Indian Pharma Industry an overview

The demand for pharmaceutical products in India is significant and is driven by low drug
penetration, rising middle-class & disposable income, increased government & private spending
on healthcare infrastructure, increasing medical insurance penetration etc.
The Indian pharmaceutical industry is growing at about 8 to 9 percent annually according to A
Brief Report Pharmaceutical Industry in India, published in January 2011. The Pharmaceutical
industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates,
pharmaceutical formulations, chemicals, tablets, capsules, orals and injectables. There are
approximately 250 large units and about 8000 Small Scale Units, which form the core of the
pharmaceutical industry in India (including 5 Central Public Sector Units).

I. Current Scenario:

India's pharmaceutical market grew at 15.7 per cent during December 2011. Globally, Indiaranks
third in terms of manufacturing pharma products by volume. According to McKinsey, the
Pharmaceutical Market is ranked 14th in the world. By 2015 it is expected to reach top 10 in the
world beating Brazil, Mexico, South Korea and Turkey. More importantly, the incremental
market growth of US$ 14billion over the next decade is likely to be the third largest among all
markets. The US and China are expected to add US$ 200bn and US$ 23bn respectively.
McKinsey & Companys report, India Pharma 2020: Propelling access and acceptance,
realizing true potential, predicted that the Indian pharmaceuticals market will grow to US$55
billion in 2020; and if aggressive growth strategies are implemented, it has further potential to
reach US$70 billion by 2020. While, Market Research firm Cygnus report forecasts that the
Indian bulk drug industry will expand at an annual growth rate of 21 percent to reach $16.91
billion by 2014. The report also noted that India ranks third in terms of volume among the top 15
drug manufacturing countries.

Further, McKinsey reports Healthcare grew from 4 per cent of average household income in
1995 to 7 per cent in 2005 and is expected to grow to 13 per cent by 2025.

Diagnostics Outsourcing / Clinical Trials: According to the estimates, the Indian diagnostics
and labs test services, in view of its growth potential, is expected to reach Rs159.89 billion by
FY2013. The Indian market for both therapeutic and diagnostic antibodies is expected to grow
exponentially in the coming years. Further, more than 60% of the total antibodies market is
currently dominated by diagnostic antibodies.

Some of the major Indian pharmaceutical firms, including Sun Pharma, Cadilla Healthcare and
Piramal Life Sciences, had applied for conducting clinical trials on at least 12 new drugs in 2010,
indicating a growing interest in new drug discovery research.

Generics: India tops the world in exporting generic medicines worth US$ 11 billion. The Indian
generic drug market is to grow at a CAGR of around 17 per cent between 2010-11 and 2012-13.

Over the next few years, it is expected that the patent laws will provide impetus to the launch of
patent-protected products. Such products have the potential to capture upto a 10% share of the
market by 2015, implying the market size of US $2bn.

R&D: According to Battelle R&D magazine, gross expenditure on R&D (GERD) by India for
2012 was projected to be US$ 41 billion in purchasing power parity terms, which works out to
0.8 per cent of GDP. This is low both in absolute terms and as a proportion of GDP compared to
other countries. This is partly because the size of the R&D base and absorption capacity is not
commensurate with requirements.

As per estimates in 2010-11, largest R&D expenditures attracted from pharmaceutical sector.
R&D intensity for the pharmaceuticals sector was much higher than that for other sectors.
Although there have been substantial increases in growth rates of patents filed in India during the
last decade, the share of patents filed for work in India through indigenous research is less than

20 per cent of the total. A White Paper on R&D prepared by consultancy firm Deloitte in July
2011 estimates that more than 300 MNCs have set up R&D centres in India.

Demand: The demand for pharmaceutical products in India is significant and is driven by many
factors like low drug penetration, rising middle-class & disposable income, increased
government & private spending on healthcare infrastructure, increasing medical insurance
penetration, changing demographic pattern and rise in chronic lifestyle-related diseases; adoption
of product patents, and aggressive market penetration driven by the relatively smaller
companies.

According to CARE research demand triggers for the growth are:

Between 2010 and 2015 patent drugs worth US$171 bn are estimated to go off-patent
leading to a huge surge in generic products.

High margin pharma export business is expected to grow at a higher rate than domestic
market given increased in outsourcing activities.

Increased M&A activities is set to consolidate the market which widens geographic
reach, strengthens distribution network and venture into new therapeutic segments.

Indian companies files the highest number of ANDAs with USFDA leading to greater
chances of approvals and thereby increasing export to regulated markets especially the
US.

There are currently approximately 175 USFDA and nearly 90 UK-MHRA approved
pharma manufacturing plants in India which can supply high quality pharma products
globally.

Growth from rural markets will outstrip overall pharma market growth, albeit at lower
margins, given lower penetration of 18-19% coupled with rising income level and
awareness.

Biopharmaceuticals is another potential high growth segment for Indian pharma

growing at double digit driven by the vaccines market.

II. Major Pharmaceutical Companies

India based pharmaceutical companies are not only catering to the domestic market and fulfilling
the countrys demands, they are also exporting to around 220 countries. They are exporting high
quality, low cost drugs to countries such as the US, Kenya, Malaysia, Nigeria, Russia, Singapore,
South Africa, Ukraine, Vietnam, and more. Currently, the US is the biggest customer and
accounts for 22 percent of the sectors exports, while Africa accounts for 16 percent and the
Commonwealth of Independent States (CIS) places around eight percent of orders, as per
Research and Market report.

For most of the pharma companies, domestic business contributes in the range of 20-50% of the
overall revenue. US business contribution stands at 20-30% and remaining comes from the RoW
markets.

Leading Indian Players by Sales

Company

Sales in US $Mn

Year End

Cipla

6,368.06

March 2011

Ranbaxy Lab

5,687.33

December 2010

Dr Reddy's Labs

5,285.80

March 2011

Sun Pharma

1,985.78

March 2011

LupinLtd

4,527.12

March 2011

Aurobindo Pharma

4,229.99

March 2011

Piramal Health

1,619.74

March 2011

Cadila Health

2,213.70

March 2011

Matrix Labs

1,894.30

March 2010

Wockhardt

651.72

December 2011

Trends:

All companies, including MNCs, have increased their field force in the last one year.

Indian companies are entering into strategic tie-ups with MNCs to strengthen their
product portfolio.

Companies are expanding their presence in rural markets.

Acquisitions by MNCs to gain quick foothold in the fastest growing Indian pharma
market.

Most of the Pharma companies have shown considerable decline in growth in the first half of
2011. The slowdown is widely visible in the Chronic and Acute categories. Anti-invective, pain
and gastro together contribute 1/3rd of the total pharma market. The pharma companies have
started facing challenges in domestic market due to increase in competition from unlisted MNCs
in this segment. They are rapidly expanding their field force to extend their geographical reach.
Companies like Cipla, Torrent and IPCA which are mainly focused on Indian market are already
feeling the heat. Growth rates of companies such as Cadila, Dr. Reddy and Ranbaxy have already
come down. On the other hand Lupin and Sun are showing growth due to the shift of focus
towards specialty therapies, where competition is relatively low.

Basing on the changing macro factors and economic growth Emkay Research has expected the
growth estimates of the pharma companies to decrease. It cut down the domestic growth
estimates for Cadila, Cipla, Dr. Reddy, IPCA, Torrent and Unichem for FY12 and FY 13 by 2%
to 5% and retained the growth estimates for Lupin, Ranbaxy, Sun, GSK and Pfitzer.
Indian Pharma Domestic Growth Expectations

Company

FY12 Domestic Growth

Earlier growth estimates

Cadila

12%

15%

Cipla

10%

15%

Dr. Reddys

10%

15%

Glenmark

16%

16%

IPCA

10%

17%

Lupin

19%

19%

Ranbaxy

12%

12%

Sun Pharma

15%

18%

Torrent

12%

12%

Unichem

5%

9%

GSK

13%

13%

Pfizer

14%

14%

Source: Emkay Research

Major recent M&As:

Sun-Merck JV: Sun and Merck have formed JV to develop, manufacture and
commercialize new combinations and formulations of innovative, branded generics in
the Emerging Markets. Under the JV, Sitagliptin and Sitagliptin+Metformin have
already been commercialized in the Indian markets.

Lupin-Lilly JV: They entered into collaboration to promote and distribute Lillys
Huminsulin range of products in India and Nepal.

Cadlia_Bayer JV: The venture will sell brands from both companies in Indian markets.

Biocon-Pfizer JV: This collaboration will give Pfizer exclusive rights to commercialize
Biocon products globally including co-exclusive rights with Biocon in Gernmany,
India and Malaysia.

Universal Medicines Aventis: Aventis has acquired Universal Medicines for over
US$ 100mn.

III. Government Initiatives:

Government initiatives in the public health sector have recorded some noteworthy successes over
time with focus on investments related to better medical infrastructure, rural health facilities etc.

100 per cent FDI is permitted for health and medical services under the automatic
route.

The National Rural Health Mission (NHRM) had allocated US$ 10.15 billion for the
upgradation and capacity enhancement of healthcare facilities.

Moreover, in order to meet revised cost of construction, in March 2010 the

Government allocated an additional US$ 1.23 billion for six upcoming AIIMS-like
institutes and upgradation of 13 existing Government Medical Colleges.

As a result, FDI inflow in hospital and diagnostic centres was US$ 1.1 billion during April 2000
and November 2011, according to st Department of Industrial Policy & Promotion (DIPP) data.
FDI inflow in medical and surgical appliances stood at US$ 472.6 million during the same
period. And the drugs and pharmaceuticals sector has attracted FDI worth US$ 5.0 billion
between April 2000 and November 2011

Budget 2012: Union Budget 2012-13, as expected, is positive for the pharmaceutical sector. The
government has again increased budgetary allocation for healthcare spending, which would be an
overall positive for the sector. Indian pharmaceutical companies have been investing on the R&D
front to tap opportunities in the domestic and global markets. To encourage the same, the
weighted deduction on R&D expenditure to 200% (in-house research) was extended for a further
period of five years. R&D sops would continue to be positive for the sector as a whole.

Budget Proposal

Impact

Proposal to extend weighted deduction of Positive

for

all

Indian

pharmaceutical

200% for R&D expenditure in an in-house companies.

facility for a further period of five years
beyond March 31, 2012.
Allocation

for

NRHM

proposed

to

be Positive for all pharmaceutical companies.

increased from Rs 18,115cr in FY2011-12 to

Rs 20,822cr in FY2012-13.
Proposal to continue to allow repatriation of Positive for all pharmaceutical companies,

dividends from foreign subsidiaries of Indian mainly Indian companies, as they generate the
companies at a lower tax rate of 15% up to highest revenue from export markets.
March 2013.
Introduced MAT on partnership firm.

Would negatively impact Cadila Healthcare

and Sun Pharmaceuticals. Since we have
already factored in higher
tax provision for FY2013, we are not changing
our FY2013 estimates for both the companies.

Indiabiznews

WHAT ARE PHARMACEUTICALS?

Pharmaceuticals are medicinally effective chemicals, which are converted to dosage forms
suitable for patients to imbibe. In its basic chemical form, pharmaceuticals are called bulk drugs
and the final dosage forms are known as formulations.

Usage of pharmaceuticals is governed by the underlying medical science. The four primary
medical sciences are as under.

Allopathy
Ayurveda
Unani
Homeopathy

PHARMACEUTICAL PRODUCT
The term pharmaceutical product means pharmaceutical or biological product intended for use in
the diagnosis, cure, treatment or prevention of disease in the human body, which is promoted or
advertised to the medical profession rather than directly to public.

GROWTH IN PHARMACEUTICAL INDUSTRY

Pharmaceutical is a continuous growth industry, immune to economic recession and commodity
cycles. Rising population, new disease incidence or resurgence of certain diseases spurs the
growth. Therapeutic usage of pharmaceuticals varies across the globe. Hypertension and cardiac
diseases are more prominent in developed countries while infectious diseases like typhoid,
tuberculosis etc are largely prevalent in developing nations.

THE GLOBAL PHARMACEUTICAL INDUSTRY

In This Report, We Will Take A Snapshot Close-Up Of Global Factors, Influences And
Behaviours Within A Twentieth Century Industry. From Humble Orgins In Traditional
Medicine Through 100 Years Of Chemical Influence And The Synthesis Of A Multiplicity Of
Drugs, The Pharmaceutical Industry (Pharma) Presents A Combination Of The Characteristics
Of Other More Mature Industries. There Are The Technological Complexity, Future Uncertainty
And Long-Term Investment Time Frames Of The Energy Industry But, In Contrast, The New
Product Development Challenges And Pressures Resemble More Those Of The Consumer
Goods Industries.

The Industry Is Therefore A Suitable Global Example Within Which To Identify And Discuss
The Trends And Perspectives Explored In Other Chapters. The Maturity Of The Industry Will
Be Examined From Its Historical Origins To Its Present International Structure With A Longer-

Lens Prespective On Its Likely Form And Function In 2020. The Nature Of Globalization And
Its Significance As An Influential Factor In The Pharma Industrys Growth And Development
Are Considered From The Following Perspectives :

Historical Milestones And Evolutionary Trends.

Corporate Parenting Roles And Global/ Local Tension.

Consolidation/ Convergence Through Mergers. Acquisitions, Partnerships And

Alliances.

Parallel Global Influences In Commerce And Communications.

Product Development Branding And Life Cycle Management.

WHO ARE THE MORE FOCUSED OF THE MAJOR PLAYERS?

Where do companies aim to be number 1? Do the advantages of knitting a simple pattern from a
single fiber (pharma by organic growth) outside the advantages of a multifibre complex pattern
(life sciences or healthcare+ acquisition)? These are important questions for the corporate parent.
The issue is the extent to which they offer the right specialist knowledge and visionary skills in
order to make the right choice and allocate resources accordingly. Do they add diminish value as
they modify or vary their strategic aims and intent?

Market dynamics, growth rates, complexity and ease and cost of access to customers determine
the degree of focus found in any industry. Fast-growing markets, requiring modest development
expenditures, never force the issue of choice. Mature markets/industries force the pace of
consolidation. Present market conditions, with healthcare expenditure globally contained to a
single-digit annual increase and development costs heading towards $0.75 billion per successful

drug launched, make focus the essential disciplined approach to ta selection and concentration.
Better for the customers as well if there are six rather than sixteen companies concentrating on
cns. Focus makes strategic sense. It is also common sense, but is postponed, pending the search
for an ideal merger partner.

WHAT ARE THE IDEAL SIZE AND FOCUS FOR LONG-TERM SUCCESS?

It is that it is in development that 75% of major investment costs are incurred, rather than in
discovery, manufacturing or marketing. That being so, a more disciplined choice of businesses
(therapeutic areas and indication within areas) should be made and regularly reviewed. Similarly,
organizational competence in both discovery and market understanding should be integrated
more by intent than by default or serendipity. Scale is important in basic research and in clinical
development.

The organizational challenge, therefore, is to build independence and innovation into the
disciplined processes of discovery and development. GlaxoSmithKline aspires to giving its free
thinkers room to man oeuvre through the formation of six stronghold discovery centers. Roche
bioscience consists of two autonomous business unites: pre-clinical and early and marketing
understanding, putting all candidate drugs through the cram program (central research assists
marketing). Although scientists account for 90% of the development team, it is captained by
people from marketing.
There are always occasional off-strategy opportunities, such as Viagra. In such events, the
more focused the business, the easier the task of managing the exception and maximizing its
value. There must be a consistent logic used that connects resources/competence building across
the typical business functions within a pharma business. Such logic the most persuasive
argument for merger candidate selection cannot be deduced easily from recent pubic statements
of strategic intent.

HISTORY
The Indian pharmaceutical industry is one of the fast growing sectors of the Indian economy and
has made rapid strides over the years. From being an import dependent industry in the 1950s, the
industry has achieved self-sufficiency and gained global recognition as a producer of low cost
high quality bulk drugs and formulations. Leading Indian companies have developed
infrastructure in over 60 countries including developed markets like USA and Europe. In the last
few years, several pharmaceutical companies have demonstrated that they possess the ability to
engage in commercially viable research and development activities and become significant
players in the international market.
The Indian Pharmaceutical Industry is one of the largest and most advanced among the
developing countries. It manufactures a wide range of basic drugs and pharmaceuticals, covering
several therapeutic regimes including antibiotics, antibacterial, steroids, harmones, vaccines,
herbal preparations etc.
The Indian pharmaceutical industry is capable of meeting about 70% of the country's
requirement of bulk drugs and almost the entire demand for formulations. The setting up of the
penicillin factory at Pimpri, Pune in early 1950s and the construction of Indian drugs and
pharmaceuticals Limited (IDPL) plants at Rishikesh and Hyderabad in the early 1960s have been
milestones in the history of the pharmaceutical industry in the country. These have been the
building blocks on which the structure of the pharmaceutical industry in India has been built. The
public sector investment in the pharmaceutical industry has been the engine of growth for the
industry as a whole in the last three decades.
At the beginning of the Eighth Plan, there were about 14,000 units producing bulk drugs and
formulations. This number has increased substantially since then. Mote than 30% of the
production of bulk drugs and formulations has increased from Rs. 2.400 million and Rs. 12,000
million respectively in 1980-81 to Rs. 21,860 million and Rs. 104,940 million respectively in
1996-97. Exports of bulk drugs and pharmaceuticals increased from Rs. 1610 million in 1983-84
to Rs. 26,810 million in 1996-97.

Apart from IDPL there are four other public sector units manufacturing drugs and
pharmaceuticals in India; Hindustan Antibiotics Limited, Bengal Chemicals and Pharmaceuticals
Limited, Smith Stan street Pharmaceuticals Limited and Bengal Immunity Limited. As these
units have been making losses owing to outmoded technology, excessive work force, high
overheads, weak marketing setups, excessive reliance on institutional savings etc. They are being
restructured through revival packages by the Government and are expected to turn around during
the Ninth Plan.
The Indian Government in 1994 announced the new drug policy. Under this policy, industrial
licensing has been done away with. A new Drug Price Control Order was announced in 1995
reducing the number of drugs under price control to 76 from the earlier 142. Though a series of
liberalization measures, the drugs and pharmaceuticals industry has registered a higher growth
and the country has emerged as a net exporter of drugs during the Eighth Plan period.
The National Institute of Pharmaceutical Education and Research has been set up at Mohali near
Chandigarh. This institute has been declared as a centre of excellence and is expected to fill a
major gap in the area of pharmaceutical education, research and training. A new program for
promoting R&D in drugs and pharmaceutical sector was initiated during the Eighth Plan. The
thrust of drugs R&D in the Ninth Plan would be on developing new drug molecules through
basic and applied research from which industry-institutional linkages would be strengthened,
apart from pursuing the objective of effective and efficient computer-aided discoveries, setting
up of specialized laboratories and adoption of good manufacturing and clinical practices. R&D
efforts in the area of tropical diseases, in particular, would be encouraged. A number of R&D
programmes have accordingly been identified for being taken up in a coordinated manner in the
national; laboratories, public sector undertakings and private sector units. Development of
sophisticated formulations such as slow release forms, advanced drug delivery systems, R&D in
the area of biotechnology by an understanding of DNA replication mechanism related to the
countries needs have been identified as immediate priorities.

 A DETAILED OVERVIEW
WORLD SCENARIO
The world market for the pharmaceuticals was valued at US $ 250 billion in 1994 and it is
expected to reach US $ 350 billion in the year 2000.
Estimated at 538 million, the worlds population in 1991 was 11% larger than in 1985 and
almost 21% larger than a decade ago.
The USA, European Unions and Japan are the biggest markets for drug formulations (USA 30
billion, E.U. 40 billion, Japan 31 billion in 1992).
All new drugs are marketed first in one of these countries. The introductory prices are thus,
related to the average per capita income of these countries and are generally out of reach of
developing countries.
The Pharmaceutical market worldwide, valued at US $ 247.9 billion in 1994 is forecast to grow
to US$ 342 billion by 1999 representing a compounded annual growth rate of 7.1%.
As per US FDA, of the 348 new drugs placed in the market in the 80s by top 25 drug companies
91 (26%) were new molecules. Even of these, 60 were classified under C category. This
means, only 10% of the drugs introduced in 80s offered significant therapeutic gains over the
existing drugs.
In the USA and Japan together constitute 45% sale on non-communist world pharmaceutical
market.

The 50 largest companies produced 66% of the world output of drugs and

pharmaceuticals, and also supply 50% of the pharmaceutical requirements of the developing
countries.
Among the worlds largest 200 odd pharmaceutical firms, 50 are Japanese and 33 are US firms.
The world trade in pharmaceutics is also dominated by the developed countries, which account
for over 90% of world exports and about 70% of worlds imports.

Though the imports of the developing countries are significant at 25% of total world
pharmaceutical imports, their exports account for barely 6 to 8%.
The market for bulk pharmaceutical chemicals are estimated at US $ 32 billion in 1994, is
expected to reach US$ 35 billion by 2000.
During the mid nineties more than US $ 100 billion worth of mergers and acquisitions, involving
over 15 major companies have taken place worldwide.
The US market in generic, is growing at around 20% annually and will conservatively worth
about US $ 15 billion by the year 2000.
The estimated figure for the generic markets worldwide is about $ 25 to 30 billion. In the next
five years it is expected to increase $ 50 billion.
Globally, over the last 50 years, about 30% of the drugs have come from academic research
while 70% of drugs have been from the product of industrial research.
In Germany, more than 50% of the prescriptions are for Generics, though they account for only
14% by value.
Worldwide, the business for OTC is estimated to be $ 44.8 billion and enjoys a market share of
28% in the US, 15% in the European Union.
The worldwide pharmaceutical market in 1996 reached US$296.4 billion at ex- manufactured
prices, up by 4% over 1995. The highest growth was in North America and Latin America,
which posted figures of 12% and 8% respectively, while sales in Africa, Asia, and Australia
regions fell by 6%. Within North America US achieved 12% growth to US$ 98.6 billion, while
sales in Canada by 5% to US$ 4 billion.
In 1996, the Italian market grew at 11%, US at 10% and Indian market at 15.8%.
In the US, about 40 drugs worth $ 16 billion are set to lose patent by the end of 2002.

The world pharmaceutical market is expected to grow at compounded annual growth rate of
6.2% and expected to reach $ 378 billion in 2001. Southeast Asia and China are likely to see the
largest jump in market share during the period from 5% in 1997 to 7% in 2001.
The world exports of pharmaceutical has increased to US $ 14.4 billion in 1983 to US $ 35
billion in 1993 and is currently around US $ 50 billion giving a compounded annual growth rate
of around 13%. The world trade in pharmaceuticals is dominated by the developed countries,
which account for over 90% of the worlds export.
The developing countries together accounted for only 5 to 7% of world pharmaceutical exports;
China, India, Hong Kong, Singapore and South Korea are the major exporters.

INDIAN SCENARIO

In India, medicines account for 2.5% in hospitalization and 0.5% in domiciliary treatment cost.
Indias exports of bulk actives and intermediates is expected to grow from the current level of
US $ 420 billion to about US$ 890 million in the year 2001.
The Indian Pharmaceutical market is expected to expand from the US$2.7 billion in 1995 to US$
5.8 billion (+ 16%) in 2001 and US$ 13.billion (+18% by 2006).
There could be sharp dip in the growth rate in the population in India, which is already down
to about 1.7% year and is projected to go down further to about 1.5% by the turn of the
century and to roughly 1% by2010.
OTC Pharmaceutical business is India is expected to jump from Rs.10 billion at present to Rs.25
billion by 2002.
Indians per capita expenditure for healthcare remains Rs.115.5 compared to the US
(Rs.6876.00) and Japan (Rs.14, 832).

In India the values for pharmaceutical production of bulk drugs and formulations in 1995-96
were US$499 million and US$ 2.5 billion respectively.
The Indian Pharmaceutical market ranks about 20th in the world and accounts for less than 1% of
world market. It is expected by 2003; the market could be worth of $ 7-9 billion (Rs.280 billion
to Rs.360 billion).
India accounts for 6% of all bulk drugs export. There are about 250 large/medium units and
about 8000 small-scale units in operations, which form the core of the industry. There are about
350 bulk drugs i.e. active pharmaceutical molecules having therapeutic values and used for
production of pharmaceuticals, which accounts for, majority of formulations produced in the
country.
During the year ending March 1998, pharmaceutical companies for various bulk drugs,
formulations and intermediates filed 265 IEMs. These IEMs are expected to generate
employment for about 19000 people and there would be an investment of approximately Rs.4.1
billion on these projects. During the same period foreign investment proposal worth approx.
Rs.1.6 billion were approved.
Between August 1991 and March 1998, Gujarat received 5174 proposals for the projects and
topped the list in terms of value of investment, which was estimated to be Rs.1379 billion during
that period. Next to Gujarat was Maharashtra and other States receiving more than 5% of the
investment proposal are Tamilnadu, Andhra Pradesh, Karnataka, Uttar Pradesh, Punjab and
Madhya Pradesh.
The top 12 companies in India together will have a turnover of around 50 billion in the domestic
market by 2005, or approximately 25% of industry turnover. About half a dozen companies with
a turnover of Rs.35 billion by 2005 will be able to spend about 8% of their turnover on research.

MAJOR PLAYER

KEY PLAYERS

The Indian pharmaceutical industry comprises both MNCs as well as domestic companies. While
at one time, MNCs dominated the market; their market share has declined steadily from 75 per
cent in 2010 to about 35 per cent. In order to boost the domestic industry, the government
introduced process patents in the Indian Patent Act of 1970. Domestic pharma companies were
quick to take advantage of this and developed expertise in process development and
manufacturing of pharmaceuticals. As a result Domestic companies had a robust pipeline of
products, large therapeutic width and depth and were able to provide masses with the low priced
quality pharmaceuticals.
Out of the ten top pharmaceutical companies in India, three are MNCs. The top ten
pharmaceutical companies operating in India are:

INDIAN PHARMACEUTICAL COMPANIES NET SALES(2013)

COMPANY NAME

NET SALES(RS.IN BILLION)

CIPLA

69.77

DR.RADDYS LAB

66.86

RANBAXY LABS

66.03

AURBINDO PHARMA

53.64

SUNPHARMA

42.84

CADILLA HEALTHCARE

40.15

TORRENT PHARMA

31.52

JUBILANT LIFE

27.66

WOCKHARDT

26.5

 OTHER PLAYER IN THE PHARMACEUTICAL MARKET

Aarti Drugs
Abbott India
Ajanta Pharma
Alembic
Astrazeneca Pharma
Aurobindo Pharma
Aventis Pharma
Cadila Health
Cipla
Dr. Reddy
Elder Pharma
German Remedies
Glaxo Smith line
Ind Swift Lab
Ipca Laboratories
J B Chemical
Jagson Pharma
K D L Biotech
Kopran
Krebs Biochem
Lupin
Lyka Labs
Medicorp Tech
Merck
Natco Pharma
Nicholas Piramal
Novartis

Orchid Chemicals
Organon
Panacea Bio
Pfizer
Pharmacia
Ranbaxy
R P G Life Sciences
Shasun Chemicals
Siris Limited
Sterling Biotech
Strides Arcolab
Sun Pharma
Suven Life Sciences
Torrent Pharma
Unichem Lab
Wockhardt
Wyeth Ltd
Zandu Pharma

INDIAN AND INTERNATIONAL SCENARIO:

Indian pharmaceutical industry growth intact amid current headwinds faced by
industry
Pharma MNCs have adopted India-focused strategies to tap the growing potential of the
countrys pharma market, says Hitesh Sharma, Partner & National Leader Life Sciences,
Ernst & Young
Amidst the increasing patent cliffs, declining R&D productivity, and increasing regulatory and
price containment pressures; the global pharmaceutical market continues its focus toward
emerging markets. The contribution of emerging markets is expected to double by 2016, as
compared to 2006. The growth in emerging markets is expected to be led by China and India in
the near future (China with a CAGR of 15 per cent18 per cent during 20122016 and India with
a CAGR 14 per cent17 per cent during 20122016).1 This augurs well for all the constituents of
the Indian pharma industry Indian companies and global pharma companies along with all
ancillary supporting players like CRAMS, CROs.
The Indian pharma industry is expected to be among the top 10 global markets in value terms by
2020, bolstered by increasing domestic demand. The Indian pharma (formulations) industry
stood at Rs 629.0 billion in FY12, registering a y-o-y growth of 16 per cent2 and expected to
reach around Rs 55 billion by 2020.
Essentially the domestic market growth has been driven by increased affordability (middle class
growing by 67 per cent from 160 million in 2011 to 267 million), access to healthcare
(Increasing penetration of private health insuranceCAGR of more than 30 per cent) and
change in the disease profile from acute to chronic.
The growth of the market was largely driven by sales of drugs for chronic diseases such as
diabetes and cardiovascular ailments, which grew by nearly 21 per cent y-o-y in FY12.
Global pharma majors continue their strategy of inorganic growth, differential pricing strategy
and rural initiatives to increase their market presence in India.

Also with the Indian Governments focus on Indian healthcare growth with coverage of the
masses through the National Rural Health Scheme, even with the economic conditions, the
Indian pharma industry is expected to continue.
Global pharma companies - India to remain as a key market
India continues to remain a focus market for pharma MNCs. Currently, the Indian market is
regarded by MNCs as one of the faster growing market globally, primarily driven by a large
population, evolving patient demographics, increasing health care expenditure, growing
urbanisation, rising life expectancy, and active private-sector participation.
They have increased investments in the domestic market over the past few years and are now
comfortably placed to capture a substantial share of the domestic market. MNCs have
outperformed the growth rate of domestic players in 1H FY13. Evidently, pharma MNCs are
projected to capture a 35 per cent market share of the market by 2017, compared with 28 per cent
in 20095. Over the years, pharma MNCs have adopted India-focused strategies to tap the
growing potential of the countrys pharma market.
Graph 1: Indian pharmacetical market

Source: Domestic Pharma monthly review- April 2012, Edelweiss

Securities and OPPI

Increased patented drug launched in India

The advent of the product patent regime in 2005 instilled confidence in the countrys IP regime.
With renewed confidence, large pharma MNCs are now looking to launch their patented drugs in
India and such product launches are expected to increase further in future.

Adopting inorganic route to enhance presence

Pharma MNCs have been considering acquisitions of domestic players to gain sizeable share in
the domestic market. These acquisitions have also enabled pharma MNCs to access the
infrastructure, distribution networks, and management capabilities of domestic players, thereby
strengthening their business operations in the country. However, valuations and the current
debate by the Indian Government on Foreign Direct Investment guidelines for the sector have put
some bumps for the MNCs.
On the other hand, licensing agreements with Indian companies have helped pharma MNCs
access a ready basket of generic products. Going forward, these deals are likely to accelerate the
launch of products in various emerging markets while offering MNCs the advantage of costeffective manufacturing. Furthermore, pharma MNCs consider India as a preferred strategic
outsourcing partner with services ranging from Contract Research Manufacturing (CRO) and
clinical research services to sales and marketing, information technology, finance and
accounting, and customer-relationship management.
Differential pricing strategy to strengthen market reach
In a bid to compete with domestic generic players, pharma MNCs are launching patent-protected
drugs in India at relatively low price points than those in developed markets. Simultaneously, a
differential pricing strategy is helping these MNCs to enhance their market reach by addressing
affordability issues. Drugs such as Diovan (Novartis), Januvia (Merck Sharp & Dohme), and
Galvus (Novartis) are being sold at discounts of up to 80 per cent on global prices.
Graph 2: Growth trend of acute vs chronic segment (%)

Source: Domestic Pharma monthly review- April 2012, Edelweiss

Securities

Rural-centric initiatives to enhance market access

Robust consumption in the rural economy is expected to be a key growth driver. Rural India
accounts for more than 70 per cent of all Indian households and close to 40 per cent of the total
consumption pie. Henceforth, a large number of companies are organising their efforts to derive
a major portion of their overall sales from this untapped market.
Additionally, pharma MNCs are looking to implement new and effective business models in
India and improve the health of patients. Delivering patient health outcomes implies getting
involved in the cycle of care, rather than just delivering drugs to a health care system.
The Governments regulatory and pricing policy is likely to have a larger impact on the MNCs.
Also the IP litigation does create a few bumps for the MNCs. However, overall the India story
still remains positive for MNCs.
Domestic pharma players
Indian pharma manufacturers are known globally for their low-cost approach, which is
backwards-integrated and has the scale to challenge patents and be the first to launch on their
expiry.
With $76 billion worth of patented drugs likely to go off patent in the US between 2012 and
2015, India is poised to capture its share of the global generics market - Plavix, Seroquel,
Singulair and Lexapro went off patent in 2012. Consequently, the share of global generics
(including biosimilars) is expected to increase from 25.3 per cent in 2011 to 35.2 per cent by
2016. This rise in the demand for generics is likely to drive the growth of bulk drug export of
off-patent drugs.3
In addition, super generics, the incrementally modified generics drugs (IMDs), are currently at a
nascent stage of their development in India, but offer a huge market opportunity for the future.

While exports continue to be a large driver of margins for the larger Indian companies, given the
regulatory environments in the regulated markets, the margins will continue to be under focus
going forward. Also the adherence to the regulated standards will be an area that most of the
Indian companies tapping global markets would have to differentially focus on.
Graph 3: Rise of lifestyle-related chronic diseases in india

Source: Fortis Healthcare (India) Limited, December 2011

The Indian companies have also continued to focus on the Indian market. While launches of new
products in the Indian markets has come down (as a result of the IP regime), the focus has turned
towards reach and therefore growth in Tier-II and rural markets. Also the focus is more on more
effective marketing and distribution strategies. Alliances with MNCs as part of co-marketing/
distribution arrangements are further strengthening this learning for the industry.
CRAMs players had at the start of the year felt a lot of pressure and in some case seen a degrowth.
But the industry seems to be stabilising and with many MNCs wanting to deleverage their over
reliance on China, this industry seems to be back on growth path. But global economic
conditions can have an impact both on growth and margins for this industry.
India was touted as fast emerging global hub in the clinical trials and research space (driven by
cost-effectiveness, a huge patient pool, a genetically diverse population and trained clinical
investigators are some of the factors driving the countrys clinical trials industry). The size of the
market was around $400 million (` 23.1 billion) in 20114. Indias share of this market is

expected to increase from 2.1 per cent in 2011 to 2.9 per cent in 2015 and reach almost $1 billion
(` 43.9 billion)5. There are more than 120 clinical trial organisations in the country. The
Government is also tightening its regulatory norms related to informed consent and provision of
compensation to victims of clinical trial. However, India is facing stiff competition from
countries such as China, due to which the number of new trials registered in the country declined
from 365 in 2010 to 230 in 20116.
Graph 4: US patent expiries: 2006-15

Source: Indian Pharmaceuticals Outlook 2012: bracing for absolute

performance year, January 2012, Morgan Stanley

Adequate government support to further boost the domestic market

In the last 10 years, the Government of India (GoI) has aggressively adopted prudent strategies to
boost the countrys healthcare industry. From granting 100 per cent Foreign Direct Investment
(FDI) in the drugs and pharma sector to establishing various pharma SEZs across the country, a
range of initiatives have further strengthened the Indian pharma industry. Moreover, the GoI is
providing incentives to encourage investment in the pharma sector.
In August 2010, the GoI announced its plans to set up a $639.56-million venture capital (VC)
fund to give impetus to drug discovery and strengthen the countrys pharma infrastructure. Both
domestic and MNC pharma players are expected to leverage these initiatives to expand their
operations in the country.
The Department of Pharmaceuticals has prepared Pharma Vision 2020, aimed at making India
one of the leading destinations for end-to-end drug discovery and innovation. It envisages

meeting this objective by building top-notch infrastructure for talent and research, encouraging
public-private partnership (PPP) models, offering financial incentives to encourage and incubate
innovation and shaping a favourable regulatory environment2. GoI also aims to position India
among the top five pharma innovation hubs by 2020, with one out of every five to 10 drug
discovered worldwide by 2020 originating from the country.
The GoIs long-term vision is to provide quality and affordable health care services to all classes
of Indian society. Consequently, the GoI plans to cover at least 50 per cent of the countrys
population under health insurance by 2020, compared with the current average of 15 per cent.
Expanding health care infrastructure and changing demographics to supplement growth
The Indian healthcare sector is forecast to reach $280 billion by 2020, contributing expected
GDP expenditure of eight per cent by 2012, compared with 4.2 per cent in 2009, according to a
report by an industry body. Over the past two decades, Indias thriving economy has driven the
need for urbanisation, thereby creating an expanding middle class with increased disposable
income to spend on healthcare. Other key growth drivers for this sector include a growing
population, the opening of new hospitals, growing lifestyle related health issues, less expensive
treatment costs, the growth of medical tourism, improving health insurance penetration,
government initiatives and enhanced focus on PPP models.
The overall growth of the Indian healthcare sector is likely to create a sizeable demand for
quality and affordable medicines, thereby providing significant growth opportunities for both
domestic and pharma MNCs.

WHAT MATTERS IN THE ORGANIZATION DEVELOPMENT OF A

GLOBAL COMPANY?

When The Business Really Needs Focus And A Radical Organizational Overall In The Face Of External
Change, Merger Mania Can Be Hypnotic. The Attitude Taken Can Be: Do Nothing: We Are About To
Merge.
The Ideal Sequence Of Events Would Be As Follows:
1. To Leave Corporate Strategy To The Pharma Company.
2. To Organize Development Into Autonomous Therapeutic Area Businesses.

3. To Encourage The Senior Management Team In Each Ta To Put Forward A Brief Statement Of
Strategic Intent, Indicating Which Enabling Technologies, Which Lead Markets Etc. Are Going
To Drive Future Growth.
4. To Obtain Commentaries On Those Statement From The Major Functions.
5. To Allocate Priorities And Existing Resources.
6. To Produce A Shopping List For Additional Resources.
7. To Decide On Any Major Initiatives Arising From The Shopping List, Chossing, If Appropriate,
The Ideal Merger Candidates.
8. To Select And Set Up The Negotiating Team. The Strategic Driver Is The Ta, Hopefully The
Point Of Confluence For The Critical Knowledge Streams.

The Astrazeneca Merger Appears To Come Close To This Ideal And, With Good Strategic Discipline,
Should Hold Or Secure Dominant Positions In Anesthesia/Pain Control And Gastro-Intestinal, With
Strong Positions In Respiratory And Oncology. Success For The Company In Cardiovascular Could Well
Depend On A Disciplined Choice Of Activities, Within Particular Indications/Therapy Combinations.
These Are Now Relevant Issues For The Corporate Patent To Address, Once The Reorganization And
Rationalization Of Its Non-Pharmaceutical Activities Is Complete.
The Real Risks With A Merger Are Introspection For A Time And Debilitating After-Effects. Ti Is
Wrong To Condone The Political Realities Of Life, But The Primeval Source Of Acute Discomfort Is
Usually Personality Clash, Followed By The Equally Primitive School Playgrounds Process Of
Appointments, Equity Demanding That Equal Numbers From Both Sides Should Occupy The Key
Positions In The New Organization. Parents Should Set A Good Example, But Rarely Do So. Then There
Is The Risk Of Indigestion, With Denial Of Some Of The Difficulties Arising From Integration. Paranoia
Over Early Loss Of Market Share Encourages Myopic Thinking Experience Dictates That An Initial
Share Losses The Inevitable Side Effect Of The Post-Merger Organizational Disruption And The Pursuit
Of The Cost Savings.Noone Should Be At All Surprise By These Or Simplistically Assume It To Be A
Symptom Of Merger Failure. Such Outcomes Need Strategies For Prevention Of Amelioration. Much
Can Be Learned From Misfortunes Of The Others. Pharmacia An Upjohn Span The Cultural Atlantic
Divide And Have Struggled To Uncover The Holy Grail Of Synergy. Pfizer And Warner-Lambert, Glaxo
And Skb Have Interest And Intentions More Simply Focused On The Us Market. Perhaps SingleMindedness Rather Then Ambiguity Is The Essence Of Parental Involvement In The Building Of A
Substantial Global Pharmaceutical Company.

PHARMA SECTOR GLOBAL TRENDS TODAY

Human history is a continuing saga of struggle for existence, a constant strife of man to maintain
his physical well-being and a search for happiness. And man being what he is, diseases and
disputes are seen as an enduring part of life. Life, which manifests through the physical body,
has always been considered something sacred. The need to maintain, nurture and cherish life is
the driving force of all human activity. The science of medicine has its roots in this philosophy.
Dis-ease, as the term indicates is an unnatural state from which one tries to free oneself at the
earliest. The quest for a means of relief from disease has resulted in the discovery and invention
of drugs.
The modern pharmaceutical industry, as we know today, has had its beginnings in the middle of
the nineteenth century. The great impetus science has received in the eighteenth and nineteenth
centuries as a sequel to the wave of renaissance and rationalism resulted in the evolution and
growth of modern chemistry, physiology and other bio-sciences. The emergence of chemical
drugs and their instant popularity can be attributed to their quick action and immediate relief
from pain and suffering. Consequently, this has swept aside the hoary traditional systems of
medicine based on natural and herbal products. The appearance of antibiotics on the scene has
further strengthened the case of modern system of medicine based on chemical combinations.
While the controversy on the subject of modern allopathic medicine system as a truly beneficial
development continues to evoke strong feelings and taking extreme stances on the part of its
proponents and opponents, none can deny the fact that it has been successfully able to combat
many a dreaded disease, increased longevity and improved the quality of life of mankind.
Pharmaceutical industry has won many laurels and added glorious feathers to its cap, literally
appearing with a plumage on its proud head in the past half-a-century. The dawn of the twenty
first century has placed the industry at a critical juncture and is floundering in a choppy sea of
uncertainty. The major problems plaguing the industry are: increasing costs of R&D, sales and
distribution, decreased R&D productivity, shrinking life-span of blockbusters, unresolved issues
of intellectual property rights, stringent regulatory environment coupled with a growing
awareness among consumers and the threat from the burgeoning biopharma sector. All these

issues are ringing strident alarm bells calling for a new business model and a paradigm shift in
their approach to the healthcare industry.
The development of a new drug takes anywhere between 8 and 15 years and involves spending
between US$500 million and 900 million. The time span and the costs are really mind-boggling,
especially in the context of the state of R&D in the developing countries such as India and China.
The drying up of the products in the pipeline in the case of many big pharma companies has lead
to a spate of mergers and acquisitions during the past five years and now even that avenue seems
to be closed. The overheads on account of sales, general and administrative expenses amount to
33 percent of the revenues in the drug industry which substantially affect the company's
bottomline and the pockets of the consumer as well. Further, it is reported that the standard
management practices such as consolidating procurement, outsourcing personnel and finance
functions and automating transaction processing all compare poorly with other industries,
according to Mr. Christopher White of AT Kearney. Thus there is an urgent need to address
these issues that have assumed gargantuan proportions posing a threat to the survival and
sustainability of the industry.
Discovery, development and distribution of blockbuster drugs (drugs with a sale of US$1 billion
and above) have been the mainstay of the pharmaceutical industry for the past half-a-century.
This model served well and still continues to do so, but is under severe strain on account of the
cost of developing a blockbuster and the competition leading to shortened life-span _ in some
cases it is not more than a few months. The number of blockbuster drugs coming to the market
has also drastically come down during the past decade. This has made the industry giants to sit
up and ponder deeply on a new business model.
The words WTO, TRIPS and product patenting have become sacred mantras for big pharma
companies. Developing countries are both a lure and a dread for pharma giants _ the size of the
population lures them but the lax legal system and unresolved issues of intellectual property
rights are a nightmare. However, India and other countries are bracing themselves up to meet the
deadline of 1-1-2005 when product patenting comes into force.

Growing awareness among consumers, demand for detailed drug information and pricing,
alternative systems of medicines and treatment, personalized attention and information being
sought from doctors and such other desirable trends are keeping pharma companies on their toes.
Though the force of inertia seems to prevent them from shedding their complacency, there is a
discernible shift in their attitude and approach in recent times.
This book, the first in the series, attempts to bring to the reader a comprehensive view of the
current global scenario of and contemporary trends in the pharma industry. The US and Europe
account for nearly three-fourths of the pharma industry's sales, and India and China are perceived
as the big emerging markets in terms of population and increasing health consciousness. Asia
excluding Japan accounts for nearly 30 percent of the industry. Thus there is a selection of five
articles on the US, Europe, India and China as also a perspective on Asia. The issue of effective
investment allocation for R&D and trends in global and Indian marketing of pharmaceuticals
form the subject matter of the other three articles in the first section. The second section
comprises a collection of case studies on two global _ Pfizer and GlaxoSmithKline _ and two
Indian companies _ Ranbaxy and Cipla _ which figure in the top five in the world and in India
respectively. A case on "Lipitor', Pfizer's cholesterol-lowering medicine, the biggest blockbuster
drug which garnered sales of US$8.6 billion last year (2002), is also included.

"OVERVIEW AND FUTURE DIRECTION FOR PHARMACEUTICAL

INDUSTRY _ AN ASIAN PERSPECTIVE",
. As the title indicates the author gives an overview and future direction for the pharma industry
in Asia. The Asian market accounts for 28 percent of the global pharma market and is growing at
more than 10 percent (excluding Japan), the strongest growing markets being China, India, South
Korea, Australia and Taiwan. The key trends pushing the development in Asia are Western
lifestyle diseases, national healthcare reforms, maturing national health insurance systems and
better infrastructure facilities. The ageing population in Asia, DTC marketing, setting up of local
clinical trial bases and increasing coverage of populations by medical insurance is the main
market drivers. The restraining factors identified are government imposed price controls on
drugs, IPR protection management, limited purchasing power and low health awareness among

the masses. The author focuses on the issue of drug development and government spending on
R&D, especially biotechnology in the Asian countries. The article concludes by saying that the
key market segments in Asia would be cardiovascular drugs, lifestyle drugs and oncology drugs.
"Trends in Global Pharmaceutical Marketing",
The authors state that currently pharmaceutical market is faced with three challenges in the
formulation and implementation of marketing strategies: Regulations with respect to what
marketing tactics are permissible; pressure from the public, government and insurance
companies to control drug pricing and defining the target group from among players, physicians,
consumers, wholesalers, pharmacy chains, independent pharmacists, hospital personnel and
HMOs. The authors discuss the following emerging trends in drug marketing with appropriate
examples _ targeting doctors, targeting patients, targeting health maintenance organizations,
creating disease awareness, targeting specific customer segments, using slick promotions,
partnering with advocacy groups and online marketing.

"Trends in Pharmaceutical Marketing in India"

The pharma market in India is prescription driven branded generic market. In a way, the market
is fragmented and intensely competitive. The market is unique in its reliance on person-to-person
communication rather than the mass media. The authors state that before launching any new
product, product concept evaluation, market potential analysis, product use profiling and
positioning strategies are required. The article talks about the emerging trends, and elaborates on
the marketing alliances (co-marketing), growing OTC market, emerging DTC channel and major
thrust towards generic marketing. The authors conclude that domestic companies with strong
R&D, effective sales and distribution network, alliance with foreign companies with world class
manufacturing facilities will have a definite competitive advantage and are most likely to
outperform the industry.

 MARKET SEGMENTATION
The industry manufactures bulk drugs and formulations of which formulations constitute about
82%. Formulations can further be classified as essential drugs and common drugs.
Essential drugs comprise five major sectors - cardiovascular, antibiotics, antibacterial, anti-TB
and anti-parasitic.
Common drugs comprise six major sectors - rubs and balms, cough and cold preparations,
general nutrients, vitamins and minerals, tropical ointments, and anti-inflammatory and
analgesics. Antibiotics constitute the largest therapeutic segment with a market value of over Rs
2,800 crore.
Of late therapeutics for lifestyle diseases like cardiovascular, diabetes etc are growing at a faster
rate than traditional antibiotics, in view of the increase in incidence of these diseases due to the
change in the life style of the Indian population in general, and urban population in particular.
Given the metamorphosis that the industry is undergoing, there could be further segmentation in
the post product patent era as research based pharma companies, generics, contract research
firms etc.

STRATEGIC ANALYSIS
SWOT ANALYSIS
It is often said that the pharma sector has no cyclical factor attached to it. Irrespective of whether the
economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow
steadily over the long term. True in some sense. But there are risks. The SWOT analysis of the industry
reveals the position of the Indian pharma industry in respect to its internal and external environment.

STRENGTHS
Low cost - Indian manufacturers are one of the lowest cost producers of drugs in the world. With a
scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the
world. In some cases, this cost is as low as 90%. Strong technical skills Indian pharmaceutical industry
posses excellent chemistry and process reengineering skills. This adds to the competitive advantage of the
Indian companies. The strength in chemistry skill help Indian companies to develop processes, which are
cost effective.
Large untapped market - Indian with a population of over a billion is a largely
untapped market. In fact the penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like
Brazil is US$ 453 and Malaysia US$189.
Huge market for lifestyle drugs The growth of middle class in the country has resulted in fast changing
lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which
has a very low contribution in the Indian markets.

Cost Competitiveness
Well Developed Industry with Strong Manufacturing Base
Well Established Network of Laboratories and R&D infrastructure
Access to pool of highly trained scientists, both in India and abroad.
Strong marketing and distribution network

 Rich Biodiversity
Competencies in Chemistry and process development

WEAKNESSES

Poor R&D expenditure -Compared to the global pharmaceutical industry, Indian R&D expenditure is
still minuscule, which could have a negative effect in the long run, especially in Product Patent regime.
The average R & D spends in India, though growing at a CAGR of 18% over last five years, is just 1.9%
of sales, as against 9-10% spend by global pharma companies.

Tag of being Copy Cats Majority of the Indian companies are dependent on replicating drugs
developed by MNC hence Indian companies are viewed in not so good light.
Price Regulation - The Indian pharma companies are marred by the price regulation. Over a period of
time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing
Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs,
which leads to lower profitability for the companies. The companies, which are lowest cost producers, are
at advantage while those who cannot produce have either to stop production or bear losses.
Slow growth - Indian pharma market is one of the least penetrated in the world. However, growth has
been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to
perspective, India accounts for almost 16% of the world population while the total size of industry is just
1% of the global pharma industry.

Low entry barriers - Due to very low barriers to entry, Indian pharma industry is highly
fragmented. This makes Indian pharma market increasingly competitive.
The industry witnesses price competition, which reduces the growth of the industry in value term. To put
things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition,
the growth in value terms was 8.2% (prices actually declined by 2.2%)
Labour laws - Outdated and restrictive labour laws are hampering all the industries in India and making it
unviable for the MNCs to set up production base in India.

 OTHER WEAKNESSES

Low investments in innovative R&D.

Lack of resources to compete with MNCs for New Drug Discovery Research and to
commercialise molecules on a worldwide basis.

Lack of strong linkages between industry and academia.

Lack of culture of innovation in the industry

Low medical expenditure and healthcare spend in the country

Inadequate regulatory standards

Production of spurious and low quality drugs tarnishes the image of

industry at home and

abroad

OPPORTUNITIES

Off patent drugs - Large number of drugs going off-patent in Europe and in the US between 2008 to
2012 (approx. $80 billion) offers a big opportunity for the Indian companies to capture this market. Since
generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are
the lowest cost producers of drugs in the world.

Expansion - Opening up of health insurance sector and the expected growth

in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of
healthcare industry of which pharma industry is an integral part.
Outsourcing - Being the lowest cost producer combined with FDA approved
Plants, Indian companies can become a global outsourcing hub for pharmaceutical products.

 OTHER OPPORTUNITES

Significant export potential.

Licensing deals with MNCs for NCEs and NDDS.

Marketing alliances to sell MNC products in domestic market.

Contract manufacturing arrangements with MNCs

Potential for developing India as a centre for international clinical trials

Niche player in global pharmaceutical R&D.

THREATS

Transition from Process patent to Product patent This is the major threat Indian pharma
industry is facing. Indian companies especially medium and small sized do not have capabilities to
develop new molecules, and they may succumb to the giants.
Counterfeit drugs The extent of the problem of counterfeit drugs is unknown.
Counterfeiting is difficult to detect, investigate, and quantify. So, it is hard to
know or even estimate the true extent of the problem. What is known is that they
occur worldwide and are more prevalent in developing countries. It is estimated that upwards of 10% of
drugs worldwide are counterfeit, and in some countries more than 50% of the drug supply is made up of
counterfeit drugs
Other low cost countries - Threats from other low cost countries like China and Israel exist. However,
on the quality front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane.

OTHER THREATS

Product patent regime poses serious challenge to domestic industry unless it invests in research
and development

R&D efforts of Indian pharmaceutical companies hampered by lack of enabling regulatory

requirement. For instance, restrictions on animal testing outdated patent office.

Drug Price Control Order puts unrealistic ceilings on product prices and profitability and prevents
pharmaceutical companies from generating investible surplus.

Export effort hampered by procedural hurdles in India as well as non-tariff barriers imposed
abroad.

Lowering of tariff protection

OT ANALYSIS

OPPORTUNITIES

Focus on R&D due to product patent: The migration into a product patent based regime is likely
to transform industry fortunes in the long term. The new patent product regime will bring with it
new innovative drugs. This will increase the profitability of MNC Pharma companies and will force
domestic Pharma companies to focus more on R&D. This migration could result in consolidation as
well. Very small players may not be able to cope up with the challenging environment and may
succumb to giants.
Generic drugs: Large number of drugs going off-patent in Europe and in the US between 2005 to
2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs
are commodities by nature, Indian producers have the competitive advantage, as they are the lowest
cost producers of drugs in the world.
It is estimated that after 2012, large numbers of many blockbuster-patented drugs are going to be
off patent, whose market size is $40 billion. After 2008, the size of the off-patent drugs market is

estimated around $80 billion. This will provide attractive opportunities to Indian companies to tap
the international market for these products. As these markets will offer great potential to Indian
drugs makers, most of the Indian companies, both large and medium sized, have started rolling up
their sleeves to meet regulatory requirements of developed countries including the US Food and
Drugs Authorities (USFDA). The US market alone accounts for about 42 per cent of the global
market for drugs worth approximately $400 billion. With approximately $40 billion worth of
products going off-patent in the next five years, it therefore makes perfect sense for any serious
company to be present in the US market

Indian companies are following a two-pronged approach. The first approach is weaved
around looking for an opportunity to tap an existing patent viz. challenge the patent of
existing products or wait for the patent to expire and then launch the generic version in the
lucrative markets of US and Europe. The second revenue stream is an even more
ambitious. Top Indian companies plan to offer research and development (R&D) services
to global majors or carry out work on their own.
Insurance: Opening up of health insurance sector and the expected growth in per capita income are
key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry
of which pharma industry is an integral part.
The penetration of health insurance is abysmally low in the country. The entry of private players
would not only bring in quantum leap in the health insurance business but also increase capital
inflows into this sector. It would also bring in the concept of managed healthcare in the country.
These would finally lead to overall increase in per-capita usage of drugs.
Low cost producer: Being the lowest cost producer combined with FDA approved plants; Indian
companies can become a global outsourcing hub for pharmaceutical products. As for contract
manufacturing, large global pharmaceutical companies are finding it profitable to outsource
production. To cash on these opportunities, many large production houses in the country are
becoming US FDA compliant.

Indian Pharmaceutical Industry will set up manufacturing capacity to make off-patent

bulk drugs and generics formulations to cater to export markets. They will also undertake
outsourcing arrangements for multinationals. India is an attractive base for producing

drugs going off-patent as well as generics formulations because of Indias skills in

chemical synthesis, process engineering and lower time to market, all at competitive
costs.
India's aging population and longer life expectancies promote larger markets for
lifestyle diseases, maintenance drugs and drugs for old age diseases, which are generally
high value drugs and increase the revenues of the market.
Shift towards product patent regime: The migration into a product patent based regime
is likely to transform industry fortunes in the long term. The new patent product regime
will bring with it new innovative drugs. This will increase the profitability of MNC Pharma
companies and will force domestic Pharma companies to focus more on R&D. This
migration could result in consolidation as well. Very small players may not be able to cope
up with the challenging environment and may succumb to giants.. While the there would
not be any impact in the short term, in longer term this will lead to strengthening of the
industry. Major companies are waiting for this opportunity to capture the markets.
New growth opportunities in life style diseases - In spite of the price war, the domestic
pharma industry continues to show decent growth rates, led by the chronic therapeutic
(lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher
awareness, exposure to newer therapies and aggressive introduction of new drugs at
reasonable price has been responsible for growth in the chronic/lifestyle segment. This
trend is also likely to continue going forward.
The prevalence of diseases is high in India because of low level of literacy, poor
awareness of hygiene and poor sanitation conditions. At the same time, rising income
levels have dramatically modified lifestyles. Today, more and more Indians are suffering
from lifestyle-related ailments like cardiovascular problems and diabetes. All this has
translated into great growth for the pharmaceutical industry, which has been growing
healthily over the last few years. This performance is expected to continue with exports
as the main driver of growth.

In the present scenario, the growth of a domestic pharmaceutical company is critically dependent
on its therapeutic presence. The old and mature categories like anti-infective, vitamins, analgesics
are de-growing while, new lifestyle categories like Cardiovascular, Central Nervous System
(CNS), and Anti Diabetic are expanding at double-digit growth rates.

Contract Research Globally, until the 2008s, most R & D efforts by Pharmaceutical,
Biotech and Medical device companies were done in house. Today, more and more
Pharma companies are outsourcing R & D efforts, to Contract Research Organizations
(CROs) in order to contain costs and speed up the drug development process. According to
a study by Frost & Sullivan, the outsourced drug discovery efforts grew 19.9 per cent in
2010, to account for more than US $4.6 billion.
The study predicts that by the year 2008, nearly 42 per cent of all pharmaceutical drug
development R & D expenditures will be outsourced to CROs. The cost of conducting
drug discovery in India is approximately of what it would be in the US and the cost of
doing development is 1/5 to a 1/3. Logic and mathematics are the forte of Indians and it is
manifested in our ability to be a world leader in software development. A combination of
strengths in pharmaceutical research and IT and a large pool of doctors and patients could
create a formidable advantage for India in attracting clinical trial programs.
R&D for discovery and development of new drugs for diseases of the developing world
on which there is little investment in the West due to high cost of drug discovery and
development and the relatively low return on investment.
A new concept that is gaining momentum in the Pharma industry is contract research
apart from contract manufacturing. Given the low cost high quality advantages, Indian
companies are poised to benefit from contract research business on behalf of
multinationals.
New delivery systems. The new products, which are likely to succeed, are those, which
give perceived value to the patient over the presently available medicines. Innovation,
novel drug delivery systems, which improve patient compliance as well as convenience,
will have good potential.

Spreading attitude for soft medication (OTC drugs): OTC herbal products considered to
provide holistic therapy is the other area for Indian market, which has already carved a
niche of its own in the international market.

THREATS
Govt. regulation related to patent act
There are certain concerns over the patent regime regarding its current structure. It might be
possible that the new government may change certain provisions of the Patent Act formulated by
the preceding government.

Threats from other low cost countries

Threats from other low cost countries like China and Israel exist. However, on the quality front,
India is better placed relative to China. So, differentiation in the contract manufacturing side may
wane

Implementation of VAT

The short-term threat for the pharma industry is the uncertainty regarding the implementation of
VAT. Though this is likely to have a negative impact in the short-term, the implications over the
long-term are positive for the industry.

Intense competition
Due to implementation of TRIPS agreement, Competition is likely to increase in the domestic
market due to entry of transnational companies. This would whittle down many manufacturers
and small and medium enterprises (SMEs) would slowly decimate. They would lose the benefits
enjoyed so far and forced to compete with the foreign firms.

Sales of foreign companies would increase:

Due to implementation of TRIPS agreement, the product sales of foreign transnational
companies would increase at the expense of the local players. Local players would increase their
research and development expenditure and try to expand their business overseas to enter generic
market due to their cost efficiency. Imitation is cheaper than invention. Post-2005, drug discovery
would be a costlier affair that Indian Pharma companies cannot afford.

High Cost of discovering new products and fewer discoveries

Various estimates place the costs for discovery and development of new molecular entities
from US$ 500 million to US$ 880 million And the pipeline of new products, let alone
blockbusters, is shrinking with more and more companies increasingly feeling the cost
burden unmanageable. High cost for entry of a new drug in the market:
Drug Discovery & Development is characterized by high failure rates. It takes 10-12 years of
R&D wherein 5,000-10,000 compounds are screened before a new drug reaches the market.
The most recent estimate by the Tuft's Center for the study of Drug Development (CSDD)
pegs the cost of bringing a new drug to market at 802 million USD. Roughly, one-third of the
R&D cost is spent on discovery phase and the remaining two-third for development phase.

 Switching over from process patent to product patent

Product patent regime poses serious challenge to domestic industry unless it invests in research
and development. India which till today is minting money through exports of drugs, courtesy its
process patenting law would suffer a severe side back once it has to comply with the rules and
provisions made in the TRIPS.

With the introduction of patents, the inventor will try to maximize his profits and therefore
price his drug higher than if there were no patents. Correspondingly the consumption of the
drug will be lower. This represents an indirect welfare loss to Indian consumers because of
higher prices associated with introducing product patents.
The magnitude of costs due to introduction of patents will depend on how much more can the
patentee charge for his patented drug and how much is the loss in consumer welfare. In India,
general income levels are low and consumers directly pay for the drugs Therefore consumers
will be sensitive to prices. Also, there are less effective but cheaper substitutes available in
almost all the cases. This limits the extent to which higher prices can be charged and acts as a
downward pressure on prices.
In addition to this are the direct costs of administering the patent system and enforcing
patentee rights through the courts in case there are infringement disputes.

SWOT ANALYSIS OF R&D IN INDIA

Strategic focus
The focus of the committee was on a holistic assessment of the R&D in the sector and that
needed for it to emerge as a global player. This strategic assessment is succinctly brought out in
the following SWOT analysis.

Strengths

Mature industry with strong manufacturing base with capacity to produce quality drugs at
relatively lower costs.

A very rich base of traditional knowledge in therapeutics i.e. Ayurveda, Sidha & Unani.

Well developed engineering base to produce wide range of pharmaceutical equipment and
machinery.

Abundance of S&T talent and infrastructure.

Successful experience in innovative process chemistry.

WEAKNESSES

Sub-critical R&D investments.

Lack of innovative R&D culture in industry

Poor networking among constituents in the innovation chain.

Inadequate framework for clearance of new drug investigation and registration.
A policy framework for testing on animals and their mport that is not facilitative.
Inadequate trained manpower in emerging areas.

OPPORTUNITIES

Due to rising costs of R&D overseas, greater tendency towards outsourcing and networking.
Expertise to blend knowledge of traditional medicines with modern science.
Increasing competence in molecular biology, immunology and biotechnology.
Early R&D wins boosting confidence (Reddys, Ranbaxys, Daburs, Shanta Biotechs).
Large numbers of patients covering wide range of diseases.
Potential for clinical research and initiating clinical trials
Opportunity to improve quality standards.

THREATS
Inability to cope-up with the rapidly changing new drug discovery technologies and processes at
the global level

Rapidly changing standards of quality and manufacturing at the international level.

Lack of clearly articulated and facilitative national IPR policies.

Lack of strategy to bring convergence between aspirations of the `small and `big players.

Distortion in priority and public concern on health & pharma issues.

 PORTER'S FIVE FORCES

Today's business environment is extremely competitive and in economics parlance where perfect
competition exists, the profits of the firms operating in that industry will become zero.
However, this is not possible because, firstly no company is a price taker (i.e. no company will operate
where profits are zero).
Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael
Porter, considered to be one of the foremost gurus' of management, developed the famous five-force
model, which influences an industry.
In this article, we apply this model for the Indian pharma industry.

 Industry competition
Pharma industry is one of the most competitive industries in the country with as many as 10,000 different
players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top
player in the country has only 6% market share, and the top five players together have about 18% market
share.
Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for
new players to enter in the industry.
Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharma industry
are very low. The fixed cost requirement is low but the need for working capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger
companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher.
Many smaller players that are focused on a particular region, have a better hang of the distribution
channel, making it easier to succeed, albeit in a limited way.
An important fact is that pharma is a stable market and its growth rate generally tracks the economic
growth of the country with some multiple (1.2 times average in India). Though volume growth has been
consistent over a period of time, value growth has not followed in tandem.
The product differentiation is one key factor, which gives competitive advantage to the firms in any
industry. However, in pharma industry product differentiation is not possible since India has followed
process patents till date, with laws favouring imitators.
Consequently, product differentiation is not the driver, cost competitiveness is. However, companies like
Pfizer and Glaxo have created big brands in over the years, which act as product differentiation tools.
This will enhance over the long term, as product patents come into play from 2005.

 Bargaining power of buyers

The unique feature of pharma industry is that the end user of the product is different from the influencer
(read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the
buyer's power, we look at the influence they have on the prices of the product.
In pharma industry, the buyers are scattered and they as such does not wield much power in the pricing of
the products. However, government with its policies, plays an important role in regulating pricing through
the NPPA (National Pharmaceutical Pricing Authority).

Bargaining power of suppliers

The pharma industry depends upon several organic chemicals. The chemical industry is again very
competitive and fragmented. The chemicals used in the pharma industry are largely a commodity.
The suppliers have very low bargaining power and the companies in the pharma industry can switch from
their suppliers without incurring a very high cost.
However, what can happen is that the supplier can go for forward integration to become a pharma
company. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies,
who turned themselves into pharmaceutical companies.

Barriers to entry
Pharma industry is one of the most easily accessible industries for an entrepreneur in India. The capital
requirement for the industry is very low, creating a regional distribution network is easy, since the point
of sales is restricted in this industry in India.
However, creating brand awareness and franchisee amongst doctors is the key for long-term survival.
Also, quality regulations by the government may put some hindrance for establishing new manufacturing
operations.
Going forward, the impending new patent regime will raise the barriers to entry. But it is unlikely to
discourage new entrants, as market for generics will be as huge.

 Threat of substitutes
This is one of the great advantages of the pharma industry. Whatever happens, demand for pharma
products continues and the industry thrives. One of the key reasons for high competitiveness in the
industry is that as an on going concern, pharma industry seems to have an infinite future.
However, in recent times, the advances made in the field of biotechnology, can prove to be a threat to the
synthetic pharma industry.

Conclusion

This model gives a fair idea about the industry in which a company operates and the various external
forces that influence it.
However, it must be noted that any industry is not static in nature. It's dynamic and over a period of time
the model, which have used to analyze the pharma industry may itself evolve.
Going forward, we foresee increasing competition in the industry but the form of competition will be
different. It will be between large players (with economies of scale) and it may be possible that some kind
of oligopoly or cartels come into play.
This is owing to the fact that the industry will move towards consolidation. The larger players in the
industry will survive with their proprietary products and strong franchisee.
In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Though
consolidation within the current big names is not ruled out. Smaller fringe players, who have no
differentiating strengths, are likely to either be acquired or cease to exist.
The barriers to entry will increase going forward. The change in the patent regime, will see new
proprietary products coming up, making imitation difficult. The players with huge capacity will be able to
influence substantial power on the fringe players by their aggressive pricing which will create hindrance
for the smaller players.

Economies of scale will play an important part too. Last but not the least, in a vast country of India's size,
government too will have bigger role to play.

PEST ANALYSIS OF GLOBAL PHARMACEUTICAL INDUSTRY

DRIVING FORCES :- PEST ANALYSIS

Socio-cultural

Political/legal

Economic

Ecological

Technological

SOCIO- CULTURAL

Population Demographics

Income Distribution

Social Mobility

Life-style Changes

Attitudes

Consumerism

Level of Education

POLITICAL/LEGAL FACTORS

Monopolies Legalization/ Deregulation

Environmental Protection laws

Foreign Trade Regulations

Employment law

Government Stability

Taxation

ECONOMIC FACTORS

Business Cycles

Interest Rate

Money Supply

Inflation

Unemployment

Energy Cost

NATURAL/ ECOLOGICAL FACTORS

Pollution

Seismic Activities

Global Warning

Desertification/Erosion

TECHNOLOGICAL FACTORS

New Discoveries/Development

Speed for Technology Transfer

Rate of Obsolescence

Government Investment on Research

PEST ANALYSIS
Pharmaceutical Policy
The drug and Pharmaceutical industry in the country today faces new challenges on account of
liberalization of the Indian economy, the globalization of the world economy and on account of new
obligations undertaken by India under the WTO Agreements. These challenges require a change in
emphasis in the current Pharmaceutical policy and the need for new initiatives beyond those enumerated
in the Drug Policy 1986, as modified in 1994, so that policy inputs are directed more towards promoting
accelerated growth of the Pharmaceutical industry and towards making it more internationally
competitive. The need for radically improving the policy framework for knowledge-based industry has
also been acknowledged by the Government. The Prime Ministers Advisory Council on Trade and
Industry has made important recommendations regarding knowledge-based industry. The Pharmaceutical
industry has been identified as one of the most important knowledge based industries in which India has a
comparative advantage.

However the process of liberalization set in motion in 1991, has considerably reduced the scope
of industrial licensing and demolished many non-tariff barriers to imports. Important steps already taken
in this regard are: Industrial licensing for the manufacture of all drugs and Pharmaceuticals has been abolished
except for bulk drugs produced by the use of recombinant DNA technology, bulk drugs
requiring in-vivo use of nucleic acids, and specific cell/tissue targeted formulations.

 Reservation of 5 drugs for manufacture by the public sector only was abolished in Feb.1999,
thus opening them up for manufacture by the private sector also.
Foreign investment through automatic route was raised from 51% to 74% in March, 2000 and
the same has been raised to 100%.
Automatic approval for Foreign Technology Agreements is being given in the case of all bulk
drugs, their intermediates and formulations except those produced by the use of recombinant
DNA technology, for which the procedure prescribed by the Government would be followed.
Drugs and Pharmaceuticals manufacturing units in the public sector are being allowed to face
competition including competition from imports. Wherever possible, these units are being
privatized.
Extending the facility of weighted deductions of 150% of the expenditure on in-house
research and development to cover as eligible expenditure, the expenditure on filing patents,
obtaining regulatory approvals and clinical trials besides R&D in biotechnology.
Introduction of the Patents (Second Amendment) bill in the Parliament. It, inter-alia, provides
for the extension in the life of a patent to 20 years.

A reorientation of the objectives of the current policy has also become necessary on account of
these issues: a. The essentiality of improving incentives for research and development in the Indian
Pharmaceutical industry, to enable the industry to achieve sustainable growth particularly in view
of anticipated changes in the Patent Law; and
b. The need for reducing further the rigors of price control particularly in view of the

ongoing process of liberalization

The Main Objectives Of This Policy Are:-

a. Ensuring abundant availability at reasonable prices within the country of good quality essential
Pharmaceuticals of mass consumption.
b. Strengthening the indigenous capability for cost effective quality production and exports of
Pharmaceuticals by reducing barriers to trade in the Pharmaceutical sector.
c. Strengthening the system of quality control over drug and Pharmaceutical production and
distribution to make quality an essential attribute of the Indian Pharmaceutical industry and
promoting rational use of Pharmaceuticals.

d. Encouraging R&D in the Pharmaceutical sector in a manner compatible with the countrys needs
and with particular focus on diseases endemic or relevant to India by creating an environment
conducive to channelizing a higher level of investment into R&D in Pharmaceuticals in India.
e. Creating an incentive framework for the Pharmaceutical industry, this promotes new investment
into Pharmaceutical industry and encourages the introduction of new technologies and new drugs.

To qualify as R&D intensive company in India, the PRDC (Pharmaceutical research &
development committee) has suggested following conditions:

Invest at least 5% of its turnover per annum in R&D.

Invest at least Rs.10 Crore per annum in innovative research including new drug development,
new delivery systems etc. in India.

Employ at least 100 research scientists in R&D in India.

Has been granted at least 10 patents for research done in India.

Own and operate manufacturing facilities in India.

ECONOMIC FACTORS
The economic liberalization and the Insurance bill have opened up wide vistas of growth for
the healthcare industry. The per capita consumption of drugs will increase exponentially with
increased insurance cover and more amounts of prescriptions being honored by patients
owing to the assurance of the insurance company who will pick up the bill.

Foreign Exchange Rate

Due to the change in foreign exchange rate, the unexpected Rupee appreciation against US Dollar during
the quarter ended Jun 04 ended up with huge forex loss for almost all Pharma players. For example the
Dr Reddys lab assumed a loss of Rs 32.3 Crore while Aurobindo Pharma sustained a loss of Rs 8.23
Crore during the period.

Social Factors Affecting Indian Pharmaceutical Industry

The increasing levels of westernization: owing to the influx of foreign media and
television channels is likely to increase the incidence of smoking, consumption of alcoholic
beverages, sexual promiscuity and high cholesterol fast food. This translates into higher
healthcare costs as respiratory, gastro-intestinal, liver and heart disorders will increase. About
HIV related healthcare costs, the less said the better. All these factors mean an increase in the
consumption of medicines.
Oflate therapeutics for lifestyle diseases like cardiovascular, diabetes etc are growing at a
faster rate than traditional antibiotics, in view of the increase in incidence of these diseases due
to the change in the life style of the Indian population in general, and urban population in
particular.
Limited purchasing power: Restrains people from seeking medical attention, and
dependence on traditional medications or alternative medication affects revenues of
Pharmaceutical manufacturers. In India, only about thirty percent of the Indian population has
access to Pharmaceutical drugs. The remaining depends on traditional home remedies or on
herbal medicines. This trend is due to the belief of the people in traditional medicine, high costs
of allopathic medicines and unavailability of products in rural markets. Traditional medicine is
also very widely used in China, Taiwan and now Singapore and Malaysia are putting money into
researching the medicinal value of these products.
The Indian pharmaceutical market is less than 1.2% of the world market, though 1 out of
every 6 people in the world is an Indian. Clearly, this is not because Indians are exceptionally
healthy, but because they cannot afford drugs. 46% of the world population is found in countries
that account for a mere 2% of the total expenditure on drugs for cardiovascular diseases. The
annual per capita spending on drugs is $124 in Canada, $7 in China, and a mere $3 in India.
The awareness: amongst the masses regarding various diseases is very low resulting in
low detection rates or little initial screening for the diseases, which affects market penetration for
most drugs. For instance, the majority of Indians are unaware of Juvenile Diabetes, thereby
hampering the penetration of anti-diabetic products. Similar is the case of osteoporosis. Postmenopausal women are prone to Osteoporosis. However, women in this age group feel that it is a

part of aging and does not require treatment. Therefore, the myths associated with the diseases;
result in low awareness thus affecting market penetration.
The water supplied is impure: the drainage system is going from bad to worse. As the
poor in the villages become poorer, they are forced to migrate to cities in ever-increasing
numbers. The dwellings of the poor in the cities are becoming ever more crowded. This causes
the infectious and contagious diseases to spread even more readily. Just last year there was a
major epidemic of cholera in Ulhasnagar (a town near Mumbai) caused by the water supplied
being mixed with sewage. There were many deaths. Just a few years back Surat was in the throes
of a plague epidemic.

TECHNOLOGICAL FACTORS
Pharmaceutical Companies are heavily dependent on their technological prowess to stay
ahead of competition and ensure profitable growth. With the professed objective of liberalization
and globalization of business in place in India since 1991, Indian Pharmaceutical industry is
compelled to be globally competitive. In addition, under the GATT and its successor, the WTO,
India needs to progressively remove her protectionist stance for the domestic industry by
removing import restrictions and reducing subsidies and tariffs for the various products being
marketed. Among the various factors impacting on ensuring competitiveness, Technology
occupies a very important place.

Technology Status in the Indian Pharmaceutical Industry

The Indian Patents Act 1970 and the availability of skilled chemists and chemical
technologists in the country propelled India into a position of dominance in bulk drug
technology. In this sector India has the potential to be a global technology leader and as a
supplier of bulk drugs for the Worlds generic drugs market. It is possible that even for
patented products; India could be a supply point.
The case of fermentation technology, however is different with India never having reached the
global competitive levels whether for Antibiotics, Steroids, Enzymes, Amino Acids or for the recent
group of Biotechnology products. Even two decades after the establishment of the National
Biotechnology Board which later became the Department of Biotechnology, and investments and

incentives from the Government, India still produces only four of the over two dozen recombinant
therapeutic proteins marketed world-wide.

On the formulations side India is fully capable of producing all the conventional dosage forms;
however the Industry has been far behind in the area of developing technology for the latest Drug delivery
systems.

It is obvious that R&D efforts and investments will continue to be deployed by the Indian
industry to maintain its momentum of technology development in the pharmaceutical sector
so that at least for this segment, India can rightfully earn the title of Drug Technology Capital
of the World for the production of generic drugs for the global markets.

Technology - The Vital Component

The manufacturing technology forms the backbone of not only the primary process

involving the production of various bulk drugs from the raw materials and the intermediates, but
also the secondary process involving the conversion of bulk drug into formulations.
Formulations with a new delivery system or a highly specialized system like the multicell, multi-layer, micro dialysis cell technology or timed release etc. are highly technology
intensive. In the years to come, this technological component is certainly going to be the driving
force in the pharmaceutical industry.
In the post-2010 era also technological component is expected to play a vital role in terms
of delivering the drugs at the exact site in the human body, thus potentiating their action with the
least of the adverse effects. Technology has always played a significant role in improving the
patients compliance. It is certainly expected to do so in future.

 R&D - The Survival Kit

With the introduction of new, strict patent laws in 2010, the Indian pharmaceutical
industry will no longer take the advantage of the reverse engineering that has been its strength. In
spite of this, India should be able to meet its January 1, 2010 commitment for product patents.
Exclusive Marketing Rights (EMR) mechanism is being implemented and should make some
significant Intellectual Property (IP) protection available even sooner. Both houses of Parliament
have considered the proposed IP legislation.

Discovery Research
With just few years to go before product patent bill implementation in India, only two
discovery research projects of Indian origin have moved to phase I/II, and even they are an
improvement on existing targets. While this is no different than the path Japan traveled in the
1975-90 period, Indian companies will need to do much more, and faster, to gain a fighting
chance for a position on global Pharma arena.
Not surprisingly, only five Indian companies have undertaken serious R&D investments,
and even they are necessarily meager, given the limited profitability and the low value of the
rupee. Much of the research efforts are still focused on analog research, as that is not only
financially affordable, but also what the current skill level would allow.
While India is very strong in process chemistry, biology and applied biochemistry will
require government-academia-private sector initiatives as well as enormous investments. But the
start in the short five years or so has been quite encouraging, and the outlook is very bright
indeed, given the very talented and highly educated workforce and increasingly global resource
base of the selected companies.

 PHARMACEUTICAL INDUSTRY IN
INDIA
The Pharmaceutical Industry in India is in the front
rank of Indias science-based industries with wide
ranging capabilities in the complex field of drug
manufacture and technology. It holds a leadership
position in the third world, in terms of technology,
quality and range of medicines manufactured. From simple headache pills to sophisticated
antibiotics and complex biotechnology derived products, almost every type of medicine is now
made in India. Not only India produces pharmaceutical formulations but over 400 Active
Pharmaceutical ingredients are manufactured in India from basic stage. Ancillary industry is also
fully developed and full range of Pharmaceutical manufacturing equipment is locally produced.
The organized sector of the Pharmaceutical Industry has played a key role in promoting and
sustaining development in this vital field. International and Indian companies associated with
this sector have stimulated, assisted and spearheaded this dynamic development in the past fifty
seven years and helped to put India on the pharmaceutical map of the world.

The value of the pharmaceutical market in India was U.S.$ 6.0 billion in 2008. It grew by 6.4%
over 2007. Although India accounts for 16% of the world population, the sale of pharmaceuticals
is just 1.8% of the global sales in terms of value and 8% in terms of volume. Globally, it ranks
4th in volume and 14th in value terms.
The Pharmaceutical Industry in India has quality producers and many units are approved by
regulatory authorities in USA and UK. Today, India has highest number of U.S. FDA approved
manufacturing facilities outside U.S.A. It has a pool of personnel with high managerial and
technical competence as also skilled workforce. Its track record, particularly in the area of
improved cost-beneficial chemical synthesis for various drug molecules is excellent. The export
of Bulk drugs and formulations in 2008 were to the tune of US$ 4.1 billion.

The Indian market has some unique advantages. India has a 57 year old thriving democracy. It
has an educated work force and English is business language. It has a solid legal framework and
strong financial markets. Over 9000 companies are publicly listed. Professional services are
easily available. There is already an established international industry and business community.
It has a good network of world-class educational institutions and established strengths in
Information Technology. The country is now committed to a open economy and globalization.
Above all, it has about 200 million middle class markets, which is continuously growing.
For the first time in many years the international pharmaceutical industry is finding great
opportunities in India. The process of consolidation which has become a generalized
phenomenon in the world pharmaceutical industry has started taking place in India. The
Pharmaceutical Industry, with its rich scientific talents and research capabilities, with Intellectual
Property Protection regime firmly established, is well set to mark its place as a Sunrise Industry.

PRICING
The prime mover in influencing the operating environment of the pharmaceutical industry is the
Governments drug policy. Currently, the drug policy of 1986, as modified and rationalised in
1994, is prevailing. The Drugs (Prices Control) Order 1995 (DPCO 95) outlines the classification
of price controlled / decontrolled products and methods of price fixation and revision. The
National Pharmaceutical Pricing Authority (NPPA) monitors the prices by fixing and revising
prices of drugs, The 347 price controlled drugs under the Drugs (Prices Control) Order 1979

were brought down to 143 in the Drugs (Prices Control) Order1987. Under DPCO-95, there are
74 bulk drugs and their formulations under price control covering around 40% of the total
pharma market. The policy makers have recognized the need for giving incentives for Research
and Development (R&D) in the Indian Pharmaceutical Industry and believe that import
liberalization process will require the industry to improve its competitiveness. The Government
announced the new Pharmaceutical Policy in February 2002. This policy which was expected to
reduce the drugs under price control from currently 74 to about 25 is delayed from
implementation as it is under judicial review.

OVER THE COUNTER (OTC) MEDICINES

Health is the most precious thing we have and therefore we make constant personal efforts to
lead a healthy lifestyle. There are many forms of minor health problems which are inevitable and
have to be accepted as consequences of living. They may be difficult to avoid but can be
alleviated and often relieved by self-medication or other self-care measures.
The use of medicines available without prescription is nowadays generally accepted as an
important part of healthcare. It is in line with the growing desire of everybody to take more
responsibility for their own health. When practiced correctly, self-medication can also be a cost
containment measure for the national healthcare system.

THE CHANGING GLOBAL SCENARIO

GLOBAL TRENDS
The health-care costs are rising world-wide.
Leading companies are merging. Strategic
alliances and collaborations are taking place in
order to meet the increasing R&D budgetary
requirement that exceeds a billion dollars each
for many leading global pharma players. The

WTO has imposed upon the Indian pharma industry the challenge of coping with product patents
by the end of the year 2004 and exclusive marketing rights (EMRs) in the interim period.
Recent advances in molecular biology and genetic engineering have enhanced the basic
understanding of human physiology and the biological action of drugs on cell receptors and
proteins. New tools of drug discovery such as combinatorial chemistry, structure based
molecular design and high throughput screening have revolutionised the drug discovery process.
This increasing `scientification of drug research has encouraged a division of labour amongst
agents specialised in different segments of the innovation chain i.e. basic biomedical research,
chemical synthesis, process development, clinical testing, etc.
At present, out of ten thousand chemical compounds screened, only one becomes an approved
drug in the developed countries. Further about 12-15 years are required for drug development. In
order to attempt to reduce the time for drug development to half and to improve the success rate
of drug discovery, intelligent screening of sources of chemical compounds is required. For this,
on one hand, creation and analysis of new tools and data base of compound sources would be
necessary, and on the other hand, new tools, such as combinatorial chemistry, structure based
molecule design and high throughput screening would have to be adopted to greatly enhance the
levels of productivity of drug discovery.
Further more, some of the new sources of NCEs could be plants, microbes, fungi, insects and
various venoms. The extracts from these material sources must continue to form a major source
of entirely novel structures.
The Human Development Report of 1999 has highlighted that there is a tremendous concern
about the control of knowledge as tighter intellectual property rights raise price of technology
transfer and increase the technological gap and block the developing countries out of dynamic
knowledge sector. On the other hand, the major pharmaceutical companies argue that compliance
of the provisions of TRIPS would stimulate transfer of technology, encourage foreign direct
investment, strengthen R&D investment and also ensure early introduction of new products in
developing countries. These arguments are invariably backed by data on increased FDI in some
countries where stringent IPRs were introduced. Whereas these claims and counter claims could

be debated, the Indian model has to be based on providing medicines at affordable prices to the
needy Indian populace on one hand and also leveraging the Indian intellectual prowess on the
other, through which India could create its own intellectual porperty.
It is clear that an internal networking and co-ordination amongst different constituents of
innovation chain has not only become necessary but imperative in order to bring down the time
and costs of new drug discovery and its introduction in the market place. This affords a great
opportunity to Indian R&D.
Striving for world class is not for the faint of heart. It requires revolutionary change, not
evolutionary.

FINDINGS

It is apparent that Indian pharma R&D has several scientific-techno-economic advantages that by
far outweigh the few inherent weaknesses. The opportunities are appealing and attractive and the
threats manageable. Thus if the proper policy support and direction is given, the industry can
carve out a niche for itself in the global market place.
THE GRAND DREAM
People of India shall lead not only a longer life, but life with a much superior quality, with
standards comparable to the developed nations.
More specifically, the committee envisages that by the year 2005, India shall :
(i) In the field of pharma R&D

Attain investment in R&D of Rs.1000 crore/annum.

File 10 new INDs annually.

File over 500 patents annually.

Export pharma R&D worth over Rs.200 crore/annum

(ii) In the field of production, export and investment in pharma industry -

Achieve 5 times of 1997-98 turnover.

Reach a cumulative dollar exports growth rate of 20% per annum.

List at least 20 pharma companies in NASDAQ.

Attract atleast Rs.500 crore investments in new start-up R&D companies.

Attain export of herbal/indigenous medicinal products of at least Rs.1000 crore/annum.

Attain three times increase in the market capitalization from 1997 - 98.

(iii) In the field of strengthening organizational/legal systems

Create an IPR system, which, while protecting national interest, will meet international
commitments.

Strengthen the databases and networking.

Revamp and modernize the CDSCO.

Create an autonomous regulatory Body.

Create an effective GLP/GCP Monitoring Authority.

Establish an autonomous Drug Development Promotion Foundation.

All of us have a right to dream. Who knows, if this dream were to come true, the Indian pharma
industry may feature on the cover page of "The Economist" as appearing at the end of this
report.

PATENTLAWS
INDUSTRY

AND

PHARMACEUTICAL

INTELLECTUAL PROPERTY RIGHTS (IPRs)

As India is a Founder Member of WTO (World Trade Organization), it is obliged to introduce
TRIPS (Trade Related Aspects of Intellectual Property Rights) compliant IPR regime on 1st
January, 2005. India ushered in Product Patents Regime by introducing The Patents
(Amendment) Ordinance, 2004 on December 26, 2004. Later, the Parliament after debating
the provisions of the Ordinance passed The Patents (Amendment) Bill, 2005. This signals
the start of a new era for the Pharmaceutical Industry in India. The new Act will boost R&D and
will help to bring in Foreign Direct Investment in the
industry and contribute to improved healthcare.
The salient features of the Act are:

has

After a gap of 35 years, product patent protection

been

extended

to

pharmaceuticals,

chemicals,

biotechnology products and food for a period of 20 years.

Provisions relating to Exclusive Marketing Rights

(EMRs) are deleted and a transitional provision is

introduced for safeguarding EMRs already granted.

To meet emergent health situations (in accordance with the Doha Declaration on TRIPs and
Public Health), a provision is made for enabling grant of Compulsory Licence for export of
medicines to countries which have insufficient or no manufacturing capacity.

Provisions relating to opposition procedures, with a view to streamlining the system by having
both Pre-grant and Post-grant opposition in the Patent Office, have been modified.

There is an addition of a new proviso to circumscribe rights in respect of mailbox applications so

that patent rights in respect of the mailbox shall be available only from the date of grant of patent
and not retrospectively from the date of publication.

The provisions relating to national security to guard against patenting abroad of dual use
technologies have been strengthened,

Several provisions are included with a view to rationalizing time-lines, allowing flexibility and
reducing the processing time for patent applications and simplifying procedures.

However OPPI also feels there are three areas where India will continue to lag behind in ushering
in World Class IPR standards. The first is that India should join other leading countries and

progressive nations in moving away from pre-grant opposition. The Act as announced will
provide representation by third parties and lengthen time for grant of Patent.

The second area of concern for the Industry are the existing Compulsory Licensing (CL)
provisions that go much beyond national emergency and extreme urgent situations, public health
crises

and

anti-trust

situations.

The third area of concern for the research based manufacturers is that a new proviso has been
added in the Act that treats patent holders in respect of mail box applications on a discriminatory
footing in so far as them being denied the rights and privileges from the date of publication
retrospectively.

The patentability criteria are also narrowly defined in the new Act which is restricted only to
New Chemical Entities (NCEs). Salts, esters, polymorphs, isomers, etc. are not patentable unless
they differ significantly in properties with regard to efficacy. However, this clause is being
reviewed and a Committee has been formed to examine it in detail.
Decisions on fresh investment focus on R&D, Clinical Trials and Productive Collaboration
between Indian and International companies will all take place only if there is an assured climate
of world class patent protection. When India is on the threshold of growth on all fronts,
Government should help to open up the healthcare sector as well.

DATA PROTECTION:
The discovery, development and bringing to market a new drug requires the originator to
conduct extensive clinical trials, pharmaceutical research and testing and generate data for
submission to the Drug Regulatory Authority for marketing approvals of the new drug. This
activity takes 10 -12 years of painstaking efforts. The data generated in such work is proprietary
to the originator and needs to be protected from unfair commercial use. OPPI has recommended
that Data Protection should be for at-least 5 years after the marketing approval. Data protection is
required to ensure confidentiality of data needs to obtain marketing approval of the product. Data

Protection does not debar the entry of another manufacturer on the patent expiry of a product so
far as such manufacturers generate their own data, and hence will not delay the generic entry.

MISCONCEPTIONS AND FACTS:

Several myths have been propounded by the anti-Patent lobby. Most of these are based on
conjecture and are unsupportable on facts. The two most frequently employed are "High Prices"
and "Impact on Local Industry". Both of these are addressed below:

MYTH OF DAMAGE TO LOCAL INDUSTRY

As has been stated earlier, the effective period of exclusivity enjoyed by a patent holder
is, at best, 5-10 years. Once patent life ends, other manufacturers are free to market
generic versions of the same products. Worldwide, generic markets are growing at a
rate faster than that of patented products. There will therefore always be a large generic
market in India and this will continue to be dominated by Indian companies.
In conclusion, India should adopt a strong world class patent law without further delay
for the following reasons:

DEVELOPMENT OF SCIENCE AND TECHNOLOGY:

In the research world today, where collaboration and alliances are the order of the day, ability to
network within the world community of scientists will be strengthened only if we have strong
IPR.

ATTRACTING FOREIGN INVESTMENTS IN TECHNOLOGY AND

RESEARCH:
World class and TRIPs compliant law will bring to India the benefits of investments, funding of R&D
and technological development. Funding of R&D is a major hurdle today. India can attract funds from
abroad if it gives the right signals.

 REVERSING BRAIN DRAIN:

IPR will provide challenging opportunities to retain scientific talent in India and attract our
scientists and researchers from abroad back into the national mainstream.

CREATION OF WEALTH:
The wealth of nations is created by Intellectual Property. Recognition of IPR will change our
scientific culture from copying to creativity. For all this to happen, India should have a Patent
Law, which is clear and unambiguous and comparable to the best statutes available to IPR. A
well-drafted

legislation

will

minimize

litigation

and

disputes.

DPCO
The new drug policy, which aims at bringing down the span of price control has been stayed by
Karnataka High court. The government of India has preferred an appeal against the Karnataka
High Court decision before the Supreme Court. The industry is hopeful that the Supreme Court
will uphold the Government's power and hence the span of price control will come down.
The drug prices are controlled by Drug Price Control order (DPCO), to ensure the availability of
essential drugs at affordable prices to the public. National Pharmaceutical Pricing Authority
(NPPA) is monitoring fixation and revision of drug prices under the DPCO. Currently, 74 drugs
are under price control, down from 347 bulk drugs in 1985. Under the new drug policy
announced in Feb'02, the drugs under price control will reduce by 50% from 74 drugs.
The New Drug Policy 2002 brings a bulk drugs or a formulation under price control only if (a) it
has an annual turnover of Rs 25 cr and in which a single firm has a market share of 50% or more
in it; (b) it has a turnover of Rs 10 to 25 cr and if a single formulator has a market share of 90%
or more. Earlier, the limit was Rs 4 cr if any formulator had more than 50% market share and Rs
1 cr if any formulator had 90% of more market share.

For the purpose of determining a firm's turnover and its market share, the government will use
the data provided by ORG Marg. Nevertheless, currently the government is not able to notify the
reduced number of drugs under price control, on account of a stay granted in May'02 by the
Karnataka High Court. The government has challenged the ex-parte interim order claiming that
the policy was framed taking into consideration the opinions of the industry also, and is not
detrimental to the industry.
In a bid to reduce drugs under price control, the policy facilitated the manufacturer to approach
NPPA for exemption from price control, if the total daily cost of treatment based on a particular
formulation is less than two rupees a day. Likewise, drugs developed and patented India will
also be exempted from price control for 15 years.
NPPA as sought the list of drugs and the optimal cost of therapy worldwide from World Health
Organization (WHO). NPPA believes that this will remove the discretionary element from its
decision while deciding on exemption from price control under the cost per patient not exceeding
Rs 2 per day. It would also plug the possible misuse of the parameter by the industry, as
decisions to free a drug from price control would be as per the data on optimal dosages published
by WHO.
The New drug policy also emphasis research and accordingly a world class Central Drug
Standard Control Organization will be set up to monitor quality, harmonies standards for clinical
trials with international bench marks and will also speed up new drug approvals.
While price controls have affected the Industry's margins, it is also acknowledged that in the
process, the Indian pharmaceutical industry has emerged as a low-cost producer in the world due
to its process engineering skills and low manpower cost.
However, due to low margins, investment in R & D was neglected and it was only 2-4% of the
turnover as against over 10% globally. As the era of product patents approaches, the concept of
price control gets diluted. The New Drug Policy gives more thrust and facilitates channelization
of resources towards research

 POST-PATENT

OPPORTUNITIES

FOR

INDIAN

COMPANIES
The Indian Pharmaceutical companies have recently made news with their initiative in the area
of research and development. The domestic players have, until date enjoyed the process patent
shield, but with 2005 approaching it has become essential for the Indian players to focus their
business to innovation rather than just copying. Indian companies like Ranbaxy, Cipla,
Wockhardt and DrReddy's have hit the headlines with their initiatives in NDD (new drug
development), and NDDS (novel drug delivery system).
With the acceptance of product patents, India is expected to open two mega-opportunities for
local pharmaceutical companies-R&D and contract manufacturing. The size of the additional
market will be more than 25 times the current Indian market.
The Major Disadvantage the Indian Companies Will Face after the Change in Patent
Policy:

Companies, which do not have patents for new products, will be unable to offer newer
drugs to customers, thereby stunting their growth.

High costs and risks associated with new drug development will prevent the Indian
corporate from developing new molecules.

Majority of the Indian players is therefore targeting the US and the European generic markets to
boost their bottom line performance. Companies like Sun, acquired Caraco Pharma labs for
$7.5mn and Wockhardt labs have a strategic tie-up with Sidmak. With 178 molecules valued at $
43bn going off patent by FY00-05 in the US, there is a race among the top line Indian companies
to enter the US market. Targeting overseas markets will help the companies to diversify their
risks.

 INDIANS MANUFACTURING PATENTED MOLECULES

The Indian companies have been exporting generics to patent-recognizing countries only after
the product went off patent. However, during the patent period, they could export only to nonpatent recognizing countries. With the acceptance of patent law, the MNCs will use India as a
sourcing base for manufacturing patented molecules. A number of MNCs are expanding their
manufacturing operations in India. SmithKline Beecham and Novartis have already set up bulk
manufacturing facilities to supply to their parent companies.
The key advantages that India offers:

Availability of skilled labor.

Domestic manufacturers with US FDA approved manufacturing facilities.

Process re-engineering skills to develop cost effective drugs.

Easy availability of fine chemicals for bulk drugs.

Ranbaxy, Lupin labs and Nicholas Piramal are the first Indian companies to have obtained
manufacturing contracts from MNCs. The trend will accelerate in the future.
The small-scale manufacturers of bulk and formulations are rushing towards capacity expansion
and US FDA approvals.

TRENDS AND STRATEGIES

The Indian domestic pharmaceutical industry is increasingly becoming globally competitive to counter
the weaknesses and threats. The key trends and strategies being adopted by the local pharmaceutical
industry are:

INCREASED R&D FOCUS

Driven by the imminent change to a product patent regime at home from 2005 the leading pharmaceutical
companies in India have been increasing their R&D budgets over the years. Indian pharmaceutical
companies are likely to double their expenditure on R&D over the next 2 years.

EXPORTS DRIVEN GROWTH

Indian pharmaceutical companies are on a global beat. Currently, exports contribute more than half the
total revenues for most of the Indian pharmaceutical majors. Exports have increased in recent years as
Indian pharmaceutical companies have made deep inroads into the regulated generic markets of the US
and Europe, in addition to unregulated markets.

MNCS SHOWING GROWING INTEREST IN INDIA

The share of MNCs in the Indian pharmaceuticals market is expected to increase
with the recognition of product patents in the country from 2005, as they will be able to freely introduce
top of the line, patented products in the domestic market. Moreover, with the new price control order
expected to be passed soon, DPCO coverage will be substantially reduced and margins of most MNCs
with strong brands will drastically improve. The Indian Governments decision to allow 100 percent
Foreign Direct Investment into the drugs and pharmaceutical industry is expected to aid increased
investment in R&D infrastructure by MNCs in India.

STRATEGIES FOR LARGER INDIAN PHARMA. COMPANIES

MARKET DIVERSIFICATION
Presence in multiple markets, especially in the regulated markets, is a positive from the credit perspective.
Low entry barriers in the unregulated markets make companies serving only these markets vulnerable to
considerable pricing pressures. The quality and process requirements of the regulated markets also act as
entry barriers for low-end players and this offers a degree of stability to prices and volume sales.
Companies targeting exports to unregulated markets alone are often characterized by low margins, long
credit periods, and low returns on capital employed, with the result that they are likely to have

significantly low coverage numbers. However, a companys ability to sustain its presence in the regulated
markets is an issue that ICRA evaluates by considering its track record, its R&D investments, its
approved manufacturing capacities, its current product portfolio and pipeline, its current and proposed
distribution arrangements, and such other factors. Some of the bigger Indian pharmaceutical companies
have already established a strong distribution network in the regulated markets. Most medium and small
companies are however still in the process of establishing their presence in these markets.

DOMESTIC MARKET PRESENCE

Strong domestic market presence is considered a positive by ICRA. The highly competitive nature of the
domestic pharmaceutical market imposes strong low-cost manufacturing discipline, which is a key
strength in this industry. Also
Strong distribution network and brand presence may open up in-licensing opportunities from original
patent holders targeting the Indian market. ICRAs assessment of domestic market presence includes
analysis of the therapeutic mix of the domestic sales of the company. A diversified therapeutic presence,
relatively strong market position in key segments, and focus on new product introductions are considered
positive by ICRA. On the other hand, high therapeutic or product concentration exposes a company to
significant business risks. The movement in market share data and ranking in the relevant segments over
the years are also analysed to understand the trend and consistency in the companys performance. Strong
sales network and first-mover advantage in a segment hold the key to developing a strong brand, and are
given adequate weightage by ICRA.

LEGAL AND REGULATORY RISKS IN EXPORTS

North America, Europe and Japanthe largest and most regulated pharmaceutical markets in the world
account for nearly 87% of the total global consumption of pharmaceutical products by value. The lowcost manufacturing
capabilities available in India (that meet the standards specified by the regulatory bodies of developed
countries) throws up significant opportunities for exports to these markets, especially with over US$40
billion worth of drugs likely to come off patent over the next four to five years. However, pharmaceutical
companies targeting these lucrative markets could be exposed to significant risks like patent infringement

or product liability risks. In this regard, a strong balance sheet and diversified product profile would act as
risk mitigating factors. Some pharmaceutical companies follow a strategy of patent challenges in the
regulated markets, which is a high-risk high-reward strategy, with significant uncertainties relating to the
final outcome. Such companies may also be exposed to large cash outflows, resulting from large
investments in R&D and patent challenge expenses with uncertain returns. The strategy could have
significant credit implications for companies that are relatively small. For companies involved in patent
challenges, ICRA evaluates the financial risks arising from potential rejection and the ability of the
company to absorb such downsides.

IMPACT OF PRODUCT PATENT REGIME

India, by virtue of being a signatory to the General Agreement on Tariffs and Trade (GATT), is required
to comply with Trade Related Intellectual Property Rights (TRIPS). The TRIPS agreement requires India
to recognize product
patents for food products, pharmaceuticals and agro-chemicals starting calendar year 2005 and is
applicable to all these products patented after 1995. According to the Indian Patents (Amendment) Act
2005, drug products patented after 1995 that are already being sold (as on December 31, 2004) in the
Indian market can continue to be sold following the payment of some royalty to the patent holder (if, and
after, the patent for the drug is granted in India).
This seeks to ensure that existing products in the market are not immediately and significantly impacted
by the switchover to the product patent regime. But in the long term, the product patent regime will have
a far-reaching impact on the domestic pharmaceutical industry as new product introduction will become
increasingly difficult for Indian companies. This will significantly alter the structure of the Indian
pharmaceutical industry and the pattern of new product introductions in the country. In future,
introduction of patented drugs by Indian companies would be possible largely through in-licensing3
arrangements with patent holders. Two to three years from now, this would start having significant
implications in terms of ageing of product basket for most pharmaceutical companies in India. Domestic
companies would need to re-align their geographical coverage, research and manufacturing strategies to
meet the imperatives of the product patent regime.
In rating a pharmaceutical company, ICRA assesses the impact of the product patent regime on the
current product portfolio of the company concerned. ICRAs analysis also includes a critical assessment

of the post-2005 strategy 3 Licensed by innovator pharmaceutical companies for selling in the target
market in lieu of a compensation being pursued by the company, in terms of in-licensing, contract
manufacturing, R&D efforts, and exports. The strategy is evaluated in the context of financial resources,
R&D and manufacturing capabilities, and depth of management resources of the company.

IMPACT OF PRICE CONTROL

The Drug Price Control Order (DPCO) controls consumer prices of several drugs in India. Lower
dependence on DPCO-controlled drugs is generally viewed positively by ICRA. However, the scope of
DPCO has been decreasing over the last few years (currently 74 bulk drugs, accounting for 25-27% of the
total domestic market, are within the ambit of DPCO). However, there could be significant changes in the
functioning of DPCO in the product patent era. Price monitoring and control in the Indian pharmaceutical
industry would continue to evolve as the dynamics of the industry change in the coming years. ICRA
would monitor these developments on an ongoing basis to assess their impact on the industry participants.

MANUFACTURING FACILITY
While low-cost manufacturing capability is a key strength for Indian pharmaceutical companies, it is also
critical for those targeting exports to regulated markets to maintain systems and processes that ensure
product quality. ICRA, therefore, assesses the systems followed by the company during manufacturing,
its testing facilities, the quality of its trained manpower, and the quality of its documentation during
manufacturing. Backward integration may be crucial in sustaining cost advantages in exports, as that
usually provides for greater value addition. For instance, some Indian manufacturers have been able to
sustain profitability even after over 90% price erosion on generics, through effective cost control.
Upgrading and maintaining a manufacturing facility that meets the standards of the regulated markets call
for significant financial commitments. Also, inspection and approvals being a time-consuming process,
companies with existing facility approvals from agencies like US FDA4, UK MHRA5, and ANVISA6
can have a crucial time advantage
over others. Besides, companies with quality manufacturing facilities can also cash in on potential
opportunities in the field of contract manufacturing and custom synthesis.

 MANAGEMENT QUALITY
The pharmaceutical industry operates in a very dynamic environment, with significant events in one
marketlike product development, patent expiry and regulatory changesoften impacting players in
other markets. Exports opportunities also throw up complex management challenges, with profitability
(and price erosion) being influenced by niche opportunities, unique chemistries or dosage forms, and
complex legal and marketing issues. These have become particularly relevant, given the retaliatory
strategies increasingly being adopted by innovator companies to thwart generic challenges. Quality of
management remains a key factor for all credit ratings. Lack of a seasoned management team in areas like
R&D, regulatory affairs, business development, and manufacturing can significantly increase the business
risks of a pharmaceutical company. The industry is also seeing several acquisitions, driven by the need for
inorganic growth. Besides a strong balance sheet, depth in management is a prerequisite for the successful
handling of integration related issues that acquisitions throw up almost invariably.
Going forward, there would be increasing competition for the trained-manpower available, especially in
critical areas like R&D and business development. Therefore, professional management structure and
focus on human resources
would be of crucial importance for the industry.

FINANCIAL RISK
Several large companies in the Indian pharmaceutical industry have healthy balance sheets, with moderate
levels of debt, and high gross margins & RoCE7 (in more recent times however there has been some
pressure on the gearing
and RoCE of several pharmaceutical companies following large investments for organic/inorganic
growth). These characteristics help these companies cope with the uncertainties related to investments in
product development and entry into regulated markets. A strong balance sheet also gives a company
favourable access to both the equity and debt markets, which in turn allows flexibility in funding growth
plans and managing liquidity. Besides strong balance sheets, higher rated entities in the industry exhibit
stable cash flows through revenue streams that are diversified among markets and product categories,
stable product pipelines, and strong distribution networks. With the investment requirements being large,
lack of economies of scale can also significantly impair a companys risk profile, especially in the
emerging product patent regime.

Complexity of products, therapeutic mix, and the market a company operates in, besides operating
efficiency, are the key determinants of its profit margin. Additionally, profitability is also influenced by
the particular stage a product has
reached in its lifecycle (matured, commoditized products usually offer low margins) and the time of its
market entry (early entry often yields a relatively large market share and hence higher margins).
Companies manufacturing products involving less complex and easily replicable processes are often
subject to intense competition, and this gets reflected in their usually low margins. Also, in highly
commoditized segments, large capacity build-ups in low cost locations like China can severely bring
down prices and margins. Margins are also likely to be stretched for players targeting less regulated
markets, as relatively lenient requirements for product registration and manufacturing facility approval
also imply low entry barriers and therefore intense competition. While better regulated markets in general
offer better operating margins, price erosions can be steep after exclusivity periods, if any. Also, less
complex molecules can invite many players, with the result that the margins may be very low. In recent
times, there
have been instances of over 90% price erosion (and thus the paring down of most of the lucrative
margin) following the entry of Indian players in some generic products in the US. ICRA places emphasis
on product pipeline strength,
as that can even out the large price fluctuations inherent in exports to regulated markets. For companies
into contract research (including custom synthesis and clinical research) and manufacturing, the risks
associated with large upfront
Investments are often mitigated by profitable long-term contracts from large innovator companies.
Diversification of client base is therefore necessary to mitigate risks, especially for those working on
research work outsourced for new product development by innovator companies. At the same time,
successful relations with innovator companies can provide greater protection to margins for Indian
manufacturers. ICRA evaluates profitability before R&D investments, as increased R&D expenditure is
likely to be a long term positive and is thus evaluated separately. For companies upgrading their
manufacturing facilities to meet the requirements of regulations in developed markets, there can be a
substantial time lag between investments in facilities and final revenues from the same. In such situations,
treatment of expenditure as revenue or pre-operative

expenses can substantially impact the operating margin. ICRAs analysis of financials therefore adjusts
for differences that can arise because of the employment of different accounting methods.
Working capital is a key factor in ICRAs analysis. High levels of receivables and inventory may be
reflective of poor quality earnings, which may require write-offs in future. At the same time, build-up of
inventory can also result from one-time events like product launches scheduled for the immediate future;
such build-up would be considered necessary investment.
Exchange risk for pharmaceutical companies could originate from imports of raw materials and exports of
pharmaceutical products. The extent of exchange risk that a company faces would be determined by its
net imports/ exports position. ICRA looks into the import/export mix of the company to assess its
exchange risk, the hedging strategy it has adopted, and the implications of such strategy, while evaluating
the companys performance.

CONCLUSION

The Indian pharmaceutical industry is at the crossroads: on the one hand, opportunities are emerging in
the developed markets, while on the other, the domestic market is becoming increasingly challenging
following the introduction of the product patent regime. In developed markets, the focus on reducing
healthcare costs has been increasing, with the result that there is pressure on the authorities to allow early
introduction of low-cost generic drugs. This in turn points to large opportunities for Indian drug
manufacturers with approved facilities and sound knowledge of patent/regulatory issues.
Besides, the impending expiry of significant drug patents in the near term also offers opportunities for
lower-cost Indian generic manufacturers in terms of greater market access. However, even as there are
opportunities, the challenges are many: drawing up appropriate distribution strategies, selecting the right
products, and anticipating competition, among others. Historically, in the domestic market, the option to
reverse engineer new molecules and come up with alternative drugs meant that investments in product
development were generally low while at the same time competition was intense, given the low entry
barriers. However, with the product patent regime having been introduced this calendar, domestic players,
to augment their product baskets, would need to focus more on R&D and enter into alliances with
innovator MNCs.