Glenmark's R&D Gamble

Glenn Saldanha looks like a man at peace. The turmoil within the pharmaceutical industry — pipelines running dry, mergers and acquisitions in the hope of new discovery and an emerging question mark on investing in innovation — seems distant for the managing director and CEO of Glenmark Pharmaceuticals.

At 41, he is pretty much in control of the task he set out to do a decade ago: Turning Glenmark into a multinational company that makes innovative drugs, and not just the generic drugs it has been developing for 23 years.

In an assertion of the belief that the company needs to innovate, French pharma company Sanofi paid $50 million to Glenmark in July. This was an upfront payment in the $613 million out-licensing deal that Saldanha had sealed with Sanofi in May. The rest of the money will come in milestone payments if and when the molecule GBR 500 crosses various clinical stages. The first phase of clinical trials for the molecule has been completed.

This deal has been momentous for Glenmark not just for its size, but as a validation of Saldanha’s stance to back innovation after the company went public in 2000. But this stance is one for which he has sometimes been penalised by the market.

His journey has been sobering, but at present, confidence levels in the company are high. GBR 500 is the first biologic (biotechnology drug) to be out-licensed by an Indian company. The molecule belongs to the technology platform of monoclonal antibodies whose market was worth $48 billion in 2010 and is estimated to cross $80 billion by 2015 when the overall biologics market is estimated to be at $239 billion.

These are dizzyingly high numbers, but Saldanha says the high that he and his company are craving lies elsewhere. “Our biggest high would be to bring the first Indian molecule to worldwide market. That’s what keeps us ticking; we have no ambition to be a $5 billion or $6 billion company,” he says.

Saldanha is all too aware that the world of molecules is a mercurial one. It may look promising at one stage, worthless at the next. But, if the first decade is any indication — Glenmark earned about $200 million in out-licensing six molecules by spending $125 million on research — Saldanha’s argument that R&D is a profitable business, and not a cost centre as most Indian pharma have made it out to be, looks convincing.

Positioning Glenmark as a hybrid between a nimble biotechnology firm and a steady generics company, Saldanha hopes to license new drugs to Big Pharma till he has the money to take it to the market himself. “If you keep doing it long enough, you’ll get there.”

Choosing the Bets
There are some who believe that Glenmark’s out-licensing success is about timely salesmanship, not deep drug discovery. But thinking that this success is only about serendipity and R&D spending is skewed thinking.

Choosing where to locate skills, which diseases to chase and the opportune moment for in- or out-licensing molecules are all astute business decisions.

“Realising the potential of the molecule, the market and when to out-license is a skill that many [Indian promoters] don’t have. It’s difficult to believe that none of the molecules in any Indian [company’s] pipeline so far was promising enough,” says an analyst with an international brokerage in Mumbai.

He, however, thinks Glenmark’s capability to discover new molecules needs more validation. Glenmark had in-licensed GBR 500 at an early stage from a Canadian start-up. It is not an in-house Glenmark discovery.

But such observations don’t unsettle Saldanha. He has carefully chosen which horse to ride and spends more time in the stable grooming future horses than most chief executives do.

He had decided to place his bets on innovation in 1998, on his return to India after five years in the US. In the US, he had worked with Eli Lilly and, as a consultant for PricewaterhouseCoopers, with Bristol Myers Squib, Smithkline, and Johnson & Johnson.

Between 1998 and 2001 when Dr. Reddy’s Laboratories (DRL) had out-licensed its first two molecules, Saldanha knew he wanted Glenmark to innovate. In 2000, it went public and in 2001, taking $10 million from the IPO proceeds, he began the journey.

Initially, the focus was on small molecules (traditional synthetic drugs) for respiratory and metabolic diseases. But, by 2004, he was bitten by the biologics bug and went in search of government sops for setting up a new centre.

He found the Swiss government’s incentives and local talent (Roche and Novartis are Swiss giants) appealing, and the city of Neuchatel became Glenmark’s biologics centre.

Achin Gupta, senior vice-president, corporate strategy, recalls his first task in Neuchatel: To hire a boutique head-hunter. “It wasn’t easy as most Indian companies were known to have a shell presence [overseas] with no real action,” he says.

By 2006, Glenmark found Michael Buschle, who now heads the Swiss centre as president, biologics. Buschle had taken his Austrian start-up Intercell AG public and was looking for fresh career challenges.

“It was a bit boring at Intercell, so the timing was good. Glenmark had done the Forest Labs deal [in 2004], there was enough know-how in the company,” he says.

Monoclonal antibodies were the obvious focus areas as four out of the top five drugs at that time were based on this platform. With GBR 500, Buschle says, the group has packaged a huge amount of test data for Sanofi and the experience would hold Glenmark in good stead for other biologic molecules in the pipeline — GBR 600, CD-19, Trk-A.

The next challenge, Buschle says, is to have two more out-licensing deals so that Glenmark has enough money to continue investing in research.

Even if they have a dry spell of not discovering a new molecule, and there will be some, says Abhishek Singhal, analyst at Macquarie Securities, they have a buffer. “Glenmark’s R&D asset has been vetted by the likes of Sanofi and Lilly; Saldanha is pretty much the torch-bearer,” he says.

To overcome dry runs, the company ensures that the turnaround time for a molecule — from identification to proof-of-concept — is very short. It’s about two years, compared to the five to six years of a big pharma, says Saldanha. Geographic distribution of skills, such as chemistry and pharmacovigilance in India, toxicology and regulatory approvals in the UK, biologics in Switzerland, adds speed to the turnaround. Buschle believes this speed also gives them “the luxury of having many molecules”. It has helped Glenmark out-license a molecule every year since its first in 2004, and that remains its goal in the near future.

Additionally, the company has entered the next-generation biologics space — bi-specific antibodies. The drug binds to two ‘targets’ (active disease sites) as opposed to a single site that a standard antibody targets.

This is an area with frenetic buying and selling between big pharma (desperate for new therapies) and small biotech companies (desperate for funds) developing these technologies. In two of the several deals made in 2010, German pharma Boehringer Ingelheim paid $2.2 billion to Macrogenics and $1.7 billion to f-star Biotechnologische for such technologies.

Infographic: Sameer Pawar

Saldanha looks excited with these developments, particularly because it holds promise for anti-cancer drugs. The biggest challenge in developing a biologic drug is to engineer an antibody that is stable. “We have achieved 90 percent stabilisation; others are at 50 to 60 percent stabilisation,” he notes.

Course Correction
The present may look good, but Glenmark had a harrowing time not too long ago. In 2008-09, Eli Lilly suspended work on a diabetes drug that Glenmark had out-licensed; its first out-licensed molecule to Forest Labs too failed. To top this, there was no new licensing deal and investors were losing patience.

“Analysts said why spend $35 million on R&D, add that to profit and it will give you so much PE multiple, multiply that by 20 times…,” Saldanha trails off. “But if you want to play the innovation game, you need a different operating style, different mindset and passion.”

He has exhibited all of that. If 2004, when the company out-licensed its first drug, was the “transformational year that validated” his position, 2008 was a watershed year, with the first failed molecule.

Saldanha understood that being late in the game even with best-in-class drugs was risky and that metabolic diseases were a dicey area to be in, especially with the US Food and Drug Administration slapping newer, bigger studies for drug approval. He exited both.

Most of Glenmark’s molecules now are either first-in-class or are pursuing new indications where they can become so. “Along with the TRPV3 programmes, Glenmark is the only company globally to advance a molecule (GRC 15300) to clinics,” says Dr. Arpad Szallasi, hematopathologist at Monmouth Medical Centre, New Jersey, a pioneer in this area who consults for Glenmark. The company out-licensed TRPV3 to Sanofi in 2010 for an upfront fee of $20 million in a $325 million deal that covers marketing rights in a few developed markets.

Agility to foresee the potential of a drug, research, and the regulatory environment is what has given Glenmark the edge. Those who’ve not done so have lagged behind, despite having a good head start.

DRL was the first to out-license two diabetes molecules to Novo Nordisk in 1998 and one to Novartis in 2001. But none of the molecules advanced in clinical studies, stalling its innovation. “PPAR were promising insulin sensitisers, but that class of molecules had a big question mark and the DRL programme [of drug discovery] was pared,” says Satish Reddy, managing director and COO of DRL.

In 2006, the company spun out its R&D division as a separate entity called Perlecan Pharma. This model was followed by Piramal Healthcare and Sun Pharma too. But no significant out-licensing deal has been struck yet. (Perlecan Pharma merged with DRL in 2008.)

Many promoter groups got lured by the stock market and spun off their R&D to shore up the profitability of the parent company, says Saldanha.
Sun pharma’s R&D spin off SPARC (Sun Pharma Advanced Research Company), at a cost of $50 million, generated $35 million in income from operations in the past five years, post de-merger from the parent company.

According to a June 22 Macquarie Research report, SPARC spends Rs. 700 million in research annually that “isn’t expensed through Sun’s profit and loss contributing to a hypothetical market cap release of about $200 million for Sun, adjusting for the tax credits. The total valuation boost is $600 million for long term shareholders of Sun.”

In contrast, says the report, the market is ascribing Glenmark’s R&D initiative a negative market cap of about $250 million (15 percent of current market cap). Expense of Rs. 1 billion goes through the P&L but no value attaches to its innovation.

Saldanha still believes in the integrated business. Funds and expertise generated in one come handy in the other. He thinks the market will get around to valuing his business model. Some would say it is already, albeit only to an extent. “The multiple at which mid-cap pharma trades is about 13; for large pharma it is 20 times. Glenmark is now trading at 15-16 times, so it does get some weightage,” says a Mumbai analyst.

The Realist
Although the past two years have been good, Saldanha isn’t rushing to ramp up his research. Glenmark will continue to focus on two therapeutic areas, inflammation (respiratory and pain) and oncology, working with six to seven molecules at a time. The learning from the initial deals and failures (only two of the six deals are alive today) has been used to get better valuations.

Saldanha admits that if the molecule and accompanying data are good, big pharma, which is acting increasingly like a venture capitalist and marketing/distribution firm, “doesn’t mind overpaying”.

This has been possible, says Achin Gupta, because the team has learnt to translate animal data to humans. Similarly, from the first failed Forest Labs molecule (Oglimilast) to the third attempt in that class of molecules, Revamilast, is a big leap. Revamilast is undergoing phase IIb studies in five countries for asthma and rheumatoid arthritis. If it is a success, the company could hit the jackpot as there is no oral medicine for this disease right now.

The results are impressive, but it’s been more than a decade for Glenmark in this business and there is no drug close to the market yet. Does that align with the larger industry tradition?

“You must be joking” is what Saldanha’s expression says, but politely mouths, “Big pharma has been doing this for 100 years. A decade is just a blip on the horizon”.

The year 2016-17 is when he is expecting to hit a home run, given that drugs fail even as late as in phase III of tests, what’s the guarantee of success?

“We probably have the best shot,” is all he’d say.