At a time when top Indian drug makers are spinning off their research divisions into new companies and listing them, a global drug expert has expressed doubts on the ability of Indian markets to understand and fund such risky business models.

KPMG’s global head of pharma practice John Morris.

“I’m not sure listing is the right answer. The spun-off research and development (R&D) units need a critical mass and they are going to need numbers like $100-200 million (Rs393-786 crore)," says John Morris, global head of pharmaceutical practice with consultant KPMG International. “Those are not the sort of numbers that the Indian stock markets are going to fund at such levels of risk."

“The (Indian) capital market is not big enough and not mature enough" to have an appetite for drug R&D companies with a payback period of as much as 12 years, Morris insists. The funding will come from tapping private equity investors, funds from West Asia and Russia or partnerships with global pharmaceutical companies who will stick around longer to get returns and are accustomed to investing in high-risk ventures, he suggests.

Indian drug companies typically invest 7-9% of revenue in new drug research for the past few years, well below the international average of 14%.

A KPMG study pegs the R&D investment by Indian companies at $500 million in 2010 and $1.2 billion by 2015. As more drug molecules enter the last stage of development, typically involving costly, large- scale human trials, the need for financing will be more acute than before.

Drug companies see hiving off such research units into separate companies as a way to attract investors and ­alliances.

There is early evidence that Morris may be right. The shares of the only Indian listed company focused on drug research, Sun Pharma Advanced Research Co. Ltd (Sparc), are trading at a discount to its debut price.

The stock listed on the Bombay Stock Exchange (BSE) on 18 July at Rs87.15 a share. It closed Monday at Rs83.25, some 4.48% below the initial public offering price.

In the same period, the Sensex, the benchmark index for BSE, rose 22.46%.

Sun’s experience could spell trouble for other R&D-focused entities such as Nicholas Piramal India Ltd, which has decided on listing its research arm, and Ranbaxy Laboratories Ltd, which is leaning toward such listing.

“The new entity will be listed by next year. By keeping the discovery research as an independent unit, we can invest much more and create many more alliances," Ranabxy’s chief executive Malvinder M. Singh had said at the time of announcing the de-merger.

Sun’s managing director Dilip Shanghavi says the company’s “essential purpose in listing Sparc was to attract sophisticated, sector investors who understand uncertainty and risk" and that being public makes it easier to “share information with the public."

Not everyone buys Morris’ views. Nicholas Piramal’s director of communication and alliances, Swati Piramal, says “sector analysts have begun to understand it and their research reports are fairly accurate in estimating the worth of the pipelines. Investors will follow soon." Nicholas Piramal spends about 5% of its annual sales, or $25 million, on R&D. Piramal also said there was “a possibility that big global drug makers themselves take a stake in these" hived-off drug units as they understood the sector.

But, Piramal says, even global pharmaceutical companies seem puzzled by the nascent Indian trend of wanting to spin out research units, as the drug companies in the West are valued and rewarded for their pipelines.

C.H. Unnikrishnan in Mumbai contributed to this story.