Opting for the co-opetitive approach

The risky business of drug discovery has resulted in a new 'co-opetitive' approach. Today, many Indian pharma companies are partnering with Big Pharma, giving rise to different collaborative drug discovery models. Arshiya Khan reveals

Adversity makes strange bedfellows. While this adage is most often applied to politics, it is also true of the pharmaceutical industry. Until recently, Indian pharma companies, who traditionally took the generic path, had to pit their might against Big Pharma, which claimed the 'innovator' label. Today, players in both camps have evolved beyond past differences to balance the risky business of drug discovery. Collaborations are seen as a short cut to minimise risk and maximise optimum use of resources at all levels—human, financial and intellectual. Most drug discovery collaborations involve a party that has experience in the desirable therapeutic area, while the other party comes with infrastructure, cost structure and development experience to effectively support drug discovery in the relevant therapeutic/target area.

New realities

Venkat Jasti, Vice Chairman and CEO, Suven Lifesciences

Utkarsh Palnitkar, Partner, Transaction Advisory Services, Ernst & Young

Venkat Jasti, Vice Chairman and CEO, Suven Lifesciences, feels that one of the prime reasons for this new approach is IP protection in India and change in the mindset of Indian pharma industry to opt for the long gestation and costly innovation path. Thus these new realities have ensured adoption of a co-opetitive rather than a competitive model. This will hopefully result in more robust pipelines in an IP intensive environment.

Indian generic players face the same challenges that global generic firms do—margin pressure, legal issues, parallel launch of authorised generics, accessing distribution channels in different geographies, increasing bargaining power of large distributors in these markets and so on. Global generic firms, in fact, lose out to India and other low-cost destinations. Further, the attractiveness of the US market has suffered a setback in recent times, especially for large generic companies counting on windfall gains in the 180-day exclusivity period. "The reasons include legal challenges by patent holders which delay and increase the cost of launch, authorised generics taking away large market share, and hence, profit from the generic patent challenger during exclusivity periods, amongst others. These factors have severely impacted the exclusivity-related profits that generic players seek from the US market, feels Utkarsh Palnitkar, Partner, Transaction Advisory Services, Ernst & Young.

Glen Saldanha, MD and CEO, Glenmark Pharmaceuticals

Dr Harish Iyer, General Manager, R&D, Biocon

With regards to biotech sector, Dr Harish Iyer, General Manager, R&D, Biocon, cites another reason for collaboration for drug discovery. "The opportunity for international bio-partnering is a fallout of the trend of declining risk capital in the West that seems to have dried up for companies engaged in early-stage discovery work." Besides this, venture capitalists (VCs) are only willing to fund companies who have reached the post proof-of-concept stage. Therefore, there are quite a few companies whose resources are simply too frugal to take their ideas to the next stage to realise their licensing potential, and so, Indian companies automatically turn to be their natural collaborators to reduce burn rates, optimise R&D spends and extend survival time lines. Ernst&Young's Biotechnology Forecast for 2004 indicated that more than 75 percent of biotech companies had less than $5 million cash reserves to pursue product development—a hopeless situation. Therefore, Indian companies offer VCs an effective de-risked model as they are in a dire need for exit or survival strategies for their investees, thereby, offering a lifeline for product development and the most affordable and effective way to move up the value as well as valuation curve.

Similar, yet different

Some of the most common models used by pharma companies are alliances, joint ventures (JVs), licensing, co-development, de-merging R&D units, contract services etc. Contract services range from fee-for-service through alliances and collaborations. Pure fee-for-service in chemistry is by full time equivalents (FTE), while bio informatics service can be both on fee-for-service or on a risk-reward basis. Collaborations at the pure developmental stage have more risk until proof of concept stage, while another option is the integrated drug discovery model with research funding and milestone payments on achieving critical success factors, besides royalty payments on marketing. The collaborators continue to work together in the developmental and manufacturing under Drug Discovery and Development Support Services (DDDSS) and CRAMS model.

Besides value added project based services in alliance with the collaborator, there are risk reward based developmental activities through integrated discovery, development and manufacturing based services which are also in vogue. Innovative deal structures have also come into play. To cite an instance, Dr Reddy's Laboratories' (DRL) ClinTec deal for joint development of an oncology candidate of topoisomerase inhibitor class was a novel initiative. According to the deal, DRL along with ClinTec will complete phase II and phase III trials. The aim is to ensure USFDA and EMEA approvals. ClinTec will get commercial rights of the compound in major European markets and will pay royalty on sales to DRL, while DRL will retain commercial rights in all other markets including US. For US market, DRL will have to pay royalty on sales to ClinTec. Such a a de-risking model, the first between a discovery based company and a CRO, will help DRL to spread risks.

Apart from these there have been target-related early discovery deals—DRL and 7TM Pharma; Nicholas Piramal India Limited (NPIL) and Eli Lilly. Technology deals include Glenmark's with Dyax while among out-licensing deals, Glenmark's arrangement with Forest, Teijin, and later with Eli Lilly, are among the most prominent.

Separating the R&D engine

Spinning of R&D units into separate entities is another model which is being adopted by many pharma companies. Palnitkar cites different reasons. In most cases, the concerned companies have restricted the hive off to New Chemical Entities (NCEs) only. However, the drug delivery system, clinical and generic part will remain intact with the parent. The rationale is that generics and innovation are two totally different businesses, with different time frames, certainty profiles and investments, and therefore, the approach that scientists need to take is also entirely different. It is hoped that the de-merger of R&D units will provide greater flexibility and impetus to drug discovery research programmes while unlocking significant value for the company and its shareholders. Furthermore, costs escalate as new drug candidates mature and proceed to advanced stages of clinical trials, and hence, funding becomes an important issue. And lastly, creation of a separate company is an innovative way to mitigate risks involved in the drug discovery business, where, despite years of expensive research, the success ratio is still low.

Reinforcing this fact, Glenn Saldanha, Managing Director and CEO, Glenmark Pharmaceuticals, points out that innovative R&D has a risk profile that is different from generic pharma, and hence, requires different financial and management models for success. Saldanha elaborates on the advantages and disadvantages of this model. The key advantage with this approach is that companies will be able to resource and focus their R&D activities more effectively. However, there will be more pressure on these Indian companies to show short-to-medium term value-addition on their R&D portfolios, as investors have no experience with the long incubation (development) time required for innovative R&D.

In this light, Glenmark has a different approach. Instead of de-merging its R&D, it has de-merged its generics and API businesses, into a new company called Glenmark Generics Limited (GGL). The stated objective of this reorganisation is to build end-to-end integration, scale and capabilities in pursuing a generic business, on the GGL side, and to build end-to-end global capabilities similar to a Big Pharma company on the R&D/specialty side.

Meanwhile, according to DRL's spokesperson, DRL has not done a de-merger of its R&D arm as in the case of other Indian pharma companies. It is primarily a de-risking strategy where DRL, along with two private equity partners, came together to form Perlecan Pharma. The formation of Perlecan Pharma was a financial agreement, which brought to table the strengths of the three companies. Perlecan Pharma provided DRL's drug discovery programme, a model to rapidly advance its 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. This model will enable them to work on multiple development programs.

Industry experts believe that this emerging business model is essentially aimed at shoring up valuations of the mother company. Once R&D costs are taken off the account books profits and market capitalisation improve. This is deemed as taking a very short-term view of the business. Others however, argue that the spin-off model augurs well for many Indian firms that have found it somewhat tricky to decide on how much of management time and capital to allocate to the discovery business, which typically involves a different risk profile and time-frame to market compared with the fast-paced generics business. "The business dynamics of running an R&D engine within the generics engine is not easy. Most companies responded by running their R&D business at a slight arm's length," feels Iyer.

Jasti points out, "De-merged companies are being listed so that investors can choose whichever (company) suits their investment needs and risk taking capability. This is a short-term goal only but eventually helps innovation based companies can reap huge benefits if they stick to both activities," he feels. Also, spinning of the assets is another way wherein people who do not have enough capital to take that IP to the next level can use this mechanism to fund that specific asset by a specific set of investors and this is better in comparison to de-mergers, clarifies Jasti.

In contrast, Jasti points out that Suven has adopted a concept-to-clinical candidate development model, ie full-scale innovation. This involves negotiated research funding, success-based milestones which accrue throughout the collaboration and if the discovered candidate makes it to the market after clinical development, royalties on world wide sales. In other words, in any programme, Suven will work on a particular molecule right from concept to discovery, development and manufacturing except marketing, thus ensuring the seamless transition of the project from phase to phase without any gap so the speed can occur, clarifies Jasti.

Full-service CROs

Besides this, another approach followed by many companies is outsourcing. According to Kalorama Market Intelligence Report, January 2006, the overall market for outsourced drug discovery in 2005 was $4.1 billion, and is projected to grow at a rate of 15 percent to reach $7.2 billion in 2009. This remains a highly fragmented market. Even the top suppliers each have less than one percent of the contract drug discovery market. What has tilted the scale in India's favour is cutting-edge operations by Indian CROs, their steadfast commitment to transparency of financial reporting, business processes, and compliance controls. CROs have also ably demonstrated integration of clinical operations into the business context and attaining efficient and effective project tracking and cost management.

Originally, drug development was outsourced by Big Pharma due to limited resources. Large late-phase drug trials are highly labour intensive and the stream of such trials is inconsistent; therefore, developing in-house capabilities to cover such intermittent needs would be economically unfeasible. CROs were traditionally seen as a necessary evil—while in-house teams allowed better oversight and typically had more experience, outsourced teams were more cost efficient. Often, only the most labour intensive and highly standardised parts of the development process were outsourced (ie clinical monitoring and data management for large phase III trials). Big Pharma was also looking at ways to cut costs in the drug discovery stage. Initially, only routine steps were outsourced. Innovation was left to in-house scientists.

The emergence of biotechnology provided a big boost to the outsourcing model. Suddenly, biotech started with limited funding, but a great idea needed to outsource nearly all aspects of both research and development. In extreme cases, these companies acted as virtual companies, with a core team of experts managing multiple vendors to complete all drug discovery, clinical trial monitoring, data management, and NDA submission work. Thus demand for full-service CROs grew.

With time, the pharma industry discovered that outsourcing firms could not only do all steps in the development process, they could do it cheaper and faster. And quality was no longer an issue, because as CROs began to specialise in certain steps of the development process or specific therapeutic fields, they became the experts in those areas. They learned to reach patient recruitment goals faster; reviewed and cleaned data files more quickly, and found innovative ways of managing clinical sites.

A new reason to outsource also emerged. With growing pressure about vigilance and independent review, the FDA began to look more favourably on CROs, as they did not have a direct stake in the success of drug trials. This aspect also helped to make CROs more profitable. Most contracts were set up as fee-for-service. The CRO was paid for its services regardless of whether a drug succeeded or not.

Therapeutically aligned business model

Another trend in the pharma industry is reorganisation according to therapeutically aligned business units. Palnitkar says this trend dates back to the mid nineties when CROS used to initially specialise in specific therapeutic areas (TAs). However, with the advent of the era of declining product approvals, they branched into multiple TAs and discarded the therapeutically aligned business model. The point to note is that CROs specialise in a bouquet of TAs rather than individual TAs. CROs are active in segments like oncology, central nervous system (CNS) disorders, cardiovascular, metabolic disorders, respiratory, anti-infectives and gastrointestinal segments. This marks a shift from acute to chronic therapeutic segments in line with the trend observed globally. Other than therapeutic segments, India-based CROs provide services spanning the entire length of drug discovery and development value chain.

Also larger pharma companies with multiple research centres now place different therapeutic expertise in each location. Novartis reorganised to this model in 2001, and Roche announced that it would change its structure to this model later in 2007. The reason for this move is to promote communication along the development pipeline for each product. Pharma companies realised that a huge amount of information was lost each time a product was handed off to a different team during successive steps in the R&D process. A negative side effect of this reorganisation is that functional groups from different therapeutic areas are less closely linked. This reduces shared learning across a functional group.

These have been some of the models adopted by many pharma companies. The 'India advantage' has been the key factor for most of the collaborations. What can be the other possible assets that an MNC can look for in Indian companies? Palnitkar says track record of regulatory compliance, cash flow from existing operations to offset long gestation period involved in drug discovery, leading IT security and information management practices, validated experience in target therapeutic areas, appropriate pool of human resources and complementary sales marketing presence, are some of these.

Jasti, however, feels that 'India advantage' is only a part of the reason, which may not last long. He feels that the huge talent pool along within strong relationships with global pharma will be the main driver for future growth. Besides this, India is becoming an increasingly attractive destination for pharma R&D activities due to changing IP and patent laws, favourable cost/skill ratios and past success of outsourcing in IT fields. These factors have converged to create a compelling business opportunity for Indian companies in pharma R&D. Therefore, "Global pharma companies can leverage this opportunity by developing an 'India Strategy' to enhance and complement their existing R&D efforts. A well-executed strategy for collaborative R&D with Indian companies can bring significant benefit to global players," avers Iyer. He further suggests that certain issues like data and IP security, performance metrics, and quality standards, should be addressed and evaluated upfront to ensure a successful relationship. Global pharma companies can learn from the experiences of their peers in other industries (eg financial, consumer, software, etc.) to develop a successful strategy for working with Indian research providers.

What lies ahead?

Change is the only constant, and so, these models will also change. A trend being noted is the evolution in the CRO industry away from modularity (i.e. providing development outsourcing as a stand-alone business) towards re-integration. In other words, CROs like Quintiles (via NovaQuest) are becoming more like pharma firms and less like outsourcing vendors. "Re-integration is what happens when outsourced functions become commoditised, as the drug development function has become," feels Palnitkar. Major CROs need a new source of growth business, and they realise that integration of functional expertise and processes, like in major pharma, or developing genomic technologies, creates efficiencies and competitive barriers that can lead to new growth.

"In India, a silent shift from service-based to a partnership-led model has taken place over the past few years. The shift was a result of the operating environs of the industry that underwent a dramatic transformation," reveals Palnitkar.

These models are the result of the needs of pharma companies. As technology develops, needs also multiply, and as more and more companies are realising the value of partnerships, more deals will take place in future, and the trend of evolution will continue. Therefore, as the Red Queen said in Lewis Carroll's Through the Looking-Glass, "It takes all the running you can do, to keep in the same place." To overcome this 'Red Queen Effect', companies have to run ahead of time and evolve before technology does. "Going ahead activities will enlarge as more players come into picture, into many more disease areas and especially adding large molecule therapeutics, which is negligible at this point

of time," predicts Jasti. Competing with Indian pharma companies are members of BRIC nations (Brazil, Russia, and China) that have potential to threaten growing dominance of Indian pharma industry, feels Palnitkar. But he opines that even though India competes with China and Korea, the opportunity is too big and everyone has a role to play and grow in this evergreen field.

arshiya.khan@expressindia.com