Analoguing and Outlicensing — Smart Ways to Conserve Cash
One point that needs to be understood about new drug research is that it costs enormous amounts of money. The expenses are high because of two reasons. One, a compound needs to go through various steps before it graduates to become a new drug (See ‘The Birth of a New Drug...’). The second reason is that a large number of compounds fail and that increases the overall costs of research.

PhRMA, a global pharma association, estimates that while last year multinational drug firms spent around $39.5 billion on new drug discovery research, only 26 new chemical entities were granted patents. They have a long way to go before they hit the market. It is estimated that Indian companies have, so far only devoted a total of $450 million on new drug research. Dr. Reddy’s has spent some $57 million on taking its first eight new compounds up to the pre-clinical stage.

Though costs of conducting research in India are lower than in the West — primarily because of vastly cheaper scientific manpower — it is also true that no Indian company has the scale or resources to pursue cutting-edge research, or even to take a new compound through all the stages on its own. This is precisely why all Indian firms are pursuing two basic strategies that vastly lower their costs and risks. The first is a research strategy called analogue research, while the second is termed outlicensing.

Let’s take the analogue strategy first. What it essentially means is this: the Indian firms are not pursuing research to find a completely new family of drugs; their research is aimed at finding a new drug within an existing family that has already been discovered. It is called the analogue strategy because it involves finding a compound that is analogous to an already discovered compound.

To understand this, let’s take the example of Dr. Reddy’s diabetes compound again. Here, it was Sankyo that originally figured out that glitazones could provide an alternative way of treating diabetes and probably also tried to develop the first glitazone. Dr. Reddy’s, though, got into the game very early and started working on creating a number of glitazones that would work better than the originals. DRF 2593 or Balaglitazone will be the third glitazone to hit the market if it eventually crosses the final hurdle. Dr. Reddy’s is promising that it will be the glitazone that works the most effectively with the least amount of side effects.

The analogue strategy is important because it cuts down on your risk. By working on protein targets that are already well established, and developing a new drug within a family that has been extensively researched, a company can reduce at least some of the uncertainties of new drug research. The downside is that the new drug developed by this strategy will not be as big a blockbuster as the first drug in a new family (or first in class, as the pharma industry prefers to dub it). But sometimes, a second or third drug in a new family also turns out to be a bigger blockbuster simply because it is overall a better drug. A classic example was Pfizer’s cholesterol busting champion Lipitor, which was not the first drug in its class to hit the market, but became the best seller anyway.

The analogue strategy was very successfully used by the Japanese drug industry when it was venturing into new drug development. Many observers think that Indian industry will also rapidly build up scale by using the same tactics.

If analogue research helps cut down research risks, the outlicensing strategy drastically reduces the financial risk and, in fact, helps a company earn some money even before the drug is fully developed.

The outlicensing strategy works this way. An Indian company identifies a number of new compounds in a family that are likely to work, and then takes them up to the pre-clinical trial phase. After that, they strike a deal with a multinational operating in the same area. The deal is structured this way: the multinational has the rights to market the compound in a particular market if it clears all the tests. The Indian company gets ‘milestone payments’ — a certain amount for each stage of clinical trials that its compound clears. If the compound successfully clears all tests, it also gets royalty when the drug is introduced in a market.

Why would a global company be interested in ‘inlicensing’ a compound from an Indian company? Why doesn’t a multinational prefer to develop its own drug from scratch? The reason can be traced to the high levels of failure in the new drug discovery game. For every 1,000 compounds that are identified by a company, only about 30 show promise. And for every 30 compounds that show promise, three get past the first round of clinical trials and finally, only one hits the market. Thus, to introduce one new drug, you need to start with many thousands of compounds.

Even multinational companies do not have the where-withal to test each and every compound in a family. Hence, licensing deals are quite common. Apart from their own compounds under development, multinationals routinely scour the globe for promising compounds developed by other companies in therapeutic areas that interest them, and put them through clinical trials. While some succeed, others fail. But some of the biggest blockbusters in the market are currently those that have come as a result of licensing deals. For example, Pfizer’s $10-billion (in sales) Lipitor was actually discovered by Yamanouchi, a Japanese company, while Bristol Myers Squibb’s three biggest drugs — Pravachol, Glucophage and Taxol — are compounds developed by other companies.

Ranbaxy, Dr. Reddy’s, Glenmark and practically everyone else follows this outlicensing strategy. But the undisputed champion of this game is Glenmark Pharmaceuticals. The Glenmark story is instructive as it shows that a smart company can practically get its entire research expenses paid for by big global pharma.

Glenmark was originally a medium-sized family-run pharmaceutical company specialising in skin care products. That was until Glenn Saldanha, the son of the founder, took charge of the company in 2000. Saldanha decided to build a new drug research laboratory and commissioned Aftab Lakdawala to build it. (Lakdawala, incidentally, is a sort of new drug lab specialist — he also set up Wockhardt’s laboratory.) Saldanha hired a team of researchers and started focusing on a number of targets. One of the promising molecules the Glenmark team identified in 2002 belonged to a family of compounds called PDE4 inhibitors. Essentially, PDE4 is a protein that triggers off inflammation in various organs of the body. A compound that targets this protein and stops it from going berserk is called a PDE4 inhibitor.

There has been a lot of work that has been conducted around the globe on PDE4 inhibitors. The big problem is that most PDE4 inhibitors have such terrible side effects that the cure is often worse than the disease. Very few PDE4 inhibitors have been successfully introduced in the market and even these aren’t particularly good drugs.

Glenmark’s PDE4 inhibitor was codenamed GRC 3886 or Oglemilast by the company. And the early indicators are that it will work rather well against asthma and another breathing problem called chronic obstructive pulmonary disorder (COPD). Inflammation of the airways is a problem in both asthma and COPD, and the Glenmark compound, so far, seems to be working well.

Having identified the compound, Glenmark did a really smart thing. It first cut a deal with US-based Forest Labs, which has a number of drugs for pulmonary (lung) diseases. Forest Labs picked up the rights to develop the compound for the North American market against a payment of $190 million. That means Forest Labs will not only bear the costs of taking the compound through the different phases of clinical trials, it will also pay Glenmark $190 million as upfront and milestone payments. Six months later, Glenmark licensed the Japan rights of the same compound to Teijen Pharma, a Japanese drug company, for $53 million. The deals were structured so that Glenmark would receive some cash upfront and the rest as milestone payments. Industry observers reckon that the money Saldanha has received so far has more than paid for the cost of setting up the lab and all the research his team has done so far. In contrast, Dr. Reddy’s had received barely $3 million when it had licensed its compounds to Novo Nordisk.

Drugs Under Development and New Organisation Structures
Dr. Reddy’s potential diabetes drug is in phase III while Glenmark’s asthma compound has successfully completed one of the phase I clinical trials. This means that both of them seem to be working on patients and have side effects within acceptable limits. Both, therefore, have a fairly good chance of taking the honour of being the first new Indian drug.

There are two other contenders in the fray. The first is Wockhardt with a compound codenamed WCK 771/2349. It belongs to a class of antibiotic drugs called fluoroquinolines. These are broad spectrum antibiotics that work against a number of bacteria, and Wockhardt is confident that it has developed a new generation that will work even against those bacterial strains that have developed resistance to other antibiotics. The 771 version is an injectable one, while the 2349 version is meant to be swallowed. Khorakiwala is chary of divulging any details of his compound but market observers think that his drugs won’t have much problem crossing phase II, in which they are currently. Their calculation is based on the fact that because of the sheer body of existing research on antibiotics, it would have been easy for Wockhardt to develop a new version. Top notch research scientists often look down upon antibiotic research as being less challenging, though there is obviously a big need for such drugs. Meanwhile, Ranbaxy is the fourth contender with an anti-malarial compound that is a synthetic version of a natural compound called artemisinin derived from the bark of sweet wormwood tree grown in China. The costs of the natural product is shooting up, one reason for a cheaper synthetic version. Ranbaxy remains tightlipped about its compound though it is supposed to have cleared phase II clinical trials.

Just a step behind these four are half a dozen compounds, ranging from an anti-obesity compound by Orchid to a potential arthritis cure from Glenmark. (For the full list, log on to www.businessworldindia.com)

Meanwhile, as they learn the rules of the game and sniff out new opportunities, some Indian firms are toying with the idea of a new drug R&D lab as a standalone commercial organisation. The thinking behind this structure goes like this: freed of the controls of the parent company, the lab could raise resources, conduct research in areas not necessarily of interest to the parent, and pursue partnerships. And by spinning it off as an independent entity, the parent reduces its own risks. Sun Pharma, run by Dilip Shanghvi, has been the first to adopt this approach, and has spun off its new drugs division as an independent entity called Sun Pharma Advanced Research company (SPARC). Others are closely watching its progress to see whether they need to adopt a new organisational structure even as they seek to develop many more new compounds.

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