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ALLIANCE BUSINESS SCHOOL
Section EGroup 10
PGP 2008-10
A Study onGrowth and Recent Developments in
PHARMACEUTICAL INDUSTRY
Submitted To:Dr. R. Venkatamuni Reddy
Submitted by:Atreyee Nandy - 08PG294Harkirt Kaur - 08PG306Nalini Sharma - 08PG317Sanaa Sadique - 08PG341Santosh Prasad - 08PG342
Vineeth Gangadharan -
08PG355
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ACKNOWLEDGEMENT
We would like to express our heartfelt gratitude and thankfulness towards our Industry
Analytics professors, Dr. R.Venkatamuni Reddy and Dr. Gervasio S.F.L Mendes for
giving us an opportunity to work on this project, which has helped us gain an in depth
understanding of the Indian Pharmaceutical Industry.
The timely advice given by Prof. Reddy and Prof. Mendes went a long way in
ensuring that we do not lose focus while working on the project. The constant
guidance and meaningful suggestions provided by them also helped in making this
project a relevant and a rich source of learning for the students of Industry Analytics.
We hope that this project would enable the readers understand the working of Indian
Pharmaceutical Industry in detail.
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EXECUTIVE SUMMARY
The Indian pharmaceutical industry has come a long way from waiting for imports of
bulk drugs from global players for re-processing to becoming an industry which is
driving the product development and is breaking new grounds in medical research
worldwide.
The Indian pharmaceutical industry has a unique amalgamation of two major critical
factors that make it so attractive and thereby add impetus to its growth. These are:
The process patent regime
Price controls
The implementation of Good Manufacturing Practices has further supplemented the
growth of this industry which is now producing bulk drugs for all the major therapy
segments, which are now most in demand. In addition to this, the competencies that
India has achieved in process re-engineering and organic synthesis have helped derive
the most cost-effective solutions which are also compliant with the quality standards.
The purpose of this report is to provide an extensive outlook on the pharmaceutical
industry. The broad objectives of this report are:
To study the growth and trend of Indian Pharmaceutical Industry and its
contribution to Indian economy.
To study the bottlenecks in patenting and suggest suitable measures in the light
of the problematic issues in patenting with a focus on TRIPS Agreement.
To track the significance of Mergers and Acquisitions in consolidation of
Pharmaceutical Industry.
The report provides a complete synopsis on the Indian pharmaceutical market and its
present demographics. The reports also presents the future prospects of the industry,
which is an indicative of vast potential and growth opportunities, and also the possible
challenges that the Indian pharmaceutical industry may face ahead.
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CONTENTS
Chapter 1: GLOBAL REVIEW 6
Origins and Evolution
Global Scenario
Therapeutic Market Segmentation
Chapter 2: COUNTRY REVIEW 16
Indian Pharmaceutical Industry
Industry Structure
Domestic Growth Drivers Domestic Exports
Critical Success Factors
Pharmaceutical Regulatory Bodies In India
Chapter 3: PATENT- The key facet of the Indian Pharmaceutical Industry 35
Background of Pharmaceutical Industry with respect to patents
Patents Amendment Act (2005)
Scenario Post Trips
Novartis Case
Chapter 4: PRICING OF DRUGS 45
Pricing of Drugs-Principle and Laws
Chapter 5: Merger and Acquisitions in the Indian Pharmaceutical Industry 54
Drivers in Mergers and Acquisitions
Mergers and Acquisition Trends in India
Mergers and Acquisitions-Challenges
Chapter 6: Framework of Analysis 66
Qualitative Analysis
Quantitative Analysis
Chapter 7: Outlook 98
Future Scenario
Issues and Challenges
Vision-2020
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increased its focus on novel drugs, good delivery system, and new chemical entities.
The other factor which is driving the growth of global pharmaceutical market is
speeding up regulation in bio-generic segment. Moreover there will be shift in growth
from top ten markets to emerging economies. The global pharmaceutical market will
change its shape from primary care driven to specialty care driven that is oncology
and biotech. The global pharmaceutical industry will take a shape of virtually
integrated pharmaceutical company. There is a widening gap between mature market
performance and emerging market performance, which will require many
pharmaceutical companies all over the globe to make changes throughout their
operations from shifting their sales and market, revising there strategies, changing
there business models to fuel there growth.
For the global pharmaceutical industry, 2008 will be a year of softening growth and a
widening gap in performance between the increasingly generalized and cost-
constrained mature markets, as well as the burgeoning pharmerging sectors where
demand is growing and economies and access to healthcare are expanding at record
levels. Marking an important inflection point for the industry, for the first time the
worlds seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will
drive less than half of the industrys growth in 2008, while the pharmerging markets
will contribute nearly a quarter of growth worldwide (Figure 1). Further divergence
will be apparent between primary care-driven and specialist-driven therapy areas, and
between therapy classes with major unmet needs and innovations, and those
dominated by generics.
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RECORD
LOW
GROWTH
FOR THE
US
In the US,
pharmaceutical growth will slow to 4-5% in 2008, marking an all-time low for this
market. This is due in part to a lessening of the volume growth generated by the
Medicare Part D prescription drug benefit. It also reflects the continued high level of
genericisation in this market with approximately $15 billion in branded products
expected to lose patents in the 2008 timeframe. The US will also continue to feel the
impact of heightened safety scrutiny, as the US FDA acquires more power, slowing
the introduction of new medicines.
A similar level of growth is anticipated in the top five European markets (France,
Germany, UK, Italy and Spain), as the industry faces significant generics exposure
and governments struggle to manage their aging populations and embrace new
treatment innovations (Figure 2). Increasing therapeutic substitution can be expected
in these markets, along with an upturn in parallel trade, particularly with specialist-
driven products. Cost-saving initiatives are likely to become more aggressive and will
include price cuts, contracting and rebating, as well as the expansion of reference
pricing schemes in Germany, Italy and Spain. Value growth in these markets will be
limited to areas of unmet needs. In Japan, cost-containment drives including
incentives for prescribing generics will also impact market performance as the
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and greater
government
involvement in
healthcare
policy. This
involvement
extends to
annual price
cuts, enforced
generic
prescribing and
an anticorruption
campaign that
targets
promotional activity, product approvals and manufacturing.
Overall, the global pharmaceutical market will grow 5-6% to over $735 billion in
2008, down from 6- 7% in 2007 (Figure 3). Key dynamics shaping this growth are the
continued wave of genericisation, expanded use of innovative specialty products,
increasing reliance on value-based medicine and higher levels of uncertainty around
safety issues.
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TOP TEN PHARMACEUTICAL COMPANIES BY WORLDWIDE SALES (2007-08)
Sales (US$ billion)
Source: IMS Health. Intelligence 360 Global Pharmaceutical Perspective
TOP TEN PHARMACEUTICAL COMPANIES WORLDWIDE BY TOTAL
R&D EXPENDITURE
Fourteen pharmaceutical companies featured in the top 50 R&D spenders according to
European Commission research in 2007-08, including 3 in the top ten:
Pfizer, Johnson & Johnson, and GlaxoSmithKline. Other companies to feature were
Sanofiaventis, Roche, Novartis, Merck, AstraZeneca, Amgen, Bayer, Eli Lilly, Wyeth
and Abbott.
Pharmaceutical companies ranked as the highest sector of R&D investment across
the worlds top 1400 companies, spending over 70 million euros.
In 2007, Pfizer spent nearly US$7.6 billion on R&D globally, followed by Johnson
& Johnson (US$7.1 billion) and GlaxoSmithKline (US$6.9 billion).
Of the top ten pharmaceutical companies, Amgen spent the largest proportion on
R&D with expenditure equalling over 24% of total sales.
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THERAPEUTIC MARKET SEGMENTATION
Commencing with repackaging and preparation of formulations from imported bulk
drugs, the Indian industry has moved on to become a net foreign exchange earner, and
has been able to underline its presence in the global pharmaceutical arena as one of
the top 35 drug producers worldwide. Currently, there are more than 2,400 registered
pharmaceutical producers in India. There are 24,000 licensed pharmaceutical
companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured
here. India has more drug-manufacturing facilities that have been approved by the
U.S. Food and Drug Administration than any country other than the US. Indian
generics companies supply 84% of the AIDS drugs that Doctors without Borders uses
to treat 60,000 patients in more than 30 countries. However total pharmaceutical
market is as follows:
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It is very much evident from above figure that chronic therapy area (Gastro Cardiac,
Respiratory, Neuro Psychiatry and Ant diabetics) is dominating the market in long
run.
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CHAPTER 2
COUNTRY REVIEW
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INTRODUCTION: INDIAN PHARMACEUTICAL INDUSTRY
Pharmaceutical Industry in India is one of the largest and most advanced among the
developing countries. It is ranked 4th in volume terms and 11th in value terms
globally. It provides employment to millions and ensures that essential drugs at
affordable prices are available to the vast population of India. Indian Pharmaceutical
Industry has attained wide ranging capabilities in the complex field of drug
manufacture and technology. From simple pain killers to sophisticated antibiotics and
complex cardiac compounds, almost every type of drug is now made indigenously.
Indian Pharmaceutical Industry is playing a key role in promoting and sustaining
development in the vital field of medicines. Around 70% of the country's demand for
bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and vaccines is met by Indian pharmaceutical industry.
A number of Indian pharmaceutical companies adhere to highest quality standards and
are approved by regulatory authorities in USA and UK.
The Indian pharmaceutical industry traditionally relied on reverse engineering i.e.
product copying, through which vast profits were made. In recent years, however, the
larger domestic companies have realised the need to undertake original research and /
or penetrate into the regulated generics markets in the USA/EU in order to survive in
the global market. At the same time, the Indian pharmaceutical industry is renowned
for supplying affordable generic versions of patented drugs for illnesses like
HIV/AIDS to some of the worlds poorest countries.
Some of the strategies that have been followed by Indian pharmaceutical companies
for their growth in the global markets have been as follows:
Geographic diversification with few companies focussing on increasing
presence in the regulated markets and others exploring the
developing/under-developed markets of the world.
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As a part of diversification strategy, some of the companies have acquired
brands, facilities and businesses overseas. Some companies have even
started their local marketing in foreign markets.
Partnerships for supply of bulk drugs and formulations with the genericcompanies as well as innovators.
For regulated markets such as the US, there are companies focussing on
value added generics, niche segments or patent challenges in the US.
Focus on offering research and manufacturing services on a contractual
basis(CMOs and CROs)
Apart from these strategies Indian companies have to devise newer strategies
continuously to survive in the highly competitive global market in an industry that is
characterised by - high capital requirement, high technical requirement, high process
skills, high value addition prospects, high export volumes, high market sophistication.
Indian companies are following the route of mergers and acquisitions to make inroads
in the foreign markets. They need to consolidate further in different parts of the world
to become trans-national players. Indian companies will have to rise above the
statement of Michael Porter (1990), that most multi-national firms are just national
firms with international operations. They shall certainly be at an advantage, as their
strong national identities will give them a competitive advantage in the global
markets.
INDUSTRY STRUCTURE
The Pharmaceutical industry in India is fragmented with over 3,000 small/medium
sized generic pharmaceutical manufacturers. It has over 20,000 units out of which 300
units are in the organized sector; while others exist in the small scale/unorganised
sector. The leading 250 pharmaceutical companies control 70% of the market with
market leader holding nearly 7% of the market share. There are also 5 Central Public
Sector Units that manufacture drugs. These companies are:
Indian Drugs & Pharmaceuticals
Hindustan Antibiotics Ltd.
Bengal Chemical and Pharmaceuticals Ltd.
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Ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative
treatment lies in drugs, diet and general mode of life.
Siddha: The Siddha system is one of the oldest Indian systems of medicine. Siddha
means achievement. Siddhas were saintly figures who achieved healing through the
practice of yoga. The Siddha system does not look merely at a disease but takes into
account a patients age, sex, race, habits, environment, diet , physiological constitution
and so forth. Siddha medicines have been effective in curing some diseases, and
further work is needed to truly understand why this system works.
Unani: The Unani system originated in Greece and progressed to India during the
medieval period. It involves promotion of positive health and prevention of disease.
The system is based on the humoral theory i.e. the presence of blood, phlegm, yellow
bile and black bile. A persons temperament is accordingly expressed as sanguine,
phlegmatic, choleric or melancholic. Drugs derived from plant, metal, mineral and
animal origins are used in this system.
Homeopathy: Homoeopathy is a branch of therapeutics that treats the patient on the
principle of SIMILIA SIMILIBUS CURENTUR which simply means Let likes
be cured by likes. Homeopathy seeks to stimulate the body's defense mechanisms
and processes so as to prevent or treat illness. Treatment involves giving very small
doses of substances called remedies that, according to homeopathy, would produce the
same or similar symptoms of illness in healthy people if they were given in larger
doses. Treatment in homeopathy is individualized (tailored to each person).
Homeopathic practitioners select remedies according to a total picture of the patient,
including not only symptoms but lifestyle, emotional and mental states, and other
factors.
Yoga and Naturopathy: Yoga and Naturopathy are ways of life. In naturopathy one
applies simple laws of nature. It advocates proper attention to eating and living habits.
It also involves hydrotherapy, mud packs, baths, massage and so forth. Yoga consists
of eight components: restraint, observance of austerity, physical postures, breathing
exercises, restraining of the sense organs, contemplation, meditation and Samadhi.
Increasing interest exists in revisiting these ancient drug systems.
INDUSTRY SEGMENTATION
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Indian pharmaceutical industry can be widely classified into bulk drugs, formulations
and contract research. Bulk drugs are the Indian name for Active Pharmaceuticals
Ingredients (API). Formulations cover both branded products and generics. Indian
pharmaceutical sector is self sufficient in meeting domestic demand and exports
successfully to various markets globally. The existence of process patents in India till
January 2005 fuelled the growth of domestic pharmaceutical companies and
developed them in areas like organic synthesis and process engineering, as a result of
which, Indian pharmaceuticals sector is able to meet almost 95 percent of the
countrys pharmaceutical needs. India is globally recognized as a low cost, high
quality bulk drugs and formulations manufacturer and supplier. Contract Research, a
nascent industry in India has witnessed commendable growth in the last few years. As
per Yes Bank /OPPI report (2007-08), formulation segment (including domestic
formulation and formulation exports) constituted 72%of the total pharmaceutical
industry (in terms of sales) while bulk drugs and contract research constituted 25%
and 3% of pharmaceutical industry respectively.
Fig: Segment-wise sales
BULK DRUGS
Bulk drug industry is the backbone of the Indian pharmaceutical industry. Growth of
Indian bulk drug industry in the last five decades has been impressive and highest
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among developing countries. From a mere processing industry, Indian bulk drug
industry has evolved into sophisticated industry today, meeting global standards in
production, technology and quality control. Today, India stands among the top five
producers of bulk drugs in the world. The market is fragmented with far too many
players. About 300 organised companies are involved in the production of bulk drugs
in India. Over 70 percent of Indias bulk drug production is exported to more than 50
countries and the balance is sold locally to other formulators. Indian bulk drug
industry is mainly concentrated in the following regional belts - Mumbai to
Ankleshwar, Hyderabad to Madras and Chandigarh. Around, 18000 bulk drug
manufacturers exist in India. Some major producers of bulk drugs in Indian
pharmaceutical industry are Ranbaxy Laboratories, Sun Pharma, Cadila, Wockhardt,
Aurobindo Pharma, Cipla, Dr. Reddys Laboratories, Orchid Pharmaceuticals &
Chemicals, Nicholas Piramal, Lupin, Aristo Pharmaceuticals, etc. Most are involved
in bulk as well as formulations while a few are solely into bulk drugs.
India is the worlds fifth largest producer of bulk drugs. The market size is expected to
grow at higher percentages in future years with more and more international
companies depending on India to meet their bulk-drug supply needs. Moreover, India
is way ahead of competitors in the total number of Drug Master File (DMF) filings.
Of the overall DMF filings to US FDA, the portion of filings by Indian players has
jumped from around 14% in 2000 to 46% of total filings in 2008( January-June) This
growth in proportion speaks volumes about the quality standards followed in Indian
manufacturing facilities.
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Fig: Increasing share of Indian companies in DMF filings (US FDA)
(SOURCE: CRISINFAC, YES BANK/ OPPI)
The growing number of DMF filings signifies the increase in number of contracts that
Indian players have garnered. While India has recorded 1671 DMF filings, China
shows a tally of 520, the second largest number of DMF filings after India. In 2008
(January-June), Indias DMF filings were around 3.5 times that of China -187 from
India vis--vis 51 from China.
The bulk drug segment is a low-margin and volume-driven business. The thrust is on
manufacturing. In manufacturing operation, efficiency through better process skills to
reduce both manufacturing time and cost is critical. Low cost manufacturing is a
distinct advantage gained by Indian companies over a period of time with a steep
learning curve. Bulk Drugs exports have grown significantly in the past on account of
growth in generic industry, increasing share of Indian companies in DMF filings and
contract manufacturing opportunity.
Bulk drugs exports grew robustly by 28% CAGR between 2001-02 and 2007-08 to
reach an estimated USD4.2 billion.
Fig. Indias Bulk Drug Export (CRISINFAC, YES BANK/ OPPI)
As already explained, India has carved a niche for itself by being one of the largest
bulk drug suppliers. India offers a number of distinctive advantages in the
pharmaceutical industry, as illustrated in the figure below:
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Fig: Advantage India-API
(SOURCE: CRISINFAC, YES BANK/ OPPI)
India has many local manufacturing equipment manufacturers. These equipments are
of high quality and low cost, thus reducing the cost of capital. According to industry
estimates, Indian companies are able to reduce the upfront capital cost of setting up a
project by as much as 25-50%due to locally manufactured equipment and high quality
technology/engineering skills. Competition in the Indias domestic formulation market
has made it inevitable for API suppliers to continuously develop alternative
production methods to improve yield or reduce costs. This ensures that India has a
significant cost advantage due to process engineering.
Apart from availability of a high number of skilled chemists, India also offers
scientists with vast experience and unmatched skills. The scientific staff in India
though equivalent or better qualified are also available at a fraction of the cost. This
makes Indian research firms more competitive than many international firms while
being cost competitive. Labour costs are also low in India, being almost 1/7 th of that in
many developed countries and offer an obvious cost advantage.
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FORMULATIONS
Formulations are broadly categorized into patented drugs and generic drugs. A
patented drug is an innovative formulation that is patented for a period of time
(usually 20 years) from the date of its approval. A generic drug is a copy of an expired
patented drug that is similar in dosage, safety, strength, method of consumption,
performance and intended use.
Formulation Industry can be subdivided into two segments:
Domestic Formulation Industry
Indian Formulation Exports
Domestic Formulation Industry
Between 2002 and 2007, the domestic formulation industry grew at a CAGR of 14%
from around USD4.3 billion in 2002 to USD 8.4 billion in 2007. Demand in India is
growing markedly due to rising population, increasing per capita income, increasing
access to medicine, especially in the rural areas and an increasing population of over
sixty years of age.
Fig: Growth in domestic formulation industry (OPPI, ORGIMS)
(SOURCE: CRISINFAC, YES BANK/ OPPI
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multinationals and global pharmaceutical companies. The Indian pharmaceutical
outsourcing market was valued at USD1.27m in 2007 and is expected to reach
USD3.33 billion by 2010, growing at a CAGR of 37.6%. The Indian CRAMS market
stood at USD1.21 billion in 2007, and is estimated to reach USD3.16 billion by 2010.
India holds the lion's share of the world's contract research business as activity in the
pharmaceutical market continues to explode in this region. Over 15 prominent
contract research organisations (CROs) are now operating in India attracted by her
ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in
the field of new drug discovery and the rest 65 per cent of business is in the clinical
trials arena. India offers a huge cost advantage in the clinical trials domain compared
to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of
hiring a chemist in the West.
DOMESTIC GROWTH DRIVERS:
Pharmaceutical sector is one of the most globalized sectors among the Indian
industries. The downside is pharmaceutical sector traditionally has been immune to
business cycles. The upside of Indian pharmaceutical sector, however, is influenced by
a mix of global and local factors. Global factors are important as most Indian
companies ship a major portion of their production to overseas markets. Also,
multinationals operating in the Indian market follows the central research and global
marketing model. Their actions are largely dictated by global trends although local
issues are given due importance. The domestic market is critical for both Indian
companies and multinationals. For Indian companies, the domestic market lends
stability to bottom line and offer means to cope with fluctuations in global demand.
The growth drivers for Indian pharmaceutical market are:
Growing Population and Improving Incomes: Household incomes are rising
in India; the proportion of middleclass in Indian population is also increasing.
Statistics show a clear migration of population towards middle and upper
classes. Rise in income levels is always accompanied by greater demand for
medical facilities and pharmaceutical products. Middle class is already 70
million strong and is expected to grow even fast, accounting for a higher share
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DOMESTIC EXPORTS
Pharmaceutical exports touched a level of Rs. 24942 crores during 2006-07. Exports
constitute a substantial part of the total production of pharmaceuticals in India.
YEAR EXPORT(Rs. in Crores)
1998-1999 6256.06
1999-2000 7230.16
2000-2001 8757.47
2001-2002 9751.20
2002-2003 12826.10
2003-2004 15213.24
2004-2005 17857.80
2005-2006 22578.98
2006-2007 24942.00
(Source:-Directorate General of Commercial Intelligence and Statistics - DGCIS, Kolkata)
The formulations contribute nearly 55% of the total exports and the rest 45% comes
from bulk drugs. Pharmaceutical exports clocked $7.2 billion in 2007-08, accountingfor six per cent of the countrys total exports, according to Pharmexcil, the
Pharmaceutical Export Promotional Council.
CRITICAL SUCCESS FACTORS
The rules of pharmaceutical business are changing. Indian pharmaceutical companies
can no longer get away with plundering intellectual properties of multinational
companies. Pharmaceutical business has become a new ballgame altogether after the
introduction of product patents in January 2005.
(a) NEW PRODUCT DEVELOPMENT
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Pre 2005: New product development efforts of Indian pharmaceutical companies in
process patents era were limited to reverse engineering molecules discovered by other
companies. Thanks to absence of product patents, Indian companies did not have to go
through long winded drug development process. Nor did Indian companies have to
expend any effort on research focus. Indian companies simply zeroed in on
blockbuster drugs and tried to come up with an alternative process as fast as they
could. The focus of the Indian companies was to launch a copy of a blockbuster drug
ahead of their rivals in India and abroad.
Key areas to focus on R&D for Indian companies:
1. Potential product identification
Complex API
Complex finished product
Commercial potential of products
Out-licensing opportunity to MNCs
2. Novel Drug Delivery System (NDDS)
3. New Drug Development
Post 2005: A large number of drugs are going off patent in the next few years.
According to IMH Health, more than $60 billion worth of drugs are going off
patent by 2011. Thus, Indian companies will not be short of new products for at least
another two years. In the long run, however Indian companies may find it hard to
make money from drugs coming off patent. Already competition in generic market is
intense and likely to increase further in the future. Hence, new molecules rather than
generics will drive revenues and profits in the product patents area. Indian companies
need to discover new drugs either through their own efforts or research alliances.
Perhaps licensing deals with multinationals could also provide Indian companies
access to new drugs. Focus on basic research will come with its own issues. Indian
companies will have to acquire the skills of identifying research areas that offer
excellent revenue and profit potential. This will entail a closer tracking of disease
profiles and related therapies as well as keeping a close tab on the research
programmes of rivals. Besides, Indian companies will have to pay more attention to
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economics of drug development process. A product patent is granted for a period of
20 years
(b) THERAPEUTIC COVERAGE
Pre-2005: In the absence of product patents, Indian pharmaceutical companies did
not feel the need to focus on specific therapeutic areas. Most Indian pharmaceutical
companies eschewed narrow focus and tried to cover as many therapeutic areas as
possible. Now the product portfolio of many Indian companies has considerable
breadth and depth. Given the price controls in the market, diversification worked to
the advantage of companies in the domestic markets. In the export markets, a wider
product portfolio gave companies the option of picking and choosing from an array
of opportunities.
Post 2005: Opinion is divided over the therapeutic strategy that Indian companies
should pursue in product patent era. Some companies believe that focus on select
therapeutic segment will fetch them greater dividends in terms of new chemical
entities and market share. Other companies believe such a strategy is risky given the
size of Indian companies and that a big setback in research could sink the company.
Instead such companies are pursuing a de-risking strategy of building a wide product
portfolio. In the domestic market, such a strategy will result in economies of scale at
production and marketing stage, putting the company in a better place to weather
competition from multinationals. In the export markets even after the introduction of
product patents, products under patent protection will comprise only 15 percent of
the market. So a vast chunk of the market will be still open for competition although
margins will be wafer thin.
EXPORTS
Pre-2005: Most Indian companies focused on exports. Exports improve the valuation
of companies owing to higher margin in overseas markets. Indian companies built
fortunes by making cheaper versions of blockbuster drugs and selling them in
domestic and export markets. Indian companies built especially strong position in
manufacture of bulk drugs. Out of the total exports, formulations constituted 55
percent and bulk drugs constituted 45 percent. Success in export market allowed
some Indian companies to build a strong position in the domestic market organically
and through acquisitions of brands and companies.
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Post 2005: Exports has continued to be a priority for Indian companies. Major
blockbuster drugs will come off patent in the near future, creating a big generic
opportunity for Indian companies. Also, a growing demand for anti-AIDS drugs in
Africa will keep Indian companies busy. Exports have and will continue to provide
Indian companies with the strength to withstand the onslaught of multinationals in
the domestic market.
(d) LOW COST PRODUCTION THROUGH SCALE
Pre-2005: Indian pharmaceutical companies have mastered the science of producing
drugs cheaply. Thanks to benign patents regime, Indian companies have developed a
high level of chemical synthesis skills. The absence of development costs together
with efficient production has enabled Indian companies to establish a solid position
in bulk drug manufacturing. But scale did not receive as much importance as it
should have, because the cost of Indian pharmaceutical companies was already low
owing to aforesaid reasons. Many Indian companies did not find the return on
investment of world class plants compelling enough.
Post 2005: By 2011, drugs worth $60 billion will come off patent, presenting a huge
generic opportunity to Indian companies. But the competition in the generic market
will be brutal, resulting in thin margins. The cost of production will hold the key to
success in the generic market. The production cost in turn depends on scale. Indian
pharmaceutical companies need to build global scale to stand a chance in the generics
market.
PHARMACEUTICAL REGULATORY BODIES IN INDIA
National Pharmaceutical Pricing Authority (NPPA)-
NPPA is an organization of the Government of India which was established,
to fix/ revise the prices of controlled bulk drugs and formulations and to
enforce prices and availability of the medicines in the country, under the
Drugs (Prices Control) Order, 1995.
The organization is also entrusted with the task of recovering amounts
overcharged by manufacturers for the controlled drugs from the consumers.
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It also monitors the prices of decontrolled drugs in order to keep them at
reasonable levels.
Central Drugs Standard and Control Organization (CDSCO) -
CDSCO lays down standards and regulatory measures of drugs, cosmetics,
diagnostics and devices in the country. It regulates clinical trials and market
authorization of new drugs. It also publishes the Indian Pharmacopeia. The main
functions of the Central Drug Standard Control Organization (CDSCO) include
control of the quality of drugs imported into the country, co-ordination of the activities
of the State/UT drug control authorities, approval of new drugs proposed to be
imported or manufactured in the country, laying down of regulatory measures and
standards of drugs and acting as the Central Licensing Approving Authority in respect
of whole human blood, blood products, large volume parenterals , sera and vaccines.
The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port offices.
The four Central Drug Laboratories carry out tests of samples of specific classes of
drugs.
Department of Chemicals & Petrochemicals (DCP)
DCP is responsible for the policy, planning, development, and regulation of the
chemical, petrochemical, and pharmaceutical industries in India. This department
aims:
To provide impartial and prompt services to the public in matters relating
to chemical, pharmaceutical and petrochemical industries;
To take steps to speedily redressal of grievances received;
To formulate policies and initiate consultations with Industry associations
and to amend them whenever required.
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CHAPTER 3
PATENT
THE KEY FACET OF INDIAN
PHARMACEUTICAL INDUSTRY
WHAT IS A PATENT?
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Patent is a legal document granted by the government giving an inventor the
exclusive right to make, use and sell an invention for a specified period of time. It is
also available for significant improvements on previously invented articles. The
underlying idea behind granting patents is to encourage innovators to advance the
state of technology. According to the UN definition, a patent is a legally enforceable
right granted by countrys government to its inventor.
Patent Law represents one branch of a larger legal field known as intellectual
property rights. Patent Law centres on the concept of novelty and non-obvious
inventions. The invention must me legally useful. The imitators and all independent
devisors are prevented from using the invention for duration of patent.
BACKGROUND OF PHARMACEUTICAL INDUSTRY WITH RESPECT TO
PATENTS:
Indian Pharmaceutical industry is undergoing fast paced changes. The Indian
Generics market is witnessing rapid growth opening up immense opportunities for
firms. This is further triggered by the fact that generics worth over $40 billion are
going off patent in the coming few years which is close to 15% of the total
prescription market of the US. The Indian pharmaceutical companies have been
doing extremely well in developed markets such as US and Europe. The quality and
affordability of generic drugs have made India a virtual pharmacy to the world.
Nearly 70 percent of generic drugs manufactured in India are exported to other
developing countries. The expansion of AIDS treatment over the past few years has
been driven by the accessibility and affordability of generic ARVs (anti-retro viral
drugs) from India.
Pharmaceutical multinationals have maintained a low-key presence in Indian market
due to absence of product patents and rigid price controls. In the domestic market,
the share of Indian companies has steadily increased from around 20 per cent in 1970
to 70 percent now
The industry has thrived so far on reverse engineering skills exploiting the lack of
process patent in the country. This has resulted in the Indian pharmaceutical players
offering their products at some of the lowest prices in the world. The quality of the
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products is reflected in the fact that India has the highest number of manufacturing
plants approved by US FDA, which is next only to that in the US.
Patents Act 1970 in its original form does not differentiate between Process and
Product patents for medicines, food and chemicals. One of the important features of
the Act was that it did not provide product patents for the three mentioned industries.
These industrial sectors were covered by product patent only. In addition the Drug
Price control Order, 1970 put a cap on the maximum price that could be charged and
ensured that the life saving drugs are available at reasonable prices. The Act of 1970
safeguards the interests of the inventor and consumer in an even-handed manner. The
Act has been promulgated in keeping with the Socialistic Principles outlined in the
Directive Principles of State Policy.
Therefore with a regulatory system focused only on process patents, helped to
establish the foundation of a strong and highly competitive domestic pharmaceutical
industry which in the grip of a rigid price control framework transformed into a
world supplier of bulk drugs and medicines at affordable prices to common man in
India and the developing world.
PATENTING' INDEPENDENCE: 1972
The Indian Patents Act of 1972 granted independence to the Indian pharmaceutical
industry. There was nothing much that Cipla or any other Indian pharmaceutical
company could do before that.
The hands of all the Indian pharmaceutical companies were tied by the then patent law
that put the interest of foreign monopolies before the health of millions of suffering
Indians. April 20, 1972 was a red-letter day for India. It was the day when the Patents
Act (Act 39 of 1970) came into force, replacing the Indian Patents and Designs Act of
1911. The new Patents Act abolished product patents and allowed process patents for
seven years only.
Come to think of it, the rationale behind the patent amendment of 1972 was not very
different from the rationale behind the Independence movement. Our freedom-fighters
essentially fought for the right to decide what was best for our country rather than be
dictated to by foreign powers.
The Indian Patents Act of 1972 granted the pharmaceutical sector the right to produce
any drugs the country needed. It did away with the shackles imposed by monopoly. It
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refused to let multinational corporations (MNCs) wear the noble garb of intellectual
rights.
If IT professionals give a thought to the significance of this old law they can
easily imagine what could have been the plight of the Indian IT industry if Microsoft
and other software giants were to prevent any Indian from doing any developmental
work on their software platforms???
There are no two opinions on the view that the Amendment brought by the Act in
1972, played an important role in avoiding the health care catastrophe.
In 1971, MNCs had an over 70 per cent share of the Indian pharmaceutical industry.
In 2007, in a reversal of roles, Indian companies commanded 83 per cent. In 1971,
Alembic was the only Indian among the top 12 companies in the Indian
pharmaceutical market. In 2007, there are only three MNCs in the top-12 list.
Pharmaceutical business models are changing. The world is now discovering India as
a preferred place for clinical research. In more ways than one, the industry appears set
to keep up its growth and progress, but for the 2005 Act.
Now we shall see in the next section of the report what exactly does the Patent Act
2005 indicate and suggest.
PATENTS AMENDMENT ACT (2005)
The Patent Amendment Act 2005 passed by the Parliament in its budget session of
2005 brings the Indian Patent Act in full conformity with the intellectual property
system in all respects. The major amendments introduced in Sections 2 and 3 of the
India patent Act suggest:
An invention in order to be patentable, should:
(i) involve an inventive step capable of industrial application;
(ii) involve technical advances as compared to the existing knowledge or having
economic significance or both; and
(iii) not be obvious to a person skilled in art.
Section 3 outlines various situations where an invention (properly so called) can yet
be not patentable.
Section 3(d) of the Patents Act 1970 has been amended under the new Act to
prescribe a class of discovery which cannot be subject matter of patent under the
following clauses:
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WHAT IMPLICATIONS DOES TRIPS HAVE FOR INDIAN
PHARMACEUTICAL INDUSTRY?
If 1972 was motivated by national interest, 2005 was prompted by international
pressure, by an ill-perceived need to "belong" to the international community. The
Patents Act 1972 resurrected a flagging domestic pharmaceutical industry. This Act
had a much wider purpose; to help the Indian who had to fight TB, diabetes and a
multitude of diseases with affordable medicines.
Every country has its own specific need-based patent laws, which are national laws.
There is no harmonization in patent laws of different countries. Each country has to
decide for itself its own destiny.
Today we have a population of over 1,100 million. The diseases that used to worry us
the most are still around. There is the additional scourge of HIV/AIDS. Millions of
Indians need medicines. Most of them cannot afford to pay high prices.
Going by global experience, product patents that are now again enforced, can only
lead to monopolies and these, in turn, to high prices. Africa and the AIDS issue of
1990-2000 is a clear example.
India needs to build in enough safeguards even in our current patent law. Perhaps in
our haste to join WTO, we neglected many important issues.
A product patent system will make India dependent on the multinational companies
for technology and for permission to produce the patented drug. Exorbitant prices
will be charged and the Indian pharmaceutical industry will become subservient to
the MNCs. They will lose the position that they had gained in the wake of the Act of
1970.
The immediate and the most drastic effect that TRIPS compliance and introduction
of the new Act of 2005 will have will be with respect to the health sector in India.
The patients are the ultimate beneficiaries of the pharmaceutical research and
development. By denying product patents India will be able to encourage bulk
generic drug production at cheap prices.
However generics are not the only solution to counter the problem of access to
medicines. Generic production of drugs will not necessarily result in the innovation
of new and more effective drugs and by not acknowledging innovation India will run
the risk of not having access to future medicines which will in turn affect public
health.
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The actual problem lies in the fact that the product patents not only increase the cost
of the drugs and medicines, but that most of them fail to introduce research and
development in the neglected diseases. Hence while on one side the introduction of
product patents will help in development of new and more effective drugs, the
problem still remains that the research and development undertaken by the drug
manufactures evade the neglected diseases and the diseases which are region specific
such as medicines for malaria and tuberculosis which are found prevailing in
developing countries like India.
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A DEBATE ON PRODUCT PATENT AMENDMENT- NOVARTIS CASE.
Protestors marched in India against Novartis. WHY?
Nearly a quarter of a million people from 150 countries voiced concerns over the
negative impact of a legal challenge brought by Novartis that could have on access to
medicines in developing countries and had asked Novartis to drop the case. Had the
challenge been won by Novartis it would have been a major blow to production,
domestic use and exports of generics to the world. The drug at issue was a cancer
drug (Glivec) which Novartis sold at US$2500 per patient per month while generic
versions of Glivec in India only cost about US$175 per patient per month.
A court case brought by Swiss drugs giant Novartis in India could define how the
industry distributes discount medicine to the developing world while maintainingprofits.
Novartis moved the court on contesting that India's patent law could leave millions
without access to affordable drugs. Opponents accused the Basel-based firm of
squeezing the competition.
In 2005, the Indian government introduced patent protection for drugs for the first
time. But the law only protects completely new compounds that were invented after
1995, a deviation of the industry standard.
The Novartis leukaemia drug Gleevec (Glivec in some countries) fell foul of this
ruling as it was deemed to be a new form of an existing treatment that was developed
before the cut-off date.
This opened the door for generic pharmaceutical companies to copy the treatment,
which was earlier distributed free to thousands of patients in India, at a fraction of the
cost.
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A POSSIBLE SOLUTION TO THE PRODUCT PATENT ISSUE
The most practicable solution to the problem which at the same time allows for
TRIPs compliance would be granting of dual licenses. This would mean that the
patent would be partly product patent and after a reasonable time being given to the
inventor to make a reasonably large profit it would be converted to a process patent
whereby the patented drug can be manufactured by competing manufacturers using
an alternative process. This would solve the problem of excessive hike in prices and
would render the drugs more accessible to the millions suffering. Collaboration with
the MNCs on various fronts such as research and development, manufacturing and
marketing will help Indian Pharmaceutical companies make profitable
breakthroughs.
As far as Indias pharmaceutical industry is concerned, various options are possible
in the WTO regime. But ultimately, the path currently is followed by international
standards for patent protection moves inevitably toward a clash between public
health and intellectual property.
Stringent intellectual property protection for pharmaceuticals would only retard
public health initiatives in the coming years. Given the rapid evolution of the AIDS
crisis throughout the world, with more than 35 million cases alone in India, a twenty-
year term of market exclusivity for new treatments is not reasonable if we expect to
make real progress in containing the disease. It might well be appropriate for a
governing body to clearly define a list of essential medicines, such as antiretroviral
(ARV) agents, that would be subject to somewhat more relaxed patent protection
compared to other drugs.
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CHAPTER 4
PRICING OF DRUGS
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PRICING OF DRUGS- PRINCIPLES AND LAWS
The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to
ensure proper market conditions
turnover
market monopoly
market competition.
Under this, prices of 74 bulk drugs and their formulation are being controlled
representing approximately 20% of the pharmaceutical market. Bulk drugs, with a
turnover of over Rs40 million, are under the purview of the DPCO, excluding
those drugs with sufficient market competition. Sufficient market competition isdefined as the presence of at least five bulk producers and 10 formulations, with
no producer's market share exceeding 40 per cent. In case a single producer
controls about 90 per cent of the market for a drug, which has a turnover in the
range of Rs.10-40 million, the drug is considered to be under the purview of the
price order (ICRA, 2000).
Industrial licensing has been abolished for all drugs, formulations and drug
intermediates except for the five drugs which are reserved for public sector. Moreover,
price controls have been waived for a period of five years for drugs which have been
developed indigenously there is a price controls under DPCO, still a majority of drugs
in the market are not regulated and the price rise during this period is still considered
to be minimal. In short, while the DPCO has evolved in a step-by-step ad hoc fashion,
it has managed to strike a rough balance between regulating prices to ensure adequate
access to essential medicines for the rural and urban poor, while allowing the
emergence of a globally competitive Indian domestic drug industry. The new research
environment has added important new elements to the risk environment of
pharmaceutical research as a by-product of the dramatic exploration of entirely new
areas of application. Manufacturers that venture into new territory are less certain of
what they will find and less confident of what it will be worth when they find itthey
face new uncertainties over both supply and demand.
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I. HOW TO DETERMINE THE PRICE OF DRUGS?
As a developing country, India has much more limited fiscal and economic resources
alongside a much larger population of low-wage urban workers and small farmers. As
a result, establishing a European-style drug reimbursement scheme, even with a
combination of public and private financing, would require a vast expansion of public
subsidies by the Indian Government.
Although reference pricing is the most common international cost-containment tool,
adopting a European drug pricing system and referencing prices to foreign prices also
would have serious disadvantages in an Indian context. Even if Indian prices were
referenced to, the prices of most advanced drugs would still be prohibitively high and
likely well beyond the reach of the common man. While a European-style universal
health insurance system and a comprehensive public drug benefit could be used to
alleviate the burden on the common man through a public subsidy, it would impose a
massive long-term fiscal burden on the Indian Government. According to the OECD,
in 2003 per capita drug expenditures averaged $606 in France, $507 in Canada, $393
in Japan, $353 in Australia, $284 in the Czech Republic, and $225 in Poland.
Even if these costs were partially subsidized by the Indian Government or the states,
the cost would be prohibitive and would likely displace other vital government
programmes. On the other hand, if the prices of advanced drugs were referenced to
other developing countries, or domestic generic drug prices, such controls would keep
drug prices lower, but undermine the global competitiveness of India's world-class
pharmaceutical companies, and deter future private sector investments in advanced
biopharmaceutical discovery. In such a situation, research by Indian companies and
patenting activity of scientists would likely shift offshore, probably to the U.S. or to
the U.K.
II. WHY PRICES OF PATENTS AND GENERICS DIFFER?
If a government sets the same price for generic and patented medicines, consumers
naturally tend to choose the more advanced product, since it provides better value or
greater quality assurance. Accordingly, demand for unbranded generics in price
controlled markets tends to be artificially reduced.
It is universally acknowledged that drug discovery is an extremely expensive process;
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Given the high number of pharmaceutical firms in the informal/unorganized sector,
domestic and foreign drug companies in India also run a large risk that their patented
drugs will be pirated even with protected product patent system.
Price controls benefit health delivery in countries that have a well regulated public
health delivery system. Public health expenditures in Indian states continue to be low,
with a wide disparity in effectiveness of delivery between states. There is a large
private sector and unorganized access to medicines. In these circumstances, price
controls would lead to market distortions, excessive regulation and the development
of grey markets. High duties and transaction costs impose a heavy burden on the
consumerthere are examples where these distort prices enormously, against
imported drugs. A mindset that creates negativity towards imported drugs needs to be
changed.
III. WHY DOES INDIAN DRUG PRICING SYSTEM NEEDS TO BE
DIFFERENT FROM EUROPEAN STYLE AND OTHER DEVELOPING
COUNTRIES PRICING SYSTEM
The above analysis makes clear that India should develop a new approach that avoids
the costs of European-style drug price controls, while also avoiding the inequities of a
free market style.
The issue of drug availability is to ensure that-
the latest clinical treatment and drugs must be available
these should be accessible to the entire population
there should be incentives for development of new drugs through R&D that
would require adequate compensation for development costs.
India presents a unique situation. Absence of product patents for over three decades, a
large indigenous industry, coupled with political economy requirements of a welfare
state; require a balance between incentives and control. It is important that the latest
drugs and formulations are available, that they can be reached to all, whether in the
public health or the private health systems. It is equally important that there be an
environment for industry and research to grow, and that global firms are comfortable
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using the talent pool in India for R&D and drug discovery, assured of reasonable
returns.
Given wide income disparities, a range of public health and private care systems, and
freedom of choice, and the distortions likely to be caused by the price fixing for
patented products, it is important to consider creative solutions that would suit a
developing country like India. A possible alternative that could be adopted in India for
patented drugs is the adoption of a two tier price system.
For example, in some states like Tamil Nadu, drug purchases for public hospitals by
the government are negotiated with the companies. Each tablet carries a distinctive
mark and the strips are separately labelled to indicate that they are not for sale, but
part of the public health care system. The same drugs are available in the open market
at market prices. Such a twin pricing system has the advantage of delivering drugs at
low costs to the public health care system without distorting the market mechanism.
In the case of patented drugs it is conceivable that producers may be willing to accept
prices that are close to marginal costs of production plus fixed returns, if allowed to
access the market for pricing that covers development costs. In this approach, the
Department of Petrochemicals would finalize a list of patented drugs that it intends to
be used in the public health system. Using this approach, the producing companies
would be invited to convey the prices at which these drugs would be made available to
government hospitals and dispensaries. These would be distinctively packaged and
labelled and supplied to the health departments of the states against invoices raised by
them, and accepted terms of payment. Outside this, firms would be free to charge
market prices, and enjoy IP protection in full for their products.
Such an approach might offer a short term solution to drug access concerns, while
longer term structural reforms are explored. In the long-term, any solution to India's
drug access problem requires major structural reforms to the health care system. In
formulating such reforms, a balance must be struck between the markets for free sales
and government supplies. The government cannot supply the entire demand for drugs
unless it is prepared to commit to massive public subsidies and drastic price controls.
A fresh approach is needed.
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IV. CHALLENGES FACED BY THE GOVERNMENT TO DEVELOP A
NEW APPROACH TO PHARMACEUTICAL PRICING.
The Government has an overriding responsibility to ensure that the citizens of
India especially the common man -- have access to affordable medicines for
treating the most common and important disease conditions.
At the same time, any new policy must maintain a world-class Indian life
sciences capability. India is a world leader in the advanced life sciences. The
Indian pharmaceutical industry dominates global generics markets and has
begun making serious investments in innovative drug discovery. Given
adoption of the Product Patents Act and increasing competition from Chinese
generic companies in the international generics marketplace, the future of the
Indian biopharmaceutical industry rests on its ability to innovate. Thus, any
new policy must balance improved access to key medicines for the common
man with support for India's continued capability to discover and develop
advanced medicines, which represents a long-term national asset.
V. KEY FEATURES OF THE NEW PRICING APPROACH
Such a solution requires a two-track approach.
First, the government should strengthen the public health infrastructure to
ensure that rural and urban poor have universal access to treatments for basic
medical needs. Such a system should be built around government bulk
purchases of low-cost generic medicines. Also, instead of seeking to provide
the latest state-of-the-art treatments for the rural and urban poor, the focus
should be on the low-cost delivery of high-quality, essential care for all.
While patients in the public health system should be free to purchase more
expensive patented or branded drugs, this could be achieved through a
"balanced-billing" arrangement in which the government would subsidize
only the cost of the basic generic drug, with the remainder being contributed
by the patient. Such an approach would avoid the prohibitive cost of have the
Central or State governments subsidize state-of-the-art foreign medicines,
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allowing government funds to be allocated to an expansion of basic care to a
larger number of people.
A second way is that the government should aim to facilitate the continued
evolution of private health care markets, including private hospitals, private
insurance, and high-cost patented drugs. Creating a separate private market
would ensure that the cost of such advanced care would be borne by middle-
income household. This two-track system would avoid the bureaucraticcomplications and prohibitive cost of transferring a European-style
government health care system to a developing country like India.
VI. AN URGENT NEED FOR A THIRD WAY APPROACH
The "third way" would address the expanding needs of the Indian middle-class for
world-class health care, whilst creating a strong domestic home base for Indian
biopharmaceutical companies to launch their new innovative patented products. And it
would offer a new and creative third-way drug pricing model for developing countries
around the world, which look to India for continued leadership.
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CHAPTER 5
MERGERS AND
ACQUISITIONS IN THE
INDIAN PHARMACEUTICAL
INDUSTRY
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IMPACT OF MERGERS AND ACQUISITIONS ON INDIAN
PHARMACEUTICAL INDUSTRY
The healthcare sector in India has experienced a paradigm a shift due emerging
trends in globalization, developing markets, industry dynamics and increasing
regulatory and competitive pressures.
Companies across the world are reaching out to their counterparts to take mutual
advantage of the others core competencies in R&D, Manufacturing, Marketing and
the niche opportunities offered by the changing global pharmaceutical environment.
The pharmaceutical sector offers an array of growth opportunities. This sector has
always been dynamic in nature and the pace of change has never been as rapid as it is
now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology
companies have evolved distinctive business models to take advantage of their
inherent strengths and the "Borderless" nature of this sector. These differentiated
business models provide the pharmaceutical and biotechnology companies the
necessary competitive edge for consolidation and growth.
DRIVERS IN MERGERS AND ACQUISITIONS
Today, there is a global trend towards consolidation and going forward, as pressures
on the pharmaceutical industry increase, this trend will continue. The driving factors
for mergers and acquisitions in the global pharmaceutical industry are:-
The lack of research and development (R&D) productivity
expiring patents
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generic competition
high profile product recalls
This sector is unique in the sense that it traverses across geographies, as health
has no boundaries, and this very boundary-less nature supports consolidation inthis Industry. With the easy availability of capital and increased global interest in
the pharmaceutical and biotech industry, the sector has become quite a `mergers-
and-acquisitions' favourite.
Apart from the patented pharmaceutical and biotech companies scouting for newer
geographies to launch their patented molecules, the global generics market also has
undergone an unprecedented consolidation wave in the past three years. In 2007,
Teva acquired US generics major IVAX for $7.4 bn, to become the worlds largestgenerics company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz
is the generics arm of the Swiss pharmaceutical group.
Novartis, has been buying small generics companies to grow in size.
Sandoz bought Hexal and Eon Laboratories in Germany, as well as Croatias Lek,
Canadas Sabex and Denmarks Durascan in 2004 and 2005.
Deflation in the generic industry would lead to displacement of weaker players
leading to consolidation. The trend has gathered momentum with the $1.9bn buyout
of Andrx by Watson to create the 3rd largest specialty pharma company
There are three levels of integration that are currently being sought in the generics
industry
Back-end manufacturing capability (API/formulation)
Product integration (ANDA pipeline)
Front-end (marketing and distribution) in the developed world
The US and European generics companies are scouting for alliances/buyouts at the
back end of the chain, which would allow them to offset any manufacturing cost
advantage held by companies in the developing markets. The Indian companies are
looking at the front-end integration as building a front-end distribution set-up from
scratch could take significant time. The product side integration is common to both
sides, with weaker US/European generics companies looking at anyone that could
offer a basket of products. This is because the US/European pipeline is weak while
Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly,
and are looking for geographic expansion.
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MERGERS AND ACQUISITIONS TREND IN INDIA
Mergers and Acquisitions (M&A) interest in India is currently very high in the
pharmaceutical industry. Size and end-to-end connectivity are major detriments in the
global markets. To achieve them, Western MNCs have to look to Indian companies.
Indias changing therapeutic requirements and patent laws will provide new
opportunities for big pharmaceutical for launching their patented molecules. While,
Indias strong manufacturing base will stand global generic companies in good stead
as a low-cost development and manufacturing destination.
Besides consolidation in the domestic industry and investments by the US and
European firms, the spate of mergers and acquisitions by Indian companies has
ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning
curve through partnerships and alliances with international pharmaceutical firms,
Indian pharmaceutical companies have now moved up a step in the value chain and
are looking at inorganic route to growth through acquisitions. Many top and mid tier
Indian companies have gone on a global "shopping spree" to build up critical mass in
International markets. Also, given the easy access to global finance the Indian
companies are finding it easier to fund their acquisitions.
Incentives for Mergers and Acquisitions by Indian companies
Build critical mass in terms of marketing, manufacturing and research
infrastructure
Establish front end presence
Diversification into new areas: Tap other geographies / therapeutic segments /
customers to enhance product life cycle and build synergies for new products
Enhance product, technology and intellectual property portfolio
Catapulting market share
The Indian companies excel as far as the back end of the pharmaceutical value chain
is concerned i.e manufacturing APIs and formulations. Over the past few years the
Indian pharmaceutical companies have also stepped up their efforts in product
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development for the global generic market and this is visible with the DMF filings at
the US FDA. About 30% of the new DMF filings at the US FDA are being filed by
Indian companies. What the Indian companies are short of is the front-end
distribution and marketing infrastructure in the developed world. The current stress is
on bridging this gap through any / or all of the following strategies. The type of tactic
employed would depend on the companies existing capabilities, available resources,
nature and scale of expansion planned and on the targeted geographical market. The
following is a table of major mergers and acquisitions involving Indian companies.
Acquisitions are the quickest way to front end access. What is interesting is the fact
that apart from market access i.e marketing and distribution infrastructure, the
acquiring company also gets an established customer base as well as some amount of
product integration (the acquired entities generally have a basket of products) without
the accompanying regulatory hurdles.
There are also entry barriers for companies from the developing countries and
acquisitions make it easy for these organizations to find a foothold in the developed
markets.
Over the last two years, several Indian companies have targeted the developed
markets in their pursuit of growth, especially via the inorganic route. Companies such
as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one or more
European acquisitions, while others such as Torrent are also scouting for potential
targets.
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Arcolab Venezuela America
Mar-05 Uno-Cicle
Hormonal
Brand
Glenmark Establish brand presence in
Brazilian market
4.6 Brazil
Feb-05 Strides
Latina
Strides
Arcolab
Additional 12.5% stake to
establish presence in
Brazilian market
6 Brazil
Feb-05 Mchem
Pharma
Group
Matrix Lab Backward integration, ARV
mfg in China
NA China
Dec-04 Rhodia
Anathetic
Business
Nicholas
Piramal
International Product line 14
Jun-04 Psi
SupplyNV
Jubilant
Organsys
NA NA Belgium
May-04 Trigenesis
Therapeutics
Dr.Reddys
Labs
Niche Technology 11 US
May-04 Espama
Gmbh
Wockhardt Front end line in Germany 11 Germany
Apr-04 Laboratories
Klincer Do
Glenmark Entry in Brazil 5.2 Brazil
Dec-03 RPG Aventis
SA
Ranbaxy Front end in France 84 France
Jul-03 Alpharma
Saa
Cadila
healthcare
Front end in France 6.2 France
Jul-03 CP Pharma Wockhardt Front end and mfg in Europe 17.7 UK
MERGERS AND ACQUISITIONS- CHALLENGE
While growth via acquisitions is a sound idea in principle, there are challenges as
well, which relate mainly to the stretched valuations of acquisition targets and the
ability to turn them around within a reasonable period of time. The acquisitions of
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RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples
of acquisitions proving to be a drain on the companys profitability and return ratios
for several years post acquisition. In several other cases acquisitions by Indian
generic companies are small and have been primarily to expand geographical reach
while at the same time, shifting production from the acquired units to their cost-
effective Indian plants. A few have been to develop a bouquet of products. Other than
Wockhardts acquisition of CP Pharma and Esparma, it has taken at least three years
for the other global acquisitions to see break-even.
Most of the acquiring companies have to pay greater attention to post merger
integration as this is a key for success of an acquisition and Indian companies have to
wake up to this fact. Also, with the increasing spate of acquisitions, target valuations
have substantially increased making it harder for Indian companies to fund the
acquisition
I. ANALYSIS OF WOCKHARDTS ACQUISITION
Wockhardt is a global, pharmaceutical and biotechnology company that has grown by
leveraging two powerful trends in the world healthcare market - globalization and
biotechnology.
Acquisition Management
The company has a strong track record in acquisition management, with three
successful acquisitions in the European market and two in the domestic space.
The acquisitions in Europe and the subsequent integration of their operations have
strengthened Wockhardts position in the high-potential markets of UK and Germany,
and have expanded the global reach of the organization.
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The growth drivers for Wockhardts European business include exports, new product
launches, penetration in the European Union through mutual recognition, and
strategic acquisitions.
Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10
largest generics companies in UK and the second largest hospital generics
supplier.
The Company has a comprehensive, FDA-approved manufacturing facility for
injectables that plays a strategic role in driving the companys growth through
partnerships in contract manufacturing
Wockhardt UK has built up a critical mass in the segments of Retail Generics,
Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care
(denture cleaning tablets, powders and fixative creams)
The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic
entry point into Germany, the largest generics market in Europe
Esparma has a strong presence in the high-potential segments of urology,
neurology and diabetology, assisted by a dedicated sales & marketing
infrastructure
The key to Wockhardts successful acquisition management is the managements
ability to turnaround the acquired company in record time and thus create value out
of the acquisition. The company believes in value buys that would have a tactical fit
with its core competencies and key strategic objectives. The acquisitions are mainly
driven by market access since Wockhardt has an extensive pipeline of generics and
biogenerics and needs a strategic front-end for the same. The company has plans for
further acquisitions in the developed markets of Europe and US to further consolidate
and strengthen their positions in these geographies.
II. IMPLICATIONS OF THE MERGER OF RANBAXY AND DAIICHI
We will study the implications of the merger between Ranbaxy and Daiichi Sankyo,
from an intellectual property as well as a market point of view.
Why did Ranbaxy go in for a merger with Daichii?
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Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy
Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to
operate as Daiichi Sankyos subsidiary but was managed independently.
The main benefit for Daiichi Sankyo from the merger was Ranbaxys low-cost
manufacturing infrastructure and supply chain strengths. Ranbaxy gained access to
Daiichi Sankyos research and development expertise to advance its branded drugs
business. Daiichi Sankyos strength in proprietary medicine complemented Ranbaxys
leadership in the generics segment and both companies acquired a broader product
base, therapeutic focus areas and well distributed risks. Ranbaxy is now functioning as
a low-cost manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a
smoother access to and a strong foothold in the Japanese drug market. The immediate
benefit for Ranbaxy was that the deal freed up its debt and imparted more flexibility
to its growth plans. Most importantly, Ranbaxys addition is said to elevate Daiichi
Sankyos position from 22 to 15 by market capitalization in the global pharmaceutical
market.
Synergies
The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their
respective presence in the developed and emerging markets. While Ranbaxys
strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the
potential of the generics business, Ranbaxys branded drug development initiatives for
the developed markets will be significantly boosted through the relationship.
To a large extent, Daiichi Sankyo will be able to reduce its reliance on only branded
drugs and margin risks in mature markets and benefit from Ranbaxys strengths in
generics to introduce generic versions of patent expired drugs, particularly in the
Japanese market.
Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and
have profound strength in striking lucrative alliances with other pharmaceutical
companies. Despite these strengths, the companies have a set of pain points that can
pose a hindrance to the merger being successful or the desired synergies being
realized.
With R&D perhaps playing the most important role in the success of these two
players, it is imperative to explore the intellectual property portfolio and the gaps that
exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by
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CHAPTER 6
FRAMEWORK OF
ANALYSIS
(A)QUALITATIVE ANALYSIS
(B)QUANTITATIVE ANALYSIS
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SWOT ANALYSIS OF INDIAN PHARMACEUTICAL INDUSTRY
The SWOT analysis of the industry reveals the position of the Indian pharmaceutical
industry in respect to its internal and external environment.
STRENGTHS-
1. India with a population of over a billion is a largely untapped market. In fact
the penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the
same for countries like Brazil is US$ 453 and Malaysia US$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 a very low contribution in the Indian markets.
3. Indian manufacturers are one of the lowest cost producers of drugs in the
world. With a scalable labour force, Indian manufactures can produce drugs at
40% to 50% of the cost to the rest of the world. In some cases, this cost is as
low as 90%.
4. The fact that despite the low level of unit labour costs India boasts a highly
skilled workforce has enabled the country's pharmaceutical industry at a
relatively early stage to offer quality products at competitive prices. Each year,
roughly 115,000 chemists graduate from Indian universities with a masters
degree and roughly 12,000 with a PhD.4 The corresponding figures for Germany
just fewer than 3,000 and 1,500, respectively are considerably lower. After
many chemists from India migrated to foreign countries over the last few years,
they now consider their chances of employment in India to have improved. As a
result, a smaller number is expected to go abroad in the coming years; some may
even return.
5. Indian pharmaceutical industry possesses excellent chemistry and process
reengineering skills. This adds to the competitive advantage of the Indian
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companies. The strength in chemistry skill helps Indian companies to develop
processes, which are cost effective.
WEAKNESS-
1. 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 Pharmaceutical 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.
2. Indian pharmaceutical sector has been marred by lack of product patent, which
prevents global pharmaceutical 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.
3. Indian pharma 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% of the world population while the total size of industry is just 1% of the
global pharma industry.
4. 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 compet