CHAPTER-4

Literature Review

Literature Review

4.1 Pharmaceutical R&D on a growth mode in India

With the product patent regime setting in its final structure from January 2005, the

Indian companies have to develop their own drugs, which calls for significant scaling up

of investment of money, material and manpower in research and development (R&D).

The discovery research also possesses a signiftcant risk of failure and despite this the

R&D has become the basic necessity of the pharmaceutical players to ensure their

foothold in the new product patent era. Fortunately, India has an excellent base in basic

biochemical process expertise, which is a prerequisite for all forms of drug development.

Further, to maintain and improve their competitiveness, the Indian pharmaceutical

players have increased their thrust for R&D, particularly in respect of New Drug

Development (NDD) and New Drug Delivery System (NDDS) shifting from reverse

engineering. Indian pharma companies have already made their presence felt in the global

arena by filling highest number of applications with USFDA in 2003. in fact they have

filed a total of 126 Drug Master Files (DMFs) in 2003, accounting for 20% of all dugs

coming into the US market, which is higher than Spain, Italy, Israel and China. Also the

Indian filing for US patents has witnessed a tremendous growth by reporting 1700 fillings

in 2003 from a mere 183 fillings in 1997.

With increasing importance oflndian R&D, various global companies are looking

for collaborative research with domestic players. In this context, Reliance Life Sciences

is recognized by the US National Institutes of Health for stem-cell research and Biocon's

subsidiary-Syngene International has entered into a contract research agreement with

Novartis Institutes for Biomedical Research to carry out research projects to support new

drug discovery and development. Also, the Apollo Group of Hospitals has signed a MoU

with US-based University of Nebraska Medical Centre to conduct stem cell research on

cancer. In fact, Quality, credibility, and reliability and a very reasonable cost

4.2 Barriers and Problems faced by R&D in Pharmaceutical Industry

The emerging economic, trade and intellectual property scenario, nationally and

·internationally, necessitates a qualitative change in the industry, obliging Indian

112

phannaceutical industry to move away from manufacturing only known drugs through

innovative process routes to discovering and commercializing new molecules. The

accumulated knowledge of traditional medicinal system and large bio-diversity of our

country offer great advantage to our country. But at this stage some gaps exist which

become a motive for degrowth of innovation/ research and development. At present most

Indian drug tinns, due to their small size compared to international operators, are not in a

position to invest in a viable new drug development programme.

The barriers faced by R&D in Indian pharmaceutical sector are:

Gap between domestic and international regulatory standards for manufacturing,

import/export and research and development.

Hassles of evaluation and clearance of new drug applications.

Ineffective network of administration of drug standards w.r.t. modernizing,

restructuring and reforming existing system.

Prohibitive cost of drug development.

Lack of innovation

Less success rate.

Among these barriers, experts opine that prohibitive cost, less success rate and

ineffective network of administration of drug standards plays significant role as barriers.

So there is need to find solutions and implement them to be more innovative inclined

sector. However, experts opine that there is a significant unmet need for great efficiencies

in the pharmaceutical and healthcare industries from a cost, speed and productivity

perspective. Prohibitive cost of development becomes a main barrier that can be soothed

by creating a library of compounds from where we can selectively pick and choose for

focused development, which will save on both cost and time.

D.S. Brar, former President of Ranbaxy states, "We are looking for a full tax

exemption for I 0 years, only on revenues from royalties and licensing of IP, provided

they are invested in R&D". Such kind of legislative or Government policies could affect

growth of R&D. This statement may boost R&D efforts of Indian companies who have

big share in the market, otherwise it hardly affect small companies.

113

4.3 Study Conducted by Piramal Health Care Limited

Piramal Health Care formerly known as Nicholas Piramal India Limited (NPIL) is

India's second largest Pharmaceutical Healthcare Company is a leader in the Cardio­

vascular segment. It has a strong presence in Antibiotics and Respiratory segments, Pain

management, Neuro-psychiatry and Anti-Diabetics segments. The company is also

making forays into Biotechnology in key therapeutic areas for which it has formed

several global alliances. For 2005-06, NPIL's recorded a turnover of Rs 14.1 billion and

profits after tax were Rs 1.7 billion.

An aggressive player in the pharma industry, NPIL came into existence in 1988

when it acquired Nicholas Laboratories from Sara Lee and in the last 15 years grown to

its leadership position through a series of well managed acquisitions, mergers and

alliances. Some of NPIL's major acquisitions include the Indian operations of Roche

Products Ltd., Boehringer Mannheim India Ltd., Hoechst Marrion Roussel Ltd,'s

Research Centre, Rhone Poulenc India Ltd., ICI India Ltd.'s Pharma Division and

Aventis' Reseach facilities.

PHL is the flagship company of the Rs. 2500 crore (US $ 500 million) Piramal

Enterprises (PEL), one of India's largest diversified business houses. The Group is

headed by Mr. Ajay Piramal, who is also the Chairman of NPIL, and among the most

respected names in Indian industry.

Mission

Making a difference to the Quality of Life by reducing the burden of disease.

Vision

To become the most admired pharmaceutical company in India with leadership in market

share, research and profits by:

Building distinctive sales and marketing capabilities

Evolving from licensing to global launch of own patented products

Inculcating a high perfonnance culture

Being the partner of choice

Always adhering to 'our values' based on our obligations as trustees of customers,

employees, shareholders and society

114

We shall pursue world-class standards m our People, Products, Processes,

Partnerships and Performance

Encouraging Innovation and Nurturing Intellectual Capital

4.3.1 Strategic Alliances

PHL has joint ventures and alliances with some of the finest global names in the

industry which include F. Hoffmann-La Roche Ltd., Switzerland; Allergan Inc., USA;

UK; Gilead Sciences, USA; Cheissi, Italy; and IV AX Corp; UK

4.3.1. (a) Manufacturing facilities

PHL has two dedicated and one multi purpose manufacturing plants.

PHL's

Hyderabad

site has

unique

features such

as continuous loop chlorination, multi-stage countercurrent liquid liquid extraction,

cryogenic reaction capabilities, temperature profile control in reactors and complete PLC

based operation.

PHL's manufacturing blocks can be configured to take up large scale commercial

manufacture of a number of Bulk APis

4.3.1 (b) Research and Development

PHL has witnessed quantum , .

increase in R&D investment over the last 5

years. A 20000 sq.ft. centralized R&D

facility 'Quest Institute of Life Sciences'

has been created at Mumbai. The CMG is actively

supported by the following R&D groups-

Process Research - focuses on process development,

custom chemical synthesis, analytical method

development & impurity profiling.

Pharma Research- focuses on developing new drug delivery systems.

115

4.3.2 UNDt:RSTANI>ING TilE CURRENT R&D MODEL

HEALTHCARE SOLUTIONS

PI RAMAL

HEALTHCARE ,,_ /

PHARMA SOLUTIONS

. . ./. . ' ' ~-- ~ ·- ~·-c- ______ , ""-~"""""""''- •• ,..-

I I CMG ~,._;:; .. _;.......;.:rl -~ ....

\1-PDS

MMBB (MARKETABLE MOLECULE & BUILDING BLOCKS):

These are essentially building components for APis or they are off patent molecules

which are in terms of trade sense; these would typically be after patent expiry.

PDS (PHARMACEUTICAL DEVELOPMENT SERVICES):

This includes Process Development Services for API and Formulations.

PMS (PHARMACEUTICAL MANUFACTURING SERVICES):

This includes commercial-scale Custom Manufacturing contracts for APis and

Fonnulations.

GCC (GLOBAL CRITICAL CARE):

This division deals with the sales of fonnulations across the globe.

CURRENT STATUS OF MMBB DIVISION

The Existing Products

The MMBB division is currently manufacturing the following API:

Active Pharmaceutical Ingredients

Diltiazem Hydrochloride

!16

Ketoconazole

Verapamil

Mebeverine Hydrochloride

Oxybuytynin

Trazodone

Misoprostol

Cloprostenol

Intermediates for

Diltiazem HCL

Ketoconazole

Verapamil HCL

Assets

The division utilizes two dedicated and one multi purpose manufacturing plants for the

production of API' s. They are:

Digwal: USFDA-approved API facility

Ennore: Intermediates facility

Grangemouth: High-potency APis

SNAPSHOT OF MMBB's POSITION

1 , Branded Fonnulations 45,0%,

2 CMGTotal 46}%

PDS 4,9% PMS 30.2%

MMBB 8.0%

3 Pathlabs 4.2%

4 Others 4.2%

TOTAL 100.0% FY 2007-2008 Annual Results

31-1\'laNJS 31-Mar-IJ7,c,

12,913,5 11,564,6

13,410,5 11,275,1

1,412.2 1,458,6 8,668A 6,648,4

2,293.6 (109cr) 2,266.1

1,194,0 695,0

1,210,6 1,184,6

728.5 719.3

Source.' ll1111'.nicholaspiramal. com (All Figures are in Rs. Min)

117

1L7%

18.90%

-3 20% 3040%

1.20%

71BO%

2.20%

16.20%

The annual results for the tinancial year 2007-2008 shows that MMBB division

has a low growth not only in terms of its top line but also its bottom line does not seem to

grow . Though the CMG business comprises of 50% of the company's revenues but

MMBB does not contribute major share in it. The division has proved its potential by

moving from an intermediate supplier to an end API manufacturer. The division has also

managed to be a global leader for few of the APis.

4.3.3 STUDY OF API MARKET DYNAMICS

The world demand for APis is forecast to increase at an average yearly rate of

8.2% over the next 5 years reaching a value of $46bn by 2010. With sales of $2bn in

2005, the Indian API manufacturing industry is the 3rd largest in the world and is

expected to make sales of $4.8bn by 2010, an average yearly growth rate of 19.3%.

India's API export growth rates are the highest in the world. India is the top country in

DMF submissions and has the largest number of US Food and Drug Administration

(FDA) approved plants on a worldwide scale.

(Source: Hindu Business line & IMS)

Amongst API manufacturers, the trend is to graduate from less regulated markets

to higher value, regulated markets in Europe and North America. Within the global API

market space, India along with China is expected to emerge as the key source for patent

API's. This is depicted as below:-

60

30

25

20

15

'"

lndia's share in global merchant API Market

Global Market

USD 31 bn

CAGR: 8.2% Global Market

USD46 bn

lndia,2 r.L. [. /GR:19% l lndia,4.S

I Othe<s, 29

t I

Other-s, 41.2

0+-----~~----~----~----~~--~----, 2005 6.5% 2010

118

Merchant API Projections- 2010

11 Generics

a Innovator

MARKET SIZE = US $ 46 bn

Demand for generic AP!s is expected to be faster (II % CAGR) than that for

innovator AP!s (6 % CAGR), by 2010. (Source: Chemical Pharmaceutical Generic

Association, CPA)

US Dl\IF Filings- An Indian View (Source: IMS)

To make MMBB a Rs. 1000 crore division keeping in mind the ''non- compete

with i1movators" strategy of CMG (Custom manufacturing group).

4.3.3 (a) CMG AND ITS "NON-CO:\IPETE WITH INNOVATORS" STRATEGY

The CMG desires to be the partner of choice for international phannacos and in

line with this objective, the group has critically evaluated the avenues within the drug life

119

cycle where it can add value for its customers NPlL will offer phannacos products and

services spanning across Custom Chemical Synthesis of kilo scale APis to bulk APis

extending further to phannaceutical finished dosage fonns.

PHL will not support generics companies in "first to file and early to market"

opportunities as these are based on challenging the innovator's IPR.

NPIL's strategy is to be the partner of choice for international pharmacos

NPIL part11er with lnnov:~tor eomp:~nles :~cross th-e fife cycle & ~Iter p:~tent -expiry

IV. MMBB division has limited product range compared to similar other companies in

this business.

Few products of significant value such as Amiodarone & Trazadone have been

introduced for the last 3 years.

Compared to the other divisions within phannaceutical solutions the growth rate

& profitability ofthe MMBB has been lower.

In last 2 years, MMBB has demonstrated successfully the reach & marketing

capabilities by cross selling products like Misoprostol & Cloprostenol.

The business has turned around since & has moved from an intennediate supplier to API

supplier.

4.3.3 (b) KEY CHALLENGES FOR MMBB BUSINESS

It takes 18- 24 months to secure sales to a customer in regulated market.

Gaining Market Share at the expense of others is possible only if you have a significant

cost advantage. Time to market should be minimal especially in less regulated markets.

120

COMPETITION

Competition from Indian manufacturers with similar cost structure. Technology

needs to be a key differentiator and (or) differentiated manufacturing process or

significant capacity leverage is critical.

IMPLICATIONS

'Less regulated' markets will remain important in the early phase of the product

& they will help benchmark cost competitiveness.

Key driver for competition will remain cost.

Need to leverage technology capabilities & differentiated manufacturing strategy

to gain competitive advantage in existing I new products.

4.3.3 (c) SWOT ANALYSIS OF THE MMBB DIVISION

I. STRENGTHS

Customer Relations

Strong Relationship spanning over 6 - 8 yrs with Global Generic players like

Teva, Sanofi, Sandoz in regulated markets- Thus PHL has not only been an intermediate

supplier but over the last 3 years has moved up the value chain to also be a finished API

supplier.

Strong Relationship with local generic players like Prati (Brazil), Group

California (Memphis) (Columbia), Kimia Pharma (Indonesia), Laproff (Columbia), EMS

(Brazil), Lab Fabra (Argentina), Northern Start (Russia), MPI Phama BV (Russia),

Protek (Russia) - PHL can thus escape European middlemen and directly supply to the

generic players and hence derive better realization for its products.

Marketing & Distribution

Extensive reach to end users in markets like Russia (4 end users), South America

(18 end users) especially Brazil, Mexico and Columbia- Thus PHL has assured channel

available to sell and don't have to rely on traders. Efficient sales and marketing- Thus

in-spite of PHL manufacturing only 9 AP!s, it is ranked amongst the top 3 global players

in 4 of these molecules. Strong Distribution/ Agent network across the globe covering 46

countries have made PHL global leader in 4 of its molecules.

121

Facilities

2 USFDA approved API facilities that can handle multiple reaction capabilities

like Acetylation, Halogenation, Aldol Condensation, Cyanation, Darzen's Condensation,

Friedel - Crafts reaction, Loop Chlorination, Sandmeyer reaction, Trans - esterification,

Catalytic Hydrogenation, Grignards reaction, Liquid Ammonia reactions, Optical

Resolution, Oxidation, Bio-catalysis, Fennentation, N-butyl Lithium, Chiral Synthesis.

State-of-the-art R&D facility at Goregoan (Piramal Life Sciences) and UK (Avecia

Research Centre) - This has ensured that PHL constantly works on improving process

yields, routes and costing so that it achieves its goal of becoming the global leader in the

AP!s it manufacturers.

Products

Handling high volume products like Diltiazem (200tons), Ketoconazole ( 80tons)

as well as niche products like Cloprostenol (3 kgs, ), Misoprostol ( 300kgs)

Manufacturing

Continuous innovation and improvement in processes and capacities over a long

period of time has ensured that PHL remains one of the most cost competitive

manufacturers - Thus PHL is able to drive away competition for a long time.

II. WEAKNESS

Products

Absence of a sustainable model to chum out new molecules has led to limited

product range compared to typical API manufacturers - Thus PHL is neither able to

leverage its relationships with key accounts nor is it able to exploit its reach to markets

like Russia and South America. [Not only that these markets are large consumers, also

it's not easy to enter these markets, for example Russia has strict registrations, South

American market does business on long credit period.

PHL's poor focus on the API business segment, and no significant efforts to build

a robust pipeline of new molecules. In the past products like Ipratropium Bromide and Co

Enzyme Q l 0 have been developed but not commercialized. In recent times with the

turnaround of this business 2 molecules viz Amiodarone and Trazadonc have been

commercialized.

122

Assets

Compared to other phannaccutical companies, PHL as yet, doesn't have a

manufacturing "asset" capability in China - This poses a threat because China is

becoming a low cost hub because of locally availability of chemicals and intennediates,

low cost of utilities and excellent infrastructure.

Insufficient asset availability - All the manufacturing blocks at Digwal are

currently either running full capacity or have been blocked for a possible future contract

from Innovator - Thus introduction of any new molecule will need additional investment

and/or PHL will need to manufacture at the cost of existing products or look free assets

that have yet to get commercial contracts from the CMG business For eg: To manufacture

Amioradarone, PHL needs to cut production of Ketoconazole.

Regulatory

PHL' s regulatory department had until few years given less priority to studying

new molecules that were to go off patent, and MMBB's low expertise in volume handling

led to PHL being slow in Regulatory filings like USDMF and ECOS compared to other

Indian players in the API industry like Cadila, Divis. Thus delaying its launch in

regulated markets. V erapamil is a classic example of this.

Ill. OPPORTUNITIES

Growing Market Size

API Industry globally valued at USD 46 billion by 20 I 0. (Source: KPMG)

Japan is going generic from the year 2009, and PHL's relation with Tanabe, Yoshando,

Essi puts PHL in a position to leverage the opportunity.

Reducing Competition

API manufacturing moving from Europe to low cost destination like India and

China - Thus PHL can gain market share against European suppliers. It can enter AP!s

where competition is mainly from Europe. Increasingly markets like Brazil, Mexico and

Columbia are moving from semi-regulated to regulated markets hence competition from

small and medium players will be limited.

123

THREATS

Competition

China is moving from servicing non-regulated market to also servicing regulated

market (Source: Dr. Reddys Laboratories presentation) - This will likely impact pricing

in these markets. Today the differential in pricing in ROW and US I EU is considerable

which over a period may comedown.

Costs

Intense competition in the US generic market, increase in cost of labour in India

and rising crude oil prices are leading to cost pressures on APis. The industry is also

witnessing depressed Active Pharmaceutical Ingredients (API) prices. These factors are

putting pressure on operating margins of major Indian API companies.

4.4 STUDY OF PHL/ D!VI'S LABORATORIES LTD.

PARAMETERS COMPARED

Competencies

/ Markets & Revenues

\ Product Range

-----""--------~----··--

124

"'\ Manufacturing

Capabilities

I

) Technological

Capabilities

4.5 PilL & DIVI'S COMPETENCIES

- Independent API manufacturer with specialty and multipurpose manufacturing

capacities (totally integrated manufacturing from basic raw material stage.

- No conflict business role with innovator/generic player

- No patent violation

- Cost competitiveness (cost efficient manufacturing

- Capability to conduct complex chemical reactions

- Reach to world markets significantly

PHL & Divi's have a strategy of respecting patent laws and have positioned

themselves as an IPR adherent by not tying up with any Para IV Challenger

MANUFACTURING CAPABILITIES (WITH RESPECT TO API ONLY)

~ocation

:ertifications

Hyderabad, Vishakapatnam Hyderabad, Grangemouth(UK)

Both plants are certified with Hyderabad Plant has follow

current good manufacturing certifications:-

practices (cGMP) guidelines, cGMP facility; USFDA

certified with (ISO) 9001 approved with no 483s -both in

(Quality Management 2002 and 2005

systems), ISOI4001 Approved by TGA, Australia,

(Environment Management ISO 900 I & ISO 1400 I certified

Systems), OHSAS 18001

(Occupational Health and Grangemouth Plant 1s USFDA

Safety Systems) and USFDA approved.

approved.

125

Other Certifications:­

WHO

MCA

European and Canadian Drug

Authorities approvals

TECHNOLOGY CAPABILITIES

Ill Tech Capabilities at Divis's Laboratories:

~~~tyl~TI!?!l, ~rie~~Tilli:~¢mffs ~B-~.?SJ12ii, Acylation, Halide Exchange, Alcoholysis,

rfal~gel}li!f9i1, Alkoxylation, Hoffmann Reaction, Alkylation, Hydroformylation,

Amidation, im~i}1\'f!5!J, Amination, Hydroxylation, Bromination, Isomerisation,

Carbomethylation, Mannich Reaction, Carboxylation, Mehylation with Dimethyl

Sufate, ~~jr~ihili$1~, Methylation with Methyl Halide, Chloromethylation, Nitration,

Chlorination , Organometallic Reaction, Condensation, mt<fa!!!~ll[~~l ~,)!!!Jii~~,

Peptide Synthesis, Cyclization, Phosgenation, Dealkylation, Phosphorylation,

Decarboxylation, Dehalogenation, Reduction (Various),

Dehydrogenation, Saponification, Diazotization, Tosylation, Diels - Alder Reaction,

l;,~i!i~m!@ltlafb11. Epoxidation, Vilsmeier Reaction, Esterification, Vinylation,

Ei\1!ar~4ii11. Handling Capability of Hazardous Chemicals:

1,3-Butadien gas, Nitromethane, Chromium trioxide, n-Hexyllithium, Diethyl

aluminium chloride (1.8 Min toluene),mmrm111!1i1!J, Dilsobutyl aluminium hydride (25

% in toluene), Oleum, Ethylene oxide gas, Potassium cyanide, Hydrazine hydrate,

Potassium metal, Lithium aluminium hydride (2.3 M in THF), Potassium tert.butoxide,

Lithium amide, Raney Nickel, Liquid Bromine Sodium amide, Lithium isopropoxide,

Sodium azide, Lithium tritert butoxy aluminium hydride (I M in THF), Sodium metal,

Lithium metal, Sodium cyanide, Lithium methoxide, Sodium tritert butoxide, Methyl

lithium-lithium bromide complex (1.5 Min diethyl ether), Sodium borohydride, Methyl

lithium-lithium iodide complex (1.5 Min diethyl ether),Triphosgene, Mercury oxide

Capabilities with PHL

PHL has the infrastructure and technical manpower to routinely carry out a

number of hazardous reactions. A sample of its reaction capabilities is as follows­

Acetylation, Halogem1tioii, Aldol Condensation, Cyanatioil, Darzen's Condensation,

Friedel - Cra!lS:;:eactioil, Loop Chlorination, Sandmeyer reaction, Trm1s ..:_-esterification,

(atalytic i:fyqrogetlatiQrL On~1ar{fs reactiOn, J:."iquirA:111moiiia rcactloi~. Optical

Resolution, PxL<J.atiQU, Bio-catalysis, Fermentation, N~_i,!t)'lL\ij!Iunl ~J!ir!l(S)'!1ihcsll

126

As a part of its strategy, PHL is constantly developing new processes and scaling them up

to commercial level. PHL is committed to investing in infrastructure required for specific

reactions I technologies involved in products and processes of its customers.

Note: Marked in green are capabilities common in PHL and Divis Laboratories Ltd.

PRODUCT RANGE

API

CARBIDOPA

DESLORTADINE

DEXTROMETHORPHAN HBr

GABAPENTIN

IOPAMIDOL

LEVETIRACET AM

LEVODOPA

LORATADINE

NAPROXEN

NAPROXEN SODIUM

NIACIN

PHENYLEPHRINE HCI

RISEDRONATE SODIUM

Sibutramine HCl Monohydrate

T AMSULOSIN HCl

TRlPOLIDINE HCl

YERAPAMIL

ZOLPIDEM TARTRATE

MEBEVERINE

OXYBUTYNIN

TRAZODONE

MISOPROSTOL

CLOPROSTINOL

AMIODARONE

Ibuprofen

Itraconazole

Note: Marked in green are products common to PHL & Divis Laboratories Ltd.

127

MARKETS & REVENUES (FOR THE YEAR ENDING 31/03/2007)

PHL (MMBB) 109 1% Key markets for MMBB :

(12 mths South America- 35-40%

EU - 25-28% (05-06 data by

sales team)

ending

Mar 2007)

Divi's Labs 181 35% The company derives 90% of

its business from exports, to a

large extent (73%) from US

(12 mths

ending

Mar2007) and Europe regions. The finn exports its products

to more

(in Rs. Mn- Source: www.myiris.com)

VII. CONCLUSION

than 25 countries including

France, Germany, Italy, South America, Spain,

Switzerland,

UK, US and Far East countries. (Data as of 2005-

06- Source: Initiating Coverage Report,

Karvy Stock Braking Limited)

Since PHL's & Divi's asset capabilities are similar, and assummg that the

molecules we aim to target are similar in number to Divi's, and also assuming that the

cost structure to PHL with respect to the short-listed molecules would be same as to

Divi's, we suggest to benchmark Divi's profitability as minimum aspiration.

From benchmarking PHL's utilization of its available manufacturing capabilities

vis-a-vis Divi's Laboratories, while keeping in mind the above assumptions, it can be

concluded that PHL is not maximizing the utilization of its available capabilities.

Keeping in mind the above assumptions, PHL is considering manufacturing new

molecules thereby taking advantage of the growing API market and India becoming the

hub of Phannaceutical outsourcing.

128

4.6 Stages of New Products Introduction

• Selection of • Preliminary • Detailed assessment • R&D probables from a research conducted of finalized molecules. • Process given laundry list of on the shortlist & • Analysis of assets Development molecules. further refinement of and production • Production • Probabfeseliminated the fist carried out on capacities. · • Commercialization on the basis of: the basis of: • Strategy for ·Capability -Value production of ·Chemistry -Volume .molecules.

- T •. Category • Reje~ted laundry List ~ Meeting with R&D

No. of molecules= 37

4.6 (A) METHODOLOGY

The MMBB division has divided the entire new product development process into 4

stages as under:

STAGE 1

A list of about 87 molecules is selected. The molecules and their varied chemistries

required for their manufacture is studied.

On the basis of the capability of PHC and the chemistry required for the manufacture of

the molecules, the first shortlist of 37 molecules is obtained.

STAGE 2

The shortlist obtained after preliminary research is subjected to further analysis. The

further refinement of this list is carried out on the basis of the therapeutic category of the

molecules and the value and volume measures of the molecules. In this stage, the

different manufacturers of the molecules are analyzed and some of them are identified for

benchmarking. After due analysis, the final shortlist of 24 molecules is obtained.

129

STAG£3

The final shortlist contains molecules which are probable volume builders and

blockbusters. The year wise revenue projections of these molecules are calculated and

appropriate strategies for their production is proposed after thorough analysis.

STAG£4

Further R & D, process development, production and commercialization of these

molecules is carried out by the MMBB division.

4.6 (B) MOLECULES REJECTED & REASONS

In the course of short-listing the molecules, many molecules are rejected. The reasons for

the same are many. In the 1 '' stage, the molecules are rejected because of the special

capabilities required in their handling that are not possessed by PHL. Also some of the

molecules are unstable and required hazardous chemistry for their handling. As we

progressed to the next stage of short listing, the molecules are eliminated on grounds of

their low market prices (our bottom limit being US$ 40/Kg) as well as their low volumes.

Many molecules are also transferred to a wish list, primarily as their patent expiry date is

found to be far away and that it was too early to determine how the molecule would

behave in the market at that point in time. Hence these molecules could be considered at

a later date but not rejected wholly. Some of the molecules eliminated from the final

shortlist include, Alendronate Sodium, Cabergoline etc. Similarly, some of the molecules

that are transferred to the wish list include Metaxalone, Donepezil, Hydralazine etc.

4.6 (C) MOLECULES ACCEPTED & REASONS

The molecules are short listed after a rigorous study. As explained above, the

molecules are short listed in 2 stages from the laundry list of molecules. The molecules in

the preliminary list arc selected on the basis of their therapeutic category and their

relatively simpler chemistries as against other molecules. The molecules in the final

shortlist arc selected after duly analyzing their market prices, values obtained and

volumes obtained in the given time frame. Some of the accepted molecules include the

Prostaglindins, Sartans basket, Carvedilol, Clopidogrel, Venlafaxine, Amlodipinc,

Natcginide, lsosorbide Mononitrate etc.

130

4.6 (D) BRIEF DESCRIPTION & LAUNCH STRATEGY FOR NEW MOLECULES

CLOPIDOGREL

Plavix (clopidogrel bisulfate) is indicated for the reduction of atherothrombotic events as

follows:

Recent MI, Recent Stroke or Established Peripheral Arterial Disease

Acute Coronary Syndrome

Clopidogrel Blood

Inhibitor

Clotting Sanofi

Aventis

Plavix Aug 2009 USA:

COMPETITION

In India

There are 70

manufacturers in India, of

which 10 are DMF

These holders.

holders

Pharrnalabs,

are

DMF

Arch

Cadila

/

70 ~/

60

50

40

30

20

/'-------------- --- , _____ _

10 '

o/-~~~--=~r-~=--,·

India China Rest

Healthcare, Cipla, Dr. Reddy's laboratories, Hetero Drugs, Ind-Swift

Labs, !pea, Lee Pharrna, MSN.

450/kg

ROW: US$

170/kg

a ClOPIDOGREL No. of Non DMFHolders

• ClOPJDOGREL No. of DMF Holders

The non-DMF holders include companies like Aarti, Amoli Organics, Aurobindo

Plwrma, Bal Pharma, Calyx, Dishman, Glenmark Generics, Glowchem, Hermes,

Hiran Organochem, Hy-Gro, Jubilant Organosys, Kopran, Kopalle Plzarmchem,

Afatrix, Neo, Neulam/ etc.

In China

There are 15 manufacturers in China. None of them are DMF holders.

:'IL\,JOR CUSTO~IERS

The major customers of Clopidogrel include the following:

Sanofi Aventis, Apotex and Dr. Reddy's Laboratories.

131

ASSUMPTIONS

Current Market Price

ROW 40% dip 20% dip 15% dip Stable

The prices for the years 2006 to 2008 have been taken as stable.

Stable

Also ROW is a realistic benchmark for the lowest possible price that a molecule can

realize.

Volume

From the year of off- patent i.e. 2009, the volume rise in the USIEU market is 7% while

in the ROW is 4%.

The volumes for the years 2006 to 2008 have been increased at a constant CAGR.

PHL Volume Market Share

US/EU 5% 10% 15% 20%

ROW 10% 20% 30% 30% 30%

PHL's MARKET SHARE IN REVENUE & VOLUME VIS-A-VIS GLOBAL REVENUE &

VOLUME

PHL share- ROW 0 9.99 20.79 32.43 33.73 35.07

Global Volume 495.04 526.69 560.44 596.43 634.81 675.74

j '" .. : ;j:i"{: .· ' !n>c:~JJI).' ,y,,.,l.H \'ti J: )•. JJ,I• ~ h_- ~~f ( ,-_ -";#. r·\·;{W" Jf.<-)o:~~tl:~.• ;'.'-:I; '- • - .r ~% ~ -:!. ~,.'

•' ....

PilL share- US/EU 0 0 19.62 41.99 67.39 96.15

PHL share- ROW 0 3.87 6.45 8.55 8.89 9.24

Global Revenue 538.60 486.70 466.01 497.73 531.64 567.88

132

4.6 (E) STRATEGY

This API targets a very specific category- anti-thrombotic (blood clotting inhibitor).

Clopidogrel shows all the indications of becoming a volume builder or a probable

blockbuster. It is the leading molecule in its therapeutic category with a constant growth

rate of 8% YOY (Source: IMS 360, 2007 report).

A multi-stage intennediate process precedes the final API. An N-1 strategy would be

most cost-effective for the company.

The company Mediking Pharmaceuticals in China could be approached for procuring

the intermediates for Clopidogrel.

2. Venlafaxine

Effexor (venlafaxine hydrochloride) is indicated for the treatment of major depressive

disorder. A major depressive episode implies a prominent and relatively persistent

depressed or dysphoric mood that usually interferes with daily functioning (nearly every

day for at least 2 weeks).

Venlafaxine Anti-Depressant Wyeth

Pharms Inc.

COMPETITION

In India

There are 21 manufacturers in

India, of which 8 are DMF

holders

IS·

10•

5 -

a •

Effexor Dec

2007

-------~ D - [.]-

The DMF holders are India Chma Rest

Alembic, Cadi Ia

USA: US$

450/kg

ROW: US$

150/kg

• VENLAFAXINE No of Non

DMFHolders

•VENLAFAXINENo. of DMF Holders

Healthcare, Cadila Phanna, Dr. Reddy's Laboratories, Ind-Swift Labs, Lupin,

Matrix, Torrent.

133

The non-DMF holders include companies like 3A Chemie, Aarti, Amoli

Organics, Dishman, Hermes, Hetero, Lee Phanna, Ranbaxy Laboratories, Sun

Phanna, Ultratech.

In China

There are 3 manufacturers in China. 1 of them is a DMF holder- Chongqing Carelife

Pharmaceutical Co. Ltd

MAJOR CUSTOMERS

The major customers of Venlafaxine include the following:

Caraco, Dr. Reddy's Laboratories, Mylan, Pliva Hrvatska Doo, Osmotica, Sandoz, Teva,

Wyeth Pharms, Zydus Pharms

ASSUMPTIONS

Current Market Price

ROW 40% dip 20% dip Stable Stable

The prices for the years 2006 to 2007 have been taken as stable. The molecule went off

patent in December 2007 and the prices have reduced from 2008 to 2010 in the US/EU

markets and until2011 for the ROW markets.

Also ROW is a realistic benchmark for the lowest possible price that a molecule can

realize.

Volume

The volumes for the years 2006 to 2008 have increased at the current CAGR.

The volume rise from 2009 in the US/EU market is 7% while in the ROW is 4%.

PHL Volume Market Share

·' ~;;·, •c{i[il!' H'~' ~~I) II ~ f'\:.,·-t!)l~ q\\ -~-,

j['\",''~.{(t;; I~'\~ -;"~-fJ f'' :_ ... ~~_u ~~j

' ~ u ~-

US/EU 0 0 5% 10% 15% 20%

ROW 10% 20% 30% 30% 30% 30%

134

PHL's MARKET SIIARE IN REVENUE & VOLUME VIS-A-VIS GLOBAL REVENUE &

VOLUME

PHL share-ROW 5.05 10.5 I I 6.39 17.04 I 7. 73 I 8.44

Global Volume 416.33 443.96 473.46 504.96 538.60 574.53

PHL share- US/EU 0

PHL share- ROW 1.38 2.44 3.81 3.96 4.12 4.29

Global Revenue 406.34 432.08 461.94 493.87 528.03 564.56

STRATEGY

Venlafaxine is the market leader in the anti-depressant market as of 2006 with sales of

over US$ 3.8 billion

This molecule is preceded by a multi stage intermediate process before obtaining the final

API, thus making it difficult to produce the molecule in-house from the initial stages.

There are many companies producing the intermediates of this product, thus obtaining the

intermediate would be a feasible option. The N-1 Strategy is thus recommended.

3. NATEGLINIDE

Nateglinide is indicated as monotherapy to lower blood glucose in patients with Type 2

diabetes (non-insulin dependent diabetes mellitus, NIDDM) whose hyperglycemia carmot

be adequately controlled by diet and physical exercise and who have not been chronically

treated with other anti -diabetic agents.

Anti-Diabetic Novaritis Starlix

135

Aug 2009 US$450/kg

US$400/kg

INTERMEDIATES

N-Hydroxy Succinimide

D-Phenyl Alanine

4-Iso Propyl Benzoic Acid

Trans Para Isopropyl Cyclohexane Carboxylic Acid

P-Methoxy Phenyl Acetone

COMPETITION

India

Cipla Ltd,Dr Reddy's Laboratories

Ltd, Ind-Swift Laboratories Ltd,

Biocon India Ltd, Cadila

Pharmaceuticals Limited, Matrix

Laboratories Ltd

China

Cangzhou Green Chemical

India China

Competitors

Other Markets

Ill Non DMF Holders

II DMF Holders

Industry Co Ltd, Changzhou Y abang Pharmaceutical Research Institute Co Ltd,

Hangzhou Dakang Chemicals Co Ltd, Jiangyin Yongda Chemical Co Ltd, Wenling

Shitang Xiangyang Chemical Factory, Zhejiang Taizhou Hisoar Pharm Chem Co Ltd

ASSUMPTIONS

The molecule is an on patent product so it is assumed that Pirarnal Healthcare has to be

ready with the DMF fillings before 2009 when the patent for this product is expiring.

The molecule will start generating revenues for Piramal Healthcare from 2009 since the

company is ready with the DMF.

The following assumptions with respect to the volume and price of the molecule have

been made to understand the revenues that would be generated from this molecule.

Current Market Price

~,·-r\ 1t :!111,}? '. . . · ..

1.\\\ Jl!J(Il tf)·.~}I1~• d\~ "ihif)} . "' . t:·\'.''•{1)'; {;~•, J~lf~-;: < ' ,,- '

US/EU 30% dip 15% dip Stable Stable Stable Stable

ROW 40%dip 20%dip 15% dip Stable Stable Stable

136

The prices for the years 2006 to 2008 have been taken as stable. Also ROW is a realistic

benchmark for the lowest possible price that a molecule can realize.

Volume

From the year of off-patent i.e. 2009, the volume rise in the US/EU market is 7% while in

the ROW is 4%. The volumes for the years 2006 to 2008 have been increased at a

constant CAGR.

PHL Volume Market Share

US/EU 10% 15% Stable Stable

ROW 10% 20% 30% Stable Stable Stable

PHL's MARKET SHARE IN REVENUE & VOLUME VIS-A-VIS GLOBAL REVENUE &

VOLUME

PHL share- US/EU 7.50 8.02 11.44 12.24

PHLshare-ROW 3.16 6.57 10.26 10.67 11.09 11.51

Global Volume 75.25 79.57 84.15 89.02 94.18 99.67

PHL share- ROW 2.88 4.80 6.35 6.61 6.87 7.15

Global Revenue 85 75 76 80 85 91

STRATEGY

The patent for Nateglinide is expiring in 2009 and since the ROW market is only

0.25% for the molecule US/EU markets should be the focus as soon as we manufacture.

As per little research done on this molecule there is no hazardous chemistry involved and

the product by itself is also not hazardous.

137

The total tonnage for the molecule is also 18 tonnes in 2012 and we do have existing

capacity of 800 tons at the Digwal plant.

Also there not many competitors for this particular molecule so PHL does have an

advantage there.

The existing competitors import intennediates from US and China so it is feasible

to follow the N-1 strategy. Also Piramal Healthcare would have to tie with those generic

manufactures who are first to launch the formulations.

5. SERTRALINE

Sertraline Anti-Depressant Pfizer

COMPETITION

DMF Holders (India)

Aurobindo Pharma Ltd, Cadila

Healthcare Ltd, Cipla Ltd, Dr

Reddy's Laboratories Ltd, Lupin Ltd, 20

Matrix Laboratories Ltd, Ranbaxy

Laboratories Ltd, Sun Pham1aceutical

Industries Ltd,

Pharmaceuticals Ltd

Wanbury Ltd

DMF Holders (China)

None

ADDITION,\L INFOR.\IATION

TotTen!

15

10

5 •

0

Zolosoft June

2006

Competitors

India China Other Markets

USA: US$

140/kg

ROW: US$

130/kg

!B Non DMF Holders

t1 DMF Holders

Sertraline is primarily used to treat clinical depression in adult outpatients as well

as obsessive-compulsive, panic and social anxiety disorders in both adults and children.

138

In 2007 it was the most prescribed antidepressant on the U.S. retail market with

29,652,000 prescriptions ( Source:'Top Generic Drugs by units in 2007', Verispan

VONA, Full year 2007 )

ASSUMPTIONS

The following assumptions with respect to the volume and price of the molecule

have been made to understand the revenues that would be generated from this molecule.

Current Market Price

ROW 15 % Stable Stable Stable

dip

The prices for the years 2008 have been calculated by taking a 20 % dip on prices in both

US/EU &ROW.

Volume

For VSIEV the volume growth rates have been assumed as 15% for 2009 over previous

year and thereafter kept uniform growth of7% ti112014

For ROW markets, the volume growth rate has been assumed to be 20% till2014 as this

molecule is a potential volume builder

PHL Volume Market Share

15%

ROW 10% 20% 30% Stable Stable

PHL's MARKET SHARE IN REVENUE & VOLUME VIS-A-VIS GLOBAL REVENUE &

VOLUME

'!_\)itt ';' • y i ;:'\ ,,,'711'1''' 1}\·:~:fiHr· ir\~&itl_~f, IS.l''Til~ •':'".' 441f,;; H\~ ~~Ot~ ,, , , A.Y . ' "!': ~ .. ,/ .... ,

PHL share- VSIEV - - 24.99 40.11 57.22 61.23

PilL share- ROW 9.89 23.75 42.74 51.29 61.55 73.86

Global Volume 317.23 352.SO 392.40 438.39 491.30 552.37

139

PHL share- ROW 3.32 14.36 17.23 20.68 24.81

Global Revenue 132.78 146.62 162.35 180.26 200.74 224.22

STRATEGY

Although there are a large number of players in the market today, but this a

growing molecule (a volume builder) and consolidation is bound in the industry in future

N-1 strategy suggested with Zhejiang Neo Dankong, the largest manufacturer of Sertaline

in China. PHL should ramp up, build volumes and go backward to in-house

manufacturing in due course oftime

PHL's MARKET SHARE IN REVENUE & VOLUME VIS-A-VIS GLOBAL REVENUE &

VOLUME

PHL share- US/EU - 10.47 22.40 35.95

PHL share- ROW 5.39 11.22 23.34 36.40 37.80

Global Volume 290.74 307.85 326.04 345.36 365.89

3.14 6.72 10.78

PHL share- ROW 1.35 2.25 3.98 6.21 6.46

Global Revenue 100.16 88.89 90.70 96.43 102.52

4.7 The Introduction of Pharmaceutical Product Patents in India:

"Heartless Exploitation of the Poor and Suffering"?- A Study by Yale

University, USA

TRIPs, the intellectual property component of the Uruguay round GATT Treaty,

gave rise to an acrimonious debate between the developed countries and less developed

countries (LDCs). On one side, business interests in the developed world claimed large

losses from the imitation and use of their innovations in LDCs. They also asserted that

140

establishing strong intellectual property rights would actually benefit the developing

countries by encouraging foreign investment, the transfer of technology and greater

domestic research and development (R&D). On the other side, LDC governments

adamantly opposed fhis view, worrying about the higher prices that stronger intellectual

property rights would entail and about fhe harm that their introduction might cause to

infant high tech industries. No country was more actively involved in opposing this

component of the GATT agreement fhan India and no part of TRIPs was, and continues

to be, more sensitive than the proposal to require product patents for pharmaceutical

innovations. The national sentiment on fhis issue is well captured in an often quoted

statement made by Indira Gandhi at the World Healfh Assembly in 1982: "The idea of a

better ordered world is one in which medical discoveries will be free of patents and there

will be no profiteering from life and death."

What is striking about the original TRIPs debate and fhe continuing discussions

about pharmaceutical product patents is fhe divergence between fhe strength of the claims

made by both sides and the weakness of fhe empirical foundations for fhose claims. Now

that the treaty has been signed and mosf of fhe developing world is' committed to

introducing pharmaceutical product patents by the year 2004, not only do we not know

how much this may effect fheir welfare, we do not even know the direction of fhe effect.

This ignorance has political implications. India, for example, agreed to this aspect of fhe

treaty much against her will, believing it to be harmful to her interests. As a result, the

implementing legislation is currently on the shelf, unable to get through parliament. If it

could be shown, empirically, fhat product patents, in fact, conveyed some benefits to fhe

country, it would increase the local political will both to pass legislation and to enforce

patentee rights with greater enthusiasm. If, on the other hand, it could be shown that the

net effect of this part of World Trade Organization (WTO) membership will be, in fact,

very costly to the developing countries, it would put them in a stronger position from

which to argue that they should receive concessions on other fronts in future international

negotiations.

Apart from the immediate interest in the effects of this particular policy change,

the sheer size of the change, together with the fact that it was, essentially, imposed from

without, makes it a rare opportunity to examine the economic effects of granting patent

141

rights. In the aftermath of the signing of the GATT treaty, we are in a situation where a

large part of the world is moving from no protection to full-Hedged twenty year

protection of intellectual property rights in the one area where, it is thought, patents really

matter: pharmaceuticals. Further, unlike the historical introduction of pharmaceutical

product patents in much of the developed world the group of countries which will be

newly granting rights in product innovations have distinctly different demands for drugs

than those which currently grant such rights. Thus, there is some hope for detecting

incentive effects in the pattern of R&D spending.

The focus is on various ways in which the introduction of product patents for

pharmaceuticals may, in theory, benefit or hurt the country. In 1970, India put into place

a series of policies aimed at moving the country towards self-sufficiency in medicines. At

this time, the national sector was very small, estimated at less than 25% of the domestic

pharmaceutical market (Redwood, 1994). Of the top ten firms by retail sales, only two

were Indian firms and the rest were subsidiaries of multinationals. Much of the country's

pharmaceutical consumption was met by imports.

An important part of the policy package was the passage of the Patents Act 1970

(effective April, 1972). This legislation greatly weakened intellectual property protection

in India, particularly for pharmaceutical innovations. Pharmaceutical product

innovations, as well as those for food and agrochemicals, became unpatentable, allowing

innovations patented elsewhere to be freely copied and marketed in India. The statutory

term was shortened to 5 to 7 years on pharmaceutical process patents and automatic

licensing was put in place. As a result, the number of patents granted per year fell by

three-quarters over the following decade, from 3,923 in 1970-71 (of which 629 were to

Indian applicants, 3,294 to foreign applicants) down to 1,019 in 1980-81 (349 Indian, 670

foreign) (OPPI, 1996a). Although all inventors were affected by the weakened patent

regime, it is clear that foreigners, in particular, no longer found taking out a patent in

India worthwhile. Other aspects of the policy package set up to encourage the domestic

production of phannaceuticals included restrictions on the import of finished

fonnulations, high tariff rates, ratio requirements (where imports of bulk drugs had to be

matched by purchases from domestic sources at a fixed ratio) and equity ceilings on

foreign participation. Further, the strict price control regulation which was introduced

142

with the 1970 Drugs Price Control Order, while making the production of

Phannaceuticals less protitable for all !inns selling in the Indian market, made it

relatively less interesting for foreign firms with market options elsewhere. Thus even the

price control regime probably contributed to the shift towards a greater share of

production being met by Indian firms. Supported by this regulatory environment, by

1991, Indian finns accounted for 70% of the bulk drugs and 80% of formulations

produced in the country (Hamied, 1993). Of the top ten firms by 1996 phannaceutical

sales, six are now Indian firms rather than the subsidiaries of foreign multinationals

Domestic firms now produce about 350 of the 500 bulk drugs consumed in the country

(Government of India, 1994a). Employment in the pharmaceutical sector was estimated

to have reached almost half a million by 1995 (OPPI, J996b).

4.7 .1 The Economic Effects of the Introduction of Product Patents: Theory

There is a well-known tradeoff implicit in using a patent system to encourage

innovation. On the one hand are the static costs associated with monopoly pricing and, on

the other, the dynamic gains associated with innovation. We first briefly review briefly

this tradeoff in the standard single country setting and then consider the new issues,

which arise in a multi -country world.

In order to develop a demand model in India for a newly marketed drug we

assume that in the absence of patent protection innovations are freely available then,

without protection, price is equal to marginal cost, MC, and output is Qc. When the

inventor is allowed to obtain a patent and prices the drug to maximize his profits from the

Indian market, the price is Pm and output falls to Qm. The fonnation of triangle 'D'

would represent the welfare loss to Indian consumers associated with introducing product

patents. In addition to this deadweight loss are the costs of administering the patent

system and enforcing patentee rights through the courts when there are infringement

disputes. There are several possible sources of dynamic gains to be had from granting

patent protection. The inventor's profit, 'P', is the most obvious source of dynamic gains.

Without protection, inventors do not appropriate the benefits of new drug innovations and

so have a sub-optimal incentive to invest in the research and development to discover,

143

test, and bring them to market. Because patents allow inventors to appropriate more of

the consumer surplus from their innovations, granting patents may increase welfare by

stimulating additional R&D investment.

A second source of potential dynamic gains comes from the disclosure

requirement today common to all patent laws: specifications must be written to enable

any person "skilled in the art" to make use of the innovation. As patentees reveal their

innovations in their patent applications, infonnation about new technologies becomes

more quickly available to others as an input into their own R&D. Finally, the availability

of patents may increase the efficiency of the production of drugs and the efficiency of the

research to discover and develop new drugs by facilitating contracting between firms.

The innovating finn is able to reveal its innovation without losing control and hence may

be able to subcontract parts of the development work at lower cost. Similarly, the finn

may be more willing to license the patented innovation to manufacturing finns for

production. Arora (1996) points to the role that patents play in providing a means to

contract for the transfer of the 'know-how' associated with innovations, a component of

knowledge which may be particularly important to finns in developing·countries. When

considering the welfare of a single country, which exists in a multi-country world, new

considerations arise.

Static Effects

In a single country world, the identity of inventors is not important. The transfer

of benefits from the hands of consumers, in the fonn of consumer surplus, into the hands

of inventors, in the form of profits (the square P) arising from the price increase may

have distributional implications, but the effect of the transfer can be offset by domestic

policies. It is not a net cost to the country. In a multi-country world, however, the static

costs to one country of introducing patent protection depend not only on the size of the

deadweight loss 'D' but on who is doing the inventing. If, for example, the newly

available patent rights for phannaceuticals in India are assigned entirely to inventors

elsewhere, then the loss of consumer surplus 'P' is a net cost to India. All of the profits

accrue to foreign nationals in the fonn of royalties, if production remains in India but

under license, or as export profits if the patented drugs are sourced from elsewhere and

144

imported to serve the Indian market. If the latter occurs, and local production is replaced

by imports, the cost associated with the introduction of product patents is exacerbated by

a loss of employment, a negative shift in the balance payments, and a loss of

selfsufficiency.

Helpman, 1994, gives a general equilibrium model of increasing patent strength

which incorporates terms of trade effects.) Of course, some of the newly granted patents

will be owned by Indians. For these, the protits remain in the country and the situation

resembles again the one-country case described above. It is important to realize, in

particular when trying to understand the strength of multinational corporations' (MNCs')

lobbying efforts during the TRIPs negotiations, that in a multi -country world there are

two relevant demand curves. That for India (or the group of LDCs) and the other for the

patent protected world (see Fgure A; dashed line marked Dw). In the 'world', the

patentee receives, each period, profits as indicated by the large dashed box--until the

patent expires and there is generic entry to bid down the price. A crucial feature of

India's lack of protection for pharmaceutical products is that it has enabled Indian firms

to develop commercial production capabilities for on-patent drugs before patent expiry

and move rapidly into the world market with them on the day the patents have lapsed.

This means that the introduction of patent protection in India will confer an additional

benefit on patent owners, over and above any profits obtained from sales in the Indian

market: it will delay the erosion of the profits derived from world sales of patented drugs

which comes about with generic competition. Is this important? It has been estimated that

just before patent expiry Glaxo-Wellcome was earning a profit of around 7 million

dollars per day from sales of Zantac (The Economist, April 26, 1997).

The flipside of this gain to patentees is that introducing product patents imposes

an additional cost on India, this time to Indian finns rather than consumers, by lowering

the profits earned by Indian finns as a result of their first-mover advantage. (It also

imposes a cost on 'world' consumers in higher prices, but they are not the focus of our

analysis here.)

Finally, in a multi-country world one must ask where R&D will take place. The

improvements in efficiency, which may be obtained through licensing when patents arc

available, may go hand in hand with a shift from domestic, imitative, R&D to a strategy

145

of purchasing technology from elsewhere, if these two strategies are substitutes. If, on the

other hand, technologies purchased from others complement domestic R&D efforts then

this aspect of the availability of patents may encourage greater domestic research efforts.

In a multi-country world firms also have many options in deciding where to locate R&D

facilities and obtaining this type of direct investment can be beneficial: local firms have

been shown to receive positive spillovers from the R&D performed by neighboring firms

as stipulated by Jaffe, Trajtenberg and Henderson.

The position that a country takes towards intellectual property may influence

whether it is viewed as a favorable location for such investment. (The evidence is mixed;

Maskus, 1996.) There may be real economic reasons why intellectual property laws

matter to location decisions. Beyond these, a country's stance on intellectual property

may be given further importance by being treated as a signal of its business climate more

generally.

Dynamic Effects

It is seen that the static costs to a country that is introducing patent protection in a

multicountry world may be higher than the standard one-country model would suggest. It

has been argued that the offsetting dynamic gains to additional patent rights may also be

minimal in a world where patents are already available to protect much of the global

market. With profits coming from other patent protected markets, those created by the

newly available rights are only incremental, may be small, and, with diminishing returns

to R&D, may stimulate negligible amounts of additional innovation. (Chin and

Grossman, 1990; and Deardorff, 1992) This suggests that the group of countries who are

introducing product patents as a result of WTO membership may face higher consumer

drug prices and a loss of industry profit and employment, for little gain in new

phannaceuticals. There are grounds, however, for thinking that this paints too gloomy a

picture. It may be the case that the incremental retums created by monopoly profits in

these LDCs are, currently, too small to stimulate much new discovery research. But

existing drug innovations are only useful if they are developed and introduced.

Innovations are not, in fact, 'freely available'. The process of adapting phannaceuticals

products to local conditions, obtaining marketing approval and developing the market

146

must be done in every country individually and it is a costly affair. While the profits

associated with India's introduction of patent protection may have little effect on world

drug discovery they may have a large effect on the willingness of foreign or domestic

firms to invest in marketing in India drugs which would, in any event, have been

discovered. As discussed below, the issues here are directly akin to those surrounding

orphan drugs. On the other hand, it is also possible that an inventor with the ability to

monopolize the market may, for reasons associated with the global market, chose to delay

introduction longer than the time that domestic firms would otherwise have been able to

launch their own imitative products. Thus it is not clear whether introducing product

patents will speed up or slow the availability of drugs to Indian consumers. Most

important, perhaps, in determining whether there will be significant dynamic benefits to

be gained from the new patent rights is the fact that demand patterns for pharmaceuticals

differ. Although the new rights may contribute very incrementally to the overall returns

to R&D, the additional profits may represent a sizable addition to the returns to doing

certain types of R&D. Just as patent protection in India might make it profitable to obtain

marketing approval in India for a new drug, 'it may also add significantly to the incentives

to discover a cure for leprosy. Long ago Vernon (1957) observed "that inventors in the

industrialized areas of the world may need some special incentive to concentrate their

talents on products of special utility to underdeveloped areas." (Quoted in Seibeck, et. al.,

1982). The benefit to the 'South' of introducing patent protection when demands differ is

explored formally in Diwan and Rodrik (1991)

Evidence: Static Price Effects

To estimate the size of the deadweight loss that will be associated with the

introduction of product patents in India one needs to know two things. First the extent to

which prices will be higher for new on-patent drugs as a result of patent protection and

second, the consumer surplus lost as the result of given price increases.

Pharmaceutical Prices

Consider first the likely increase in pnces. How much the granting of legal

monopoly rights to an inventor enhances his ability to raise prices above marginal cost

depends, firstly, the extent to which it is possible to extract rents without patent

protection. In India, this seems to be small for most drugs. The phannaccutical market in

147

India currently appears to be competitive. There are a multitude of manufacturers: in

addition to 250 large pharmaceutical finns and about 9,000 registered small-scale units,

the Indian Drug Manufacturers' Association (IDMA) estimates that there another 7,000

unregistered small-scale units producing drugs (Clippings, 12/93). Seven years after its

introduction in India, there were 48 firms offering the important on-patent drug

Ciprofloxacin for sale in the 1996 Pharmaceuticals Guide. The U.K. multinational Glaxo

was faced with several local competitors from the first day that its subsidiary marketed its

proprietary drug Ranitadine (Zantac) in India. Competition between MNCs also may be

growing. One executive of an MNC subsidiary suggested in an interview that the

gentleman's agreement which has, over the past decades, kept MNCs from selling other

MN C's on-patent drugs in India is now beginning to break down. That said, drugs are

sold in India under brand names and early entrants with strong brands seem to have a

persistent advantage in the market. Ghemawat and Kothavala (1996) report that Ranbaxy,

one of the largest Indian pharmaceutical firms, is consistently able to charge a 5 to 10%

price premium (on uncontrolled drugs, see below). This is partly a reflection of real

quality differences in a situation where quality control is primarily assured by a firm's

interest in its reputation. It is also a reflection of doctors' strong tendency to prescribe by

brand rather than more difficult to remember generic names (interviews).

The third column of Table 2 shows the 1995 Indian prices of the four drugs with

the largest sales in India among those which were on-patent in Europe in 1995. The

following columns indicate, for each drug, the ratio of prices in Pakistan, the U.K. and

the U.S. for the same dosage form relative to the price in India. Although the ratio of

Indian prices to those elsewhere differs substantially across drugs, and this is a small non­

random sample of drugs, it suggests that prices in India for drugs which are on-patent

elsewhere are currently substantially lower than in the countries granting protection.

Would they have been higher if India had had in place the type of protection it

now is facing? This depends on what the patentees would like to do and what they would

be allowed to do. A number of factors might contribute to a high price elasticity of

demand for a new patented drug in India and thus a monopoly price which is not

substantially higher than the competitive price. First, incomes are low and, with less than

4% of the population covered by medical insurance, drug expenditures are mainly paid

148

directly by consumers (Redwood, 1994). As a result, consumers are likely to be more

price sensitive than they are in the developed countries and quicker to switch to less

effective but cheaper alternative therapies when they exist or to stop making drug

purchases altogether. Currently many diseases and conditions do have multiple

alternative drug therapies which are off-patent and competitively priced. In fact, as of the

end of I 996, only eight drugs on the World Health Organization's 7th Model List of

Essential Drugs were still under patent protection in Europe. Of these, five are designated

as 'complementary' rather than 'essential' (Redwood, 1994). So the option to switch to a

lower-priced drug often seems to be available. In addition, it was found during the

research that in context of sale and distribution of pharmaceuticals it is also relatively

easy for consumers to switch between drugs in India. Chemists quite freely substitute

alternative, usually lower priced, medicines for those prescribed, and will sell

prescription-only pharmaceuticals without scripts. The results of this research in terms of

trial buying Zantac in Khan Market fully support this view.) Danzon and Kim (1995)

provide examples of the sensitivity of cross-country pharmaceutical price comparisons to

sample selection. In comparison, in 1987, about 75 percent of Americans had outpatient

prescription drug benefits (OTA, 1993).

However, while all of the above considerations suggest that Indian consumers will

be very sensitive to high prices on patented drugs, there are reasons not to take it for

granted. Income per capita has been growing at about 5 percent per year during the past

few years and the opening of medical insurance provision to private competition is a

refonn which is being discussed by government (JMF, 1997). One also cmmot assume

that alternative therapies will always be available to provide competition for patented

drugs. A considerable research has been undeitaken to detennine the percentage of the

audited Indian pharmaceutical market going to drugs which are on-patent in the U.K. in

various therapeutic areas, based on data from 1992. For example, 84% of the drugs sold

to treat antipeptic ulcers contain substances on-patent in Europe. While there may be

substitutes, the dominance of the patented drugs in some categories suggests that they are

not very close substitutes and hence would not contribute much to holding down prices.

A look at history also does not give one much confidence that low incomes will put an

149

effective lid on prices. In 1961, at a time when India had strong intellectual property

laws, a U.S. Senate Committee headed by Senator Kefauver reported that "'in drugs,

generally, India ranks amongst the highest priced nations of the world."' (quoted in

Hamied, 1993). Similarly, the prices of four major drugs in Pakistan, which does grant

product patents for pharmaceuticals, are 3 to 14 times higher than in India. Although

Pakistan is somewhat richer than India (1995 GDP per capita was about $419 in Pakistan

versus about $334 in India; IMF, 1997) the difference in income is too small to seem a

plausible explanation for most of the observed price differential. There is another

consideration, one which did not exist historically but is of growing importance today,

which may exert a strong upward pressure on the price that a patent-owning firm would

choose to set in India. Patentees maximize global profits. Increasingly, drug prices in

developed country markets are being regulated using global reference pricing. For

countries which fix ceiling prices, the price for a newly introduced drug may be linked to

its price elsewhere. This policy may be explicit, or world prices may be linked, but less

directly, to regulatory decisions. In the U.S., Clinton's 1993 Health Security Act proposed

using the lowest price in 22 other countries as a benchmark for determining the

reasonableness of prices set for newly introduced drugs (Danzon and Kim, 1995). Faced

with either situation, patent owning firms may well chose to sell in India at a price

substantially higher than Pm in Figure A because they do not want to put in jeopardy the

prices that they are allowed in other regulated markets. The importance of this reference

pricing concern was brought up repeatedly in interviews with executives of MNCs'

Indian subsidiaries However that an innovating firm would choose to sell at a higher

price when granted patent protection is clearly beside the point if it is not allowed to

charge a higher price. One cannot really think about the effect of product patents in the

pharmaceutical industry without being equally attentive to the price control regime. India

has had, and continues to have, price control on a large part of the drug market. There is

nothing in the GATT treaty which prevents India from continuing to use price regulation

to protect consumers against patented drugs being sold at high prices. While appealing,

and, on the face of it, simple, this policy is not straightforward. First, the Indian price

control regime is set up such that ceiling prices arc detem1ined as a mark-up on input

costs. This means that there is a 'transfer-price loophole'. An MNC may export the

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patented active ingredient to its Indian subsidiary at an artificially high transfer price and

thereby attain a higher controlled price for its formulations. News reports suggest that

MN Cs have not been restrained about using this loophole:

"Pfizer charges $9,000 per Kg. for same material available from Italy@$ 125 per

Kg." "Sandoz imports @ $60,000 per Kg. item available from Gennany@ 23,000 per

Kg." Theobromine imported by an MNC subsidiary at 2,436 Rs/kg compared to a price

of I ,088 Rs/kg on the international market. (Scrip, quoted in IDMA, 1996; and Clippings,

1993). However, this practice can be controlled, if it is detected, by GATT rules on

uniform global transfer prices. A patent owner may also simply refuse to supply a drug

placed under what it views as too stringent price control. While this is conceivable, it is

unlikely that either a foreign or a domestic firm would relish the type of negative

publicity that a refusal to supply would create. Domestic firms, in particular, could be

subject to retaliatory pressure by the government. And the government would have a

good case for waiving the restrictions on compulsory licensing as allowed by the GATT

treaty in cases of "national emergency or other circumstances of extreme urgency".

Because India has' a well developed industry; allowing domestic firms fo obtain

compulsory licenses is a realistic alternative to supply by the patentee. Finally, some

patented drugs may be explicitly exempted from the price control regime by the

government. Currently, in order to encourage domestic R&D investment, indigenously

developed pharmaceutical products may be declared free of price control for 3 to I 0

years, with the number of years depending on the extent of the domestic R&D input. As

of 1996, the Department of Scientific and Industrial Research had issued 37 certifications

of indigenous R&D efforts (Government of India, 1996). These include two companies

who received exemptions from price control for developing indigenous processes to

produce Ranatidine (Pharmaceutical Guide, I 996). In the future, some of the products

exempted under this policy will also be patent protected in India. In the end, the

stringency of the price controls actually placed on patented phannaceuticals will be the

outcome of a complex bargaining process between the government and industry. The

most that can be said with certainty is that granting inventors product patent rights, with

limited scope for compulsory licensing, will strengthen the hand of fim1s in the

negotiations.

15 I

The Deadweight Loss

The deadweight loss of Indian consumer welfare that will result from the introduction of

product patents will depend, in large part, on how important patented drugs are in total

pharmaceutical sales. Redwood (1994) gives two figures for June of 1993. At that time,

the top 500 brands in the audited pharmaceuticals market contained 24 active substances

under product patent in Europe. Redwood (1994) points out that compulsory licensing on

the grounds that the patented item is being sold by the patentee at too high a price is not

expressly forbidden in the treaty. To argue that it was granted to counter a threat to not

supply would give India a strong case if a compulsory license were disputed by the

country of the patentee. It would seem that the only possible benefit of this policy could

be to firms with strong brands able, on that basis to price at a premium, or to single

suppliers. Otherwise, exemption from price control, given that competitor suppliers

remain bound by price control, would seem rather uninteresting. Sales of drugs

containing these substances were only 10.9% of top 500 sales. Including all brands, 31

substances were on-patent in Europe, and sales of drugs containing these substances were

· just 8.4% of total audited sales. Since audited sales exclude small firms and government

procurement, these figures probably overstate the share of sales in India of drugs which

contain substances under product patent cover elsewhere. There is no indication here that

the introduction of patent protection is going to have a large effect the welfare of most

drug consumers. If the rate of new product innovation is stable over time, in equilibrium

the introduction of new patented drugs will be matched by those going off patent.

Supposing this to be the case, as exclusive marketing rights and then product patents are

introduced in India, the percentage of the market under patent protection will initially

grow but then top off by the year 2015, probably remaining at a rather low level. One

question that it is important to ask here is whether it is reasonable to extrapolate into the

future from current levels of on-patent drugs. Is the rate of phannaceutical innovation

likely to be stable? In the past innovation has come in waves, with important

breakthroughs, such as the sulpha drugs. Putting a clever twist on these statistics, which

are repeatedly used by the supporters of the impending regime, the Indian Drug

Manufacturers' Association (the industry lobby for the smaller domestic, and therefore

opposition, firms) makes the following calculation:

!52

Total production of formulations in 1994 Rs. 80 billion,

Share covered by foreign patents at I 0% Rs. 8 billion,

Estimated share of U.S. MNC's at 50% Rs. 4 billion

Loss to U.S. MNCs as calculated by them and submitted, and accepted, by the U.S. Trade

Representative Rs. 14 billion gains to Indian manufacturers on same at at 4% of sales Rs.

0.16 billion (IDMA, 1996). It is not likely to be the same as the share of the market

currently going to drugs on-patent in Europe for two reasons. First, some products will be

patented in India which are never patented in Europe. Second, the higher prices arising

from patent protection may either raise, or lower, the value of sales of the patented and

substitute off-patent drugs relative to what they would have been if such protection

werenot available. followed by incremental developments of the newly discovered

families of drugs. There is a suggestion that drug research in recent years has been

relatively unfruitful so we may currently be at a low point in tenns of important drugs

still under patent cover. While U.S. FDA approvals of new medical entities have been

fairly constant over the past two decades, ranging from 12 to 30 per year during the

period 1976-91 but with no obvious trend (OPPI, 1994), it is claimed that in recent years

they have largely been for 'me-too' type innovations which do not represent significant

therapeutic advances. The U.S. FDA reported that 84% of the new drugs placed on the

market by large U.S. firms during the period 1981-88 had 'little or no' potential for

therapeutic gain over existing drug therapies (Special Committee on Aging of the U.S.

Senate, reported in Hamied, 1993). Similarly, in a study of 775 New Chemical Entities

(NCEs) introduced into the world during the period 1975-89, Barra! (1990) reports that a

group of experts rated only 95 as truly innovative. If there is a new breakthrough in

chemical-based drug research this pattern could change again, leading to a jump in

important patented drugs. Further, biotechnology, and the inclusion of micro-organisms

as patentable subject matter, present a whole new opportunity for finding important and

patentable new drug therapies. If biotechnology fulfills its promise or if there is a new

breakthrough in chemical-based research, then granting product patents for drug

innovations could have a much more substantial impact on consumer welfare than the

153

ligures given above would suggest. Focussing only on the part of the Indian market

which will be patent protected, the deadweight loss of consumer welfare associated with

those patents depends on the elasticity of demand for the patented drugs. Greater price

sensitivity may result in lower prices (although, as noted above, Indian demand

conditions may not be the overriding concem of patent owners when setting prices in

India).

However, for a given change in price, greater sensitivity implies a greater fall in

sales and a correspondingly higher deadweight loss as consumers switch to Jess desirable

alternatives or out of the drug market altogether. A number of estimates have been made

of the potential consumer surplus loss from price increases associated with introducing

product patents in India. The general method followed has been to assume.a constant

price elasticity demand function for patented drugs and a range of ex-ante industry

structures. Then price and welfare changes are simulated under various assumed

elasticities of demand and assuming that firms have pricing freedom and no global

concerns (see Nogues, 1993; Subramanian, 1994; and Maskus and Eby Kanan, 1994) .

The most recent and detailed of these studies is Watal (1996) who breaks down the

market by patented drug and links the assumed elasticity to the level of therapeutic

competition. Her results suggest a fall in social welfare of 33 million US dollars and an

average increase in the price of drugs if patents had been available of about 50 percent..

4.7.2 The Redistribution of Profits and Manufacturing Employment

In a multi-country world, the static cost associated with the introduction of

product patents depends in part on which countries' inventors receive the protlts which

are gained through higher prices in India and a longer period before generic entry in the

world market. Given current patterns, it appears that most of these profits will, at least

initially, go to foreign inventors. During the period 1975-1995 only 65 of approximately

l 00,000 patents granted in the U.S. for drug and health innovations were to inventors

with an Indian address.S Initial 'black-box' applications to the Indian Patent Ofllce (those

submitted after January I, 1995; See Appendix II) suggest too that foreign inventors will

be the main beneficiaries of the new product patents regime. Of the drug-related patents

154

granted in 1995 and 1996, and therefore process patents, 39% and 48%, respectively,

were to domestic finns or inventors (based on the applicant's address) (IDMA, 1996). In

a sample (about half) of the patent applications made in the first six months of 1995,

again 50% of the applications for process patents were to India resident inventors.

However, in contrast, just 14% of the applications for product patents were made by

domestic inventors (CDRI, 1996a). The size of the new profit opportunities in India, and

hence the transfer from domestic consumer to foreign firms, depends, like the deadweight

loss, on the local demand functions for patented drugs and the extent to which patent­

owning firms choose and are permitted to set prices above costs. What about the other

profit rectangle, the world generics market? This market is already large: in 1995, about

half of all U.S. prescriptions were filled with generics (BCG, 1996). And it is projected to

grow very rapidly. Being first into this market appears to matter. A report by Lehman

Brothers (1996) notes that, in the U.S., the first generic entrant can sell at a 30% discount

to the branded product, compared to a 75%. Drugs and health includes all patents with an

international patent classification. Jonathan Putnam, Charles Rivers Associates, provided

these data. Newsletter reports that "Industry experts say ... SO per cent [of profits] are

milked out of a drug in the first 18 months of its reincarnation as a generic." CDRI

(1996). Being based in a country which does not grant product patents helps firms to get

into the market earlier. McFetridge (1996) notes that when Canada stopped granting its

generics manufacturers compulsory licenses to produce on-patent drugs, the firms "were

exercised by their loss of 'first mover' advantages in U.S. and other foreign generic

markets." In fact, Indian firms current! y have two institutional advantages in trying to

enter quickly with low costs. The lack of product patents means that an imitating firm can

have many years of experience with the commercial production of an on-patent drug

before the day that the patent expires in the U.S., in Europe and elsewhere. Indian firms

also benefit from the fact that, in India, changes in a drug's production process do not

require that it be re-approved for marketing, as is typically required elsewhere. Thus

Indian finns are free to experiment to fine-tune their production processes. That said,

Indian !inns are likely to become important players in this market regardless of whether

they have a first-mover advantage. India is a currently positioning to become a significant

supplier of bulk drugs to the world. Many manufacturing facilities have been approved by

155

the U.S. FDA, the U.K. MCA, and so on. In generics, low manufacturing costs are

essential. Here labor costs are India's most obvious advantage, but one Indian firm

recently estimated that its capital costs were also 50- 75% lower than those in developed

countries (Ghemawat and Kothavala, 1996). Most of the larger Indian firms have

ambitious plans to expand their generic drug exports, either as suppliers, through joint

venture agreements with foreign firms or by purchasing formulation plants overseas. For

example, Cipla has fonned a subsidiary with a local firm in South Africa to sell Cipla

products in that country, as well as a marketing alliance with Novopharm, Canada (Cipla,

1996). Ranbaxy has purchased formulation plants in the U.S. and in Ireland, as well as

forming a joint venture with Eli Lilly to market joint products in the U.S. Lupin has

alliances with Merck Generics, U.K., Fujisawa, U.S. and McGaw Inc., U.S., to market

their cephalosporin products. They have also just established a joint venture in South

Africa and are negotiating further alliances in Russia and China. Forming alliances rather

than direct marketing is the established route into the international market. A local

presence is seen to be necessary both to speed It was told by an executive at one MNC

subsidiary that in developed country· markets firms will often continue to use an early

process in commercial production, even when they know it to be less efficient than one

discovered later, simply because of the high cost of getting a new process approved,

marketing approvals and increase customer acceptance of Indian made products. MNCs

are also moving towards greater production of generics in India through their own

subsidiaries or in collaboration with Indian finns. In 1994 and 1995 there were 50

applications per year for government approval of collaborations with foreign partners in

the field of pharmaceuticals (including the establishment of subsidiaries; Government of

India, 1994 and 1995). These are primarily to source generic bulk drugs. Thus, while

generic sales may become less profitable for the Indian finns without the jump on other

entrants, it seems unlikely that the introduction of product patents will prevent either

Indian firms or India-based MNC subsidiaries from increasing their participation in the

world generics market. It is not entirely clear what the overall effect of granting product

patents will be on the amount of phannaceutical production taking place in India.

Currently, over three-quarters of the bulk drugs and finished fonnulations consumed in

India are produced domestically (see Section II). Most of these are off-patent drugs (see

156

Section IV). There is no reason to expect that granting product patents would e!Tect the

production of off-patent drugs for the domestic market one way or the other and, as

discussed above, it is not likely to dampen production for export to the world generics

market. Once patent protection is available, however, patent-owning firms may choose

either to export their patented drugs to India, thereby replacing domestic production, or

they may chose to produce in India through a subsidiary or under license to Indian firms.

An executive of an MNC subsidiary suggested in an interview that the MNCs' concern

about global price differentials makes local, low cost, production attractive as a way to

justify Indian prices which are lower than those charged in developed country markets.

On the other hand, the 'transfer pricing loophole' would give patent-owning MNCs an

incentive to produce bulk drug inputs elsewhere and then import them. On this point, one

executive of an Indian firm described a recent consumer opinion survey fielded in the

U.S. which indicated that an Indian made health product was acceptable to the extent that

it was used externally: shampoos and cremes were fme, toothpaste was more doubtful

and pharmaceuticals were definitely considered suspect. This bias may carry over to the

domestic market. An executive from an Indian fiim told me that launching a new drug in

India was impossible because of Indian doctors' view that a drug could not be important

if it had not appeared in Lancet. On the other hand, in another interview I was told of a

recent survey which had shown that, given the choice, Indian doctors prefer to prescribe

drugs made by Indian companies--which, it was suggested, might be due to unethical

detailing. Another executive of an MNC subsidiary pointed out that, while the availability

of strong intellectual property protection was necessary, other considerations, like tax

advantages, were at least as important in choosing a manufacturing location for on-patent

drugs. Further, he noted that, unlike generic drugs, manufacturing costs are a small

component of the price of patented drugs and therefore India's advantages as a low-cost

manufacturer would not be particularly useful in attracting investment in local production

facilities. So, while the largest part of phannaceutical production should be unaffected, it

seems likely that some part of the local production of on-patent drugs will be replaced by

imports. Since 1988-89 the phannaceutical sector has made a positive contribution to

India's balance of payments. With the introduction of product patents, the resulting

transfer of profit from domestic to foreign patent owners, via royalty payments or export

157

pro tits on drugs sold to Indian consumers, will have an adverse effect on India's balance

of payments. So, too, will the fact that Indian firms will no longer be able to export on­

patent drugs to other countries, primarily in the former Soviet Union and in Africa,

which, until now, also did not offer protection for pharmaceutical products. The latter

effect is likely to be small, however. Measuring exports of major on patent drugs, it is

clear that on-patent drugs are only a small part of total exports by value. One can see too,

that most of the growth in exports has been in bulk drugs, which are likely to have been

headed to the West, rather than in finished formulations. The current and growing

importance of generics in exports suggests that the introduction of product patents will

not have a dramatic negative effect on the balance of payments, such as that experienced

by Italy where the net pharmaceutical exports as a share of total trade fell by about 30

percent in the decade after product patents were introduced (Scherer and Weisbrot, 1995).

4.7.3 Evidence: Administration and Enforcement

In the developed countries, the resource cost in terms of skilled labor required to

run and enforce It is not entirely obvious why MNCs have not invested in Indian

manufacturing of their on-patent drugs since, regardless, the drugs are imitated by local

firms. When posed this question, the same executive stated there was 'always something

to lose', particularly through employee job switching, a patent system is given little

thought. However, patent examiners, to take one example, typically have advanced

degrees and work experience in the relevant sciences. In the countries strengthening their

patent systems now, nationals with such qualifications are scarce, in high demand from

industry, and consequently patent offices will either be under (or inappropriately) staffed

or they will be very costly to run. For the year 1993-94, the Indian PTO cost the

government about 330 thousand dollars (net of receipts; Controller General of Patents,

Designs and Trademarks, 1996). By contrast, in the late 1980s the U.S. PTO was

spending about 300 million dollars per year. Although one would not expect the Indian

system be as costly as that in the U.S. (but note that India has a population roughly four

times greater), improving the facilities and staff so that it can effectively deal with the

coming expansion in the size and importance of the intellectual property rights system is

certain to be expensive. There is also a shortage of the complementary skills outside of

the patent office required to maintain an effective patent system. In 1995 there were only

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151 patent agents in the entire country (Controller General of Patents, Designs and Trade

Marks, 1996). Because relatively few patents are filed, there is little experience with

writing specifications, detecting loopholes in others' patents, and so on.

According to a Delhi patent attorney, in the past two decades there have been just

four or five patent infringement cases filed per year, so there is little local legal

experience with patent litigation. The types of problems encountered in a country

inexperienced with intellectual property go further. He related a story of an early

copyright infringement case, where the police stapled confiscated CD Roms into a

notebook, thus destroying the evidence. In recognition of the current shortage of

awareness and skills needed to maintain and use a patent system, some training has

begun. The Council of Scientific and Industrial Research (CSIR) has held more than 50

seminars across the country to increase understanding of intellectual property. A.K.

Reddy, Chairman of Reddy's Group, has donated land to establish a National Institute of

Intellectual Property. A primary goal of the institute would be to train patent agents. This

does not, of course, mean that there is little infringement. With a short patent term,

compulsory licensing with a royalty cap of 4%, and no reversal of the burden of proof,

there has been little payoff to prosecuting infringements. According to an Indian patent

attorney, patentees usually do better than the 4% royalty by settling disputes outside of

court. In discussions with people in the country involved with the patent system one

becomes aware of the large range of expertise--within companies, among lawyers, the

courts, the police, and so on required to make a patent system work. Again, developing

and using these human resources is expensive, and will be particular! y so if strengthening

the system leads to a rash of litigation. Of course, not all of the anticipated increase in

administration and enforcement costs can be laid at the feet of phannaceutical product

patents, since changes in the IPR system will be more extensive. However, if the U.S.

experience is anything to go by, most litigation can be expected over patents in this area

(Lanjouw and Schankennan, 1997).

4. 7.4 Evidence: Diffusion

Dynamic benefit of new innovation comes only after two steps: discovery and

diffusion. One part of diffusion is moving a new pharmaceutical product from the

laboratory to the market. This process includes adapting the product to local conditions,

159

obtaining marketing approval, and introducing it to doctors and others in the distribution

chain. Diffusion also includes the spread of infonnation about new discoveries to other

firms, so that the information can become an input into their own research and

development. In this section we consider what empirical evidence can say now about the

effect that introducing product patents might have on the rate of the diffusion of

pharmaceutical innovations to India, as infonnation to !inns and as new products to

Indian consumers.

One of the original argwnents for having a patent system was that, in return for

monopoly rights received from the government, the inventor disclosed his innovation in

the patent specification. This was seen as an important mechanism for diffusing

information so that others could build upon it and to avoid the replication of research

efforts. While this argument makes sense in a one-country world, or, as in history, a

multi-country world where communication links are poor, it does not carry through to the

group of countries introducing produce patents today. The bulk of significant innovations

are patented.

As one· Indian R&D manager pointed out, the local conditions inClude climatic

variation from the tropics to snowy mountains with unpredictable transport conditions

and long shelve-life requirements. Ensuring stability is one of the foremost concerns in

product development for the Indian market. Internationally and Indian firms are easily

able to access world patent specifications. Interviews with the major Indian firms

indicated that all of them had this capacity in-house, through computerized databases and

the internet, and none considered access to frontier technical information a difficulty. For

small and mediwn-sized firms, the Indian PTO operates a computerized patent search

facility in the city of Nagper with access to patent specifications from all countries. They

will perform searches and send copies of specifications for a low fee. Thus, there is, if

anything, a negligible gain in additional infmmation disclosure to be expected by the

country's granting of new patent rights.

Will granting product patents speed the arrival of new drug discoveries to the

shelves of Indian phan11acics? This depends on how quickly new drugs are an·iving now,

in the absence of product patents, and whether patentee control will speed or slow this

arrival.

160

With the exception of Cefaclor , for drugs where both dates are known the

introduction lag has been found to be typically four or five years. Since the process of

clinical testing and obtaining marketing approval takes about three years for the first

applicant in India (estimated by the Drugs Controller General) and since executives of

Indian firms stated in interviews that they usually waited to see the extent of a new drug's

acceptance internationally before investing heavily in process development, this implies

very quick imitation by Indian firms. The managing director of Glaxo (India) Ltd., noted

that they had tried to be first into the Indian market with their patented drug Ranatidine

(Zantac ), but were met with seven Indian competitors at the time of launch. Whether the

speed of imitation in recent years can be extrapolated into the future, when more difficult

to copy biotechnology-based drugs become increasingly important, is, of course, again an

open question.

One MNC representative suggested that product patents will increase the access

of Indian consumers to new drugs by pointing to the fact that many 'important drug

therapies' had not been introduced in India at all. However, to put this in context,

consider again the study by Barra! (1990) of NCEs introduced anywhere in the world

from 1975 through 1989. As noted above, his group of experts cllassified 95 of these 775

NCEs as therapeutically innovative. Among the innovative drugs, as of 1990, 31% were

being marketed in fewer than six of the seven largest pharmaceutical markets. In other

words, even restricting attention to new drugs deemed to offer a therapeutic advantage, a

significant portion were not introduced by the patentee in developed country markets that

did grant product patents. It is likely that failures to launch in India are for quite different

reasons than the absence of product patents. One is administrative. The inventor, or an

imitating Indian firm, may have tried to introduce the product but failed to obtain

marketing approval. In India, by law firms are required to show on! y the safety and

efficacy of new drugs in order to obtain marketing approval from the Drugs Controller

General (as in the U.S.). However, according to the Drugs Controller General himself, in

practice they are often also required to show utility, that is, that the new drug is needed.

One company interviewee involved in this process from the industry side also asserted

that this was often required and, further, that new drug applications were frequently

rejected by the government on this basis. If this is the main explanation then changes in

161

intellectual property laws will have little impact. Another explanation lies in possible

hesitation on the part of patent-owning MNCs in launching their patented drugs

themselves, because of their concern about global reference pricing. This was brought up

repeatedly in interviews with executives of MNC subsidiaries as an explanation for

decisions either to delay launches or to never launch their patented pharmaceuticals in

India. This is apparently a particularly important issue for American firms, but most

European !inns also pay attention to global price differentials (the pricing freedom given

to Glaxo's Indian subsidiary, demonstrated in its race to enter the market with Ranatidine,

seems to be a rare exception). For example, Bayer chose not to introduce its patented

drug ciprofloxacin in India because it would have had to sell it at what Bayer viewed as,

at that time, too low of a price. Instead, ciprofloxacin was introduced three years after its

world launch by the Indian firm Ranbaxy Clearly truncation could be part of the story.

Some of these may have ended up being globally launched after 1990. However,

truncation would only affect a few of the more recent NCEs. Danzon (1997) reports that

Glaxo did not launch Imigrarn for several years after obtaining marketing approval in

France because the governmenfinsisted on a low price. Will this issue cause problems for

India once inventors are granted monopoly control over the introduction of new

products? More than seven years after its world introduction and long after the entrance

of a multitude of local producers, Bayer also began marketing ciprofloxacin in India, at a

price about a tenth of that in the U.S. (interview). Since regulatory attention to prices in

developed countries is paid primarily at the time that drugs are initially introduced, it

appears that global price differences become less important over time. Also, like a threat

of non-supply in the face of price regulation, a failure to introduce could be combated

with compulsory licensing (see Section IV). Nevertheless, these remedies do not operate

immediately. A tendency on the part of patent-owning MNCs to delay the introduction of

their innovative drugs in India could mean that, in the future, new drug therapies become

available to Indian consumers more slowly than they would have if the current regime,

which allows imitation, had been retained.

4.7.5 Evidence: Research and Development

In thinking about the possible effects of the introduction of product patents on

investment in R&D, there are three separate issues. First is the efTcct of the incremental

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returns received by inventors as a result of these new rights on the incentive to invest in

research on projects which are aimed at a global market. Second is the effect on

incentives to invest in projects of particular interest to India. And finally there is the

effect of granting product patents on the amount of pharmaceutical R&D that takes place

in India, either within government or academic institutions, MNC subsidiaries or

domestic finns. Since it is difficult to anticipate the size of the profits which will be

obtained by patentees as a result of product patents and since we do not know very much

about the elasticity of R&D investment in response to increased returns, it is difficult to

guess whether the first effect will be significant. Given the enormous disparity in mean

incomes between the developed countries and the LDCs, and given the small proportion

of higher-income households within the LDCs, the contribution of profits coming from

the LDC markets will probably be initially a quite small addition to total global profits. It

is apparent that expenditure per capita in India compared to a range of other countries is

extremely low. However, this may be set to change. India has a huge population and even

with very low expenditures per capita in 1995 and the 12th largest pharmaceuticals

market iri the world. (And this is with, it is claimed, only 30% of the population

consuming allopathic medicines.) A possible loosening of restrictions on the insurance

market is under discussion in the government and private insurance may be available in

the next few years. One Indian executive said that his firm had an agreement already set

up with an American insurance company interested in entering the Indian market and

suggested that another Indian firm had a similar arrangement with a second American

insurance company. Given the low starting level, there is much scope for increased

pharmaceutical consumption in India as incomes grow and medical insurance becomes

more prevalent. Thus, with a long time horizon, it might be the case that the introduction

of product patent protection in India will have more than a negligible impact on new drug

discovery. It is possible to be more optimistic on the second point. The demand patterns

of consumers in the group of countries now introducing product patents are quite

different from those of the developed countries. For drug therapies relevant to LDCs, the

incremental incentive generated by product patents may be significant even in the short

run. There are two senses in which a drug therapy may be particularly relevant to India

and to the LDCs as a group. First, disease patterns are quite different. Research has

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shown the diseases for which 99% or more of the global burden is in low- and middle­

income countries( where burden is defined as the number of disability adjusted life years,

or DALYs, lost to the disease. This includes years lived with disabilities as well as

premature mortality.) Although India shares the diseases important in developed

countries, and will increasingly as the population grows more wealthy, vast numbers of

Indians also suffer from diseases, such as malaria and leprosy, which the developed

world is largely free ot: 16 Another sense in which particular therapies can be relevant is

in the cosUefficiency tradeoff. Even within disease categories which are also of interest to

developed countries, drug discoveries which have the potential to be very cost effective

but not as effective overall may not be acceptable in those markets and hence not

developed and commercialized in the present environment. Currently almost all research

on drugs for diseases prevalent in the LDCs is done either by internationally-funded

organizations or the military in the developed countries and it is a very small part. Even

within diseases there can be differences in incidence. For example, AIDs cases in

developing countries are the result of HIV which is a subtype different than the subtype

common in the West which is the subject of vast amounts of R&D spending (WHO,

I 996) of world pharmaceutical R&D investment. For example, of the 56 billion dollars

spent on health-related R&D worldwide, only 0.2% is on pneumonia, diarrhoeal diseases

and TB, diseases which between them represent 18% of the global disease burden (WHO,

1996). In Barral's (1990) study of NCEs marketed commercially in the seven major

industrialized markets between 1975 and 1989, only eight of775 were specific to tropical

diseases, and two of these were discovered in U.S. army laboratories. By contrast, the

UNDP/World Bank/WHO Special Programme for Research and Training in Tropical

Diseases has developed 78 products in the past 19 years, 24 of which are already in use

and of which another 35 are in clinical or field trials (Scrips, 1995). Although purchasing

power in India, and the other LDCs, is low, the sheer size of this potential market may,

once patent protection is available, make investing in drug discovery projects with

primary markets in the LDCs sufficiently profitable that private finns become interested.

The example of orphan drugs may be instructive. In the early I 980s there was discussion

in the U.S. about the problem of drugs which had been discovered but were not being

developed and marketed by finns because they were useful only to a small population of

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sufferers. They were tenned orphans because of the discoverers' lack of interest in these

unprofitable drug candidates. In 1983, a bill was passed which offered finns seven years

of market exclusivity for drugs with a potential market of fewer than 200,000 patients,

even when a patent would otherwise not be available, as well as subsidies for testing.

Although there is room for abusing this policy by carefully designing target populations

so as to classify a drug as an orphan, there is no doubt that this legislation lead to a surge

in investment in drugs which were legitimate orphans and which would not have been

developed otherwise. In the decade before 1983 there were ten drugs for rare diseases

approved by the U.S FDA In the decade after passage of the Orphan Drug Act, 99 such

drugs were approved, and 189 were reported to be under clinical testing in 1992 (BCG,

1996). Perhaps the most difficult question is the last. Will the introduction of product

patents lead to more R&D being done in India? For MNCs, strong intellectual property

laws are certainly a pre-requisite for the choice to locate pharmaceutical R&D facilities in

a country. A survey of U.S. firms conducted by Edwin Mansfield found that IPRs are

very important to pharmaceutical MNCs when making decisions about R&D locations,

less so for finishing generic drugs (United Nations, 1993). Currently, India fails on this

count. India was the country most frequently cited by corporate respondants as having

intellectnal property laws too weak to permit investment in the chemicals (including

pharmaceuticals) sector (Mansfield, 1994). In recent years, Hoechst has been the only

MNC with a subsidiary doing basic research in India (with a focus on natural products).

The only other example is Ciba-Geigy, which had a basic R&D facility located in India

from 1963-1989. That said, even more than in the case of manufacturing facilities,

granting and enforcing intellectual property rights is likely to be far from sufficient to

attract MNC investment. R&D tends to be quite centralized. For example, Pfizer has

R&D centers outside of the U.S. in only four, developed, countries--the U.K., France,

Germany and Japan compared to manufacturing plants in 65 countries, of which 21 are in

LDCs (Santoro, 1995). It is frequently argued by proponents of the TRIPs accord that

India, once new, WTO-consistent, intellectual property laws are in place, will be very

attractive as a location for R&D because, by locating in India, firms can take advantage

of a sizable pool of low-cost and technically skilled labor to escape part of the great

expense of drug discovery and development. They point to the rapid growth in the Indian

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software industry, centered in the city of Bangalore, where a very large number of MNCs

have located part of their software development. However, a head office R&D executive

from a pharmaceutical MNC emphasized in an interview that cost is not a main

consideration in their location decisions, even for development research. Further, it is not

even clear that real costs are that much lower in India. Interviewees said that although

customs restrictions on the import of equipment had been eased in recent years, this still

posed a problem. A manager at one linn noted that they have an employee permanently

stationed at the Bombay port to deal with 'time-sensitive' imports such as mice. While

much of the equipment in R&D labs is now available from Indian suppliers, precision

equipment is still imported and the difficulty and time necessary to obtain parts and

servicing on foreign-made equipment was claimed by one interviewee as their biggest

disadvantage in running a research lab. Even labor, while cheaper than in the West, does

not appear greatly so. In one interview, a scientist just retmning from graduate school and

then five years at one of the U.S. National Institutes of Health, when asked about relative

salaries, said that starting salaries were quite different: $4,500 in India against $35-

40,000 for a comparably skilled person in the U.S. His own salary,' however, he judged to

be at least a quarter of the salary of someone at a comparable level in the U.S. In an

interview at another Indian finn the same story emerged. Starting salaries for research

scientists were judged to be about 20% of those in the U.S., but approaching 50% at

higher levels. In many finn interviews it was also noted that salaries for researchers are

increasing quickly. Taken together, the fact that costs are not their prime concern and the

fact that the cost of doing R&D in India does not actually appear to be dramatically lower

than elsewhere suggest that there is no reason to expect that the introduction of product

patents will encourage MNCs to locate R&D facilities for discovery research in India. On

the other hand, the story may well be different for Indian finns. In a paper which

considers the likely response of Indian firms to obtaining the ability to purchase foreign

technologies, Fikkert (1994) estimates that domestic R&D efforts would decline, but to

very modest degree. In line with the efficiency gains to be expected from licensing, he

estimates that the switch to greater reliance on purchased technologies would be

associated with a large increase in the productivity of domestic finns. Looking at the

domestic pharmaceutical sector today, a handful of !inns have already begun increasing

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their total investment in R&D (from about 1-2% of sales to 5-6% of sales in the past few

years). More significantly, some of them are beginning to allocate a part of that

investment to the search for new molecules rather than imitative process development

research. And there are signs that they will be successful in this new direction. As

discussed in the previous section, the Indian firms have already demonstrated great

expertise at rapidly devising new processes for patent products. A particularly dramatic

example is Ranbaxy's development in 1991, after 20 million dollars and three years of

effort, of a new process for producing Eli Lilly's patented drug cefaclor. In the words of a

Ranbaxy executive, processes were under patent (with Lilly). Since Eli Lilly's product

patent for cefaclor expired in 1992 and the firm was expecting to protect its monopoly

with process patents which were due to expire only in 1994, this gave great scope for a

mutually advantageous agreement between the two companies. A series of 50:50 joint

ventures followed in the wake of Eli Lilly's recognition of Ranbaxy's superior research

capabilities. This was, of course, an example of process development. A few companies

have also been successful in discovering new products. For example, Reddy's Research

Foundation, a· separately. The magnitude of this achievement is brought out by this

comment made by Eli Lilly's Pharmaceuticals President in February 1991, emphazing the

protection offered by a difficult production process and a patent on a late stage

intermediate: "when all factors are considered Ceclor (cefaclor) should 'remain a viable

product for Eli Lilly beyond expiration of the patent"'. And the Research Labs President:

"'The Ceclor synthetic route is so long and so complex' that it will be difficult to

duplicate ... .'a legal end-run seems extremely improbable.'" (quoted in OTA, 1993)

constituted research center established in 1992 which is part of Dr. Reddy's Group, only

works on the discovery of new molecules. In June of 1995 they filed their first two

product applications in the U.S. (anti-cancer and anti-diabetes substances) and now have

ten more patent applications in developed countries. Dabur also has a self-standing

research foundation which is 50% devoted to doing discovery research related to anti­

cancer drugs. To date they have submitted two patent applications in the U.S. and two

more in the U.K. (interviews). An important aspect of the R&D being done by MNC

subsidiaries and Indian firms in India is the extent of sub-contracting. Discovering a new

molecule and bringing it to market involves many stages. Sub-contracting allows finns to

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focus initially on the parts of the process in which they have gained a comparative

advantage. Organizing R&D through networks of research collaborations and joint

ventures is becoming increasingly common with the advent of biotechnology firms.

Commonly, biotechnology finns supply ideas, compounds, therapies, and applied

research outcomes, while large pharmaceutical partners supply complementary research

capabilities (where economies of scale are important), largescale development and

marketing. (See Gambardella, 1995, for examples of the complexity of these networks.)

Most of the Indian subsidiaries of foreign MNCs interviewed said that they did some, and

expected to do more, development work for their home offices. Several were very close

to having their clinical testing results approved by the home office for use in U.S. FDA

submissions. Recently, Roffman-La Roche and Smithkline Beecham have sought

approval from the Indian government to establish wholly-owned subsidiaries for R&D

projects, in the latter case to develop new and existing Beecham vaccines (Government of

India, 1994a and 1995). For an Indian finn taking the first steps towards new molecule

discovery, the ability to lower costs by sub-contracting or by joining up with foreign

firms in research joint ventures, is particularly ·important. A surprising array of

agreements have already been made. For example, Wockhardt just established a joint

venture with Rhein Biotech GmbH, Germany, to do research in India on biotechnology

products. One of Ranbaxy's joint ventures with Eli Lilly will be based in India and

involved in development work.. Cipla undertakes custom synthesis under secrecy

agreements. Dabur is in discussions with a U.K. company about doing development work

for them. Two of the firms involved in discovery research send compounds to Daiichi,

Japan, for screening. Compounds which look promising are pursued by the Indian firm

and may result in a joint patent. In an interesting twist, Reddy's Research Foundation has

an arrangement with a Swiss firm whereby Reddy's sends them interesting compounds

which the Swiss firm then develops. What is not obvious is what the importance of Indian

product patents will be in encouraging this process, given that product patents are already

available to Indian inventors in much of the rest of the world. The cooperative R&D

arrangements described above were made between Indian and foreign finns without

product patents being available in India. Scherer and Weisbrot ( 1994) point out that

Switzerland was a leading originator of important new drugs even in the period before it

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began granting product patents. Interviewed executives of R&D intensive Indian finns

were all very clear that their target market for new drug discovery research is one

hundred percent global. They are concentrating their efforts on drugs for important

developed country diseases, such as cancer and diabetes, where U.S. FDA marketing

approval is quick and even a moderately important discovery is likely to have a

significant payoff. The availability of patents in India may be important for encouraging

innovation by smaller Indian finns and may facilitate contracting in the development of

products for the local market. The advantage is that it will allow a finn to obtain a

priority date with an Indian patent application at a cost far below a foreign application:

$300-400 in India versus about $6,000 for a U.S. patent (interviews). A government

official in the Dept of Biotechnology (DoB) described how the department had helped

researchers apply for foreign patents (four thus far), in order to help them overcome the

cost hurdle. He noted, however, that for products with a more limited local market, where

a foreign patent would not be useful, the lack of patent protection in India was a

stumbling block in getting innovations to market. Companies interested in

commercializing DoB i1movations were held back because; without patents, the DoB

could not guarantee them exclusivity (Ghosh, 1996).1n the end, however, perhaps the

main reason for thinking that the introduction of product patents in India will increase the

amount of innovative R&D done by Indian firms has nothing to do with the traditional

explanation based on enhanced returns. It is simply that they will soon be prevented from

following a strategy which has been profitable, imitation, and must switch to something

else in order to grow.

4.7.6 Concluding Comments

It is too soon to draw any strong conclusions about what the effects will be of

India's upcoming introduction of product patents for phannaceuticals. In answer to the

question posed in the title: "exploitation of the poor?" the answer is probably no--if

nothing else because the "poor" in India are too poor to consume pharmaceuticals, even

under the current regime. For the 70% or so of the population who currently does not

have access to pharmaceuticals, the introduction of patent protection, and any price

effects that may follow, are irrelevant. We have also seen that, of the drugs currently on

the market, just under ten percent are on-patent in Europe. Extrapolating this percentage

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into the future, which may itself be questionable, means that even if product patents result

in significantly higher prices, much of the pharmaceutical market will not be affected.

Considering only the part of the market which will be affected by the new regime, there

are a number of reasons for thinking that the low incomes of India's consumers and the

lack of medical insurance will not ensure low prices, as is sometimes suggested. Firstly,

the latter two features are likely to begin to change in the next decade. Historical and

cross-country evidence also does not give confidence that this will be tbe case. And,

perhaps most importantly, patent-owning firms may not be setting prices to maximize

profits in the Indian market. They maximize global profits, and the politics of drug price

regulation may dictate a limit to how low they will be willing to set prices in India. Price

control may also be ineffective in keeping down prices, since patent protection in

combination with both the transfer-price loophole and a possible threat to not supply give

firms non-negligible power in bargaining with the government over the price of patented

drugs. Whatever eventuates, the fact that the industry is very competitive today means

that any monopoly profits obtained by patent-owning firms once product patents become

available can, with reasonable confidence, be attributed to the change in IPR regime.

Indian firms are moving into tbe world generics market and, although the introduction of

product patents will cause them to lose their first -mover advantage, their low

manufacturing costs will continue to give them an advantage in competing for this

market. It may become somewhat less profitable, since speed into the market seems to be

important, but there does not seem to be any reason to expect that they will not be

successful in increasing their participation in the generics sector. The bulk of production

for the domestic market is drugs which are not on-patent. As a result of these two

features, the introduction of product patents should not have a strong adverse affect on

employment in the industry or on the contribution of the phannaceutical sector to the

balance of payments. The positive contribution of intellectual property comes in its

dynamic effect on the creation and diffusion of knowledge. Considering first the

diffusion of information, it appears that Indian finns are well able to access and

infonnation disclosed in patent specifications filed elsewhere. Since most important

phannaccutical innovations will be patented internationally, there is likely to be little or

no additional benefit to be gained by Indians from specifications being filed domestically.

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In the case of diffusion of products into the market, granting protection may speed

diffusion, for the traditional reason that having a monopoly position makes the process of

adapting a product, getting marketing approval, and introducing it to consumers

prolitable. However, there are also reasons to think that giving patentees control over

introductions may slow down diffusion. Currently Indian firms are quite quick to bring

imitations to the market. An MNC with a new patented drug may delay a launch in India

because of the concern over global price regulations noted above. If, for this reason, they

hesitate to introduce a drug at a low price in the initial years of global marketing, with

imitators prevented from entering because of the new patent law, innovative

pharmaceuticals may actually become available to Indian consumers more slowly.

Finally, there are several issues regarding the effect of product patents on discovery

research. It seems unlikely that, at the current levels of income in India, the profits to be

made from having monopoly rights in that country will add substantially to the profits

already available in the world for drugs which are of global interest. However, as

discussed in the paper, very little R&D is done to develop drug therapies for the set of

diseases which aie relevant to Indian consumers but which are not important to

consumers in developed countries. Almost all of it is done by government-funded

development institutions or by the military. For these drugs, the introduction of product

patents in India could create a substantial incremental increase in profits and encourage

more commercial interest in their discovery and development. The final question was

whether the introduction of product patents will contribute to more R&D being done in

India. Although strong intellectual property rights are important to MNCs in deciding

where to locate R&D facilities, given the centralized nature of R&D and fact that costs

are not the paramount concern there does not seem to be any compelling reason for them

to locate in India even after product patents are available. Further, a number of MNCs are

already increasing their use of local subsidiaries to do development work. Although

stronger intellectual property rights may make the Indian environment more appealing to

MNCs as a location for R&D, it is unlikely that product patents will make a dramatic

difference to their choices. There is more reason to think that the upcoming introduction

of product patents will make a difference to the amount and type of R&D being done by

Indian firms. Already the larger firms are increasing their total R&D expenditure as a

17 I

percentage of sales and they are beginning to move in the direction of new molecule

discovery rather then concentrating solely on development research. Given that there is

already patent protection available to Indian inventors in the rest of the world, if there is a

role for Indian product patents in encouraging this process it is not in the incentive effect,

but rather the fact that the strategy of imitation is being closed off. While some firms may

not make the transition, signs thus far suggest that a number of Indian firms will

successfully weather the transition and come out as more innovative companies.

4.8 Technology Management in Pharmaceutical Industry

Pharmaceutical Industry, globally, is a high value industry due to the sheer nature

of the industry. It has been estimated to have a value of around $630.7 billion with a

growth rate of 6.6% in the year 2007. Presently the growth in the industry has been

noticed in the Asia-Pacific countries while the developed countries have witnessed a

slack in the growth. If we make strategic groups in the pharmaceutical industry, then

there would be two groups:

- Research Based Group: Companies which form this gr~up are those who spend around

15-20% of their sales revenue into the Research and Development of new drugs.

Consequently the price of their drugs is also very high. They become the owners of their

products through patents. Some ofthese companies are Pfizer, Merck, GSK, Eli Lilly.

- Generics Group: Companies in this group do not spend much on the Research and

Development of new drugs. Their expenditure on R&D is in the range of 3-4% and the

price charged by them is also low. Most of the Indian companies come in this group.

4.8.1 The Industry Value Chain

Through its massive R&D investment, the research-based industry represents our

society's best hope to fight, defeat and eventually eradicate a wide range of illnesses that

are costing a fortune - not to mention pain and suffering. For developing a new

innovative drug it takes about $800 million and about 15-16 years time period on an

average. Of this amount only half the. cost is actually incurred by the company, the rest is

the opportunity cost of the capital invested in developing the drug. This cost incurred is

directly reflected in the pricing of the new drug. This has prompted major phannaccutical

companies to base their research and development centers in third world countries who

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have the necessary infrastructure. It is important to identify the current situation in major

markets of the world namely the US market and the European market. Some of the major

issues and questions related to drug development process are cost of developing new

drugs, role of government, and performance of the drug industry and the profitability of

the different R&D activities. An innovative way to improve efficiency of R&D activities

is through decision analysis for selecting the right projects so as to derive the maximum

benefit from it. This will also help in reducing the cost of drug development an will

induce companies to go for more R&D spending in the future. Benchmarking has been

' adopted, by many companies, in the field of operational excellence in their production

units located in different parts of the world. This makes the cost of producing a new drug

much cheaper and in a way absorbs the high cost incurred in the discovery stage and the

clinical trial stage. Big pharmaceutical companies should partner with small biotech firms

for upstream research stages. To give more freedom to their R&D wings, many Indian

companies have gone for its separation from the other operations of the firm.

· Again there is a correlation between the amount of research and development

spending a firm makes and the profit margins which they derive from it. The trend has

been explored for two global firms which show an increase in R&D spending also

increases the firm's profitability. The contract research opportunities available in the

Asian countries are being tapped by many western Pharmaceutical majors though

outsourcing. This has looked in seriously as an increased contract research spending by

international giants of the pharmaceutical industry acts as a source of earning the crucial

foreign exchange and at the same time producing cheaper drugs quickly.

4.8.2 Pharmaceutical Market in United States

Let us have a look at the current scenario in the pharmaceutical industry in the

United States which is the largest market for the advantages of low cost at both research

stage and clinical trial stage, accessibility of a large population base and a good

infrastructure. The Asian countries also have a challenge of giving consistent quality in

the R&D activities outsourced to them and improving on their infrastructure. Another

challenge is in the implc1nentation of TRIPS in the Asian countries by their respective

governments, which are being phannaceutical products. Standard & Poor's industry

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report forecasts low to mid single digit top line gains and high single digit or low double­

digit earnings per share (EPS) growth for both 2007 and 2008. Sales gains, particularly in

the second half of 2007, have continued to reflect price increases and momentum from a

modest number of new products introduced in 2006 and early 2007, while EPS (Earnings

per Share) is benefiting from aggressive cost cutting initiatives and common share

buybacks. Favorable foreign currency exchange rates also have added to performance.

Given the dollar's weakness against the pound and fhe euro in recent quarters, S&P

expects foreign exchange to boost the average top line by 3% to 4% for the sector in

2007. The pharmaceutical sector currently is of interest to investors primarily because of

anticipated positive EPS trends over the coming quarters and, to a lesser extent, because

of its recession resistant characteristics. The business model that spurred unprecedented

growth in the pharmaceutical industry since the early 1990s has changed. The shift has

been occurring slowly for several years, but its impact became obvious in 2007.

Throughout the 1990s, pharmaceutical companies concentrated their R&D and sales

efforts on selling small-molecule drugs to mass markets. Today, however, they

increasingly rely on more customized biological products that help ·smaller patient

populations with harder-to-treat medical conditions. The US market grew 7.7% in the 12

months through June 2007, faster than any country except Spain, China, and Brazil, each

of which has a much smaller base. As of October, IMS Health was forecasting 2007 US

growth in the range of 5% to 6%, bringing the market size to $285 billion to $295 billion.

Most companies are also in the midst of realigning their R&D operations. They are

concerned about the lack of productivity in their current R&D operations and by

increasingly stringent demands for data by government regulators and third-party payers.

A 2007 study by McKinsey & Co., a consulting finn, estimated that the average R&D

spend per FDA approval (including small molecules and biologics) climbed from $660

million in 2000 to $1.626 billion in 2005, largely as a result of declining success rates. If

companies could even partially improve the attrition rates in late-stage R&D, their

relative costs would plummet, making a huge impact. Financially, drug manufacturing is

a high-risk business: for every 5,000 compounds discovered, only one ever reaches the

phannacist's shelf. The odds against making a profit are steep as well: less than a third of

marketed drugs achieve enough commercial success to recoup their R&D investments.

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When a drug maker launches a new compound that is' widely accepted in the

marketplace, the economic rewards can be immense. This is the primary reason for the

industry's hefty profit margins. R&D is the lifeblood of the phannaceutical industry.

Drug makers become industry leaders by spending large sums on R&D in order to

produce a steady stream of successful products. Because ethical phannaceuticals are

patent-protected only for a finite number of years, the pharmaceutical industry needs to

continually find new drugs to ensure future growth. Firms with R&D programs that

falter, end up struggling, particularly if they face generic competition for their key drugs.

4.8.3 Pharmaceutical Market in Europe

To take a look at the European market, in 2005 alone, the pharmaceutical industry

in Europe invested over €21 billion in R&D, which accounts for 18% of the whole EU

business R&D expenditure. Huge as industry's R&D investment is, however, it is by no

means a guaranteed path to success. Due to the growing understanding of the scientific

basis of diseases, the complexity of regulatory requirements and "administrative" delays,

it now takes an average of 12-13 years to tum a new promising compound into an

approved medicinal product. The average medicine has then about 8-1 0 years of

effective patent protection left by the time it reaches the pharmacy shelves before facing

stiff generic competition. The result is that each new medicine now costs in the range of

€900 million to develop, that half the medicines that reach the final stage of clinical trials

fall at that hurdle and that only three out of ten marketed medicines produce revenues that

match or exceed average R&D costs. With a strategy that above all stimulates R&D in

Europe and rewards innovation, the research based industry will not only be able to

improve healthcare in Europe, bring new innovative medicines faster to European

patients, it will also contribute to the Lisbon objective of economic growth, to more and

better jobs, and therefore guarantee high living standards for current and future

generations of European citizens.

4.9 STUDY ON R&D MANAGEMENT BY PFIZER

To take a look at the how the R&D expenditure is carried out, consider Pfizer, the

largest phannaceutical company in the world. Its pipeline of new medicines in

development is the largest in the phannaceutical industry, focusing on a broad range of

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unmct medical needs spanning l 0 Therapeutic Areas. Pfizer invests more than $7 billion

annually in the research and development of new products across more therapeutic areas

than any other company in our industry. Relying on the strength of its pipeline and

scientific talent, Pfizer has generated a steady stream of breakthroughs over the years. Its

researchers continue to work around the clock and around the globe to ensure the best

medicines for our patients in the years to come. The figure below indicates the number of

discovery project which were in various stages of clinical trial in the year 2006-07.

Source: www.pfizer.com

4.10 Decision Analysis for Selecting R&D Projects

Drug development can be regarded as a process in which a skeptical regulator

mandates the sponsor to provide rigorous evaluations of pharmaceuticals so that the

regulator can decide on their value. Nevertheless, much of the value added is through

development of information ratherthan product. The complex decision-making that

attends drug development, together with the evaluation of attendant options, is often

handled in a crude and ad-hoc manner with minimal analysis. In choosing which drugs to

develop, many companies rely on inadequate indices, awarding points for probability of

success, time to market and earning potential and perhaps subtracting them for cost to

develop. ln fact, no index based on totals alone can capture adequately the options open

to management in developing any project. It is necessary to study and reflect the cost and

probability architecture of projects to do this. Consider a simple case of two drugs about

to enter phase II. The expected time to market, if successful, is five years in each case,

the cost to develop including launch costs are identically US$440 million and expected

financial returns (having subtracted costs of drugs and selling), if successful, are

identically US$1.25 billion discounted. If the drugs are registered, market success is

considered to be inevitability. The probability that the drugs will make it to registration is

identically 0.36. Such figures are often taken to be adequate to evaluate the interest in

developing the drug and, that being so, it is obvious that any method that uses such totals

will judge the two projects as being equally valuable. A crude calculation that might be

attempted would be to estimate the expected return as:

0.36 x USS/.25 bi/lio11- US$440 millio11 = US$450 millio11 - US$440 million = USS/0

million

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Suggesting not only that there is nothing to choose between the two projects, but

also that they have little value, offering an expected (but uncertain) net return of US$1 0

million for an outlay of US$440 million.

This calculation is inappropriate, however. It assumes that, whether or not a

project fails, all development costs have to be paid. However, development costs in phase

Jli will not be paid unless phase II is successful. To evaluate these projects, the cost and

probability architecture needs to be studied in closer detail. Suppose that the situation is

that project A's costs are expected to be US$50 million in phase II and US$390 million in

phase III. On the other hand, project B will cost US$! 00 million in phase II and only

US$340 million in phase III. Project A has a Therefore, the expected return is:

US$450 million- US$206 million= US$244 million/or A; and

US$450 million- US$406 million= US$44 million for B.

Not only are both these projects more valuable than it appeared at first sight, but they are

quite different in terms of value.

In short, the pharmaceutical industry is not just suffering from an innovation

deficit but also from an information and implementation deficit. Nevertheless, there is

much in the way of quantitative methodology for decision-making that is available and

being under-utilized.

4.11. Achieving Operational Excellence

The above mentioned decision analysis has to be coupled with very high

operational excellence while manufacturing them across various facilities around the

globe. Almost all multinational pharmaceutical companies have launched efficiency and

continuous improvement initiatives. Global competition, increasing cost pressure, shorter

product life cycles and a more and more complex production program have a strong

impact on the industry and its production sites. To achieve better results some

benchmarks have to be established which was done by a survey called "Operational

Excellence in the Phannaceutical Industry" (OPEXPharma) is being conducted by

Institute of Technology Management, University of St. Gallen, Switzerland.

With the help of this a company can compare implementation of 6 Sigma, Lean

Thinking and other basic principles of Operational Excellence for one particular

manufacturing site with its own average and also with the industry average. They can

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also see the difference in different operational excellence attribute's cost as compared to

the top perfonner in the industry and then can try to achieve the same.

Source: 2008 Benchmarking Survey by Institute of Technology Management, University

of St. Gallen

4.11.1 Partnership with Academic Organization & Small Bio-technology

firms

As the biotechnological paradigm is progressively replacing the chemical one, the

biotech startups are the principal engine of R&D activity. They discover new molecules

and impulse drug innovation. Still, big pharmaceutical companies have some advantages ,

such as benefiting from higher funds to support development of new drugs, scale and

scope economies in R&D.

Partnerships between small and big fmns are developed on a win-win basis.

Consequently, the size of the firm is a moving target. Innovation is to be linked with

industrial, technological networks. Small firms are cooperating and so increasing returns

to scale may appear at the level of the research networks, strategic alliances or bio­

clusters. Industrial policies stimulating innovation as a competitive edge should then

concentrate on creating strong incentives for small firms to cooperate.

The competitive process in bioteclmological research, which is today oriented

towards forming partnerships, aims to eliminate vertically organized firms that research,

develop, manufacture and market their own drugs alone and to rationalize organizational

structures in order to make each link in the value chain effective. As a matter of fact, all

kinds of research (whether carried out in small finns or in hierarchical organizations)

play a role. Thus, in the conception of industrial collaboration, a distribution of roles is

beginning to emerge that relies on the coexistence of two fields of creation, that of

technical imagination and that of development. In fact, a sort of division of the innovative

work is developing, favoring academic organizations for the fundamental research,

biotechnology firms for the upstream research stages and large firms for the routine and

costly stages of development and marketing. Therefore, biotechnological companies find

results in their applied research, whereas pharmaceutical finns manage the stages of

large-scale commercial development.

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4.11.2 De-Merging NCE Operations into Separate Companies to Scale­

Up R&D Activities

Top Indian phanna companies are now de-merging their NCE (New Chemical

Entity) operations into separate companies to scale-up their R&D activities, achieve

better focus and hedge against risks. They are stepping out to leverage the expertise

gained in reverse engineering of patented molecules, and build capabilities in original

research - targeting new chemical entities (NCE) and novel drug delivery system

(NODS). The trend is catching up fast and already deep-pocket pharma majors such as Dr

Reddy's Laboratories, Ranbaxy Laboratories, Nicholas Piramal India Ltd., Sun

Pharmaceutical Industries have separated their NCE activities into separate companies.

Experts feel it's the logical extension for the R&D activities ever since India

recognized the product patent regime since 2005. The R&D operations of Indian

pharmaceutical companies have reached an inflexion point that could catapult them into

the big league globally. Their expertise in early discovery- phase I & II clinical trials

- is most useful, especially when combined with the late discovery competencies of

intemational pharmaceutical majors. R&D for drug discovery is a capital-intensive

activity. Each step of the discovery process is steeped with uncertainty. A risk-and­

reward sharing mechanism can therefore help unleash synergies and enable both partners

to maximize the value of their investments. In this regard, free and standalone NCE

companies are best positioned to realize gains [8] because of the inherent flexibilities in

their business model. The de-merger also helps in getting more funding and expanding

the R&D activities better.

4.12 STRATEGIES FOR THE FUTURE

Nowadays, bio phannaceutical corporations are facing serious inefficiencies in

their drug discovery process. Undoubtedly, research is the step in which substantial risks

are being taken. During this process, researchers develop tests to screen libraries of

chemical compounds against therapeutic targets, evaluate the amount of a drug required

to effectively treat the disease, study the extent to which a drug interacts only with the

target, assess the presence and significance of any harmful side effects and design the

way the drug is going to be administered to patients. It is generally agreed that efficiency,

productivity and quality are the main drivers for the phannaceutical industry. However,

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there is a tendency to underestimate the impact that R&D operations, project

prioritization and partnership strategies have in the company output.

4.12.1 Research & Development Operations

Research and Development operations constitute a big issue in the operating

model of pharmaceutical companies. There is an unmet need for high throughput assays

to be used in the validation of the therapeutic targets. If that problem is solved, then the

drug discovery process can change from a linear process to an iterative process in which

target validation runs in parallel with drug discovery or drug optimization activities.

4.12.2 Project Prioritization:

Project prioritization is concerned with allocating the company resources

according to the importance of each project. Unfortunately, project prioritization is not

being carried out in the best way possible. It is often used to track resource utilization

rather than forecasting or modeling which is the better way to fit each project into the

business model of the company.

4.123 Partnership Strategies:

Pharmaceutical companies should integrate through cooperative research ; the

critical mass needed in the vital areas of drug development . With such partnerships

biopharmaceuticals can experiment emerging technologies before bringing them inhouse.

The idea is shifting from straightforward contracts and licenses to 'invasive' deals in

which people, technology and strategies are shared.

4.13 OUTSOURCING- An Effective Way to Reduce R&D Costs

A growing trend in R&D is that of outsourcing. Outsourcing enables companies

to reduce overall costs, cover gaps in capacity and improve their skill base. It also allows

them to concentrate their in-house efforts on those patts of the R&D process that are most

cmcial to their objectives. An increasing number of companies have sought

collaborations with other companies in order to spread the risks and costs involved in

drug development and also to gain access to new technologies and expertise that can

drive innovation. As a result, biophannaceutical companies have begun to pay more

attention to alliance management in order to monitor this process. Achieving a successful

partnership depends on the participating organizations co-operating in setting up systems

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and processes that will advance technical breakthroughs for the project and encourage

cross-talk between the personnel involved. A particular area for collaborations has been

the biotechnology (biotech) sector. Although it is a relatively young sector, the biotech

industry promises to deliver many benefits, such as medical treatment tailored to the

individual patient's biological make-up. Deals of this nature give smaller companies the

finance to carry on with their R&D and for the larger companies it has the benefit of

supplementing their new drug pipelines.

4.13.1 ASIA- The Emerging Pharmaceutical Hub

The large number of patent expirations, decreasing R&D productivity and high

costs of drug development are forcing big pharmaceutical companies to outsource their

R&D operations to other locations. Asia is proving to be the most preferred destination to

carry out their drug development activities. Availability of a vast patient population, low

costs, R&D workforce and a favorable regulatory environment are the main driving

forces to transform Asia into the hub of R&D activities. A number of Contract Research

Organizations {CROs) have set up shop in Asia to provide trial monitoring, project

management, data management, safety reporting, drug distribution and central laboratory

services. Many top-notch western multinational companies have already moved their

R&D operations to Asian countries including Glaxo Smith Kline, Pfizer and Novartis.

India is also one of the most preferred Asian countries for R&D activities. Easy

availability of patient pool, diverse disease profiles in the patient population, an estimated

cost savings of 50 percent in Phase I studies and 60 percent in Phase II & III studies and

well-equipped institutions with skilled professionals are the major driving forces behind

this trend. The country has also become TRIPS compliant since the year 2005, which also

makes its phannaceutical industry more attractive.

The Chinese phannaceutical market is one of the fastest growing in the world. It

is estimated to be the fifth largest by 2010 and third largest by 2020. The country offers

many advantages like economical costs and huge patient population. As compared to the

West, the cost of carrying out clinical trials in China is 15% lesser for Phase I and 20

percent cheaper for Phase IVIII . China also has the advantage of a cheap and educated

R&D workforce.

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Problem Areas: In spite of the Asian R&D doing exceptionally well, there are

concerns galore like lack of adequate skills and infrastructure in many areas of R&D,

imprecise documentation systems, ambiguities in the interpretation and implementation

of global regulatory and intellectual property protection standards and issues on

maintenance of confidentiality. While the region is known for its economical costs, there

are concerns about the quality aspects.

Therefore, Asia needs to strike the right balance between quality and economics

m cost. Concerted efforts are needed from the pharmaceutical industry, academic

institutions and regulatory bodies.

4.13.2 OPPORTUNITY FOR INDIA

Soaring drug discovery development times, prolonged regulation-mandated

testing, complex review processes, rapidly escalating R&D expenditures and competition

are hurting the margins of pharmaceutical companies. In an attempt to improve falling

revenues, the pharmaceutical industry has resorted to outsourcing of high-end services

such as drug discovery and development to inexpensive but highly skilled destinations in

Asia.

India has emerged as a preferred destination for outsourcing research services

owing to its low cost manufacturing, lower cost of R&D personnel, lower capital and

operational costs for quality infrastructure of international standards. Technology

developments are happening at a bewildering pace. Such advances not only create new

market opportunities but also set the platform for stronger collaborative framework for

discovery, and development. The end-result will only mean more business to India.

"While the climate is ripe for cross-disciplinary team research and scientific exchange

flourish, challenges surface while handling the overwhelming amounts of data generated

in modem research and their ownership rights", cautioned Analysts. Data exclusivity is

the key to attracting foreign investments in the Indian pharmaceutical industry. However,

this would require political will and resources to improve institutions and train personnel

in-charge of implementing IPR.

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4.14 FUTURE SCENARIO OF GLOBAL PHARMACEUTICAL

INDUSTRY & COST BENEFIT CALCULATION FOR INDIA

Of all the opportunities for global pharmaceutical companies in present scenario,

outsourcing the clinical development phase of the R&D process appears the most

promising. With a large population and world class medical skills, this outsourcing

service segment is developing rapidly and with patent protection no longer a hurdle, a

fresh look at this segment is warranted. Including India in the clinical development

outsourcing network presents a four fold benefit - it is the most immediate opportunity

with the greatest potential benefit in the shortest possible time addressing the most

pressing issue today.

Source: A white paper from Deloitte Life Sciences and Health Care, Deloitte Consulting,

Zurich written by Dr. Satish Acharya

An Example to Illustrate the Cost Advantage of India

Two approaches were taken to estimate the savings by time and cost by

outsourcing clinical trials to India. In the first approach the authors took widely accepted

estimates that a clinical trial costs an average $ 30,000 a day and lasts an average 6.6

years, and that outsourcing to India could save half the time and cost. In the second

approach they took a more generic view that bringing a molecule to market has crossed a

billion dollars in recent times, and that overall half the costs of clinical trials can be saved

by outsourcing to India

Source: A white paper from Deloitte Life Sciences and Health Care, Deloitte Consulting,

Zurich written by Dr. Satish Acharya

4.14.1 GROWTH SEGMENTS TO BE FOCUSSED BY INDIAN

PHARMA INDUSTRY

A report by Care Research on the Indian Phannaceutical Industry (!PI) shows an !PI

Value Road which enlists the various value opportunities for growth of Indian

phannaceutical companies. The !PI Value Road attempts to establish a growth path for

Indian pharmaceutical companies by identifying six growth segments in increasing order

of perceived value that can be generated by following strategies focused on a particular

segment. The segments identified are:

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Bulk-drugs

Domestic formulations

Exports to non regulated markets

Contract Research and Manufacturing Services (CRAMS)

Exports to regulated markets and

New Chemical Entity [NCE] research

It is also a common understanding that the growth of the Indian pharmaceutical

companies in the domestic market gets restricted with the MNCs introducing newer

patented drugs in the country. Under this scenario, the growth for the formulation

companies is likely to come from the generics opportunity in the regulated markets and

geographic expansion in the semi/non regulated markets. The value of drugs going off­

patent in regulated markets is estimated at US$ 70-80 billion [14] during the next five

years and this represents a huge opportunity for Indian pharmaceutical companies to

establish their presence in these markets.

The investment in R&D is also on the rise as it has become important for Indian

companies to start innovating new drugs in order to ensure long terin sustainable growth

and remain competitive at the global level. Indian companies have invested in New

Chemical Entity (NCE) research and are scouting for global partners for pursuing

collaborative research.

4.14.2 SUPPORTING ROLE OF THE STATE GOVERNMENTS IN

INDIA

As we have seen from the above, the global phannaceutical companies are

increasingly outsourcing and off shoring their discovery research, clinical testing and

manufacturing functions. High quality service delivery coupled with greater cost

competitive offered by Indian companies has catapult India among the preferred off

shoring destinations for global phanna majors.

To assist Indian pharmaceutical industry gamer large share of the upcoming

global opportunities, the Govemment of Madhya Pradesh (GOMP) intend to assist the

development of a phannaceutical cluster in the State. The cluster would support all kind

of phanna companies engaged in manufacturing, research, or clinical functions, large or

small, across the entire pharmaceutical value chain. The proposed cluster would be

184

comprehensive in nature. It would encompass firms of all size and types engaged in

various manufacturing and research activity, key support functions and various other

facilities of specific and generic use at a single geographic location . The cluster format

would extend various benefits to the tenants in terms of synergies of operations and

realization of various growth avenues arising out of such a format.

Due to changing business dynamics in the global phannaceutical industry,

substantial opportunities are emerging across the entire pharmaceutical value chain for

Indian companies to tap. There is significant potential for establishing FDA approved

API's and formulation units, integrated R&D centers, preclinical research centers etc. in

the Country.

Keeping in view the clustering tendency of pharmaceutical companies around the

location of strategic importance, there is huge scope for creating world class

pharmaceutical cluster in the country.

4.15 Implementation of Technology Managemnt

l. Global Technology (R&D) Management

It can be inferred from the above study that through its massive R&D investment,

the research-based industry represents our society's best hope to fight, defeat and

eventually eradicate a wide range of illnesses that are costing a fortune - not to

mention pain and suffering. It has been assumed that companies with high R&D

expenditures will be the most innovative and productive, but the relationship has been

shown to be much more complex. This is clear from the fact that although R&D

investment by the industry has been on the increase, the number of novel drugs

reaching the global market has been on the decline. However, the tendency to

maintain a high level of spending on R&D seems set to continue. This is because it is

believed that greater expenditure on R&D will translate into easier access to the new

technologies of genomics, high throughput screening (HIS) and combinatorial

chemistry (CC).

Looking at the relation between sales revenue and R&D spending of two global

phannaceutical companies - GSK and Pfizer- we see that there is a positive cmTelation

between the revenue and R&D spending for both the companies for most of the years.

The years when there is a negative correlation, it has been so that either some of the drugs

185

development had to be abandoned at later stage or some earlier investments proved to be

successful in the current year.

Source: Annual reports of last 5 years for Pfizer and GSK

As the biotechnological paradigm is progressively replacing the chemical one, the

biotech startups are the principal engine of R&D activity. They discover new molecules

and impulse drug innovation. In fact, a sort of division of the innovative work is

developing, favouring academic organisations for the fundamental research,

biotechnology firms for the upstream research stages and large firms for the routine and

costly stages of development and marketing.

Project Selection and decision analysis is of vital importance which can have a

direct impact on the profitability in the Pharmaceutical Industry. Drug development can

be regarded as a process in which a skeptical regulator mandates the companies to

provide rigorous evaluations of hantanu pharmaceuticals so that the regulator can decide

on their value. Nevertheless, much of the value added is through development of

information rather than product.

Of all the opportunities for global pharmaceutical companies in present sceniuio,

outsourcing the clinical development phase of the R&D process appears the most

promising. In an attempt to improve falling revenues, the pharmaceutical industry has

resorted to outsourcing of high-end services such as drug discovery and development to

inexpensive but highly skilled destinations in Asia.

2. Opportunities for the Asian countries.

Especially in Indian context, with growing outsourcing from global companies along

with present and future strategies for major India pharmaceutical companies. The

large number of patent expirations, decreasing R&D productivity and high costs of

drug development are forcing big pharmaceutical companies to outsource their R&D

operations to other locations. Asia is proving to be the most preferred destination to

carry out their drug development activities. With a large population and world class

medical skills, this outsourcing service segment is developing rapidly and with patent

protection no longer a hurdle, a fresh look at this segment is warranted in countries

like India and China. Many top-notch western multinational companies have already

186

moved their R&D operations to Asian countries including Glaxo Smith Kline, Pfizer

and Novartis.

The !PI Value Road attempts to establish a growth path for Indian

pharmaceutical companies by identifying six growth segments in increasing order of

perceived value that can be generated by following strategies focused on a particular

segment. The segments identified are Bulk-drugs, Domestic formulations, Exports to

non regulated markets, Contract Research and Manufacturing Services (CRAMS),

exports to regulated markets and New Chemical Entity [NCE] research.

The investment in R&D is also on the rise as it has become important for

Indian companies to start innovating new drugs in order to ensure long term

sustainable growth and remain competitive at the global level. Indian companies have

invested in New Chemical Entity (NCE) research and are scouting for global partners

for pursuing collaborative research. Many pharma majors are now de-merging their

NCE operations into separate companies to scale-up their R&D activities achieve

better focus and hedge against risks. The trend is catching up fast and already deep­

pocket pharma majors such as Dr Reddy's Laboratories, Ranbaxy Laboratories,

NicholasPiramal India Ltd., Sun Pharmaceutical Industries have separated their NCE

activities into separate companies. This helps in getting more funding and expanding

the R&D activities better.

4.15.1 RECOMMENDATIONS AND SUGGESTIONS FOR

TECHNOLOGY MANAGEMENT

I. Pharmaceutical companies should re-evaluate the idea that 'Big is Better' and

integrate through cooperative research the critical mass needed in the vital areas of drug

development. With that kind of partnerships biopharmaceuticals can experiment

emerging technologies before bringing them in-house. The idea is shifting from

straightforward contracts and licenses to 'invasive' deals in which people, technology and

strategies are shared.

2. In choosing which drugs to develop, it is necessary to study and reflect the cost

and probability architecture of projects. Many calculations assume that, whether or not a

project fails,all development costs have to be paid. However, development costs in phase

187

III will not be paid unless phase II is successful. So by adopting this model of decision it

can be ascertained as to which project is going to be profitable for the firm.

3. There is an unmet need for high throughput assays to be used in the validation

of the therapeutic targets. If that problem is solved, then the drug discovery process can

change from a linear process to an iterative process in which target validation runs in

parallel with drug discovery or drug optimization activities.

4. If companies could even partially improve the attrition rates in late-stage R&D,

their relative costs would plummet, making a huge impact.

5. Due to changing business dynamics in the global pharmaceutical industry,

substantial opportunities are emerging across the entire pharmaceutical value chain for

Indian companies to tap. There is significant potential for establishing FDA approved

API' s and formulation units, ntegrated R&D centers, preclinical research centers etc. in

the country.

4.16 Impact of Research and Development on Indian Pharmaceutical

Industry -Post 2005

After 2005, a wide scope for the Indian pharmaceutical industries in the world

market is being observed. The players who have their own strong R&D activities as well

as significant domestic and international business will have an edge over others. A few

companies such as Ranbaxy, Dr Reddy's Laboratories, Orchid Chemicals, and Lupin

Chemicals have already shifted their focus and taken active measures for innovation of

medicines since 1994, when India signed in WTO.

According Mr. Ramesh Chopra, M. D., Facts For You Enterprises Pvt. Ltd.,

one can say that: "The next few years will see a variety of changes in the Indian phanna

industry. The industry will need to adopt i !self to do well in India and in global market.

The Indian phanna industry will flourish after 2005.

A FICCJ (Federation of Indian Chambers of Commerce and Industry) survey on

the state of capital markets shows that the pharmaceutical and power sectors will be the

most favoured sectors by investors in the coming years, while there wiii be decline in

FMCG scrips.

Indian pharmaceutical manufacturers are one of the lowest cost producers of

drugs in the world. With a scalable labour force, Indian manufacturers can produce drugs

188

at 40 per cent to 50 per cent of the cost in the rest of the world. In some cases, this is as

low as 90 per cent. This is a good sign according to researcher as investment in R & D of

pharmaceutical companies is increasing in order to compete globally in new product

patent regime & so they will be required to raise more funds.

Source: I. http://www.finsights.com/article29.html (Facts For You Survey)

Source: 2. http://www.hinduonnet.com (The Hindu Business Line)

Indian phanna is adopting altern alive business models to navigate competition

and opportunity. India is well positioned to attract large global pharmacies with

competitive costs & improving IPR protection Indian pharma companies shifting from

business-driven research to research-driven business Global pharma's key debates to

focus on Value and Pricing, Innovation and Productivity, Compliance and Risk.

According to Ernst & Young's Report released in July 2004, "India is recognized as

global pharmaceutical outsourcing hub". Value and Pricing, Innovation and Productivity

and Compliance and Risk are the three core issues facing global pharma today.

The Report has identified India as an emerging hub for collaborative and

outsourced. Says Jainij Purandare, chairman, Ernst & Young India, "Several Indian

Pharma companies are now holding on to their own on the world stage. Our pool of

trained chemists, excellent track record of innovation and US FDA approved

manufacturing facilities enable local players to offer significant benefits in the drug

development process. "

According to the report, "many global companies are confronted by a value crisis

as they try to sustain a business model based on high costs of manufacturing, R&D,

Marketing and sales, increasing regulatory scrutiny and reimbursement pressures.

Countries that can combine lower cost manufacturing with adequate regulatory.

Protection of intellectual property are well positioned to attract large phannaceutical

Companies, India being a prime example." Approximately 30-50 per cent cost saving

Opp01tunity is possible in India, it adds.

"We are seeing a fundamental shift in Indian companies' approach from business­

Driven research to an increasing focus on research-driven business," says Utkarsh

Palnitkar, Emst & Young India's Health sciences Industry leader.

Source: . http://www.ey.com

189

(Global Pharmaceutical Report 2004- Ernst & Young)

· In the changing Landscape Indian companies are adopting a combination of

alternative business Models to navigate competition and opportunity. According to Ernst

& Young's report these includes

a) Focusing on export led growth through subsidiaries or acquisitions in high Margin

regulated markets.

b) Bolstering NCE research capabilities.

c) Partnering across the value chain with multinationals through licensing,

collaborative R&D or co-marketing arrangements.

d) Contract research and manufacturing

According to Mr. Srikant Panigrahy of Xavier Institute of Management,

Bhubaneswar, one of the major concerns of India after becoming a member of World

Trade Organization (WTO) is adopting Trade Related Intellectual Property Rights

(TRIPS) and Product Patents in Pharmaceutical Industry. Many economists urge that

there· will be a steep increase in price, more investment in R&D due to product

patents and a shut down of large number of small scale industries.4 Multinational

companies of India have started preparing for the post-GATT era (after 151 Jan.2005). But

there are medium and small sized companies, who although having an urge to innovate

something are unable to set up their own research and development units as well as

regulatory affairs department due to high cost. Infact, many of them are not clear about

the TRIPS agreement. Out of the 20,000 pharmaceutical industries, there are more than

19,600 medium and small-scale industries in India. Government of India has recently said

that small-scale units are backbone of India and they should be protected at any cost in

the post-GAIT era.

Source: http://home.ximb.ac.inl-u503002/ (" WTO and its implication m Phanna

industry" Paper Presented by: Srikant Panigrahy, FPM, XIMB)

This paper discusses several aspects related to Indian phannaceutical industry and

identifies a few areas of study relating to managerial challenges, which will be faced by

medium and small-scale companies who are fighting for their survival in the post-GA TI

era.

190

Mr. J P Ghose Dastidar General Manager - Dabur India Limited carries a

view on impact of patent regime on pharmaceutical industry's Research and

Development as:

"To establish an identity in the International market, Research and Development

activities have to be strengthened with substantial investment by Indian finns. As a result

of the availability of the patents in drugs and medicines, Multinational companies will not

be interested to establish separate R&D centres in India. If fact, it will be difficult for

domestic companies to be able to match multinational companies potential in R&D

sector, sales turnover and world-wide infrastructure for patenting and promotion of their

products. Further to achieve significant performance on the basic R & D front in India,

Government will have to come forward in a big way to support public and private efforts

on a long term basis".

Dr. Saji Nair, faculty member of Amrita School Business, Coimbatore, has

done exploratory study on the topic "Globalization of R&D in the Indian

Pharmaceutical Sector". Dr. Saji Nair has published in 2004; "Recent Trends in

Globalization of R&D: The Case of Indian Pharmaceutical Industry", in Delhi Business

Review, Vol.5, No.2, pp.lll-116.

Source: http://www.shilpabichitra.com/shilpa2000/wbartl5.htrn

Source: www.arnrita.edu/publications/ arnritarpan/arnritarpan-dec2k5.pdf

4.16.1 The Pharmaceutical Research and Development Committee

(PRDC) Report charts out Roadmap to Transform India into a

knowledge Power as detailed under.

I. The Phannaceutical Research and Development Committee (PRDC) was set up

under the chainnanship of Dr. R.A. Mashelkar, Director General, CSIR to study and

identify the measures needed to strengthen R & D base of the Indian phannaceutical

industry. The PRDC had submitted the PRDC REPORT to the Minister of Chemicals &

Fertilizers, Government of india, Shri Suresh Prabhu on December I, 1999.

2. The Indian Phannaceuticals Industry is today self-reliant in several areas. The

low levels of profitability combined with comparatively small size of the companies was

largely responsible for the low investment in R & D, which has been largely concentrated

191

on process development for known drugs. The commg century will pose several

challenges to the industry, not the least of all will be the new IPR regime.

3. The Committee enunciated a vision for Indian pharma R&D as:.

''To provide intellectual capital to make available safe, cost-effective, contemporary,

quality therapeutics to the people of India to help reduce percentage of mortality and

morbidity and to emerge as a significant player in the global market place."

In consonance with this vision, a grand dream for production, export and investment in

phanna R&D was evolved. This report suggests the measures by which such a dream and

vision could be realised.

Source http://pib.nic.inlarchieve/lreleng/lyr2000/rjan2000/r24012000.html

(Press Information Bnreau, Government of India )

4. Priority areas for Indian pharma R&D have been identified. India's excellent

expertise in developing new and innovative processes for known molecules needs to be

exploited in a greater measure. Priority needs to be given for initiation of new drug

development for diseases of relevance to the Indian population, while at the same time

seizing opportunities to become a global player by introducing globally competitive

products based on new molecules, new delivery systems, etc.

5. To achieve such objectives, the existing human resonrces in conventional

methods of drug discovery need refurbishing alongside acquisition of newer tools of drug

discovery. Identification of such tools, estimation of the new human resource

requirement, the levels of required investment and the centres where such investment

could be made have been specified in the report.

6. Citing the unique opportunity for India to become a leading centre for clinical

trials, the Committee has called for basic changes in the legislation allowing import of

animals, contract research, and a legal status for institutional animal ethics committee.

Furthennore, establishment and operationalisation of a cGMP, GLP and GCP monitoring

authority has been recommended.

7. Recognising the crucial role played by the Indian systems of medicine in the

health care needs of our population, the Committee has recommended major and specific

initiatives to strengthen and modernise the existing infrastructure. Proper scientific

192

documentation of our traditional knowledge base in the internationally accepted format

and media has been suggested as a priority.

Source http://pib.nic.in/archieve/lreleng/lyr2000/rjan2000/r24012000.html

(Press Information Bureau, Government of India )

8. A higher level of innovation and IPR management coupled with strategic

manufacturing and aggressive marketing will largely determine Indian pharma industry's

future. Specific measures for strengthening the IPR system with action points for the

Government, judiciary and the legal system, industry, S&T and educational system have

been suggested. Some suggestions for enacting a TRIPs compatible IPR legislation,

which protects the interest of the consumers and allows a platform for the growth of

Indian pharma industry have been made.

9. In the backdrop of a strong trend towards globalisation of regulatory and

scientific requirement pertaining to safety, efficacy and quality issue, the Committee has

recommended a professionally managed and efficient regulatory mechanism under the

Central Drugs Standard Control Organisation. Several specific measures have been

suggested to facilitate creation of a new structure for CDSCO.

10. Recognising that the significant areas of healthcare of relevance and value to

the Indian populace will not be addressed by the companies in the developed world, the

Committee has recommended the establishment of Drug Development Promotion

Foundation, which will promote such R&D. This foundation will be truly autonomous

and independent of the government, with a well defined legal structure. The Committee

has also detailed the functions, management and financing of the Foundation.

II. On the funding of R&D, the Committee has suggested several fiscal and non­

fiscal measures. Most importantly, an effective venture capital financing environment

needs to be created by removing the existing roadblocks, which have been specifically

identified. For attracting R & D towards high cast-low-return areas the Committee

recommends mandatory collection and contribution of l% of MRP of all

fonnulations sold within the country to a fund called 'Phannaceutical R & D Support

Fund' to be administered by the Drug Development Promotion Foundation. In a major

recommendation the Committee has suggested that a significant portion of the proceeds

realised under DPEA should be credited to this fund.

193

12. Finally, concrete action points for the government agencies and departments

have been specified with time frames. The Committee has urged the government to

quickly set-up an enabling mechanism under the Department of Chemicals and

Petrochemicals to initiate implementation of its recommendations in a time bound

manner.

Source: http:/ /pib .ni c. in! archieve/lrel eng/! yr2 000/rj an2000/r240 12 000 .html

Information Bureau, Government of India)

(Press

Icfain Journal of Management Research carried out out a detailed research on

R&D activities of Indian Pharmaceutical Industry and the authors state that considering

the substantial time taken in the development process of a drug (I 0-12 years) there is a

need to predict a future healthcare environment as also factoring in issues of

epidemiology and demographics in R&D decision-making. The authors have developed

two types of R&D models in the pharma industry- the traditional model focused on the

large scale output of blockbuster drugs to help the company dominate the world market

and the modem R&D model which is more focused on the company being innovative,

flexible and dynamic in its decision-making. The authors mention that though the aim of

pharma and biotech companies is creating a company culture that thrives on innovation

and employment development, it is hard to achieve in practice. They emphasize on the

need for making use of external partners such as Contract Research Organizations

( CROs) in the R&D process for both reducing the cost and time involved.

In another study published in Marketing Mastermind of ICFAI University

'Trends in Phannaceutical 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

194

with foreign companies with world class manufacturing facilities will have a definite

competitive advantage and are most likely to outperform the industry.

Source : http://www.icfaipress.org/books/Pharm _Sect_ Tmds _Cases_ V.asp

ICFAI Press Publication )

4.17 REVITALIZING THE PHARMACEUTICAL BUSINESS

Innovative Marketing Approaches by Dr. R.B. Smarta

Dr R B Smarta explores new and innovative marketing responses to the changing

realities in order to inject new life into pharmaceutical organizations. Beginning with a

discussion on innovation and strategy, the book goes on to suggest how pharmaceutical ·

companies can acquire, develop and nurture their marketing assets. Dr. Smarta stresses

the need to be creative in communicating to one's customers. He outlines new and

unconventional sales promotion avenues while emphasizing the need to reach customers

through well-defined distribution channels. He also discusses the policies, practices and

procedures that can help to implement innovative marketing approaches in order to

achieve definite results. The book concludes with demonstrating how the success of . .

marketing operations can be measured through financial analysis.

4.17.1 PHARMA SECTOR MISSES ATTENTION OF UNION

BUDGET 2004-'05

Despite a host of important suggestions and demands submitted by various drug

industry associations to the Ministry of Finance, the Union Budget 2004-'05 has no

specific proposals to give a boost to this promising industry. Even as the drug industry in

India is to enter a new mode of business pattern with the emergence of product patent

regime during the same budgetary period, the finance minister hardly considered any of

these proposals made by the industry thus naturally, the responses to the Central Budget

this time from the disappointed industry circle was greatly melancholic. The reactions to

the Union Budget presented by P Chidambaram in the Parliament echoed that it was not

digested well by the phanm industry for the lack of any specific proposal for the sector

and for not making any mention of price control, encouragement due to lPR regime, tax

incentives in the areas of R&D and manufacturing. On the overall, the MNCs were more

195

vociferous in expressing their dissatisfaction from the Budget. The Indian corporales, on

the other hand, seemed to have a more balanced view on the Budget.

Yogin Majmudar, president, Indian Drug Manufacturers' Association (IDMA),

said, "The Budget is more or less an extension of last year. Nothing has been assured in

the areas of R&D or duty revision. None of the IDMA recommendations were

met. We had requested for a duty exemption on the import of anti-AIDS drugs, which

was not met."

Dr. Ajit Dangi, director general, OPPI, said that as per the recommendations of

the Chelliah committee, the government could have reduced the import duties of drugs

from 20 per cent to 15 per cent and I 0 per cent respectively. There is still an import duty

of 5 per cent and 15 per cent on the import of life saving drugs, which could have been

done away with," he said.

Source: www.pharmabiz.com

Dr. Brian W Tempest, CEO & managing director, Ranbaxy Labs. Ltd. said, "

Though the pharmaceutical industry is widely believed to be India's next potent vehicle

for catapulting the country on a high growth trajectory, no fiscal incentives seem to have

been provided either for pharma R&D or for leveraging Intellectual Property. The

Finance Minister should address these issues in the 2005-2006 Budget. Emphasis has

been laid on education, rural health, employment, food, water-shed management and

defense. Rates have been kept unchanged in both Direct & Indirect Taxes. The most

significant revenue raising measure is the 2 per cent education cess on all taxes and the

widening of the Service Tax net, along with the increase in Service Tax rate from 8 per

cent to I 0 per cent. In a nut-shell, there is thought and honour in this Budget, but no

passion or courage

Satish Reddy, managing director and COO, Dr Reddy's Laboratories, strongly

reacted to the Union Budget 2004-'05 that there is practically nothing for

Phannaceuticals, except for a 10 years I 00 per cent tax exemption for companies doing

research in Biotechnology. "The Budget is likely to lead towards the growth of certain

sectors like Agriculture, and for more broad based focus on growth, one may have to wait

for the next Budget," he added.

196

l/amla, director (Finance), Pfizer India, said, "The Budget has been a

disappointment as far as Indian pharmaceutical industry is concerned. The Common

Minimum Programme (CMP) of the current government had promised an increase in

expenditure for the pharma industry, which was not indicated in the Budget. A

countervailing duty of 16 per cent has been imposed on life saving drugs, which means

the life saving drugs will become costlier by !6 per cent. The service tax is extended to

transport and logistics sector, which will increase operational expenditure of pharrna

companies."

Source : www.pharmabiz.com

However, T S Jaishankar, chairman, Confederation of Indian Pharmaceuticals

Industries (CIPI), welcomed the Budget saying that it takes into consideration the

interests of all the walks of public life, and is satisfactory for the pharmaceutical industry.

The Finance Minister has not tried to bring in much sensational changes that could not

only affect the pharmaceutical sector, but also other sectors. The decision to increase the

CLSS scheme limit to One crore and to increase its subsidy component to 15 per cent will

definitely help the cause of the pharmaceutical industry, now undergoing a transition

phase. Another noticeable development was the proposed health insurance scheme, which

will definitely boost the turnover of the Indian Pharma sector.

Habil Khorakhiwala, chairman, Wockhardt Ltd feels that the Budget was

balanced. "The 2 % cess that will yield Rs 5,000 crore a year for education is a gigantic

leap if implemented properly. At the same time, he has sent the right signals to the

industry and world at large by raising the foreign direct investment cap in key sectors like

telecom and airports. However, we are disappointed that there is nothing in this Budget to

promote R&D in phannaceutical sector, which the industry expected and deserved,

against the background of the new patent regime begitming on January I, 2005. The

Finance Minister has provided incentives to R&D in automobile but left out

pharmaceuticals. I hope he will make amends for this omission before long,"

A jay Piramal, chairman, Nicholas Piramal India Ltd was also of a similar opinion.

"The growth plan of 7-8 per cent is encouraging. I would have liked if there would have

been a clarification on weighted income tax deduction status for R&D spend of

phannaceutical companies beyond March 2005. Indian phannaceutical companies are at

!97

a crucial point of evolution, and the continuation of this incentive will assist Companies

to allocate higher funds for research," he said.

Source: www.pharmabiz.com

According to Venkat Jasti, president, Bulk Drug Manufacturers Association, and

vice chairman, Pharmaceutical Export Promotion Council (Pharmexcil), there is no much

emphasis on pharma sector, though only health insurance is given some importance.

"Though Automobile industry has been notified as an industry entitled to 150 per cent

deduction of expenditure on in-house R&D facilities, and it is presumed that it may

continue for pharma sector for another 9 months or so," he said.

1A Modi, chairman, Cadi/a Pharmaceuticals, said, "The exemplary work done

by the Indian Pharmaceutical Industry has totally missed the attention of the Finance

Minister while presenting the Budget for the year 2004-2005. It seems that, the

concessions to the Farming Sector has over shadowed the Pharmaceutical Sector. "He

added that the Pharmaceutical Industry today is growing at a commendable speed and

particularly it is making deep inroads into the developed countries, where the earnings are

substantial. From 2005 when the WTO comes into effect, the existence of the 'Industry

largely depends on research. Pharmaceutical research shall have to be strengthened more

and more to capture the developed markets through newly expiring patents and new

molecules discovery. To exploit the patent expiry market, the Pharmaceutical research

should have sufficient fund, to address the issue through non-infringing processes where

the Indian Pharmaceutical Industry has done commendable achievement and a large

number of molecules have already been registered in the developing countries.

SV Veeramani, clwimum of the SSI Subcommittee of the !Julian Drug

Manufacturers Association (JDMA) ami CMD, Fourtts Lab, said the Budget could be

tem1ed as a poor man's Budget and it has not much to enthuse the pharmaceutical sector.

However, the Budget could be felt as satisfactory since it has not brought in any negative

provisions against the sector.

He added that the welcome steps include increasing the CLCSS scheme limit for

SSls from the existing 40 lakhs to Rs l crorc and to hike the subsidy part from 12 per

198

cent to 15 per cent. Similarly, the liberal incentives announced for the growth of biotech

sector and for the R&D units will definitely help the Indian industry to grow marginally.

4.18 MONOGRAPHS ON ACCOUNTING FOR RESEARCH &

DEVELOPMENT COSTS

The advent of WTO related issues have once again surfaced on a strong platform,

after l st January, 2005, when the new patent, IPR regime has come into full effect. The

main theme of" Competency Building under Global Competition under WTO scenario",

opens the key issues relating to Accounting of Research and Development Costs. The

Institute of Cost and Works Accountants Of India ( ICWAI ), had come out with a major

treatise on " Management and Accounting for Research and Development - The Indian

Praxis" by Prof. S.K. Chakraborty in collaboration with Mr. Bipul K.Bhaumik, in the year

1984. The macro and micro level issues on Research and Development Costs were

deliberated in detail in the publication. The current brief update on Accounting for

Research and Development Costs, takes off from the earlier views and opens the area,

that has to evolve in Accounting for Research and Development Costs. "Product and

Project Costing and Monitoring of R & D Costs" gives thorough analysis of R&D Costs

and The Committee felt that it will be most appropriate to include it as part of this

monograph. The Accounting Standard -8 -Accounting for Research and Development is

also included as a reference, as the accounting treatment is a key issue on the treatment of

Research and Development Costs.

Source: www.phannabiz.com

Source: http://www.aicmas.com/rd.doc

This brief monograph evolves standard practices in future, that can be helpful to

the management accounting fraternity and various users.

l. In most of the cases explored R&D costs do find their way into cunent produc­

tion costs and into product pricing.

2. This is achieved by adding R&D costs usually to administrative and at times to

manufacturing overheads.

3. We came across at least one instance where R&D costs did not percolate down

to product costing, but were directly debited to the P&L NC.

199

4. Project-costing, especially for manpower costs and overheads, is being done in

rather sophisticated ways in certain very large and diversified companies having an R&D

set-up. The responsibility centre concept for overhead allocation, and standard manpower

unit conversions are employed in a few cases only.

5. The range of practices regarding project cost monitoring is also very wide.

Amongst them, the various fonnats illustrated above highlight the crucial aspects of R&D

monitoring in some of the organisations surveyed by us. Many R&D Heads, however

believe in aggregate R&D budgeting, but not in project wise budgeting.

6. As a sequel to the last stance mentioned above, specific tracing of R&D costs

to individual projects is rare to find (see point 2 above also). Obviously, project­

budgeting and project-costing for R&D should be implemented by all concerned.

7. Little evidence could be collected on the manner of apportioning common

overhead costs of the enterprise to the R&D centre.

8. Filling up of time spent record cards by researchers was in clear evidence

(supported by printed formats) in only two firms. Though manhour time cost is the

largest single category of R&D costs, research personnel, including· their Heads, usually

resent the time-logging formality. The 1979 NAA study also concludes that while time

reporting is an important area, the amount of control in it must be weighed against a

possible loss in research productivity.

Source: http://www.aicmas.com/rd.doc

9. Often the rules and regulations of the Department of Company Affairs, the

Indirect Tax Authorities, and price regulating Ministries provide conflicting motivations

to enterprises in the treatment of R&D costs for product costing and pricing.

10. The Cost Accounting Record Rules should draw a clear distinction between

Research and Development-so far as deferred revenue expenditure treatment is pennitted.

Besides, the costing fonnats should provide R&D costs with a separate identity, or

explain under which existing head it is to be incorporated.

II. Wherever firms draw a distinction between Research and Development,

explicit policies should be framed regarding who should bear these two types of costs-the

existing consumer, or the future consumer or the shareholder?

200

(Extract from "Management and Accounting for Research and Development- The Indian

Praxis" by Prof. S.K.Chakraborty in collaboration with Mr. Bipul K.Bhaumik, and

JCWAI Publication.)

4.19 Studies on Intellectual Property Rights

It needs a lot of idea and knowledge for creating something new. For example,

new drugs and new technology products are produced after a lot of research work, time

and above all, huge costs. Films, music recordings, computer software etc. sales depend

on their innovativeness. So, creators should be given the right to prevent others from

copying their inventions, designs or other creations as well as negotiating with others the

use of their products. With this frame, the IPR was bought into WTO. As per the WTO's

agreement negotiated in 1986-94 Uruguay Round, Intellectual Property Rights was

introduced into the multilateral trading system from!'' Jan.2005.

"Intellectual Property Rights are defined as the rights given to people over the

creation of their minds. An exclusive right is given to the creator over the use of his/her

creations for a certain period of time (Now called Trade Related Intellectual Property

Rights".

Source: www.wto.org

Any country coming under WTO is obliged to follow TRIPS, although it has

independence to make its own patent law matching with the specific needs of the country.

There is nothing like an international patent law. There is a transition period given to

each country to adopt the TRIPS Agreement covered under three categories as per the

WTO.

Developed countries were given a transition period of one year following the

entry into force of the WTO agreement, that is, until!" January 1996.

Developing countries were allowed a five-year period up to I" January 2000 to

apply the provisions of the agreement (excluding Articles 3,4, and 5 of WTO

Agreement). Transition economies also come under this.

Least developed countries were given a transitional period of eleven years i.e.

until I'' January 2006 with the possibility of an extension. For phannaccutical

201

patents, this has been extended to l'' January 2016, under a decision taken at the

Fourth ministerial Conference in November 2001.

4.19.1 Under the agreement during Transition period:

All members availing longer transitional period have to comply obligations on

national treatment (i.e. equal treatment for foreign and domestic individual and

companies) and most-favored nation treatment (i.e. equal treatment for nationals of all

trading partners in the WTO) fium 1 '' January 1996. A developing country is given

around ten years i.e. up to 1 '' January 2005 to provide patent protection in a particular

area of technology. A mail box provision is created for filing patent applications for

pharmaceutical and agricultural chemical products from beginning of the transitional

product, even though decision to grant patents may be taken at the end of the transition

period. If marketing rights are given to these products by government, then it should be

only for five years or until a decision to grant a product patent is taken, whichever is

shorter.

Any country coming under WTO is obliged to follow TRIPS, although it has

independence to make its own patent law matching with the specific needs of the country.

There is nothing like an international patent law. There is a transition period given to

each country to adopt the TRIPS Agreement covered under three categories as per the

WTO

Developed countries were given a transition period of one year following the

entry into force of the WTO agreement, that is, until!'' January 1996.

Developing countries were allowed a five-year period up to l '' January 2000 to

· apply the provisions of the agreement (excluding Articles 3,4, and 5 of WTO

Agreement). Transition economies also come under this.

Least developed countries were given a transitional period of eleven years i.e.

until !'' January 2006 with the possibility of an extension. For pharmaceutical

patents, this has been extended to I" January 20 I 6, under a decision taken at the

Fourth ministerial Conference in November 200 I.

202

4.19.2 Obligations under the agreement during Transition period

All members availing longer transitional period have to comply obligations on

national treatment (i.e. equal treatment for foreign and domestic individual and

companies) and most-favored nation treatment (i.e. equal treatment for nationals of all

trading partners in the WTO) from I'' January 1996. A developing country is given

around ten years i.e. up to I'' January 2005 to provide patent protection in a particular

area of technology.

A mail box provision is created for filing patent applications for pharmaceutical

and agricultural chemical products from beginning of the transitional product, even

though decision to grant patents may be taken at the end of the transition period. If

marketing rights are given to these products by government, then it should be only for

five years or until a decision to grant a product patent is taken, whichever is shorter.

Countries which are availing the transition period should ensure that any change

in their laws, regulations and practice made during the transition period do not result in a

lesser degree of consistency with the provisions of the agreement.

4.19.3 Subject Matter and Main Fields of Application of Intellectual

Property Rights

Types ofiPR 1Subject Matter [Main Fields j L~ ------ - -- - - ---r,:;---~-~- --------- -------- ------ ---·-J 1 • !Chemicals, drugs, plastics, engines, r 'New non-obvwus, I

Patents I ' iturbines, electronics, industrial control:1 industrially applicable 1

land scientific equipment ·

:si~;orsymbols t~ id~~tify I -- - -~ - --- - --- - --Trademarks 'All industries

:goods and services J

i -- 'i'ri~tini entertainment (~u~li~: -video, I CopYJight Original works of authorship I ;

I :motion pictures), software, broadcasting' , I

---· ------ --- r· - - --~---- ---- --

,Integrated circuits ,Original layout designs Micro-electronics industry

' Breeders' rights

I

'New, stable, homogeneous, I ~ 'Agriculture and food industry 'distinguishable varieties I

---~-------

203

Trade secrets I secret busin;ss information !All industries I - ~-- ---- - --- ------- __ J

Industri~ldesign;-;o-;:;1~ment~l desig~s-- :Clothing, automobiles, electronics, etc. I < I l

Ge~g~~phical-~iae~g;~phical -~rigi;---~f:Wines, spirits, cheese and oth~;-foodJ

indications 1goods and services :products __j Utility models 'Functional models/designs !Mechanical industry 1

••• '~---'" ~Mw ,,,,__l __ , __ ,~w•-""-''"-''~~-~--~---~m~~-'"' __ j Source : The TRIPS Agreement: A Guide for the South, South Center, Geneva, 1997

4.19.4 Suggestions for modification in the present Patents Act, 1970

Sr. No Present Act Modification Transition status

I Product No product patents Product patent to Product patent

Patent are allowed for be allowed in all applications go to a

food, fields of mailbox that will be

pharmaceutical and technology opened latest by 2005

agro-chemical, only without any

process patents exception

2 Duration 14 years for all Uniform duration Have to wait till

except for food, of 20 years amendment of patent

pharmaceutical and without any laws. EMRS for

agrochemical where exception mailbox patents can be

it is of seven years granted for 5 years.

3 Life forms Patenting of Patenting of life The biodiversity . .

fonns must be Conversation Bill, m1croorgamsms,

non-biological and pennitted which will protect

microbiological Indian germplasm, IS

processes are not still under

pennitted consideration mnong

the ministries.

4 Plant No protection of Plant varieties Plant Varieties Bill IS

varieties plant varieties must be protected also under

204

either to patents consideration among

or sui generis the ministries

system by 1999

5 Granting Govt. has power to Compulsory No action is taken on

of licenses grant compulsory licenses to be granting of licenses on

licenses g1ven only on merit basis

merits of each

case. Patent

holder will be

given an

opportunity to be

heard

Source: Bhushan K.Bonde, Vilas "Patents m Pharmacy The Indian Scenario", The

Eastern Pharmacist, September 1999.

Patents are important as they give legal protection for newly developed products and

processes. Many new basic inventions, protected through patents, have given rise to

m[\jor breakthroughs in various sectors such as Viagra for Pfizer Ltd., techno-industrial

development- xerography and the Xerox Corporation, etc.

4.20 Studies conducted by Contract Research and Manufacturing

Industry

India with its intrinsic competitive advantages remams as one of the most

preferred outsourcing destinations and is now playing a vital role in manufacturing as

well as drug development value chain of various im10vator companies. It has become a

strategic imperative for global phanna companies to make India an integral part of their

manufacturing value chain to maintain lean cost structures and combat intense

competition in the global generics industry. Besides, phanna multinationals are also

increasingly using India as a base for exports not only to the immediate neighbouring

markets, but also to other markets, around the world such as Japan, South Africa, Latin

America and Europe.

205

Due to government policy initiatives for strengthening R&D in pharma by way of

fiscal incentives and other steps to strengthen regulatory mechanism, new R&D setups

with excellent infrastructure are coming up in various regions of the country. Compared

to the average R&D spend of two percent turnover in the sector, more and more pharma

companies are taking a lead in increasing their R&D spending to over seven percent of

their turnover which is a noteworthy achievement. Results of the R&D, manufacturing of

drugs with high quality cost effectiveness and availability world over and higher market

penetration will enable India to become the first in production volume from the present

fourth place in the world.

In due course of time we will develop more 'molecules to drugs' indige-nously.

We have the human power, but what we need to do is to organise ourselves to attain

global standards. This is imperative if we have to develop products that are universally

accepted. Since these involve different technologies like preclinicals, phase I and phase II

clinical trials, pharmacology, bioinformatics etc, we need to develop co-operative skills.

India will soon be able to achieve wider availability and accessibility of therapeutic drugs

arid medical services of acceptable quality at affordable rates to all citizens. The industry

would have indigenous cost-effective drug developments in the form of vaccines,

medicines and diagnostics, which will help in the world market through exports since our

products will have an edge due to the cost. But industry players are clear that over a

period of time they will not be able to rely on cost arbitrage for growth.

"To some extent, the US and European companies understand the cost structure of

the service providers - quality and project management are critical," points out Bharat

Shah, president of Calyx International, a manufacturer of APis and intennediates that

entered the CRAMS space in 200 I.

India is already an attractive destination and to sustain this, building capacity is

going to be a key factor. It is not just about cost arbitrage, because beyond cost arbitrage,

it would be the ability to offer large intellectual capital in numbers which no other

country can do. We have to be competitive in terms of regulations and the speed at which

we tum things around.

Experts foresee expansiOn m new areas, including contract manufacturing of

injcctablcs, which is currently a minor segment because of the need for sterile facilities

206

and specialized technical knowledge. They also suggest that biology based services will

also gain momentum over a period of time.

According to industry experts, the next three years will be good for the industry as

there will be several strategic shifts like many more Indian majors moving up the value

chain and entering into partnerships involve early-stage licensing and risk sharing. The

clinical research market is also likely to undergo a composition change; bioavailability

and bioequivalence studies have occupied a reasonable share of the clinical research

market. However, clinical trials of NCEs/NBEs (Phase II-IV) and data management

would pick up in the years to come.

In conclusion, it is imperative to state that in the future as the CRAMS business

and markets get more mature, the cost advantage will no longer be the prime attracting

factor for the innovators, but rather the importance would shift to factors such as quality,

timeliness and value-added services that are offered.

4.20.1 DIVI'S LABORATORIES LTD.

Vintage: Divi's Laboratories Ltd. was established in the year 1990; with Research &

Development as its prime fundamental.

Focus: Divis Laboratories has focussed on developing new processes for the production

of Active Pharma Ingredients (APis) & Intermediates.

Product uses: It is in the manufacturing of drugs that are used as painkillers and in the

treatment of cold, cough, fever and inflammation in the body.

Infrastructure

Divi's operates from its Headquarters and Registered Office at Hyderabad. The company

has three manufacturing facilities:

• The 1st Facility at village Lingojigudem, Choutuppal Mandai, Nalgonda district, about

60 KM fi·om Hyderabad. Area: 300 acres

• The 2nd Facility has been converted as an Export Oriented Unit at village Chippada,

Bheemunipatnam Mandai, Visakhapatnam Dis!. about 30 KM from the Port City of

Visakhapatnam on the east coast. Area: 314 acres

207

• The 3rd facility is an SEZ Unit at village Chippada, Bheemunipatnam Manda!,

Visakhapatnam Dist., which was commissioned and commenced commercial operations

during 2007.

The company has 4 Research Centers having a total of 117 research stations.

Subsidiaries

Divi's Laboratories (USA) Inc. New Jersey, USA.

Divi's Laboratories Europe AG Basel, Switzerland.

Both were inc01porated in early 2006 for the purpose of marketing the products and

widening their customer base in these regions. Divi's Laboratories Limited, India having

a I 00% holding.

Regulatory compliance: Complete cGMP guidelines are complied to in both the plants I

and 2. Both the plants are also USFDA and ISO compliant. As a company Divis

understand that sustained development is not possible without respecting to IPR. Divis

takes great care to ensure that its product or processes do not infringe valid patents.

Manpower

Unit I: 1300, Unit2: 600

Research Center: 200 scientists

Clients: Divi's has emerged as the 'Preferred Supplier' for around 20 of the top 25 global

Pharma innovators.

Three vears financials at a !!lance (Rs in Lakhs)

2004-05 2005-06 2006-07

Sales (Net) 34737.83 38111.07 72442.45

Sales growth(%) 14.71 9.71 90.08

Other Income 1714.65 1062.48 1360.83

Total Income 36452.48 39173.55 73803.28

Total Income growth (%) 14.89 7.46 88.40

EBIDTA 12167.99 12731.03 25960.62

Interest 429.89 558.32 1057.39

Depreciation 1506.68 1481.59 2232.86

Profit Before Tax (PBT) l 0231.42 l069l.l2 22670.37

PBT Growth (%) 0.34 4.49 ---·-

112.05

208

Provision for Taxation 3628.30 3643.98 3495.87

Profit after Tax (PAT) 6603.12 7047.14 19174.50

PAT Growth(%) -9.35 6.72 172.09

Equity Share Capital 1281.87 1281.87 1291.14

Reserves & Surplus 27084.12 32799.78 52913.37

Net worth 28365.99 34081.65 54204.51

Net Worth growth(%) 23.76 20.15 59.04

Gross Fixed Assets 25380.49 30185.58 49066.56

Net Fixed Assets 18154.39 21477.38 38119.19

Total Fixed Assets 37478.26 51916.04 72553.22

KEY INDICATORS

Earnings per share (EPS) 51.51 54.98 149.54

Debt equity ratio 0.23 0.44 0.28

Operating Margin (%) 35.02 33.41 35.84

Net Profit Margin (%) 19.01 18.49 25.98

Return on Networth (%) 23.28 20.68 35.37

Turnover

During the year, Divi's achieved a turnover ofRs.72442 lakhs as against Rs. 38llllakhs

during the previous year reflecting a growth of 90%.

Your company's product portfolio currently comprises about Ill products covering:

i) Generic products and their intermediates.

ii) New Chemistries comprising:

a. Custom Synthesis of AP!s and Intennediates for multinational

innovators worldwide.

b. Peptide building blocks

c. Nutraceutical products

During the year, Divi's has added 13 products to its product portfolio of which 2

are generic APls and intenncdiatcs and 11 are custom synthesis AP!s and intennediates.

Exports constituted 93% of total turnover as against 89% in the previous year and

exports to advanced markets comprising Europe and America accounted for 75% of

business.

209

Other Income

Other Income mainly comprised Contract Research fee and sale/transfer of some

of the export benefits like DEPB Credits and drawbacks available to the company. The

newly commissioned SEZ Unit has also contributed to business during the year. Other

Income for the year amounted to Rs.l361 lakhs as against Rs. 1 062 lakhs for the previous

year. Income on Export benefits for the year came to at Rs.747 lakhs as against Rs. 446

lakhs during the last year. Income on contract research accounted for Rs.269 lakhs during

the year as against Rs.348 lakhs during the last year.

Earnings before interest, depreciation, taxation and amortisation (EBIDTA)

EBIDTA for the year grew by about I 04% to Rs. 25961 lakhs as against Rs. 12731 lakhs

during the previous year. This impressive growth in profitability during the year is due to

significant increase business aided by custom synthesis which has grown close to 50% of

total business and a very good growth in the generic products business.

Operating Margin

The Operating margin is 35.84% as against 33.07% during the previous year. This

is mainly on account of the impressive 104% growth of EBIDTA in comparison to the

previous year.

Profit after Tax (PAl)

Profit after Tax (PAT) grew by about 172% to Rs.19174lakhs as against Rs. 7047

lakhs during the previous year reflecting a magnanimous growth of 172.09%.This is

attributed to the phenomenal increase in the company's turnover and the tax exemptions

that the company gets on its EOU (Export Oriented Unit) and SEZ. The marginal

decrease in the provision for taxation by 4% has also contributed to this increase in PAT.

Net Profit Margin

The net profit margin of the company which was 18.49% during the previous year

increased to 25.98%. This is attiibuted to the growth in sales and thus brought about

increase in the Profit after Tax.

Earnings per Share (EPS)

Eamings per Share for the year work out to Rs.l49.54 per share as against Rs.

54.98 last year.

210

Debt Equity Ratio

Debt-equity ratio as of 31st March, 2007 was at 0.28, based on total debt, as

against 0.44 during the previous year. This is mainly due to a 37.12% increase in the

shareholders' funds (as the company introduced ESOPs) but not a commensurate increase

in the loan funds which recorded an increase of only 2.5%, and commencement of the

repayment of the loans (to the extent ofRs. 286lakhs) taken during the previous year.

Return on Net Worth

Return on Net Worth has increased to 35.37% as compared to 20.68% during the

previous year, thus making the company more profitable for the shareholders.

This year the company also paid an interim dividend in addition to the I 00% final

dividend that it had distributed during the previous year as well, thereby showing that the

company values the shareholders' interests and ensures that they are satisfied.

4.20.2 MATRIX LABORATORIES

Focus: Matrix Laboratories offers Contract Research & Development services during

early stages of Development and Contract Manufacturing for projects that have advanced

further into development and are being considered for commercial manufacturing.

Product uses: The company is in the manufacturing of drugs that are used as painkillers

and in the treatment of diabetes, aids, cardiovascular diseases, asthma and bacterial and

viral diseases.

Infrastructure: Matrix Laboratories has manufacturing facilities at four locations in and

around Hyderabad and Visakhapatnam, India, manufacturing a wide range of Active

Pharmaceutical Ingredients. The company's Solid Oral Dosage Forms facility is located

nearNashik, about 150 km from Mumbai.

Joint Ventures

Matrix Laboratories has joint ventures with Astrix Laboratories Ltd. and Fine Chemicals

Corporation (Proprietary) Ltd., holding 50% of interest in both the entities.

Subsidiaries

The company has 26 subsidiary companies and a geographical footprint in places like

USA, Europe, Singapore and South Africa.

211

Regulatory compliance: All of the company's manufacturing facilities in India have

been designed to meet the requirements of Drug Regulatory Agencies. All the facilities

are US-FDA approved. The facilities also have ISO 9000, ISO 14000 Certifications. The

Finished Dosage Form facility as Nashik is WHO GMP compliant.

Manpower

Total Employees: 2000

R & D scientists: 200+

Clients: Matrix's clients include 15 of the top 20 pharmaceutical majors in the world

Three years financials at a glance (Rs. in Lakhs)

2004 -OS 2005-06 2006-07

Sales (Net) 67168.80 66713.60 74950.60

Sales growth (%) 20.62 (0.60) 12.34

Other Income 1097.00 13128.40 1637.20

Total Income 65229.00 82570.10 79998.30

Total Income growth(%) 20.85 26.58 (3.11)

EBIDTA 18770.40 24221.10 14798.70

Interest 627.70 815.00 1540.10

Depreciation 2043.30 2234.20 2507.10

Profit Before Tax (PBT) 16099.40 21171.90 10751.50

PBT Growth(%) 8.82 31.50 (49.21)

Provision for Taxation 3072.70 2933.90 790.20

Profit after Tax (PAT) 13026.70 18238.00 996!.30

PAT Growth(%) 4.54 40.00 (45.38)

Equity Share Capital 3059.50 3604.20 3966.10

Reserves & Surplus 59340.90 93628.20 101935.50

Net worth 62400.40 97232.40 105901.60

Net Worth growth(%) 250.00 55.82 8.91

Gross Fixed Assets 43227.40 81679.10 106230.50

Net Fixed Assets 33235.50 62913.70 81281.70

Total Fixed Assets 37110.70 75284.70 84896.70

212

KEY INDICATORS

Earnings per share (EPS) Rs. 8.90 Rs. 13.23 Rs. 4.96

Debt equity ratio O.Q7 0.18 0.23

Operating Margin (%) 27.94 36.31 19.75

Net Profit Margin(%) 19.40 27.33 13.30

Return on Networth (%) 20.88 18.75 9.41

Turnover

Matrix Laboratories has achieved net revenues ofRs. 74950.60 Lakhs for the year

ended 31st March, 2007 compared toRs. 66713.60 Lakhs in the previous year, reflecting

a growth of 12%. Even though the market witnessed sharp price cuts for most of the first

line products, volumes continued to grow.

Export sales contributed 64% of the total sales and recorded a growth of28% over

the previous year whereas domestic sales that contribute 36% of the total sales recorded a

I 0% decrease over the previous year. During the year 2006, My! an Laboratories Inc., a

leading pharmaceutical company in USA, acquired a controlling interest in Matrix

Laboratories. This has enabled the company to derive advantages in terms of economies

of scale by supplying a number of APis to Mylan Laboratories, in addition to its present

business with third party customers.

Other Income

Other Income mainly comprised Interest on bank and other accounts and

miscellaneous income. Other Income for the year amounted to Rs.l637.20 lakhs as

against Rs. 13128.40 lakhs for the previous year. Interest on Bank and other accounts for

the year came to at Rs.363.30 lakhs as against Rs. 194.60 lakhs during the last year.

Miscellaneous Income accounted for Rs.ll59 lakhs during the year as against Rs.838

lakhs during the last year.

Earnings before interest, depreciation, taxation and amortisation (EBIDT A)

EBIDTA for the year declined by about 39% toRs. 14798.70 bkhs as against Rs.

2422!.10 lakhs during the previous year. the lower EBITDA is primarily due to lower

than expected earnings from Docphanna NV, a subsidiary of the company and higher

R&D spend. During FY07, Docphanna's results were lower than expected, due to price

213

erosion for key products in pharmaceutical business, initial costs incurred for the entry

into new markets as well as lower margins in Hospital business. The R&D spend was at

Rs.l 008 Lakhs, showing an increase of 156% over the previous year. This increase is due

to development of more number of APis as well as ramping up of the Finished Dosage

Development and filings.

Operating Margin

The Operating margin is 19.75% as against 36.31% during the previous year. This

is mainly on account of the 39% decline of EBIDTA in comparison to the previous year.

and an disproportionate increase of the company's turnover (12% ).

Profit after Tax (PAT)

The profit after tax (PAT) for the year declined by 45% to Rs. 9961.30 Lakhs

from Rs. 18238 Lakhs in the previous year. Previous year profit after tax includes

exceptional income to the extent of Rs 6859 Lakhs. Without exceptional income the

profit after tax for the previous year is at Rs 11379 Lakhs. The decline in the profit after

tax is primarily due to increased R & D spends and higher interest cost (which recorded

an increase of 161% over the previous year).

Net Profit Margin

The net profit margin of the company which was 27.33% during the previous year

decreased to 13.30%. This is attributed to the decline in the Profit after Tax and the

disproportionate increase in Turnover. With controlled R&D spends and lower interest

burden the company will be able to achieve higher profit margins. Since it has been only

a year since the Joint Venture between Matrix and Mylan, such a situation is witnessed.

In the coming years Matrix will start reaping the benefits of the economies of scale

brought about by this joint venture.

Earnings per Share (EPS)

Earnings per Share for the year work out to Rs.4.96 per share as against Rs. 13.23

last year.

Debt Equity Ratio

Debt-equity ratio as of 31st March, 2007 was at 0.23, as against 0.18 during the

previous year. This is mainly due to a 9% increase in the shareholders' funds but not a

commensurate increase in the loan funds which recorded an increase of 46% as the

214

company took a working capital loan of Rs. 22308.40 lakhs to meet its R&D spends and

increased costs.

Return on Net Worth

Retum on Net Worth has decreased to 9.41% as compared to 18.75% during the

previous year, thus making the company less profitable for the shareholders. Once the

profits of the company start improving, this situation can be taken care.

However, having regard to the significant capital expenditure embarked upon by the

Company to augment production capacity of its various plants to fulfill its global role, the

Directors, after due deliberation, decided not to recommend a dividend for the financial

year 2006-07. The Board was convinced that this approach is consistent with the

Company's commitment, amply demonstrated in the past, to growth and to enhance

shareholder value continuously.

4.20.3 JUBILANT ORGANOSYS LTD.

Vintage: Jubilant Organosys Limited was incorporated m 1978 as Yam Organic

Chemicals Ltd.

Focus: Jubilant Organosys is an integrated pharmaceutical industry player having

presence across the pharmaceuticals value chain. Their range of offerings include drug

discovery and development services, custom research and manufacturing services,

advance intermediates, fine chemicals, active pharmaceutical ingredients, dosage forms

and regulatory affairs services.

Product uses: Jubilant Organosys Ltd is a leading manufacturer of acetyl, animal

nutrition and agricultural products like fertilizers and agrochemicals. These products have

wide applications in industries such as pharmaceuticals, agrochemicals, textiles and

foods.

Infrastructure

Jubilant has seven manufacturing locations in India situated at Gajraula (in Uttar

Pradesh), Roorkee (Uttarakhand), Udaipur (Rajasthan), Nanjangud (in Kamataka), Nira

(in Maharashtra) and Samlaya (in Gujarat) and a manufacturing facility for dosage fonns

in Maryland, USA and state of Washington, USA.

215

Subsidiaries

In India:-

Jubilant Biosys Ltd. for bio/chemo informatics databases & drug discovery

serv1ces

Jubilant Chemsys Ltd. for medicinal chemistry services

Clinsys Clinical Research Ltd. for clinical research

International :-

Belgium: PSI N.V. and PSI Supply N.V., in which Jubilant Organosys holds 80%

equity, are the pharmaceuticals companies providing regulatory affairs services

and supply of dosage forms to European generic companies.

USA:Jubilant Pharmaceuticals, Inc., a subsidiary of Jubilant in USA, is a generic

phannaceutical company.

Clinsys Clinical Research Inc., a wholly owned subsidiary, is a clinical research

organization (CRO) operating out of the USA.

Jubilant also has marketing subsidiaries in USA and China.

Regulatory compliance: The companies facilities in India are cGMP and ISO certified

and the facilities in USA are USFDA approved.

Manpower: 2400

Clients: With respect to the CRAMS business, Jubilant has entered into a "multi-million"

dollar 5-year contract with Syngenta to supply pyridines.

Three vears financials at a !!lance (Rs in Lakhs)

2004-05 2005-06 2006-07

Sales (Net) 111450 138600 160970

Sales growth (%) 35.80 24.36 16.14

Other Income 1386 1774 3100

Total Income 115325 141550 166040

Total Income growth(%) 14.89 22.74 17.30

EBIDTA 20640 23800 36620

Interest 2130 1470 1510

Depreciation 3480 4420 5150

Profit Before Tax (PBT) 15030 17910 29960

216

PBT Growth(%) 15.42 19.16 67.28

Provision for Taxation 3700 4030 6810

Profit after Tax (PAT) 11330 13880 23150

PAT Growth(%) 10.20 22.50 66.79

Equity Share Capital 1295 1425 1438

Reserves & Surplus 48305 81020 94730

Net worth 49600 82455 96168

Net Worth growth(%) 8.75 6.62 16.64

Gross Fixed Assets 83595 105160 124270

Net Fixed Assets 52760 69860 83940

Total Fixed Assets 62060 81550 101630

KEY INDICATORS

Earnings per share (EPS) Rs. 9.39 Rs. 10.00 Rs. 16.13

Debt equity ratio 0.76 0.77 1.68

Operating Margin(%) 18.52 17.18 22.75

Net Profit Margin (%) 10.17 10.00 14.38

Return on Networth (%) 22.84 16.83 24.07

Turnover

Net Sales of the Company recorded growth of 16.1% to Rs.l60970 lakhs as

compared to Rs.13860 lakhs in the previous year. Export revenues increased 32.9% to

Rs.63200 lakhs from Rs.47600 billion. This increase in exports was mainly due to high

growth in Phannaceuticals and Life Science Products business in regulated markets of

USA, Europe and China. The Industrial Products business witnessed 8.9% growth in

sales to Rs.6900 lakhs. The Performance Polymers business also recorded growth of

4.8% to Rs.l9800 lakhs as compared to Rs.l8900 lakhs in FY 2005-06

Other Income

Other Income mainly comprised Income from non trade investments,

insurance/other claims and miscellaneous receipts. Other Income for the year amounted

to Rs.31 00 lakhs as against Rs. 1744 lakhs for the previous year. Income from non trade

investments (dividend) amounted to Rs. 2660 lakhs as against 2340 lakhs whereas

217

incurance claims declined to Rs. 36510 lakhs as against Rs. 39330 lakhs in the previous

year. Miscellaneous Receipts from Sale of unserviceable spares, used drums, residual

catalyst, etc showed a great jump from Rs. 125170 lakhs during the previous year to Rs.

270620 lakhs during FY07.

Earnings before interest, depreciation, taxation and amortisation (EBIDTA)

EBITDA at Rs.36620 lakhs recorded a growth of 53.9% as compared to Rs.23800

lakhs in the previous year, given better revenue performance and stability in the input

pricing environment across all business segments.

Operating Margin

The Operating margin is 22.75% as against 17.18% during the previous year. This

is mainly on account of the impressive 53.9% growth of EBIDTA in comparison to the

previous year.

Profit after Tax (PAT)

Profit after tax (PAT) showed a significant increase of66.8% toRs. 23150 lakhs

(14.4% of net sales) from Rs.13880 blakhs '(10% of net sales). This is attributed to the

increase in the company's sales and controlled expenditure by the company. Stability in

the input pricing environment across all business segments has also contributed to this

achievement.

Net Profit Margin

The net profit margin of the company which was I 0% during the previous year

increased to 14.38%. This is attributed to the growth in sales and the increase in Profit

after Tax brought about by controlled expenditure and stability in the input costs for all

business segments.

Earnings per Share (EPS)

Eamings per Share for the year work out to Rs.l6.13 per share as against Rs. I 0

last year.

Debt Equity Ratio

Debt-equity ratio as of 31st March, 2007 was at 1.68, as against 0.77 during the

previous year. The shareholders' funds increased by 16.64% as the paid up equity share

capital recorded an increase of 0. 7% as 10,02,339 equity shares were allotted on

218

conversion of FCCBs into equity shares and exercise of stock options by

employees/directors during the year 2006-07 and reserves & surplus increased by 17%.

However, loan funds increased in a much greater proportion ie 156%, as the company

took loans for investing in capacity expansion activities, thereby giving a high boost to

this ratio in comparison to the previous year.

Return ou Net Worth

Return on Net Worth has increased to 24.07% as compared to 16.83% during the

previous year, thus making the company more profitable for the shareholders. This year

the Directors recommended a dividend of 125% on fully paid up equity shares of Re. I

each, for the year ended 31st March 2007, thereby showing that the company values the

shareholders' interests and ensures that they are satisfied that they funds are being used

for productive purposes and they too reaping the benefits of the profits that the company

is making.

4.20.4 VIMTA LABORATORIES LTD.

Vintage: Vimta Laboratories Ltd. was established in the year 1984.

Focus: VIMTA Labs provides contract research and testing services in the areas of

clinical research, clinical reference lab services, environmental assessment and analytical

testing ·of a variety of products.

Infrastructure

The company has 130 roomed, centrally air conditioned laboratory equipped with

analytical instruments and data management systems. Round the clock operational

bioanalyticallab, equipped with 5 HPL Ss, 6 LCMSMSs and one GCMSMS.

Regulatory compliance

GMP: Drugs & Pharmaceutical testing including stability Studies-implementation

complete by June, 2007,at the Life Sciences facility, Hyderabad.

ISO 17025 -2005: Implemented in Analytical laboratories.

ISO 15189-2003: Implemented in Clinical Reference Laboratory.

Manpower

Scientists and Engineers: 3 66

PhDs: 15

Doctors (MDs: 12, MBBS: 14): 18

219

Supporting staff: 271

Total: 670

Clients: Clients include 6 Fortune 500 companies and 3 of the world's top ten generic

drug development companies.

Th ee vears financials at a !!lance r (Rs in Lakhs)

2004-05 2005-06 2006-07

Revenue (Net) 5249.36 5469.39 5963.94

Revenue growth (%) 50.49 4.19 9.04

Other Income 8.49 36.31 427.30

Total Income 5257.85 5505.71 6391.24

Total income growth(%) 50.61 4.5 16.08

EBIDTA 2723.48 2577.78 2600.08

Finance Charges 47.11 42.50 274.78

Depreciation 375.97 503.40 939.95

Profit Before Tax (PBT) 2243.45 2031.88 1343.36

PBT Growth (%) 77.21 (9.43) (33.88)

Provision for Taxation 799.00 734.00 302.05

Profit after Tax (PAT) 1444.45 1349.90 872.73

PAT Growth(%) 72.92 (6.54) (35.35)

Equity Share Capital 360.86 442.15 442.15

Reserves & Surplus 2464.14 11290.16 11955.97

Net worth 2825.00 11732.31 12398.12

Net Worth growth(%) 79.00 315.00 5.67

Gross Fixed Assets 3556.94 4396.71 13474.42

Net Fixed Assets 2399.15 2738.76 10876.52

Total Fixed Assets 3111.31 7222.80 11492.18

KEY INDICATORS

Eamings per share (EPS) Rs. 39 Rs. 7 Rs. 4

Debt equity ratio 0.36 0.33 0.31

Operating Margin(%) 51.88 47.13 43.59

220

Net Profit Margin(%) 27.51 24.68 14.63

Return on Networth (%) 51.13 1!.50 7.03

Revenue

Revenue (ie income from testing and analysis services) has posted a growth of

9%. This is because domestic operations that comprise 60% of the company's operations

grew by 8% and exports which comprise 40% of the operations recorded a growth of 2%.

Other Income

Other Income mainly comprised Interest on deposits with banks, Gains on

exchange fluctuations, Interest received on electricity consumption deposit and

Miscellaneous Receipts. Interest on deposits with banks increased by Rs. 271 1akhs,

Gains on exchange fluctuations posted an increase ofRs. 112.61 lakhs, Interest received

on electricity consumption deposit increased by Rs. 2.45 1akhs and miscellaneous receipts

increased by Rs. 4.6 lakhs. Thus, enabling other income to account for the fourfold

increase in Total Income.

Earnings before interest, depreciation, taxation and amortisation (EBIDTA)

EBIDTA for the year grew by marginal 0.8% toRs. 2600.08 lakhs as against Rs.

2577.78 in the previous year. This is because the payments and benefits to employees

increased by Rs. 315.19 lakhs as 60 new employees were hired by the company during

the year and the Administrative, Selling and General Expenses increased by Rs. 263

lakhs and testing and analysis expenditure also increased by Rs. 285 lakhs whereas the

Total Income of the firm posted an increase of only Rs. 885.53 lakhs which is almost

equivalent to the increase in expenses.

Operating Margin

During the year, the Analytical and Clinical Reference Lab facilities have been

shifted from the existing Cherlapally Facility to the newly established Life Sciences

Facility in S.P.Biotech Park, Genome Valley, Hyderabad and started commercial

operations from September, 2006. Facility at Cherlapally has been taken up for

renovation to increase the Capacity for its Clinical Research activities. In addition, the

company has focused on stabilization of its operations and achieving compliance with

enhanced quality standards ofGMP at its new facility. It is because of the time loss in the

221

above stated areas that have affected the EBIDT A and in tum the operating margin has

declined to 43.59% as against 47.13% during the previous year.

Profit after Tax (PAT)

Profit after tax (including deferred tax) stood at Rs.872. 73 Lakhs as against Rs.

1349.90 Lakhs of previous year. The 35.35% fall in the net profits of the company is due

to additional impact of interest cost and depreciation on the investments of the Life

Sciences facility, on its commissioning during the year.

Net Profit Margin

The net profit margin of the company which was 24.68% during the previous year

decreased to 14.63%. This is on account of the decrease in the Profit afterTax.

Earnings per Share (EPS)

Earnings per Share for the year work out to Rs.4 per share as against Rs. 7 last

year.

Debt Equity Ratio

Debt-equity ratio as of 31st March, 2007 was at 0.31, as against 0.33 during the

previous year. The equity share capital is same as· the previous year but the reserves and

surplus have increased by 6% but the loan funds decreased by 5%. Thus, maintaining the

debt equity ratio at almost the same level.

Return on Net Worth

Return on Net Worth has been decreasing over the last 3 years. It was 11.5 %

during the previous year as against 7% during 2006-07. This is because the Profit after

Tax has declined significantly during the previous year (35.35%), as the company has

shifted operations to a new plant and made large investments to renovate the old one. The

company must start capitalizing on the expanded facilities as soon as possible in order to

regain its profits, keep the shareholders happy and enhance their worth to the maximum.

4.20.5 SHASUN CHEl\IICALS PVT. LTD.

Vintage: Shasun Chemicals (Madras) Private Limited was incorporated as a private

limited company, in Chennai.

Focus: Shasun has emerged as a key player in vanous service segments m the

phannaceutical field besides APls and intennediaries, and is strengthening its offer of

contract research, custom synthesis, contract manufacturing and contract fonnulation

222

services to clients. Shasun in its endeavour to become a true one-stop shop for global

phanna companies, is evolving to become a complete service provider, offering services

right from the discovery stage to manufacturing fonnulations.

Product uses: The company is in the manufacture of non-steroidal anti-inflammatory

drug (NSAID) used for relief of symptoms of arthritis, primary dysmenorrhea and fever.

It also manufactures drugs that are used in the treatment of stomach acidity and of high

blood pressure in order to reduce the risk of stroke and heart attack.

Infrastructure

Shasun Research Center (SRC) is Shasun's state-of-the-art research & development

center established at Keelakottaiyur, around 35 km from Chennai.

The company has two facilities at Pondicherry, one of which 1s dedicated for the

manufacture of Ibuprofen and the other to handle Oral Solid Dosages.

Spread over 64000 sq. meters, the facility at Cuddalore manufactures anti-ulceratives

Nizatidine and Ranitidine as well as excipients.

Shasun Pharma Solutions, UK is the vertically integrated chemistry partuer for the

pharmaceutical industry. Its services include innovative process research and

development, rapid response small scale manufacture for clinical trial supply and full

scale commercial manufacture of .advanced intermediates and API's, all with seamless

technology transfer.

Regulatory compliance: The facilities at Pondicherry and Cuddalore are FDA compliant

and ISO certified whereas the UK facility is FDA and cGMP compliant.

Manpower: The company recruits professionals of high academic achievement,

experience and behavioral competencies across the operations, research and marketing

functions.

Clients: Global phannaceutical companies including (but not limited to) Aventis, Abbott,

Critical Therapeutics, Eli Lilly, GSK, Reliant Phamm and Reckitt & Benckiser as well as

a significant portfolio of emerging pharmaceutical companies.

223

Three vears financials at a !!lance ' ' (Rs in Lakhs) . ' 2004 -OS 2005-06 2006-07

Sales (Net) 31874.20 34903.40 40591.00

Sales growth (%) 24.39 9.50 16.29

Other Income 556.10 189.00 417.30

Total Income 32793.40 35903.10 40887.40

Total Income growth (%) 22.56 9.48 13.88

EBIDTA 6922.50 7118.00 7084.00

Interest 337.80 493.60 540.90

Depreciation 2159.00 2314.50 2508.80

Profit Before Tax (PBT) 4425.70 4309.90 4034.20

PBT Growth(%) 40.00 (2.62) (6.39)

Provision for Taxation 1321.30 659.50 206.00

Profit after Tax (PAT) 3104.40 3650.40 3828.20

PAT Growth(%) 30.23 17.60 4.87

Equity Share Capital 915.20 962.10 964.20

Reserves & Surplus 12710.30 16970.10 19908.10

Net worth 13844.60 17985.20 21133.80

Net Worth growth (%) 22.63 29.91 17.50

Gross Fixed Assets 26864.40 29358.10 32798.60

Net Fixed Assets 15647.30 17474.90 17825.30

Total Fixed Assets 17346.10 17694.50 18831.40

KEY INDICATORS

Earnings per share (EPS) Rs. 6.77 Rs. 7.78 Rs. 7.93

Debt equity ratio 0.65 0.41 0.49

Operating Margin(%) 2!.77 20.39 17.45

Net Profit Margin(%) 9.00 10.00 9.00

Return on Networth (%) 22.00 20.00 18.00

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Turnover

During the year Shasun achieved a turnover of Rs. 40591 lakhs, recording an

increase of 16.29% over the previous year. This revenue growth of Shasun Pharma

Solutions is mainly due to a significant improvement in product base and customers as

the company successfully introduced a large number of customer compounds into their

drug development pipeline. Sale of bulk drugs and intennediates constitute 95% of the

total sales which recorded an increase of 13%, by product sales constituting a miniscule

2% of the total sales recorded and increase of 27% and trade sales which constitute the

remaining 3% of the total sales increased phenomenally by 603%.

Other Income

Other Income mainly comprised Contract Manufacturing and development and

Contract Research fee and export incentives available to the company. Contract

Manufacturing and development fees increased by 51% whereas Contract research fees

posted an increase of 13% and export incentives decreased by 29%. As a result of the

consolidated increase in turnover and other. income, the total income increased by

13.88%.

Earnings before interest, depreciation, taxation and amortisation (EBIDTA)

EBIDTA for the year declined marginally by about 0.5% to Rs. 7084 lakhs as

against Rs. 7118 lakh~ during the previous year. In spite of a growth in revenues

EBIDTA decreased on account of the company completing commissioning, validation

and regulatory inspections on one hand and initiated development and manufacture in

their new state-of-the-art formulations unit on the other, which resulted in an increase of

the manufacturing cost for the company. And as new products were introduced during the

year, Research and Development costs also increased substantially, thus pulling down the

EBIDTA.

Operating Margin

The Operating margin is 17.45% as against 20.39% during the previous year. This

is mainly on account of the fall in EBIDT A and increased costs in comparison to the

previous year.

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Profit after Tax (PAT)

Profit after Tax (PAT) grew by about 4.87% to Rs.3828.20 lakhs as against

Rs.3650.40 lakhs during the previous year. This is attributed to the increase in the

company's turnover and the reduction in the provision for current taxation and fringe

benefit tax paid by the company during the current year, as compared to the previous

year.

Net Profit Margin

The net profit margin of the company which was I 0% during the previous year

decreased to 10%. This is attributed to the growth in sales but not a commensurate

increase in Profit after Tax.

Earnings per Share (EPS)

Earnings per Share for the year work out to Rs.7.93 per share as against Rs. 7.78

last year.

Debt Equity Ratio

Debt-equity ratio as on 31st March, 2007 was at 0.49, as against 0.47 during the

previous year. This marginal increase is due to a 546% increase in the Unsecured Loans

(as the company borrowed to invest in excess of Rs. 8700 lakhs to support although the

Secured Loans decreased by 5.16% (as the company repaid Rs. 2170 lakhs of debt) and

the Shareholders' funds increased by I 7.5% (as the company allotted I,05,759 shares of

Rs. 2/- each to its employees under ESOP). This is why the ratio increased inspite of the

business growth of the company.

Return on Net Worth

Return on Net Worth has decreased to 18% as compared to 20% during the

previous year, thus making the company less profitable for the shareholders. However,

this year the company paid an interim dividend of 0.80 for each equity share of Rs. 2/-. in

addition to the a final dividend of Re. 0.90 per equity share of Rs. 2 each, showing that

the company values its shareholders and is consistently trying to enhance their value.

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4.21 Strategies for financing CRAMS

4.21.1 Lending to midsize pharmaceutical companies is a viable

proposition as these companies have a strong parentage

India with its intrinsic competitive advantages remains as one of the most

preferred outsourcing destinations and is now playing a vital role in manufacturing as

well as drug development value chain of various innovator companies. It has become a

strategic imperative for global pharrna companies to make India an integral part of their

manufacturing value chain to maintain lean cost structures and combat intense

competition in the global generics industry. Besides, pharrna multinationals are also

increasingly using India as a base for exports not only to the immediate neighbouring

markets, but also to other markets, around the world such as Japan, South Africa, Latin

America and Europe. This shows that the mid sized Indian pharrna companies have a

strong parentage and backing as they are grabbing multi-million dollar contracts from

pharmaceutical MNCs, thus making lending to these companies a viable proposition for

the bank.

4.21.2 Capitalize on the increasing R&D spends of the pharmaceutical

companies

New R&D setups with excellent infrastructure are coming up in various regions

of the country as a result of the government policy initiatives for strengthening R&D in

phanna by way of fiscal incentives and other steps to strengthen regulatory mechanism.

In addition to this, the average R&D spend of two percent turnover in the sector of more

and more ph arm a companies is increasing to over seven percent of their turnover which is

a noteworthy achievement. This is also an extremely profitable opportunity that ECG can

capitalize on to reap the benefits that the growth in the sector can offer.

4.21.3 Strategic Shift in the industry holds immense opportunity for the

financial institutions

The predicted strategic shift in the industry like Indian majors moving up the

value chain and entering into partnerships involve early-stage licensing and risk sharing,

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focusing on factors such as quality, timeliness and value-added services along with cost

advantage, and preparing themselves to become a one stop solution for their clients will

also call for great fund requirements. This is where the bank can play a vital role by

offering their lending services to these companies.

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