'India began drug discovery before China, but China has moved years ahead'

India's pharma industry must pivot from global leadership in generics to innovation, backed by stronger policy, R&D funding and regulatory reforms, says Satish Reddy

India’s pharmaceutical industry used the  opportunities created by liberalisation to build  globally competitive capabilities in active pharmaceutical ingredients (APIs), formulations, generics and biosimilars. The industry’s next major pivot must be towards innovation, says Satish Reddy, chairman of Dr Reddy’s Laboratories. In a video interview with Sohini Das, Reddy discusses the company’s early international ambitions, the impact of the 1991 reforms, India’s loss of API leadership to China, and the policy framework needed to support drug discovery. Edited excerpts: 

What was your experience of the reforms of 1991? 

I returned from the US in December 1990 after completing my education. Things changed quickly. In early 1993, a team from research and development (R&D) — which was literally the heart of the company then — left. My father, Dr Anji Reddy, put me straight into the thick of things to restore order. That is how I moved into an operating role. 

I was aware of the reforms because my father frequently discussed the business. I had heard about the difficulties of doing business in the highly controlled pre-reform era. From 1992, I became part of the journey of taking the company in a different direction as new opportunities opened up. 

Did the firm immediately recognise the opportunities created by liberalisation? 

The company began in 1984 as a producer of APIs and then entered formulations in India. Even in 1990, revenues and profits largely came from APIs. But we were already exporting. The company went public in India in 1986, and I believe the first US Food and Drug Administration (USFDA) approval for a plant came in 1987. 

We were exporting off-patent APIs to the US before liberalisation. We developed better, high-quality processes for products such as ibuprofen and methyldopa. In ibuprofen, we displaced Italian and Japanese suppliers and became the third-largest supplier in the US. 

Liberalisation did not create that ambition. What it did was open a much larger opportunity in formulations and international markets. Original drug discovery was a natural extension of our scientific capabilities, while the Trade-Related Aspects of Intellectual Property Rights agreement and the impending change in India’s patent regime gave it further impetus. 

Did improved access to capital fuel Dr Reddy’s research ambitions? 

We had already raised money in the Indian market, but liberalisation opened international capital markets. In the 1990s, we raised about $48 million through a global depositary receipt issue listed on the Luxembourg Stock Exchange. 

We had begun our discovery programme around 1992. It was an extremely risky bet for a company whose profits came largely from APIs. Discovery required substantial capital, returns would not be immediate and failure rates were high. Dr Reddy wanted the financial ammunition to pursue that ambition without being burdened by debt. International institutional investors also expected higher standards. That changed our practices, including quarterly disclosures, accounting standards and governance. 

Industrial licensing was abolished. Import duties were lowered, making it easier to acquire advanced equipment. Controls on foreign exchange and travel were also eased, allowing us to access technology, consultants, partnerships and specialised talent more readily. 

How did liberalisation help Dr Reddy’s become a global formulations player? 

The API business had already taught us how to compete globally. In a product such as ibuprofen, chemistry skills gave us a lower-cost process, but cost alone was not enough. We also had to meet USFDA standards, undergo plant inspections and understand the regulatory process. We acquired those capabilities before 1991. 

We then applied those lessons to formulations. The opportunity in the US was created partly by the Hatch-Waxman Act, but liberalisation enabled the investment required to pursue it. (The Act offered a regulatory pathway for generics to secure marketing approvals in the US either by successfully challenging the patent or proving the patent was not infringed). 

Work on the Bachupally plant for the US market began around 1996. It required imported equipment, expertise, scale and capital; the first commercial sale came in 2001. The GDR proceeds helped fund these investments as well as research. 

We transferred our API capabilities in quality, cost, efficiency and process innovation to formulations. Patent challenges also required intellectual-property skills. Dr Reddy’s secured its first 180-day exclusivity with fluoxetine 40 mg. 

We built scale product by product, not only in the US but also in Europe, Latin America and other markets. Today, we supply to about 80 countries because the foundations were built during that phase. 

In 2001, Dr Reddy’s became the first Indian pharma company to list on the New York Stock Exchange (Photos: company)

 

How did the company approach expansion across geographies? 

Each market required a different approach. Europe was not a single market then; each country had its own regulatory system and required separate filings. The UK moved towards generics faster, while France, Spain and Italy came later. 

Russia was a completely different branded-generics market. We were among the early companies to establish a significant presence there. The break-up of the Soviet Union created an opportunity: Government procurement was important, and we registered our products at the right time. 

Depending on the market, we used partnerships, direct presence or distributor-led models. Distribution was especially relevant in parts of Asean. There was no single formula for international expansion. 

How did India become dependent on China for APIs? 

India was the dominant API producer before China emerged at scale. We led in new products, including off-patent products and products supplied to countries that did not then recognise patents. Dr Reddy’s was one of the leading API companies. 

China’s rise was a concerted, state-backed effort. Technology was accessible, but China built plants at a scale that pushed Indian producers out of several products. 

We were once among the largest producers of ciprofloxacin, for example, but eventually stopped manufacturing it and began sourcing it from China. State support enabled Chinese producers to out-compete others. India did not have comparable subsidies or sufficiently effective policy responses, including anti-dumping measures. 

Even before the pandemic, Dr Reddy’s had begun diversifying sources rather than relying on one country. The pandemic made supply-chain resilience a global priority. India’s dependence remains substantial, particularly for key starting materials. 

The tide is beginning to change as companies diversify and India attempts to support domestic production. 

How did the shift to a product-patent regime affect Indian pharma and Dr Reddy’s research strategy? 

The shift was known well before 2005. India signed the General Agreement on Tariffs and Trade (GATT) in 1995, so companies had time to prepare for it. Some companies moved into original research. Dr Reddy’s was the first off the block. We demonstrated that possibility in 1996-97 when we licensed a molecule to Novo Nordisk. Other companies — Glenmark, Wockhardt, Lupin, Torrent and Zydus, among others — also entered discovery research. But the policy ecosystem did not develop sufficiently to support that ambition. 

Indian companies nevertheless became globally competitive in APIs, formulations, generics and biosimilars. The first phase after liberalisation was about building these capabilities. The next pivot has to be towards innovation. 

What policy changes are needed for India to make the next leap in pharmaceutical innovation? 

We need a carefully orchestrated innovation framework built around four elements: Regulation, funding, infrastructure, and academia-industry collaboration. 

First, the drug-discovery regulatory system needs further reform. Approval timelines were historically long, partly because the regulator lacked in-house expertise and relied on subject expert committees drawn from institutions such as All India Institute Of Medical Sciences. These experts often had limited experience of global clinical trials. 

Even companies with global development expertise faced delays, prompting Indian companies to conduct Phase-I studies in countries such as Australia and Malaysia. 

The system has started improving, and companies are again considering or conducting Phase-I trials in India. But the scientific cadre needs to reside within the Central Drugs Standard Control Organisation so that decisions can be made with the necessary expertise and speed. 

Second, funding must be available at different stages and recognise the risks of drug discovery. Startups face one set of problems, while large listed companies face another. R&D is expensed, and if returns do not materialise, listed companies find it difficult to sustain investment under market scrutiny. 

The government’s Promotion of Research and Innovation in Pharma-MedTech scheme is a good beginning, although ₹5,000 crore is small relative to the need. BioPharma Shakti is also important as biologics form a growing share of the global pipeline. 

India’s venture-capital system for drug discovery is underdeveloped. China reduced the risk for private venture funds by investing alongside them. It combined grants and venture-capital funding with a reimbursement system that created a domestic market for successful drugs. 

Third, India needs research infrastructure designed specifically for discovery. Existing research parks are fragmented and need specialised infrastructure, mentorship and links with academic institutions. The country needs a model suited to its own system, but with the essential elements seen in ecosystems such as Boston: Academia, startups, research infrastructure and large pharma firms working together. 

Fourth, incentives need to be restored and improved. Weighted deduction of 200 per cent of the research and development expenditure for calculating taxable profits was withdrawn because it was misused by some companies. That should not penalise the entire sector. 

The government can create guardrails and bring the incentive back. 

Industry data show that companies invested more when the deduction was available. The research expenditure and subsequent revenue generation outweighed the near-term revenue forgone by the government. 

 

Does India’s low-price market make it harder to recover the innovation cost? 

The Indian market is not sufficiently conducive to recovering the cost and risk of original research. A product launched only in India may generate a few hundred crore rupees, which does not cover the development cost, much less the cost of earlier failures. 

Multinational companies also hesitate to launch some new molecules in India. They have limits on how low they can price a drug because lower Indian prices can affect other markets through reference pricing. Patient-access programmes can improve reach but do not solve the market problem. 

New products are not under price control, but the question is who will buy them. Government procurement is small and largely limited to channels such as the Central Government Health Scheme and some state programmes. 

We have asked the government to create a dedicated procurement fund for innovative products, whether developed by Indian companies or multinationals. A predictable public market would improve patient access and allow innovators to recover at least part of their costs. 

Will the next innovation wave come from startups rather than large listed pharma companies? 

India needs a vibrant ecosystem that includes both startups and large companies. For large companies, the government does not have to underwrite the whole risk, but it can underwrite part of it. 

The scale, however, must be meaningful compared with countries such as China. 

Pharma companies account for about 30 per cent of private-sector research spending within the country’s overall research expenditure, even though India’s total R&D spending is only around 0.7 per cent of its gross domestic product. 

Companies are spending, but the stock market gives them little or no additional valuation for discovery research, while venture funds generally prefer to enter at a later stage. 

After 35 years, has Indian pharma exhausted the opportunity created by liberalisation? 

The first phase was generics. India built globally competitive capabilities in APIs, formulations, generics and biosimilars. But we have lost ground in areas where we once led. India began original drug discovery much earlier than China, yet China has moved years ahead. 

The capabilities still exist in India, and large companies have shown that they can discover molecules. What is required now is a policy framework that encourages and incentivises innovation across the ecosystem. 

The next major pivot for Indian pharma has to be from global competitiveness in generics to innovation. Government policy must enable that shift.