Pharma cos splitting R&D units to cut costs

Ranbaxy Laboratories, Dr Reddy's, Nicholas Piramal and three other Indian drug companies cut their research costs by separating the units involved in developing new drugs, thereby addressing investor concerns on low operating margins.

Sun Pharmaceutials, Lupin and Wockhardt, which are focused on the global generics and domestic pharma market, reduced their research expenditure as a proportion of operating income to 5.8 per cent in the quarter ended March 31 from 6.14 per cent. The curb on R&D expenditure came at a time when the generic players were grappling with a 9 per cent year-on-year surge in the rupee, coupled with input costs.

The shares of Ranbaxy hit a 52-week high of Rs 535.7, but closed at Rs 529.95, Sun Pharma ended at Rs 1441.05, below its 52-week high of Rs 1,481 on May 2. Lupin ended at Rs 698.45 and has now gained 8.6 per cent since the beginning of 2008.

Companies were able to absorb the costs, led by buoyant growth in emerging markets such as Eastern Europe and strong domestic sales that varied between 12 and 18 per cent y-o-y in the three months ended March.

In the December 2007 quarter, these six generic players saw their R&D costs as a proportion of total operational income declining by 50 basis points y-o-y to 7.3 per cent. To keep a tight check on R&D costs, the Ranbaxy's board approved a plan, in February 2008, to demerge its new drug discovery research activity into a subsidiary, Ranbaxy Life Science Research.

Analysts expect RLSLR to list on the bourses once it receives the regulatory nods. Sun Pharma had earlier approved a scheme to demerge its innovative R&D business (covering new chemical entities and NDDS programmes) into a new company called Sun Pharma Advanced Research Company.

This new entity Sun Pharma Advanced Research Company was listed on the bourses in mid-July 2007.