2593 belongs -- thiazolidinediones -- was first discovered by a Japanese R&D firm, Takeda. In the early 1980s, another Japanese research lab, Sankyo, developed troglitazone, which became the first -- and thus far the only -- thiazolidinedione to be marketed in this class.

Thiazolidinedione treats diabetes by striking at the very root of the problem: insensitivity of the target tissue to insulin. By making the tissue more sensitive to insulin, it increases the absorption rate of glucose into tissues. Moreover, vivo tests on mice show that troglitazone also restores insulin content.While DRF has finished the pre-clinical trials on DRF 2593, the three phases of human trials are being conducted by Novo Nordisk, which will stagger the licensing-fee through each of these milestones. And when the drug is put into commercial production, DRL will earn a royalty of 10 per cent on sales. While DRF is now focusing on improving DRF 2593, it will have to licence all subsequent analogues of this class to Novo Nordisk.