CHAPTER-2 Profile of Indian Pharmaceutical...
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CHAPTER-2 Profile of Indian Pharmaceutical Industry
Transcript of CHAPTER-2 Profile of Indian Pharmaceutical...
CHAPTER-2
Profile of Indian Pharmaceutical Industry
2.0 Profile of Indian Pharmaceutical Industry
Historical Background Overview
The Indian pharmaceutical industry has come a long way from its humble
beginnings in 191 0 when the first pharmaceutical company Bengal Chemical and
Pharmaceutical Works commenced its operations. At the time of independence, the
domestic industry had a turnover of Rs. l 00 million. However, the industry grew at an
infinitesimal pace from 1947 to about 1970 due to the lack of incentives and a clear
regulatory framework. During 1970, the Indian Patents Act (IPA) and the Drug Price
Control Order (DPCO) were passed. Although, the DPCO acted as a buffer against
pharmaceutical companies by making free pricing illegal, it fulfilled the goal of providing
quality drugs to the public at the reasonable rates. The introduction of the IPA provided a
major thrust to the Indian pharmaceuticals industry and Indian companies, who through
the process of reverse engineering and synthesis, began to produce bulk drugs and
formulations at lower costs. This led to high fragmentation in the Indian pharmaceutical
industry due to the emergence of a number of small Indian firms.
2.1 Pre-Globalization Scenario in Indian Pharmaceutical Sector
The Indian Pharmaceutical Sector has seen many changes primarily due to
government policies. The Indian Patent Law, the drug Price Control Order of 1970 and
the FERA in early 70's resulted in change of fortunes for MNCs that until then had
dominated the Indian Market. The Patent Law recognized process patents instead of
product patents. The Drug Price Control Order placed a ceiling on prices of drugs for
mass markets. The drugs under price control were 347 that were reduced to 74 in 1995.
The MNCs did not expand; companies would copy the process and market the product at
a lower price in India. Incentives for SSI units resulted in a surge in the number of
registered units for manufacture of pharmaceutical products. Large Indian companies also
set up SSI units to take the benefits offered to them and this resulted in a highly
fragmented market. Indian Companies became big and profitable. They became experts
at Applied Research that was a fraction of the cost of Basic Research and required only
bin-equivalence and bioavailability studies to get approval to launch the product in the
Domestic Market. There was a mushrooming of SSI units and that led to the market
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becoming highly fragmented. By year 2000, the market share of MNCs had fallen to 35%
from a high of 75% in 1971 while the share of Indian Companies increased from 20% in
1971 to nearly 65%.
2.2 Post GlobalizationScenario in Indian Pharmaceutical Sector
The Government signed the General Agreement on Tariffs and Trade (GATT).
India is expected to introduce the patent regime and provide legal protection to Trade
Related Intellectual Property Rights (TRIPS).
Under TRIPS, MNCs can apply for Exclusive Marketing Rights for a product that
has been granted a patent in any WTO member country. The Mailbox Application
Facility for accepting product patents has also been introduced by the Indian Govt.
Industrial Licensing was abolished on all bulk drugs, formulations and
intermediaries except for the five drugs reserved for the Public Sector (This has now been
removed for all drugs except Ox tetracycline). This removed hindrance to capacity
expansion and increased the role of market dynamics in determining supply conditions.
Companies with foreign equity holdings up to 51% were brought in par with Indian
companies.
The Government exempted I 00% EO Us and those set up in the Export Processing
Zones from complying with the DPCO and the reservation policy for the SSI sector. It
also upgraded the Pharma industry to a high priority one and the DPCO was further
trimmed. As per the new order 61 drugs have come out and 18 new molecules have been
brought under the purview of the order. This has reduced the span of control of drugs
under DPCO from the existing 40% to 24% of total domestic formulations market.
2.3 Milestones in Pharma Industry
1960 Government of India laid the foundation for the domestic pharma industry by
promoting Hindustan Antibiotics Ltd and Indian Drugs and Pharmaceuticals Ltd for
the manufacturers of bulk drugs.
1970 Government introduces Indian Patent Act (IP A) and Drugs Price Control Order
(DPCO)
1994 Syngene International, country's first Contract Research Center {promoted by Biocon
India Group) to offer R&D services in drug discovery based on modern biology.
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1997 Shantha Biotechnics launches India's first recombinant product, Hepatitis B vaccine.
Government sets up an Independent body of experts called National Pharmaceutical
Pricing Authority.
2000 Genome, country's first joint venture between institute (CBT) and Industry (Nicholas
Pharmacy) to pursue pharmacogenomics
2001 Genetic Engineering Approval Committee (GEAC) apprqves Wockhardt's EPO Drug
authority implements GCP guidelines for clinical trials.
2002 Government introduces Indian Pharmaceutical Policy 2002, based on
recommendations made by the Pharmaceutical Research Development Committee.
2.4 Features of Indian Pharmaceutical Industry
The Indian Pharmaceutical Industry has a wide range of over 1,00,000 drugs,
which include vitamins, anti-biotics, anti-bacterials, cardio-vascular drugs etc. The
players focus on limited number of product groups and, try to achieve strong presence in
them.
Indian pharmaceutical market is worth US $ 6.6 billion in 2002-03, displaying a
growth of 15% since 1997-98 and is expected to touch US $25 bn by 2010. The industry
is highly fragmented with about 15,000 plus registered units with only about 300 in the
organized sector. The industry is one of the globally competitive industries in India, with
exports accounting for nearly 43% of total revenue to over 65 countries.
Indian Pharmaceutical Industry is moving up the value chain. From being a pure
reverse engineering industry focused on the domestic market, the industry is moving
towards basic research driven, export oriented industry with a global presence. It ruled on
the global pharmaceutical map in 2002-2003 with its low-cost medicines, which made
HIV I AIDS treatment accessible to a million poor in sub-Saharan African and Asia and it
helped India emerge as favourites in the global markets. The cost of HIV /AIDS
treatment was reduced from $ 15,000 per year to $ 140 per year.
Indian companies have now started thinking and acting globally. Leading pham1a
majors export up to 40-70% of their output to over I 00 countries. Ranbaxy, the largest
Phannaceutical Company in the country with annual revenues inching close to $ I billion
exports its products to over I 00 countries, with ground operations in 28 countries and
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the
manufacturing facilities in more than seven countries. Dr.Reddy' s has presence in more
than 50 countries with USA, UK, Russia and China as its main markets.
In FY 2005 Indian companies have filed 60 ANDAs -Abbreviated New Drug
Applications. The leading two, Ranbaxy & DRL are already filing about 18-20 ANDAs
each every year.
Indian Pharma companies have also been on buying spree in the last few years to
acquire a global capability. Ranbaxy's acquisition of RPG Aventis, Zydus Cadilla's
acquisition of Alpharma and Wockhard's acquisition ofCP pharma are just some of the
examples. The industry is a net foreign exchange earner and over 350 APis (Active
Pharmaceutical Ingredients) are being manufactured. Over 60 manufacturing facilities
are approved by some of the toughest regulatory agencies such as US FDA, UK MCA,
Australian TGA, and WHO etc.
2.5 Industry Structure
Indian pharmaceutical industry can be broadly divided into organized and
unorganized sectors.
2.5.1 Organized Sector
There are around 300 manufacturing and formulation units in the organized sector
contributing to 70% of the total industry sales. The market is concentrated at the top with
the top 10 players controlling about 30% of the market share. Moreover, the growth rate
of the top 30 players is around 18% per annum as compared to the industry average of
7%. Based on management control, the organized sector can be classified into Indian
companies & Multi National Companies (MNCs). The MNCs, which had dominated the
industry till 1970, began to lose market share following the failure of the Indian Patents
Act (IPA) to recognize product patents. The share of MNCs declined from about 75% in
1971 to about 20% in 2002. Consequently, the market share of the Indian companies has
increased steadily from 25% in 1971 to over 80% in the 2002.
The major Indian players in the organized sector are Ranbaxy, Dr.Reddy's
Laboratories, Cipla, Cadila Healthcare, !pea laboratories, Nicholas Primal, Sun
Pharmaceuticals, Wockhardt, Lupin, and J B Chemicals & Phannaceuticals. The major
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MNC counterparts are GlaxoSmithkline Pharmaceuticals, Aventis, E Merck (India),
Pfizer, Novartis, and Wyeth Laboratories.
2.5.2 Unorganized Sector
The unorganized sector contributes to 30% of the total industry sales. Most of the
players in the unorganized sector are engaged in manufacturing of fonnulations, as layout
is nor much technology intensive. These players mainly cater to local demand and
compete on prices.
Exhibit 2.1 : Market Share of Top Ten Indian Pharma Companies in 2003 - 2004:
Companies Market Share
%
GlaxoSmithK!ine Pharmaceuticals 5.5
Cipla 5.5
Ranbaxy Laboratories 4.7
Piramal Pharma 4.3
ZydusGroup 3.9
SunPharma 3.1
Pfizer Group 2.6
Dr Reddy's 2.5
Knoll 2.5
Aventis 2.3
' ·'" Source: ORG MAT, Bloomerg, CII s conference papers published on 5 Nov 2004
2.5.3 Evolution of Indian Pharmaceutical Industry
India's healthcare spending is roughly 6 per cent of GDP of which almost three
fourth is spent from private resources. By comparison the healthcare spending in the USA
is about 11 percent of GDP, majority of which is from government or third party
(insurance) funds. The expenditure on medicines is roughly 16 percent of all healthcare
spending.
The phannaceutical industry in India evolved from being almost non-existent
before 1970 to a prominent provider of hcalthcare products, meeting 95 percent of
country's pharmaceutical needs. The size of Indian phannaceutical industry has increased
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from INR 4 billion in FY71 to INR 197.4 billion in FYOO, which is a compound annual
growth rate of 16.4 per cent per annum. The total Indian production constitutes about 1.3
per cent of the world market in value terms, and 8 percent in volume terms. This is
because drug prices in India are about I/ 6th of the average world prices. The industry is a
net foreign exchange earner with exports of bulk drugs and finished formulations,
amounting to INR 70 billion in FYOO, and the biggest market for Indian pharmaceuticals
is USA. Per capita consumption of drugs in India at USD 3 is amongst the lowest in the
world compared to Japan's USD 412, Germany's USD 222 and USA's USD 191.
Exhibit 2.2 : Annual per capita drug expenditure (in USD).
Japan 412 Philippines 11
Germany 222 Ghana 10
us 191 China 7
Canada 124 Pakistan 7
UK 97 Indonesia 5
Chile 30 Kenya 4
Mexico 28 India 3
Turkey 21 Bangladesh 2
Brazil 16 ..
Sectoral Reports-Pharmaceutical Industry; India Economrcs By AJrt Ranade, Chref
Economist and Gaurav Kapur, Associate Economist, Govt. of India.
2.6 The pharmaceutical industry can be divided into two segments:
Bulk Drugs, which are the active ingredients with medicinal properties and are
the basic raw materials for making fonnulations. The field of bulk drugs is broad based.
It covers all products and preparations used in the production of phannaceutical
formulations. The bulk drugs industry segment in India has been able to establish its
presence in the international markets and more than 60 percent of its produce is exported.
This segment has managed tremendous growth, with production of only INR 0.18 billion
in FY66, rising to INR 31.5 billion by FY99 and hence meeting 70 percent of the
domestic requirement. The segment is a net foreign exchange earner producing export
quality drugs; with bulk drugs export accounting for 60 percent of the total
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phannaceutical industry exports. Exports of bulk drugs are growing by 30 percent year on
year. But given the size of world market, supply from India is miniscule-India's exports
account for only 0.3 percent of the worldwide demand. In tenns of the inputs used in
production of drugs the industry faces low cost of inputs at competitive rates helped by
the presence of a well-developed chemical industry.
As the manufacture of most bulk drugs is neither capital intensive nor technology
intensive, process re-engineering encouraged the growth of production bases. There are a
large number of bulk drug manufacturers in India, including many small-scale industries.
This has increased competition, leading to a drop in prices and consequently lower
margins. Most bulk drugs under DPCO sell below govennnent-administered prices due to
stiff competition and lower import tariffs.
Formulations, which are specific dosage forms of a bulk drug or of a
combination of different bulk drugs or of a combination of different bulk drugs and the
final form in which the drugs are sold i.e. syrups, injections, tablets and capsules. The
size of the domestic formulations market is around INR 130 billion and it is growing at
I o· percent per annum. India is largely self sufficient in case of. formulations. Some life
saving, new generation under-patent fonnulations continue to be imported, especially by
MNCs, which then market them in India. More than 85 percent of the formulation
production in the country is sold in the domestic market. Exports are largely to
developing nations like China, South Africa, and CIS etc and to countries with weak
patent laws. To access the generic (off patent) formulation market of developed countries,
Indian companies will need tie-ups with international majors.
The number of varied fonnulations produced in the country has reached a
staggering figure over the last decade. An estimated 15,000 formulations are
manufactured and marketed by the industry. Most of the formulation manufacturers have
integrated backwards to consolidate their position to improve their profitability. They
have gone in for manufacturing of bulk drugs required as inputs for their formulations.
The net profit margins achieved by the players operating in this industry have averaged
around 5 percent over the last few years.
MNC subsidiaries have overtaken Indian manufacturers by creating and selling
branded fonnulations in the domestic market. In fact, they own 50 percent of India's top
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20 branded fonnulations. The DPCO and IPA acted as effective deterrents. However the
scenario could change now as TRIPS formulated under WTO has become operational in
India.
Exhibit 2.3 : Production and Export Perfonnance -Pharmaceuticals
INR Billion FYOO FYOl FY02
Bulk Drugs
Production 37.8 45.3 54.4
Export 22.8 27.3 32.8
Import (CIF) 20.4 22.8 25.4
Formulations
Production 158.6 183.5 211.0
Export 18.1 20.0 22.0
Total
Production 196.4 228.8 265.4
Export 41.0 47.3 54.7
Import (CIF) 20.4 22.8 25.4
2.6(a) Current Issues
Globally, the pharmaceutical industry is witnessing a number of trends including
increasing emphasis on consolidation, resulting in mergers and alliances, a conscious
shift towards generics (off-patent drug) and emergence of niche players focusing on
specific areas of the pharmaceutical industry. These trends offer a range of opportunities
for Indian companies.
The changes in the domestic industry are also being driven by the ongomg
changes in the domestic regulatory framework. EMRs (Exclusive Marketing Rights) have
been granted for five years to foreign pharmaceutical companies till product patents come
into force. There are some concerns that granting EMRs would mean allowing close to
3000 fonnulations and combination of known compounds getting patent and marketing
approval in industrialized countries, to claim EMRs in India.
But this concern about the magnitude of the impact of EMR is misplaced because
of two reasons. First, considering that the number of actual new drug introductions into
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the Indian market, will at best be five or six drugs per year, as EMRs would be applicable
only to new drugs patented on applications made after January I, 1995, and that
fonnulations and combinations of known drugs are not eligible to receive EMRs and
second, it takes more than eight years for a drug (from the date of patent application) to
come into the world or Indian market, as it typically takes 8-10 years for a drug to move
from the patent application stage to the market.
Thus it is evident that the number of new drugs that will seek EMR will be
extremely few. It is for this reason that no more than 5 to I 0 drugs have qualified for
EMR in India by December 31, 2004. Moreover EMR is essentially a self-extinguishing
provision as it has ceased to apply after December 31, 2004 when the product patent
system has taken over.
The response of the Indian companies to this changing global and domestic
regulatory scenario has been in terms of an increased focus and expenditure on R&D
especially by large Indian companies. While a few companies are carrying out basic
research, most companies are focusing on applied research, especially on products going
off patent over the next few years. Moreover the farge Indian companies are getting their
products and production facilities certified by international regulatory authorities like the
US-FDA and the UK-MCA.
Mergers, acquisitions and consolidation of global life sciences companies are
forcing them to outsource most of their generic (off-patent) products to cut costs. Given
the low cost of manufacturing, India has the potential to become an important sourcing
base for the global industry. MNCs can get bulk drugs and finished dosage forms 20-25
percent cheaper if they source from India. Most of the savings are from infrastructure
cost as it costs roughly half as much to set up an FDA-approvable plant in India
compared with the developed country. A case in point is USD !-billion American eye
care company Allergan. The company, which has until now outsourced all bulk drug
production from the US, Europe and Latin America, has shifted its base to India.
In the domestic market, companies are focusing on strengthening the distribution
system. Because of the largely generic nature of the Indian phannaceutical industry, the
focus of domestic companies continues to on off-patent drugs. The MNCs arc likely to
bring in newer drugs into the market as the new patent laws arc implemented. Some of
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the companies are moving towards over-the-counter (OTC) segments where margins are
better and products are largely outside DPCO.
Pharmaceutical companies are also weighing the options of getting into joint
ventures and alliances for joint marketing of products. The reasons for such alliances are
many-increase in geographical coverage, better utilization of sales force, access to new
products and brands, and sharing of resources.
2.6. (b) Year over Year Growth Breakup
The following chart shows the breakup of the growth (Yo Y) of Indian
pharmaceuticals industry in six years from 1998 to 2003.
Exhibit 2.4: Year over Year Growth Breakup
%price
Year %Overall growth %Volume growth growth
1998 18 14
1999 7 3
2000 11 7
2001 9 7.5
2002 8 7
2003 7 6
20~-15
~-. . ......--:---_. ___ ___:::; -----1 10
5
3
3
3
1
-1
-2.5
D %Overall growth
Cl %Volume growth
o %price growth
: o %New products growth'
Source: http://inhome.rediff.com/money/2004/jun/24phanna.htm &
www.equitymaster.com
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%New products
growth
2
2
3
2
2
2.5
2.6.1 Exports
The Indian phannaceutical companies are focusing on the international markets to
expand their geographical coverage and improve their margins. Exports of
pharmaceuticals include Bulk drugs, Finished fonnulations and Bulk Intermediates
The pharmaceutical industry is now a net exporter with Rs.104.7bn exports in
2002. The bulk drugs segment is net foreign exchange earner producing exports quality
drugs, contributing to almost 60% of the total pharmaceutical industry exports. Finished
fonnulations and bulk intermediates contribute to the rest. Export activity in the field of
finished pharmaceuticals is of comparatively recent origin. The industry, which marks its
origin to importing finished preparations and which before independence, was mainly
engaged in processing imported bulk material into formulations switched over rapidly
into manufacturing of formulations.
There are huge opportunities for the Indian pharmaceuticals companies in the
regulated world markets, with many blockbuster-patented drugs going off patent in the
years to come. The trend has already started and US generic market has become key to
Indian pharmaceuticals industry growth and is set to grow at a high rate, due to the
number of patent expiries and various initiatives in US to reduce cost of drugs. Taking
into cognizance this view, the Indian companies are upgrading their manufacturing
facilities and are applying for plant approvals to US FDA and European regulators.
While fine chemicals and basic drugs are exported to the developed countries such as US,
UK and Germany; the principal destinations for fmished preparations are South East
Asia, Middle East and Africa.
Exhibit 2.5 Exports (Rs BN) Upto to 2001-02
Year Rs (Billion)
1992-93 16
1993-94 18
1994-95 20.5
1995-96 21
I 996-97 39
I 997-98 58
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1998-99 61
1999-00 78
2000-01 81
2001-02 101 - ------- ----- ·----
Expoprts BN upto 2001-02
120 r--'"7-~T'"'"-,y--vc--yc---c;---~~~r--~~~~~
I
' 100 '2
' 0 80
I @. 60
&. 40
I 2~ 1=';--±2=
I I __ _
1
Year
Exhibit 2.6: Growth in Bulk Drugs Exports %
Year %Growth
1989-90 45
1990-91 18
1991-92 78
1992-93 -42
1993-94 25
1994-95 38
1995-96 40
1996-97 38
1997-98 37
1998-99 20
1999-00 2
2000-01 5
2001-02 2
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D 1992-93 ' '1111993-94 I
D 1994-95
D 1995-96
Ill 1996-97
liJ 1997-98
Ill 1998-99
D 1999-00
I' Ill 2000-01
. 1112001-02
....
100
80
60
40
~ 20 >-
0
-20
-40
-60
Growth in Bulk Drugs Exports
Grwoth%
Exhibit 2. 7 : Growth in Formulations Exports %:
Year %Growth
1989-90 20
1990-91 0
1991-92 -10
1992-93 62
1993-94 0
1994-95 -10
1995-96 -5
1996-97 -7
1997-98 -3
1998-99 -12
1999-00 -15
2000-01 -1
2001-02 -15
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I-% Growth I
%Growth
80
60 ~:~~~~~~----~~~~-~~~~~ .s:: ~ 40 0 ...
C) 20 ~
0
-20 ~
8l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
Year
The Indian manufacturers are increasingly tapping the export market. Export
revenues now contribute almost half the total revenues for the top 3-pharma majors, viz,
Dr.Reddy's, Ranbaxy and Cipla. In FYOl, exports constituted 38% of the total
production of pharmaceuticals in India. The industry exported drugs worth Rs 87 bn, of
which formulations contributed nearly 55% and the rest was from the bulk drugs. During
the year, exports grew by 21% yoy. In FY03, the Indian pharmaceuticals have exported
drugs worth Rs 11 Obn. The comparative advantage lies in the low cost of bulk drug
manufacturers. In the past five years, the pharmaceutical exports grew by 30% per
annum. Formulation exports (i.e. finished products) are largely to developing nations in
CIS, South East Asia, Africa and Latin America. In the last three years generic exports to
developed countries have picked up. In the coming years, opening up of US generics
market and anti AIDS market in Aflica would keep export growth high.
2.6.2 Imports
Indian phannaceutical impm1s were to the tune of Rs.25.8bn in 2002. Imports have
registered a CAGR of only 2% in the past 5 years. The imports of bulk drugs have
slowed down mainly due to the following reasons:
Over capacity in the domestic market.
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Quality of bulk drugs manufactured by the local manufacturers has improved
significantly acting as import substitute for bulk drugs being supplied by MNCs.
The domestic bulk drug prices have declined in the past three years leading to
drop in value growth.
Exhibit2.8: Figure Imports (Rs BN) Upto 2001-02
Year Rs (billion)
1992-93 II
1993-94 14
1994-95 15
1995-96 18
1996-97 23
1997-98 28
1998-99 31
1999-00 16
2000-01 20
2001-02 25.2
Rs (billion)
~g . < J .• ' .. ,.. ·\ ,\ ''"'" .. ' • •• ;:......... ; :< .... _._ 25 . ·: ;''i .. uk . -r·•· k• r ··, r:-: -1; ••• •!>•! •••;' •: :.:: 20 . .. ; .·· . . .. ;· .. -::- f-".1·· -.• ,... : ; ... 1':· 15- ... ·.-~·---' li ''" .. - i GJ Rs (billion) 1
• . -=-I· - I~ I . 10 rr . __ __ _. _ --1-; _.___,.-:--'-I· __ • ~ -- ' -- --. . ._ -•-; .. __ :,.I.:_ I;· __ , ..
~o]'J :icy. ~&) rd<$' i (\?J> [1:[0]> PJ)S> ~c:::,"- "-'{Y "cf? "cf? "cf? "cf? "qp "cf? "cf? "qp rvcSS rv~
Source: IDMA
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Year
Exhibit 2.9 Value oflmports & Exports
(Rs in Crores)
Total Imports Total Exports
2000-01 2032.47 8723.89
2001-02 2581.23 10475.87
2002-03 1102.50 11925.00
2003-04 4000.00 Est 14600.00
Source IDMA
In FY01, India's phannaceuticals imports were approximately Rs 20.3 bn. In the
past five years, imports have registered a CAGR of only 2%. Imports of bulk drugs have
slowed down because firstly, there is over capacity in the domestic market and secondly,
the quality of bulk drugs manufactured by domestic manufacturers has improved
significantly.
2.7 Domestic Industry Vs MNCs
The Indian Patent Act and the Drug Price Control Order (DPCO) effectively curtailed
the presence of MNCs in the Pharmaceutical sector. The price controls deterred the
MNCs from lauching new products in India. In addition to the above legislation imposed
by above two bodies, the implementation of the Foreign Exchange Regulation Act
(FERA) in 1973 (now FEMA-Foreign Exchange Management Act, 1999-a more relaxed
and diluted version of FERA) compelled MNCs to reduce their equity holding in their
Indian ventures to 40%. In order to retain a controlling 51% equity stake they had to
comply with export obligations. As a result some MNCs abated their operations, which
further strengthened the position of domestic phannaceutical companies. The market
share of MNCs has fallen from 75% in 1971 to around 20% at the current levels. It is
generally accepted that phannaceuticals MNCs are at a disadvantage compared to local
players. This is on account of the following factors:
Greater DPCO coverage due to a more mature product range.
Parent company's reluctance to launch new products because of the absence of
patent protection, the threat of process piracy and the requirement to price the
product lower in India because of the population's low purchasing power.
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Higher cost of manufacture due to parent company's insistence on stricter
compliance ofGMP (Good Manufacturing Practices)
Exhibit 2.10: Growth Drivers in 2002- MNCs versus Indian Companies:
Volume Price New Introduction
Indian 2.0% 1.8% 9.8
MNC 2.9% 3.2% 1.6%
Source: Indta Infolme Research Report
2.8 Key factors for greater profitability in the Indian market include:
Presence in large, high growth therapeutic areas e.g. cardiology, diabetes, CNS,
NSAIDs etc;
Selection of new high potential molecules for launching in India;
Backward integration into bulk drugs;
Reverse engineering capability to pioneer new processes;
Lower DPCO coverage-new product launches to reduce proportion of products
underDPCO;
Increasing franchisees among doctors;
Distribution network in India; large number of well trained Medical
Representatives (strength of the sales force);
2.8.1 Key factors for greater profitability in Export Sales include:
-Development of products which have recently gone off-patent (generic drugs) or
which are scheduled to go off patent;
-Entering the high potential US & European generics markets;
- Seeking regulatory approvals viz.(JVs)/ Wholly Owned Subsidiaries (WOS) or
company acquisitions, marketing tie-up with overseas pharmaceutical companies in
targeted markets; Franchisee manufacturing of fonnulations for overseas pharma MNCs;
- Own marketing network in other countries to develop brand equity for
fonnulations.
- Patent protected product exports to other unregulated developing I third world
countries.
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Exhibit 2.11: Region Wise Exports-The Changing Equation (Rs MN):
1999-00
East Asia 15,500
South Africa 6,000
West Asia 2,500
Africa 8,000
East Europe 6,500
West Europe 13,000
North America 7,000
Latin American countries 4,000
Other American countries 1,000
25,000 ~~
2o.ooo Hrt5~~~~~~~± 15,000
10,000
5,000
0
1ii ro UJ
- "' "' ·-" "' 1ii 5<t ro
UJ
" " .<:: () n. t:: ·c e 0 " :J z E
UJ <t
2000-01
19,000
7,000
3,500
11,000
7,500
15,500
11,000
7,000
12,000
c ~ ro
" (.) .<:: ·c - " 0 E
<t
Source: Indian Drugs Manufacturers Association (IDMA)
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2001-02
20,500
8,000
4,000
12,500
7,500
18,000
17,000
7,500
2,000
Exhibit 2.12: Growth of Indian Pharmaceutical Industry: 1950- 1999 (in INR
billions)
1950-51 1980-81 1998-99
Number of 200 6417 23790
Manufacturers
Investment 0.05 6.0 21.5
Production 14.4 170.3
(a) Bulk Drugs 0.02 2.4 31.5
(b) Formulations 0.08 12.0 138.8
Export 0.47 53.7
(a) Bulk Drugs - 0.11 23.3
(b) Formulations - 0.35 30.4
Import 1.13 24.6
(a) Bulk Drugs NA 0.87 19.2
(b) Formulations NA 0.10 5.5
R&D Expenditure 0.29 3.2
(1.5 percent of
turnover)
Cumulative Average - 18 20
Growth (CAGR)
2.9 Features of Indian Pharma Sector
A study of the Indian pharma industry in respect to its internal and external
environment reveals the following features.
I. India with a population of over a billion is largely untapped market. In fact the
penetration of modem medicine is less than 30 per cent in India. To put things in
perspective, per capita expenditure on health care in India is $93, while the same for
countries like Brazil is $453 and Malaysia$ 189.
2. The Growth of middle class in the country has resulted in fast changing lifestyles in
urban and to some extent rural centres. This opens a huge market for lifestyle drugs,
which has very low contribution in the Indian markets.
50
3. Indian manufacturers are one of the lowest cost producers of drugs in the world. With
a scalable labor force, Indian manufactures can produce drugs at 40 per cent to 50 per
cent of the cost to the rest of the world. In some cases, this cost is as low as 90 per cent.
Indian pharmaceutical industry posseses excellent chemistry and process reengineering
skills. This adds to the competitive advantage of the Indian companies. The strength in
chemistry skill helps Indian companies to develop processes, which are cost effective.
4. The Indian pharmaceutical companies are marred by the price regulation. Over a
period of time, this regulation has reduced the pricing ability of companies. The NPPA
(National Pharma Pricing Authority), which is the authority to decide the various pricing
parameters, sets prices of different drugs, which leads to lower profitability for the
companies. The companies, which are lowest cost producers, are at advantage while
those who cannot produce have either to stop production or bear losses.
5. Indian pharmaceutical sector has been marred by lack of product patent, which
prevents global pharma companies to introduce new drugs in the country and discourages
innovation and drug discovery. But this has provided an upper hand to the Indian pharma
companies.
6. Indian pharmaceutical market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on exports for
growth. To put things in to perspective, India accounts for almost 16 per cent of the
world population while the total size of industry is just 1 per cent of the global pharma
industry.
7. Due to very low barriers to entry, Indian pharma industry is highly fragmented with
about 300 large manufacturing units and about 18,000 small units spread across the
country. This makes Indian pharrna market increasingly competitive. The industry
witnesses price competition, which reduces the growth of the industry in value tenn. To
put things in perspective, in the year 2003, the industry actually grew by 10.4 per cent but
due to price competition, the growth in value tenns was 8.2 per cent (prices actually
decline by 2.2 per cent)
8. The migration into a product patent based regime is likely to transfonn industry
fortunes in the long tenns. The new product patent regime will bring with it new
innovative drugs. This will increase the profitability of MNC phanna companies and will ..-,- 2'' c·o·:>, (\,c r:c:r !", ,
1 -~ ~
~4; ,.. ,. _....,_ . ~~, .
1 K f """ '...,. o , "?( -' -~ 'I
51 f ~· 1 • 1~.,.. • ..., • ) ·: ~) I ''"i j ••, ·'"· ~ ,. "' ' ) ,_ \'f-\ ?:: \ ~ . u<: ' ·> ' '
force domestic phanna companies to focus more on R & D. This migration could result
in consolidation as well. Very small players may not be able to cope up with the
challenging environment and may succumb to giants.
9 .. Large number of drugs going off patent in Europe and in the US between 2005 to
2009 offers big opportunity for the Indian companies to capture this market. Since
generic drugs are commodities by nature, Indian producers have the competitive
advantage, as they are the lowest cost producers of drugs in the world.
I 0. Opening up of health insurance sector and the expected growth in per capita income
are key growth drivers from a long-term perspective. This leads to the expansion of
healthcare industry of which pharma industry is an integral part.
II. Being the lowest cost producer combined with FDA approved plants; Indian
companies can become a global outsourcing hub for pharmaceutical product.
12. There are certain concerns over the patent regime regarding its current structure. It
might be possible that the new government may change certain provisions of the Patent
Act formulated by the preceding government.
13. Threats· from other low cost countries like China and Israel exist. 'However, on the
quality front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane.
14. The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the short
term, the implications over the long-term are positive for the industry.
The noteworthy features of the Indian Phanna Industry are immense flexibility in
the industry to move from one drug to another with ability to respond quickly to new
demands and needs, strong distribution networks with strong presence in foreign markets
(net exporter of bulk drugs & formulations), advantage of low production and R&D costs
as compared to other nations and availability of high skills in process development, low
R&D expenditure by Indian manufacturers mainly due to relative small size and resource
base of individual units compared to major international phanna companies limiting
R&D options, world class manufacturing plants approved by US-FDA , and low profit
margins as it is highly fragmented industry with intensive competition.
52
2.10 SWOT OF INDIAN PHARMA SECTOR
The SWOT analysis of the industry reveals the position of the Indian phanna
industry in respect to its internal and external environment.
2.10.1 Strengths:
Indian with a population of over a billion is a largely untapped market. In fact the
penetration of modern medicine is less than 30 per cent in India. To put things in
perspective, per capita expenditure on health care in India is $93, while the same for
countries like Brazil is $453 and Malaysia $189.
The growth of middle class in the country has resulted in fast changing lifestyles
in urban and to some extent rural centers. This opens a huge market for lifestyle drugs,
which has a very low contribution in the Indian markets.
Indian manufacturers are one of the lowest cost producers of drugs in the world.
With a scalable labor force, Indian manufactures can produce drugs at 40 per cent to 50
per cent of the cost to the rest of the world. In some cases, this cost is as low as 90 per
cent.
Indian phannaceutical industry posses excellent chemistry and process
reengineering skills. This adds to the competitive advantage of the Indian companies. The
strength in chemistry skill help Indian companies to develop processes, which are cost
effective.
2.10.2 Weakness:
The Indian pharma companies are marred by the price regulation. Over a period
of time, this regulation has reduced the pricing ability of companies. The NPP A (National
Pharma Pricing Authority), which is the authority to decide the various pncmg
parameters, sets prices of different drugs, which leads to lower profitability for the
companies. The companies, which arc lowest cost producers, are at advantage while
those who cannot produce have either to stop production or bear losses.
Indian phanna sector has been marred by lack of product patent, which prevents
global phanna companies to introduce new drugs in the country and discourages
innovation and drug discovery. But this has provided an upper hand to the Indian pham1a
compamcs.
53
Indian phanna market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on exports for
growth. To put things in to perspective, India accounts for almost 16 per cent of the world
population while the total size of industry is just 1 per cent of the global pharma industry.
Due to very low barriers to entry, Indian pharma industry is highly fragmented
with about 300 large manufacturing units and about 18,000 small units spread across the
country. This makes Indian pharma market increasingly competitive. The industry
witnesses price competition, which reduces the growth of the industry in value term. To
put things in perspective, in the year 2003, the industry actually grew by 10.4 per cent but
due to price competition, the growth in value terms was 8.2 per cent (prices actually
declined by 2.2 per cent)
2.10.3 Opportunities
The migration into a product patent based regime is likely to transform industry
fortunes in the long term. The new patent product regime will bring with it new
innovative drugs. This will increase the profitability of MNC pharma companies and will
force domestic pharma companies to focus more on R&D. This migration could result in
consolidation as well. Very small players may not be able to cope up with the challenging
environment and may succumb to giants.
Large number of drugs going off-patent in Europe and in the US between 2005 to
2009 offers a big opportunity for the Indian companies to capture this market. Since
generic drugs are commodities by nature, Indian producers have the competitive
advantage, as they are the lowest cost producers of drugs in the world.
Opening up of health insurance sector and the expected growth in per capita
income are key growth drivers from a long-tenn perspective. This leads to the expansion
of healthcare industry of which pharma industry is an integral part. Being the lowest cost
producer combined with FDA approved plants, Indian companies can become a global
outsourcing hub for phannaceutical products.
2.10.4 Threats:
There are certain concerns. over the patent regime regarding its current structure.
It might be possible that the new govemmcnt may change certain provisions of the Patent
Act fonnulated by the preceding govemment. Threats from other low cost countries like
54
China and Israel exist. However, on the quality front, India is better placed relative to
China. So, differentiation in the contract manufacturing side may wane.
The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the short
term, the implications over the long-term are positive for the industry.
2.11 TRIPS & INDIAN PHARMACEUTICAL INDUSTRY
IPRs are the rights, which are granted to a person for his creation that cover
patents, designs, trademarks and copyrights broadly. A patent includes mainly processes,
apparatus, products and articles capable of industrial applications. The Patent Act of India
(Act 39 of 1970) which came into force from April 20,1972, recognized mainly process
patents, while did not recognize product patents of food, drug and chemicals. As the
world is moving towards Globalization, India is under tremendous pressure to sign the
WTO, GATT, Paris convention and World Intellectual Property Organization (WIPO).
With WTO, India has to adopt TRIPS, as it cannot keep aside, or ways it will be an
isolated nation facing the economical crisis. But it may be noted that when the world is
moving towards liberalization of trade in the matter of patents, the drug industry of India
will receive a huge setback due to introduction of product patents from process patents.
TRIPS enact countries to follow product patents, and India is passing now through a
transition phase till 1 ''January 2005 after which it has to shift to product patent system.
So, it is considered to be really a tough time for the Indian Pharmaceutical sector.
Government of India has already passed the Patents Bill (1998) in the Rajya
Sabha, which grants Exclusive Marketing Rights (EMRs) up to 2005 in the field of
Phannaceuticals and Agro-chemicals14. During the transition period, Govemment has
introduced a system of accepting application for product patents (Mailbox) and EMRs
have to be granted for a period of 5 years, but this system has not been a major success at
India.
Source : Bhushan K.Bonde, Vilas "Patents m Phannacy The Indian Scenario", The
Eastem Phannacist, September 1999.
55
2.12 Present position of Patents-Indian context
Total number of filing of patents in India on medicine and pharmaceuticals
regarding product patents is too small compared to other countries. (Major Indian players
that have filed include Ranbaxy, Dr. Reddys, Nicholas, Cadilla, etc.) Only 20% of the
total patents relate to Phannaceuticals while the rest to other sectors like chemicals,
electronics, electrical, mechanical, etc. The patents in medicine and pharmaceuticals are
more related to some modification of the previous drugs (process patents).
The benefit India would get after the introduction of product patents and signing
WTO, GATT, Paris Convention is 'Right of Priority' which will give automatic
preference in the queue for patent rights in all the member countries. This will help to
increase trade among the WTO countries and also create an improved industrial climate,
greater information flow, better and more extensive protection of Indian investpr' s
abroad, encouragement to scientific research and technological development and
membership of Patent Co-operation Treaty (PCT) and other treaties leading to overall
growth of country.
The consumers will also benefit as global medicines will be available to
consumers and global competition will lead to better products. As India is a poor country
(25% below poverty line), the ability to charge a premium amount on the medicines is
very difficult, but in post GATT era, the price of drugs are surely going to increase,
which is evident from table. The data compares Indian medicines price with other
countries who have adopted product patents.
Exhibit 2.13: Comparison of price of medicines of various countries with
India
DRUG & PIUCE IN INDIA PRICE IN PIUCE IN USA
DOSAGE PACK (Rs.) PAKISTAN (Rs.) (Rs.)
Ranitidine 18 242 !Ill
Tabs.300mg. Strip
of lO's
Diclofcnac Tabs. 6 56 350
50mg.Strip of IO's
Atcnolol Tabs 50mg 23 120 460
56
Strips of 14's
Piroxicam 27 73 930
Caps.20mg. Strips
of lO's
Ciprofloxacin 40 500 1140
tabs.500mg.
Source: www.natwnmaster.com
Note: for better compatibility, the drugs are marketed by the same MNC in all three
countries in the table.
"It is sure that drug prices will be increased and Indian Pharma Industries
should strive hard to counter attack in many ways to decrease the drug price if not
suddenly after implementation of GATT, at least over a period of time which in turn
depends on how well we develop or get equipped in order to survive or compete
immediately before and after implementation of GATT in India"/6 feels Prashanth
Kumar who is Lecturer at JSS College of pharmacy Ootacarnund. The researcher feels
that the prices of only a few number of drug will in'crease after 2007 and not
immediately in 2005.
According to Confederation of Indian Industry ( CII ), to build irmovative
pharma in India, we need to create a conducive environment for R&D, streamlining the
regulatory process to make it simple, transparent and accountable. It is imperative
to network Government, Industry & Academia and envisage necessary support to create
centers of excellence. Finally, it is essential to have an environment where creation and
protection of intellectual property is encouraged.
Source : http://phannainfo.net/subjects-viewpage-pageid-80.html; (Paper presented by
Prashanth Kumar on Effect of GATT agreement on drug prices in India. Published on
0511212005)
Honourable President of India Dr. A. P. J. Abdul Kalam said that,''The
phannaceutical business in the WTO environment will have to be competitive.
Competitiveness springs from the technological strength. The research and drug design,
development and acceptance for introduction is indeed a big mission. Particularly
institutions of Phan11aceutical Sciences need to understand the challenges, design to drug
57
development and marketing. When you evolve Pharma vision 2020, you must identify all
missions which will make drug production by India first in the world with a target of 20%
in total value of production in the world and global sales of drugs with the multinational
companies established in the world."18 He carries a view that the most important
component of success comes from creative leadership.
Despite evident challenges that will haunt Indian drug companies in the product
patent era, heat of which is likely to be felt precisely from 2007, ingredients of success
like chemistry and pharma skills, innovation, strategy, clear vision and integration could
well arm them to do well19, feels Raghvendra Kumar of Dalal Strret journal.
Finally according to Richard Gerster "The Indian pharmaceutical industry is a
success story providing employment for millions and ensuring that essential drugs at
affordable prices are available to the vast population of this sub-continent."
2.13 Contract Research and Manufacturing (CRAMS) in the Indian
Pharmaceutical Industry
The pressure to reduce or maintain costs, while increasing productivity, has been
the driving force in outsourcing in the life sciences sector. Outsourcing is happening
across the whole spectrum- in the pharmaceuticals and biotechnology sector right from
drug discovery research, preclinical studies, clinical trials, manufacturing, packaging,
distribution to even sales and marketing. In the medical devices area outsourcing is
happening in design, component manufacturing, device assembly, (from individual
components) and supply chain management (in the form of packaging, warehousing,
sterilization). Outsourcing in the pharmaceutical space is a business that holds immense
potential. Some experts even say that it could easily replicate the runway success story of
the Indian IT industry in the next decade or so.
In fact contract research and manufacturing services in the pharmaceuticals industry
could tum out to be the next big outsourcing story, going by the way the local companies
are wanning to the oppm1unity created due to the following reasons:
One, an ageing population in the West is straining healthcare budgets almost
everywhere. Most US and European governments are thus looking for cheaper
generics and lower cost drugs.
58
Two, with new drugs becoming more difficult to develop, pharma companies
cannot sustain large R&D spending unless new blockbusters are developed
cheaper.
And three, a large number of blockbuster drugs - currently accounting for an
estimated annual sale of around $80 billion - is set to go off-patent over the next
five years.
Unless new blockbusters are quickly developed to replace them, most pharma
companies will start seeing slimmer margins and top lines after 2010. This is where Indian
outsourcing and CRAMS fit into the global picture. While CRAMS is yet to take off in a
big way in India, analysts expect this segment to emerge as a key future growth driver.
2.13.1 CRAMS Industry Overview (Specific to India)
The Indian contract manufacturing and research market was worth US$ 930
Million in 2006. Although this market presently occupies a fraction of the total global
opportunity, the future potential of the market seems immense. The Indian market, with
its low cost advantage, strong chemistry and reverse engineering capabilities, improving . '
infrastructure and strong incentives from the government, is expected to grow strongly in
the next five years. By 2010, the Indian industry is expected to grab nearly 5% of the
total global market.
The CRAMS industry is composed of 2 segments-Contract Manufacturing
and Contract Research. The segment Contract Research consists of the sub-segments
Clinical Trials and Drug Discovery and Custom Chemical Synthesis. Following is the
explanation of the segments Contract Manufacturing and Research in detail:
2.13.2 Contract Manufacturing-An Emerging Trend
Contract manufacturing is work sub-contracted to a manufacturer by a company
that owns the product design and IPR. In some cases, the manufacturer takes the
responsibility of marketing the products using the vendor's brand and provides after-sales
support. Experts say that one of the most important sectors to watch in the future will be
contract manufacturing. Contract manufacturing is expanding rapidly in many industries,
meaning that more manufacturing is being done on the outside of companies we have
traditionally thought of as manufacturers. We can almost think of contract manufacturing
as a service function.
59
A contract manufacturing organization ("CMO") is a finn that manufactures
components or products for another firm. The finn for which the CMO manufactures
components or products is the hiring firm.
In a contract manufacturing business model, the hiring ftnn approaches the
contract manufacturer with a design or formula. The contract manufacturer will quote the
parts based on processes, labor, tooling, and material costs. Typically a hiring firm will
request quotes from multiple CMOs. After the bidding process is complete, the hiring
firm will select a source, and then, for the agreed-upon price, the CMO acts as the hiring
firm's factory, producing and shipping units of the design on behalf of the hiring firm.
Many well-known companies use contract manufacturing as an alternative to operating
and maintaining their own factories.
2.13.3 Contract Research-A New Approach
World over research & development (R&D) activities are carried out in the
pharmaceutical industry for discovering new rugs , molecules or re-engineering existing
drugs.
The global pharmaceutical companies can either perform these research activities
in-house or outsource it to a third party. Traditionally, top global pharmaceutical
companies outsource most of the research work to small, medium pharmaceutical
companies or to organizations that are specializing in conducting R & D activities. These
organizations are known as Contract Research Organizations (CRO). The key entities
involved in contract research are sponsors, CROs, regulators and sites and hospitals
where trials are conducted. A sponsor is a pharmaceutical company that wants trials to
be carried out for its investigational drugs on human subjects.
A CRO is an organization that offers a wide range of research services (like
research for new drug discovery and research for generic drugs) to the sponsor. An
independent CRO employs committed resources in research. This enables focus on the
highest standards set by the industry, like strict adherence to protocols, excellent clinical
practices along with complete and accurate documentation. A CRO's attention to detail
and its ability to provide timely and proficient trials, speeds up the whole process of
cltnical studies.
60
The regulators ensure if all regulatory requirements have been fulfilled and
decide whether or not a clinical trial can be conducted for the investigational drug.An
ethics committee is any board, committee or a group of people nominated by an
institution or a hospital to review and approve the research which is being proposed by a
sponsor or a contract research organization. Every institute or site generally has its own
ethics committee which recommends whether a particular research study should be done
in that site or not. The pennission of the ethics committee must be sought before starting
a trial at a particular site or institution.
A principal investigator is a physician, usually a medical expert in a particular
therapeutic category, under whose direction a candidate drug is administered to a subject
I patient. He I she is responsible for carrying out tbe clinical trial at a site.
Exhibit 2.14: Research & Development in tbe Pharma Space
Research for Generic Research for New Drug Development Discovery
+ ~ Reverse engineering of already Research for a new molecular entity
existing molecules & undertaking & taking it through the drug bio-equivalence studies discovery process
Source: CRISIL Research
The above R&D functions give rise to the sub segments
Discovery and Custom Chemical Synthesis.
Clinical trials & Drug
61
2.13.4 Clinical Trials & Drug Discovery
Clinical trials are used to determine whether new drugs or treatments are both safe and
effective. These are mainly carried out by innovators which undertake research for a new
drug discovery.
Clinical trials of experimental drugs proceed through four phases:
In Phase 1 clinical trials, researchers test a new drug or treatment in a small group
of people (20-80) for the first time to evaluate its safety, determine a safe dosage
range, and identify side effects.
In Phase 2 clinical trials, the study drug or treatment is given to a larger group of
people (40-100) to see if it is effective and to further evaluate its safety.
In Phase 3 studies, the study drug or treatment is given to large groups of people
(more than 200) to further determine its effectiveness, monitor side effects,
compare it to commonly used treatments, and collect information that will allow
the drug or treatment to be used safely.
Phase 4 studies are done after the drug or treatment has been marketed. These . .
studies continue testing the study drug or treatment to collect information about
their effect in various populations and any side effects associated with long-term
use.
2.13.5 Custom Chemical Synthesis
Several companies in the Pharma space offer chemical synthesis services of
compounds that are not commercially available and synthesize the compounds to
customer specifications. These companies serve the generic players who undertake
reverse engineering of already existing molecules and biological equivalence studies
wherein they assess the expected in vivo (within humans) biological equivalence of two
proprietary preparations of a drug. If two products are said to be bio equivalent it means
that, for all intents and purposes, they are expected to be the same.
2.13.6 Global Industry Size
Total size of the CRAMS Industry was $ 34 bn in 2006 with the contract
manufacturing segment occupying 52% of the total share ie nearly$ 18 bn, the clinical
trials and drug discovery segment blocking 42%, around $ 14 bn and the rest 6% ie $ 2
62
bn blocked in the custom chemical synthesis segment. is projected to increase to $ 64 bn
by 2010 (13% CAGR) Exhibit 2.15
42%
,· -.
2006
6%
1:D Contract Manufacturing
Ill Clinical Trials & Drug Discovery
0 Custom Chemical Synthesis
Exhibit 2.15 (Source: Merrill Lynch)
52%
The industry is projected to increase to$ 64 bn by 2010 (13% CAGR). The share
of the contract manufacturing segment is expect to witness a slight decline to 4 7% , yet
occupying the industry share of$ 30 bn, whereas the other two segments would witness a
rise with the clinical trials & drug discovery segment having a 45% share which is nearly
$ 29 bn, and custom chemical synthesis segment having an 8% share accounting to $ 5
bn. Exhibit 2.16
63
2010
8%
Contract Manufacturing -~ , linical Trials & Drug Discovery
l . -~0 Custom Chemical_~;:I1(11e_sis _ .. __
Exhibit 2.16 (Source: Merrill Lynch)
2.13.7 Indian Industry moving towards CRAMS
Many global pharmaceutical majors are looking to outsource manufacturing and
research from Indian companies, which enjoy much lower costs (both capital and
recurring) than their western counterparts, provide more production capacity and a wider
range of services. Many Indian companies have made their plants cGMP compliant and
India is also having the largest number of USFDA-approved plants outside USA, in
comparison to its non US counterparts. (Table 2.1)
Table2.1 :No. of USFDA approved facilities
India 75
China 22
Spain 25
Taiwan 10
Israel 8
Hungary 5
The Phanna companies arc going for compliance with Intcmational regulatory
agencies like US FDA, MCC etc. for their manufacturing facilities.
64
Collaborative research is the other big story that every CRAMS story says is hot and
happening right now. Indian drugs are either entering in to strategic alliances with large
generic companies in the world of off-patent molecules or entering in to contract
manufacturing agreements with innovator companies for supplying complex under-patent
molecules. There is a shift from being piecemeal service providers to aggressively
integrating across the drug development life cycle, pre- dominantly through the inorganic
route.
This is happening because the more services companies offer, the higher number
of customer points they get, allowing greater scope for relationship building. Such
collaboration also mitigates risks and optimizes the use of resources. Indian companies
are also proving to be better at developing AP!s than their competitors from target
markets and that too with non-infringing processes, as the innovator company comes in
with experience in the therapeutic area, while the CRAMS partner brings technical
expertise and low cost infrastructure.
Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have
been undertaking contract jobs for MNCs in the US and Europe. Even Shasnn Chemicals,
Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large
Indian companies started undertaking contract manufacturing of AP!s as part of their
additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis,
Novartis, Teva etc. are largely depending on Indian companies for many of their AP!s
and intermediates.
In 2006, Indian Contract Research & Manufacturing Sector market size was $930
mn (3% global share) where the contract manufacturing segment occupied a significant
85% which is around $ 781 mn, the clinical trials and drug discovery sector had 11% of
the market share which was $ 102 mn and the remaining 5 % which is $ 47 mn was
occupied by the custom chemical synthesis segment. (Exhibit 2.17)
65
5% 2006
r·- ---~Contract Manufacturing - ~
I Ill Clinical Trials & Drug Discovery I D Cu_stom Chemic_al Synthesis ~--___j
Exhibit 2.17 (Source: Merrill Lynch)
This opportunity is forecasted to grow to$ 3700 mn(5% global share) by 2010
where the contract manufactnring segment is expected to occupy .68% of the market with
$ 2516 mn, the clinical trials and drug discovery segment is expected to show an increase
to 21% thus grabbing $ 777 mn and the custom chemical synthesis segment also expected
to grow to II% occupying the market share of$ 407 mn. as indicated in (Exhibit 2.18)
11% 2010
0 Contract Manufacturing
II Clinical Trials & Drug Discovery
0 Custom Chemical Synthesis
Exhibit 2.18 (Source: Merrill Lynch)
66
Table 2.2 : Select Contract Manufacturing Deals in India
Indian Company Multinational Product
Lupin Laboratories Fujisawa Cefixime
Apotex Cefuroxime Axetil ,
Lisinopril (Bulk)
Nicolas Piramal Aile gram Bulk and fonnulations
Advanced Medical Optics Eye Products
Wockhardt Ivax Nizatidine (anti-ulcerant)
Dishman Pharmaceuticals Solvay Pharmaceuticals Eprosartan Mesylate
IPCALabs Merck Bulk Drugs
Tillomed Atenelol
Orchid Chemicals & Apotex Cephalosporin and other
Pharmaceuticals Injectables
SunPharma Eli Lilly cvs Products,
antiinfective
drugs and Insulin
Kopnm Synpac Pharmaceuticals Penicillin -G Bulk Drug
Cadila Healthcare Altana Pharma Intermediates for
Pantoprazole
Boehringer Ingelheim Gastrointestinal and CVS
Products
Biocon Bristol Myers Squibb Bulk Drugs
2.13.8 Select Contract Research Operations in India
Astra Zeneca is conducting research into tuberculosis (TB) at the Astra Zeneca
Research Foundation India in Bangalore. India's estimated 8.5 million TB patients36
mean clinical trials can be conducted easily and economically. Although the revenue
potential for anti-TB drugs is limited as the disease mainly affects poorer nations, the
reduced research costs of developing the drug in India and the goodwill associated with
helping to eradicate a major disease in developing countries still present a good business
opportunity for AstraZeneca.
67
GSK and Ranbaxy have set up an early-stage partnership in drug research, under
which GSK will provide the Indian firm with leads, Ranbaxy will conduct lead
optimization and animal trials, and GSK will take the drug through human trials. GSK
will have exclusive rights to sell any resulting product in developed-world markets, and
the two fims will co-promote it in India.
Pfizer is exploring the establishment of an R&D facility and setting up an
Academy for Clinical Research in Mumbai, India.
2.13.9 Shift to Contract Manufacturing in the Pharma Industry
Globally, contract manufacturing in the pharmaceutical industry has been aided
by the fact that companies across the world don't want to build expensive manufacturing
facilities and thereby risk getting stuck with expensive capacity that they might not use
all the time. The cost of drug development has soared during the past ten years
compelling pharmaceutical companies to look for new, smarter ways of manufacturing
and developing drugs. Driven by mounting market pressures, companies are increasingly
implementing outsourcing strategies to increase revenues through faster drug
development. By decreasing their in-house facilities and staff and outsourcing more of
their R&D functions, pharmaceutical companies are reshaping the drug development
services industry.
The pharma industry utilizes a combination of outsourcing models derived from the
outsourcing aspects of drug discovery research, the clinical trial process or development
and manufacturing process. This shift to outsourcing has gradually come about, the
causes for which can be attributed as under:
The phannaceutical industry is characterized by long development cycles
(roughly 12 years) and intense time to market pressure. Consequently, a company
that wants to manufacture its own product must make a large capital investment in
a plant before the drug has completed regulatory reviews. If the drug fails, the
plant may have little value. Given this, it is always wise for a pharma company
that has spent hundreds of millions of dollar developing a drug to outsource
manufacturing to somebody else. This is why, today contract manufacturing in
phannaccuticals has become worth billions of dollars.
68
The international regulatory requirements of various countries are highly
demanding and never ending. The global pharma industry, therefore, is
continuously under tremendous pressure from governments, national regulatory
bodies etc. for high tech, international standards manufacturing facilities. It is not
easy to continuously upgrade facilities to meet these never ending demands and
keep on producing quality products to feed the markets. The problem gets further
compounded due to DPCO (Drugs Price Control Order). It is becoming
increasingly difficult at the national level to cope up with the rising costs and
when it comes to international level negotiations the DPCO norms which are
available to the markets being the benchmark and the contract manufactures are
pushed on the defensive by the prospective outsourcing companies as they readily
have the base figures under DPCO with them. This makes negotiations
meaningless. The spiraling input costs and the margins being not commensurate it
becomes difficult to survive in this volatile business as the quality requirements
and technology updating expected by the international regulatory bodies and the
customers keep on adding to the costs. Therefore for long-term growth and
survival, the contract manufacturing helps to build up a reputation for absolute
quality and reliability at lowest cost.
US patents worth $ 40 billion and European patents worth $ 25
billion are likely to expire by 20 I 0. With such a high number of blockbuster drugs
getting off patent in the coming years, drug prices are expected to fall by almost
80%.In addition to this, increasing R&D costs coupled with low R&D productivity,
major pharmaceutical companies worldwide are finding it difficult to maintain their
bottom-lines. They have taken recourse to outsourcing part of their research and
manufacturing activities to lower cost countries, thereby saving costs and time in
the process. Pfizer, the maker of some blockbuster drugs has talked of closing
plants and research centers worldwide and reducing the number of factories to 48
this year from 93 in 2003.Merck is trying to fight off a $ 700 million loss from
escalating generic competition for its cholesterol fighting drugs through plant
closures and pink slips.
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Outsourcing enables pharma compames to focus on their core capabilities.
Applying external skills and expertise directly when and where they are required avoids
dependence on fixed resources. This flexibility reduces the need to reallocate or recruit
additional personnel with a corresponding reduction in overheads thereby enabling drug
companies to cut capital investment while circumventing production bottlenecks
and avoid problems of labour disputes, tough environment regulations etc.
2.13.10 Shift to Contract Research in the Pharma Industry
There are several reasons that have led to the outsourcing of research in the
pharma space. These reasons are discussed in detail as under:
- In the past, margins of global generic players have been under pressure due to severe
price competitions. With innovators pooling in authorized generics to combat
competition and multiple players winning exclusivity for different dosages, the situation
has worsened. Furthermore, with more players entering the generic space after the
exclusivity period, matters have gone for a toss. As a result global generic players are
looking for alternatives to to maintain their profitability. One alternative' being availed of
by players is outsourcing their Bioavailability (BA) and Bioequivalence (BE) studies
efficiently to low cost destinations.
- As per the IMS Health research, the revenue growth of the global pharmaceutical
industry declined during 2002-2005; thereafter it stabilized at around 7% and amounted
to US $ 300 billion in 2006. Similarly, the global R&D spend surged at a compounded
rate of 8% between 2002 - 2006 and amounted to $ 56.2 billion in 2006. Thus, putting
the R&D productivity under pressure. Attempts made by players to enrich the R&D
product pipeline, so as to sustain growth and profitability, have resulted in rising R&D
expenditure. The number of drugs in the developing pipeline has increased from 3 800 in
1997 to around 6400 in 2005. While the R&D outlay has been increasing gradually, the
number of NMEs (New Molecular Entities) approved has dipped in the past few years.
Consequently, the cost per NME (at real prices, includes cost of failure) has risen from$
423 million in 200 I to over$ 1.2 billion in 2006.
Moreover, the intensifying regulatory scrutiny has added to players' woes. The
average number of clinical trials per new drug application rose from 30 in the 1970s to
about 68 in the 1990s and is has already crossed 90 in 2005, as per an industry source.
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Likewise, the number of subjects tested for clinical trials has escalated to over 4200,
thereby lengthening the overall development time.
Global CROs conduct around 65-70% of the total R&D outsourced by key
pharmaceutical players. They global CROs are also under pressure to improve
productivity, as the operating margins of the key players have been declining over the
years. To combat this pressure, they are seeking options to boost efficiency, especially by
trying to reduce the time taken for conducting trials.
Thus, amidst the pressure on global revenues, the need for greater R&D
productivity to sustain and improve profitability has intensified. Global players (Pharma
companies & CROs) are on a lookout for options and opportunities to increase the
molecule throughput time and increase the time- to- market while simultaneously
reducing the cost of developing new molecular entities (NMEs). The players are therefore
choosing the option of outsourcing the research process, in whole or in part to countries
/destinations providing cost and research related advantages.
2.13.11 Drivers of Demand for CRAMS
The fundamental factor that has been driving the demand for contract
manufacturing is the increased acceptance and prescribing of generics, which has
increased the demand for many pharmaceutical products. This increased demand, in tum,
opens up opportunities for pharmaceutical companies to contract out manufacturing of
generics, because the timelines and costs associated with expansions to increase capacity
within an existing site often are outweighed by finding a suitable CMO that can
manufacture at a lower cost and get the product out to the market more quickly.
In addition to this, the pharmaceutical contract manufacturing market is moving
beyond providing traditional services, and is focusing on tapping the large demand for
specialized niche technologies. The market is constantly evolving in various ways in
order to drive its expansion.
CMOs have been building state-of-the-art facilities like rivals those of
phannaceutical companies and arc constantly upgrading them to enable novel
manufacturing processes. The anticipated influx of biophannaceuticals, especially
oncology products and sterile injectables, creates huge opportunities for specialized
manufacturing technologies that arc not available with phannaceutical and
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biopharmaceutical companies, thus creating the need to outsource. Lyophilization is
another process that is in huge demand in the biopharmaceuticals segment, as it requires a
high degree of automation. Pharmaceutical companies are increasingly adopting the
concept of 'virtual pharma', wherein they retain the marketing rights while outsourcing
all manufacturing activities and related processes. This allows companies to deliver
goods to the market at a faster rate than an internal plant would allow. With CMOs
offering development services, outsourcing offers pharmaceutical companies a better
value proposition while ensuring growth. The emergence of 'virtual pharma' as a
successful, risk-sharing business model in comparison to the present big pharma,
'blockbuster' model is likely to be a major driver for the pharmaceutical contract
manufacturing markets.
Several biopharmaceuticals are presently in the late developmental stage and their
imminent approval could see a wave of new products enter the market. These
biopharmaceuticals include sterile injectables and oncology products, which are the
largest product segments among biopharmaceuticals.
With biopharmaceutical companies looking to nirrrow their focus to research
and development, there is likely to be an increased demand for higher manufacturing
capacity in sterile vials and syringes. Although the manufacturing of injectables presently
constitutes the smallest segment in the pharmaceutical contract manufacturing markets,
the increased demand for sterile products, especially injectables, is expected to drive this
segment across the globe.
The underlying cost of building new manufacturing plants across regional
boundaries as well as complying with differing regulatory environments and
requirements are encouraging the outsourcing of manufacturing and related processes
among phannaceutical and biopharmaceutical companies.
2.13.12 Advantage India-Contract Manufacturing
In the past, major international companies have been reluctant to partner with Indian
companies for fear of product quality and delayed deliveries, but over the last few years
India has become a preferred destination for contract manufacturing as Indian companies
are proving their capabilities in this area. Several factors have been working to India's
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advantage in contract manufacturing. India is able to offer the following advantages to
global players:
(a) Skilled human resources
India has got an excellent pool of English speaking, highly qualified and trained
phannacists/scientists and other pharma workers. India's technical talent can match the
best available in the world in this knowledge based industry. India has 3-4 million
scientists, the second largest concentration in the world following the US. Majority of
these scientists are English speaking and are willing to work for less than a fifth of the
salaries of their Western counterparts, thus enabling her to gamer a large share of the
contract manufacturing opportunity.
(b) World-class facilities and infrastructure for drug manufactures
There are many US FDA approved manufacturing facilities in India that enable local
players to offer significant benefits in the drug development process. India has the
world's largest number of FDA-approved plants located outside of the US. India has
almost three times the number of FDA- approved plants as China. This is one of the most
vital factors for the outsourcing manufacturing services in India by'the multinationals and
global pharmaceutical companies.
(c) Reduction in costs without compromise on quality
To top it all, cost savings is the major advantage that global companies can get in India
by outsourcing manufacturing as production, labour and R&D costs are very low here.
Moreover this cost savings comes without any compromise on quality as the Indian
companies' focus is on cost-quality balance and they look to explore the potential for cost
reduction in manufacturing by utilizing the latest international technology and economies
of scale.
To sum it up we can say that India serves global clients through various business
models and offerings, such as outsourcing of services (including R&D) and
manufacturing. Strong reverse-engineering skills, a robust talent pool, government
support for exports, low production and R&D costs, and world-class infrastructure to
assure high quality standards are some of the factors that enable India to play a pivotal
role in the global phannaceutical market. India is considered a global destination for
supplies of high-standard APis. Economical service of high quality and good
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infrastructure make India an attractive outsourcing destination. All the top multinationals
operating in the pharmaceutical industries are increasingly setting their sight to India for
their key APis and generics needs.
2.13.13 Advantage India -Contract Research
(a) The Time Advantage- Abundant Availability of Drug Naive Patients
With a l billion plus population and a huge patient base with tropical diseases and the
diseases of the developed world, India is an unrivaled location for companies to conduct
their trials. The country has about 40 million asthmatic patients, 34 million diabetic
patients, 3 million cancer patients and around 8-10 million people who are HIV positive.
Therefore the process of patients recruitment is much faster in India as compared to
regulated markets.
Table 2. 3: Patient Population Estimates in India
Estimated No. of Patients Therapeutic Category
40 million Asthma
34 million Diabetes
8-l 0 million HIV
3 million Cancer
> 2 million Cardiac
1.5 million Alzheimer's
1.5 million Hypertension
Source: India Infolme Research Paper
While many regulated markets are faster than India in granting regulatory
pennission, they lag behind in this arena. Slow rate of patient recruitment implies delay
in commencement of clinical trials. India offers the opportunity to recruit faster and
complete the trials as per schedule.
The speed of regulatory approval in India is similar to that of Russia, China, Latin
America and Africa. With proper documentation, clinical trials can be approved within
I 0- 12 weeks. Conversely, approval for similar studies takes 6 to 12 months in other
countries having semi regulated markets.
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(b) The Cost Advantage
Cost saving has gradually become a critical consideration for most pharmaceutical
companies in their decision to outsource clinical research to emerging markets such as
India, China and Latin America. As per industry sources outsourcing can significantly
reduce cost of conducting clinical trials by 50 - 60%. In the drug development process
approximately 70% of the cost is incurred in clinical trials and the remaining in drug
development. The cost of conducting clinical trials in India is 50-60% of that in the US.
In conducting every phase there is a huge cost differential depending on the therapeutic
category of the investigational drug. A phase 3 trial for example costs nearly$ 45 million
m India whereas m the US it costs around $ 110 million.
Average Clinical Trial Costs ($ mn)
250
200
!ill INDIA I
100 II US
Phase 1 Phase 2 Phase 3 Overall
Figure 2.19 (Source: Assocham , Merrill Lynch)
(c) Low Cost of Investigations
Not only the cost of conducting trials but also the costs of conducting investigations like
blood tests, MRis, CT scans etc is substantially low in India as compared with US and
Europe. The cost of aCT scan is around $ 45 in India as compared to $ 1100 in the US. A
MRl costs$ 100-120 in India as against$ 1,500 in the US.
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Table2. 4: Examples of Investigational Cost Differentials
India us Bio Analytical Cost (per sample) $ 20-30 $50- 60
Cost of CT Scan $45 $ 1100
CostofMRI $ 100- 120 $ 1500
(c) Cost of Research Personnel Substantially Low
The cost of manpower in the country is lower by 40-45%. In India a clinical assistant will
normally charge $ 60-70 per hour whereas his US counterpart will charge somewhere
around $ 120-125 per hour. The salary gap between India & US is extremely high.
Table 2.5: Salary gap between India & US
Position us annual salary India annual
in salary
2001 ($) in 2001 ($)
CRA 52000 5555
68000 7750
SeniorCRA
Regional CRA 65000 7750
Project Manager 74000 17500
Regulatory Affairs 73000 17500
Source: Centre Watch
(d) Overall Cost per patient per trial lower by 50% of US
The overall cost per patient per trial is lower by 50% in India than that in US. Also, the
attrition rate of patients during trials in India is much lower than that in US and Europe,
which reduces the cost and time of trials. .
(e) Exemption of Service Tax: Further Reduction in Overall Cost
In 2007 budget, all services carried out by the clinical trials industry was exempt from
service tax, resulting in a saving of 12.24%. Earlier, CROs used to ask sponsors to
reimburse the service tax they paid to the government. This exemption by the govenunent
can be seen as a favorable step for the Indian Clinical Trials industry.
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(f) Pool of Medical Investigators
India has a trained pool of principal investigators (PI) - professionals who actually
perform the clinical trials the hospitals and sites. A PI has to be an MD with a specialized
training of around 3 years in a therapeutic area. According to industry estimates, there are
around 450-500 highly skilled and competent principal investigators in India.
(g) The Language Advantage
Indian investigators and clinical assistants are well versed in English, which proves to be
of great help while communicating with the sponsor. This gives India an edge over
China, which is otherwise similar to India in terms of benefits such as huge population
and low cost of conducting trials. Clinical trials involve massive amount of
documentation between multiple parties and systems and Pis need to capture the data
properly. Knowledge of English comes very handy while collecting the data related to
clinical trials and presenting it to the sponsors.
2.14 Possible Disadvantages to CRAMS Industry in India
The only possible disadvantage could be inconsistent quality among the small
medium sized players, which needs to be overcome. There are occasions where Indian
companies could provide the quality but to rely on consistency in quality and also
supplies on time, there is a problem. There are scores of reasons for not being able to
adhere to timelines because of the cumbersome bureaucratic hassles in exports and
imports. This is an area where the industry at large should take a concerted effort to work
hard on and surmount the problem on a war footing. Despite these hassles, Indian pharma
sector is at an advantage to bag orders for manufacture and research from the leading
global companies.
2.15 Key Success Factors of Companies in the CRAMS Industry
Generally, an MNC or an innovator company looks at the following skill-sets in a
partner before considering for outsourcing:
Chemistry skills
Intellectual property understanding
International regulatory skills
Cost effective manufacturing
Timely delivery of quality products/ services
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Facilities and resources
Financial stability
However, there certain peculiar characteristics those companies must possess in order to
qualify as a suitable Contract Manufacturing and Research partner.
2.15.1 Key Success Factors for Contract Manufacturing Organizations
Developing a world-class Phannaceutica\s Production network with outstanding
business process· excellence along with low cost manufacturing skills
Focus on customer satisfaction and strive to exceed customer expectation through
striking strategic alliances
Delivery of the right product with the right quality in the right quantity at the right
time
Continuously capturing the voice of customers and seeking for opportunity of
improvement
Growing experience with GMP compliance
2.15.2 Key Success Factors for Contract Research Organizations
Training of people to keep abreast the latest technological developments
Change in mindset to follow standard operating procedures (SPOs)
Creation and protection of the Intellectual Property Rights (IPR)
Scaling at the thought process level- Intellectual People
2.16 Evolving Business Models in the CRAMS Industry
A number of business models have been evolving with companies augmenting
their research and development spend in order to develop their pipeline of molecules to
counter the threats arising from the implementation of the product patent regime in India
as well as tap the outsourcing oppot1unity to sustain growth and generate reserves in
order to carry on the manufacturing and research activities.
The four prominent business models that have evolved are:
2.16.1 Out licensing model
Indian phannaccutical companies have increased their research and development
expenditure over the last few years - with an increased focus on new chemical entity
development in addition to the generic filings. Since most Indian companies arc
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financially incapable of conducting the clinical trials on their own, they have been
resorting to out-licensing their molecules to their foreign counterparts for milestone
payments and rights for certain markets after conducting the pre clinical and Phase I
trials on their own. Examples of this are Dr. Reddy's out licensing its anti diabetic
molecules to Novo Nordisk and Glenmark out licensing its anti asthma molecules to
Forrest Laboratories etc.
2.16.2 Services Model
The services model has emerged on account of certain players specializing in
niche activities like clinical trial monitoring, regulatory affairs, and data management etc.
Players like Vinta Laboratories, Quintiles India and Divi's Laboratories follow this
model. The margins in this business depend on the criticality of the service being
provided and are in the range of20-45%.
2.16.3 Risk Sharing Model
The risk sharing model involves a joint venture with another pharmaceutical
company or a research house in order to develop a drug till its commercialization stage.
An example of this model is the joint venture between Orchid Pharmaceutical and Bexel
Laboratories in the US, engaged in the joint development of an anti diabetic molecule.
2.16.4 Fee-for-service Model
The fee-for-service model is a higher risk reward model where the costs are
covered, but a part of the fee is contingent on delivery. In case of this model, the
possibility to rake in the lucre is enormous but there is only one problem: the money
comes in at unpredictable intervals, given the jerky pipeline of custom synthesis.
Moreover, there are different kinds of deals and it is never entirely clear how they are
structured because disclosures are not always detailed and such deals are often kept under
confidentiality clauses because innovators often like to keep cost structures under wraps.
The deal between Nicolas Piramal and Merck to develop molecules till the mid-clinical
trial phase is an example of this business model.
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