Four major drug firms -- Dr Reddy's Laboratory (DRL), Sun Pharmaceuticals, Nicholas Piramal India Ltd [Get Quote] (NPIL) and Ranbaxy Laboratories [Get Quote] -- spun off their research and development and drug discovery operations into separate units to unlock better value for shareholders and attract funds for new products.

The collective market capitalisation of new research entities is estimated to touch $120 billion in less than a decade.

Simultaneously, the industry is at loggerheads with the government over the controversial National Pharma Policy. The new policy still looms large with a Group of Ministers

expected to take it up next month. The industry, however, was successful in buying more time during the year, more by default, as two meetings of the GoM remained inconclusive.

Earlier in January this year, the union cabinet asked Agriculture Minister Sharad Pawar to head a GoM for discussing the policy that was intensely pursued by Chemicals Minister

Ram Vilas Paswan. The GoM held two meetings without any result due to a lack of consensus on the issue of expanding price control to 354 essential medicines, besides the existing 74 drugs under Drug Price Control Order (DPCO), 1995.

The industry has maintained that price control would not help in making medicines more affordable and accessible, but would only discourage crucial R&D.

Unable to implement the policy and bring down prices of drugs, the Chemicals Ministry tightened the noose on the industry by reducing the permissible price increase limit on medicines that are out of DPCO 1995 to 10 per cent in a year from the earlier ceiling of 20 per cent.

Amid this tussle, the pharmaceutical industry continued its march forward. The firms realized they will have to develop new drugs and have a larger focus on R&D operations to grow in future. This prompted them to spun off drug development operations into separate subsidiaries.

Analysts predicts if the country's top 10 pharmaceutical firms hive-off their R&D divisions, the collective market capitalisation of new research entities would touch $120 billion in less than a decade. Compare this with the present $20-billion collectively invested by the firms in R&D, with the industry size being about $150 billion.

Though R&D requires huge investments, it does not guarantee new drugs. This makes sense for companies to demerge their R&D units, a move which is expected to reduce the cost burden on other group businesses and improve valuation.

Sun Pharma [Get Quote]ceuticals, India's most valued pharma firm, was one of the first to announce hiving off its R&D activities into Sun Pharma Advanced Research Company. The new entity is now listed on stock markets and the parent firm will invest about $100 million in it over the next few years.

Likewise, NPIL is also spinning off R&D operations and expects a separate listing by middle of next year. The company is developing 13 new chemical entities (NCE) and expects to launch its first patented drug by 2010.

India's largest drug firm by sales, Ranbaxy, is the latest entrant to the list. The company would start operating its R&D NCE arm as a separate unit from January and expects a listing later in the year. Hyderabad-based DRL also set up Perlecan Pharma Pvt Ltd for R&D operations.

Indian companies, which were active on the mergers and acquisition front last year, decided to go slow in 2007. The industry restricted itself to consolidation on the domestic turf rather than looking for acquisitions abroad.

The year saw only a few outbound acquisitions and instead of bigwigs like Ranbaxy, mid-size firms like Sun Pharma and oncology drug maker Dabur Pharma [Get Quote] hogged the limelight.

Sun Pharma acquired Israel's Taro Pharmaceutical Industries, a multinational generic manufacturer for about Rs 1,800 crore (Rs 18 billion) in the year's biggest in the sector. Dabur Pharma acquired oncology sales and distribution network of its Thai partner Biosciences Co Ltd, and sold its non-oncology based products to Ahmedabad-based Alembic Ltd [Get Quote] for Rs 159 crore (Rs 1.59 billion).

Dabur Pharma said sale of non-oncology business would help it in focusing on its core area of oncology drugs. It is India's biggest oncology player and has a substantial share of anti-cancer drug market in various South-east Asian markets.

Earlier in the year, Ranbaxy, DRL and Ahmedabad-based Torrent [Get Quote] Pharma put in bids to acquire German pharmaceutical company Merck's generic business. While Ranbaxy and DRL pulled out of the race citing over-valuation, Torrent was fighting it till the last only to lose out to Teva, which paid $6.5 billion for the deal.

Ranbaxy later went ahead and consolidated its stake in Hyderabad-based Zenotech to 45 per cent from seven per cent initially in a deal worth Rs 214 crore (Rs 2.14 billion). The move is in line with the Gurgaon-based company's strategy of expanding its presence in new therapeutic areas.

The deal provided Ranbaxy access to bio-similar and oncology segments - two key segments where it did not have a presence earlier.

Indian firms also bagged various in-licensing deals to sell drugs made by foreign players in India. Mumbai-based Wockhardt Ltd [Get Quote] entered into a deal with Syrio Pharma SpA for dermatology products, while Cipla has lined up similar deals with four-five multinational firms for biotechnology products.

Ranbaxy also acquired the rights to market 13 dermatology products from Bristol-Myers Squibb (BMS) for Rs 105 crore (Rs 1.05 billion).

Amid all this, the rising rupee against the US dollar took its toll on pharma industry with exports declining by as much as 20 per cent over last year. The industry, which exported Rs 20,000 crore (Rs 200 billion) of drugs last year, missed its projected 14 per cent growth in the April-June quarter.

Exports dropped 20 per cent in value terms during the period to Rs 5,054 crore (Rs 50.54 billion) from Rs 6,069 crore (Rs 60.69 billion) in the year-ago period. Exports declined for the first time in five years during April-June.

Industry body Pharmaceuticals Export Promotion Council predicts India is likely to miss its export target for the year by more than 25 per cent after the Indian currency rose more than 12 per cent against the dollar in 2007.

Yet, pharma players are upbeat that their new focus on R&D and expansion into emerging markets will pay dividends in future. They feel a big step towards that was taken in 2007 and similar measures will be needed in the New Year.

PTI