Pharmaceuticals Industry analysis - Final

STRATEGIC MANAGEMENT INDIAN PHARMACEUTICAL INDUSTRY ANALYSIS

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INDIAN PHARMACEUTICAL INDUSTRY (HISTORY AND GROWTH) INTRODUCTION

Indian Pharmaceutical Industry has come a long way from being almost non-existent in the 1970’s

to being one of the largest and most advanced Pharmaceutical industries in the world. The

domestic Pharmaceutical output has increased at a CAGR of close to 13. Currently the Indian

Pharmaceutical Industry is valued at $ 8 billion (approx). Globally the industry ranks 4th in terms

of volume and 13th in terms of value. It provides employment to millions and ensures that essential

drugs are available to the vast population of India at affordable prices. Indian Pharmaceutical

Industry has attained wide ranging capabilities in the complex field of drug manufacture and

technology developed through a range of governmental incentives and the industry has been

declared a knowledge based industry. This Industry is a highly organized sector and is extremely

fragmented with severe price competitions and governmental price control. The major players in

the Industry are Ranbaxy, Dr. Reddy’s Laboratories, Cipla, Sun Pharmaceutical Industries, Lupin

Lab, Glaxo SmithKline Pharmaceutical, Cadila Healthcare, Aventis etc. According to data

published by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total

turnover of India's pharmaceuticals industry between September 2008 and September 2009 was

US$ 21.04 billion. Of this the domestic market was worth US$ 12.26 billion.

Pharma Industry in India – Environment Scanning (PEST Analysis)

The Indian pharmaceutical industry has shown satisfactory progress in terms of infrastructure

development, technology base and product use. It has shown domestic sales of US $ 4 billion and

exports of over US $ 3 billion, during the fiscal year 2004-05, according to the Economic Survey

2004-05. The industry produces bulk drugs belonging to all major therapeutic groups requiring

complicated manufacturing processes and has developed good manufacturing practices (GMP)

compliant facilities for the production of different dosage forms. The pharmaceutical industry is

capable in developing cost-effective technologies in the shortest possible time for drug

intermediaries and bulk actives without compromising on quality, which is realized through the

country’s strengths in organic synthesis and process engineering. India has gained fame as a low

cost producer of antiretroviral and supplier of the same to international organizations and more

importantly to the needy patients in Africa. It may be recalled that in a recent case of supplying


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anti-retroviral drugs to South Africa, the price quoted by the Indian firm was the lowest at US $

350 per year per person compared to the US $ 1679 quoted by the multinationals. The Department

of Chemicals and Petrochemicals in India is working on the issue of price management of drugs,

including making life saving drugs (LSD) available at reasonable prices, reducing trade margins on

generic drugs and data protection.

The R&D effort in India has focused on development of new molecules. Rs. 150 crore has been

provided under the Pharmaceutical Research and Development Support Fund. A Drug

Development Promotion Board under the Department of Science and Technology has also been set

up for the utilization of this fund. India’s biotech research is concentrating in the areas like

vaccines, diagnostics, molecular and cellular biology, cell culture, fermentation and hybridoma

technology. Recombinant vaccines (for typhoid, rabies and hepatitis B), HIV 1&2 diagnostics test

kit and gene probe test for TB are some of the important areas where research is being carried out.

Imports & Exports

A look at the table 1 below shows that pharmaceutical and drugs export has increased from Rs.

14,901 million in 1993-94 to Rs. 1,04,759 million in 2002-03. Similarly, the imports of

pharmaceutical and drugs have increased from Rs. 11,374 million in 1993-94 to Rs. 25,812 million

in 2002-03.

Years Exports (in Rs.

Million)

Import (in Rs.

Million)

1993-94 14901 11374

1998-99 61520 30473

2000-01 72302 15020

2001-02 87299 20325

2002-03 104759 25812


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Table 1: Export and Import of Drugs and Pharmaceuticals from 1993-94 to 2002-03

If one looks at the table 2, then one can find that value of bulk drugs production has increased from

Rs. 13,200 million in 1993-94 to Rs. 2,41,850 million in 2002-03. Similarly, formulation

production has increased from Rs. 69,000 million in 1993-94 to Rs. 2,41,850 million in 2002-03.

Year Bulk Drugs Production (Rupees in millions)

Formulation production (Rupees in millions)

1993-94 13200 69000 1998-1999 31480 138780 2000-2001 45330 183540 2001-2002 54390 211040 2002-2003 65290 241850

Table 2: Production of Bulk Drugs and Formulation (Rs. Million) from 1993-94 to 2002-03

The number of drugs and pharmaceutical units in India has increased

from 1,752 in 1952-53 to 20,053 in the year 2000-01.

Government of India is honouring its binding commitment to change the

Patents Act 1970 to conform to the TRIPS (Trade Related Aspects of

Intellectual Property Rights) provisions. In this process, the Act has

been amended twice in 1999 and 2002. On 26, December 2004, the

Government promulgated the Patents (Amendment) Ordinance, 2004,

followed by the amended Patents Rules 2005, issued on 31st December.

The Third Amendment to the Patents Act, 1970 was to be tabled in the

winter session of Parliament in 2004, but the Government’s justification

for the Ordinance was that the TRIPs (Trade Related Aspects of

Intellectual Property Rights) agreement under the GATT signed in 1994, required WTO members

to make their domestic patent laws TRIPs compliant by 1st January 2005 or else face retaliatory

measures from other WTO members. The main objective of the Patents (Amendments) Ordinance

2004 was to introduce product patents for food, pharmaceuticals and chemicals, preventing others

from manufacturing through different processes, without taking permission from and paying

royalty to the patent holder. To make the Patents Act 1970 TRIPS compliant, the erstwhile NDA

(National Democratic Alliance) government had carried out, among many others as well, two

important amendments—extension of term of patent protection from 7 to 20 years and grant of

Years No. of Units

1952-53 17521969-70 22571977-78 52011979-80 51261980-81 64171982-83 66311983-84 90001984-85 92341985-86 95401989-90 160002000-01 20053

Table 3: Number of Drugs and Pharma Units


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exclusive marketing rightsi to patents applicants or “Mail Box” candidates even before approval of

the patents and thus gave them a monopoly over the products ahead of completion of formalities

(see Box 1).

1970 Indian Patent Act TRIPS Agreement

1. Process patents in the pharmaceutical sector.

1. Products and process patents.

2. Fields excluded from patenting: nuclear, agriculture

2. Fields excluded from patenting: Diagnostic, therapeutic and surgical methods for the treatments of human and animals

3. Patent Duration: 7 years in the chemical and pharmaceutical sector from the filing date. 14 years in other sectors.

3. Patent Duration: 20 years minimum from the filing date.

4. Discrimination: Patent validity in case of local production. Compulsory licenses, parallel imports and other transfers of rights.

4. Discrimination: Patent validity in case of local production and imports.

Box 1: Patenting under the 1970 IPA and the TRIPS Agreements

One can conclude that the Ordinance is only a replica of the earlier ‘Mail Box’Act. Thus (a) it

simply states in general terms that a patent application has to show that there is novelty and an

inventive step involved in the new product. But both the Indian Pharmaceuticals Alliance (IPA)

and the Indian Drug Manufacturers Association (IDMA) have warned against the strategy of

‘evergreening’ of patents by allowing the filing of patent applications for new forms of older

patented drugs and for new uses of older drugs, thereby trying to block the entry of generic drugs

into the market. By allowing the ‘evergreening’ practice, off-patent drugs used for even common

ailments, which are in the generic category could get patented and monopolised. Evergreening is

possible because patentability is not defined. (b) A change in the procedure for filing opposition

against a patent application has been made. However, by not making the opposing person/agency a

party to the proceedings, the Ordinance, in the name of curtailment of delay in disposing of

objection petitions, ensures that patents are by and large granted as a matter of course and denial


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would become an odd exception. (c) The clauses related to Compulsory Licensing and Government

takeovers of patents have been left as vague as they are due to which the so called safeguard of

public interest will in practise be nullified on two counts -- one, the procedure for Compulsory

Licensing continues to be cumbersome and time consuming, and two, the royalty to be paid to the

patent holder has no fixed ceiling.

The Patents (Amendment) Bill, 2005, introduced in the Parliament in March, 2005 with the

objective of making the Patents Act compatible with India’s international obligations, particularly

under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement)

had the benefit of detailed discussion in both the Lower and Upper Houses, pertaining to issues

like patentability of micro-organisms and the definition of 'pharmaceutical substance' to mean “a

new chemical entity (NCE)” or “new medical entity (NME)”.


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EARLIER PATENTS SYSTEM IN INDIA

Production of modern medicines by domestic units started with the setting up Bengal Chemical

and Pharmaceutical works in 1892, which was followed by the establishment of Alembic Chemical

work in 1907 and Bengal Immunity in 1919. Before the existence of Patents Act 1970, the patent

law framed by the Britishers viz. Patents and Design Act 1911 product patent system was being

practised. The prices of medicines and their availability were a serious issue during those times.

According to the Report of the American Senate Committee headed by the Senator Kefauver, the

prices of antibiotics and other medicines sold by the MNCs in India used to be the highest in the

world. During that period 85% of the medicines available in India were produced and distributed

by the Multi National Companies (MNCs). Hindustan Antibiotic Ltd. was founded in 1954, in the

first Five Year Industrial Policy Plan (1950-1955), with the technical assistance of the WHO

(World Health Organisation) and UNICEF (United Nations Children’s Fund). Its goal was to

reduce the country’s dependence on external antibiotics drug supplies and provide supplies at

lower prices than those posted by NMNCs. In the same way, the Government of India promoted

drug production from domestic raw materials. Thus, local units started to produce sulfamides and

anti-infectious drugs. In the Second Five Year Plan (1955-1960), the company Indian Drugs and

Pharmaceuticals Ltd. was set up to help in the production of low cost drugs with the technical help

of the then USSR (Felker, 1997)Process patent system was introduced with short term of patent for

only 5-7 years, with the enactment of Patents Act 1970. The licenses of right system were also

provided to guarantee effective role of the domestic industry. Over a period the role of the

domestic enterprises increased tremendously and virtually 85% of the pharmaceuticals produced

and distributed in the country are being provided by the domestic enterprises (Keayla, 2005). Since

the 1980s, the industry has grown rapidly due to the enactment of the Patents Act 1970 and

announcement of the Drug Policy 1978 (Lanjouw, 1997).


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Flexibilities within the TRIPS

There are important components, which have not been adequately dealt with in the amending

process keeping the flexibilities available and views expressed in various important studies. These

are given below:

a. Scope of Patentability

b. Role of Domestic Enterprises through Compulsory Licensing

c. Mail Box Products in Public Domain

d. Term of Patent and Compulsory License

e. Royalty Parameters

f. Export of Pharmaceuticals Patent Product

g. Opposition to Grant of Patent

h. Data Exclusivity

Article 30 of the TRIPS Agreement allows limited exceptions to the exclusive rights conferred by a

patent provided that such exceptions do not unreasonably conflict with normal exploitation of the

patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking

account of the legitimate interests of third parties.

The Patents Act 1970, India, had been conducive to the growth of pharmaceuticals and other

industries, since it provided process patents (and not product patent) for pharmaceuticals and agro-

chemical products in addition to food substances and other chemical based products. Justice

Rajagopal Ayyangar Committee Report 1958 provided a techno-legal-developmental critique of the

well accepted fundamental grounds on which the limited patent monopoly was being granted by all

countries as part and parcel of their political economies—the crucial rationale being that patents

and their limited monopoly rights are ultimately granted and given legal protection for making

them available for national development by encouraging potential inventors for undertaking ‘R&D

of possible industrial use’ and consecutively giving rise to viable technological-industrial

development. The two Enquiry Committees namely Bakshi Tek Chand Committee-Patent Enquiry

Committee (1948-50) and Justice Ayyangar Committee-Patents Revision Committee (1957-59),

recognised that although India had a patent system in some form or the other, the country did not


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derive much benefit from the previous or the then existing systems (Damodaran, 2005). The first

investigation into the pharmaceuticals market in a Third World country was carried out by the

Hathi Committee, which was formed in February, 1974 by the Government of India and chaired by

Jaisukhlal Hathi. One of its principal conclusions was that brand names were responsible for the

large number of unnecessary and often irrational formulations on the market. The introduction of

the MRTP Act and the FERA reduced the level of foreign direct investment (FDI) in the

pharmaceutical sector in the 1980s. However, with the adoption of trade liberalisation measures,

the limit for automatic approval of FDI was first raised from 40 to 51 percent and subsequently to

74 percent and in 2001, it was raised to 100 percent.

Pharmaceutical Drugs Manufacturing

In past firms imported most of the bulk drugs (the active pharmaceutical or API ingredients) from

their parent companies abroad and sold the formulations (the end products in the form of tablets

and capsules, syrups etc.) at prices unaffordable for a majority of the Indian population.

This led to a revision of Government of India’s (GOI) policy towards this industry in 1972

allowing Indian firms to reverse engineer the patented drugs and produce them using a different

process that was not under patent. The entry of MNC’s was also discouraged by restricting foreign

equity to 40%. The licensing policy was also biased towards indigenous firms and firms with lesser

foreign equity1. All these measures by GOI laid foundations to a strong manufacturing base for

bulk drugs and formulations and accelerated the growth in the Indian Pharmaceutical Industry

(IPI), which today consists of more than 20,000 players. As a result the Indian pharmaceutical

industry today not only meets the domestic requirement but has started exporting bulk drugs as

well as formulations to the international market.

Typically, the pharmaceutical industry is characterized by low fixed asset intensity and high

working capital intensity. The Material cost, Marketing and selling cost and Manpower Cost

constitute the three major cost elements for the Indian pharmaceutical industry, accounting for

close to 70% of the operating income. In the past 6-7 years, material costs, which account for

almost 50% of the operating cost have declined owing to the decrease in prices of bulk drugs and

intermediates, increase in exports which enabled procurement of raw materials in large quantities

and hence at low prices and finally due to increase in production efficiencies. On the other hand,


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the marketing and selling expenses, comprising of promotional expenses, trade discounts,

advertising and distributing costs; and freight and forwarding costs have increased in the past few

years owing to the increase in emphasis on sales of formulations. This increased focus on

marketing partly lead to the increase in the manpower costs of pharmaceutical companies during

the last decade. The other factor for the increase in the manpower costs, at least in case of a few

companies might be due to an increase in R&D efforts, which requires quality research personnel.

Most of the parameters fostering growth are external in nature like demand in external markets etc.

The one factor which is internal and under the direct control of the management are the costs

expended for a given output. The major cost elements, which contribute towards 70% of the

operating income of a pharmaceutical firm in India are as follows:

(i) Cost of Production and selling ; (ii) Cost of Material and ; (iii) Cost of Manpower.

The choice of the inputs and outputs also is very crucial for the relative efficiencies to be useful in

arriving at meaningful conclusions. In case of Indian pharmaceutical industry like any firm,

performance or efficiency is purely relative. There are no predefined efficiency indicators given the

general constraint that the sum total of output should always be greater than the sum total of input.

Given this relative efficiency depends on the firm’s capability or to be precise the management’s

capability in utilizing the given resources better than the competition. This provides these firms

with surplus output or slack, which can be used to face market uncertainty and take advantage of

any new opportunities thus enhancing the growth of the firm. Thus Indian pharmaceutical industry

which is faced with a major period of uncertainty and an unprecedented opportunity for growth

also realizes the importance of efficiency & performance.


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Typology & manufacturing setup of Pharmaceutical companies

Currently the main activities of Indian pharmaceutical industry are broadly restricted to producing

(i) bulk drugs and (ii) formulations with very few companies risking investing in primary research

aimed at developing and patenting new drugs. The bulk drug business is essentially a commodity

business, where as the formulation business is primarily a market driven and brand oriented

business. Bulk drug business is characterized by relatively low risk and is more cost driven but

requires very low marketing and selling expenses.

Multinational companies which have entered the Indian market have mostly restricted themselves

to formulation segment till date. The domestic pharmaceutical industry (MNC’s and Domestic)

meets about 90% of the country’s bulk drug requirement and almost the entire demand for

formulations. The economics of bulk drug business and that of formulation business are quite

different.

For formulations companies, the domestic branded generics business has traditionally been the

cash cow, providing steady cash flows that serve as a buffer against the uncertainties of

international ventures. The growth prospects continue to remain strong on back of increasing

healthcare awareness, rising penetration in semi-urban and rural markets and changing disease

profile. Most MNC pharma majors have also stepped up their focus on Indian market exploring

opportunities of expanding their product portfolio. Uncertainty related to potential changes in the

scope of price control, however, remains a negative. Regulatory price controls are however an

integral part of the pharma business world-wide. The risks of adverse developments in the

domestic market also highlight the importance of geographical diversification as a risk mitigating

measure in the pharma industry.


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Price

Comparison of International Prices vis-à-vis Indian Prices with some selected products retail prices

in India and wholesale prices in other countries considered are as mentioned in the table below:

(Prices converted into Indian Rupees)

Drugs, Dosage and Pack

Prices in India (Rs.)

Prices in Pakistan(Rs.)

Prices in Indonesia (Rs.)

Prices in UK (Rs.)

Prices in USA (Rs.)

Anti- infectives Ciproflaxin HCL 500 mg 10’s tabs

29.00 423.86 393.00 1185.70 2352.35

Times Costlier 14.55 13.55 40.89 81.12Norflaxin 400 mg 10’s tabs

20.70 168.71 130.63 304.78 1843.66

Times Costlier 8.15 6.31 14.72 89.06Ofloxacin 200 mg 10’s tabs

40.00 249.30 204.34 818.30 1973.79

Times Costlier 6.23 5.10 20.45 49.34Cefpodoxime Proxetil 200 mg 6’s tabs

114.00 357.32 264.00 773.21 1576.58

Times Costlier 3.13 2.32 6.78 13.83Anti-Ulcerants Diclofenac Sodium 50 mg 10’s tabs

3.50 84.71 59.75 60.96 674.77

Times Costlier 24.20 17.07 17.42 192.79Rantidine 150 mg 10’s tabs

6.02 74.09 178.35 247.16 863.59

Times Costlier 12.31 29.63 41.06 143.45Omeprazole 30 mg 10’s cap

22.50 578.00 290.75 870.91

2047.50

Times Costlier 25.58 12.92 38.71 91.00Lansoprazole 30 mg 10’s caps

39.00 684.90 226.15 708.08 1909.64

Times Costlier 17.56 5.80 18.16 48.97Cardiovasculars Atenolol 50 mg 10’s tabs

7.50 71.82 119.70 NA 753.94

Times Costlier 9.58 15.96 -- 100.52Amlodipine Besylate 5 mg 10’s tabs

7.80 200.34 78.42 338.28 660.21


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Times Costlier 25.68 10.05 43.37 84.64Anti-Viral Fungal Zidovudine 100 mg 10’s caps

77.00 313.47 331.65 996.16 895.90

Times Costlier 4.07 4.31 12.94 11.63Lamivudine 150 Zidovudine 300 mg 10’s caps

274.00 NA NA 4767.02 4988.62

Times Costlier -- -- 17.40 18.21Anti-histamine Ceterizine 10 mg 10’s tabs

6.00 35.71 57.50 262.19 927.29

Times Costlier 5.95 9.58 43.70 154.55Anti-Anxiolotics/ Psychotics

Alpramazoo 0.5 mg 10’s tabs

7.00 160.57 31.05 NA 446.81

Times Costlier 22.94 4.43 -- 63.83Fluxetine 20 mg 10’s caps

25.80 444.53 143.40 395.79 1416.42

Times Costlier 17.23 5.56 15.34 54.90Anti-Cancer Boposide 100 mg injection

190.00 554.69 242.90 1217.43 6210.30

Times Costlier 2.92 1.28 6.41 32.68Cholestrol Reducer Atorvastatin 10 mg 10’s tab

39.00 NA 565.95 537.74 1102.92

Times Costlier -- 14.51 13.79 28.28Simvastatin 10 mg 10’s tabs

35.00 283.05 187.00 537.74 1149.79

Times Costlier 8.09 5.34 15.36 32.85Antiasthmatic Salmeterol 25 mcg Fluticasone 50 mcg inhaler

210.00 NA 782.65 1628.25 NA

Times Costlier -- 3.73 7.75 --Urology Sildenafil Citrate 50 mg 4’s tabs

48.00 NA 1356.93 1614.89 1744.93

Times Costlier -- 28.26 33.64 36.35Conversion rate of exchange considered: USD=Rs. 45.50, 1 GBP=Rs. 83.51 PAK, Rs= 0.84, 1 Indonesian Rp=Rs. 0.005


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Sources for prices: USA prices—Red Book 2002, UK Prices—UK MIMS Feb. 2004 Pakistan-Pharmaguide June 2002-03, India-IDR Nov/Dec 2003


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Cost Efficiency

Today India rates higher on cost efficiency as compares to other countries. This is as listed below

in the graph.

The main reason for this is that the Indian market is highly fragmented with about 8,000

manufacturers. This high competition has driven Indian companies to reduce costs across the life

cycle of a product. This is visibly reflected in the manufacturing costs of USFDA plants in India,

wherein the costs are 65 per cent lower than the US and 50 per cent lower than that in Europe.

Below Table shows the trend of outsourcing of contract research in India due to pricing & cost

efficiencies coupled with the technical capability..

The Changing Environment

During the early 1990s, markets were opened by removing restrictions on imports and in 1994

licensing was abolished for producing bulk drugs and formulations. Other than this FDI restrictions

into this sector have been modified to allow 74% foreign equity through the automatic route. More

favorable conditions are to follow in future particularly for MNCs as soon as ‘Product Patents’ and

‘Exclusive Marketing Rights’ (EMRs) are permitted.

In a situation like this, there is a lot of speculation that the indigenous companies that have been

the mainstay of the Indian pharmaceutical industry2 over the past couple of decades finally

becoming a formidable part of Indian economy and a major source of foreign income might be

facing uncertain market conditions in the future. It may also come down to a state where most of

the small scale companies have to close down, with the multinational companies dominating and

monopolizing the industry once again.

There is a justified reason for this, and that is, so far Indian companies have made use of the cheap

labor and the reverse engineering skills under the favorable conditions of process patent regime

and developed generic replicas to drugs that were under patent in developed countries, which then

were sold in the domestic markets and exported to other unregulated markets elsewhere in the

world. This generic business enabled them to compete with multinational companies in India and


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abroad and resulted in good revenues. However, once the product patent regime gets implemented

from the year 2005, one is not allowed to reverse engineer drugs that are patented after 1995, and

the revenues from this business will suffer. Whereas, the multinational companies in India, which

have an impressive new product portfolio will get exclusive marketing rights to sell their products

at higher prices and will be in a position to dictate the terms. Given the above, survival of Indian

companies depends on producing generics of drugs whose patent has lapsed and export the same to

regulated markets4. This is possible only if these firms are able to formulate these products at

much lower prices allowing then to face competition from established players in the international

markets. Other than this, avenues like contract research and manufacturing for multinational

companies have become popular business models for many small scale and medium scale firms.

Exports


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Export of pharmaceutical products from India increased from US$ 6.23 billion in 2006-07 to US$

5.92 billion in 2007-08 and to US$ 8.7 billion in 2008-09—a combined annual growth rate

(CAGR) of 21.25 per cent. According to Mr Jyotiraditya M Scindia, Minister of State for

Commerce, pharmaceutical exports from the country have recorded growth rates of 21.61 per cent,

14.37 per cent and 28.54 cent, respectively, in the three consecutive years of 2006-07, 2007-08 and

2008-09.

Technical Capability & Government Support

Pharmaceutical sector is a growth driver and this is mainly due to the technical capabilities of the

country. To give a glimpse of the achievements:

• India has 119 USFDA-approved plants in addition to 84 UK MHRA-approved plants.

• Many of these plants also have approvals from countries such as Canada, Australia,

Germany and South Africa.

• These approved sites aptly demonstrate the ability of Indian companies to deliver quality

products worldwide and act as a platform for CRAM (contract research & Manufacturing)

players.

The chart below shows the current scenario of the Indian Pharma Industry.


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Government support has played a major role in promoting the technical capabilities by :

1. Promoting Major multi-billion dollar initiative with 50 per cent public funding through a

public-private partnership model to harness India’s innovation capability. The vision is to

catapult India into one of the top five pharma innovation hubs by 2020, targeting to achieve

a global niche with one out of every five to ten drugs discovered worldwide by 2020

originating from India.

2. Collaborations between industry, academia and the government through various

programmes such as New Millennium Indian Technology Leadership (NMITLI) and Drugs

and Pharmaceuticals Research Program (DPRP).

3. By focusing on specialized pharmaceutical education . The government has set up seven

National Institutes of Pharmaceutical Education and Research (NIPERs) as institutes of

‘national importance’ to achieve excellence in pharmaceutical sciences and technologies,

education and training.


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Pharmaceutical Market Trends 2010

The global pharmaceutical market research has been done by many companies and almost all of

the market reports indicate a significant growth of of pharma market in 2010. The forecasting

indicates pharmaceutical market growth of about 4 - 6% in 2010.

Global Market Scenario

If present industry overview is taken into consideration then the global pharmaceutical market in

2010 is projected to grow 4 - 6% exceeding $825 billion. The global pharmaceutical market sales

is expected to grow at a 4 - 7% compound annual growth rate (CAGR) through 2013. This industry

growth is driven by stronger near-term growth in the US market and is based on the global

macroeconomy, the changing combination of innovative and mature products apart from the rising

influence of healthcare access and funding on market demand. Global pharmaceutical market value

is expected to expand to $975+ billion by 2013. Different regions of the world will influence the

pharmaceutical industry trends in different ways.

Asia Pacific Pharmaceutical Market

The pharma market world over will experience significant shifts. Asia-Pacific region will emerge

as the fastest growing pharmaceutical market over the recent past. The reason for this positive shift

can be attributed to the low costs and favorable regulatory environment. This region has

experienced important developments regarding contract manufacturing, especially in generics and

APIs. Increased R&D activities in the region has helped Asia-Pacific pharmaceutical industry to

achieve an estimated market size of around US$ 187 Billion in 2009. Here, the pharmaceutical

industry is expected to grow at a CAGR of around 12.6% during 2010-2012. It can, in fact, become

the global API production hub in next few years.

Pharmaceutical sales are growing at a fast rate in India, China, Malaysia, South Korea and

Indonesia due to the rising disposable income, several health insurance schemes (that ensures the

sales of branded drugs), and intense competition among top pharmaceutical companies in the

region (that has boosted the availability of low cost drugs). China’s pharmaceutical market will

continue to grow at a 20+ % annually, and will contribute 21% of overall global growth through


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2013. India - 3rd Largest Producer of Pharmaceuticals Across the World- is already a US$ 8.2

Billion pharmaceutical market. The Indian pharmaceutical industry is further expected to grow by

10% in the year 2010.

Anti-Diabetic Drugs and those for cardiovascular diseases are expected to see the fastest growth in

2011. Cardiovascular patients will increase to 251 million in 2010, with the greatest rate of growth

forecast for the US market. This is due to the changes in demographics and lifestyle that will boost

the cardiovascular sales. However, the growth rates will be limited by continued patent expiries for

major products and due to the lack of of novel therapies. The anti-hypertensives drugs will

dominate the global cardiovascular market with a market share of nearly 50%.


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Future of pharmaceutical industry

Prediction of Pharma Industry for next decade.

• New follow-on biologics legislation in the U.S. will increase competition from generic

equivalents and eventually decrease brand profits.

• Social media marketing will become a significant part (>10%) of the pharmaceutical

marketing mix.

• The European Union will finally allow Direct-to-Consumer (DTC) advertising to its

citizens.

• Due to decreasing effectiveness of traditional physician detailing and rise of non-personal

detailing, the role of traditional sales representative will become obsolete.

• More efficient targeting of drugs and marketing to specific patient populations will greatly

increase effectiveness and decrease side effects of drugs.

• Internet-based drug promotion (including search engine marketing) will overtake TV-based

DTC in the U.S. in terms of dollars spent.

• Extensive outcomes data available to payers and comparative effectiveness research will

force the industry much further down the path of pay-for-performance (ie, adopt a more

flexible approach to pricing)

• New healthcare reform legislation will dramatically increase the sales of drugs in the U.S.

• The next BIG opportunity for targeted marketing to patients and physicians is mobile apps

on "smart phones"

• Patients will become even more influential and empowered5 in making healthcare decisions

as they are forced to pay a larger share of costs and/or have access to health information

from a variety of sources

• Broadcast (ie, TV) Direct-to-Consumer (DTC) drug promotion will be banned or sharply

curtailed by law in the U.S.

• Despite lack of innovative new drugs and/or generic competition, sales of brand drugs

worldwide will show a sharp increase due to increased demand in emerging markets (eg,

China)


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Indian Pharmaceutical Sector: Future Scenario

The dream of Indian pharmaceutical companies for marking their presence globally and competing

with the pharmaceutical companies from the developed countries like Europe, Japan, and United

States is now coming true.

The new patent regime has led many multinational pharmaceutical companies to look at India as an

attractive destination not only for R&D but also for contract manufacturing, conduct of clinical

trials and generic drug research. With market value of about US$ 45billion in 2005, the generic

sector is expected to grow to US$ 100billion in the next few years.

The Indian companies are using the revenue generated from generic drug sales to promote drug

discovery projects and new delivery technologies. Contract research in India is also growing at the

rate of 20-25% per year and was valued at US$ 10-120million in 2005. India is holding a major

share in world's contract research business activity and it continues to expand its presence.

Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118 million per year in

India, is estimated to grow to US$ 380 million by 2010, as MNCs are entering the market with

ambitious plans. By revising its R&D policies the government is trying to boost R&D in domestic

pharma industry. It is giving tax exemption for a period of ten years and relieving customs and

excise duties of all the drugs and material imported or exported for clinical trials to promote

innovative R&D.

The future of Indian pharmaceutical sector is very bright because of the following factors:

• Clinical trials in India cost US$ 25 million each, whereas in US they cost between US$ 300-350 million each.

• Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs.

• In India investigational new drug stage costs around US$ 10-15 million, which is almost 1/10th of its cost in US (US$ 100-150million).

According to an Ernst & Young and industry body study, the increasing population of the higher-

income group in the country, will open a potential US$ 8 billion market for multinational

companies selling costly drugs by 2015. Besides, the report said the domestic pharma market is

estimated to touch US$ 20 billion by 2015, making India a lucrative destination for clinical trials

for global giants.


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Government Initiative to support future growth

100 per cent foreign direct investment (FDI) is allowed under the automatic route in the drugs and

pharmaceuticals sector including those involving use of recombinant technology. (DIPP)

The Government plans to set up a US$ 639.56 million venture capital (VC) fund to give a boost to

drug discovery and strengthen the pharma infrastructure in the country.

The Drugs and Pharmaceuticals Manufacturers Association had received an in-principle approval

for its proposed special economic zone (SEZ) for pharmaceuticals, bulk drugs, active

pharmaceutical ingredients (APIs) and formulations to be located at 19 dedicated SEZ in various

part of the country. These are at different stage of development.

The functional pharma SEZs in India include Jawaharlal Nehru Pharma City (JNPC) at

Visakhapatnam (Andhra Pradesh), PHARMEZ (Gujarat) developed by Zydus infrastructure and

PhaEZ park (Gujarat) developed by Cadila Pharma.

The other SEZ being developed are shown in the following map :


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According to Mr Ashok Kumar, Secretary, Department of Pharmaceuticals, the Government had

issued an expression of interest (EoI) for technical and financial bids for the selection of a global

level consultant (GLC) for the preparation of a detailed project report (DPR) in order to develop

India as a drug discovery and pharma innovation hub by 2020.

According to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilizers, the

Department of Pharmaceuticals has prepared a "Pharma Vision 2020" for making India one of the

leading destinations for end-to-end drug discovery and innovation and for that purpose provides

requisite support by way of world class infrastructure, internationally competitive scientific

manpower for pharma research and development (R&D), venture fund for research in the public

and private domain and such other measures.

As a strategy of growth in pharmaceuticals industry, Government of India had formulated the Drug

Policy of 1986. It was evolved under the dynamic guidance and leadership of late Shri Rajiv

Gandhi to ensuring availability, reasonably priced medicines of good quality and to leverage

India’s competency towards growth of this sector.

The policy is mentioned in Annexure – 1, Drug Policy: Government of India

Investment

• The drugs and pharmaceuticals sector has attracted FDI worth US$ 1707.52 million

between April 2000 and April 2010, according to data published by Department of

Industrial Policy and Promotion (DIPP) in April 2010.

• Indian Immunologicals Ltd (IIL), a subsidiary of National Dairy Development Board, will

launch four new vaccines next year. The company is setting up a new manufacturing facility

in Hyderabad with an investment of US$ 32.4 million. The manufacturing unit will produce

both human and animal vaccine.

Road Ahead

According to a report by PricewaterhouseCoopers (PwC) in April 2010, India will join the league

of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching

US$ 50 billion. (Exchange rate used: 1 USD = 46.66 INR ,as on July 2010)


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PART : 2

STRUCTURAL ANALYSIS OF PHARMACEUTICAL INDUSTRY

The Industry can be analyzed using the Porter’s Five Forces of Competition Framework

Porter’s Five Forces of Competition Framework There are four structural variables influencing competition and profitability.

1. Threat of new market entrants 2. Bargaining power of buyers 3. Power of suppliers 4. Threat of substitute products (including technology change)

These factors tell about the competitive rivalry amongst the players.

In practice, there are many features of an industry that determine the intensity of competition and

the level of profitability. To analyze, we have used widely accepted framework for classifying and

analyzing these factors i.e. Porter’s Five Forces of Competition framework


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COMPETITIVE RIVALRY Number of Competitors: There are large numbers of players in this sector. More than 15 major pharma companies exist in the Nation. Industry Growth: There is very high growth rate (approx 25% this year and 14 % till 2015) in this industry. Fixed Cost: The SME needs to bear a Moderate Fixed Cost for a non patented technology, however in case of R & D & patented manufacturing; the capital required would be high. Differentiation: There are thousands of Brands existing in the OTC drugs segment and hence it has high differentiation in terms of customer’s perspective. Excess capacity: The excess capacity acts inversely to industrial growth if the rate of latter is lower than the capacity. This increases the rivalry as the price pressure becomes intense and the fight for market share intensifies. Presently the growth rate surpasses the capacity thereby creating a demand. Barriers to exit: Costs associated with capacity leaving this industry is high due to high costs of dismantling, environmental cleanup, and employee layoffs


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Hence Industry Competitive Rivalry is high. There also remain the first mover advantages in form of stringent patents / copyright laws. THREAT OF ENTRY Economies of scale: High capacities impact the price and hence act as a deterrent to a new entrant. However in the API and patent free segment there is a room for players on a small scale to produce with limited capacities till the time they are cost effective. Product differentiation: While the threat of differentiation is high if a company comes with a molecule basis the R&D efforts and attaches a patent to it. It is low for the OTC Brands brands like Vicks, Saridon etc which has created high brand equity. Brand Identity: Lack of Brand Identity is a barrier to entry for OTC and other branded products; it is low for API & formulations market which can be sub-contracted. Access to distribution channels: The importance of the distribution channel for the pharma products for domestic as well as in global products makes the entry barrier high. Capital requirements : Is high due to the quality standards needed as well as the bulk manufacture of the drugs. Access to technology: The Technology plays important part on the production hence the rating would be High. Access to Raw material: Moderate to Low for Non Patent drugs & intermediateries while high for patented ones. Government and legal barriers: Are moderate due to the liberal policy coupled with quality standards requirements in production. Retaliation by established producers: is high for the patented drugs being legal issue of patent infringement. However it is low for OTC & API drugs. Hence Barrier to entry is high due to Cost of R&D and patent limitations


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THREAT OF SUBSTITUTES Availability of close substitutes: is low for products with patents and medium after patent expiry or open to market. Switching Cost is moderate for non patent components Buyer propensity to substitute is high due to availability of raw materials as well as. Relative prices and performance of substitutes is same hence the effect is low. Hence effect of substitutes is low with patents and medium after patent expiry SUPPLIER POWER Size and concentration of suppliers is high for the non patent API while it is low for patented API. Availability of substitutes is high for the non patent API while it is low for patented API. Switching costs is low for the non patent API. Ability to forward integrate is not possible for the patented API while it is moderate to high for patented API. Industry’s threat to backward integrate is a possibility but with low effect. Cost of product relative to total cost is having a high effect as the margins are low for open API market due to many suppliers. Competition between buyers is high thereby having low supplier power due to high pricing pressure Hence Suppliers: supplier power is low


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BUYER POWER Number of buyers is high hence having high power Availability of substitutes is less present for OTC drugs hence is low as the API remains the same for a drug. Switching costs is less for OTC drugs and similar brand promotions hence is less, however for patented technology it is more. Ability to backward integrate is low for SME but high for the major players due to the volumes and the variety of drugs under production. Industry’s threat to forward integrate is high for non patent API while it is low for patented API thereby high Buyer power for patented ones. Cost of product relative to total cost is moderate for the non patent API hence moderate buyer power while it is high for patented API hence more buyer power. Profitability & Product differentiation is high for Branded & Patented drugs hence the buyer power is high for differentiated products. Buyer’s Information: The Buyer has more information and controls the patented API hence have more power. Hence Buyer power is low for OTC and non patented API drugs but moderate to high for patented API drugs.


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CONCLUSION Compilation of the above analysis reveals two broad types of segment in Pharma Industry

1. OTC / API manufacturing 2. Patented drug manufacturing

The following block explains the Competitive scenario for bothe these segments.

Competitive Rivalry

Barrier to entry

Threat of substitutes

Supplier power

Buyer power

OTC / API Segment High Moderate /

High Moderate Low Low

Patented drug Segment High High Low Low Moderate /

High Hence the Competitive forces are High in the Patented Drug Segment while Moderate to Low in the OTC & API segment.

Documents

Pharmaceuticals Industry analysis - Final