INDIAN MARKET

Due to poor sanitation conditions, infectious (acute) diseases are predominant in India. However, the incidence of chronic ailments, characterised by prolonged exposure, has been increasing with the emergence of lifestyle diseases in India, due to changing work pattern of the working population, higher stress levels, and unhealthy eating habits.

Key issues answered through this analysis: What are acute and chronic ailments? What is the proportion of drugs for each segment in the total domestic formulations market? How have various therapeutic categories in the domestic formulation market performed over the last three years?

Publish Date: 15-Jul-2013

Majority of ailments in India are more acute than chronic in nature

Types of ailments

Source: CRISIL Research

Ailments can be classified into acute and chronic.

Acute ailments are characterised by sudden, severe exposure (usually a single, large exposure) and rapid onset of the disease. The patient shows intense symptoms for a brief duration (not longer than 30 days). Infectious diseases such as common cold, fever, etc are some examples of acute ailments. However, some acute ailments may turn chronic if left unaddressed.

Chronic ailments are characterised by prolonged or repeated exposures over many days, months or years. Chronic diseases can only be alleviated through treatments, but not fully cured. Unlike acute ailments, they do not usually resolve on their own accord. Examples of chronic diseases include diabetes, asthma, blood pressure, cancer, etc.

Due to relatively poor sanitation facilities, India has a greater share of acute diseases than chronic diseases, as compared to developed countries. Thus, drugs addressing acute diseases dominate the domestic pharmaceutical market. About 68 per cent of total drugs sold are used to treat acute diseases.

Domestic formulation sales continue to grow strongly

Domestic formulation sales grew by 11.9 per cent (y-o-y) to an estimated Rs 623 billion in 2012-13. Among therapeutic drug categories, growth was driven by chronic drug segments such as anti-diabetic, cardiovascular, neurology/ central nervous system (CNS), while sales of gastro-intestinal drugs (acute segment) also grew steadily. A growing population, increasing healthcare awareness, and rising per capita income enabled the domestic formulations market to post a 13.7 per cent CAGR over the last three years.

Over the next few years, the therapeutic category mix is expected to gradually move in favour of speciality therapies. However, mass therapies such as anti-infectives and gastrointestinals will continue to grow at a steady pace, due to the increasing penetration of such drugs in rural areas, which lack proper sanitation facilities and are thus more prone to acute ailments.

Domestic formulations sales by top therapeutic categories

E: Estimated

Source: CRISIL Research

Classification of key therapeutic categories under acute and chronic segments

Source: CRISIL Research

Acute drug segments Anti-infectives

Sales of anti-infectives reached an estimated Rs 100 billion in 2012-13, at a 3-year CAGR of 10.4 per cent. In 2012-13 alone, anti-infectives sales grew by about 9.8 per cent y-o-y and accounted for 16.1 per cent of the total formulations sales. Key drug classes among anti-infectives are cephalosporins, ampicillin/amoxycillin and quinolones. GlaxoSmithKline, Alkem Laboratories and Ranbaxy are key players in this category.

Gastrointestinals
Gastrointestinals contributed about 10.7 per cent to total domestic formulation sales in 2012-13. Sales grew by 13.5 per cent y-o-y to an estimated Rs 67 billion, due to higher price competition. The largest drug class in this category is anti-peptic ulcerants. Major players include Sun Pharma and Zydus Cadila.

Pain/analgesics

Pain/analgesic drugs accounted for 8.1 per cent of total domestic formulations sales in 2012-13. The segment registered a CAGR of about 11.2 per cent over the last three years, reaching an estimated Rs 51 billion in 2012-13. Anti-rheumatics, non-steroids, non-narcotic anti-pyretics, anti-osteoporosis drugs, topical antirheumatics and muscle relaxants (systemic) are the main drug classes within this segment. Ranbaxy and GlaxoSmithKline are the leading pharmaceutical companies in this space.

Chronic segments Cardiovascular system drugs

Therapies for cardiovascular (CVS) ailments rely primarily on control of blood pressure and cholesterol, since high blood pressure increases the risk of heart diseases and strokes. In 2012-13, this segment was one of the fastest-growing in the domestic formulations market, posting a 14.5 per cent growth to reach Rs 76 billion. The segment constituted 12 per cent of total domestic formulation sales. Leading drug classes in this segment are statins, hypotensive combinations, anti-coagulants, diuretic combinations, calcium channel blockers and beta blockers. Key players in this therapy are Sun Pharma, Zydus Cadila and Lupin.

Respiratory
Sales of respiratory drugs posted a 3-year CAGR of 11 per cent, reaching an estimated Rs 51 billion in 201213. Cipla continues to lead the segment, while other key players in the segment are Abbott Laboratories (through its acquisition of Piramal Healthcare), Pfizer, Cadila and GlaxoSmithKline. The major drug classes include cough preparations, bronchodilator inhalants, anti-histamines, bronchodilators solids and cold preparations.

GLOBAL MARKET
Regulated markets continue to lag, due to patent expiries and slower pace of new drug launches

Several blockbuster and large-sized drugs losing patents, coupled with severe erosion in prices of generic drugs on the face of increasing competition, has caused a decline in the growth trajectory of major regulated markets, such as the US and Europe. Certain emerging markets such as Latin America, Asia, Africa (semiregulated markets) have, however, witnessed healthy growth rates, which could be attributed to the growth in penetration of healthcare in these markets.

Key issues answered through this analysis: Which factors have impacted growth in regulated and semi-regulated markets? How have the changing global dynamics impacted share of large global pharmaceutical players in the pharma industry? Which are the drugs leading global pharmaceutical sales? How have different therapy classes grown over the past one year?

Publish Date: 30-Oct-2012

Growth in regulated markets remains tepid, amid patent expiries, lack of new drugs

In 2011, global pharmaceutical sales (including audited and unaudited markets) grew by a modest 5.1 per cent y-o-y, to $956 billion (keeping the US dollar constant). Regulated markets such as the US, Europe and Japan continue to register slower growth, caused by expiry of additional drug patents and declining productivity of research and development activities, carried out by major pharmaceutical companies. Even as players witness a higher R&D cost, new drug approvals and filings have been on a declining trend.

Trend in global pharmaceutical sales

* Using actual quarterly exchange rates

Source: IMS Health

Region-wise pharmaceutical sales (2011)

Note: Includes both audited and unaudited markets. Sales cover direct and indirect pharmaceutical

channel purchases in US dollars from pharmaceutical wholesalers and manufacturers. The figures

above include prescription and certain over-the-counter data.

Source: IMS Health

Top 5 countries by pharma sales (2011)

Source: IMS Health

North America (mainly the US), Europe and Japan are dominant markets in the global pharmaceutical industry. Despite a marginal 3 per cent growth in sales to $347.1 billion, the North American market remained the single-largest market in 2011. Strong growth in generic sales (more than 10 per cent) was partly offset by muted sales of branded (on-patent innovator) products.

Drug sales in Europe and Japan also grew by a modest 2.4 per cent (y-o-y) and 5.6 per cent, respectively. Europe lost share to emerging markets (such as India, China and Brazil) and its contribution to global sales slipped to 27.8 per cent in 2011 from 28.6 per cent in 2010.

Meanwhile, drug sales in other regions, such as Asia (excluding Japan), Africa and Australia, grew by a strong 31 per cent and accounted for about 17 per cent of total global pharmaceutical sales in 2011. China, being the only semi-regulated country in the top five pharmaceutical markets, continued on a high growth trajectory, to record $66.7 billion in sales. Rising penetration of healthcare aided growth in these markets. Latin America too clocked a healthy growth of 9 per cent y-o-y by contributing $66.7 billion to global sales, as of March 2012.

Oncology remains largest global therapy, despite patent expiries

Therapy-wise sales: Oncology leads the pack

Note: Includes only audited markets

Source: IMS Health

Oncology retained the top spot under therapy classes, with a 7.3 per cent share in overall global pharmaceuticals sales. Growth in oncologics moderated to 5.5 per cent, as few drugs like Arimidex and Taxotere went off-patent in 2010, and Femara was exposed to generic competition in 2011.

Markets for anti-diabetics, auto-immune agents and HIV antivirals each grew by over 9 per cent. Autoimmune agents grew the fastest at about 15 per cent, continuing with a nearly double-digit growth for six years consecutively. This category includes blockbuster drugs, such as Remicade, Enbrel and Humira, which treat a wide variety of immunological diseases. Anti-diabetics grew by about 11 per cent, due to growing prevalence of the disease.

Leading drugs by global pharmaceutical sales (2011)

Note: Includes only audited markets

Source: IMS Health

Among branded drugs, Lipitor remained the top-selling drug, as the generic version did not enter the market until December 2011. Plavix and Seretide/Advair followed the cholesterol-reducing blockbuster drug. However, with both Lipitor and Plavix going off patent in 2012, we expect these branded drugs to record significantly lower sales in 2013. Most of these drugs (except Remicade, Crestor and Humira) face patent expiration over the next four years.

Pfizer still at the top; Roche climbs above GSK

The top 10 players maintained a global market share of about 43 per cent in 2011. Despite a decline in sales, with key drugs going off patent, Pfizer continued to lead the market. Novartis continued on a strong growth

trajectory, following the Alcon acquisition in 2010 and strong performance of its generic wing, Sandoz.

Top corporations by global sales (2011)

Note: Growth is calculated with quaterly exchange rate Source: IMS Health

Roche replaced GlaxoSmithKline at the sixth position, backed by the launch of several new drugs. Revenues from Roche's tissue division and professional diagnostics division grew by 19 per cent and 9 per cent respectively. In comparison to the nine innovator companies, mentioned in the list above, Teva is the only player in the list of top 10 pharmaceutical corporations, which is engaged in generics.

EVOLUTION OF THE INDUSTRY

The evolution of the Indian pharmaceutical industry can be broadly divided into two periods, the prepatent regime and post-patent regime. In the pre-patent regime (before 2005), India recognised only process patents, which helped built the basis of a strong and competitive domestic industry. In 2005, India entered the product patent regime which marked the end of a protected era and signaled a new phase in the integration of India players into the global market.

Key issues answered through this analysis:

1. What are the different phases through which the Indian pharmaceutical industry has evolved during the pre-patent and post-patent regime? 2. Which are the significant events that occurred during the evolution of the pharmaceutical industry?

Publish Date: 25-Oct-2012

Evolution of the Indian pharmaceutical industry

The Indian pharmaceutical industry has grown rapidly over the last few decades. Prior to 2005, the Indian regulatory system recognised only process patents. This helped build a firm foundation for the strong and competitive domestic pharmaceutical industry. During this phase, the prevalent price control mechanisms helped companies deliver medicines at affordable prices, to patients across India. This chapter lists the different phases that the Indian pharmaceutical industry has gone through, during the pre-patent (till 2005) and post-patent (post 2005) regimes.

Pre-patent regime (before 2005)

Process patents helped the Indian pharmaceutical sector flourish, amid a fast growing generics industry. During this regime, multinational companies (MNCs) were reluctant to directly introduce new products in India. Domestic companies leveraged this situation, by re-engineering these products and marketing them in India.

Up to 1970
In the 1950s, the government realised the need to set up indigenous drug production facilities in India, to minimise dependence on imports and enable access to essential drugs at lower prices. To fulfill this objective, the government set up the Hindustan Antibiotics Limited in 1954 and Indian Drugs and Pharmaceuticals Limited (IDPL) in 1961. Soon,

these companies established themselves as major producers of critical drugs, such as penicillin and other antibiotics, which were being imported at that time. Despite these initiatives, MNCs dominated the domestic market until 1970. In 1970-71, the size of the Indian pharmaceutical industry was at around Rs 4,000 million. Lower income levels restricted Indian consumers' per capita spending on healthcare. Further. the market was small in size and vital drugs needed to be sourced largely through imports. Even as there were over 2,000 players in the domestic industry, MNCs largely dominated the industry, by importing formulations from their parent companies and selling them in India.

1970 to 1979
To speed up the indigenisation process and boost self-reliance of the domestic pharmaceutical industry, the government introduced two landmark regulations in 1970, as follows:

Indian Patent Act, 1970

The Indian Patent Act aimed at encouraging domestic players to manufacture drugs and ensure self-sufficiency in medicines. The Act granted patents, based on the process of manufacturing, as against the global practice of granting patents, based on the new drug alone. As a result, several Indian players began manufacturing products, based on the same bulk drug, yet through different processes. This strengthened domestic players' process chemistry skills and increased their expertise in developing low-cost generic drugs.

Drug Price Control Order (DPCO), 1970

The DPCO governed prices of all bulk drugs and formulations, to ensure widespread availability of medicines, at reasonable prices. Together, the Indian Patent Act and the DPCO, significantly influenced the structure and growth pattern of the domestic pharmaceutical industry.

Decline in share of MNCs

Introduction of these regulations caused great dismay among MNCs, who were left with little incentive to introduce new products in India. They shifted their focus towards vitamins, cough preparations, NSAIDs (pain killers) and eventually built up a strong brand equity in these products. Hence, it is not surprising that the share of multinationals in total production of formulations began to decline after 1970. Further, the Foreign Exchange Regulation Act (FERA), 1974 was introduced, which required all multinationals to dilute their equity holdings. A combination of all these factors led to a dramatic reduction in MNCs' share in total industry production.

Growth of small-scale units

At the same time, the number of domestic small-scale units increased rapidly, due to following reasons:

Low-entry barriers (a formulations unit could be set up for Rs 120-150 million)

Abundant availability of bulk drugs Numerous incentives, such as waiver of price control on drugs produced by them, offered to SSIs A vast, geographically dispersed market.

Additionally, several large producers began outsourcing production to small units (under the loan licensing scheme) to contain costs, which further encouraged growth of SSIs.

1979 to 1987
Nine years after implementing the DPCO, the government lowered the number of products under price control to 163 from 347, in 1979. In addition, the government permitted a higher mark-up on the cost of production - from 40-60 per cent in 1970, to 75-100 per cent in 1979. During this period, bulk drug production also increased, due to a surge in export demand.

Spread of research know-how

Sales of Indian pharmaceutical companies, such as Cipla, Ranbaxy, Lupin and Torrent, rose significantly during this period. Drawing upon the process patent regime and availability of skilled research personnel, some players gradually began investing in research activities and introduced new products, through process re-engineering. For instance, Lupin Laboratories introduced Rifampicin in 1980; Torrent launched Ranitidine in 1985 and Dr Reddy's introduced Norfloxacin in 1987. Government research institutes, such as Central Drug Research Institute (CDRI) and Council of Scientific and Industrial Research (CSIR), also contributed to the gradual build-up of the indigenous research base. Not to be left behind during this growth era, smaller players also capitalised on the manufacturing knowledge base, created by IDPL and Hindustan Antibiotics.

Bulk drug production increases

The DPCO further regulated the production pattern of pharmaceutical companies, by fixing a ratio between the amount of formulations and bulk drugs produced by companies. This led to a spurt in investments in production of key bulk drugs, such as antibiotics and cardiovascular drugs, thereby increasing their production.

Market share of multinationals continued to slide

As domestic players gained expertise, the share of MNCs in total production continued to slide. Most formulations that MNCS imported and distributed in India, had a limited market. This was because the the high tariff structure made them costlier. MNCs were unable to match the low prices offered by Indian producers, who were more costcompetitive. MNCs, therefore, continued to focus on select therapeutic groups, such as cough preparations, analgesics and vitamins (Inadequate patent protection deterred them from new product launches).

Indian players leveraged the opportunity to widen their exports

After creating a niche for themselves in the domestic market, several Indian players such as Ranbaxy, Lupin, Torrent and Dr Reddy's, turned their sights towards exports. They initiated steps to capitalise on their technical skills of reverse engineering and their low-cost structure, to tap overseas markets. Consequently, the share of exports in total bulk drug production soared to 19 per cent in 1986-87, from 5 per cent in 1980-81.

1987 to 1994
Domestic players continued to build on their strengths, in the late eighties and the early nineties. During 1987 to 1994, production of formulations posted a CAGR of 18 per cent per annum, compared to 10 per cent CAGR during 1980-1987. Sharp rise in the number of new drugs introduced and low prices boosted growth. Further, rising per capita income levels encouraged people to spend more on modern allopathic drugs.

Growth in bulk drugs driven by exports

Bulk drug production also continued to increase during 1987-1994, led by higher exports. Total bulk drug production registered a CAGR of 16 per cent and bulk drug exports grew at a CAGR of 40 per cent. By 1994, bulk drug exports accounted for nearly 50 per cent within the total bulk drug production.

Increased investments
To meet the ever-growing demand for drugs, investments in new capacities (largely driven by Indian players), increased to nearly Rs 13,800 million in 1994-95 from Rs 7,000 million in 1986-87.

Renewed interest from multinationals

MNCs considered the liberalisation programme, initiated by the Narasimha Rao government in 1991, as a major turning point. Key reforms included reduction in tariff barriers and relaxation of FERA regulations. This restored MNCs' confidence to an extent and encouraged greater foreign investment in the domestic

pharmaceutical industry. Most multinationals attempted to curb costs - by relocating plants and retrenching the work force -and also quickened the pace of new product launches. Exceptions included Sara Lee (which held a stake in Nicholas Laboratories in India) and Switzerland-based Roche, who sold their Indian operations to the Piramal Group in 1987 and 1993, respectively.

Growth of Indian producers

Reforms also benefited Indian producers, who were able to introduce more bulk drugs (due to increased imports of bulk drug intermediates), because of lower tariff and non-tariff barriers. Domestic players also made efforts to widen their global presence, by setting up branch offices and subsidiaries abroad.

Increased competition
The surge in demand intensified competition in the industry. The number of manufacturing units rose to over 20,000 units in 1994, from an estimated 10,000 units in 1987. Most new producers introduced brands in large-sized and fastgrowing categories, such as antibiotics, NSAIDs and cough preparations. Hence, the number of competing brands, within a single category, soared to over 100 in many cases.

1995 to 2001
In 1995, the government further amended the DPCO, by lowering the number of drugs under price control from 146 to 74. According to CRISIL Research's estimates, the market share of drugs covered by price control norms, declined from 70 per cent in 1987-88 to 52 per cent in 1997, and further, to 40 per cent in 2001. One of the key developments in 1995 was the government's decision to adhere to the product patent regime from 2005 onwards, as a member of the World Trade Organisation (WTO),

Increased interest of multinationals

The government's commitment to recognise product patents in drugs after 2005, rekindled MNCs' interest in the domestic market. Parent companies of several multinationals began increasing their equity stakes in their Indian operations. For instance, Sanofi-Torrent and Eli Lilly-Ranbaxy purchased the equity stake of their Indian partners, to increase their presence in the domestic market. Low production costs also drew MNCs' attention towards India. Thus, at a time when most MNCs were on a cost-cutting spree, India was increasingly seen as a cost-effective market and an alternative manufacturing base. (Globally, multinationals were shutting down facilities that were economically unviable and relocating plants to low-cost countries). The heightened pace of consolidation in the international market also affected the structure of the domestic pharmaceutical industry. Despite low growth in sales, the ranking of multinationals in the Indian market improved, due to mergers taking place in international markets.

Indian producers leverage on their strengths

India's commitment to recognise product patents limited Indian producers' ability to reverse engineer international proprietary drugs. On the flipside, since several Indian producers had already achieved a critical mass in terms of size of operations, they turned their focus towards their global operations. To strengthen their presence in both, domestic and international markets, Indian producers have followed a number of strategies, which comprise:

Setting up manufacturing and marketing joint ventures abroad Building world-class production facilities for bulk drugs, to tap the fast growing market for generic drugs in developed countries Entering into alliances with multinationals for new drug launches

Conducting clinical trials in India, to help multinationals reduce development costs of new drugs Strengthening their brand (and market) franchises Significantly expanding their geographical reach within India.

Growth, profitability and competition

Between 1995 and 1997, demand in the pharmaceutical industry continued to grow by over 15 per cent. However, due to intense competition in the domestic bulk drugs segment, many producers began to market generic formulations, especially in the alimentary and anti-infective segments. To better compete with smaller players on the basis of prices, large domestic formulation manufacturers increased their focus on generic-generic formulations. These formulations are sold under the bulk drug name, and have lower price realisations, compared to branded formulations. Rising share of low-priced, generic-generic drugs led to a decline in growth of the pharmaceutical industry, in value terms, to 10-12 per cent over the past 2-3 years, from around 15 per cent in 1996- 97. There was growing pressure to introduce new products at affordable prices, for ensuring reasonable volumes. However, newer products, which were generally priced higher than older drugs, helped boost profitability of Indian pharmaceutical companies despite stiff competition. Operating margins of domestic players increased to 21.6 per cent in 2001-02, from 20.9 per cent in 1996-97. Increased competition in the domestic market, especially in large and old products, affected margins of bulk drug producers heavily. In order to maintain profitability, many of them have forward integrated into manufacturing formulations. Large bulk drug producers have also increased exports of new molecules to semi-regulated markets, which offer relatively higher margins.

2001-2004
During 2001-04, domestic formulation sales continued to decline, except for few segments. While Indian players continued to use new drugs to drive their domestic sales, their greater focus on generic markets became apparent. Several players invested in research and development (R&D) activities and upgraded their manufacturing facilities, to comply with current good manufacturing practices (cGMP) norms. This was, in part, encouraged by huge success recorded by Dr Reddy's Laboratories and Ranbaxy, with respect to their drugs - fluoxetine and cefuroxime axetil, respectively. The government's move to further amend the Patents Act, to consider drugs under "inventions" as eligible for patent protection, further forced Indian players to seriously mull over the generic markets option. On the other hand, the government's move on product patents and its decision to grant exclusive marketing rights (EMRs) heightened MNCs' interest in the domestic market.

Post-patent regime
In line with its commitments to the WTO, the Indian government passed an ordinance to introduce the product patent regime w.e.f. January 2005. This aided the integration of India into the global pharmaceutical market and rendered duplicating of post-1995 patented drugs illegal. While this discouraged process re-engineering of products patented post 1995, the amendment aimed at gradually enhancing confidence of large global players on Indian companies. In 2005, the Indian pharmaceutical industry witnessed a series of regulatory developments, ranging from the implementation of value added tax (VAT), shift from excise duty levy to an MRP-based levy system and Schedule M implementation to recognise the product patent regime. While implementation of the VAT and shift in the excise duty regime had short-term implications, the implementation of Schedule M (compliance with tenets of cGMP) and adherence to the product patent regime will have medium and long-term implications, respectively.

Enactment of product patent regime

India entered the product patent regime on January 1, 2005. This marked the end of a protectionist era and better integrated India with the global pharmaceutical market. While the earlier process patent regime helped the Indian pharmaceutical industry develop into a world-class generics industry, the product patent regime aimed at encouraging new drug discoveries over the long-term. Traditionally, pharmaceutical MNCs had maintained a low-key presence in the Indian market, due to the absence of product-based patents and rigid price controls. Hence, the recognition of product patents will gradually boost confidence levels, placed by large global players on India. From January 2005 till date, India has seen a handful of patented product launches. Pfizer has launched three of them, while Roche and GSK launched two and one, respectively. The launch of patented products in India has been slow as innovators are taking their time, to seek clarity on data protection, patenting of derivatives and pre- and postgrant opposition. While not much has changed on this front, MNCs' approach towards the domestic market is slowly changing.

Rising focus on exports

India gained a foothold on the global arena, with innovatively-engineered generic drugs and active pharmaceutical ingredients (API). The country now seeks to become a major player in outsourced clinical research and the contract research and manufacturing services (CRAMS) segments. India has the highest number of manufacturing facilities approved by the US Food and Drug Administration (US FDA). Further, in 2011, one-third of all Abbreviated New Drug Applications (ANDA) approved by the US FDA, belonged to Indian companies.

Implementation of Schedule M
The mandate issued to small-scale pharmaceutical units, necessitated compliance with the Schedule M norms. Schedule M of the Drugs and Cosmetics Act outlines various requirements for manufacturing good quality drugs and pharmaceuticals, by applying cGMP.

Affixing of prices by NPPA

The government fixed prices of nine commonly used drugs, in cases where it was noticed that companies have increased prices for no legitimate reason. As a result, pharmaceutical companies will no longer be able to increase medicine prices, at their discretion. Major companies were asked to revise drug prices to levels fixed by the National Pharmaceutical Pricing Authority (NPPA). The regulator directed companies to make relevant changes in their maximum retail prices (MRPs). Drugs, which have come under the scanner, cater to major therapeutic areas, such as diabetes, cardio-vascular, allergies and infections.

Drug law
During the year, the Drug Controller General of India (DCGI) reviewed the rationality of fixed dose combinations (FDCs) available in the market. Based on the review, the regulator issued directives for withdrawal of certain FDCs. These norms, coupled with few others, point towards a more stringent drug regulatory environment, which could increase compliance and facility upgradation costs, for the industry, over the medium term.

Proposed new drug pricing policy 2012

In September 2012, the Group of Ministers (GoM) set up to determine India's drug pricing policy has proposed that retail prices of 348 essential drugs should be fixed at the weighted average price of brands, that have more than 1 per cent market share. Even as additional details on this policy are awaited, our interactions with industry participants indicate that it will not have a significant impact on growth of the domestic pharmaceutical industry.

INDUSTRY OVERVIEW
Indian pharmaceutical industry valued at USD 32 billion The Indian pharmaceutical industry, sized at USD 32 billion in 2012-13, has remained on a strong growth trajectory, over the past few years. The industry is marked with high fragmentation and relatively low drug prices, as compared with the regulated markets.

Key issues answered through this analysis:

1. What is the structure of the domestic pharmaceutical industry? 2. How do industry dynamics such as market size, healthcare spending and health insurance penetration in India compare with developed markets? 3. What is the typical capital expenditure incurred by a pharmaceutical company to set up a manufacturing facility in India?

Publish Date: 15-Jul-2013

Indian pharmaceuticals industry worth $32 billion

Size of the manufacturing opportunities in the Indian pharmaceutical industry are estimated at $32 billion (including exports) in 2012-13. Of this, the domestic formulations market was valued at about $11.4 billion (or Rs 623.3 billion) and constituted less than 2 per cent of the global pharmaceutical market in value terms. This is because of lower drug prices and lesser penetration of healthcare, vis-a-vis developed markets, such as US and Europe. India spends only 1-1.5 per cent of its total gross domestic product (GDP) on healthcare and hence, ranks amongst the lowest in this respect, globally. In contrast, developed countries spend about 7-10 per cent of their GDP on healthcare.

Pharmaceutical value chain

Source: CRISIL Research

Bulk drugs or active pharmaceutical ingredients (APIs) are raw materials used to manufacture formulations, which are ready to use forms of bulk drugs (including capsules, tablets, syrups and injections) administered to patien

ts. Bulk drugs are manufactured by combining more than two chemicals or intermediaries. They directly influence the diagnosis, cure, mitigation, treatment or prevention of a disease.

Exports - a key growth driver for the Indian pharmaceutical industry

Exports have been the cornerstone of growth of the Indian pharmaceutical industry, with the global pharmaceuticals market offering strong opportunities to Indian players. Healthcare expenditure is spiralling the world over, and the steepest rise is seen in the developed markets of the US and Europe, which traditionally contribute the largest share to global medicine sales. With India's key strengths of cost-competitiveness and advanced process chemistry skills, Indian players are well-placed to tap into this opportunity and increase their presence in the generics market

Domestic formulation industry - highly fragmented

Over 1,00,000 drugs, across various therapeutic categories, are produced annually in India. The domestic formulations industry is highly fragmented in terms of both, number of manufacturers and variety of products. There are 300-400 organised players and about 15,000 unorganised players. However, organised players dominate the formulations market, in terms of sales. In 2012-13, the top 10 formulations companies accounted for 42.6 per cent of total formulation sales. MNC pharmaceutical companies have steadily gained a foothold in the Indian formulations market. As of March 2013, they enjoyed a market share of 26-28 per cent.

Domestic market share of top 10 players in 2012-13

Source: Industry

Manufacturing bases concentrated in few states

Indian pharmaceutical companies operate largely from Maharashtra, Gujarat and Andhra Pradesh. However, during the last few years, many players have shifted their manufacturing bases to excise-free zones like Baddi (Himachal Pradesh), Haridwar (Uttaranchal) and Sikkim, after the government imposed an MRP-based excise duty system in 2005.

Low penetration of health insurance in India

Per capita annual healthcare expenditure in India, as per World Bank data (2007-2011), is very low at $40-50 as compared to $3,500-4,000 and $8,000-8,500 in Japan and the US, respectively. This can be attributed to the large population in India and lower share of health expenditure in total government expenditure. In India, about 80 per cent of medical spends is out-of-pocket expenditure, wherein the consumer directly pays for medicines. Unlike the US, India lacks a strong health insurance sector that can share healthcare costs with patients. In the US, government organisations and managed care organisations reimburse majority of drug costs to patients.

Low capital intensity and gestation periods

Unlike commodities, capacity expansions in the domestic pharmaceutical industry do not bunch up due to a low capital-intensity and gestation period. Hence, companies expand capacities in line with demand patterns. A US FDA-approved API manufacturing facility can cost up to Rs 300-400 million, as compared to Rs 150-200 million for an unapproved facility. Cost of compliance with US FDA norms is higher. Setting up a US-FDA approved formulations manufacturing plant costs about Rs 500-600 million, as compared to Rs 250-300 million for an unapproved facility.

Cost of setting up manufacturing plants

Note: The above figures are for a capacity of 1 billion tablets/capsules per year Source: Industry

Also, unapproved units have lower gestation periods. The average gestation period for a US FDA-approved manufacturing facility is 18-24 months, as compared to 6-12 months for an unapproved facility

REGULATORY FRAMEWORK
Compliance with cGMP is a must to manufacture and distribute drugs in India

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It is very important for players to maintain high standards in the pharmaceutical industry, as it concerns the lives of people. Regulatory bodies impose regulations to ensure that drugs meet the safety and quality standards. Regulatory bodies not only ensure that pharmaceutical companies meet the set quality standards, but also ensure that the pharmaceutical companies do not charge unreasonable prices from consumers.

Key issues answered through this analysis:

1. 2. 3. 4. What are the regulatory mechanisms followed in India and US? Which are the major regulatory bodies in India and how are their actions coordinated? What is the approval process for an NDA? What is the process for obtaining an ANDA approval? What is a DMF filing?

Publish Date: 25-Apr-2013

Countries have their own pharmaceutical regulatory authorities

Regulatory bodies impose regulations to ensure that drugs meet safety and quality standards. It is extremely vital that players in the pharma industry maintain high standards, considering the number of lives at stake. Regulatory bodies also ensure that pharmaceutical companies do not charge unreasonable prices from consumers. The stringency of regulatory procedures varies across countries. On the basis of established regulations and patent laws, the global pharmaceutical industry can be broadly classified into regulated and semi-regulated markets. Regulated markets include the US, EU and Japan that have established systems of patent laws and sophisticated regulatory systems for controlling drug quality. On the other hand, semi-regulated markets include countries such as

China, India and South Africa, which have less stringent systems of patent laws and less sophisticated regulatory systems for drug quality control. However, there is no single harmonised protocol for drug approval across countries. Countries have their own regulatory authorities and drug approval mechanisms.

Regulatory authorities in key countries

Source: CRISIL Research

To understand the regulatory framework governing Indian pharmaceutical players, we have also examined regulations in the US, which is the largest pharmaceutical market for Indian exporters.

Regulatory environment in India

Regulatory bodies

Source: CRISIL Research

The Drugs and Cosmetics Act, 1940 (Drugs Act) and Drugs and Cosmetic Rules, 1945 (Drug rules) regulate the import, manufacture, distribution and sale of drugs in India. Under the provisions of these Acts, the Centre appoints the Drugs Technical Advisory Board (DTAB) to advise the central government and the state governments on technical matters. The responsibility to enforce the Drugs Act is entrusted with both the central government and the respective state governments. Under the Drugs and Cosmetics Act, state authorities are responsible for regulating the manufacturing, sale and distribution of drugs, whereas the central authorities are responsible for approving new drugs and clinical trials, laying down the standards for drugs, controlling the quality of imported drugs and co-ordinating the activities of state drug control organisations. The Drugs Controller General of India (DCGI) is the central body that co-ordinates the activities of state drug control organisations, formulates policies and ensures uniform implementation of the Drugs Act throughout India. It is also responsible for approval of licenses of specified categories of drugs, such as blood and blood products, IV Fluids, Vaccine and Sera.

Indian pharmaceuticals industry is mainly regulated on the basis of patents, price and quality

Source: CRISIL Research

Patents
Before 2005, the regulatory system in India focused only on process patents. Indian pharmaceutical companies thrived during the process patent regime. They would re-engineer products of global innovator companies, which were unavailable in India, and launch them in the country as generics, as India did not recognise the product patents. In this manner, Indian companies gained process chemistry skills, but did not focus on R&D for new drug discovery. In January 2005, India complied with the World Trade Organisation (WTO) to follow the product patent regime [sale of re-engineered products (for drugs patented after 1995) is restricted]. However, enterprises, which had made significant investments and were producing and marketing the concerned product prior to January 1, 2005 and which continue to manufacture the product covered by the patent on the date of grant of the patent, are protected, and the patentee cannot institute infringement suits against them, but would be entitled to reasonable royalty. For a detailed analysis on the product patent regime and its impact, please refer to the Thematic Coverage section.

Drug prices
The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and formulations. APIs and formulations falling under the purview of the legislation are called scheduled drugs and scheduled formulations. The National Pharmaceutical Pricing Authority (NPPA) collects data and studies the pricing structure of APIs and formulations and accordingly makes recommendations to the Ministry of Chemicals and Fertilisers. The new Pharmaceutical Policy, notified in 2012, intends to bring 348 essential drugs in the National List of Essential Medicines (NLEM), under the purview of the DPCO. With this policy, the market size of drugs under price control will increase from 15-20 per cent of the domestic formulations market to 20-30 per cent. The policy also introduces a radical change in the mechanism of control: shifting from the current cost-based control to a market-based price mechanism. Under the policy, the ceiling price for each drug under control would be fixed as the simple average price of brands having more than 1 per cent market share (by value) in the sales (MAT - Moving Annual Turnover) of that particular molecule. Thus, prices of brands which are higher than this ceiling will need to be lowered. The ceiling prices will be allowed an annual increase as per the Wholesale Price Index (WPI). Prices will be recalculated using MAT only once in five years or when the NLEM is updated.

Price of drugs that were part of the earlier policy, but do not come under the current policy, would be frozen for a year and, thereafter, allowed a maximum annual increase of 10 per cent. A 10 per cent increase would also be the limit for prices of drugs outside the government's price control. Quality No drug can be imported, manufactured, stocked, sold or distributed in India unless it meets the quality standards laid down in the Drugs Act. All companies have to comply with Schedule M of the Act, which outlines various requirements for manufacturing drugs and pharmaceuticals by applying cGMP (current Good Manufacturing Practice). cGMP has to be followed for control and management of manufacturing and quality control testing of drugs.

Regulatory environment in the US

The Department of Health and Human Services regulates the US pharmaceutical market through the US FDA, which ensures that human and veterinary drugs, biological products and medical devices are safe and effective. It lays down the procedures for product approvals (generic and new drugs) and is primarily responsible for enforcing the Federal Food, Drug and Cosmetic Act - the basic drug and food law in the US.

Evolution of laws governing the US pharmaceutical industry

Federal regulation of pharmaceuticals in the US began in 1906, when the Pure Food and Drug Act was enacted. This law required that drugs meet official standards of strength and purity and that the ingredients are accurately described on a drug's label. However, these laws were not strong enough. In 1937, 107 people died after consuming elixir sulphanilamide - a sulfa drug mixed with diethylene glycol - a drug manufactured by Massengill, an established pharmaceutical company. This tragedy led to the passage of the Food, Drug and Cosmetic Act of 1938. This legislation, for the very first time, required drugmakers to submit evidence of a product's safety. It also required that a drug's label state its contents, how it should be administered and its possible side effects. The US FDA was appointed to oversee the law's enforcement. In 1957, a West German pharmaceutical manufacturer introduced a new sedative, thalidomide, which alleviated the symptoms of morning sickness in women, during the first trimester of pregnancy. In 1962, by which time the drug had been sold in 46 countries, it became clear that thalidomide damaged the foetus, causing stillbirth or, more prevalently, phocomelia (Greek for "seal limb"). Thousands of newborn babies were found to have truncated limbs that resembled flippers. This tragedy resulted in the Kefauver-Harris Drug Amendments of 1962. The Kefauver-Harris Amendments required that manufacturers demonstrate both the safety and efficacy of new drugs before receiving approval for commercial sale in the US. In addition, this legislation required that drugs be produced according to the specified GMP (good manufacturing practices) guidelines and that plants should be subject to US FDA approval and periodic inspection. These regulations resulted in long delays in the introduction of new drugs and led to the enactment of the Modernisation Act of 1997, which incorporated several measures to speed up the approval of new drugs, especially

for the treatment of life-threatening illnesses, and improve the overall efficiency of the FDA. The new legislation extended the Prescription Drug User Fee Act (PDUFA), a programme that charges drugmakers a fee for filing new drug applications with the US FDA. These funds are used to hire new personnel for the US FDA, and the programme has resulted in a significant reduction in the time taken for new drug approvals. The new law also enabled seriously ill patients to have easier access to experimental compounds and provided new initiatives for the development of paediatric medicines. In 2012, US FDA introduced the Generic Drug User Fee Amendments (GDUFA), a law that is designed to speed access to safe and effective generic drugs to the public and reduce costs to industry. The law requires the industry to pay user fees to supplement the costs of reviewing generic drug applications and inspecting facilities. Additional resources will enable the Agency to reduce a current backlog of pending applications, cut the average time required to review generic drug applications for safety, and increase risk-based inspections. GDUFA is designed to build on the success of the Prescription Drug User Fee Act (PDUFA).

GDUFA User Fee Requirements

ANDA: Abbreviated new drug application API: Active pharmaceutical ingredient PAS: Prior approval supplement DMF: Drug master file Source: US FDA

Some key concepts in the context of new and generic drugs are discussed below:

Investigational New Drug (IND)

The US FDA's role in the development of a new drug begins when the drug's sponsor (usually the manufacturer or potential marketer) finishes screening the new molecule for pharmacological activity and acute toxicity potential in animals and plans to test its diagnostic or therapeutic potential in humans. Companies obtain approvals for human trials via the IND.

New Drug Application (NDA)

Source: CRISIL Research

Data gathered during animal studies and human clinical trials of an IND are used to file for a New Drug Application (NDA). The NDA application is the vehicle through which the drug sponsors formally propose that the US FDA approve a new pharmaceutical for sale and marketing in the US. NDA aims to provide sufficient information to permit the US FDA reviewer to make the following key decisions:

The drug is safe and effective in its proposed use(s) and its benefits outweigh the risks The proposed labelling of the drug (package insert) is appropriate The methods used in manufacturing the drug and the controls used to maintain quality are adequate to preserve the drug's identity, strength, quality, and purity.

Abbreviated New Drug Application (ANDA)

New drugs, like other new products, are developed under patent protection. The patent protects investments on the drug's development, by giving the company the sole right to sell the drug while the patent is in effect. When patents or other periods of exclusivity expire, other drug manufacturers can apply to the US FDA to sell a copy of the original drug. Drug companies must submit an ANDA for approval to market a generic (copy of the drug). The Drug Price Competition and Patent Term Restoration Act of 1984, more commonly known as the Hatch-Waxmann Act, made

ANDAs possible by striking a compromise in the drug industry. As a result, generic drug companies gained greater access to the market for prescription drugs and innovator companies gained restoration of patent life of their products lost during the US FDA's long approval process. Drug substitution laws further aided generic drugmakers by allowing pharmacists to substitute branded drugs with generic drugs, unless the doctor specifies, "dispense as written" on the prescription. The ANDA process does not require the drug's sponsor to repeat costly animal and clinical research on ingredients or dosage forms already approved for safety and effectiveness. However, to gain FDA approval, a generic drug must:

Contain the same active ingredients as the innovator drug (inactive ingredients may vary) Be identical in strength, dosage form, and route of administration Have the same indications for usage Be bioequivalent to the innovator drug Meet the same batch requirements for identity, strength, purity and quality Be manufactured under the same strict standards of FDA's GMP regulations that are required for innovator products.

Drug Master Files

A Drug Master File (DMF) is a submission to the FDA that may be used to provide confidential and detailed information about facilities, processes, or articles used in manufacturing, processing, packaging and storing of one or more human-use drugs. Although the information contained in the DMF may be used to support an IND, an NDA, an ANDA, another DMF, or an export application, it is not a substitute for any of these. A DMF is neither approved nor disapproved. Hence, registering of a DMF by the US FDA does not by itself mean that the drug can be sold in the US. That right is obtained on review of the DMF in connection with the review of an IND, NDA, ANDA, or an export application, and consequent approval of manufacturing facilities and processes.

EXPORTS AND IMPORTS

Manufacturing opportunities for Indian pharma companies to remain upbeat

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The global pharmaceuticals market continues to offer strong opportunities to Indian players. An increase in the number of drugs losing their patents and a decline in the research and development productivity of global innovators will provide immense potential to Indian formulations and bulk drugs manufacturers. Thus, CRISIL Research expects the Indian pharmaceuticals industry's revenues to clock a CAGR of 14-16 per cent over the next 5 years.

Key issues answered through this analysis:

1. What is the outlook on the overall manufacturing opportunities for Indian pharma companies? 2. How is the increasing proportion of exports impacting the dominance of domestic pharmaceutical sales in the overall revenue mix of Indian players?

Publish Date: 15-Jul-2013

Buoyant manufacturing opportunities for Indian pharmaceutical companies

Indian pharmaceutical companies have manufacturing opportunities in two segments - formulations and bulk drugs. The formulations segment can be further categorised into domestic consumption and exports. Traditionally, the domestic segment accounts for 40-50 per cent of the total formulations production, with exports accounting for a larger share.

Manufacturing opportunities for Indian pharmaceutical players

By contrast, in the case of bulk drugs, domestic consumption accounts for only 10-20 per cent of total production. Hence, the Indian pharmaceuticals industry is dominated by exports (in both, bulk drugs and formulations), which contributed about 60 per cent to the industry's sales in 2012-13. Formulations are exported either through contracts (supply) or directly sold (retail) in the market. Similarly, bulk drugs are either supplied under a contract in case of patented drugs, or are sold outright in the case of off-patent drugs. In the coming years, Indian pharmaceutical manufacturers are poised to extend their presence in on-patent regulated markets, while maintaining a strong foothold in the generics (off-patent drugs) market as well.

Indian pharmaceuticals industry sales by key segments

Overall, demand for pharmaceuticals is expected to increase at a CAGR of 14-16 per cent to $60-63 billion by 201718 from an estimated $32 billion in 2012-13. Between 2007-08 and 2012-13, formulation exports grew strongly at about 19 per cent CAGR. During this period, exports to regulated markets also grew at a robust CAGR of about 22 per cent owing to increasing penetration of generics in key markets such as the US and Europe. Over the next few years, we expect formulation exports to continue to grow at a 14-16 per cent CAGR, driven by the growing opportunity from drugs going off-patent in the regulated markets and a favourable growth in the semiregulated markets. Indian players' continued and successful efforts to secure a substantial share of Abbreviated New Drug Application (ANDA) approvals in the US also reflect India's aggressiveness in pursuing regulated markets. Bulk drug exports too are expected to grow at a similar pace of 14-16 per cent CAGR, as the growing generics market and rising cost pressures faced by innovators provide a significant opportunity. Additionally, India's key strengths such as low-cost manufacturing, high process chemistry skills, manufacturing facilities and increasing number of drug master filings (DMFs) are expected to drive growth in bulk drug exports. Domestic demand for formulations grew at a 14.2 per cent CAGR during 2007-08 to 2012-13, driven by a rise in consumption of drugs used to treat lifestyle diseases. We expect this trend to continue and the domestic formulations

market to expand to over Rs 1.1 trillion in 2017-18, registering a CAGR of 12-14 per cent. The pricing policy introduced recently is unlikely to impact the strong growth trajectory of the domestic formulations market. A detailed analysis and assessment of the growth opportunities in each of the above mentioned segments along with their regional distribution are discussed in the subsequent sections

Player profile
Alembic Ltd Background
In 1907, Alembic Ltd was incorporated at Vadodara, as Alembic Chemical Works Co Ltd. The company commenced its operations, with the production of tinctures, alcohol and pharmaceuticals. Subsequently, it began to manufacture active pharmaceutical ingredients (APIs), formulations and veterinary products for both, domestic as well as international markets.

Manufacturing and R&D facilities

Alembic has three manufacturing units in Gujarat - Vadodara, Karakhadi Village and Panelav - and one at Baddi, Himachal Pradesh. The Vadodara plant has the largest domestic fermentation capacity, where Pencillin-G, used in making antibiotics, is manufactured. However, in 2010-11, Alembic de-merged the Pencillin-G business and the Vadodara plant from its other businesses. The Panelav facility manufactures API and formulations, which are approved by the US Food and Drug Administration (US FDA). The Baddi plant manufactures formulations for domestic and export markets. The company's new R&D facility and bio-equivalence centre is located in Gujarat and has received approval from the Drug Controller General of India (DCGI). As of 2011-12, the company has filed 45 ANDAs (of which 19 are approved) and 62 drug master filings (DMF) with the US FDA.

Business profile
Alembic manufactures a range of formulations and APIs for domestic and export markets. The formulations segment accounts for over 75 per cent of the company's revenues. Within formulations, the company manufactures and markets antibiotics and anti-bacterials, cough and cold remedies, analgesics and anti-inflammatory medications, nutraceuticals and anti-diabetes. In the domestic formulations business, anti-infective drugs is a major segment, which comprises leading brands such as Althrocin, Azithral, Roxid, and Wikoryl.

Exports, which largely comprise formulations, accounted for about 40 per cent of Alembic's turnover in 2011-12. Traditionally, the company has catered to semi-regulated markets. However, over the last 3-4 years, it has steadily increased its focus on regulated markets, such as the US, Canada and Europe. In 2010-11, Alembic de-merged its pharmaceutical business into a 100 per cent subsidiary, Alembic Pharma Ltd (APL). The de-merger was aimed at strengthening the company's financials, which were skewed by the loss-making Penicillin-G business. APL will focus on three core businesses: domestic formulations, formulation exports and the API business (except the fermentation facility that manufactures Pencillin-G).

Market position
Alembic is a mid-sized player in the domestic formulations market. It was at the 23rd position, with a market share of about 1.4 per cent, as of March 2012. It has strong presence in the anti-infectives segment, which accounts for over 50 per cent of its domestic formulations sales, followed by respiratory and gastro-intestinal segments. Prior to acquiring Dabur Pharma's non-oncology business (chronic portfolio) in 2007-08, Alembic only had a marginal presence in lifestyle-related segments, such as gastro-intestinal, cardiovascular (CVS) and anti-diabetes. Following the acquisition, the company has managed to strengthen its presence in these chronic disease segments; nevertheless, its portfolio remains highly concentrated in the anti-infectives segment. In 2011-12, the company's domestic formulations business grew by 13 per cent y-o-y, backed by an effective panIndia distribution network and a therapy-based marketing strategy in the acute and chronic segments. The company also launched around 20 to 25 new products to improve its sales and enhance its brand value.

Key developments
Currently, APL is involved in expanding the annual capacity of the Panelav formulation plant, from 2.6 billion tablets to 5 billion tablets by FY 2013.

Financials
Alembic's revenues grew by a healthy 22 per cent y-o-y in 2011-12. While the formulations business (domestic and exports) grew by a moderate 12.9 per cent y-o-y, revenues from the API segment increased by a strong 36.1 per cent, compared to the previous year. The company's focus on exports to regulated markets yielded a robust growth of 41.1 per cent in overall formulations exports. Although the company has a higher share of revenues from regulated markets, it has been unable to improve margins significantly. This could be attributed to lower price realisations for its products, due to stiff competition from several other large players, who are also procuring approvals for the same products. In 2011-12, Alembic's operating margins increased mainly due to restructuring activities in the domestic formulation space, the shift towards the chronic segment and growth in contribution from regulated markets.

Key financial indicators

Note: Financials for March 2010 include the Pencillin-G business

Source: CRISIL Research

Aurobindo Pharma Ltd Background

In 1986, Aurobindo Pharma Ltd was set up in Hyderabad as a private limited company, which went public in 1995. It is the largest manufacturer of bulk drugs in the country, and has been steadily widening presence in the formulations segment. The company manufactures semi-synthetic penicillin, cephalosporin and lifestyle products, both as bulk drugs and generic formulations. The company also manufactures antibiotics, anti-virals, antidepressants, anti-fungals, cardiovascular, macrolides, anti-retrovirals, anti-ulcerants, anti-emetics, etc.

Business profile and product mix

Aurobindo Pharma is an integrated pharmaceutical company that develops, manufactures and sells active pharmaceutical ingredients (APIs), intermediates and generic formulations. The company is the largest Indian player in the bulk drugs space, and has a sizeable presence in the export formulations market. Globally, the company is a key player in the semi-synthetic penicillin, cephalosporin and anti-retroviral segments. During the last 4-5 years, the company has steadily increased its focus on the high-margin formulations business. In 2011-12, formulation sales contributed around 56 per cent, while API sales contribute about 44 per cent of the total sales. Within the formulations segment, Aurobindo Pharma has primarily focused on the regulated markets, with the US and Europe accounting for more than half of the segment revenues.

Plant details

Source: Company annual report

Key developments
In December 2010, Aurobindo Pharma faced an import ban on its Unit-VI cephalosporin facility at Chitkul village, Hyderabad following an audit check by the US FDA. The compliance report, sent by the company to the US FDA, is currently under review. In September 2011, Aurobindo Pharma Ltd entered into a joint venture with a Russian ecological healthcare equipment and nutrition supplements manufacturer, named OJSC DIOD through its subsidiary. The joint venture enabled Aurobindo to construct a plant for manufacturing non-penicillin and non-cephalosporin generics in Russia.

Market position
In the formulations business, regulated markets such as USA and Europe are the company's major export destinations, contributing more than half of the company's formulations revenues. Other major markets include South Africa, Australia, Japan and South-East Asia. Apart from the anti-infectives segment, which has been the company's mainstay over the years, Aurobindo has increased exports of drugs used in fast-growing therapeutic segments, such as cardiovascular system (CVS), central nervous system (CNS) and gastro-intestinal.

Aurobindo continued its strategy of aggressively filing Abbreviated New Drug Applications (ANDAs) with the US FDA. As of March 2012, the company's cumulative ANDA filings reached 239, of which 147 have been approved The company has filled six Drug Master Files (DMFs) with US FDA, taking its cumulative filings to 160, as of March 2012.

Financials
Aurobindo's revenues grew by a modest 5.7 per cent y-o-y in 2011-12, compared to a 22.3 per cent growth recorded in 2010-11; this was mainly on account of the ban on the Unit VI Cephalosporin manufacturing facility by the US FDA. The company's operating margins declined by 1,000 bps, primarily due to lower contribution from high margin formulations (44 per cent to total revenues in 2011-12, compared to 57 per cent in 2011-12). Additionally, the company's employee costs also surged by 25 per cent y-o-y, due to aggressive hiring in the regulated markets of USA and Europe. The decline at the net level was more severe at 1,550 bps due to foreign exchange losses on short term borrowings and redemption premium paid on foreign currency commercial borrowings (FCCBs) redeemed during the year.

Key financial indicators

Note: 1 - Standalone breakup n.m.: not meaningful Source: CRISIL Research

Cipla Ltd
Background
The late Dr. K A Hamied launched Cipla as Chemical, Industrial & Pharmaceutical Laboratories in 1935. The company launched its first set of products in 1937. Till date, the Hamied family remains the company's largest shareholder.

Manufacturing and R&D facilities

Cipla has eight manufacturing facilities, located at Bengaluru (Karnataka), Patalganga and Kurkumbh (Maharashtra), Verna (Goa), Baddi (Himachal Pradesh), Kumrek and Rangpoo (Sikkim), and Pithampur (Madhya Pradesh). In 2010, the company commenced production of pharmaceutical formulations at its special economic zone (SEZ) in Indore (Madhya Pradesh).

Currently, the company's research & development (R&D) efforts largely focus on low-risk areas, such as reverse engineering and new drug delivery systems (NDDS). The company has achieved reasonable success in NDDS, especially in the anti-asthma segment. Cipla was the first company outside the Europe and the US to manufacture Salbutamol inhalers, free of chloro-fluoro carbon (CFC).

Business profile
Cipla is predominantly a formulations player (formulations contributed about 87 per cent of domestic sales in 201112) with a small presence in the bulk drugs segment. The key therapeutic categories include respiratory, antiinfectives, cardiac, anti-cancer drugs, anti-inflammatory drugs, anti-depressants and animal healthcare products. Cipla also offers technology services to facilitate preparation of products, process know-how and new developments. The company's major export markets include Africa, the Middle East, Europe, America, Asia and Australia. The company is also building long term growth platforms in the regulated generics and drug discovery research markets, through the contract manufacturing route where it partners with large global generic players.

Market position
Cipla is the second largest player in the domestic pharmaceutical industry, with a market share of 4.9 per cent as of March 2012. Strong brand value and a well-diversified product portfolio spread across therapeutic segments, have helped the company grow at a healthy rate of 13.4 per cent CAGR over the last four years. Cipla's growth rate was lower than industry levels, as the company sold off its key revenue generating brand, i-pill to Piramal Healthcare. Cipla dominates the respiratory therapeutic segment and also occupies a key position in both, the antiinfectives and the cardio vascular (CVS) segments. The company's top brands include Asthalin and Seroflo (respiratory), and the MTP kit.

Financials
Cipla's revenues grew by 10.1 per cent (y-o-y) in 2011-12, backed by a 10 per cent (y-o-y) growth in exports and about 14 per cent (y-o-y) growth in domestic business. During the same period, operating margins increased by 300 bps (y-o-y) on account of a favourable product mix.

Key financial indicators

n.m.:Not meaningful Source: CRISIL Research

Glenmark Pharmaceuticals Ltd

Background
In 1977, Mr. Gracias Saldanha established Glenmark Pharmaceuticals as a private limited company, which became a public limited company in 1991. Glenmark manufactures and markets pharmaceutical formulations and active pharmaceutical ingredients in India and abroad. The company is also engaged in discovery of new molecules, which includes new chemical entities (NCEs) and new biological entities (NBEs).

Business profile
Glenmark Pharmaceuticals Ltd is primarily a formulations manufacturing company based out of India, but also having a global presence. The company has strong presence in acute therapy segments, such as dermatology (Derma), respiratory systems, gastro-intestinal and anti-infectives. In addition, it has been strengthening its chronic products portfolio, in segments such as cardiovascular (CVS), oncology and anti-diabetics. Glenmark operates through two separate entities - Glenmark Pharmaceuticals Ltd (GPL) and Glenmark Generics Ltd (GGL). GPL manages the speciality business (branded business), and focuses on new drug development and the branded product markets, largely in semi-regulated regions. On the other hand, GGL controls the generics business operates and focuses on launching off-patent formulations and active pharmaceutical ingredients in the regulated markets of US and Europe. Glenmark's oncology business, based out of Argentina, is also managed by GGL.

Manufacturing and R&D facilities

Glenmark has 14 manufacturing facilities; 11 of these manufacture formulations, while the remaining three are API plants. The company's API plants at Solapur and Kurkumbh are GMP (Good Manufacturing Practices) compliant and cater to semi-regulated markets. Its Ankleshwar plant is approved by the US FDA and European regulatory bodies. The company's formulation manufacturing units are located at Nasik (Maharashtra), Bardez and Kundaim (Goa), Baddi (Himachal Pradesh), Pithampur (Indore) and two plants at Solan (Himachal Pradesh) in India. The rest of its manufacturing units are located in Brazil (2), Argentina (1) and Czech Republic (1). Its research and development (R&D) centres are located at Navi Mumbai, Nasik, Panvel and Switzerland. Glenmark's strong focus on generic R&D has helped the company file 10-15 Abbreviated New Drug Applications (ANDAs) each year, since 2006. In 2011-12, Glenmark filed 12 ANDAs, taking its total tally of ANDA filings to 116. (Of this, 78 have been approved). GPL has actively focused on the high-risk-high-return drug discovery segment. As new drug discovery requires sizeable funds, the company has adopted the out-licensing business model. Under this strategy, GPL develops a molecule till phases I and II and then out-licenses it to a global player for subsequent development.

Key Developments
In August 2012, Glenmark won a case against Napo Pharma, after which it procured rights to sell the HIVassociated diarrhoea drug, Crofelemer in 140 countries, including India. In a three-party agreement, Napo Pharmaceuticals, which discovered the molecule, had given the license for developing and marketing the drug in

certain territories, to Salix Pharmaceuticals and Glenmark. In November 2011, Napo Pharma terminated the agreement, citing a breach of terms and conditions. Glenmark subsequently sought arbitration in the US, in December 2011. Market position Glenmark occupies the 17th position, with a market share of about 1.8 per cent, as of March 2012. The company has a major presence in the acute therapy segments of dermatology, respiratory systems and anti-infectives. GPL is one of the largest dermatological players in the Indian pharmaceutical market, having a market share of 8.8 per cent as on June 2012. About 57 per cent of Glenmark's revenue comes from the speciality sector, which includes several therapeutic segments such as dermatology, internal medicine, respiratory, pediatrics, diabetes, gynecology, oncology etc. 43 per cent of the company's revenue comes from its generic segment, which includes the discovery of new chemical entities for subsequent commercialisation and out-licensing. Glenmark's leading brands include Telma (Chronic), Ascoril Pus (Acute), Candid-B (Acute), Candid (Acute), Telma Am (Chronic), Lizolid (Acute), Elovera (Acute), Altacef (Acute) and Momate (Acute). In the API segment, the company has a strong presence in the CVS segment such as Perindopril, Lercandipine, Telmisartan and Amiodarone.

Financials
GPL's topline grew by a stellar 36.2 per cent (y-o-y) in 2011-12, on the back of a strong sales growth in international business segments and introduction of 20 new products in the acute and chronic segments. In 201112, the formulation business posted nearly 38 per cent growth, with US and Europe being chief contributors. The company's sales from the domestic formulation business increased by 19 per cent (y-o-y) in 2011-12. Despite strong revenue growth, operating margins declined by 240 bps (y-o-y) to 18 per cent, due to a sharp increase in other expenses. Other expenses surged during the year on account of payment of Rs 1,316.8 million made to Paul Capital (a one-time payment to receive royalty rights on certain products) and an increase in selling & marketing expenses to support strong growth.

Key financial indicators

Note: In 2010-11, the company shifted to IFRS reporting. Thus, the figures are strictly not comparable. Source: CRISIL Research

GSK Pharmaceuticals Ltd

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Publish Date: 12-Jul-2013

Background
GlaxoSmithKline Pharma Ltd (GSK), a 51 per cent subsidiary of UK-based Glaxo-Wellcome, was formed after the merger of Glaxo India Ltd and SmithKline Beecham Pharmaceuticals India in January 2001. The company is wholly focused on the domestic formulations market.

Manufacturing and R&D facilities

GSK has two manufacturing units in India at Thane and Nashik. The Thane plant manufactures bulk drugs, while the Nashik plant produces formulations. The company also has two R&D facilities at Thane and Nashik, both of which, have been approved by the Department of Science and Industrial Research in India. The company's R&D activities focus on clinical studies for diseases such as cancer, depression, schizophrenia, diabetes. Moreover, GSK India also has access to the GSK Plc's (its parent company) product pipeline.

Business profile
The company manufactures, sells and distributes antibiotics, gastrointestinals, nutritionals, dermatological and respiratory care products. It has presence in mass markets (acute care) with brands such as Calpol, Zinetac, Neosporin, etc and mass therapy segments (anti-infectives) with brands such as Augmentin. Following the successful launch of Tykerb (which is used for treating breast cancer) in the oncology business, the company further expanded its presence in two new segments - Kidney cancer and Hematology - with the launch of Votrient and Revolade.

Market position
GSK is the third-largest player in the domestic formulations segment with a market share of 4.8 per cent as per market research firm AWACS (as of December 2012). Globally, its parent GlaxoSmithKline Plc is among the top five global pharmaceutical companies.

Financials
GSK's sales grew by 10.9 per cent (y-o-y) in 2012. The modest growth was due to supply issues at its vaccines plant in Nashik. Operating margins declined by 170 bps (y-o-y) on account of higher employee cost and raw material cost. However, net margins increased by 320 bps in 2012 due to the absence of extraordinary expenses relating to an earlier case of overcharging.

Key financial indicators

n.m.: Not meaningful Source: CRISIL Research

DOES THIS RESEARCH MEET YOUR NEEDS? Ranbaxy Laboratories Ltd

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Publish Date: 12-Jul-2013

Background
Ranbaxy Laboratories, a 64 per cent subsidiary of Japanese pharma firm Daiichi Sankyo Company Ltd, is the largest pharmaceutical company by sales in India. The company manufactures a wide range of generic drugs and ranks among the top 10 generic companies in the world. Daiichi Sankyo, a

Japanese pharmaceutical company, became the majority stakeholder in June 2008, when it acquired a 50.1 per cent stake in Ranbaxy for about $4.6 billion.

Ranbaxy has an expanding international portfolio of affiliates, joint ventures and representative offices across the globe, with a presence in 23 of the top 25 pharma markets of the world. In addition, the company also has robust operations in the US, UK, France, Germany, Russia, India, Brazil and South Africa. It is strengthening its generics business in Japan, Italy, Spain and several countries in the Asia Pacific.

Manufacturing facilities
Ranbaxy has 19 manufacturing facilities in eight countries, namely, India, China, Ireland, Malaysia, Nigeria, Romania, the US and Vietnam. Its overseas facilities are designed to cater to the requirements of the local regulatory bodies of respective countries, while Indian facilities meet the requirements of all international regulatory agencies such as the UK's MHRA, South Africa's MCC, US FDA and Australia's TGA.

Business profile
Ranbaxy has a significant focus on exports (overseas revenues accounted for about 80 per cent of its overall turnover in 2012). It manufactures and markets generic pharmaceuticals, branded generics, active pharmaceuticals ingredients (APIs) and intermediates. The company's products are sold in more than 125 countries. The key therapeutic segments of the company are cardiovascular, anti-infectives, central nervous system (CNS), pain and musculoskeletal, respiratory, gastrointestinals, while the top five molecules are Atorvastatin (cardiovascular), Donepezil (CNS), Valacyclovir (Anti-Infective), Simvastatin (Cardiovascular), Ginseng + Vitamins (Nutritional). In the domestic market, however, the company has a significant exposure to acute therapies.

Key developments
In May 2013, the company was fined USD 500 million by the US Department of Justice to settle criminal and civil lawsuits. The charges pertained to falsifying data from its drug facilities and distributing adulterated drugs from two manufacturing facilities in India. In November 2012, the company voluntary recalled its atorvastatin drug from the US market due to presence of some foreign matter in it. The company has thereafter employed several Corrective and Preventive Actions (CAPA) and has resumed its production and supply in US from February 2013. In September 2012, the company received approval for setting up a Greenfield manufacturing facility in Malaysia as an EPP (Entry Point Project). The new facility would manufacture dosage forms including tablets and capsules primarily in the Cardiovascular, Anti Diabetic, Anti-infective and Gastrointestinal segments.

Ranbaxy's total output in Malaysia will be increased from 1 Billion doses/annum to 3 Billion doses/annum when the new facility is fully operational.

Financials
Ranbaxy's revenues rose by 22 per cent (y-o-y) in 2012 mainly on account of higher sales of first-to-file (FTF) products and authorised generics (atorvastatin and pioglitazone). Operating margins dipped by 210 bps (y-oy) to 14.5 per cent. Sales of atorvastatin helped Ranbaxy maintain healthy operating margins for a major part of the year. However, despite having market exclusivity, improvement in margins was restricted due to the profit sharing agreement with Teva. Additionally, the company had to recall some of the batches of atorvastatin in November. The resulting inventory write-offs and adverse product mix led to a sharp fall in profitability in the fourth quarter. On the net level, margins for the whole year improved significantly due to the absence of the provision made for the US FDA case. Adjusted for the one-time provision made in 2011, net margins improved by about 1,000 bps due to lower foreign exchange hedging losses in the year.

Key financial indicators (Consolidated)

n.m. - Not meaningful Source: CRISIL Research

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