Indian School of Business

ISB028

June 30, 2013

Nita Sachan | Charles Dhanaraj

Organizing for Innovation at Glenmark (A)

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and CEO of Glenmark Pharmaceuticals, remarked to Rajesh Desai, Executive Director and Chief
Financial Officer of Glenmark, as the two prepared to meet with the board in June 2008. The global
financial crisis that had been unleashed in 2008 was challenging most firms, owing to the suddenness
with which it had stalled much of Europe and the United States and was threatening Asia. For
Glenmark, it had been a rolleU FRDVWHU \HDU 7KH FRPSDQ\¶V UHVROYH WR UHPDLQ HQJDJHG LQ KLJK-risk
discovery research was being tested. In February 2008, Merck Serono, a division of global drug major
Merck KGaA, terminated its out-licensing agreement with Glenmark, signed in 2006, to co-develop the
novel molecule Melogliptin (GRC 8200) for type-2 diabetes in Phase II of clinical development. In
2FWREHU DQRWKHU RI *OHQPDUN¶V RXW-licensees, Eli Lilly and Company, decided to suspend clinical
trials. To make matters worse, early results from a longstanding collaboration with Forest Laboratories
on another molecule had not been very encouraging.

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XQGHU D %LOOLRQ´ $QG LQ 'HFHPEHU  *OHQPDUN Ueceived two of the most coveted awards in the
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which started at INR 708 per share in mid-June, had plummeted to INR 252 by the end of the year.
Saldanha had to brief the board on whether the company would change its R&D strategy or stay the
FRXUVHDQGDFFRUGLQJO\UDOO\*OHQPDUN¶VPDQDJHPHQWDQGHPSloyees.

THE INDIAN BIOPHARMACEUTICAL INDUSTRY

The global biopharmaceutical industry in 2008 was reeling under the worldwide financial crisis.
The industry had generated revenues of US$773 billion in 2008, and its annual growth had slowed to
4.8% from 6.6% in 2007. , The total industry revenue was expected to drop to US$734 billion by
12
3
2013. Moreover, the industry was plagued by challenges on numerous fronts, a situation that was

1
³Global Pharma Looks to India: Prospects for Growth,´ PwC report, 2008.
2
³7RWDO8QDXGLWHGDQG$XGLWHG*OREDO3KDUPDFHXWLFDO0DUNHWE\5HJLRQ,´ IMS Health ,2009.
3
Global Top 10 Pharmaceutical Companies, Datamonitor Report, 2009.
Nita Sachan and Professor Charles Dhanaraj prepared this case solely as a basis for class discussion. This case is not
intended to serve as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This
case was developed under the aegis of the Centre for Teaching, Learning, and Case Development, ISB.

Copyright @ 2013 Indian School of Business. The publication may not be digitised, photocopied, or otherwise reproduced,
posted or transmitted, without the permission of the Indian School of Business.

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 ISB028

only worsened by the growth in the generics industry, with the global market for generic drugs
projected to reach US$129.3 billion by 2014.
th 4
In 2008, the Indian pharmaceutical industry ranked 14 globally with sales of US$19 billion and
was estimated to grow to US$50 billion by 2020. The lax patent policy, which was in force from 1970 to
2005, had led to the development of an indigenous pharmaceutical industry that had become a
significant player in the global generics business. The Indian generic drug market was expected to
grow at a compound annual growth rate (CAGR) of around 15-20 per cent. India produced more than
20 per cent of the world's generic drugs. Almost one-third of the Abbreviated New Drug Applications
(ANDAs) had been granted to Indian firms by the U.S. Food and Drug Administration (FDA). With the
HFRQRPLFOLEHUDOL]DWLRQRIWKHVDQG,QGLD¶VHQWU\LQWRWKH:RUOG7UDGH2UJDQL]DWLRQLQ,QGLD
was tightening its patent regime, and a handful of Indian companies were exploring discovery research
as a way to create a high-growth, high-margin business.

Drug discovery was a high-risk activity. The average investment required for drug development,
5
from discovery to marketing, was estimated at nearly US$800 million to US$1 billion (see Exhibit 1).
Of the millions of molecules explored as potential drugs, only a small percentage would develop into
new chemical entities (NCEs). The protracted clinical trials phase that was necessary to obtain
regulatory approval increased the risk even further. This was further compounded by pricing pressure,
including mandatory price cuts and stringent reimbursement regulations. In 2008 alone, US$62.3
6
billion was spent on pharmaceutical R&D, approximately US$1.2 billion per new discovery. Clinical
trials accounted for two-thirds of the drug development cost, and increasing cost pressure was leading
7
many large pharmaceutical firms to pursue aggressive licensing strategies. Big Pharma , in particular,
was licensing promising molecules from smaller firms for further in-house development.

As drug development costs soared, global pharmaceutical companies began looking towards
emerging markets such as India, where clinical trials were estimated to cost 30-65 per cent of the cost
in the United States or the European Union. Due to the large and diverse patient populations available
in emerging markets, it was also easier to recruit patients, which, in turn, shortened drug development
8
time. This had led to a contract research industry in India, growing at an annual rate of between 20 to
SHUFHQW7KH,QGLDQJRYHUQPHQW¶V'HSDUWPHQWRI6FLHQWLILFDQG,QGXVWULDO5HVHDUFKSUHGLFWHGWKDW
E\  ,QGLD¶V VKDUH RI JOREDO 5 ' H[SHQGLWXUH FRXOG UHDFK -3 per cent, translating to between
US$1-3 billion.

The growing phenomenon of Western companies entering into alliances with and/ or acquiring
domestic Indian companies was indicative of the need of these large companies to augment their own
portfolios. The Indian pharmaceutical market demonstrated high potential and was expected to
feature strong growth in the future. In June 2008, Daiichi Sankyo, the second largest Japanese
pharmaceutical company, shocked the industry with its acquisition of Ranbaxy, a top 10 global
9
generics player, for US$4.6 billion (see Exhibit 2).

GLENMARK PHARMACEUTICALS
Gracias Saldanha, a graduate of Bombay University, established a drug company in 1977 to
manufacture and market skin care products with only INR 100,000 (approximately US$3,000) from his

4
³Global Pharma Looks to India: Prospects for Growth,´ PwC report, 2008.
5
DiMasi, J. A., Hansen, H. W., and Grabowski, H. G. ³The Price of Innovation´ Journal of Health Economics 2003,
22:151-185.
6 ³R&D Cost Cutting: Managing Cost Containment and Safeguarding Productivity,´ Datamonitor, 2009.
7 Big Pharma- refers to the largest players in the pharmaceutical market.
8 The Continuing Evolution of the Pharma Industry: Career Challenges and Opportunities,
RegentAtlantic Capital, April 2010.
9
³The Ranbaxy-Daiichi Deal: Good Medicine, or a Harbinger of Future Ills?´ India Knowledge@Wharton, June 12,
2008, accessed in December 2012.
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10
pension money and three employees. Glenmark Pharmaceuticals Limited (GPL) was set up in
0XPEDLDQGQDPHGDIWHUWKHIRXQGHU¶VWZRVRQV*OHQQDQG0DUN*OHQPDUNPDGHLWVIRUD\LQWRWKH
pharmaceutical industry in the area of dermatology. During 1979-2000, the company expanded its
product lines to include respiratory, internal medicine, pain management and diabetes drugs. By
1996, Glenmark had more than 60 products in the Indian market and had established an exports
division.

In 1998, Glenn Saldanha, the elder son of the founder, returned to India from the United States
following the death of his father and was appointed director of Glenmark Pharmaceuticals. Saldanha
KDG HDUQHG KLV %DFKHORU¶V GHJUHH LQ 3KDUPDFRORJ\ IURP %RPED\ 8QLYHUVLW\ DQG DQ 0%$ IURP WKH
Stern School of Business, New York University. After graduating from Stern, he joined the global
marketing team of U.S.-based pharmaceutical major Eli Lilly and subsequently worked with Price
Waterhouse Cooper as a management consultant. On taking over the reins of Glenmark, Saldanha
set in motion his ambitious plans to take the company beyond generic drugs manufacturing.
Benefiting from his exposure to international pharmaceutical companies, he strongly felt that in order
to survive in the highly competitive and crowded pharmaceutical industry, Glenmark needed to enter
the drug discovery and research business. Saldanha recalled:

When I moved back from the U.S. in 1998, Glenmark was a very small firm; 99 per cent
11
of our business came from India. India had just signed the WTO TRIPs agreement in
1995 and this was expected to change the operating landscape for Indian companies.
Our management team came together and we made a conscious choice. We were
putting our strategy in place  what segments we would play in and how we would build
our business. We hired Arthur Andersen LLP to guide the strategy process. That was
how we got into the innovation space. To a large extent, my belief in the execution
aspect came from my background and experience working as a consultant with various
companies in the U.S. That is what gave me the conviction and commitment to execute
something like this in India.

JOURNEY INTO HIGH-RISK INNOVATION

Glenmark announced its IPO in 2000, with the issue being oversubscribed 65 times and a market
capitalization of US$40 million. The IPO raised US$10 million, which enabled the company to invest a
substantial amount in building a discovery research center in Navi Mumbai, India. Saldanha reflected
RQ*OHQPDUN¶VUHVHDUFKLQLWLDWLYH

From 1978 till 1998, we were an India-specific domestic formulations company selling
dermatology products, respiratory products and products in various other therapeutic
sectors. Since 1998, we have pursued several new fronts. We started our innovation
focus in 2000. We got into API (active pharmaceutical ingredients) manufacturing in
2003 and subsequently expanded into the U.S. generics space in 2004. We slowly built
our capabilities ground up. We did a lot of initial groundwork. We saw labs in the U.S.
and studied the infrastructure overseas. We put together a strong management team,
UHFUXLWHGDORWRISHRSOHRI,QGLDQRULJLQIURPWKH86DQGSURPLVHGWKHPDµELRWHFK-OLNH¶
environment, where there was a lot of freedom. When we listed the company, we gave
stock options to the whole leadership team, which kept everyone motivated.

6DOGDQKD¶V ILUVW VWHS LQ DGYDQFLQJ WKH FRPSDQ\ WRZDUGV LQQRYDWLRQ-driven growth was to hire
motivated individuals like Neelima Joshi, who went on to become Head of R&D. Joshi, a PhD in
Molecular Biology from Bhabha Atomic Research Centre (BARC), a renowned research institute in
India, brought her extensive experience in discovery research to the table. Joshi recalled:

10
³6HFUHW%HKLQG*OHQPDUN¶V6XFFHVV´Redif.com, June 14, 2006, http://www.rediff.com/money/2006/jun/14spec.htm,
last accessed in December 2012.
11
WTO TRIPS refers to World Trade Organization (WTO) agreement on Trade Related Aspects of Intellectual Property
Rights (TRIPs) that sets down minimum standards for many forms of intellectual property (IP) regulations.
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I came as part of the core team to establish the R&D labs, recruit people and start
projects where nothing existed. We were just six or seven people who came with some
experience in drug discovery concepts and techniques. This whole concept of drug
discovery was totally new, and not just to our company; the language of drug discovery
was not well-known in India, neither to scientists nor to pharmaceutical companies.
Getting the right talent was a difficult task as drug discovery is really a cross-functional
effort, a novel concept to most Indian institutions.

*OHQPDUN¶V LQLWLDO 5 ' IRFXV ZDV RQ GLDEHWHV DQG LQIODPPDWLRQ :LWKLQ D VKRUW WLPH WKH 5 '
center in Mumbai had built a small team, comprising 50-60 people primarily from biology, chemistry,
pharmacokinetics and toxicology backgrounds. However, it was difficult to find regulatory, project
management and clinical specialists. Saldanha elaborated:

Back then [in 1998], the skill availability for drug discovery in India was very poor. We
picked inflammation and metabolic disorders because those were the only two skill sets
available in India. Interestingly, these therapeutic areas were large and of enough
significance for MNCs to partner with us and take notice. Hoechst Marion Roussel, which
later became part of Sanofi-Aventis, had invested in a research facility in India. We were
able to tap into the pool of return migrants with PhDs and postdoctoral degrees from
Harvard and other prestigious institutions, who ended up working in the API side of the
business because they could not find appropriate research opportunities in India. Our
current chemistry division head was a postdoc with a Nobel Laureate. When he initially
came back to India, he was working in process chemistry for another firm. We were able
to hire a multi-talented team and provide them with right environment. We invested
heavily in what they needed, both in terms of equipment and training.

Saldanha was appointed CEO in 2001. The company launched its bulk drug manufacturing of APIs
or bulk drugs, comprising mostly of dermatology products. In 2002, Glenmark's API business was
strengthened by the acquisition of an API manufacturing facility from GlaxoSmithKline (GSK) in
Gujarat, India. Glenmark aspired to develop capabilities across the complete value chain. Saldanha
said:

2000-2004 was a difficult period for the company. We took great risks. At one time, we
put our entire profit into innovative research. It was a situation where you either succeed
or you shut down the research effort. We literally had our backs pushed to the wall by
investors and by everybody. Most people on the street hated us in the short run,
because we were putting our entire profit into high-risk research. However, we were
committed to doing innovative research, and got the right team  got our hands dirty at
the very basic level. Our team had the passion and dedication to do it. At the end of the
day, my belief that only innovation can succeed in India kept us going.

In 2004, the company established Glenmark Pharmaceuticals S.A., a wholly-owned subsidiary in

Switzerland. The subsidiary focused primarily on biologics research in addition to small molecule
research. Rajesh Desai, Executive Director and CFO, Glenmark Pharmaceuticals Limited, who had
worked with the company for over two decades, explained that in 2006, Glenmark opened a biologics
R&D center at Neuchâtel, Switzerland, in order to tap into the rich talent pool in Europe as India did
not have the requisite R&D capabilities in the area of biologics. The division employed 50 scientists
who primarily worked on monoclonal antibodies in oncology and inflammation. It also recruited
Michael Buschle as its Chief Scientific Officer. Buschle, a PhD in molecular biology from the
University of London, had worked for several years at Boehringer Ingelheim and was one of the co-
founders of Intercell AG, a successful biotech start-up. Desai recalled:

If one looks at the skill set that is available for scientific research and drug discovery
within India, a lot of it is in chemistry. Historically, we have been doing reverse
engineering (generics) and have been very good at chemistry. So it made a lot of sense
to have NCE research out of India. It is easy to get bright talent in that space because

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 ISB028

there are a lot of people who are doing it. But if you look at biologics, no Indian company
has done much. And in Switzerland, with companies like Novartis, Bosch, Roche, etc.,
who have done a lot of work in biologics, we could attract the type of talent we needed.

Glenmark was simultaneously moving forward on other fronts to build its capacity in international
markets. In 2004, with an eye on export markets, Glenmark established a manufacturing plant in Goa,
India, which met USFDA standards for manufacturing pharmaceutical formulations. The same year,
the company acquired Laboratórios Klinger in Brazil for US$5.2 million to bolster its operations in
Brazil. Glenmark also successfully acquired two FDA approved products from Clonmel Corporation,
12
Ireland. The company wanted to build a sizeable generics business that could generate the cash
required for investing in innovation. In 2008, Glenmark established a clinical division based in Oxford,
U.K. to help with clinical trials for its in-house pipeline of drugs. Patrick Keohane, with more than 30
years of experience in the pharmaceutical industry, was recruited as President and Chief Medical
Officer of the clinical division of Glenmark Pharmaceuticals Ltd. Glenmark felt that first-in-man clinical
trials would be difficult to conduct in India; thus, an overseas location where the necessary expertise
was available was critical for building their pipeline. Saldanha elaborated:

We have successfully built infrastructure in the rest of the world, i.e., Latin America,
Africa, Asia and CEE [Central and Eastern Europe], with the view that some day we will
have a molecule and we will leverage the current infrastructure to sell our own molecule
XQGHU WKH*OHQPDUNEUDQG,W¶VWKHVDPHPRGHO7KH PRGHOKDVQRWFKDQJHGVLQFH ZH
started. In the U.S., we have an unbranded generics business. The U.S. is a sizeable
market for us, with sales of US$250 million. We have five to 10 people on the generics
side who generally call on the large chains and wholesalers like Walmart, CVS,
Walgreens, etc.

Glenmark was balancing its aggressive approach to discovery research with careful management
of its generics and API businesses. Achin Gupta, a graduate in biochemical engineering and
biotechnology from Indian Institute of Technology (IIT), Delhi and an MBA from Indian Institute of
Management (IIM), Ahmedabad, had been with Glenmark since 1994 and had witnessed the
FRPSDQ\¶VHYROXWLRQILUVWKDQG,QKHZDV6HQLRU9LFH3UHVLGHQWDQG+HDG*OREDO6WUDWHJ\DQG
Mergers and Acquisitions at Glenmark PhaUPDFHXWLFDOV*XSWDVKDUHG*OHQPDUN¶VEXVLQHVVVWUDWHJ\

Ours is a three-pronged strategy. From being an India-centric company where 95 per

cent of the revenues come from India, we want to become a global company focusing
largely on emerging markets for our branded generics business. That was the first leg.
The second leg was to open up a pure generics business in developed markets such as
the U.S. The third leg was discovery research, not necessarily in this order or priority. I
think aspiration-wise, the first priority was research, the second priority was having a
front-end and the third priority was having a pure generics business. Obviously, when we
started all three between 2000 and 2004, all of them were in the investment phase, but
the fact that branded generics matured very quickly and started generating cash flows,
followed by the next leg and then the third one, lent some kind of stability to the whole
model.

BUILDING THE OUT-LICENSING MODEL

$VWKHFRPSDQ\¶V5 D capabilities were being developed and established, Saldanha focused on
finding global partners. Within the pharmaceutical industry, licensing deals were growing in frequency
and in complexity. For many small pharmaceutical companies, the focus of their R&D programs was
to develop a novel molecule and then license it out to Big Pharma. Saldanha mitigated the risk
inherent in discovery-driven R&D through other activities such as funded research agreements,
conducting bioequivalence and bioavailability studies for other firms as well as collaborations with
other discovery companies. Saldanha described Glenmark's out-licensing model:

12
Glenmark, Datamonitor Report, 2010.
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We come from the belief that even novel R&D needs to be monetized, and thus we were
clear that while we will do work at the cutting edge of R&D, we will out-license our
molecules to Big Pharma during the later stage of clinical trials. In this way, we would not
only hedge our risks as clinical trials cost millions of dollars, but we would also monetize
novel R&D at an earlier stage. We feel that by keeping novel R&D within the parent
company, we would continuously remain passionate about our discovery efforts. On the
innovation side, we said that whatever comes out of our pipeline, we will give up to the
U.S., Europe and Japan and keep the rest of the world rights with us in some shape or
form  either exclusively or through co-marketing.

)RXU\HDUVDIWHUWKHODXQFKRIWKHUHVHDUFKFHQWHULQ1DYL0XPEDL*OHQPDUN¶V*5&HQWHUHG
clinical trials in the United Kingdom, its first molecule to do so. Commercially known as Oglemilast,
GRC 3886 was a novel, oral drug for Chronic Obstructive Pulmonary Disorder (COPD) and asthma.
The company valued the market for this class of drugs at over $10 billion. Glenmark had filed an
application for a U.S. patent, which, if issued, would be valid until 2024. Saldanha recollected:

We were very aggressive in coming out with our first molecule. I used to spend two to
three days at a time at our research facility. In 2000 we were very small  US$40 million
in revenues, US$8-10 million in profit and US$10 million in research. Investors just killed
XVDWWKDWSRLQW7KH\VDLGµ<RXJX\VDUHVSHQGLQJ ZD\WRRPXFKPRQH\¶7KHUHZDV
huge pressure on us. We, as an organization, had to succeed or to shut down.

In September 2004, Glenmark out-licensed the molecule to a New York-based pharmaceutical

company, Forest Laboratories, to develop and commercialize the molecule for the North American
market, while retaining the rights for the rest of the world. The up-front payment upon the execution of
the agreement and other milestone payments were estimated at US$190 million, without considering
the potential royalties that Forest would pay to Glenmark after the commercial launch. The deal was
considered to be the single largest licensing deal concluded by any Indian pharmaceutical company at
that time. Saldanha recalled how the Forest deal had come about:

In the early days, most of the work was in the pre-clinical stage; we did animal studies
and toxicological studies. Forest noticed us at a scientific conference where we had
presented our work. They liked the work, and we subsequently made contact with them.
The Forest deal helped us in many ways, apart from the financials of the deal. It provided
us with the confidence that we could do something differently and that we were on the
right path. It showed us that someone was valuing the work that we were doing,
especially in a country like India, which was never recognized as an innovative nation. It
was inspirational for the entire Glenmark team. The years 2005 to 2007 were a huge
learning for us as a management team. Collaborating with Forest taught us a number of
things about drug development, which we never would have learned had we been on our
own.

Several successful licensing deals followed suit. In 2005, after the successful outcome of the
Phase I studies of Oglemilast, Forest and Glenmark announced that they had been allowed to
conduct Phase II studies of the drug. Within months, Glenmark sold the territorial rights for Oglemilast
in Japan to Teijin Pharma for US$53 million, including an up-front payment of US$6 million. The
PRQH\UDLVHGIURPWKHILUVWWZRGHDOVZDVXVHGWRIXQGWKHLUSLSHOLQHRIGUXJVDWWKDWWLPH*OHQPDUN¶V
research in the area of diabetes had yielded a novel molecule, Melogliptin, in a relatively short
timeframe of approximately three years. In 2006, Glenmark out-licensed the molecule for US$250
million to Merck KGaA, in Germany. Within a year, Glenmark developed a molecule for the treatment
of osteoarthritic pain, known as GRC 6211, and was able to negotiate an out-licensing agreement with
Eli Lilly for US$350 million (see Exhibit 3). Describing the evolution of their licensing activities,
Saldanha said:

We were the golden boys of research. Between 2004-2008, nothing could go wrong.
Whatever we touched turned to gold. In the early days, the primary channel was through

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scientific meetings and conferences, primarily in the U.S., where a lot of data would get
picked up and circulated. Subsequently, we put together a business development and
licensing group. Now the game is very different. We built networks with all the Big
Pharma companies and have discussions with them all the time.

Glenmark gained valuable knowledge and insights into drug development and innovation from
working on a diverse portfolio of collaborations. Saldanha explained:

The Japanese [Teijin] are very different from the Americans [Forest]. They are very
detail- oriented, very thorough. This taught us a number of things that we needed to do in
drug development. The Germans (Merck KGaA) have a completely different view about
drug development. From these three different deals, collectively, we learned a lot about
drug development and innovation.

There is so much tacit knowledge in this business. How to design Phase I clinical trials
and how to design biomarker studies in clinical trials early in the process to hedge some
risks are very complex matters. How do you do proof of concept studies in Phase IIa
versus large-scale trials, or what are the benefits of one over the other? We never knew
these things. That knowledge did not exist in India. If you look at our drug development
process now, we have incorporated all these aspects. We have included animal and
human ADME [absorption, distribution, metabolism and excretion] studies very early and
appreciate the role of biomarkers in clinical development. Pharmacokinetics and
pharmacodynamics now play a bigger role than in the past.

By the end of 2007, Glenmark decided to separate its generics business and pharmaceuticals
business into two separate entities  Glenmark Generics Limited (GGL) and Glenmark
Pharmaceuticals Limited  and allow each business to pursue its own distinctive skill set needs,
objectives and growth imperatives, while being driven by independent and aligned management
teams. Glenmark expanded its overseas R&D capabilities by setting up an R&D facility for clinical
research in Oxford, U.K. in 2008. The United Kingdom had become one of the largest generic drugs
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WRFDWHUWRQHHGVRIWKDWPDUNHW2Q*OHQPDUN¶VGHFLVLRQWRLQYHVWLQDFOLQLFDOGLYLVLRQDEURDGUDWKHU
than in India, Saldanha said:

Everybody wants to do trials in India, but the ground realities are very different. Because
of a lack of knowledge and understanding on the part of regulators, your trial applications
very often get struck and you spend enormous amounts of time dealing with regulators.
The game of innovation is about speed. If you lose the commercial window, you cannot
be successful. That is why we off-shored our clinical trials. We had no choice but to do it
outside India.

From the launch of its orchestrated out-licensing strategy until early 2008, Glenmark had signed a
wide range of deals (see Exhibit 3). However, the successful run of its out-licensing program would
soon come up against a set of unforeseen hurdles. Saldanha observed:

During 2004-07, the out-licensing strategy generated US$115 million (approximately INR
5,000 million) as up-front and milestone payments for four deals by Glenmark
Pharmaceuticals. These four licensing deals spanned across the therapeutic areas of
diabetes, pain management and respiratory disease. However, as with risks linked to
drug discovery and development, Glenmark too faced its share of challenges and
setbacks.

CHALLENGING TIMES FOR GLENMARK

2008-09 was a challenging year for the global economy. Large and iconic companies were badly
shaken by the financial crisis, some to the point of bankruptcy. A global trend emerged of bankruptcy

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and government bail-outs of large conglomerates. With a substantial segment of its business
generated in the developed markets, Glenmark Pharmaceuticals also felt the pain of the economic
crisis. The sharp devaluation of foreign currencies led to a severe lack of liquidity in the system and to
extended cash cycles.

To add to the strain of the financial crisis, Glenmark faced a major disappointment with the first
reversal of an out-licensing deal with Merck Serono to develop Melogliptin (GRC8200). In 2007,
Merck KGaA had merged with Serono, and following the newly merJHGFRPSDQ\¶VGHFLVLRQWRUHIRFXV
its portfolio, Merck decided to stop investing in the therapeutic area of diabetes. While this decision
was amicable, Glenmark suffered a setback in its plans for the development of the molecule.
Eventually, the company made a strategic decision to discontinue investment in Melogliptin. Saldanha
explained:

When we developed the DPP4 (Merck molecule) we were second-in-class or third-in-

class. When Merck merged with Serono, they restructured the company and decided
diabetes was not a priority anymore, and hence, they ended the deal. By the time we got
the molecule back, we had lost about a year and a half of research time. We got money
to do the Phase IIb trials, and the drug showed great Hb1ac reduction and good
glycemic control, but we had missed the commercial opportunity. From being second- or
third-in-class, we became fifth-in-class because of the time we had lost in an area that is
heavily researched. It did not make commercial sense to spend US$100 million on a
Phase III program. Peak sales, which could have been US$1 billion or US$800 million,
now had dropped to US$200-300 million, and we still had to spend at least US$100
million on Phase III trials. Melogliptin was a sad case. Here we have a drug that we know
works and has the maximum likelihood of making it to market, but we had to kill it.

/DWHUWKDW\HDULQ2FWREHU*OHQPDUN¶VSDLQGUXJPROHFXOH*5&D7539DQWDJRQLVW
out-licensed to Eli Lilly, suffered an unexpected blow. Given that this molecule was not first-in-class,
various other companies were also conducting clinical studies on different molecules in the same
class. One such study, conducted by Amgen on a TRPV1 antagonist, reported the adverse effect of
hyperthermia (elevated body temperature) in patients undergoing treatment with the product. Despite
there being little knowledge about the actual side effects of GRC 6211, Eli Lilly chose to return the
molecule to Glenmark as a precautionary measure. This decision was attributed to the fact that
regulatory authorities had become extremely stringent with approvals on new products, rendering drug
development an extremely risky business. Following the announcement, Glenmark stocks fell 20 per
13
cent. (OL/LOO\¶VGHFLVLRQWRUHWXUQ*OHQPDUN¶VPROHFXOHwas for purely commercial reasons. Yet, these
unforeseen developments called for some intense introspection and difficult choices. Within a year
Glenmark's profits fell by one-thirds (Exhibit 4). Saldanha recalled:

From 2000-2008, whatever we touched turned to gold. In 2008, when all these
transactions started falling apart, it brought a hard reality to our business models. The
financial community realized that it was not going to be easy for Glenmark. There was
disappointment within the management team and people were worried about whether we
would or could continue the research effort. Many analysts felt we should shut down
research because it was not productive or spin it off.

We were very clear about what we wanted to do. Out-licensing has always been our
model. We felt that developing a new drug from the beginning to end was too risky.
Instead, we decided to work on several molecules, which we would license out before
completing clinical trials. R&D is a zero-sum game. It's essential to hedge your risks and
diversify your research. The moment you fall in love with a molecule, you are doomed.

13
³*OHQPDUN(OL/LOO\6XVSHQG'UXJ'HYHORSPHQW6WRFN'RZQ´Economic Times, October 24, 2008,
http://articles.economictimes.indiatimes.com/2008-10-24/news/27725083_1_Eli-Lilly-GRC-molecule, last accessed in
December 2012
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 ISB028

Despite the financial setbacks it faced, Glenmark still managed to bag two prestigious awards 
³%HVW3KDUPD&RPSDQ\ LQWKH:RUOG60(´DQGWKH³%HVW&RPSDQ\LQ(PHUJLQJ0DUNHWV´  at the
SCRIP awards ceremony in London in 2008. Glenmark was the only Indian company to have received
14
this prestigious recognition. However, these recognitions were given to the company for its
outstanding track record up to March 31, 2008.

Saldanha knew that if he wanted to pursue an innovation strategy, he would first have to convince
the board of its merit. The Saldanha family had majority controlling shares in the company and
Saldanha knew that he was not heavily dependent on the capital markets. But he needed a
convincing argument to persuade the family to accept the strategy, and even stronger arguments for
his employees who were looking to him to lead the way.

As 2008 drew to a close, the Indian pharmaceutical industry was going through a major rethink. It
was as though the whole industry had flirted with an idea that would not take root in Indian soil. After
having initially tested the waters, the majority of Indian pharmaceutical firms shied away from high-risk
5 ' 'U 5HGG\¶V /DERUDWRULHV '5/ ZKLFK LQ  KDG EHHQ RQH RI WKH SLRQHHUV RI GLVFRYHU\
research, saw several failures impact its share price, and in 2005, decided to set up a separate R&D
firm, Perlecan Pharma, to isolate the R&D risks. However, in 2008, following the failure of two of its
drugs under development and the exit of some key partners, including ICICI Ventures and Citigroup
Ventures, DRL decided to shut down its R&D unit. Ranbaxy, another large Indian pharmaceutical
manufacturer, decided to spin-off its R&D division into a separate subsidiary in 2007, but over time, its
focus on discovery research systematically dropped. In June 2008, Daiichi Sankyo, the second largest
pharmaceutical firm in Japan, acquired Ranbaxy.

For Glenn Saldanha, the burning question was: Should Glenmark follow the steps of DRL or
Ranbaxy or should it stay the course? Could it succeed? Even if he believed in the possibility of
innovation-driven pharmaceuticals, how was he going to convince his fellow board members and his
employees? Saldanha paused for a moment and collected his thoughts before entering the
ERDUGURRP+HNQHZKLVGHFLVLRQZRXOGGHWHUPLQH*OHQPDUN¶VGHVWLQ\

14
SCRIPS Crowns GlenPDUNDV³%HVW3KDUPDCompany in World ± SME,´PRNewswire, December 11, 2008,
http://www.prnewswire.co.uk/cgi/news/release?id=244839, accessed in October 2011.
Organizing for Innovation at Glenmark (A) | 9

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 ISB028

EXHIBIT 1

DRUG DEVELOPMENT PROCESS

Drug Discovery Pre-clinical Clinical Trials FDA Review

Phase I
20-200
Volunteer
Phase III
1,000-5,000
Volunteers

NDA Submitted
IND Submitted
3,000- 250 Compounds 1 FDA
5-10 Compounds
10,000 approved
compounds drug

Phase II
100-
500Volunteers

3-6 years 6- 7 years 0.5- 2 years

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EXHIBIT 2

GROWTH IN THE INDIAN PHARMACEUTICAL INDUSTRY (2008)

India Sales 2008 India Sales 2007 Growth 2008/ 2007

Company US$ (millions) US$ (millions) Fixed Rate US$ (%)

Cipla 510 468 9.0 %

Aurobindo 477 416 14.5 %

Sun Pharmaceuticals 449 340 31.9 %

Piramal Healthcare 428 354 20.9 %

GlaxoSmithKline
399 395 1.2 %
(GSK)

Ranbaxy (Daiichi) 368 385 -4.5 %

Cadila Healthcare 357 324 10.4 %

Lupin 286 261 9.2 %

'U5HGG\¶V
232 218 6.3 %
Laboratories

Glenmark 134 146 -8.5 %

Source: Annual Report (2009) and Company reports.

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EXHIBIT 3

*/(10$5.¶6287-LICENSING DEALS (2004-2007)

Licensing Deal Up-front

Company Molecule Year Value (US$ Payments Therapeutic Area
millions) (US$ millions)

Forest Labs (U.S.) Oglemilast 2004 190 35 Asthma

Teijin Pharma (Japan) Oglemilast 2005 53 6 Asthma

Merck Melogliptin 2006 250 31 Diabetes

TRPV1
Eli Lilly antagonist 2007 350 45 Osteoarthritic Pain
molecule

Source: Company reports

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EXHIBIT 4

GLENMARK FINANCIALS

2004-05 2005-06 2006-07 2007-08 2008-09

(All figures in INR millions)

Turnover 6,120.53 7,575.89 12,515.34 2,009.01 21,160.33

Out-licensing
0 265.63 1,395.12 2,402.73 0
Revenue

Other Income 52.29 128.20 156.99 458.20 1740.12

PBDIT 1,609.80 1,500.26 4,419.85 8,463.46 6289.95

Interest 172.63 147.20 384.08 631.68 1404.77

Depreciation 164.23 232.34 422.59 716.80 1026.83

Profit Before Tax 1,272.94 1,120.72 3613.18 7,114.98 2688.81

Tax 201.53 240.96 512.58 793.87 754.08

Profit After Tax 1,071.41 879.76 3,100.60 6,321.11 1934.73

Source: Company Annual Report

Organizing for Innovation at Glenmark (A) | 13

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