final pharma report_2010

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Indian Pharmaceutical Industry

ReportSubmitted on: September 04, 2010

Submitted By:

PGP/14/270 Chhavi Anand

PGP/14/277 Kritika Gupta

PGP/14/286 Pooja Gandhi

PGP/14/289 Preetha Subramanian


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IndianPharmaceuticalIndustry|9/4/2010

Indian Pharmaceutical Industry

ContentsEXECUTIVE SUMMARY......................................................................................................... 3

GLOBAL SCENARIO OF PHARMACEUTICAL INDUSTRY.......................................................... 4

HIGH SALES GROWTH ...................................................................................................... 4

STRONG EMPHASIS ON R&D............................................................................................. 5

GEOGRAPHICAL PERFORMANCE OF THE GLOBAL PHARMACEUTICAL INDUSTRY............... 5

INDIAN SCENARIO................................................................................................................ 7

CHANGING DISEASE PATTERNS........................................................................................ 8

INSURANCE SECTOR ......................................................................................................... 8

EMERGING MARKETS......................................................................................................... 10

KEY SEGMENTS OF INDIAN PHARMACEUTICAL INDUSTRY .................................................. 11

GENERIC DRUGS: ........................................................................................................... 11

CRAMS ......................................................................................................................... 11

VACCINES ...................................................................................................................... 12

API MARKET .................................................................................................................. 12

THE OTC MARKET ......................................................................................................... 13

BIOSIMILARS .................................................................................................................. 14

REGULATORY LAWS AND POLICIES AFFECTING THE PHARMACEUTICAL INDUSTRY............ 16

REGULATORY FRAMEWORK OF INDIA ................................................................................ 17

OVERVIEW ..................................................................................................................... 17

THE DRUGS PRICE CONTROL ORDER (DPCO),1995 ...................................................... 17

PRICING REGULATIONS .................................................................................................. 17

POST-2005PERIOD......................................................................................................... 18

TARIFF STRUCTURE........................................................................................................ 18

SALES TAX ..................................................................................................................... 18OTHER POLICIES AFFECTING PHARMACEUTICAL SECTOR ............................................... 18

DRUG REGULATORY ENVIRONMENT IN INDIA IN TRANSITION ......................................... 19

EXISTING DRUG REGULATORY SYSTEM....................................................................... 19

PROPOSED NEW SYSTEM ............................................................................................. 19

CDAINDIAS NEW DRUG REGULATOR ......................................................................... 20

KEY PLAYERS IN THE INDIAN PHARMACEUTICAL INDUSTRY ............................................. 21


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KEY TRENDS...................................................................................................................... 25

CHANGING GROWTH FUNDAMENTALS OF DOMESTIC MARKET ........................................ 25

EXPANSION OF PRIVATE SECTOR HEALTHCARE DRIVING ACCESSIBILITY .................... 25

INCREASING PENETRATION OF MEDICAL INSURANCE .................................................. 26

RISING DISPOSABLE INCOME TO DRIVE DRUG CONSUMPTION.......................................... 26

FOCUS OF INDIAN COMPANIES SHIFTING FROM THE US .................................................. 26INCREASING QUEST FOR NEW CHEMICAL ENTITIES (NCE) ............................................ 26

BIG PHARMA COMPANIES JOIN OUTSOURCING QUEUE ..................................................... 27

INNOVATORS- JOINING HANDS WITH GENERIC COMPANIES ............................................. 27

KEY CONCERNS ................................................................................................................. 29

PRICING PRESSUREINTERRUPTING THE GROWTH OF KEY ECONOMIES.......................... 29

SWOTANALYSIS .............................................................................................................. 30

PORTERS FIVE FORCE ANALYSIS ....................................................................................... 31

REFERENCES ...................................................................................................................... 32


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Executive Summary

There has been a quantum leap in the global pharmaceutical sector in the last ten years. A similar trend

has been observed in the Indian pharmaceutical sector as well. The Indian pharmaceutical industry is

the 3rd largest in the world in terms of volume and 14th in terms of value. An especially important

indicator of its growth is that the industry is expected to double in the next two years. The mountingageing population, increase in income and a significant demographic shift are expected to be the

driving factors for the growth of this sector in the coming decade and making its presence felt

globally.

The Indian generic players are making their presence felt across regulated and semi regulated market

through merger & acquisition, alliances and agreement with big pharmaceutical MNCs. Shift from

process patenting to product patenting regime offers huge opportunity for the pharmaceutical MNCs as

it will not only position India as an important market to launch their block buster drugs, but also as a

strategic destination for conducting clinical trials. The alliance and partnerships model will help Indian

companies to foray into new markets and geographies as it would help them to capitalize on the on thelatter companys knowledge as well as understanding of the local market and technical know-how.

The increasing cost dried up research pipelines and increasing pricing pressures have led the

companies to outsource the R&D activities. The increasing outsourcing in the pharmaceutical industry

has led the Indian players focus on outsourcing opportunities from their international counterparts.


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Global Scenario of Pharmaceutical Industry

With a Compound Annual Growth Rate (CAGR) growing at almost 8% per year, the pharmaceutical

industry is one of the fastest growing industries in the global marketplace. If the CAGR continues to

grow at this pace, the global pharmaceutical market is expected to reach upwards to 1045 Billion in

2012. The growth is credited to previously untapped markets, the Asia Pacific market like India andChina, as being one of the most lucrative pharmaceutical markets of the future, as also the recent

growth in Latin American markets, such as Mexico and Brazil, as being key players in the

pharmaceutical industry, over the next 20 years. Many pharmaceutical consulting firms are suggesting

many other global trends that are factoring into this large boost in the pharmaceutical industry. Some

of these factors include growing market size, favorable government policies, expanding health

coverage, and new developments in drug developing technology, just to name a few

However, many life sciences consulting firms are pointing out, that as patents held to key drugs begin

to expire in the next ten years, it could hurt the growth of the North American pharmaceutical market.

Coupled with the growing prevalence of generic drugs all over the world, as well as dwindling drug

pipelines, and the development of less blockbuster drugs and less and less economic cooperation, these

factors may challenge the growth of the global marketplace in times to come.

The majority of the largest pharmaceutical companies are not diversified. They are either concentrated

exclusively on pharmaceutical products (Eli Lilly and AstraZeneca are good examples with virtually

100% of their revenues coming from sales of pharmaceutical products) or, although they develop and

manufacture other health care products, they still have pharmaceutical divisions as the core of their

business that provide more than 50% of their revenues. Other products manufactured by these

companies usually include medical devices, nutritional products, consumer healthcare products and

products for animal health.

Only two out of these 15 major pharmaceutical companies, Johnson & Johnson and Bayer have

revenues from sales of pharmaceutical products that are lower than 50% of their total sales.

Geographical headquarters of major pharmaceutical companies are approximately evenly distributed

between the U.S. and Western Europe with only one Asian company in the list.

High Sales Growth

According to IMS Health as restated in the 2004 AstraZeneca Annual Report, the United States, the

European Union and Japan comprise the three major pharmaceutical markets which together represent

88% of world sales; and the U.S. market alone accounts for about 47% of world sales. Not

surprisingly, all Big Pharma companies to a significant extent concentrate their resources on these

markets, especially on the U.S. market.At the same time, although the share of world pharmaceutical sales in developing countries at this

point of time is much lower, they show much faster growth rate than developed countries do. For

example, the China, 9th largest world market, showed a 26% sales increase in 2004, followed by

Thailand (16% growth) and Egypt (15%). Some Latin American countries, such as Mexico, Brazil,

Argentina and Venezuela also show much faster sales growth rate than average worldwide. Therefore,


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developing countries contain a significant potential for further expansion of pharmaceutical industry in

the future.

The pharmaceutical industry showed high sales growth rates in the recent past, and a number of factors

suggest that this trend will continue in the future.

Increased life expectancy:Advancements in science and technology, including those in the health care industry, life

expectancy in the developed countries has been steadily growing. As a result, growing

proportion of elderly people promises further growth of demand for healthcare products.

Access to healthcare:Moreover, according to various studies, a significant portion of elderly population does not

receive proper treatment. For example, even in the U.S., only about one third of the population

who requires medical therapy for high cholesterol is actually receiving adequate treatment. As

it is expected, the Medicare Prescription Drug Improvement and Modernization Act startingfrom the beginning of 2006 will increase access of senior citizens to the prescription drug

coverage, thus increasing pharmaceutical sales.

Growing EconomiesAlthough developing countries at the moment have a small portion of world pharmaceutical

sales, these countries also have a significant potential for the pharmaceutical industry in the

future. Fast growing economies in Asia, South America and Central & Eastern Europe suggest

an increasing solvency of population and make these markets more and more attractive for

Big Pharma companies. Further reforms of legislation systems in the countries of theseregions, especially regarding patent protection issues, will inevitably result in growing

pharmaceutical sales.

Strong emphasis on R&D

One of the distinctive characteristics of the Big Pharma companies is a very high level of

investments in research and development. On average, it takes about 10-15 years, and millions of

dollars to develop a new medicine. According to industry statistics, only about one in ten thousand

chemical compounds discovered by pharmaceutical industry researchers proves to be both medically

effective and safe enough to become an approved medicine, and about half of all new medicines fail in

the late stages of clinical trials. Not surprisingly, according to Research and Development in Industry:

2001 report of the National Science Foundation, in 2001 the pharmaceutical industry had one of the

highest R&D expenditures as percentage of net sales.

Geographical performance of the global Pharmaceutical Industry


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USA: The largest generic market and the most sought after target for Indian companies involved in the

generic business, is the US. As more companies gained the expertise to file for FDA approval, the

number of ANDAs approved increased dramatically. In 2005, the number increased to 52 and

subsequently increased year-on-year, to reach 132 in 2008. In 2009, the total number of ANDA

approvals was 125. In the first quarter of 2010, a further 20 were approved.

UK: Over 80% of prescriptions in the mature UK market are written generically. The UK has always

been a focus for Indian companies with 9 companies running 11 manufacturing sites. Between January

2009 and January 2010, Indian companies had more than 260 marketing authorisations approved by

the UKs Medicines and Healthcare Regulatory Agency (MHRA) for a wide range of products. During

this period, Ranbaxy received 55 approvals; Dr. Reddys received 54; Aurobindo received 39; and,

Lupin received 25.

Europe: Beyond the UK and Germany, significant European markets have been slow to adopt a

vigorous generics drugs policy. However, pressure on governments to cut costs in the face of

burgeoning drugs bills and economic recession, are seeing countries such as France, Italy and Spainexploring the increased use of generics. A number of Indian companies are either monitoring them

from the sidelines or have already identified growth potential; Ranbaxy, for example is established in

France, Germany, Italy and Spain.

Source: ICRA Report, February 2010


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Indian Scenario

The Indian pharmaceutical industry is the 3rd largest in the world in terms of volume and 14th in terms

of value. More significant is the fact that it is expected to grow by over 100% in next two yearsaccording to an IBEF report to become a USD 20 billion market by 2015.

The current industry CAGR is pegged at 13% driven by increasing expenditure of healthcare;

changing disease profile; rising disposable income levels and growing penetration of health insurance

besides regulatory reforms. New product introductions contribute to around 6-8% of the total growth,

with the rest being contributed by a combination of volume and price increase. Tier II cities (with

population less than 1 lakh) and rural areas currently account for 40% of the market, and are expected

to grow much faster than the rest of the country.

The organized sector consists of 250-300 companies, the top 10 companies of which control about

30% of the market and the rest control 70% of the market.However, the total sector is estimated atnearly 20,000 businesses, some of which are extremely small. There are over 20,000 pharmaceutical

firms, 60,000 distributors and 700,000 to 800,000 retailers involved. Approximately 75 percent of

India's demand for medicines is met by local manufacturing. However, the leading players continue to

retain their market share owing to their strong distribution reach, strong field force and new product

launches. While the domestic branded formulations business continues to offer high gross margin,

many of the innovator companies are now aggressively targeting this segment, which is likely to

increase the competitive pressures.

The profitability indicators of leading formulations companies have remained fairly stable over the

past six quarters except for marginal fluctuation during October-March 2009, which was largely on

account of spike in input material prices and foreign currency fluctuations during the same period. Inspite of competition, profitability in the domestic branded business remains healthy supported by new

product launches; investments on branding; increasing presence in chronic segments and above all an

efficient operating cost structure.


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Changing Disease Patterns

Its also likely that India will require different types of drugs in the future. Like almost every other

emerging economy, India is experiencing epidemiological changes. Amongst therapeutic areas,

chronic segments such as anti-diabetics, CVS, CNS and oncology have been growing at fairly strong

rates owing to changing lifestyle patterns and have been the key drivers of growth. Thanks to greateraffluence and better hygiene, the population is ageing; by 2028, an estimated 199 million Indians will

be 60 or older, up from about 91 million in 2008. Besides that, it has the largest pool of diabetic

patients, for example, with more than 41 million people suffering from the disease. The pattern of

demand for medicines is shifting accordingly. In 2001, anti-infective and gastrointestinal drugs and

vitamins accounted for 50% of the domestic market. By 2012, they are expected to account for just

36%. Conversely, drugs for cardio-vascular problems, disorders of the central nervous system and

other chronic diseases will account for 64% of total sales, up from 50% in 2001.

Insurance Sector

India currently spends 4.5 to 5.0 percent of its GDP on health care, but public spending accounts for

just 0.9 percent, putting the nation among the 20 lowest-spending countries worldwide. The balance

of spending is also iniquitous; while the poorest 20 percent of the population has double the mortality


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rates, malnutrition and fertility of the richest quintile, the latter group receives about three rupees for

every one rupee spent on the former. Two-thirds of what the government spends on health care goes to

secondary and tertiary care rather than basic services. Ninety-four percent of all private health

spending is out of pocket, mostly at the time of the incident, and more than 40 percent of hospitalized

people borrow money or sell assets in order to cover their expenses. The remaining 6 percent ofspending is provided by insurance -3.7 percent social, 1.6 percent employer-sponsored and 0.7 percent

private insurance. Just 15 percent of the population has some form of insurance; an estimated

800,000,000 people in India have none. The health insurance market was opened up to the private

sector in 2000 and, since then, growth has been fast. A 40 percent compound annual growth rate

(CAGR) is forecast for the health insurance sector over the coming years, making it a significant

driver of the domestic pharmaceutical industry.


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Emerging Markets

Brazil: Brazil is perhaps the most notable emerging generic market in recent years. According to the

Brazilian generic industry association, Pr-Genricos, prices of generic medicines have to be at least35% cheaper than prices of original medicines but, in practice, they are up to 50% cheaper. In 2009,

generic medicines represented 19.4% of the pharmacy sector by volume, increasing 19.0% over the

previous year to 330.0 million units. In value terms, pharmacy sales of generic medicines increased by

24.0% to R$4.5 billion (US$2.2 billion). Indian companies have been present in the Brazilian market

for several years. In 2008, Indian pharmaceutical exports to Brazil were valued at around US$166

million per year and made up a significant part of all trade between India and Latin America.

Australia: Due to low prices of branded products, Australia is not yet a major market for generics. A

number of leading drugs are due to lose patent protection, but price competition tends to be muted for

off-patent drugs. The government is, however, currently looking at ways to boost generic consumption

in an effort to rein in the overall drugs bill. The market is beginning to attract Indian companies, a

number of which have gained approval from the Therapeutic Goods Administration for their

manufacturing facilities and a range of products.


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Key segments of Indian pharmaceutical industry

Generic Drugs:

The Indian pharmaceutical industry is a leading producer of high quality, low cost generic drugs. India

now produces more than 20% of the worlds generics and has a significant market share in the US$80

billion world Generic market and is expected to increase it to 50% by 2010. After the recession,

demand for generic drugs has significantly soared due to the low cost factor. The generic drugs market

in India is projected to grow at a CAGR of around 16.3% during FY 2011-FY 2013.

India is conveniently placed, with the advantage of cost competitiveness, ability and experience in

reverse engineering, availability of skilled scientific and engineering personnel and the capability to

produce raw materials for a wide range of drugs from the basic stage. Moreover, around US$70 billion

worth of drugs are expected to go off patent in the US over the next three years, and India is well-

positioned to take a substantial share of the resulting new generics markets.India tops the world in exporting generic medicines worth US$ 11 billion and currently the Indian

pharmaceutical industry is one of the worlds largest and most developed. The European and African

countries have been added as new destinations for exports. The US and East Asian countries will

remain a vital importing destinations for Indian generic products. In future, the exports are expected to

pick up pace as healthcare reform in the US and other countries will inflate demand for generic drugs.

Indias generic houses are now entering into strategic alliances with global pharmaceutical companies

to strengthen their generic portfolio and jointly market these drugs globally. Mr. Anand Sharma,

Union Minister of Commerce and Industry and Lim Hng Kiang, Minister for Trade and Industry,

Singapore, have signed a 'Special Scheme for Registration of Generic Medicinal Products from India'

in May 2010, which seeks to fast-track the registration process for Indian generic medicines in

Singapore.

CRAMs

India is a major destination for contract research and manufacturing services, owing to its low costs,

(as drug development and manufacturing can be done in India at 40% of the expenses in the US and

Europe) skilled manpower and manufacturing capability, with a number of USFDA-approved plants

operating in the country. API manufacturing, clinical research and basic research are the major

facilities currently offered by domestic service providers. The pharmaceutical outsourcing in India is

expected to grow to around US$7 billion by 2013, as global firms seek to leverage advantages relatedto cost and quality the country possess. The MNC pharmaceutical and biotech companies spend

significant portion of their R&D budgets on the outsourcing services offered by CRO (Contract

Research Organization) industry, which was approximately $ 15 billion in 2007 and is expected to

grow at 15% over the next few years to touch US$20 billion by 2010.

Crams is the fast growing segment in Indian pharmaceutical sector. During 2004-08 the segment has

grown at a remarkable rate of 39%. The growth in this sector is mainly due to the acquisitions and


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global outsourcing. Indian Crams segment is divided into contract research and contract

manufacturing. Globally, the outsourcing trends are expected to grow further with the contract

manufacturing market size at US$ 45 billion (US$ 29 billion from Dosage Forms and US$ 16 billion

from APIs) whereas the

Contract research market size is estimated to be at ~ US$ 38 billion (US$ 11 billion from Drug

Discovery and US$ 27 billion from Clinical Research).

Vaccines

Vaccines are another prominent area of growth. India is one of the largest vaccine producers in the

world, with many new vaccines set to be launched in the next five years. The vaccines segment was

around US$780 million in March 2008, growing at a compounded annual growth rate (CAGR) of

15%. India currently exports vaccines to about 150 countries. It also meets around 40-70% of the

World Health Organization (WHO) demand for the DPT and the BCG vaccine and almost 90% of its

demand for the measles vaccine. The Serum Institute of India is a leading player which produces and

supplies low-cost, lifesaving vaccines for children and adults.

API mark et

India plays an important part in the global API market as it ranks fourth in the world in terms of API

output. The API output value of India was $4.1 billion in 2007 and the sector is set to grow at a CAGR

of 24.07 per cent from 2008 to 2020. The API industry in India meets around 70 per cent of the

country's demand for bulk drugs, drug intermediates & chemicals and is registering a growth of around

18-19 per cent annually.

India currently has about 3,000 API factories and 5,000 reagent factories. The key API producers

include Ranbaxy, Dr Reddys, Cipla, Cadila Healthcare and Matrix. These companies produce more

than 400 types of APIs and around 10,000 types of reagents, satisfying over 90 percent of Indian

domestic demand. Pharmaceutical companies such as Dr Reddys, Wockhardt and Sun

Pharmaceuticals are also producing APIs. The API export of India will enjoy a rapid growth in the

coming years and will increase to $12.75 billion in 2012 from $3.75 billion in 2007.

Other Services (5%)

Contract research

(29%)

Contract

Manufacturing(66%)


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Several factors make India an attractive alternative for sourcing active ingredients. The low-cost

innovations and manufacturing coupled with skilled manpower and cutting-edge R&D has helped in

the growth of Indian API market. Moreover Indian firms are able to tackle complex synthesis in

relatively shorter periods with cost-efficiency. The factors that favor Indias pharmaceutical industry

in general include stability of supply, high quality of products and firm governmental policies.

The size of the pharmaceutical chemicals industry is estimated to be around Rs 35000 crore, of the

total Rs 78,000 crore Indian pharmaceutical industry turnover. Out of the total API business, around

Rs 18000 crore comes from exports.

Even though the API units are doing well, they are looking for assistance from the government in

terms of environmental protection norms. The manufacturing of intermediates requires large-scale

chemical activities which goes against the current environment norms. At present India relies on China

for almost 60 to 70 per cent of its intermediate needs despite the competition between the two

countries in API sector. India and China have to work closely for mutual benefits through partnershipsand collaborative approaches.

The OTC market

The global OTC market over the past eight years has grown rapidly and is expected to continue.

Globally, the Indian pharmaceutical industry ranks third in terms of volume and 14th in terms of

value. Currently, India ranks 11th in terms of the OTC market size globally. In 2009, the Indian OTC

market was estimated to be worth $1.8 billion with an annual growth rate of 18%.

Some pharmaceutical players with prominent OTC franchises include Johnson & Johnson and

GlaxoSmithKline, Pfizer and Merck & Co.

OTC or non-prescription medicines in India continue to grow faster than the global average of

approximately 5% despite being perceived as less effective than prescription drugs. This sustainable

growth is driven by strong socio-economic drivers, primary drivers being the historically low per

capita spend on OTC, the widespread prevalence of untreated common ailments, greater penetration of

OTC drugs in rural areas, increasing medical costs, rising consumer confidence in the ability of OTC

drugs to control common ailments and increased advertising by manufacturers. Indian consumers are

also placing more emphasis on prevention and wellness, which should contribute to continued

increases in sales of OTC vitamins and minerals. Profitable OTC drugs for some of Indias largestpharmaceutical companies include artificial sweeteners, emergency contraceptive pills and nutritional

supplements. The popularity of Ayurvedic therapies should also contribute to the sales of related OTC

formulations. Some of the leading OTC brands in India are registered as Ayurvedic Medicines

because of their plant-based natural active ingredients and there being no price controls on Ayurvedic

Medicines.


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Currently about half of OTC sales come from chemists, while grocery stores and general stores

account for over a third of the sales. Pharmaceutical companies are also targeting post offices to sell

OTC drugs in rural India. This move could substantially increase the access of OTC drugs, especially

in areas where there are no pharmacies.

OTC proprietary drugs are regulated by the Drugs and Cosmetics Act and the Drugs and Cosmetics

Rules. Only a few OTC active ingredients, e.g. acetylsalicylic acid and ephedrine and its salts, fall

under the current DPCO price control. Counterfeits of popular OTC drugs are however a major issue.

Indias regulatory framework permits advertising for OTC products, and consumers can buy them

without a doctors prescription.

Some global pharmaceutical companies are already launching OTC products in India or buying OTC

products. Novartis India launched Calcium Sandoz as an OTC supplement in 2000 and has now come

out with Otrivin nasal drops in a spray form. Pfizer has launched Listerine, Benadryl, Caladryl and

Benylin in India, which were later sold to Johnson and Johnson. In the future, India may also serve as

a manufacturing location for OTC products destined for other markets.

Biosimilars

The global pharmaceutical market is seeing rapid increase in penetration of biologic drugs. These

drugs accounted for more than 10% of the global pharmaceutical markets revenues in 2007, up from

almost nil a decade ago. The global biosimilars market is expected to be worth $19.4 billion by 2014,

growing at a CAGR of 89.1% from 2009 to 2014. The early commercialization and high absorption

rate of biosimilars products has made Asia the dominant market in 2008 occupying 34.1% share of the

global biosimilars product market.

In a short term, biosimilar market growth will be driven by drug classes including erythropoietin,filgrastim, human growth hormone (HGH) and insulin. Gradual expiry of patents will create

significant market opportunities for developers through to 2016. Between 2012-19, the market will see

a patent expiry of a whopping $60 billion of biotech drugs.

In India biosimilars spell big opportunities especially for companies like Dr Reddys Labs, Ranbaxy,

Biocon, Shantha Biotech and Intas Biopharmaceuticals, who are actively involved in the space. The


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Indian biosimilars market in 2008 was about $200 million, with an expectation to reach about $580

million by 2012.

The interest in biosimilars has been spurred on by multiple factors. Firstly, under the Trade Related

Intellectual Property Rights (TRIPS) agreement, pre-1995 product patents were exempted thus

granting some biologicals, the rights to continue manufacturing.

Secondly, biotechnology drugs (besides insulin) are free from the governments price control act,

allowing independence in price setting. Also there seem to be signs of acceptance of locally

manufactured biosimilars among healthcare professionals within the country.

The upcoming oncology market is one of the prime targeted areas for many companies. The current

size of the Indian oncology market is about $18.60 million, which is expected to be over about $50

million by the end of 2010.


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Regulatory Laws and policies affecting the Pharmaceutical industry

Regulatory Control of Pharmaceutical sector

Source: Adapted from Dun & Bradstreet (D&B) 2007

Major Pharmaceutical policiesDrug Policy 1986

Pharmaceutical Policy 2002National Pharmaceuticals policy

Quality

Control

IPR

Control

PriceControl

On prices On margin

Bulk Drugs Formulations

GMP Issues

GoverningPolicies

Amended

Patent Issues

Patent Act, 1970Product Patent,

2005

EssentialCommodities

Act,1955

Drugs andCosmetics Act, 1940

Schedule M


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Regulatory Framework of India

Overview

Over three decades ago, Indian government introduced price controls with the objective ofmaking medicines affordable.

India is a signatory to GATT and is committed to the implementation of TRIPS. The country introduced product patents from 2005 onwards. Introduction of product patents without relaxing price controls will hurt the

competitiveness of the Indian companies in the long term.

FDI limit through automatic route has been raised from 51 per cent to 74 per cent in March2000 and further to 100 per cent in May 2001.

A foreign pharmaceutical player can enter Indian market through following ways:

Importing Drugs In To India Imports constitute only 5 per cent of the total market. Foreign companies cannot promote subsidiaries for marketing their products in India. Entry through joint venture/subsidiary Foreign company is allowed to invest up to 100 per cent in any new or existing

pharmaceuticals company in India under automatic approval route. In such cases, RBI

needs to be informed only after the capital has been remitted into India.

The Drugs Price Control Order (DPCO), 1995 The order lists price controlled drugs, procedures for determining drug prices, method of

implementing prices fixed by Government and penalties for contravening provisions

among other things.

Now only 74 out of 500 commonly used bulk drugs are under statutory price control. Prices excluding local taxes of scheduled bulk drugs are fixed to provide a post tax return

of 14 per cent on net worth or a 22 percent return on capital employed.

Pricing Regulations

Price Approval is given by NPPA (National Pharmaceutical Pricing Authority).

NPPA fixes the ceiling price of scheduled drugs. Manufacturer must file a price list of all the prices fixed with the State Drug Controllers, dealers and Government along with NPPA official price notification reference. Packages of formulations (the outer container) must bear the retail price (whether fixed by

NPPA or not).


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Post-2005 Period

In 2005, India amended its patent laws to comply with the World Trade Organizations(WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS), an

international treaty mandating minimum standards for trade and intellectual property

protection. These amendments allowed, for the first time, patent protection in India for

pharmaceutical products. The earlier law provided patent protection only for the process ofmaking the drug, not for the drug itself.

January 1, 2000, companies were granted Exclusive Marketing Rights (EMRs) for theirproducts that have been patented in any other WTO signatory country.

Patents of outside companies will be protected through EMR in India. EMR will not begiven for items based on Indian system of medicine (Ayurvedic or Unani) or if the items

are already in the public domain.

Indian residents are permitted to apply for patent abroad without permission of theController.

Tariff Structure

Life-saving drugs are allowed at zero tariffs. Bulk drug, intermediaries and formulation imports attract a basic customs duty of per cent To encourage research, the excise duty on drugs and materials for clinical trials has been

exempt from excise duty, which had hitherto been levied at 16 per cent.

Basic customs tariff rate now ranges from 0 to 40 per cent plus additional duty of 2 percent.

Sales Tax

The rate of sales tax is same for both Indian and imported items. Sales and local taxes vary from 4 to 10 per cent of the price depending on item and location

Other Policies affecting Pharmaceutical sector

For licensable drugs and pharmaceuticals manufactured by recombinant DNA technologyand specific cell/tissue targeted formulations, FDI needs prior government approvals

The industry is undergoing consolidation due to recent legislation and policy updates: Manufacturing unit should adhere to good manufacturing practices (GMP) outlined in

Schedule M of the Drugs and Cosmetics Act Manufacturing units are required to comply with the WHO and international standards of

production

Source: India Pharmaceuticals and Healthcare Report Q2 2008, Business Monitor International


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Drug regulatory environment in India in transition

Existing drug regulatory system

India has a bifurcated drug regulatory system. Regulatory functions are divided between the Centre and state authorities Existing infrastructure at the Centre and the state is inadequate to perform the assigned

functions of drug administration with efficiency and speed.

Proposed new system

The Central Cabinet approved the formation of the Central Drug Authority (CDA) inJanuary 2007

Proposed organizational structure of the CDA would be analogous to the US FDA It would be a strong, well equipped, empowered, independent and professionally managed

body

It is expected to facilitate up-gradation of the national drugs regulator, uniformity oflicensing, and enforcement and improvement in drug regulations

Efficiency and efficacy of drug administration is expected to be much after this transition


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CDA Indias new drug regulator

Existing Proposed

Central Government

State Government

Drug Controller General ofIndia (expert committees)

Responsibilities:

Broad policy issues

State Drug Authorities(State drug controllers and foodand drug inspectors)

Responsibilities:

Licensing andmonitoringmanufacturing

Legal cell Spurious Drug

monitoring

Pharmacies

Central Drug Administration

Three joint drug controllers Two deputy drug controllers Six Assistant drug controllers 50 drug inspectors 5 technical experts 1 administrative officer 1 accounts officer

Responsibilities:

Regulatory affairs andenvironment New drugs and clinical trials Biological and

biotechnological products

Medical devices anddiagnostics

Imports Organizational services Training and empowerment Quality control affairs Legal and consumer affairs


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Key Players in the Indian Pharmaceutical Industry

Competition is mainly from the domestic manufacturers and imports from China because of the low

manufacturing cost. With the new patent regulations the industry expects to see a major structural shift

with the entry of foreign pharmaceutical manufacturers. There are five government-owned companies

the Indian public sector. These companies are the Indian Drugs and Pharmaceuticals, HindustanAntibiotics Limited, Bengal Chemicals and Pharmaceuticals Limited, Bengal Immunity Limited and

Smith Stanistreet Pharmaceuticals Limited. Some of the major Indian private companies are Alembic

Chemicals, Aurobindo Pharma, Biocon, Cadila Healthcare, Cipla, Dr. Reddys, IPCA Laboratories,

Jagsonpal Pharma, J.B. Chemicals, Kopran, Lupin Labs, Lyka Labs, Piramal Healthcare, Matrix

Laboratories, Orchid Chemical and Pharmaceuticals, Sun Pharmaceuticals, Ranbaxy Laboratories,

Torrent Pharma, TTK Healthcare, Unichem Labs, and Wockhardt. The foreign companies in India

include Abott India, Astra Zeneca India, Aventis Pharma India, Burrough-Wellcome,

GlaxosmithKline, Merck India, Novartis, Pfizer Limited, and Wyeth Ledele India.

Comprehensive analysis of some of these companies is tabulated below.

Company Name Ranbaxy

Company Profile Ranbaxy is among the top 100 pharmaceuticals in the world

and that it is the 15th fastest growing company. It is

consolidating its position to become the top 5 generics

producer in the World, with the purchase of French firm RGP

Aventis in 2003. It keeps a dedicated research facility staffed

with over 1100 scientists. They currently have two molecules

in Phase II trials and 3-5 in pre-clinical testing.

The Company is aggressively pursuing its internationalizationstrategy it has also gained market leadership in India,

leveraging its strong brand building skills.

Sales revenue/ Turnover Companys Global Sales were at USD 1,340 Million. Overseas

markets accounted for around 80% of global sales. The

Companys largest market, USA with the sales of USD 380

Million, while Europe and BRICS (Brazil, Russia, India,

China, South Africa) countries contributed USD 194 Million

and USD 477 Million to global sales

Future prospects By 2012, Ranbaxy hopes to be one of the top 5

generics producers in the world. The Company will

focus on increasing its momentum in the generics

business in its key markets of US, Europe, BRICS

and Japan through organic and inorganic routes.


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Company Name Dr. Reddys

Company Profile The company was Founded in 1984 with USD

160,000

Sales Revenue/Turnover Dr. Reddys is a vertically integrated, global

pharmaceutical company with proven research

capabilities and presence across the pharmaceutical valuechain. They manufacture Active Pharmaceutical Ingredients

(API) and Finished Dosage forms. In addition, the drug

discovery arm of the company conducts basic research in the

areas of diabetes, cardiovascular, inflammation and bacterial

infection. Dr. Reddys was the first Asia-Pacific

pharmaceutical outside of Japan and the sixth Indian company

to be listed on the New York Stock Exchange. 58 per cent of

Dr. Reddys revenues come fromgeneric drugs. Dr. Reddys

has long been a research-oriented firm. It had set up a New

Drug Development Research (NDDR) in 1993 and out-licensed its first compound just four years later. Dr. Reddys

has since out licensed two more molecules and currently has

three others in clinical trials. Revenues for fiscal 2007 were

USD 1.51 billion.

Future Prospects Open to brand acquisitions. Bulk prices havent bottomed out

as yet

Company Name Nicholas Piramal

Company Profile Nicholas Piramal started its existence with the 1988

acquisition of Nicholas Laboratories and grew through a series

of mergers, acquisitions and alliances. The company has

formed a name for itself in the field of custom manufacturing.

It cites its 1700-person global sales force as core strength. It is

well-poised for the challenge of surviving in the aftermath of

product patent protection. The company has respected

intellectual property rights since its inception.

Sales Revenue/Turnover The company grossing USD 350 million per year

Future Prospects Nicholas Piramal is well-poised for the challenge

of surviving in the aftermath of product patent protection. It

decided to make its own intellectual

property and opened a research facility inMumbai with hopes of launching its first drug in

2010 at a cost of USD 100,000.


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Company Name Cipla

Company Profile In 1935, The Chemical, Industrial & Pharmaceutical

Laboratories was set up, which came to be popularly known as

Cipla. It was officially opened on September 22, 1937 when

the first products were ready for the market. Today they have

31 world-class manufacturing facilities spread across thecountry, with dedicated plants for Oncology products,

Hormones, Inhalers, Carbapenems, and Cephlosporins, among

others. They more than meet the stringent international

standards, such as that of US FDA, MHRA-UK, TGA

Australia, Bfarm-Germany MCC-South Africa, WHO, TPD-

Canada. Cipla produces one of the widest range of products

and dosage forms in the world today, everything from

metered-dose inhalers, pre-filled syringes, trans-dermal spray

patches, lyophilized injections, nasal sprays, medical devices,

and thermolabile foams. Whether it is constantly extending ourproduct range or consistently introducing innovations, the

mission is always to make the life of the patient better.

Sales Revenue/ Turnover Revenue in 2004 totaled USD 552 million (using

Rs 43.472 = USD1) about 75 per cent of which

was derived in India.

Future Prospects Cipla started with a vision to build a healthy

India. And along the way realized, that in their

own small way, they could contribute to making the world a

healthier place. They will continue to

bring a smile on as many faces as they can to heal the world as

much as they can.

Company Name Biocon India

Company Profile Biocon India is incorporated as a joint venture between Biocon

Biochemicals Ltd. of Ireland and an Indian entrepreneur, Kiran

Mazumdar-Shaw in 1978. Biocon is Indias premier

biotechnology company. Headquartered in Bangalore Biocon

has evolved from an enzyme company to a fully integrated

biopharmaceutical enterprise, focused on healthcare. Biocon

strategically focuses its activities on its bio-pharma businessverticals that include APIs, biologicals and proprietary

molecules. Biocon Limited and its two subsidiary companies,

Syngene International Limited and Clinigene International

Limited form a fully integrated biotechnology enterprise

specializing in biopharmaceuticals, custom research and

clinical research.


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Sales Revenue/Turnover Total Revenues are Rs 9.9 billion.

Future Prospects Consistent with their long-term growth strategy,

Biocon remains committed to building biotherapeutics

franchise through their own R&D efforts. To further enhance

their IP and technology platforms, they have made an

investment of Rs. 764 million in R&D, which is a 76%

increase over the previous fiscal.

Turnover of some of the major companies has been graphically represented below.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Sales Turnover


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Key Trends

Changing growth fundamentals of domestic market

Expansion of private sector healthcare driving accessibility

Medical value travel has led to an investment spurt in the private healthcare services in thecountry

There has been accelerated investment from the private sector in healthcare facilities acrosstier-I and tier-II cities in the country

Estimated one million beds would be added by 2012 taking the total beds available in thecountry to over two million**

Estimated US$ 69.7 billion would be invested by private sector in healthcare infrastructureby 2012

Number of patients visiting Indian hospitals is expected to rise by 30 per cent to 22 millionby 2015

** Source: E&Y FICCI Healthcare Report


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Increasing penetration of medical insurance

Penetration of medical insurance would grow at a higher pace due to increasing influx offoreign players

Favorable regulatory changes such as permitting Foreign Direct Investment (FDI) of 51 percent in the stand-alone health insurance companies and setting the minimum capital

requirement at US$ 5.4 million would drive growth in this segment. Indian middle class with its increasing purchasing potential is expected to become a major

buyer segment

Increasing penetration of customized insurance plans would drive the affordability,influencing the consumption of medical and healthcare products

Rising disposable income to drive drug consumption

High purchasing potential of the burgeoningFocus of Indian companies shifting from the US

Pricing pressures and shrinking margins in the generics space and the increasing litigationinstances in the US are compelling Indian companies to consider opportunities beyond US

Indian companies have invested more than US$ 1.2 billion in the European markets

Increasing quest for New Chemical Entities (NCE)

Indian pharmaceutical companies striving to move up the value chain and make place forthemselves in the innovator league

Enhanced level of investment in R&D capabilities and infrastructure by the industry andthe Government

Dr. Reddys Laboratories NCE Balaglitazone is Indias the first indigenously developedmolecule to enter the Phase III trial.


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Growing R&D pipeline of Indian companies presents significant in-licensing opportunitiesfor global companies.

Big pharma companies join outsourcing queue

India emerging as a big global destination for contract manufacturing,unlike R&Doutsourcing. Some of the reasons why India is emerging as an inviting destination foroutsourcing drug production

Over 80 per cent of the 38 big and medium-sized pharma companies across the world ratedIndia higher than China, Eastern Europe, Puerto Rico, Singapore and Ireland.

Offers a significant cost-quality proposition in end-to-end research and development, withpotential savings of over 60 per cent as compared to the US, coupled with a strong supply

of skilled manpower and capital efficiency

Has close to 100 manufacturing facilities approved by the US Food and DrugAdministration (FDA), the largest after the US

Drug production outsourcing industry to grow over 43 per cent annually, thrice the globalgrowth rate

Diminishing numbers of new drugs, as against existing drugs going off-patent, highresearch and development costs, and pressure to reduce healthcare costs are forcing Big

Pharma to rope in strategic partners to contain manufacturing and drug development

expenses

Innovators- joining hands with generic companies

Over the last few years the global pharmaceutical industry has witnessed innovatorcompany entering into alliances with generic companies thus clearly signaling their plans

of venturing in the generic space.


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*Acquisition is yet to complete.A$ means Australia dollar.E- Estimated value.


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Key Concerns

Pricing pressure interrupting the growth of key economies

The main concern for the global generic market is the increased pricing pressure. The lowentry barrier of the segment has led to an increase in the number of players resulting in anincrease in the level of competition.

Generic pharmaceutical companies compete based on their comparatively low cost andtherefore do not mount sizable sales campaigns. Because these companies do not rely on

sales representatives, heavy advertising, and relationships with referral

sources (i.e., physicians), some of the most stringent compliance concerns in thepharmaceutical industry publicized over the past 10 years do not impact the generic

pharmaceutical companies to the same extent as their proprietary competitors.


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SWOT Analysis

Strengths- Low cost manpower in scienceand technology

- Non infringing process of AcivePharmaceutical ingredients (API)

- Increasing liberalization of

government policies- Excellent clinical trial centers

Weakness- Low investment in R & D

- Fragmentation of installedcapacities

- Low share of India in worldpharmaceutical industry

- Non availability of intermediariesfor bulk drugs

Opportunities

- Increasing income levels- Growing health awareness

- With globalization, exportpotential is increasing

- Large number of patent expiry

- New markets opening

Threats

- Strict registration process- Competition from other genericdrug manufacturers

- Non tariff barriers imposed bydeveloped countries

- Counterfeit drug industry


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Porters five force Analysis

Bargaining power of suppliers:

-- Numerous suppliers lead to lowswitching costs

--Volume benefits occur

-- Suppliers can go for forwardintegration

-- Raw material costs consist majorportion of total expenses

Threat of new entrants:

-- High number of domestic andinternational players in the market

-- Economies of scale exist

-- Advent of product patent regimesupportive for entry of pharmaceuticalMNCs

-- High degree of development costinvolved

Bargaining power of buyer

-- End consumers do not have muchbargaining power as practitioners act asgatekeepers

-- Buyers are less price sensitive

-- Highly fragmented market so buyerconcentration v/s industry is low

Threat of Substitutes

-- Biotechnology is a threat to syntheticpharma products

-- Generics are the biggest threats topropreitary drugs

-- Increased popularity of alternativemedicinal techniques poses a threat forthe OTC market

Competitors

-- Highly competitive industries with top 10companies controlling about 30 % of the Indianmarket

-- High fixed and exit costs add to the competition

-- Companies tend to establish facilities in lower laborcost areas, leading to increased competition

-- Major players are large multinationals with hugeworking capital


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References

http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/

Indian Pharmaceutical Industry- Worlds Destination !!, report by KRChoksey, 2009 Global Pharma looks to India: Prospects for growth, report by PWC 2010 Pharmaceuticals: The next big opportunity (biosimilars), report by IIFL 2010 India Pharma 2015-A Mckinsey Report http://www.kpmg.fi/Binary.aspx?Section=174&Item=2888 http://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdf http://www.ibef.org/industry/pharmaceuticals.aspx http://www.duke.edu/web/soc142/team2/segments.html http://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-

pharmaceutical-industry

http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/ http://www.economywatch.com/world-industries/pharmaceutical/ S&T Industry www.ibef.org www.pharmainfo.net
http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/http://www.kpmg.fi/Binary.aspx?Section=174&Item=2888http://www.kpmg.fi/Binary.aspx?Section=174&Item=2888http://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdfhttp://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdfhttp://www.ibef.org/industry/pharmaceuticals.aspxhttp://www.ibef.org/industry/pharmaceuticals.aspxhttp://www.duke.edu/web/soc142/team2/segments.htmlhttp://www.duke.edu/web/soc142/team2/segments.htmlhttp://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-pharmaceutical-industryhttp://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-pharmaceutical-industryhttp://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-pharmaceutical-industryhttp://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/http://www.economywatch.com/world-industries/pharmaceutical/http://www.economywatch.com/world-industries/pharmaceutical/http://www.ibef.org/http://www.ibef.org/http://www.pharmainfo.net/http://www.pharmainfo.net/http://www.pharmainfo.net/http://www.ibef.org/http://www.economywatch.com/world-industries/pharmaceutical/http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceutical-industry/http://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-pharmaceutical-industryhttp://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-the-pharmaceutical-industryhttp://www.duke.edu/web/soc142/team2/segments.htmlhttp://www.ibef.org/industry/pharmaceuticals.aspxhttp://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdfhttp://www.kpmg.fi/Binary.aspx?Section=174&Item=2888http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow-10-14-to-touch-40-billion-by-2015-mckinsey/

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