Hyderabad: The board of Dr Reddy’s Laboratories Ltd is likely to pull the plug on a much-heralded business venture that created a so-called special purpose vehicle—Perlecan Pharma Pvt. Ltd—for drug discovery research, as early as 23 October.
Dr Reddy’s was the first Indian drug company to hive off its drug discovery related research and development (R&D) activities into a separate firm, when it set up Perlecan in September 2005.
Sun Pharmaceutical Industries Ltd and Nicholas Piramal India Ltd then followed suit and hived off their drug discovery units into separate entities.
Wockhardt Ltd is also believed to be in the process of doing the same.
Dr Reddy’s informed the Bombay Stock Exchange (BSE) this week that the board will meet on that day to not only consider the unaudited financial results for the quarter and half year ended 30 September, but also a proposal to absorb Perlecan.
Dr Reddy’s declined to comment citing the so-called silent period prior to announcing the second quarter financial results on 23 October.
If the board clears the move, Perlecan would become a part of Dr Reddy’s and turn into an in-house research facility.
That would formally put to rest a model seen as an innovative Indian model to de-couple the risk and long-term gestation of drug development from the parent company.
Indeed, “the formation of Perlecan acts as a precursor to many more exciting partnerships in the area of drug discovery and development”, Dr Reddy’s chairman K. Anji Reddy had said in September 2005 when announcing Perlecan.
The latest move by Dr Reddy’s comes not long after venture capital firms ICICI Venture and Citi Venture Capital International exited Perlecan in June.
In September 2005, as part of the first phase of its $52.5 million (Rs257 crore today) funding commitment, the firms had invested $26 million in Perlecan for an 86% stake.
Industry observers interpreted that as a thumbs down for the future of innovation and drug discovery in the entire Indian pharma sector, which—despite its size and revenues—is yet to develop and commercialize a single new drug on its own.
“The initial enthusiasm of private fund houses and the positive response from the market is long gone. There is increasing awareness of the high risk and extremely long gestation periods involved in this capital intensive business of drug discovery,” says Sujay J. Shetty, who specializes in pharma and life sciences at audit and consulting firm PricewaterhouseCoopers (PwC).
In June, Dr Reddy’s had said it would pay $18 million to buy back the 86% in Perlecan from Citigroup and ICICI, which held 43% each.
Some analysts said that Citi and ICICI wanted out as the commercial viability of the drug candidates under development was doubtful. Following the buy-back, Perlecan became a wholly owned subsidiary of Dr Reddy’s.
“Private equity investors are still going slow in this new space and are taking their time to understand this unique risk-return profile,” explains Hitesh Gajaria, executive director at audit and consulting firm KPMG India. “In light of the current economic scenario, raising capital is a challenge, particularly when the visibility of future revenue inflows is unclear. Hence, at least currently, we cannot expect increased funds from financial investors to flow into this business segment as a whole.”
Gajaria says he still believes the original Perlecan model is viable as it “provides the much required flexibility and opens up opportunities for these players to scout for innovative funding options”.
It is the funding, however, that has become a stumbling block.
“Spin-off R&D entities are a good model in theory, but unfortunately, at present is not a financially viable model as external funding sources are drying up because of the high risk and long gestations involved,” notes Shetty of PwC.
Perlecan had four drug candidates when it started.
However, two of them—RUS 3108, a cardiovascular drug candidate, and DRL 11605, for metabolic disorders—were dropped along the way as results were not promising.
Perlecan is the name of a protein that Dr Reddy’s was betting on in its RUS 3108 cardiovascular drug candidate to find a cure for atherosclerosis, a condition that could lead to a heart attack.
Perlecan still has DRL 16536, which is for the treatment of diabetes and obesity, and DRF 10945, for type 2 diabetes—which are drugs in various stages of development.
Dr Reddy’s shares rose 1.8% to close at Rs454.40 on Thursday on BSE, whose benchmark Sensex index lost 2.1%.