Friday, September 5, 2008

Outsourcing the Drug Industry

Outsourcing the Drug Industry

In her swank headquarters just blocks from some of Mumbai's worst slums, Swati Piramal is midway through an impassioned pitch about revolutionizing the world of drug discovery. Sanskrit passages of the Bhagavad Gita, the ancient Hindu text that guides her business philosophy, adorn the office walls of her company, Piramal Life Sciences. Its logo is gyan mudra, a finger gesture used in yoga meditation resembling the Western sign for "A-O.K."

Journey now to Bangalore. After a crawl through the city's notorious traffic and a bone-rattling ride over a cratered road that washes away with each rainfall, the four-wheel-drive van arrives at the glistening, ocean liner-shaped headquarters of Jubilant Biosys. The laboratories inside are world-class. But when equipment fails, repairs often take a week, scientist Ajith Kamath explains sheepishly. Lunch is Domino's pizza with toppings that include corn, Indian paneer cheese, and hot spices. Turns out Jubilant is co-owner of India's Domino's franchise.

At first glance, companies such as Jubilant and Piramal may seem too undeveloped—or perhaps just too culturally remote—to rub shoulders with the world's top pharmaceutical makers. But judging from all the deals taking shape in India, they may have a critical role to play in the industry's future. In recent months, Western executives have been flocking to India's hastily built science parks, looking for allies in the never-ending quest to develop blockbuster treatments. With little fanfare, they've started a process that could lead to wide-scale outsourcing of drug research to Asia.

Five Western companies have formed drug discovery partnerships with Jubilant, including Eli Lilly (LLY), Amgen, and Forest Laboratories (FRX). Lilly is also partnering with Piramal, as is Merck (MRK). Every month deals are signed with India's elite pharmaceutical companies. The goal is to take promising compounds discovered by the multinationals, run tests to weed out the weakest candidates, and develop some of the others into marketable drugs. Eventually the Indian partners also hope to rack up scientific breakthroughs that lead to entirely new medicines for diseases such as Alzheimer's, cancer, or diabetes.

Looking beyond India's potholed streets and poverty, Western drug executives say they've forged a powerful model for research collaboration. The timing is no accident. Despite spending billions at home on technologies to turn gene-based discoveries into new medicines, pharmaceutical companies are struggling to come up with revolutionary products that will pull them out of a five-year slump with virtually no revenue growth. In desperation, the drug giants are paying hefty premiums to swallow biotech companies—witness Roche's $44 billion bid to purchase Genentech (DNA) in July.

What the multinationals now seek from India is the same combination of brainpower and cost savings that made the subcontinent a leader in software and computer services. Some Western companies are volunteering to share intellectual-property rights on new discoveries and even divvy up the profits. "It's a transformation of the R&D enterprise," says Robert W. Armstrong, Lilly's vice-president for global external research. "We have to think in a totally different mode."

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