Microeconomics Project

PHARMACEUTICAL INDUSTRY

10-Sep-09

ASHWIN SHRIVASTAVA(09BSHYD0189)

BIPLAV PATNAIK(09BSHYD0220)

CHHAVI JAIN(09BSHYD1013)

SNEHA NAGAR(09BSHYD0831)

SILKY AGARWAL(09BSHYD0819)

BACKGROUND ANALYSIS OF THE INDIAN PHARMACEUTICAL SECTOR :

The Indian pharmaceutical industry was estimated at US $16.6 billion (including exports) in 2007-08. India’s healthcare spending is around 6 per cent of the total gross domestic product (GDP) of India.

Formulations (drugs) are the end products administered to consumers i.e. the diseased population. Bulk drugs are the raw materials used to make formulations which are ready-to-use forms of bulk drugs and include capsules, tablets, syrups and injections.

Bulk drugs or APIs are made of two or more chemicals or intermediaries. Bulk drugs are intended to have a direct effect on the diagnosis, cure, mitigation, treatment or prevention of a disease. Out of the total Indian pharmaceutical market in 2007-08, formulations account for around 70 per cent and bulk drugs for the balance 30 per cent in value terms. India produces 22 per cent of the world’s generic drugs (in terms of value) and is also one of the top five API producers (with a share of about 6.5 per cent).

Highly fragmented formulation industry:The formulations industry is highly fragmented both in terms of the number of manufacturers as well as the variety of products. There are about 300-400 units in the organized sector and around 15,000 units in the unorganised (small scale) sector that form the core of the industry. The industry has a wide range of over 100,000 drugs spanning across various therapeutic categories.

Supremacy of the Indian companies vis-à-vis multinational players: Indian companies dominate the formulations market as seven out of the top ten players are Indian. The formulation market in India is quite concentrated. The top five formulations companies, Cipla, Ranbaxy, GlaxoSmithKline, Cadila Healthcare, and Piramal Healthcare, accounted for about 22.3 per cent of the domestic formulation market in 2007-08. The market is concentrated at the top with top 10 players controlling about 36% of the total formulaton sales.

Concentrated Manufacturing :In geographical terms manufacturing operations are largely concentrated in Maharashtra, Andhra Pradesh. However, many players have shifted their manufacturing bases to excise free zones like Baddi (Himachal Pradesh) and Haridwar (Uttaranchal) due to the shift towards MRP based

excise duty levy.

In 2006, the per capita annual drug expenditure in India was around $3 as compared to $412 and $191 in Japan and US, respectively. This can be attributed to the huge population in India and the declining health expenditure as a percentage of total government expenditure in India.

Unlike US, India does not have a strong health insurance sector to share the healthcare cost with the patient. Consumers do not directly pay for their medicines in the US. Government organisations and managed care organisations reimburse most of the drug cost to the patients in US. However, with rising drug expenditure, patients are being asked to share a large portion of their expenses. This has prompted consumers to choose generic drugs and forego the use of high priced branded drugs.

R&D

While the average R&D spending in India as a whole is a meager 2% of sales, the spending of the top five companies is about 5% to 10%. Despite having a 16% CAGR growth over the last four years, the ratio is still way below the global average of 15% to 20% of sales. However, despite the relatively low R&D spending, Indian companies are stepping up their research activities to make themselves more self sufficient in terms of product development, now that the product patent regime has come into force.

Porter’s Five Force Model for Pharmaceutical Industry:

Barriers to entry: Licensing, distribution network, patents, plant approval by regulatory authority.

Bargaining power of suppliers: Distributors are increasingly pushing generic products in a bid to earn higher margins.

Bargaining power of customers: High, a fragmented industry has ensured that there is widespread competition in almost all product segments. (Currently also protected by the DPCO i.e Drug price Control Order).

Competition: High Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.

Supply: Higher for traditional therapeutic segments, which are typical of a developing market. Relatively lower for lifestyle segment.

Demand: Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.

Role of Pharma Sector in Indian Economy:

The Indian Pharmaceutical industry is currently the largest amongst the developing nations and one of the flagship sectors of the Indian economy. Indian pharmaceutical companies continue to move to the center stage of the global pharmaceutical market. As such The Indian government has listed the pharmaceutical industry as an intellectual industry and investment in research and development has been enhanced.

The pharmaceutical industry in India has emerged, as a prominent maker of healthcare products, currently meeting almost 95% of the domestic healthcare needs.

From a modest beginning in 1970, today the total Indian pharmaceutical sector is valued at US $ 8.8 billion with a growth rate of 8 %. The Indian pharmaceutical industry is a net exporter of bulk drugs and generics and ranks 17th in the world in terms of bulk drug and formulation exports. In 2004-05 the net pharmaceutical export was more than US $ 3.75 billion, formulations accounted for 55% while the remaining 45% came from bulk drugs. Exports of pharmaceuticals have been consistently outstripping the value of corresponding Imports in the period 1996-97 upto 2008-09.The trade balance increased from Rs. 2157 crores in 1996-97 to Rs. 29881 crores in 2008-09.

India, with its increasing pool of intellectual workforce and lower production costs is rapidly turning into a manufacturing hub for global outsourcing.

The average life expectancy in India is 63 years as compared to 78 years in developed countries. However, India’s improving healthcare delivery infrastructure has ensured the continued rise in life expectancy and maternity child care measures. There has been a strengthening of specific programs, such as the Expanded Program on Immunization (EPI) and the introduction of Oral Rehydration Therapy (ORT) in 1986–87. Ongoing measures seek to control local endemic diseases. The consequent increase in life expectancy drives the growing proportion of an aging population - the 60+ age-group will account for 11% of total population by 2021. This will further boost growth of the pharmaceutical industry.

As the Indian Pharma Industry grows- more and bigger players gear up to bring global blockbusters in the Indian market, as such bringing in more funds to the Indian economy through FDI Investments and Joint Ventures. The Pharmaceuticals sector has been able to attract FDI amounting to Rs.21409 million during the period from

April, 2007 to April, 2009 including Rs. 43.42 million in the first month of the current year.

The pharmaceutical industry in India has made phenomenal progress in the past 10 years. With over $ 8 billion in domestic sales and another $ 5 billion in exports in the year 2006, both growing at double digit, it has acquired its place in the sun. It has also started making global footprints and over $ 2.5 billion worth of acquisitions were made overseas in past couple of years.

Employment: Indian pharmaceutical sector employs over 42 lakh people directly and indirectly.

Exports of pharmaceuticals at Rs 38433 crores in FY 2008-09 registered a growth rate of 25% in 2008-09. This is quite impressive, given the growth in the country’s total exports of all commodities was at 16.9% in the corresponding period

Growth:

India, a US$ 8.2 Billion pharmaceutical market, represents one of the most emerging pharmaceutical markets in the world. The market, presently driven by over a billion population, an expanding GDP, and rapid epidemiological transitions, is expected to be the major player in the global pharmaceutical market both in terms of its large domestic market and also as a pharmaceutical export hub.

Between 2007-08 and 2011-12, the Indian domestic pharmaceutical market is expected to grow at a CAGR of nearly 16%. The size of the domestic pharmaceutical market is larger than export market. However, owing to the growth of global generics market, stringent price controls in the domestic market, and better margins, the export market is growing much faster than the domestic market.

Traditional branded generics presently dominate the Indian pharmaceutical market but the future will see strong growth in the specialty branded generics and patented drug segments.The retail pharmaceutical market in India is presently highly unorganized; however, a vast opportunity exists for the organized market.

While there has been a slowdown in the global pharmaceutical markets, the emerging markets could drive the growth for global pharmaceutical market going forward. Emerging markets, which form 18% of the global pharmaceutical market, outperformed developed markets in terms of growth with a 49% in 2009 with a CAGR of 12-13% during 2003-2008, whereas the CAGR growth for developed economies stayed around 6-8% for the same period.

According to the report of the total global outsourcing, custom manufacturing contributes almost 65% of pie of the $51 billion market in 2008. Within India, custom manufacturing is almost $1.1 billion and is growing at 43% that is thrice the global custom manufacturing outsourcing growth rate.

This is driven by the India’s ability to create a differentiating cost value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilities.

However India lacks a culture of innovation due to legacy issues such as low levels of funding, collaboration between industry, academia and educational infrastructure with India spending only 0.8% of its total GDP on research and innovation.

Exports:

Over the years India has emerged as one of the top generic drug suppliers globally and it is expected that in the years to come India’s foothold over the global generics market is to get stronger and stronger.India’s total exports, comprising bulk drugs and formulations, increased from USD2 billion in 2001-02 to USD 8.1 billion in 2007-08. Formulation exports witnessed a growth of 16.2 % in 2007-08 (y-o-y). With India’s ever growing popularity in the global generics markets, a further surge in the exports is projected. The total demand for formulation and bulk drug exports is expected to cross USD 22 billion by 2011-12. The Indian Pharma exports market is projected to grow to almost twice the size of domestic formulations market by 2011-12.The Indian pharmaceutical industry ranks 17th with respect to the export value ofbulk drugs and dosage forms.US, Russia, UK, Nigeria, and Germany are the top five export destinations for India.

Increased Focus on Emerging Markets- Indian companies are now also looking towards Emerging markets such asRussia and the CIS Nations, Eastern Europe, Brazil and other Latin Americancountries (Argentina, Mexico and Chile) and South Africa. A large chunk of salesof the Indian Pharmaceutical companies comes from these regions. Thesemarkets, similar to the Indian market, have branded generics and high entrybarriers that leads to less competition and higher profitability.The future growth opportunity in the emerging markets is likely to be driven by aseries of socio-economic factors such as increasing per capita incomes and risinglevels of disposable income, growing demand for high-quality healthcare infrastructure and improved healthcare spending.

Large,Medium and small sized firm Growth/Exports:Exports contributed more than half of the revenues for most of the large sized formulation players. In recent years, export revenues for most of the medium sized as well as small sized formulation players have been on an increasing trend. Large and medium sized formulation players’ export sales increased significantly at a CAGR of 26.5 % between 2003-04 and 2007-

08. In 2007-08, large sized formulation players registered a moderate growth of 6.6% (y-o-y) in export sales while medium and small sized formulation players showcased anincrease in exports by around 11.6 % and 22.1 per cent (y-o-y) respectively. In the bulk drugs segment, export of large sized players grew by 34.% while small sized players registered a de-growth of 8.7% 2007-08 as compared to 2006-07.

Foreign Participation:

Mergers and Acquisitions:The acquisition strategy has played a vital role in strengthening India’s competitive position in the global generic space. Itis driven by various factors like attaining scale, geographic diversification by venturing into new markets, expanding product portfolios, building new therapeutic specialisations and strengthening supply chain capabilities

Presence of Global Companies in India:While the outbound trend continues, a parallel trend can be observed whereglobal companies are acquiring Indian companies to get access to low costmanufacturing facilities and create a strong back-end for their global supply chain.

Market Structure:

1979 to 1995 ( price contol by govt) : Nine PCO came into existence, the government made some changes to it. In 1979, the number of products under price control was brought down from 347 to 163.

Spread of research know-how (process reengineering)The sales of many Indian pharmaceutical companies such as Cipla, Ranbaxy, Lupin and Torrent rose significantly during this period. Indian companies gradually began investing in research, and introduced new products through process re-engineering. The smaller players were also able to capitalize on the pharmaceutical manufacturing knowledge base that IDPL and Hindustan Antibiotics had created. Increased bulk drug production (production pattern control by govt) .Apart from controlling the prices of certain drugs, the DPCO also regulated the production pattern of pharmaceutical companies by fixing a ratio between the formulations and bulk drugs produced by the companies. This led to greater investments in the production of key bulk drugs such as antibiotics and cardiovascular drugsand hence, ensured their availability.

Continued decline in the share of multinationalsThe share of MNCs in total production continued to slide. Many formulations imported and distributed by MNCshad a limited market due to high prices (as a result of the high tariff structure).

Indian players leveraged the advantage to increase exports(market expansion)

After creating a niche for themselves in the domestic markets, a number of Indian players such as Ranbaxy, Lupin, Torrent and Dr Reddy's turned their sights on exports. They initiated steps to capitalise on their technical skills of reverse engineering and low cost structure in order to tap the overseas markets. Increased investmentsTo meet the ever-growing demand for increased exports, investments in new capacities went up substantially (largely by Indian players). They increased from Rs 7,000 million in 1986-87 to nearly Rs 13,800 million in 1994-95.

Renewed interest by multinationals (Post liberalisation)

A major turning point, as far as MNCs were concerned, was the liberalization programme initiated by the Narasimha Rao government in 1991. As part of the reforms process, tariff barriers were lowered and Foreign Exchange Regulation Act (FERA) regulations were relaxed. This restored MNCs’ confidence to a certain extent and encouraged greater foreign investment in the domestic pharmaceutical industry. Most multinationals undertook comprehensive cost-containment programmes through plant relocation and retrenchment of work force, and enhanced the pace of their new product introductions.(lower tariff barriers, cost containment programmes)

Growth of Indian producersThe reforms process also benefited Indian producers who were able to increase the rate of new bulk drug introductions (due to the large quantity imports of bulk drug intermediates) as a result of lower tariff and non- tariff barriers. Many Indian players also made efforts to heighten their presence in the international markets by setting up branch offices and subsidiaries.Increased competitionDue to the surge in demand, the level of competition in the industry also went up. The number of units rose from an estimated 10,000 units in 1987 to over 20,000 units in 1994. Most new producers introduced brands in large-sized and fast growing categories such as antibiotics, NSAIDs and cough preparations. Hence, the number of competing brands in a single category soared to over 100 in many cases.

1995 to 2001( relaxation of price controls )In 1995, the government again amended the DPCO and brought down the number of drugs under price control from 146 to 74. According to CRISIL Rsearch estimates, the share of the market covered by price control declined from 70 per cent in 1987-88 to 52 per cent in 1997 and further, to 40 per cent in 2001.

Increased interest of multinationals(low cost in india)The government's commitment to recognise product patents in drugs after 2005 fuelled the expectations of MNCs.Yet another factor that drew the attention of MNCs was the low cost of production in India. Multinationals began increasingly looking at India as a market and amanufacturing base .The greater pace of consolidation in the international market has also affected the structure of the domestic industry. In spite of low growth in their sales, the ranking of multinationals in the Indian market improved, as a result of the mergers in the international markets.

Seeing the above trend and growth in the pharmaceutical sector, the market structure looks like a monopolistically competitive market for the following reasons:

Firstly, product differentiation is widely seen in this sector. There are different drugs for a particular disease by different companies.

Secondly, price controls have been continuously relaxed. Such relaxations are giving companies some control over the prices of their products

Moreover, more than looking at each other, companies are increasingly trying to develop newer drugs and trying to cater to the market. Research and development expenditures are high for most of the players as they are continuously involved in innovating newer drugs.

Price wars are not seen in this sector as products are differentiated.

From the market share of top players we see that the top 4 companies have a market share of 19.3% (2005 figures)

LETTER TO THE PRESIDENT,WORLD BANK

ToThe President World Bank

Respected Sir/madam,

Subject- Proposal for funding the Indian Pharmaceutical sector.

Please find below an analysis of the Indian Pharmaceutical sector highlighting innumerous growth opportunities, the need for financial aid and reasons as to why it is a leading indicator in of the Indian economy.

Contract Research And Manufacturing Services(CRAMS): The Indian ContractResearch and Manufacturing Services (CRAMS) industry took off a few years back as a result of India’s ability to position itself as a low cost manufacturer and supplier of high quality pharmaceutical products and services. Over the years several Indian companies have shifted their focus from the pure generics play and meager revenue streams from the CRAMS segment, to establish themselves as full-fledged CRAMS service providers spanning the entire drug development and manufacturing value chain.The Indian contract manufacturing market was estimated at USD 869 million in

2007 It is projected to grow at a CAGR of about 41.7 percent to touch USD 2.46 billion by 2010. Indian companies, through their high quality-low cost production models, have bagged some impressive deals in the contract manufacturing space. These deals validate India’s potential to achieve a larger share of the global manufacturing outsourcing market. They also signify that Indian companies have been able to win the trust and confidence of multinational companies.

Clinical Research: India has registered impressive growth and development in the clinical research space. It is now high on the radar of several multinational pharmaceutical companies as a preferred clinical research destination. Foreign companies are now increasingly outsourcing their clinical research activities to India either by setting up their own research facilities here or by outsourcing such work to local Clinical Research Organisations (CROs). A number of multinational CROs have set up shop in India. Globally, the clinical research outsourcing market was estimated at USD 12.3 billion in 2007. This market is expected to reach USD 23.1 billion by 2011.The Indian clinical research market was estimated at USD 200 million in 2007 as against USD 140 million in 2006 and a mere USD 70-80 million in 2001-02.the Indian clinical trials outsourcing markets is displaying positive industry dynamics to drive India to the foremost rank among the preferred destinations for clinical research works. The Indian clinical research market is projected to reach USD 500-600 million by 2010. As per industry estimates India can capture a share of about 15% by 2011 in global clinical trials market.

Drug Discovery: Indian companies have strong qualifications to emerge as a critical player in the global new drug discovery efforts in the long term. India possesses impressive pool of scientists, the most important resource needed for new chemical entity(NCE) R&D. India is adopting a collaborative strategy with major global players and the main reason for such collaboration is lack of capital funding/capital constraints. Areas like these, if focused on would propel the Pharma industry tremendously.

Biopharmaceutical: The Indian biotechnology industry is a sunrise sector growing at 35-40% over the last 3 years. The industry was valued at USD 2 billion in 2006-07. India is currently ranked among the top 12 biotech destinations in the world and is the third biggest in the Asia Pacific in terms of number of biotech companies.

Domestic Drug market: Indian domestic formulation market has grown at about 1.6 times the growth of Indian economy and is estimated at USD 6.2 billion in 2006-07. This market is expected to report robust growth with rising income levels, improving living standards, improved medical infrastructure, increasing health insurance penetration and the growing number of organized retail chains.

Social Benefits: Major causes of concern are environmental issues pertaining to pharma industry. With the funding from world bank –technological advances can be made moving towards cleaner environment. Thus reducing health hazards resulting from toxic wastes. This would inturn result in higher life expectancy thereby increasing the potential workforce for the entire Indian economy.

All these points indicate that despite the recession the Pharma sector continued to grow in double digits and thus bolstered the Indian economy. The cost of manufacturing in India is significantly lower as compared to costs in the regulated markets of the US and Europe. This is mainly due to

availability of cheap skilled labour and raw materials. India also has the largest number of US FDA approved facilities outside the US (more than 100 in 2007-08).

Kindly take into consideration all these factors before making your decision.

Yours sincerely,

Ashwin Shrivastava

Bibliography:

Crisil research report on Pharma sector (Jan 2009)

KPMG and CII- Pharma summit 2008 report

Deutsche bank Research report on India’s pharmaceutical industry on course of globalization(2008)

http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf