Murali K Divi had a tough job on his hands eight months ago. The managing director of the Hyderabad-based Divi's Laboratories was trying to convince investors to buy shares in his company, which was about to make its stock market debut.
Initially, it was a tough sell. Divi's Labs was the first pharma company to hold an IPO in three years and it wasn't big enough to be tagged the next Ranbaxy or Dr Reddy's.
It turned out that Divi didn't need to lose any sleep over the maiden issue. Divi's merchant bankers fixed a floor price of Rs 130 and the issue was oversubscribed 19.5 times.
Finally, it made its debut on March 12 at Rs 155 and began to power ahead at once. During the ongoing bull run it touched a high of Rs 970.
Divi's Labs isn't the only Hyderabad-based pharmaceutical company that has seemed to be on steroids for the last six months.
Take a look at Matrix Laboratories, which has climbed vertiginously from Rs 100 a year ago to about Rs 900 now. But then, the company has also turned in a sparkling turnaround during the last three years.
In 2000, N Prasad, the then managing director of Vorin Labs (controlled by Ranbaxy) teamed up with a few others and acquired a controlling stake in the Rs 45-crore (Rs 450 million) loss-making Herren Drugs.
Today Herren's name has been changed to Matrix and it's a bulk drug specialist with a multi-product portfolio and a turnover of Rs 500 crore (Rs 5 billion). Also, it has some of the highest margins in the bulk drug industry.
Divi's Labs and Matrix are amongst a clutch of Hyderabad-based pharma companies that have caught the fancy of the stock market.
The reason is not far to seek: these companies have developed a business model that is global in its outlook and leverages their traditional strength in process technology.
Equally importantly, it steers clear of frightfully expensive legal battles by restricting their activities to drugs that have gone off patent.
Over the last three decades, Indian pharma companies have thrived by maximising the opportunities offered by the country's patent regime.
Under the pretext of making medicine available to all and encouraging the local manufacture of drugs, the Indira Gandhi-led government in 1970 changed the Patent Act, recognising only process patents and not product patents.
The upshot was, Indian pharma companies were free to make clones of any drug so long as they did not infringe upon processes patented by the innovators of these medicines. (Even protection to process patents has been loosely enforced in the country.)
As a result, Indian companies have developed formidable reverse-engineering skills and sold their products in India and other markets which didn't recognise process patents at hefty discounts, yet making profits of 200 per cent to 300 per cent at times.
All this will change on January 1, 2005, when India reverts to an era of product patents. This will bring the cloning business to a halt. This will leave Indian companies with two options: either invent your own medicines or make drugs that have gone off-patent.
While companies like Ranbaxy and Dr Reddy's Labs have declared their intent to become research-based companies, a handful of Hyderabad-based companies have decided to choose the second option.
Clearly, the investments of up to $1 billion required to develop a new molecule has made them choose a more cost-effective model for growth.
This may not be as ambitious as a Ranbaxy or a Dr Reddy's. But the opportunities are tremendous and the model could be highly profitable.
Over the next few years, drugs with sales worth $70 billion are going off patent globally. When the patent on a drug expires, generic players move in and the drug prices crash -- at times by up to 80 per cent.
This leads to a scramble involving the generics companies, and at times the innovator as well, to locate a cheaper source of supply for the drug.
This is where these companies based at Hyderabad, the bulk drug capital of India, see themselves coming into the picture. (One reason why Hyderabad has become a pharma industry hotspot is that back in the 1960s the government set up IDPL here with Russian help, to make bulk drugs for medicines that had come off patent.)
One question begs an answer here: why are these companies restricting themselves to bulk drugs and not selling formulations?
That's because marketing costs in developed markets are huge. What's more, it's extremely tough to sell a single product to retailers.
People prefer to do business with companies that offer a complete bouquet of products. Clearly, the Hyderabad-based companies know the space they can attack.
There are, of course, snags in this model. For a start Big Pharma globally has discovered complex ways of 'evergreening' its patents so that they stretch for longer periods.
Also, the great dream of selling vast quantities of generic drugs in the US has died ever since the medicine-for-all campaign started by Hillary Clinton almost a decade ago ran out of steam. But this has not deterred these Hyderabad-based bulk drug companies.
Thus, Matrix came into the limelight in the recent past with an exceptional performance on the back of certain high-value anti-depressant and anti-asthma bulk drugs, besides a new generation anti-bacterials.
Its star performer is the anti-depressant Citalopram bulk drug sold in the European market. Matrix was granted process patents in Europe in 2002 and it now supplies Citalopram to around 20 generic companies which together have around 30 per cent of the market.
Matrix claims that, apart from the innovator, it is the only company in the world to supply the Citalopram bulk drug for the European market with non-infringing process patents.
In fact, in February 2003, Matrix issued a statement that it had rejected an offer from Danish pharma company Lundbeck's, the innovator of Citalopram.
Matrix says that Lundbeck offered it 300 million Danish Crowns [approximately Rs 207 crore (Rs 2.07 billion)] to stop production of Citalopram which is the active pharmaceutical ingredient (API) in the latter's Cipramil.
"Today, we are a transformed company with a focus on building world-class and intellectually-driven organisation. We have strengthened our ability to compete in the markets of the future. Our vision is to emerge as a knowledge-based and dependable pharmaceutical supplier to the global healthcare industry", says Prasad, the chairman and CEO of Matrix.
Matrix is pushing ahead with other big plans. In the next five years it plans to develop 25 products that can be supplied to regulated markets like Europe and the US.
The company is planning to file 10 Drug Master Files (DMFs) with the US FDA by the end of the current fiscal, in addition to seven DMFs that have been filed so far. (DMFs contain the details about how the drug was developed).
"Our strategy is complementary business with our customers. We are not interested in the manufacture of dosage forms. We have enough scope to grow in APIs business," Prasad added.
Or, look at the Rs 1,200 crore (Rs 12 billion) Aurobindo Pharma which is carving out its own niche in different parts of the world. Aurobindo has already made a bold foray into China.
And it has already prepared the ground for an aggressive entry into regulated markets by drawing up plans to file seven or eight DMFs and four abbreviated new drug applications (ANDAs) with US FDA during the current financial year. (ANDAs must be filed before a generic drug gets approval).
The company has already filed two DMFs with US FDA and six Common Technical Documents (CTDs) with European authorities. (CTD is a common format that can be filed with regulatory authorities in Europe, US and Japan for getting approvals from those authorities for supply of APIs.)
Aurobindo Pharma is gearing up to get approvals for two API Plants from authorities in regulated markets (US and Europe).
"We have invested over Rs 285 crore (Rs 2.85 billion) over the last three years on upgradation of existing facilities, creation of new facilities and R&D infrastructure with an eye on regulated markets. Now, we are a vertically integrated pharma company and it shall be the backbone of our thrust into US and European markets," says Lanka Srinivas, director, Aurobindo Pharma.
The company expects regulatory inspections from the US and European authorities to commence early next year.
"We have a robust and broad product portfolio of cardio vascular, CNS, anti-ulcer, anti-viral and anti-depresant products. We hope to enter into regulated markets in a big way from the second-half of the next fiscal", Lanka Srinivas says.
Then, there's the smaller Suven Pharmaceuticals, which is working on a strategy to provide the entire spectrum of services including discovery, development through manufacturing in post-2005 scenario, when the country accepts product patents.
"Our prime focus has been to emerge as a partner of choice in providing contract research and manufacturing services (CRAMS) to global life science companies. The strength of our foundation remains the relations that we have been able to nurture and grow with over 20 global life science companies," says Venkat Jasti, managing director, Suven.
Suven Pharma promoted a wholly-owned subsidiary called Suven Life Sciences LLC in US in April this year to showcase its offerings.
Suven also entered into a three -way strategic alliance in March this year with Chennai-based Shasun Chemicals and Drugs, Mumbai-based Innovasynth Technologies (India) and US-based Austin Chemical Company to tap the outsourcing opportunities in the pharma industry.
Slightly different from these players, Granules India is trying to leverage its strengths in the area of pharmaceutical formulation intermediates (PFIs).
PFIs are pre-processed blends that are ready to be compressed into tablets, filled into capsules or form into liquid dosages.
It is similar to bulk drug intermediates where bulk drug manufacturers do the final steps of synthesis from outsourced intermediates.
The company has huge capacities and it recently, it set up a Rs 30-crore (Rs 300 million) PFI plant in Hyderabad with an installed capacity of 7,200 tonnes per annum, in addition to its existing PFIs facility of 1,200 tonnes. The company has exported PFIs to 15 countries including the US, UK, Germany and Australia.
"Our new unit is the biggest stand-alone PFIs facilty in the world. The new facility will be a perfect launch pad for us," says Krishna Prasad, managing director of Granules India.
There are others like Vimta Labs, another Hyderabad-based company that has come into the limelight recently.
Vimta is into contract research and testing services in the areas of clinical, pre-clinical, analytical testing, environmental assessments and clinical diagnostics. It aims to become a full-service clinical research organiation (CRO) by 2005.
What makes these companies globally competitive? Murali Divi, for instance, is known for his skills in process chemistry and developing cost-effective and complex processes for bulk drugs and intermediates.
Divi's today has two very large bulk drug units -- one near Hyderabad and the other near Visakhaptnam.
Its main products include Naproxen, Diltiazem, CIS Lactum and Dextromethorphan, and several other advanced intermediates under custom synthesis contract with MNCs.
Since the commencement of production in 1995, about 90 per cent of the company's turnover has come from exports.
Currently, about 30 per cent of its Rs 250 crore turnover comes from custom synthesis contracts, while the rest represents generic APIs and intermediates.
Divi's Labs expects to clock a turnover of over Rs 310 crore (Rs 3.10 billion) during the current fiscal. The contribution from custom synthesis business, where the margins are high, is expected to go upto 50 per cent over the next few years.
What does the future hold for these companies? Certainly, life will be tougher now that Indian is moving into the product patent regime. But they are moving swiftly and taking a cocktail of medicines to stay in the pink of health.
