R&D growth in pharma firms like Cipla, Dr Reddy's outpaces revenue growth

Domestic pharma majors are betting big on R&D to drive future growth

Domestic pharmaceutical companies are increasingly focusing on research and development (R&D) to create a robust product pipeline that would drive future growth. Analysis of the past four years' numbers shows that the growth rate of R&D expenditure has consistently outpaced the operating income growth. 

Gaurav Jain, vice-president and co-head, corporate sector ratings, ICRA, said that for the leading seven companies they track (Cipla, Dr Reddy's Laboratories, Lupin, Aurobindo, Cadila Healthcare (Zydus), Sun Pharmaceuticals, and Glenmark) the growth rate in R&D spend has been more than the growth rate in operating income. (Refer chart) Jain added that overall R&D spend includes both incremental capital expenditure as well as recurring expenses. 

In FY14, while the operating income of big pharma grew by 24.2 per cent, the R&D spend grew 32.7 per cent. In FY17, this came to 8.5 per cent growth in operating income, while R&D spending grew by 17 per cent — almost two times the growth of the former. 

Jain said that in the first quarter of the current financial year, R&D spend as a share of operating income stood at 9.5 per cent. This is already higher than its nine per cent share in FY17. In terms of R&D cost as a share of operating income, the share has been rising too. From a 5.8 per cent share of operating income in FY12, it grew to nine per cent in FY17. 

If we take a look at some of the key pharma firms, data show that in FY17, their R&D spends have continued to rise over previous years. 

Torrent Pharmaceuticals, for example, posted a 76 per cent year-on-year (Y-o-Y) increase in R&D spend to Rs 432 crore, or about seven per cent of their revenues, in FY17. Torrent, however, is not a part of the ICRA sample. Torrent Pharmaceuticals is currently working on several in-house new chemical entity (NCEs) projects within the areas of metabolism, gastrointestinal and respiratory disorders. So far, it has filed 552 patents for NCEs from these and earlier projects. Of these, 245 patents have been granted. 

"Our strategy is to develop novel drugs relevant for India and other principal branded markets. The cost of development in these territories, although high, is still not as high as in developed markets. Returns from these territories would be commensurate with the cost of development," said a Torrent executive. The company is spending less than 25 per cent of its annual R&D budget on novel drugs. 

Glenmark, which saw its R&D spend grow more than 54 per cent Y-o-Y in FY17 and reach 13.74 per cent of its turnover, spent nearly five per cent of its R&D spend on developing innovative products, primarily in monoclonal antibodies. "We feel that we are well-positioned to deliver on our strategy... such that by 2025, speciality and innovative products will comprise 30 per cent of our revenues," said Glenn Saldanha, chairman and managing director, Glenmark Pharmaceuticals. He added, "We will maintain our R&D expenses roughly at 11-12 per cent of revenues."

Another Gujarat-based firm, Alembic, in fact, is spending around 14 per cent of its sales on R&D, one of the highest (in percentage terms) in the industry at present. Alembic's Y-o-Y R&D spend growth for FY17 was 34 per cent, which took the figure to Rs 470 crore from Rs 356 crore in FY16. This is a 217 per cent jump when compared to FY15 levels (Rs 148 crore). Starting from FY18, it plans to file 100 abbreviated new drug applications (ANDAs) over the next three years. 

Cipla's R&D spend as a percentage of revenues has grown from 3.97 per cent in FY13 to 7.6 per cent in FY17. During the same time, revenue from operations increased from Rs 8,279 crore (FY13) to Rs 14,360 crore (FY17). At 32 compared to just about five in FY16, the last financial year saw the highest number of ANDA filings by Cipla in recent years. The R&D spend for Cipla grew by 26.5 per cent Y-o-Y in FY17, Jain said. 

"Companies are focusing on niche molecules and complex generics. Not only for the US market but also other complex generics markets. The R&D spend is thus on an upward curve," Jain said. 

Indian pharma bets big on R&D 

Year	R&D spend growth	Operating income growth
2013-14	32.70%	24.20%
2014-15	45%	30.20%
2015-16	27.60%	9.50%
2016-17	17%	8.50%

Source: ICRA

Sample: Cipla, Dr Reddy's Laboratories, Lupin, Aurobindo, Cadila Healthcare (Zydus), Sun Pharmaceuticals, and Glenmark