PB Jayakumar July 22, 2019
What is common between Pankaj Patel, Chairman of India's fourth largest drug firm Cadila Healthcare (also known as Zydus Cadila), and other doyens of India's drug industry like erstwhile Ranbaxy's late Parvinder Singh, Dr Reddy's founder late Dr Anji Reddy and Lupin's founder late Dr Deshbandhu Gupta? All of them dreamt of inventing new chemical drugs that would convert their generic drug-making firms into original innovator companies like Pfizer, Novartis or GlaxoSmithKline. But that dream has not been fulfilled yet and India's first novel chemical entity (NCE) reaping billions of dollars is still miles away.
Drug discovery has been a tough ride for Indian pharma companies. After Parvinder Singh, sons Malvinder and Shivinder did away with the company's costly and risky new drug pursuit. The same story played out at Dr. Reddy's. Even before Anji Reddy's death, son Satish Reddy and son-in-law G.V. Prasad had put new drug research programmes on the backburner. At Lupin, founder Deshbandhu Gupta's son Nilesh and daughter Vinita decided to focus on developing specialty drugs and short-term big business from the US rather than spend heavily on NCEs.
New drug research is not easy. It not only takes 10-15 years of research but also over a billion dollars to bring the drug to global markets. Millions of chemical compounds have to be screened to identify the molecule and the product can fail at any stage of development. Historically, eight of 10 promising molecules that reach clinical trial stage fail. Adverse events after marketing can also result in the drug being withdrawn.
In 1997, scientists at Dr Reddy's Laboratories in Hyderabad discovered a molecule to treat Type-2 diabetes. They named it Balaglitazone. Dr Reddy's formed a drug research company, Perlecan Pharma, with funding from ICICI Venture and a couple of PEs, and licensed two diabetics molecules under development to pharma MNC Novo Nordisk for pursuing clinical trials. Dr Anji Reddy, a drug discovery scientist, was heartbroken when he learnt a few years later that rats had died in the lab and Novo was going to discontinue the trials in the third and final phase. Within a few years, the company stopped its new drug research in the US, merged new drug research in India into a subsidiary Aurigene, and subsequently put new drug discovery on the backburner.
"You have to be determined to succeed in drug discovery and should be ready to immediately discard projects when you get signals from the lab or clinical trials that something is going wrong," says Pankaj Patel of Cadila Healthcare.
Ranbaxy pursued a unique malaria drug called Arterolane till the last stage of trials, led by US-returned drug scientists like Sudarshan Arora and Pradip Bhatnagar, but its sponsor, Medicines for Malaria Venture (MMV), a WHO body, backed out in 2007. In 2010, Ranbaxy's new owner, Daiichi Sankyo, merged its new drug research with the parent R&D department. Eventually, Ranbaxy was sold to Sun Pharma, which focussed more on new platform technologies for specialty generics.
Similarly, Piramals formed a new drug discovery company in 2007, Piramal Life Sciences, led by Vice Chairperson Swati Piramal. In 2011, it was merged with Piramal Enterprises, after the sale of its formulation division. At one point, the company had over 400 scientists and succeeded in developing a biological drug for cancer, which failed in 2012 in the second phase of trials. Two years later, Piramal exited drug discovery and 180-plus employees were asked to either retire or join other group companies.
Glenmark also passionately pursued new drug research, and even succeeded in out-licensing seven molecules to MNCs. But it could not take any of these to global markets.
The biggest challenge for most drug hunters is reluctance of shareholders to invest in long-term drug discovery. Pharma companies are also not able to find alternative funding sources that will support research for 10-15 years for no returns.
This is where Pankaj Patel's Rs 16,000 crore-plus Zydus Group stands out. Like his illustrious scientist father Ramanbhai B. Patel, who founded a research driven drug company Cadila in 1952 with a friend Indravadan Modi to make vitamins, Pankaj Patel wanted to pursue drug research. He studied pharmaceutical science and joined Cadila in 1974, and in 1995, he inherited a Rs 200 crore-business. He took the company forward, much like others, by selling generics drugs in India and abroad. With a 20 per cent-plus compounded annual growth rate (CAGR), it became the fourth largest Indian drug company by revenues. However, unlike the next generation of other drug companies, Pankaj Patel's son Sharvil Patel, the company's MD, also passionately pursued drug research. As a result of the continued focus on research, the Ahmedabad-based company came up with India's first new chemical drug as well as a slew of novel drug innovations. If things go well, within a few years, Zydus may become India's first MNC to sell its own drugs in global markets.
Chasing New Cures
Currently, Zydus Cadila has 10 new chemical entities and new biological entities (NBEs) in different stages of development - an achievement no other Indian drug company can boast of.
A good part of the company's profits is being ploughed back into research of new drugs and specialty products and vaccines - about 10 per cent of profits every year. Even though these form a small part of the overall business, Zydus has big plans for them. About 18 years ago, Zydus was among the first to invest in developing biosimilars (copycat of biotech drugs) and vaccines. Today, it has the largest portfolio of biologics among all Indian companies. Its overall investment in this is nearly Rs 300 crore.
Zydus has one of the largest biologics manufacturing plants in Asia for monoclonal antibodies (cloning of cells for cancer cure) with a capacity of 11,000 litres, when the nearest competitor's capacity is less than 1,000 litres. It has launched 10 biosimilars and another eight are under development. The plan is to launch at least three molecules every two years.
The company developed Exemptia, the world's first biosimilar of Adalimumab, for treating inflammatory arthritis. "We have partnered with many companies to sell in various geographies and my assessment is that we can easily get $200-250 million annually from these biologics within the next four years," says Sharvil Patel, who did his doctorate in pharmaceutical science.
Similarly, he is betting big on vaccines. Zydus's Vaccine Technology Centres (VTCs), located in Catania, Italy, and in Ahmedabad, have already developed 11 approved vaccines and another eight-nine are under development. VTC, which developed Vaxiflu-4, India's first tetravalent inactivated influenza vaccine, is also developing vaccines for diseases such as chikungunya, HPV and hepatitis. Apart from the governments and WHO-related vaccine business, Zydus also has a Rs 100 crore private vaccine business. "Many of our vaccines, like for Varicella (chicken pox), do not have many competitors and I expect this business to grow to $200-250 million (Rs 1,381-1,726 crore) by 2023/24," says Sharvil Patel.
He expects to earn about $500 million (Rs 3,452 crore) a year in the next four to five years from the sale of vaccines and biologics alone in India and emerging markets. The present size is much smaller: only about Rs 300 crore.
But the biggest bet for Pankaj and Sharvil Patel is the NCE segment, which the father heads. The Zydus Research Centre in Ahmedabad is a 475,000-square feet facility that employs over 400 scientists. In 2013, the company announced the launch of Lipaglyn (Saroglitazar), India's first NCE. Zydus developed a 4 mg once-a-day pill that can simultaneously control cholesterol and glucose levels - a first of its kind drug for Hypertriglycerdemia (elevated triglyceride levels) and Diabetic Dyslipidemia (high cholesterol in diabetic patients not controlled by statin drugs). Now sold only in India, Lipaglyn is already a Rs 50 crore drug.
Though named in the 'glitazar' class of drugs, which had safety issues, Lipaglyn's molecular structure is different from the glitazar family of drugs, says Sharvil Patel. Zydus plans to take the drug global. It is undergoing second phase clinical trials in the US for treatment of severe Hypertriglyceridemia and Non-Alcoholic SteatoHepatitis (a disease in which fat accumulates in the liver). For treating fatty liver, according to Sharvil Patel, there is no single-dose pill available in the market and so he feels their drug's global potential is about $25 billion (about Rs 1,72,569 crore). Clinical trials are on in India and the US for additional indications like diabetes.
Zydus has already spent many hundreds of crores to develop Saroglitazar and is keeping fingers crossed for positive Phase II outcome by year-end. "We have encouraging results so far, and if everything goes well, it may take two-three years for commercialisation in the US. On a conservative basis, Saroglitazar can become a $4-5 billion drug," he says.
Another NCE under development is Desidustat, an oral pill in the final phase of clinical trials in India for treating anaemia in patients with chronic kidney disease (CKD). Currently available agents for the treatment are injectable drugs and intravenous iron supplements. The estimated global market for treatment for anaemia related to CKD is $10 billion, but it is too early to factor it revenue plans, says Sharvil Patel.
Zydus is also developing NCEs in pain management and cancer, but those are still to reach the clinical stage. In the case of new biotech drugs called NBEs, Zydus has already successfully developed an injection for rabies, in collaboration with the WHO. Rabimab, a cocktail of two monoclonal antibodies, is a first-in-class and has to be injected at the site of the wound. This may be worth hundreds of millions of dollars globally and Zydus plans to take the injection to the US as well, besides getting pre-approvals from the WHO.
"Since the beginning, I was very clear Zydus will pursue drug research and that will be the core for our growth," says Pankaj Patel.
Pumping in Cash
A lot of Zydus's new ventures are based on its healthy financial performance. In 2018/19, Cadila Healthcare's consolidated revenues were Rs 13,367 crore, up from Rs 12,068 crore the previous year, with a net profit of Rs 1,849 crore (Rs 1,776 crore). Of this, 49 per cent revenues came from the US, followed by 28 per cent from India. The company has been consistently growing revenues at over 20 per cent for the past two decades. In the past 15 years, EBITDA has been growing at 18 per cent CAGR.
While most Indian companies were struggling in the US market due to channel consolidation and increased regulatory scrutiny, Zydus was more or less insulated and had $900 million sales last year, growing at a CAGR of 21 per cent in three years. In the last two years, Zydus has received the most US FDA drug approvals for any company - 120. It has already launched 150-plus products in the US market; a similar number of drugs are pending for approval. It plans to file 40-60 abbreviated new drug applications (ANDAs) every year for traditional generics and specialty high-value and difficult to make complex generics. "For the next three years, in the current model of business, we don't foresee any fundamental issue that can hamper growth in the US market and we should grow at over 10 per cent for sure," says Sharvil Patel.
The pharma company holds strong in India as well; in the past five years, its domestic business has grown at a CAGR of 9 per cent. "Despite challenges like price control, margin pressure and other policy interventions in the domestic market, we are sure to grow at over 10-12 per cent in the coming years with specialty and new biologic launches," says Sharvil Patel.
While Zydus enjoys a strong balance sheet, especially when compared with the pharma sector in India, it wasn't always so.
"The turning point was when Zydus was formed - a brand new company to start from a legacy of 40 years. It was a big challenge," says the 66-year-old Pankaj Patel. The two promoters of Cadila - Ramanbhai B. Patel and I.A. Modi - decided to split in 1995. One became Cadila Pharmaceuticals and the Patels named their Rs 200 crore-business Zydus Cadila (Cadila Healthcare).
The biggest initial challenge for Pankaj Patel was raising working capital. His limit was Rs 20 crore, but no bank was willing to fund him. So, he sold assets to raise Rs 5-10 crore in tranches to ensure liquidity. A year later, banks were queuing to fund him. He closed down the diagnostic business and chose to focus on the domestic market when many Indian companies were exporting to other countries. "We were a small company and decided to focus only on the local market with mainly cardiovascular, respiratory and gastroenterology drugs. The plan was to get into exports once we reached a size of Rs 1,000 crore, which we achieved by 2000."
In 2000, Zydus Cadila entered into a strategic alliance with Ambalal Sarabhai Enterprises to integrate the animal healthcare business of both the groups and create Sarabhai Zydus Animal Health. A year later, Zydus acquired German Remedies to boost its presence in India. Later in 2007, Cadila Healthcare acquired the entire stake of Sarabhai Zydus Animal Health and also bought dermatology company Liva Healthcare.
Sharvil Patel set up a target of 'Healthy Billion' to propel Zydus into the billion dollar revenue club. The target was achieved in 2011. Zydus created a new listed company in consumer healthcare business, Zydus Wellness, which holds popular brands such as Sugar Free and Nutralite, with revenues of about Rs 500 crore. Last year, it acquired Heinz India for Rs 4,595 crore to get brands like Glucon-D, Complan, Nycil and Sampriti. The acquisition will make Zydus Wellness a Rs 2,000 crore-plus company.
But all may not go as planned for Zydus. One plant in Ahmedabad was found short of manufacturing standards of the USFDA. The company is now trying to fix it. Similarly, the biosimilar sales guidelines in the US and Europe are not yet clear though their current plans exclude these geographies. A bigger concern is if the Lipaglyn US trial results, that are to come out by the end of this year, are negative. As of now, however, Zydus investors have faith in Pankaj and Sharvil Patel's quest for new drugs.
New drug research takes 10-15 years and millions of dollars. Shareholders are reluctant to invest for that long, and finding alternative funding sources for such a long period, with no returns, is difficult. Add to that the fact that eight of 10 promising molecules that reach clinical trial stage fail. Many Indian companies have tried and failed in this pursuit.
In 1997, scientists at Dr Reddy's Laboratories in Hyderabad discovered a molecule to treat Type-2 diabetes, Balaglitazone (named after Tirupati deity Balaji). A drug research company was formed with funding from ICICI Venture and a couple of PEs. Two diabetes molecules under development were licensed for clinical trials. A few years later, some lab rats died and trials in the third and final phase were discontinued. Within a few years, the company stopped its new drug research in the US, and subsequently put new drug discovery on a backburner.
Ranbaxy pursued a unique malaria drug called Arterolane till the last stage of trials. But its sponsor, Medicines for Malaria Venture (MMV), a WHO body, backed out in 2007. In 2010, Ranbaxys new owner, Daiichi Sankyo, merged its new drug research with the parent R&D department. Since then there has been no news of discoveries. Eventually, Ranbaxy was sold to Sun Pharma, which focussed more on new platform technologies for specialty generics than new drug research.
The Piramals formed a new drug discovery company in 2007, Piramal Life Sciences. In 2011, it was merged with Piramal Enterprises, after the sale of its formulation division. At one point, the company had over 400 scientists and succeeded in developing a biological drug for cancer, which failed in 2012 in the second phase of trials. Two years later, Piramal exited drug discovery.
Glenmark succeeded in out-licensing seven molecules to MNCs. But it could not take any of these to global markets.