Pill factory to the world -India's drug industry

[Guest guest]

Pill factory to the world

Tanzer, Forbes Global, 12.10.01

India's drug industry is growing beyond cheap knockoffs of Western

innovation.

It's better to be a pirate than a killer, " says Amar Lulla, the

comanaging director of Cipla in Bombay. Lulla's outfit is the type of

pharmaceutical manufacturer most associated with India: It ignores

patents. Cipla's copy of Bayer's anthrax-fighting Cipro, fabricated by

more than 100 Indian drug manufacturers, retails for 12 cents a pill

in India, versus $5.50 in Manhattan. With reverse engineering, Cipla,

whose revenue in fiscal 2001 was $226 million, makes and sells more than 400

of the world's 500 top branded drugs.

Now meet the face of a new Indian pharmaceutical industry: K. Anji

Reddy, 58, the soft-spoken founder and chairman of Dr. Reddy's

Laboratories, whose headquarters are in Hyderabad. Reddy is lobbying

the Indian government to adopt and enforce the international drug-patent

regime, something that New Delhi under a World Trade Organization

agreement has promised to do by 2005. Reddy aspires to build his

enterprise into a research-based drug major. " We [in India] have

brilliant people who are as good as or even better than anyone

anywhere else in the world, " he insists. " We're ready for 2005. "

India, with its flowering of English-speaking, scientifically literate

people, just might rise above the business of making generic drugs and

ripping off patents. It could become an innovator and a respecter of

intellectual property.

Dr. Reddy's invests 6.5% of its $276 million sales in research, a

habit that it began in 1994. The results are impressive; the company has

discovered three molecules it has licensed for diabetes drugs, two to

Novo Nordisk, one to Novartis. Anji Reddy says that he's negotiating

licenses for several more cholesterol, diabetes and cancer drug

molecules discovered in his laboratory. For the three diabetes

licenses, Dr. Reddy's should gross $72 million during the drug-development

stage. After commercialization, Reddy's will earn royalties on overseas sales

and hold comarketing rights in India, where 70 million diabetics

live.

Even this research-rich company gets a chunk of revenue from generics.

Dr. Reddy's generics, though, are increasingly of the sanctioned

variety--copies of drugs whose patents have expired. In August, U.S.

drug regulators awarded Dr. Reddy's a so-called 180-day exclusive

period for the 40-milligram generic version of Eli Lilly's Prozac, which had

just come off patent. Merrill Lynch says that Reddy's took an 80%

share of the 40-milligram market within eight weeks and estimates that it

will net an amazing $45 million on $65 million sales of the generic capsule

this year. Merrill forecasts that Reddy's will earn $69 million, 25%

of aftertax revenue; that's a better profit margin than Merck's 15%.

In April, Reddy's listed on the New York Stock Exchange and, with help

from Merrill, raised $133 million. The share price has since more than

doubled, to $21, and is this year's best performing ADR. At that, it

is only 23 times current fiscal-year earnings and 20 times next year's

projections, versus averages of 42 and 27 in the U.S. pharmaceutical

sector.

The company symbolizes enormous national potential. India missed the

industrial revolution, but it is bursting with entrepreneurs and

intellectual capital. " Our chemistry skills are among the best in the

world, " says G.V. Prasad, Reddy's CEO (and Anji Reddy's son-in-law).

In India a chemist with a Ph.D. can be hired for $15,000, versus $100,000

in the U.S.

But you need patent protection to keep that talent from voting with

its feet. " Since patents weren't recognized in India, the best brains went

abroad, " explains Satish Reddy, the company's chief operating officer;

educated at Purdue University in the U.S., he is Anji Reddy's son.

Ajit V. Dangi, the director general of the Organisation of Pharmaceutical

Producers of India, estimates that 15% of the drug scientists in U.S.

laboratories are Indian immigrants. But he foresees a " revolution " in

the Indian industry, including an influx of foreign investment in

research and clinical testing--if the Indian government implements the

patent law.

Will it? In a 1970 law the government stopped recognizing product

patents on drugs. This permitted Indian drug companies to

reverse-engineer Western pharmaceuticals without paying licensing

fees. Foreigners' share of the Indian market collapsed from 75% in 1970 to

30% last year.

In a poor nation with scant medical insurance and with serious public

health problems, the patent abrogation made eminent political sense.

It may also, at least transitionally, have spurred industrial

competitiveness (rare for India). Today drugs in India typically sell

for just 3% to 15% of their U.S. price. V. Thyagarajan, managing

director for India of GlaxoKline, the national market leader,

estimates that India accounts for 35% to 40% of the drug giant's

global sales by volume but only 1% by value.

Anji Reddy, who founded Dr. Reddy's in 1984 with $40,000 in cash and a

$120,000 bank loan, makes no apologies for his country's history. " We

[Dr. Reddy's Labs] are products of that [1970 law]. But for that, we

wouldn't be here. It was good for the people of India, and it was good

for this company. " The Reddy family's 26% stake in the Bombay-listed

company is worth $430 million.

In fighting AIDS, Brazil's generics makers have gotten much ink. But

according to data from IMS Health Global Services, India's active

pharmaceutical sales by volume are about triple Brazil's. India gets

efficiencies from huge volume. Quality is high; more than 25 of the

country's drug plants have been inspected and approved by the U.S.

Food & Drug Administration (FDA). The country's chemists are innovative.

http://www.forbes.com/global/2001/1210/026.html

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