Less than a month after shuttering a financially unviable factory in Pune, Ranbaxy Laboratories Ltd is considering multiple options to generate more returns from its heavy investments in research and development (R&D). The options include hiving off the testing and development services part of its R&D facility into a separate company and partnering a leading clinical trials firm, two people familiar with the situation said.
Ranbaxy “is in talks with a few multinational players in the drug development business to set up a joint venture company that will undertake development services of Ranbaxy as well as similar projects from outside”, one of the two people said, asking that he not be identified because a final decision on the proposal is yet to be taken.
A second option under consideration is to expand Ranbaxy’s partnership model in core drug discovery research. The Gurgaon-headquartered firm, which signed a multi-year agreement with global drug maker GlaxoSmithKline Plc. for drug discovery research in February this year, is keen to forge similar partnerships with more players. “This will help reducing dependence on the parent company (Ranbaxy) to sustain high-cost R&D and will also optimise utilization of the already created infrastructure,” the person said.
“The moves are in the view of turning the research infrastructure, including the technical capability and the scientific pool, to its optimum use along with ensuring a regular cash flow by way of service fee and also milestone payments from discovery partners,” said the second person, a senior executive of Ranbaxy, who asked that he not be identified because he is not allowed to speak to the media.
India’s second largest drug maker, Ranbaxy, which has one of the largest R&D budgets among Indian peers, has four R&D centres and a team of more than 1,200 scientists. The company’s annual R&D spend at present is 6-7% of its revenue. Ranbaxy ended 2006 (it follows a calendar year for accounting purposes) with revenues of Rs6,069.8 crore.
A company spokesman said there were no immediate plans to restructure Ranbaxy. “The R&D set-up is an integral part of our company at present and (there are) no plans to separate it as on today,” said Ramesh L. Adige, Ranbaxy’s director of corporate affairs and global corporate communications. “But, we are open to take up any new opportunities on the R&D front, which will ultimately enhance shareholder value,” he added. Ranbaxy managing director Malvinder Singh had told Mint in July that he “was open to all options, but this does not mean anything is being done immediately”.
Ranbaxy’s off-patent or generic drugs R&D pipeline has about 88 drug applications pending with the US FDA (food and drug administration) for approval; about 20 first-to-file generic drug candidates that can be commercialized soon; and four new drug compounds at various development stages.
A Mumbai pharma analyst, who tracks Ranbaxy closely, said the moves being considered augured well for the drug maker. “It will be a wise move if Ranbaxy can share the investment risk to sustain the high-cost R&D, which is a must for the future growth. But the real success will depend on how they structure it,” said Kirit Gogri of ASK Raymond James Securities India Pvt. Ltd.
The options being considered are part of a larger restructuring of operations at Ranbaxy. In R&D work on generic drugs, the company recently shifted all its bio-equivalence studies from the US and elsewhere to Gurgaon. And it closed down its 100-employee facility at Jejuri in Pune last month.
Both these steps were initiated to enable maximum capacity utilization of existing facilities, which will help save on operational costs significantly, said the company executive.
The changes are seen as well-timed for Ranbaxy. One of the Top 10 generic drugs companies in the world, it faced a significant drop in profits in 2005 due to severe price competition in the US drugs market (at $252 billion or Rs10.33 trillion, the biggest pharmaceuticals market in the world) as well as a series of regulatory and patent-related issues. The company made a sharp recovery with its profits nearly doubling in 2006.
Ranbaxy, which spent more than Rs2,000 crore on multiple acquisitions in 2006, carries more debt on its books than most other Indian drug firms, around Rs3,178 crore as on 31 December 2006, nearly three times the previous year’s number. So, said an analyst with a leading equity research company in Mumbai, “a strict financial discipline along with a business consolidation of the acquired businesses on expected lines would help taking the company back on track”. The analyst did not wish to be identified.
Two other leading drug makers , Dr Reddy’s Laboratories Ltd (DRL) and Sun Pharmaceutical lndustries Ltd, have spun off their R&D operations into separate companies in the last 15 months. Sun hived off its research work into a fully-owned unit in late 2006, ahead of a July listing.
DRL floated Perlecan Pharma together with ICICI Venture Funds Management Co. Ltd and Citigroup Venture Capital International Growth Partnership Mauritius Ltd in May 2006.