Pharma R&D spending outpaces growth in operating income
Domestic pharma companies are increasingly focusing on research and development (R&D) to create a robust product pipeline to drive future growth. Analysis of the last four years' numbers shows that the growth rate of R&D expenditure has consistently outpaced operating income (OI) 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 Pharma, Cadila Healthcare (Zydus), Sun Pharmaceuticals and Glenmark) the growth rate in R&D spend has been more than the growth rate in OIs. Jain added that overall R&D spend includes both incremental capital expenditure as well as recurring expenses.
In FY14, while OI of Big Pharma grew 24.2 per cent, R&D spend grew 32.7 per cent. In FY17, this came to 8.5 per cent growth in OI while R&D spend grew 17 per cent, almost two times the growth of OI.
Jain informed that in the first quarter of the current financial year, R&D spend, as a share of OI, stood at 9.5 per cent. This is already higher than the nine per cent share in FY17. In terms of R&D cost, as a share of OI, the share has been rising too. From a 5.8 per cent share of OI in FY12, it had grown to nine per cent in FY17.
For some 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 ~432 crore in FY17, or about seven per cent of its revenues. (Torrent is not a part of the ICRA sample). Torrent is currently working on several inhouse new chemical entity (NCE) projects in the areas of metabolism, gastrointestinal and respiratory disorders. So far, it has filed 552 applications for NCE patents from these and earlier projects, and so far 245 patents have been granted.
"Our strategy is to develop novel drugs relevant for India and other principal-branded markets. 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 on developing innovative products primarily in monoclonal antibodies.