Orchid spins off research

Orchid Chemicals and Pharmaceuticals has announced the formation of Orchid Research Laboratories, a subsidiary that will house all of Orchid's research and development activity. With this, the Chennai-based pharmaceuticals company has become the third of its tribe to spin off research and development, prone to risk, into a separate company.

About three weeks ago, the Mumbai-based Sun Pharma spun off its research and development services into a separate listed company, Sun Pharma Advanced Research Company (Sparc). Hyderbad-based Dr Reddy's Laboratories pioneered the concept in September 2005, with the formation of India's first integrated drug development company, Perlecan Pharma Private, with equity capital commitment of $52.5 million from the Citigroup Venture and ICICI Venture.

Although more linked to the financial and market sentiments than a strategic business ploy, the model followed by the three companies are totally different from one another.

While strategic investors prefer companies with a good pipeline of drugs than traditional generic companies, portfolio investors get worried about the high research and development investments in the long-term projects such as new chemical entity (NCE) research and development.

While formation of Perlecan Pharma was mainly to insulate the shareholders of Dr Reddy's from the high risks associated with drug research and to pump in external capital for drug research, the birth of Sparc was more linked to offering the shareholders of Sun Pharma short and long term options for investment in either Sun Pharma or Sparc.

According to Dr CB Rao, deputy managing director, Orchid, formation of ORLL is mainly to integrate and focus research and development activities of Orchid under an umbrella and to enter the contract research and manufacturing services (CRAMS) market as an end to end service provider in a big way by leveraging the manufacturing capabilities of Orchid.

While Sparc pins its hopes on outlicensing one or two molecules in the pipeline in near future to infuse fresh capital, ORLL is open to the idea of attracting external capital in the long run to pursue further research. It also hopes to outlicense its diabetic molecule BLX-1002 in the near future. The drug is currently undergoing Phase IIA clinical trials in the Europe.

The business of generic drug manufacturing, in which Indian pharma companies have traditional strength, and that of novel drug research involving uncertanity, high risk and huge capital investment during trial stage are totally different businesses to manage and that can be regarded as one of the main reasons for viewing both businesses as separate entities, feel officials of the companies which hived off their research and development activities to separate companies.

"Investing in generic business is relatively safe as the success rate of developing a new drug delivery (NDD) mechanism and processes is very high. NCE research is highly risky and requires a minimum gestation period of about 10 years. Naturally, the common shareholders who look at immediate gains are concerned about this investment," said Uday Baldotha, president, investor and international relations, Sun Pharma.

"Perlecan Pharma provides Dr Reddy's drug discovery programme a model to rapidly advance the existing as well as future NCE assets through Phase-II trials and seek out-licensing, co-development or joint commercialisation opportunities thereby enhancing the value of the pipeline," said a Dr Reddy's spokesperson.

However, Glenmark is not planning to go down this road, saying the model of spinning off research and development into separate company is not followed by any of the global generic companies. "Currently, we don't find any need for setting up a separate research and development company," said Glenn Saldanha, MD and CEO of Glenmark.

Another expert noted that pharmaceutical manufacturing was a knowledge-intensive industry driven by research, and hiving off the key division to a separate business might not augur well for the generic companies in future. Financial and issues related to manufacturing could crop up between the parent company and the research and development company during the commercialisation stage of developed molecules.