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Pharma Summit 2007India Pharma Inc. A Continuing Success StoryNovember 2007

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Executive Summary & Acknowledgements 01

Domestic Pharmaceutical Market 03

Global Generics Industry 15

Contract Research and Manufacturing Services(CRAMS) 29

Research and Development 39

Growth Through Collaborations 47

Annexures 51

Table of Contents

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The Indian pharmaceutical industry has achieved significant momentum in the

last few years, making its presence felt in the global market primarily through its

focus on global generics markets.

It is now well positioned for sustainable growth and expansion and companies in

India are identifying diverse business models as a means to participate in the

global growth potential. The domestic market also has strong underlying growth

drivers such as increasing spend on healthcare, increasing penetration of health

insurance and changing disease profile which should sustain the double digitgrowth witnessed over the last year.

On the international front, Indian generic manufacturers are playing an important

role in the global consolidation process. They are also increasing their market

presence across regulated as well as semi-regulated markets, through organic as

well as inorganic means. In spite of increasing competitive intensity on account

of continued pricing pressure, several significant opportunities are being

leveraged by Indian generic players.

Contract Research and Manufacturing Services (CRAMS), is becoming one of the

most promising opportunities for the Indian pharma industry. Global pharma

companies are finding pioneering ways to attain cost efficiencies across the value

chain. India, with its intrinsic competitive advantages, remains 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 pharma companies.

Enactment of patent product regime offers multiple growth opportunities for

MNC pharma companies in the medium to long term. India has not only become

an important market for launching their global blockbusters, but also a strategic

destination for conducting global clinical trials and making it a significant

component of their global drug development value chain.

Following the patent product regime, many Indian pharma companies have

embarked on Research and Development (R&D) to achieve sustainable long term

advantage. These companies are now adopting innovative funding models to

advance their R&D activities.

Strategic alliances have been one of the preferred routes adopted by Indian as

well as MNC pharma companies while foraying into new markets and

geographies, as well as in the development and sourcing of new products and

molecules. Such partnerships enable companies to capitalize on the associates

knowledge and understanding of the local market, technical know-how as well asprovide them with ready access to a strong distribution and supply infrastructure.

Executive Summary andAcknowledgements

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However, there are a few structural impediments and constraints that may affect

the future growth potential.

Ambiguity in regulations vis a vis patents and regulatory threat of extending the

span of price control may hinder growth in the domestic market and government

actions in different markets will be key considerations for generics players.

Strengthening the IPR infrastructure and culture will benefit the CRAMS industry

and new drug development and investment in research and development can be

further driven by access to funds.

The Indian pharmaceutical industry is at a critical juncture given its inherent

strengths and its ability to be a dominant player in the global pharmaceutical

industry. If the government, industry and corporates can act together to drive

reforms that strengthen knowledge and compliance enabling companies to follow

differentiated business models, India will be positioned to emerge as one of the

leading pharmaceutical markets of the world.

This knowledge paper prepared by KPMG in partnership with CII, presents the

latest trends and insights on the Indian pharmaceutical industry. We hope this

report will be immensely helpful to key stakeholders of the pharmaceutical and

healthcare market and provide them with an in-depth analysis of the business

prospects.

A number of eminent industry stalwarts made time to provide valuable insights

for this report. We would like to acknowledge and thank the following people for

their contribution (in alphabetical order):

Dr. Brian Tempest, Chief Mentor and Executive Vice Chairman of the Board,Ranbaxy Laboratories Ltd.

Dr. Hasit Joshipura, Vice President, South Asia and Managing Director, IndiaGlaxoSmithKline Pharmaceuticals Ltd.

Dr. J M Khanna, Executive Director & President, Life Sciences,Jubilant Organosys Ltd.

Mr. Kewal Handa, Managing Director, Pfizer Ltd.

Mr. Pankaj Patel, Chairman and Managing Director, Cadila Healthcare Ltd.

Mr. Ranga Iyer, Managing Director, Wyeth Ltd.

Mr. Ranjit Shahani, Country President, Novartis India Ltd.

Dr. Swati Piramal, Director, Strategic Alliances & Communications,Nicholas Piramal India Ltd.

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Introduction

The Domestic pharmaceutical market is going through a transformation, led by

strong underlying growth drivers and has witnessed robust growth over the last

couple of years. While this growth was driven mainly by an increasing spend on

healthcare, on account of rising disposable income, increasing penetration of

health insurance and changing disease profile, regulatory reforms also provided a

significant boost. The industry has grown at a CAGR of 13 percent from

2002-2007 and is expected to grow at a CAGR of 16 percent over 2007-2011.

I think by and large, the market will grow in double digits giventhat the penetration level of modern medicine in the country is low and the fact that the health insurance sector is growing rapidly.Everywhere else in the world, economic growth is linked toincreased longevity. So that being the case, I would say that there will be growth. Healthcare in general will grow and therefore the pharmaceuticals market will grow. And this growth would be led by prescription and volume and not price, says Dr. Hasit Joshipura.

Domestic Pharmaceutical Market

Source: Crisil Research

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Growth Drivers

Strong Economic GrowthThe prospects of the Healthcare and Pharmaceuticals industry are strongly linked

to economic growth. Over the last couple of years, the pharmaceuticals industry

has grown at approximately 1.5-1.6 times the growth of economy. The rise in

disposable income has a positive impact on healthcare spend. In 2005, 6.2

percent of disposable income was spent on healthcare as compared to 2.8

percent in 1995.

There is a view that if the GDP of a country grows by 1 percent the pharma industry grows by approximately 2 percent. So if you are going to have 8-10 percent growth in the GDP, the pharma industry will grow in double digits. This growth would primarily be led by expansion of healthcare services, says Dr. Brian Tempest.

This augurs well for the pharma industry, as the strong economic momentum isexpected to continue and the Indian economy is expected to grow by 89

percent in the next few years.

Improving Healthcare InfrastructureBoth healthcare delivery and infrastructure segments are going through a

structural change with the entry of corporates. Significant investments have been

lined up in the domains of organized pharmacy chains and private hospitals. In

addition to Metros even B and C category towns are witnessing sizeable

investments. Many pharma companies have expanded their sales force in order

to cater to these untapped markets.

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Source: CSO, IMS

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Following factors will drive the growth of the domestic market: Increase in disposable income, newer therapeutic segments, newer markets, and semi-urban and rural areas. Last but not the least is health insurance. Also, the growth in the domestic market would be based on volumes rather than price, says Mr. Ranga Iyer.

At present, organized players account for a meager 2 percent share of the

pharma retail market. It is expected that with the advent of modern retailing

in India, increasing investments in this space will multiply the availability

and accessibility of pharma products. The organized pharmacy chains will

not only capture an increasing percentage of the total market but will also

expand the market with value added services and enhanced offerings. The

culmination of all these factors is expected to further drive the growth of the

domestic pharma market.

Increasing penetration of health insuranceAt present, only 4 percent of the healthcare costs are borne by the insurers in

India as against 80 percent in developed economies. With increasing health

insurance penetration in India, this is set to change and going forward, a larger

proportion of expenses will be paid by insurers and consumption of sophisticated

drugs is likely to become more affordable.

Expansion Plans of prominent pharmacy chains

Company Expansion Plans

Apollo 1000 stores by 2008

Subhiksha 1000 stores by Dec. 2007

Medicine Shop 500 outlets by 2009; 700 by 2010

Dabur HealthWorld 1,000 HealthWorld stores in 400 cities in next five years

Guardian Lifecare 250 stores by Mar 2008 and 3,500 by March 2015

Frank Ross Limited 100 stores by 2010

Morepen Laboratories 8 stores in 2007 and 80 by 2011

Source: Credit Suisse Investment Report, April 2007; Press Articles

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At present, the health insurance penetration is estimated at approximately 10

percent in India and is expected to double in the next five to seven years. This

increasing penetration will help expand the pharmaceuticals market in two ways.

One, it will increase the access to more sophisticated and expensive drugs; and

two; it will also make basic drugs more accessible through wider coverage. This

augurs well not only for domestic pharma companies but for MNC pharma

companies as well; as increasing health insurance will also help expand the

markets for patented products.

The growth in the domestic market will be driven by volume. The small to medium size players are growing their presence inuntapped tertiary markets while MNCs are expected to grow through introduction of high value products. As Insurance gets more liberalized as in the west and further growth in health infrastructure in this country will be key factors to drive growth, says Mr. Ranjit

Shahani.

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Source: Industry

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Changing Therapeutic MixThe existing therapy mix is tilted towards acute diseases. However, in the

medium to long run the domestic pharmaceutical market will be largely driven by

the increasing prevalence of the chronic segment. Increasing urbanization,

changing lifestyles and ageing population will drive the growth of this segment.

In most cases, ailments in the chronic segment are recurring in nature, which

ensures regular consumption of medicines for the lifetime of the patient. Going

forward, therapies for treating cardiovascular diseases and diabetes are expected

to have one of the highest growth rates.

50 percent of the industry is still anti Infective plus metabolism and respiratory products. Standards of sanitation and hygiene in this country are low. As long as this issue is not tackled, you cannot expect acute disease to come down. CNS, CVS and other chronic disease are also growing along with this, says Mr. Ranga Iyer.

Source: Crisil Research

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Source: IMS

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Dr. Hasit Joshipura also feels that, both segments, anti infectives and respiratory will continue to grow. At the same time due tochange in Indian life styles in cities, which are getting more akin tothose in western countries, the disease profile will also change. Soyou will have chronic and life style disease such as CVS, CNS and diabetes also growing.

In terms of the geographical distribution of the Pharma market, 23 Metro cities

account for approximately a quarter of the market. Class I towns comprising

300 towns altogether account for about one-third of the market. Rural markets

which account for 21 percent of the total market have been increasingly

becoming an important market for big pharma companies. Though rural markets

are dominated by acute segments, chronic segments have slowly started making

inroads.

The domestic Indian pharmaceutical market is expected to grow at 11-12 percent and will primarily be driven by the launch of new products and market expansion strategies. Domestic companies will also continue to grow through acquisitions, joint ventures,leveraging low operational costs and outsourcing. However, price control mechanisms and ambiguity in the policy environment may constrain market growth, says Mr. Kewal Handa.

Source: Merck Presentation

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Mr. Kewal Handa also feels that, Though patented products will be introduced in India, the domestic market will predominantly remaina branded generics market. By 2015, it is estimated that the share of patented product will be about 10 percent.

Government InitiativesThe Government has introduced several development programmes to improve

the access to and quality of the healthcare services in the country. The National

Rural Health Mission (NRHM), introduced by the government to provide basichealthcare amenities in the rural areas, is expected to increase the access to

drugs in the rural areas. In Budget 2007-08, the budgetary allocation to health

was increased by 22 percent to INR 1,52,910 million.

Launch of Patented DrugsAfter the product patent regime was introduced in India in 2005, the domestic

pharma industry has witnessed the launch of around 11 patented products by

multinational companies.

This number is expected to grow, as MNC pharma companies are already

planning significant patented launches over the next few years. Various industry

estimates suggest that by 2015, patented drugs will account for 10-15 percent of

the domestic pharma market.

Key Patented Molecules launched in India (till March 2007)

Product Company Therapeutic Category Launch date Current Status

Vfend Pfizer Anti-Infective Feb-05 On Patent

Avandia GSK Anti-Diabetic May-05 On Patent

Viagra Pfizer Erectile Dysfunction D ec-05 On Patent

Lyrica Pfizer Neuropathic Feb-06 On Patent

Caduet Pfizer Cardiovascular Feb-06 On Patent

Carvedilol GSK Cardiovascular Mar-06 Off Patent

Genotropin Pfizer Endocrine Disorders Mar-06 On Patent

Tamiflu Roche Influenza Apr-06 On Patent

Pegasys Roche Hepatitis C May-06 On Patent

Avalide Sanofi Aventis Cardiovascular Jul-06 On Patent

Ambien Sanofi Aventis Insomnia Jan-07 Off Patent

Source: CRISIL Research

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However, ambiguities in the patent laws remain with respect to issues such as

data protection, pre-grant and post-grant opposition and patenting of derivatives.

When GSK introduced patented products in 2005, there were lots of sceptics. But we still launched the products. The interest of the government is to globalize the country and all the signs are there,and therefore I do expect that the steps will be such that they will not take India back but they will continue this path of integrating

India into global economy. And I think the one indicator that the global pharma players are sitting up and taking notice is the number of new entrants. Companies that were not present in India are now establishing businesses in India. So these are all indicators that the people are hopeful that these changes would continue in a directionthat would facilitate innovative companies to operate in this country with protection of their intellectual properties, says Dr. Hasit Joshipura.

The domestic market will continue to be attractive. The patent law today is not the best we have. But I think it will get better. I think it will become more positive, says Mr. Ranga Iyer.

The full impact of the patent laws will be felt only after 2010, says Mr. Ranga Iyer, because anything patented after 1995 only is eligible to be patented in this country and if it takes the normal cycle of 12 years to get a molecule out, then it will come out only in 2007- 08 inthe western countries. It will take another 1-2 years for it to come toIndia. I think all companies during the last 3 to 4 years have launched one or two products per year. This is a lot for MNC pharmavis a vis history.

Key Considerations

Need for PublicPrivate Partnership (PPP)At present, a principal share (almost 75-80 percent) of the total healthcare

expenditure by the country is incurred by the private sector, while the public

sector finances the balance. On the other hand, affordability and accessibility of

the latest and quality drugs continues to be one of the major issues for a large

section of the population and for the country as a whole. Both the public as well

as private sectors have recognized this as a serious concern and are looking at

PPPs as a sustainable model to cater to the growing demand of medicines

across all sections of society.

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70 percent people in this country do not have access to modernmedicine. 700 million people in a population of 1 billion. That is aproblem that the government needs to solve. There has to be apublic private partnership to reach medicines to these 700 people, says Mr. Ranga Iyer.

Mr. Ranjit Shahani also has similar opinion, according to him,Approximately 65 percent of the population does not have access to

medicines. The government should focus on improving access toimprove healthcare.

Spurious / Sub-standard drugsAt a time when India is moving towards becoming a preferred manufacturing

base for global pharma companies, the menace of spurious and substandard

drugs could give a negative image to the country. According to the Mashelkar

committee report, the industry faces a loss of around INR 40 billion due to

substandard drugs and a WHO report suggests that 35 percent of spurious drugs

of the world are being produced in India. Spurious and counterfeit drugs are a

major public health hazard.

Government needs to accelerate the legislative reforms to curb the menace of

counterfeit drugs. This is one of those issues that needs to be tackled as the industry comes of age. It is not just spurious drugs; it is pharmacovigilance per se. says Dr. Hasit Joshipura.

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Source: Edelweiss Investment Report, April 2007

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Price ControlsUncertainties regarding the Draft Pharmaceutical Policy 2006, which proposes to

bring 354 essential drugs under the purview of Drug Price Control Order (DPCO)

continues to be an area of acute concern for the industry. The pharma industry

feels that regulation should try to simulate the "effects of competition" and price

control should not be imposed on drugs where the "effects of competition"

already exist. The proposed policy would significantly increase DPCOs span of

control from the existing 25 percent to approximately 50-60 percent of all

medicines produced.

Some of the notable views from the industry as follow.

Artificially imposed constraints of any kind will hamper the growth.Industry is responsible enough to make sure that pricing will not spiral out of control. And again in this country where you have 50 brands for each molecule, there is an inbuilt mechanism to control prices. says Dr. Hasit Joshipura.

Dr. Hasit Joshipura also feels that, it is the concern of governments world over that the medical costs should be affordable. And if prices go out of hand then it is not desirable. Certainly some monitoring should be there.

By subsidizing and controlling prices, the government is actually subsidizing these for the rich also. Because they are the people buying it. Access is the problem in this country and not the price.You improve the access of medicines to the poor and lots of these problems could be solved, says Mr. Ranga Iyer.

The market is growing and it will continue to do well except for one thing and that could be public policy. If the government does not have a progressive policy then that perhaps could hamper the growth. Fundamentals are strong and if the policy is progressive then it will augur well for the industry. The industry needs good legislations and price monitoring by the government would be aforward looking step as compared to price control, feels Dr. Swati Piramal.

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Mr. Kewal Handa feels that, India needs a locally relevant healthcare policy. It is imperative that the government broadens the focus from controlling the price of medicine, which is just one element of the healthcare expense cycle, to investing in other critical elements such as improving primary healthcare infrastructure and availability of doctors. Investments in preventative measures will reduce the overall diseases incidences thus resulting in lower healthcare costs.

Price controls would constraint the growth of the market. However,price monitoring may be an effective way to manage prices, feels Mr. Ranjit Shahani.

High fragmentationThe domestic formulations market is predominantly a branded generics market

and intensely competitive, with the presence of several players, including small

scale companies. The top 10 companies account for only 37 percent of the

market. This shows the level of fragmentation in the industry. Given this

industry structure, brands franchise, field force strength and product innovation

become critical success factors to operate in this market place.

In a market that is only selling copied products, the importance of strong brands is very crucial and vital and the only way to grow inthe future. Otherwise how do you differentiate between 18 different molecules? All you can look at is the brands, says Dr. Swati Piramal.

A report by the Institute for Studies in Industrial Development (ISID), a national-

level policy research organization in the public domain, mentions that in 2000-01

there were approximately 2872 pharma units in India and out of these 91 percent

were small manufacturing enterprises.

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However, the amendments made by the government to the Schedule M which

deals with standard manufacturing practices, will help in establishing quality

standards and uniformity across manufacturing practices.

I dont see consolidation happening in a massive way in the near future. Many of them are family run businesses and they are doing well. They have no reason to give up their business. Its afragmented industry all over the world and why should it be different here, says Dr. Swati Piramal.

Mr. Ranjit Shahani feels that consolidation will happen in the longer term by 2010. However, current high valuation expectations and emotional attachments due to them being largely family runorganizations, are the key reasons why you do not see consolidationin the short term.

Conclusion

Indias domestic pharmaceutical market is at an inflection point. The strong

underlying growth drivers offer enormous opportunities for domestic as well as

MNC pharma companies. However, an inclusive and growth oriented public policy

regime will ensure that this growth is sustainable.

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Global Generics Industry

Introduction

Over the last few years, Indian pharma companies have been scaling up their

presence in the non-traditional business segments such as drug discovery and

development, contract research and manufacturing, etc., and are focusing on

building their competencies in every area of the pharma value chain. However

generics continue to remain the mainstay of the industry. Indian companies are

increasingly advancing beyond domestic boundaries and are aggressively

focusing on making their mark in the global generics space. In order to reducetheir dependence on the U.S. market, Indian pharma companies are now entering

new and under-served generics markets across different geographies such as

Japan, South Africa, European and Commonwealth of Independent States (CIS)

countries and Latin America. While the global generics industry continues to

remain under severe pricing pressure, the Indian generic drug makers continue to

spread their wings across different international markets.

Growth Drivers

Trend towards an increased use of genericsGlobally, the trend towards an increased use of generics is on the rise and isexpected to open up tremendous opportunities for generics players as

governments in many countries encourage the shift to generics on the back of

rising pressure on healthcare budgets. Globally, the generics industry is expected

to grow at a Compound Annual Growth Rate (CAGR) of 11 percent between 2006

and 2010 1 and touch USD 94 billion by 2010. At present, India has only 10

percent market share in this industry.

Regulated Markets

U.S. - The worlds largest generics marketThe U.S. market is still by far the largest pharma market in the world and

accounts for over 28 percent of the worlds generics market. 2

In spite of severe pricing pressure and declining profitability, the U.S. market will

continue to be attractive. Drugs worth USD 65-70 billion are expected to go off

patent in the next four-five years.

1 Crisil Research

2 SSKI Investment Report, March 2007

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Given the opportunity and challenges in this market, it is evident that the success

of Indian players in the U.S. market will largely depend on their ability to offer

value-added generics products and their specialization in business development

through partnerships, strategic alliances and joint ventures (JV).

European Union (EU) regulatory reforms to drive growthMost European markets such as France, Italy, Belgium, Spain and Germany are

highly regulated and have low levels of generics penetration. Rising healthcare

expenditures in these countries is becoming a key concern for most European

regulators. Several reforms and regulatory changes have been introduced in the

last couple of years to encourage an increased use of generics. These markets

are largely branded generics; hence pricing pressure is limited as compared to

the U.S. market.

These regulatory changes coupled with a significant number of drugs going off

patent over the next few years, has opened up a big opportunity for Indian

generics makers. Many Indian companies have already made their mark in these

markets while others are pursuing aggressive strategies to foray into these

markets, primarily through their inorganic initiatives.

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Source: Motilal Oswal Investment Report, April 2007

Source: Motilal Oswal Investment Report, April 2007 Source: Motilal Oswal Investment Report, April 2007

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Japan Low generics penetration and Government legislation to drivegrowthJapan, the worlds second largest pharmaceutical market, has lured many Indian

companies, in spite of its low generics penetration rate. The Japanese pharma

market was valued at USD 65.2 billion in 2006. 3 At present, generics account for

approximately 17 percent of the market by volume and 5 percent by value. It is

expected to grow to USD 14 billion by 2010. 4 The government is actively

introducing reforms and measures to encourage low cost-high quality generics

drugs, with the objective to cut the increasing healthcare spending.

Indian companies are looking at significant opportunities in the Japanese market.

The growth of the generics industry in Japan is expected to be driven by a rapidly

ageing population, increasing healthcare expenditure and government reforms.

Since 2002, the Japanese government has introduced several legislations to

promote the use of generics drugs. The generic substitution law which was

introduced in April 2006 is one of them. It is expected to be a key engine to

expand Japans generics drug market and enable medical institutions to dispensegeneric drugs.

Emerging Markets- gaining tractionEmerging markets such as Russia and the CIS nations, Eastern Europe; Brazil and

other Latin American countries and South Africa are increasingly being viewed as

highly remunerative markets.

Presence of Indian companies in Japan

Indian Company Remarks

Ranbaxy Entered into a JV with Nippon Chemiphar, a medium sized pharma companyfocused on generics, to strengthen its presence in Japans generics market

Lupin Acquired Kyowa, a Japanese generics company ranked amongst the top 10generics companies

Strides Arcolab Entered into a JV with SORM Co. for long-term supply of generic drugs, Over-the-Counter (OTC) and nutraceutical products

Zydus Cadila Acquired Nippon Universal to gain access to a manufacturing base anddistribution network

Source: Motilal Oswal Investmenr Report, April 2007; Company websites and Press articles

3 Datamonitor Report, December 2006

4 Motilal Oswal Investment Report, April 2007

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Many of these markets are primarily branded generics markets and have high

entry barriers, and are thus subject to lesser competition. As a result, these

markets offer better price realizations and stable margins. The demand in these

markets is further driven by favorable demographics, increased healthcare

spending and improving healthcare infrastructure.

Regulated Markets are the largest markets and their role will always remain important. But, as and when there are opportunities in other markets, people that have entered the regulated markets will also look at these markets. Some of the emerging nations and semi regulated markets offer better opportunities in terms of profitability than the regulated markets, says Mr. Pankaj Patel.

South AfricaSouth Africa is perceived as a very promising market for several Indian generics

makers. The South African pharma market was valued at USD 1.3 billion in 2006.

This market is expected to grow at a CAGR of 5.5 percent over the next five

years and touch USD 1,698 million by 2011. 5 It is predominantly dependent on

imports and the generics market accounts for around 40-45 percent of the total

market.

Hence South Africas pharma market has become one of the prime emerging

markets for Indian generics players. Several players have established their

presence in this market through subsidiaries, JVs, acquisitions, or marketing and

distribution agreements. Some of the leading Indian companies which have

already capitalized on the opportunities in this market include Cipla, Dr. Reddys,

Ranbaxy and Wockhardt.

5 Espicom Business Intelligence World Pharma Market, January 2007

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Source: Citigroup Investmenr Report, May 2007

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Russia and other CIS nationsThe Russian pharmaceuticals market was valued at USD 7 billion in 2006. 6 It is

one of the fastest growing pharmaceuticals markets in the world. Russias

generics market is around 30 percent of the total market. 7 It is a semi-regulated

market, offering high and stable returns. Other attractive CIS markets include

Ukraine, Kazakhstan, Belorussia, Uzbekistan and Azerbaijan.

The reforms in healthcare systems and the shift to generics, clubbed with

favorable demographics such as a large population base, high per capita income,

as well as low entry barriers compared to the U.S. is expected to augur well for

companies focused on this region.

JB Chemicals, Ranbaxy, Lupin, Lyka Labs, IPCA Labs, Plethico have established

their presence in Russia. Investments are in the form of JVs and manufacturing

facilities in Russia, Ukraine and Uzbekistan. Competition for Indian companies in

these regions is from the neighboring European generics players.

Brazil and other Latin American marketsThe Brazilian market has caught the fancy of many Indian companies in the

recent years. In fact, approximately 50 percent of the JVs and partnerships

between India and Brazil are formed in the pharma sector.

6 Economist Intelligence Unit

7 Espicom Business Intelligence World Pharma Market Fact Book

Source: Express Pharma

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Generics accounted for 14.2 percent of the estimated USD 11 billion market in

2006. Although Indias pharma exports to this market stood at only 3 percent of

the total pharma exports in FY07, this market is expected to generate significant

opportunities in the near future, driven by the recent de-recognition of the patent

for antiretroviral drugs and promotion of generics.

Other markets of Latin America which have attracted many Indian companies are

Argentina, Mexico and Chile. These semi-regulated markets offer stable returns

and higher margins as compared to regulated markets.

Indias competitive positionIndian companies have already proved their mettle in the fiercely competitive

global generics space. India has a share of around 23 percent in the total

Abbreviated New Drug Application (ANDA) approvals and 48 percent of the total

Drug Master Files (DMF) filings. 8 Indias cost advantage is highly compelling. This

fact, coupled with strong chemistry and regulatory skills and the largest no. of

USFDA-approved plants outside the U.S., makes India one of the most dominant

players in the global generics space.

Indian Company Presence in Brazil

Ranbaxy Formed a JV Ranbaxy S.P.Medicamentos (with local partners)

Dr. Reddys Established a subsidiary Dr. Reddy's Farmaceutica Do Brazil Ltda

Glenmark Established wholly-owned Brazilian subsidiary Glenmark Farmaceutica Ltd.Acquired Laboratorios Klinger

Zydus Cadila Established Zydus Healthcare Brasil Limitada to market formulations in BrazilAcquired Quimica e Farmaceutica Nikkho do Brasil Ltda (Nikkho)

Wockhardt Established a sales and marketing subsidiary Wockhardt Farmaceutica do BrasilLtda

Strides Has set-up two manufacturing units (Cellofarm Ltda)

Source: Company websites, Indo-Brazilian Commercial Relations Report, December 2006 and Press articles

8 Crisil Research

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In order to remain competitive and maintain their dominance, Indian players have

realigned and restructured their operating paradigms reflected in lean cost

structures, vertically integrated models, geographically diversified presence, vast

product baskets and increasing presence in niche segments.

Yes, the competition is rising; it took Ranbaxy 4-5 years to get established, so it will take 4-5 years for the Chinese to get established. China is incredibly strong in terms of intermediates and API but in formulations, Indias share is increasing. One out of every four ANDAs is from India. But competition from China will begin by 2008. And it will be very important to be competitive on costs. There are pricing pressures, but there are good profits to be made. The good thing not to forget is the branded generics, which is a growthoriented sector, says Dr. Brian Tempest.

Enhanced focus on niche specialtiesIndian players are now focusing on capturing emerging opportunities in certain

niche specialties. These segments offer higher and more sustainable margins

which can compensate for the intense pricing pressure in the generics segment.

Source: Merrill Lynch Investment Report, November 2006

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The table below shows some of the high growth-high profit niche segments

identified by Indian companies.

Building Para IV pipelinesAggressive Para IV filings and teaming up with innovator pharma companies for

launching authorized generics is also gaining momentum. Indian generics giants

such as Ranbaxy and Dr Reddys have already tasted the success of these

strategies and have reported significant gains by winning the 180-day

exclusivities. To give an example, Ranbaxy won the 180-day exclusivity for

Simvastatin 80 mg, an anti-cholesterol drug in the U.S. This exclusivity period

gave the company a share of approximately 56 percent of that market. Sun

Pharma and Glenmark are the latest entrants in the high risk-high reward Para IV

filings space.

Developing Niche portfolio

Ranbaxy Laboratories NDDS products, Branded Generics

Sun Pharmaceuticals Controlled Substances

Dr. Reddy's Laboratories Biologics, Dermatology

Nicholas Piramal Controlled Substances, Bio-fermentation-based products

Wockhardt EPO, Insulin

Biocon Immunosuppressant, Oral Insulin, Monoclonal Antibodies

Glenmark Dermatology, Controlled substances

Zydus Cadila Anti-Cancers

Lupin Cepharlosporins (Steriles and Oral)

Aurobindo Pharma Lifestyle drug formulations

Source: Merrill Lynch Investment Report, November 2006

Ranbaxy Dr. Reddy's Sun Pharma Glenmark

No. of filings with FTF position 20 18 6 3

Innovator sales for FTF (USD bn) 26 10 6 to 8 3

Source: Analyst Reports

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Global ConsolidationThe consolidation drive that has accelerated over the last two years continued

unabated this year as well a prominent one being Mylans acquisition of

Mercks generics business. Most of these companies have made it to the top

league by aggressively pursuing the inorganic route. Today, the top 10 global

generics companies collectively have a market share of over 50 percent of the

global generics market. This is likely to have a positive effect and reduce pricing

pressure in the global generics market, to some extent.

The enthusiasm for acquisition has been driven by a series of factors such as

attaining scale, geographic diversification by venturing into new markets,

expanding product portfolios, building new therapeutic specializations and

strengthening supply chain capabilities.

Acquisitions by Indian CompaniesThe augmented risk appetite of the Indian players is reflected in their aggressive

acquisition strategy and increased leveraged funding activity, over the last few

years.

In continuation of their strategy of growth through the inorganic route, this year

also, the pharma industry was buzzing with heightened Merger and Acquisition

(M&A) activities. This is driven by the growing ambitions of Indian companies to

strengthen their competitive position and consolidate their presence in the

generics space. The primary drivers that would sustain profits for generics

companies given the pricing pressure are market penetration and access to

diverse markets. Hence, growth through the inorganic route has been the most

sought after strategy for not just the large players but also the medium and small

companies.

While most of the acquisitions were focused on the European markets,companies have concluded deals in the emerging markets of South Africa, Brazil

and Thailand. One of the notable trends, is Indian companies are now increasingly

targeting front-end marketing and distribution companies, in order to strengthen

their position in the entire value chain.

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The table below explains the strategic rationale of some of the prominent acquisitions concluded by Indian companies in

the last one year.

Cross-border acquisitions by Indian companies

Date Target Name Target Country Acquirer Name Deal ValueUSD mn Rationale

Oct-06PinewoodLaboratories Ireland Wockhardt Ltd. 150

Entry into Ireland and to consolidate its positionin U.K. and Germany.

Leverage on Pinewoods marketing network andoffer a wider basket of products

Oct-06 CantabriaPharma SL Spain Wanbury Ltd. 62.6 Entry into the European generics market

Dec-06Be-TabsPharmaceuticals

South Africa RanbaxyLaboratories Ltd. 70

Strengthened Ranbaxys South Africanoperations.

Be-Tabs is South Africas largest penicillinmanufacturers and the fifth largest genericsplayer

Dec-06 Genemedix (74percent stake) U.K.Reliance LifeSciences 63.2

Access to GeneMedixs manufacturing andclinical research facilities to launch bio-similars

portfolio in European markets

Dec-06 PharmacinInternational NetherlandsAurobindoPharma Ltd. NA

Access to several key European markets andwiden product portfolio

Jan-07 BiosciencesCo Ltd. ThailandDabur PharmaLtd. NA

Access to the marketing and distributionnetwork for Thailands rapidly growing oncologymarket

Mar-07 MedicamentaAsCzech Republic(and Slovakia

GlenmarkPharmaceuticalsLtd.

NA Entry into the Czech Republic and Slovakiamarkets

Apr-07NipponUniversalPharmaceutical

Japan Cadila HealthcareLtd. NALeverage on Nippons manufacturing base andstrong distribution network to gain access to4,000 hospitals and clinics

Apr-07 Negma LeradsSas FranceWockhardtLimited 265

Entry into the French market and access toNegmas portfolio of 172 patents anddistribution network

May-07Disapa S.p.Afermentationfacility

Italy Strides Arcolab NA Access to a U.S. FDA and EU approved facilitywith strong technology and fermentation skills

May-07

Quimica eFarmaceuticaNikkho doBrasil Ltd

Brazil Cadila HealthcareLtd NA Entry into Brazils branded generics space

Aug-07Biomeda Group(51 percent

stake)

Bulgaria Elder Pharma 5Entry into the Bulgarian market and expansionof the product portfolio to other European

marketsNote: In May 2007, Sun Pharma announced the acquisition of Taro for USD 454 mil lion. The deal is pending closure. The Acquisition will expand Suns U.S.portfolio and strengthened its Research and Development (R&D) activity and add 170 scientists to Suns existing team. Taro has a strong focus on the U.S. and Canadian markets.

Source: Analyst Reports, Press articles, Company websites

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Acquisitions of Indian assets by international pharmacompaniesIt has become a strategic imperative for global pharma 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. Global generics

players such as Mylan and Actavis have acquired Indian assets to create a strong

back-end for their global supply chain.

Generics industry will continue to be very attractive. India's position is very strong. There are lots of products coming in, lots of governments worried about rising health costs. Pricing pressure is increasing and there is focus on the issue. If you don't have abusiness in India, I can not see the company surviving in the future. I really think that you need an Indian part of the business. So, you may be Indian or you are based outside of India but you require anIndian operational base or you will loose. So there is optimismabout the generic business which is still going to be there, says Dr.Brian Tempest.

Global pharma companies have been sourcing Active Pharmaceutical Ingredients

(API) and formulations from India through tie-ups with Indian manufacturers.

However, acquisitions provide them with greater control and flexibility and access

to the same resources available to Indian drug manufacturers.

Foreign companies areacquiring Indian assets Rationale

Actavis acquired themanufacturing facilities ofGrandix and Sanmar

Grandix provided Actavis access to low cost manufacturing facilities, to develop andmanufacture products for U.S. and Europe as well as re-launch older products atcompetitive prices from the facilities

The Sanmar acquisition provided Actavis a U.S. FDA approved facility and the ability todevelop and manufacture its own APIs

Mylan acquired a majoritystake in MatrixLaboratories

Matrixs acquisition is expected to significantly enhance the backward integrationcapabilities of Mylan and strengthen its supply chain capabilities

Provided Mylan an access to the emerging markets of India, China, Africa and also Europe(through the distribution network of Matrixs Docpharma subsidiary)

Teva acquired RegentDrugs Regent Drugs provided Teva access to API manufacturing facility for its global needs

Watson Pharmaceuticalsacquired Mumbai-basedSekhsaria Chemicals

The acquisition was part of Watsons strategy to expand its presence in India. It providedWatson access to facilities such as process R&D, contract manufacturing and development;and manufacture of API and intermediates

Watson acquired DrReddys Goa formulation

facility

Watson produces solid dosage generic products for the U.S. market from this plant

Source: Press articles, Analyst Reports

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Key Considerations

Pricing Pressure and Increasing Competitive IntensityThe global generics industry continues to reel under pressure with intense

price-led competition, and the entry of smaller players has further intensified the

competitive intensity. Though the generics segment continues to grow at a rate

higher than the global pharmaceutical market, the operating environment is

becoming increasingly competitive. U.S., the leading generics market, is

witnessing intense competitive pressure with several new players entering thisspace leading to price erosion to the tune of 95-98 percent in some instances

Given the fact that there are newer players entering the fray, inaddition to the existing players, we can expect the generics space tobecome a more competitive one, feels Mr. Pankaj Patel.

While the long term business drivers are intact, the near term prospects seem

challenging. However, Mr. Pankaj Patel feels that the generics market will expand. It is a growing market and opportunities still exist. The severe pricing pressure will continue and eventually it will become avolume game. The key factors that will become very important tosucceed in the generics business will be the ability to differentiate oneself in terms of technological development and cost optimization.Taking care of these two aspects would have a positive impact for companies.

Managing Growth in multiple marketsOne of the key issues to be dealt with while achieving geographical

diversification is to manage growth in multiple markets. Not only big players but

even mid and small sized Indian pharma companies have started foraying into

regulated as well as non-regulated markets. Each of these markets has uniquecharacteristics. It is a challenging task to develop a strong presence and acquire

scale in each of these markets. The success of companies in these markets will

depend on factors such as:

Entry strategy

Ability to comply with regulatory complexities

Building product portfolio based on disease profile of each country.

Its not just managing multiple markets, but the complexities interms of supply chain and regulatory requirements that make the task of managing growth a challenging one, says Mr. Pankaj Patel.

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Competition from ChinaIt is becoming increasingly difficult for India to ignore China. China is emerging as

a strong competitor on the back of its cost competitiveness, strong government

support (in the form of incentives), implementation of GMP norms, aggressive

focus on exports and the soaring consolidation drive to build large Chinese

pharma giants. In fact, China is thought to be the preferred contract research

destination over India.

In some aspects, however, China lacks the required specialization in some areas

such as finished formulations, regulatory compliances for regulated markets and

Intellectual Property Rights (IPR) development. In terms of U.S. FDA approved

plants, China is still far behind India. India is also leading in terms of the number

of DMF filings. While India has filed 1,155 DMFs between January 2000-June

2007, China has filed only 329 in the same period. In 2007 itself, India has filed

110 DMFs, which is nearly thrice that of Chinas 38 filings. 9

China has always tried to compete on price, so they could pose athreat to India in the Generics Market. However, they are still six years away from doing anything significant as far as generics are concerned. Apart from China there is no other country that could pose a serious threat to India, says Mr. Pankaj Patel.

9 Crisil Research

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Integration IssuesFinding a target and acquiring it is just one aspect of a deal, what is equally

important is the ability to successfully integrate the target with itself. Some of

the key concerns of the integration process involve people management,

managing cultural differences and aligning the goals and ambitions of the staff

members with the vision of the merged company. Going forward, the successful

implementation of planned growth strategies will also depend on how well

companies manage the integration process.

Conclusion

These are very exciting times for Indian generics players. On one hand, the

mainstay of the Indian players, the U.S. market, is experiencing intensely

competitive business environment, and on the other hand, semi-regulated and

emerging markets are expected to become new growth markets. While,

operational restructuring and realignment of business models will help Indian

players survive the competitive environment in the U.S. and European markets,

their increasing presence in other promising markets will further enhance their

market share in the global generics industry.

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Introduction

Pharmaceutical companies are increasingly realizing the benefits of outsourcing.

Until the late 1990s, companies developed their products in-house and only

shared select information with third parties. However, in recent times, increased

competition, weaker product development pipelines, fewer approvals, the need to

accelerate the time-to-market of new products, and pricing pressures have

compelled pharmaceutical companies to re-examine their priorities and

increasingly include outsourcing as part of their model structure for businessoperations.

CRAMS, considered as one of the most promising medium to long term

opportunities for the Indian pharma industry, is gaining momentum. In recent

times, the CRAMS segment has witnessed heightened activities on the back of

increasing deal flows, presence of global Contract Manufacturing Organizations

(CMOs) and Contract Research Organizations (CROs) and emergence of new

players. Global pharma companies are finding innovative ways to capture cost

efficiencies across the value chain and are resorting to outsourcing of core as

well as non-core processes. India, with its inherent competitive advantages,

stands as one of the most preferred outsourcing destinations for a range of

activities and is now becoming a critical component in manufacturing as well as

the drug development value chain of various innovator pharma companies.

Contract Research andManufacturing Services (CRAMS)

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Growth Drivers

MNC pharma companies are increasingly focusing on realigning their

manufacturing activities in order to concentrate on core activities such as R&D

and brand building - thereby reinforcing the potential for cost savings through

contract manufacturing. At the same time, existing global CRAMS players are

facing adverse business conditions, on account of increasing regulatory

compliances on environmental issues and competition from low cost countries.

MNCs - leveraging on their Indian subsidiaries for globalsupportThe introduction of the product patent regime has opened up dual opportunities

for global pharma companies in India. While on one hand the regime has made

India one of the most promising pharma markets (on account of the favorable

demographics and increasing income levels), on the other, it has boosted Indias

capabilities as an emerging off-shoring destination for providing end to end

pharma outsourcing services.

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 tooffer large intellectual capital in numbers which no other country cando. We have to be competitive in terms of regulations and the speed at which we turn things around, says Dr. Hasit Joshipura.

Company Remarks

MerckReduction of the workforce by 5,100 people (47 percent frommanufacturing)

Eli LillyComprehensive restructuring package: greater reliance oncontract manufacturing

Sanofi Aventis Sells manufacturing plants in Puerto Rico and France

Pfizer USD 4 bn cost-savings plan: 25 percent reduction inmanufacturing plants by 2008

Source: Citigroup investment Research, May 2007

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India is an attractive choice for outsourcing. The attractiveness of demographics and cost advantage are key. However the ambiguity in patent law and bureaucracy can be inhibitors of growth. Key areas for outsourcing in India are bio informatics, lead optimization and clinical trials. Currently India is getting the lower end of these activities, however companies will slowly move to outsourcing higher end of their activities here once we demonstrate value through lower cost and also reduce the time to market, feels Mr.

Ranjit Shahani.

Global pharma MNCs are increasingly enhancing the scope for outsourcing of

their operations, related to research and manufacturing to their Indian

subsidiaries. Accordingly, they are increasingly leveraging on their facilities in

India.

Some of the key operations for which India is evolving as an important

outsourcing base include:

Support for global R&D functions

In order to improve R&D productivity and curb escalating costs, MNC pharmacompanies are capitalizing on their existing low cost facilities in India. ManyIndian subsidiaries are already playing a vital role in the global R&D programmesof the parent company.

Outsourcing of manufacturing operations to the Indian subsidiariesPharma MNCs that have renewed their interest in the Indian markets have set uplow cost manufacturing facilities in India that meet international standards. Whilethey continue to expand their presence in the domestic markets, many of themare simultaneously using these facilities as off-shoring hubs.

Using India as a export base for other countriesPharma MNCs are also increasingly using India as a base for exports not only tothe immediate neighboring markets, but also to other markets around the worldsuch as Japan, South Africa, Latin America and Europe.

Clinical Data Management for global drug discovery and research functionsPharma MNCs are also exploiting Indias competencies in the field of InformationTechnology and its strong and low cost IT skill sets; by setting up centers for theirglobal clinical data management functions in India.

The India pharma industry is positioning itself as the provider of value addedservices such as support for early phase discovery, research, clinical tests, and

synthesis of custom-made intermediates or even finished APIs, elaboration ofgenerics dossiers bundled with the supply of the formulated drug product, etc. ataffordable prices. Accordingly, many MNC pharma companies have alreadystarted taking advantage of this.

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The table below illustrates the various activities outsourced by MNC pharma companies

Company Remarks

GlaxoSmithKline (GSK)R&DIn 2006, GSK India was involved in 16 global clinical studies. Going forward, GSK India is

planning to play an important role in the parents global drug discovery programme. India has

been recognized as one of the prime centers for clinical research, especially for therapeutic

segments such as oncology, psychiatric disorders and infectious diseases. It is also involved inthe custom synthesis for drug discovery and research initiatives of GlaxoSmithKline R&D at

U.K., Italy, and U.S.

ExportsIndia is being used as a base for the export of bulk drugs to key markets such as Japan,

Mexico, France, Germany, Holland, U.K., South Africa and Denmark.

Clinical Data Management CenterIt has set up a center for clinical data services with Data Management, Biostatistics andScientific Writing functions to support the clinical R&D activities of GlaxoSmithKline Biologicals

worldwide.

Pfizer R&DConducts clinical research on behalf of Pfizer Global Research and Development (PGRD)worldwide development teams. Approximately 3/4th of the clinical research portfolio is related

to Phase II and Phase III studies, while the balance pertains to the research essential for the

local registration, launch and marketing.

Export BaseIndia is also used as a base for exports to other countries.

AventisOutsourcings of mainly APIs by the parent company as well as sales to Russia are the two keycomponents of exports.

AstraZenecaHas set up a process R&D facility focused on tuberculosis in Bangalore, the first outside

Sweden and U.K.

Novartis Novartis is increasingly using India as a base for exports to other countries.

Novo Nordisk It is planning to set up a global data management center.

Sanofi Aventis

Planning to make India one of its largest bases for clinical research. It set up a dedicated Indian

Clinical Research Unit (CRU) in April 2006. It has been assigned 17 studies in several

therapeutic areas till date. Sanofi is planning to send almost 100 percent of its feasibilitystudies for Phases II and III trials to the Indian CRU.

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Contract ManufacturingContract Manufacturing represents the largest opportunity within the CRAMS

space. India, with its efficient labor pool and large number of USFDA compliant

manufacturing plants outside the U.S., is expected to garner a major share of this

large opportunity. At present, the global manufacturing outsourcing opportunity is

estimated at USD 20 billion and is expected to reach USD 31 billion by 2010.

The four main components of the global outsourcing market are intermediates,

APIs, custom synthesis and formulations/dosage forms. It is estimated that

approximately 40 percent of outsourcing demand is for the manufacturing of

APIs.

Source: Citigroup Investment Research, May 2007

Source: Crisil Research

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Having a presence across various segments of the contract manufacturing space

is important and helps to capitalize on opportunities provided by this space.

Though Custom Chemical Synthesis (CCS) and the intermediates space offers

limited scale and volume but strong chemistry skills at this stage is a significant

step in getting increasingly involved with the overall drug development process

and developing relationships with MNC pharma companies.

Well integrated players certainly will have an advantage. The clients

will certainly prefer players who could be contracted for all the disciplines and segments, says Dr. J M Khanna.

For Indian contract manufacturing players, opportunities exist on two

fronts

- capture a larger share of the opportunities created because of the shift from

in-house manufacturing to outsourcing by innovator pharma companies and

- foray into western countries by acquiring existing contract manufacturing players

in the western countries.

Acquisitions are not new to Indian pharma companies. The success of the

generics players can very well be attributed to the large acquisitions they have

made to foray into western countries especially in the European region. Indian

contract manufacturing players have also opted for the inorganic route to growth

and have made strategic acquisitions to gain scale and strengthen customer

relationships.

Acquisition is also a philosophy. Ambition of the management togrow is an important factor. Acquisition is a quicker way of achieving higher revenues. Organic growth may also result in higher revenue growth however, it takes time and it can be slow. It depends on the

management, how they want to grow, feels Dr. J M Khanna.

Acquirer Target Country Deal Value (USD mn)

Nicholas PiramalAvecia

Pfizer Facilty

U.K.

Morpeth, U.K.

18

38

Shasun Chemicals Rhodias CCS business U.K. 5

Jubilant OrganosysTarget Research Associates

Hollister Steir Laboratories

U.S.

U.S.

33.5

122.5

Dishman Pharma Carboogen Amcis Switzerland 74

Dr. ReddysLaboratories Roches Facility in Mexico Mexico 61

Source: Citigroup investment Research, May 2007

Notable acquisitions in the CRAMS segment

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Considering that some of these assets were not doing well due to a bloated cost

structure and inadequate focus, Indian companies were able to acquire them at

reasonable valuations. With proper operational realignment and rapid scale up in

contracts, most of these acquisitions are now proving to be earnings accretive.

Contract ResearchContract Research also offers significant opportunity to the Indian pharma

industry which is becoming a global R&D hot-spot for innovator pharma

companies. The global contract research opportunity was pegged at USD 14billion in 2006 and is expected to reach USD 24 billion by 2010. Declining R&D

productivity, coupled with an increasing number of products going off patent is

expected to drive the growth of the contract research segment.

Besides manufacturing, outsourcing of discovery services will alsostart happening sooner rather than later. However, it would be afunction of the experience that some of the earlier innovators have

had and how competitive the country is as against other countries such as China, Singapore, Brazil, etc. says Dr. Hasit Joshipura.

Given the conducive regulatory environment, strong chemistry innovation skills,

large and diverse patient pool; and availability of players providing ancillary

services such as bio-informatics, clinical data management and bio-statistics; the

contract research market in India is expected to grow at a CAGR of 30-35 percent

during 2006-2011. At present, contract research for new drug discovery accounts

for 60 percent of the total market while the balance 40 percent is for generic

drugs.

Source: BiotechFinances.com

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Clinical ResearchAt present, a majority of clinical trials conducted in India are for Phase II and

Phase III. Further, Phase I trials are not permitted in India for new drug

substances discovered in other countries unless Phase I data from other

countries is made available to Indian authorities. However, the government is in

the process of considering the recommendation of the Drug Technical Advisory

Board (DTAB) to allow Phase I clinical trials for the drugs discovered abroad. If

this happens, then it will enable the Indian CRAMS industry to provide a wide

range of drug discovery services.

The advent of the product patent regime in 2005 has provided the much needed

impetus to the growth of the clinical research and clinical trials segment. Many

MNC pharma companies have made India their R&D hub - especially for clinical

trials. India is also becoming a preferred destination for clinical trials given that it

offers a huge patient base afflicted by both tropical diseases as well as lifestylediseases. Patient recruitment in India is also faster than other semi- regulated and

regulated markets.

Following the move of their global customers, international CROs have also

forayed into the Indian market. Some of the prominent ones include Quintiles,

SBFC International, ICON Clinical Research and i GATE Clinical Research

International.

Source: acrohealth.org

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Government SupportOn the regulatory front, the government is also trying to promote the growth of

this industry by providing tax exemption on all services carried out by the

contract research and clinical trials industry. This step is likely to further boost

clinical trial outsourcing to India.

Key Considerations

Efficient execution of contractsGiven that the Indian CRAMS industry is still evolving, the industry experiences a

rather long gestation period due to a longer time taken for awarding contracts.

Further time spent on registration and other regulatory processes can extend

final delivery timelines by almost two additional years in the initial phase.

The Indian CRAMS industry also needs to focus on building strong and

sustainable client relationships and improving the quality of service with respect

to meeting delivery timelines, upholding ethics, and the ability to offer

value-added services.

Execution of CRAM deals also depends on how we exploit the technical capabilities and how we manage broader issues such as people and ethics. These things are still not in full control. We are holding back. The day we start it and demonstrate it, we will attract more business, feels Dr. J M Khanna.

Building a strong technology platform and long termpartnershipsConsidering the large opportunity and strong growth drivers, several Indian mid

sized companies have forayed into this segment.

The CRAMS segment is becoming commoditized with more number of players entering the segment and people constantly driving down prices. Therefore, even in this segment technology and research will play a part. Developing the best technology, focusing on a few large deals and building long term partnerships, will help inachieving success in this segment, says Dr. Swati Piramal.

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Training and InfrastructureEducation pertaining to contract research, including discovery services and

clinical trials, needs to be given high priority. An adequate physical infrastructure

coupled with specialized training and an industry wide accreditation system will

help balance the demand-supply equation in this rapidly growing industry.

IPR CompliancesIssues related to data exclusivity and confidentiality are still areas of concern for

most clinical trials sponsors. Stronger IPR compliances will instill greaterconfidence in MNC Pharma companies and will further boost the CRAMS

segment.

We need to speed-up the patent process, infrastructure has to be ramped up and more clarity on the data exclusivity factor needs tobe provided. If you were to bring more and more R&D into this country, then these are the issues one has to consider, says Dr.Hasit Joshipura.

Conclusion

Today, what was once considered a potential opportunity is now being translated

into real numbers. In recent times, the pharma industry has seen has seen an

emergence of significant opportunities in the form of increase in outsourcing

contracts. Indian companies are now witnessing increasing visibility in this

business from one-off contracts to becoming preferred vendors with assured

revenue streams.

One of the most notable trends is a formation of a proper eco-system that will

support the growth of this industry on a sustained basis. Emergence of domestic

players, increasing presence of global CROs, well developed IT infrastructure,encouraging regulatory environment and well established Knowledge Process

Outsourcing (KPO) industry. A combination of all these factors will take this

nascent industry to the next level.

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Introduction

Research on New Chemical Entities (NCEs) and New Drug Delivery Systems

(NDDS) is steadily becoming an integral part of the strategy of Indian pharma

companies, who want to build a sustainable long term advantage. Over the last

couple of years, the discovery R&D segment has gained significant momentum

and discovery R&D pipelines of several players have expanded substantially. At

present, as many as 10-12 companies have molecules under various stages of

development. R&D investments by Indian companies have also increasedsignificantly and now account for as much as 7-9 percent of sales for leading

pharma companies. It is expected that investment in R&D is expected to rise to

USD 500 million in 2010 and USD1.2 billion by 2015.10

I believe India will be recognized as a research hub, it may not happen very soon. There are tremendous opportunities for people toget into this innovative business, as the cost of conducting researchin India is significantly lower. But we still dont have great respect for innovation and this will take time to evolve. There has to be acultural change and societal change to make this happen. So Indiawould be the place for research, but perhaps in the long term, feels Mr. Pankaj Patel.

Growth Drivers and Trends

Indias competitive advantage in offering strong chemistry innovation skills at

significantly lower costs has lured many multinational innovator pharma

companies to make India a major component of their global drug discovery value

chain.

Key aspects of R&D initiatives of Indian pharma companies are the variouscollaborations and innovative funding models that are being adopted by each one

of them. Research on NCEs is relatively a new field for Indian pharma companies,

which have traditionally relied on their process engineering skills and is fraught

with uncertainties and demands considerable financial resources. Collaborative

research, through in-licensing and out-licensing helps in accessing the vast pool

of resource capabilities of MNC Pharma companies. This also allows Indian

pharma companies to build resources for expanding their research pipeline.

In-licensing and out-licensing transactions are gaining strategic importance with

MNC pharma companies making it an integral part of their business models. This

not only helps in boosting their weak short to mid-term growth prospects by

swiftly filling gaps in their pipelines but also helps in saving time for conducting

early stage R&D process.

Research and Development

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Prominent deals in collaborative research

IndianCompany Molecule Indication Nature of deal Global Partner Remark

Glenmark

GRC 3886 Asthma,COPD

Out-licensing Forest LabsOut-licensed to Forest Labsfor USD 190 mn for NorthAmerican markets

GRC 3886 Asthma,COPD Out-licensing Tejin PharmaOut-licensed to Teijin Pharmafor Japanese markets

GRC 8200Type IIDiabetes Out-licensing Merck KGaA

Out-licensed to Merck KGaA,Germany for the NorthAmerican, European andJapanese markets.

Dr Reddys

DRF 1042 Cancer JointDevelopment

ClinTec International Co-development andcommercialization agreement

DRF 2593 Type IIdiabetesJointDevelopment Rheoscience A/S

Co-development andcommercialization agreement

Ranbaxy RBX 11160 Anti-malarialJointDevelopment

Medicines forMalaria Venture(MMV)*

Co-development andcommercialization agreement

Nicholas Pre clinical drugcandidate NA In-licensing NA Global clinical development

AlembicNDDS forKeppra XR

Anti-epilepticdrug Out-licensing UCB, Belgium

Out-licensed for milestonepayments of USD 11 millionand royalty on futureworldwide net sales

Suven Pre clinical drugcandidate CNSJointDevelopment Eli Lilly

Partnering deal with Eli Lillyfor early phase research forDiscovery of NCEs in the CNSarena

*this joint venture has been discontinued

Source: Company websites, Analyst reports, Press articles

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MNC Pharmas quest for in-licensingFor MNC pharma companies, in-licensing is the most sought after strategy to

arrest declining R&D productivity. Over the last couple of years, many MNC

pharma companies have stepped up their in-licensing activities. Novartis has

more than 320 ongoing collaborations across 19 countries while Astra Zeneca has

in-licensing partnerships with more than 50 companies. Globally, leading pharma

companies are witnessing increasing dependence on in-licensed products to

augment sales. In 2005, revenues from licensed products accounted for 24.4

percent of the total sales of the top 55 pharma companies as against 20.7percent in 2002. Datamonitor estimates that by 2010, these companies will

derive as much as 29 percent of their total sales from in-licensed products.

Source: Datamonitor, April 2006

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Collaborative ResearchIndian CROs with advanced research capabilities and value added service

offerings are going beyond their pure service led models to an incentive based

structure. Advinus Therapeutics, a CRO promoted by the Tata Group, is one such

example. It has entered into an in-licensing cum joint development agreement

with Merck for the development of two drugs in the metabolic disorder segment.

In addition to the USD 75 million milestone payments, upon commercialization,

Advinus will also receive royalty on drug sales. In another example, Indias

biotech major, Biocon, has entered into a USD 300 million deals with BMS todevelop a new research center employing 400 scientists for providing discovery

and pre clinical support to BMS.

De-mergersDe-merging of R&D assets into a separate company is one of the most notable

trends among Indian pharma companies. The objective being to enhance the

focus on the drug discovery business and generate resources by roping in

strategic investors to take molecules to advance stages of development.

You take the R&D assets of all the Indian companies together and the market cap that the stock market is ascribing to them today. By 2015, these assets would have an approximate value of USD 65 billion. But, if you create a separate company specifically for research then value could be as high as USD 100 billion by that time.So the de-mergers would add significant value, says Dr. Swati Piramal.

Dr. Swati Piramal also feels that, Generics Discovery and CRAMS should be separate. You can't do both. In discovery, your scientist is asked to be creative and find a new innovation. The mandate of the

scientist is broad and ensuring that it won't infringe on anyone's patent. In CRAMS the mandate to your scientist is different. The mandate is to make an existing patent or innovation better. So the approach is different.

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Key Considerations

Need for partneringNew drug discovery is a costly and lengthy process. It takes anywhere between

(approximately) 10-12 years, for a new drug to reach the market from the

laboratory and costs approximately USD 800 million to 1.2 billion. Indian playershave been funding their research pipelines through resources generated from the

generics business which is facing intense price competition. This makes it

particularly difficult for Indian pharma companies to drive the entire process of

drug discovery all the way to the stage of marketing. Indian pharma companies

are well placed to do early stage research but lack the financial strength to take a

promising new molecule to advanced stages of development.

Globally, the R&D business is becoming tougher with declining productivity and

spiraling costs. On the regulatory front, product approval norms are becoming

stricter. Both Indian pharma companies and global innovator pharma companies

realize the benefits of partnering.

Strategic R&D Demergers

Company Strategic Rationale

Sun

To provide scope for independent collaboration and expansion

To offer investors an option to separately hold investments in

businesses with different investment and return characteristics,

depending on what matches their risk and return expectations.

Dr Reddys

To rapidly advance the existing as well as future NCE assets throughPhase II trials and seek out-licensing, co-development or joint

commercialization opportunities

To aggressively accelerate new discoveries to clinical development in

the areas of Metabolic Disorders and Cardiovascular.

Nicholas Piramal

To enhance the focus on the NCE Business

Improve profitability of core business such as CRAMS and domestic

formulations

Funding flexibility to explore innovative financing mechanism

including strategic investors.

Ranbaxy

To create an independent pathway for Drug Discovery Research

Operational freedom and flexibility for new growth opportunities

Provide a platform for increased collaboration.

Source: Company websites, Analyst reports, Press articles

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Companies are investing, trying to partner with various companies to do testing of compounds and take it to a pre- clinical level. This will develop and will be more like an investment for the future. There are few companies that are already doing that. As an industry we can learn this testing of new compounds. This is a weak area and which we need and should build. When that is done, I think India will be benefit, says Dr. J M Khanna.

Partnering with a MNC Pharma company helps in taking new compoundsthrough all the phases of clinical trials right till the launch of the molecule. This

strategy considerably reduces payback period and helps Indian companies

develop specialization to consistently generate new innovative compounds

through in-house R&D.

Research and Development offers a lot of advantage to India and this is where India can create a priority structure and reorient the business.There is plenty of scope for R&D Collaboration. We could undertake research in full-scale therapeutic areas or collaborate in specific or partial research and development projects. Another area for collaboration could be for products that are not so important for large pharma companies,but still relevant for others. The MNC Pharma companies would not be interested in these products because of their limited market size but this could be an area of interest for Indian companies, feels Mr. Pankaj Patel.

Need for Regulatory ImpetusThe government and other regulatory bodies can play a significant role in

determining the success of drug discovery research in India. One form of

government support, would be the PPP models that can give the much needed

impetus to this segment. The PPP model can help companies finance the

molecules across different stages of development, provide support forconducting clinical trials and get faster regulatory approvals. The public sector will

also stand to benefit by getting access to drugs of high therapeutic use meant for

mass distribution, at significantly low costs.

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Funding is the biggest constraint. It takes lot of money to develop anew drug and chances of failure are also high. If the prices of the drugs in the domestic market are controlled then there is very little money left for research. We are the only country in the world where this is happening. China, Korea, Israel, Taiwan, they all encourage research. If we dont do it, then the money doesnt go to research.But if it does go to research, then with much less cost we can domuch more because of our inherent advantages, says Dr. Swati

Piramal.

Conclusion

India is expected to play a vital role in the global R&D space and collaborative

research is expected to be the future of the new drug discovery process in India.

This is reinforced by the increasing collaborations between Indian and MNC

pharma companies. Going forward, this trend will continue to gather momentum.

However, success would largely depend on proper partner selection and well

structured alliances.

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The pharma industry is regarded as one of the most globalized industries. The

Indian pharmaceutical industry has the ability to exploit the opportunity inherent

in the global industry at various points in the value chain from raw materials,

intermediates and active pharmaceutical ingredients at one end, to generic and

outsourced formulations and drug discovery and development at the other end. In

order to rapidly integrate with the global pharma industry, Indian pharma players

have entered into various collaborations in almost every area of the pharma value

chain, be it drug discovery and development; manufacturing, sales or distribution.

Post the introduction of product patents in Indian legislation, the domestic market

has become even more attractive to pharma MNCs that have now started

collaborating with domestic players through in licensing deals and marketing

alliances.

For MNCs pharma companies that are augmenting their market presence (after

the new product patent system), by utilizing domestic industry's skills andinfrastructures to boost their research and manufacturing activities, partnerships

will be crucial to penetrate the tertiary and rural markets.

This enables the MNCs to utilize the vast marketing and distribution networks on

the Indian players while these alliances enable Indian companies to access a

wider knowledge base and a diverse product range.

Growth Through Collaborations

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Conclusion

Collaborations have played a very important role in the growth of the Indian

pharma companies. Be it the domestic market or international, the co-existence

of collaboration and competition has now become an inherent characteristic of

the Indian pharma industry. Companies have identified collaborations as a faster

growth tool than building their own infrastructure.

Today, pharmaceutical companies operate in multiple markets spanning multiplesegments and with varied business models. Collaborations will be critical to

success in such a dynamic business environment.

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Annexures - Profiles

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Educational Background

Dr. Brian Tempest has acquired his CSci, CChem, MRSC, BSc and PhD.

Professional Experience

Dr. Tempest has worked in the pharma industry for the last 36 years. During this

time, he has worked for several pharma majors, including Glaxo & Searle, around

the world and joined Ranbaxy 12 years ago. During this period, Ranbaxy has

transformed from a small company focused on the India domestic market, to a

top 10 global generic company. Dr. Tempest lives in New Delhi, India and has

been President, Managing Director & Chief Executive Officer and is presently the

Chief Mentor & Executive Vice Chairman of the Board. Dr. Tempest is one of afew westerners to hold a leadership position in an Indian blue chip MNC, and has

an unusual insight into India.

Dr. Tempest is also a Honorary Professor of the Management School at Lancaster

University, U.K., and he sits on the Editorial Board of the Journal of Generic

Medicines.

Dr. Brian W. TempestChief Mentor & Executive Vice Chairman of the BoardRanbaxy Laboratories Ltd.

Brian Tempest

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Educational Background

Dr. Joshipura is a graduate in Electrical Engineering from VJTI - BombayUniversity and a Post Graduate from Indian Institute of Management -

Ahmedabad. He has completed his Doctorate programme at the School of

Management at IIT Mumbai.

Professional Experience

After having spent about three years with the Tata Administrative Services, Dr.

Joshipura has spent about 16 years with the Unilever Group of companies in

India and held positions of increasing responsibility in commercial, sales,

marketing and business management functions. He joined the pharmaceuticalbusiness of Johnson & Johnson Ltd., as President & Executive Director in

October 2001, a position he held until August 2006. Dr. Joshipura was also the

Chairperson for the Corporate Contributions Programme, as well as the lead for

Government Affairs for the Johnson & Johnson group of businesses in India.

Other Achievements

Dr. Joshipura brings considerable management experience in both consumer

healthcare and pharmaceuticals and is ideally placed to lead GSK India in the

patent era. He is also an Executive Committee M