1

India’s Pharma Sector: Ready for a Closer Look

While India’s vast population still has far to develop as a profitable market for themultinational pharma industry, the country's burgeoning marketplace already offers

opportunities for foreign companies to build useful partnering relationships.

Introduction

Serving a population of over 1 billion people, India’s pharmaceutical market stands fourth in the worldin volume and 13

thin terms of domestic consumption value.

Limited appeal. Yet the multinational pharma industry has found India's appeal limited because of anumber of barriers:

Per capita spending on health care stands at just .7% of India’s GNP: about US$24 and US$3 onpharmaceuticals, which is anticipated to grow by 50% by 2009. Even as government pricecontrols are being phased out, they continue to pose an obstacle to profitability. Only 100 millionpeople among the growing middle class of an estimated 300 million are able to afford quality

private healthcare.

A combination of high regulation and taxation,along with limited government reimbursement andrestrictions on private insurance, prompted the exitor limited presence of most major global names inthe 1970s and 1980s. While some of thesechallenges have eased, the benefits of re-establishing or increasing their presence will notbe seen before the end of the decade, at aminimum.

The Indian pharma sector is very fragmented, including more than 40,000 brands produced by roughly

20,000 manufacturers. Finished imports comprisea minute part of the market, specialized areas likediabetes care. It is dominated by generics foracute therapies (anti-infectives, vaccines), withfew lifestyle-related drugs.

Building momentum. Still, India’s pharma sector is building momentum in terms of globalcompetitiveness and profitability, as foreign companies become increasingly confident about localcapabilities. This is the result of such factors as a growing biotechnology sector, the government’sreintroduction of a product patent regime and the highest number of FDA-certified manufacturingfacilities outside the United States.

One of the results is that India has begun to capture the imagination of the global venture capital (VC)community, notably, with an unprecedented spike in investment interest from this notoriously choosysector over the last two years. Industry estimates peg venture capital inflow into India at US$4.5billion over the next five years and of this only US$1 billion is expected to be invested in start-ups.Pharmaceutical R&D is expected to be one of the key focus areas for investments.

As conservative industry investors wait for the country’s huge potential market for drug sales to comecloser to reality--watching as the generic issue plays out and today's significant price controls arerelaxed--they are beginning to find other ways to take advantage of India’s pharma industry’s strengths

Health Insurance in India Less than 10% of the Indian population

is covered by health insurance.1

The Indian Medical Associationpromotes the use of medical savingsaccounts – Medisave.

1

Janaraogya Yojana is a governmentmedical insurance program that aims tocover about four million individuals,covering about US$141 (Rs5,000) perannum.

1

The Insurance Regulatory andDevelopment Authority Act of 1999allows for private, for-profit healthinsurance.

2

Sources: 1 WPM Outlook, January 2005; 2 IMS

Knowledge Link, 2004.

2

PerctageShare

COMPANY

TOP 10 Companies of Indian PharmaIndustry

2.37%Alkem

2.41%Dr.Reddy’s Labs

2.93%Pfizer

2.93%Avantis Pharma

3.47%Sun Pharma

3.89%Zydus Cadila

4.32%Nicholas Piramal

4.35%Ranbaxy

4.88%Cipla

6.59%GlaxoSmithKline

PerctageShare

COMPANY

TOP 10 Companies of Indian PharmaIndustry

in infrastructure, technology and production, while raising their own profiles locally. This includes aclimate conducive to a variety of relationships related to:

Sourcing, which take advantage of the country’s lower costs and FDA-approved facilities.

Partnerships, which utilize India’s R&D capabilities, including drug pipeline.

Clinical trials, which call on a skilled labor pool.

Market Overview

Ten pharma companies, including three multinationals (MNC) account for nearly 37% of the Indianmarket, which IMS Health estimated to be US$4.2 billion in 2003. Figures vary, however, and theindustry’s definition is not consistent across market surveys. One source estimated the market in2004 to be as high as US$8.2 billion, with a market growth at about 7%

1; however, pharmaceutical

executives indicate a much slower growth rate in 2005. More optimistic projections suggest themarket could grow to US$11.6 billion by 2009

2–an impressive prospect for the 10 MNC players that

account for 18.5% of the market.

Often referred to as a country of “branded generics”, India’s pharmaceutical market is undergoing agradual transition, making it more appealing for global investors.

Generics may dominate the current domestic market but branded products are increasing.Generics account for 70-80% of overall sales, but this is likely to change in the coming decade.

R&D is expanding. Indian pharmaceuticalcompanies have mobilized over US$1.3 billion in2004-2005 through a variety of financialinstruments—i.e. foreign currency convertiblebonds, global depository receipt shares—in order toconduct R&D, complete acquisitions, and fundexpansions.

The Government of India and the Department ofScience and Technology have said they willincrease the Pharmaceuticals Research andDevelopment Fund, which is currently insufficientfor the needs of the Indian pharma industry. Out ofthe proposed Rs 150 crore pharma R&D fund,Rs 80 crore will go to industry as loans, and Rs70 crore will be given to institutions as grants.

The Indian industry is increasingly focusedon the export market. The government hasliberalized regulations on outward investment. And Indian companies are now able to invest up toUS$100 million annually through an automatic route, an increase of 100%.

3Restrictions on joint

venture investments have also been eased. At present, the United States is the leading exportdestination (17%).

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Market Optimism About Change

While the sales environment in India is complex and has many pitfalls—for example, GlaxoSmithKlinehas contracts with roughly 8,000 wholesalers and sells to some 4,000 wholesalers at any given time in agiven month—foreign pharmaceutical companies are optimistic about the market potential in India forseveral reasons, although not all have yet proven their true value:

Regulatory restrictions on private insurance have eased,allowing for the entry of large multinational insurers.

Many of the leading insurers are already involved in the life insurance market in India, and areplanning to expand into health insurance over the next five-to-ten years. However, the government isonly likely to cover a small portion of prescription costs, and the patient will need to cover the majorityof costs out of pocket for the foreseeable future.

One of the remaining inhibitors to the growth of this sector is the foreign equity ownership restriction(26%). Extensive lobbying efforts by insurers are seeking an increase in that level to 49% (if not higher)in the near future.

According to Ranga Iyer of Wyeth Pharmaceuticals-India, “Once insurance comes in you’ll see thepharmaceutical markets growing at a much, much faster pace.”

Despite the widespread prevalence of generic versions of patented medicines,multinationals already see indications that branding campaigns

will drive growth in the Indian market.

For the most part, local generic drug manufacturers side-step branding and compete primarily on price. According toKali Subrana of GSK India, the country’s largest MNCpresence ($US1.3 bn), systematic price erosion in themarket because of competition between the Indiancompanies is dragging the market down.

The history of Wyeth’s ofloxacin in India is a prime example of what can happen to a drug when thebrand manufacturer foregoes the market, leaving the local market open to generic companies. While

successful on the global market, the molecule has failedmiserably in India, according to Iyer, because Wyeth neverlaunched it and, therefore, the generic companies fought a pricewar. Though the market grew to US$10 million at one point, itnow stands at US$4-5 million; the price is nearly one-fourth of itsoriginal price, which itself was one-tenth of the global price.

A potential handicap for multinationals’ efforts to execute asuccessful branding campaign in India is the lack of market data.Unlike the current prescription data available in Western markets,data is published only periodically and is not considered wholly

reliable. Though the situation is improving, marketing executives cannot expect to replicate bestpractices from Western markets.

Approximately 75% of pharmaceuticals go to the retail market through distributors and wholesalers,with the remaining 25% going to hospitals, health centers, and clinics. The procurement of drugs forstate institutions is the responsibility of the Ministry of Health’s Medical Stores Organization (MSO).,with distribution through small, locally strong wholesalers.

“Indian generic manufacturers are notout to build brands; they are out tobuild volumes.” –Ranga Iyer, Wyeth, August 2005.

A distinguishing characteristicof the Indian market is thatmuch of the time the salesapproach is driven by pricewith very little focus onpromotions. –Kali Sunbrana, GSK India,Interview, August 2005.

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The distribution system is seen as largely ineffective, remaining traditional, with little or no innovationsand modern medicines barely reaching 30% of the country's population. Pharmacists havetraditionally been very loyal to pharmaceutical marketers; as a result, strategic changes in distributionarrangements have been rarely recommended or carried out.

Policymakers are reviewing the traditional structure and operations of India’spharmacies, a move that could help simplify a highly complex network ofover 500,000 retailers. Concurrently, pharma companies are re-evaluating

their sales approach to focus, in some case, on educating fewer physicianson the merits of products that deserve to be marketed at a premium.

Distributors are increasing in scale andseeking to serve as preferred providers toretail chemists in some regions. India hasabout 60,000 distributors, the majority ofwhich generate US$1 million. to US$2million. in sales. International distributors are

increasing their presence in the market as well. Ranga Iyer of Wyeth, predicts that significantchanges in the distribution environment will take at least five years to come to fruition. In themeantime, the transportation infrastructure in India will pose operational challenges for manufacturersusing the system to ship to wholesalers and retail chemists.

Counterfeiting remains a problem in India, representing an estimated 15-20% of the market.4

Modified regulations that came into effect in 2005 are expected to usher ina “quality revolution” as the ability to manufacture to international standards

becomes an imperative. Mandatory compliance is expected to drive consolidationin the sector, as units that fail to comply will perforce shut down.

While the Department of Chemicals & Petrochemicals is the regulatory body with the ultimate controlover drugs in India, the country's FDA is responsible for quality control and the approval of formulations.Drug approval and registration of a new drug can take up to 18 months, with local Phase III clinical trialsusually required. (Trials conducted in government hospitals may double this period.) Fast-trackregistration is possible for innovative and life-saving drugs, with the regulatory authority given approval tomarket a drug before clinical trials, if it is already being marketed in another country.

In February 2005, the Drug Controller General of India (DCGI) issued a new notification on clinical trialsin the country (excluding Phase I) in the form of an amendment to Schedule Y of the Drugs and CosmeticRules. India will now be partaking in multicentric global clinical trials of drugs. This allows pharmacompanies to undertake simultaneous clinical trials in India and abroad.

On July 1, 2005, modified regulations to the Drugs and Cosmetics Act (1940) went into effect to ensurestandard quality of drugs manufactured in the country. These relate to control of pharmaceuticalproduction, involving licensing of manufacturing, storing locations and laying down of GoodManufacturing Practices, which were amended to provide a fillip to India’s growing globalcompetitiveness in pharmaceutical manufacturing.

(In 2004, documentation irregularities and the failure of contract research organizations (CRO) toadequately follow international Good Clinical Practices and Good Laboratory Practices guidelines hadcast enough doubt on the validity of bioequivalence data to cause the World Health Organization toremove two Indian-manufactured generic antiretrovirals from the market, and others to be removedvoluntarily. Some products were subsequently re-launched following further studies.

5)

“The government is getting much stricter with the oldretail chemists in terms of their structure, how they dobusiness, and how they stock the goods. I think that's avery promising sign.” – Kewal Handa, Pfizer-India

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These two changes will are expected to mean an end for about 3000 small scale pharma manufacturingunits, in addition to 1000 estimated to have already shut down. Over the short term, many of these unitswill become acquisition targets for larger domestic and foreign companies; medium-long term, there islikely to be better control of spurious drugs, upholding India’s quality reputation in the global supply chain.

Intellectual property rights protection has improved

When India joined the World Trade Organization (WTO) in 1995, the country was given a grace perioduntil 2005 for compliance with Trade-Related Aspects of Intellectual Property Rights (TRIPs) patentregulations.

India officially moved to a new patent regime in December, 2004 under an ordinance by the Indiangovernment. However, full details of the legislation were not formally introduced until February, 2005.

While the ordinance was intended to bring India’s patent laws in line with WTO obligations, with productpatents issued after 1995 to be honored under the new system, a lack of clarity in the ordinance andambiguity over the number of patent applications awaiting approval through the “mailbox” system has leftthe industry in a state of uncertainty over the input of the new patent regime. The future remainsuncertain for generic copies of internationally patented drugs that were approved prior to the granting ofpatent protection for the original.

To allay the concerns of the global pharmaceutical majors and to ensure that the India’s Patent Actadministers speedy justice to violated parties, the Government has proposed several measures toaddress issues relating to the procedural delays, existing backlog, trained human resources, etc.These range from proposals to set up specialized IP courts to comprehensive modernization of patentoffices in the country. The following table summarizes other efforts in this direction:

IP related developments in recent years

Clearance & Backlog

• Clearance of over 10,000 patent cases in 2002-03 vis-à-vis clearance of2,800 patent applications in 1999-2000

• Out of the pending 45,000 patent applications, preliminary scrutiny reportshave been issued for over 42,000 applications

Proposal to recruitadditional manpower

• 62 new patent examiners have been recruited• 181 patent examiners will be recruited

Operation Sunrise• The patent office has reviewed all the 2,000 applications received till

December 30, 2003, by the January 30, 2004 deadline.

Digitization• Over 70,000 patent records and 20,000 design records have been

digitized• Searchable database proposed to be put on the website

Although the multinational companies were not satisfied with every component of the Patent Act, theycontinue to work with the government to address ongoing concerns, including the compulsory licensingagreement provision of the law permitting the manufacture and export of generic versions of patentedproducts to certain countries, and provisions to deal with emergency situations.

In addition, the government is likely to modify the Drugs and Cosmetics Act and the Insecticides Act toprotect the confidentiality of data submitted to the government supporting the approval of new drugs andchemicals. The government is likely follow the Brazilian and Argentinean models of data protectionwithout offering market exclusivity.

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Most products already on the market will not be affected by the patent law; only products still in the R&Dpipeline will receive IP protection. Over the next two to three years, some of the steps that companiescan take to create a natural barrier and protect their IP include:

Establishing a comprehensive confidentiality/non-disclosure agreement that covers the IP ofboth parties for a length of time sufficient to cover the sensitive nature of information beingdisclosed.

Utilizing contracts (e.g. feasibility, development, and supply agreements) that clearly delineate IPownership.

Launching products in market segments where physicians are less inclined to choose generics. Selling products requiring sophisticated and resource-intensive manufacturing, such as insulin.

Strict price control are being moderated.

Pharmaceuticals in India are subject to strict price-control regulations. The government has made somemoves towards deregulation and reducing the number of drugs under tight price controls in its efforts foraccession to the WTO. However, the absence of effective and all-inclusive drug reimbursement hasimpeded this process. India operates price controls under the Drugs Price Control Order (DPCO),introduced in 1971, designed to keep the prices of 152 essential drugs low.

In February 2002, the government announced plans to slash the number of bulk drugs under pricecontrol by an estimated 50%, to some 38 drugs. The National Pharmaceutical Pricing Authority (NPPA)now has limited authority to fix, revise, and cut prices under the 1995 DPCO. Under this system, theprofits of pharmaceutical companies are also limited to 8–13% of pre-tax sales.

A proposed government policy aims to freeze prices for roughly 270 essential medicines through aweighted average-price. (Current prices are roughly 3% of those in the United States for the sameproducts.) Rather than freeze market prices, pharma companies would prefer to help increase access byselling drugs to government hospitals at one half the maximum permitted.

The tax environment has been improved in several ways.

India has taken steps to rationalize its tax structure since the economic liberalization efforts began inthe early 1990s. In the past, custom duties reached as high as 90-95% on pharmaceutical productsand income tax peaked as high as 90%.

Although the tax environment has become demonstrably friendlier formultinationals, it is far from ideal. For example, import duties on rawmaterials and intermediates are higher than finished products. Thegovernment is, however, addressing some of these issues.

“The government clearly recognizes the need to reduce the [tax] burden oncompanies,” according to Iyer of Wyeth.

Margin rate about 15-20% import duty.Effective rate ofapproximately 33% ofduty.

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Wyeth India was successful in building afacility in the state of Goa in a matter of 15months. Companies need to “understand theprocess and not get put off by the delays, bythe questions, by the attitude of some of thebureaucrats, be it the regulatory authoritiesor the income tax officials. In India,companies cannot expect the samepredictability as Western countries; in India,a process that should take six months maytake nine months. Companies cannot expectofficials to cut out the delays in thebureaucracy. But they can get the thingsdone in a clean and clear manner as long asthey have any necessary data and they areopen and ready to share with the officials.”

-- Kewal Handa, Pfizer, Interview, August2005.

The government’s plan to streamline the tax environment is to create one tax agency responsible formultiple taxes, for example income tax and excise and custom duty.

Certain Indian states are offering income tax and excise duty concessions to attract investment.Under the provision, profits derived from a business in that local are tax free for the first five years,

and are tax free to a lesser extent for thesubsequent five years. In addition, no excise dutypayment is paid by manufacturers.

The government provides tax benefits in the formof a weighted tax deduction on R&D expenses andhas accelerated depreciation rates for thepurchase of R&D-related equipment.Pharmaceutical companies can deduct 150% ofR&D expenses from taxable income.

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There is also no importation duty on clinical trialmaterial. The 2003-2004 government budgetextended the range of life-saving products thatqualify for a 5% concessional customs duty andexempted all drugs in the 0-5% customs dutybracket from excise duty.

Medicines bear a significant tax burden in India,averaging about 30-35% for most products. Taxes

include customs, excise, and Value Added Tax.

Value-added tax. In April, India transitioned to a value-added tax system. For the pharma industry,the average rate of sales tax was lowered from about 7.5% to about 4%.

Many pharmaceutical executives agree that in the long term, the VAT system will prove beneficial.But in the during the transition period, many companies were hurt because tax authorities wereunclear about stock held as of March 31, 2005, which was taxed at the higher rate. Manoush Kapadiaof GSK India explained that “from the middle of February onwards, the trades started de-stockingand, in fact, the first quarter was disastrous for the entire pharmaceutical industry. But we've beenable to ramp up sales; essentially it’s a timing issue, and back to business as usual.”

In fact, the pharmaceutical industry recovered in the June quarter, with a jump in domestic business andindustry sales increased by 19% to US$2.03 billion. Profitability during the quarter improved, withoperating margin increasing to 19.5% from 18.4%. Recovery of losses owing to VAT implementation wasthe major reason of an increased top line. Except for Ranbaxy, whose net profit declined by 47% (US$23.52 million) despite an 11% sales increase (US$307 million), almost all companies saw a growth inprofitability. (Source: August, 2005, Economic Times)

Business Models for Investment: Looking In and Looking Out

In order to take advantage of India’s high number of FDA-certified manufacturing facilities, manymultinationals are considering a business model consisting of third-party manufacturers.

8

Diabetes care is a key growth market in India, wherean estimated 40 million people have the disease.Roughly 500,000 patients currently receive insulintreatment. Both multinational and domesticmanufacturers are competing in this area.

Source: WPM Outlook, January 2005, p. 174.

82

11

7 15

0

23

4

71

56

47

39

33

31

27

0

50

100

150

200

250

0%

10%

20%

30%

40%

50%

60%

Investment in USD mn Grow th Rate

Indian Pharmaceutical R&D Spend

Source: Compiled by E&Y (OPPI & Pharmabiz)

Indian Pharmaceutical R&D Spend

Source: Compiled by E&Y (OPPI & Pharmabiz)

Pharmas have little incentive to build new manufacturing facilities; some that remained in the marketover the past two decades have decided to consolidate their manufacturing capacity and rely on thirdparties.

With third parties likely playing asignificant role in the MNC’sbusiness model in India, companiesare intent on developing localorganizations that span the valuechain.

For example, Merck, which began implementing its re-entry strategy into India in 2004, aims todevelop a model encompassing all key functions: manufacturing, R&D, information technology,finance, and sales and marketing. The company is addressing dual growth opportunities by initiatinga large-scale IT project and launching a series of new products, beginning with vaccines.

Indian Companies Seek Other MarketsAs Indian companies look externally for opportunities, there will be varied opportunities for foreignpharma companies to take advantage of local expertise.Globalization. There are roughly 3,000 small generics manufacturers in India and many are seekingto globalize as quickly as possible. They understand that they cannot depend on the local market forgrowth in the near-term because of many of the same reasons that global pharma finds theenvironment inhospitable: regulation, taxation and the low per-capita spending.Some of the largest Indian manufacturers are focused on selling generic and specialty drugs in theUnited States and Europe in order to generate revenue to support internal R&D efforts. Imports andexports of semi-finished and retail pharmaceuticals grew in excess of 30% in 2002.

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There are about 250 R&D-based pharmaceutical companies in India, including multinationals,government-owned and private entities. While R&D expenditures (as a% of sales) have increaseddramatically in the past five years, from 2% to 10%,

8those figures are still small in comparison to the

amounts invested by large multinational pharma companies. Wockhardt, the largest of the privatelyowned domestic companies generated US$2.4 bn in sales in 2004.

9While a global pharma and

biotech company, it is also taking advantage of the burgeoning market at home, through itsWockhardt Hospital & Heart Institute and Kidney Institute, tertiary care facilities performingangioplasties, catheterizations and related procedures.

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Market Consolidation. The Indian pharmaceutical sector is ripe for consolidation. The introduction ofproduct patents, the growing presence of multinational pharmaceutical companies, the larger numberof older, low-growth infectives in manufacturer portfolios and the ambitions of domestic big pharmawill fuel consolidation in the next 5-10 years.

Changes in the industry’s makeup are likely to occur after 2007. Those companies with skills incontract manufacturing or clinical research are likely to fare well.

In the future, Indian companies will likely fall into two or three major categories:

Major companies with generic and brand offerings and co-promotion deals.

Smaller entities that result as small- and medium-sized companies exit the market or mergewith equals.

The difficulty facing companies in this new environment is that many believe that other Indian companiesare overvalued. “They will hate to write a million dollar check to an Indian company, but they will do it verywillingly to a multinational,” Iyer of Wyeth, maintains.

Another possibility is that global generic companies will acquire available Indian manufacturers.

Alliances. Indian companies are not yet prepared to pursue a drug through its entire lifecycle—fromdiscovery through to patient treatment. According to one Indian venture capitalist, there are about 15viable new drug compounds in the pipelines of Indian manufacturers.

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Executives will therefore look to forge alliances with some of the large multinational pharmaceuticalcompanies, as well as the up-and-coming biotech companies. To date, Indian pharma companieshave entered into licensing deals only for early-stage compounds. They have also entered intocontract manufacturing agreements with foreign companies, as shown in the chart below.

Many In

Bulk DrugsBristol Myers SquibbBiocon

Boehringer Ingelheim

Penicillin-G Bulk DrugSynpac PharmaceuticalsKopran

CVS Products, Insulin & Anti-infective drugsEli LillySun Pharma

Cephalosporin and other injectablesApotexOrchid

AtenelolTillomed

Bulk DrugsMerckIPCA Labs

Eprosartan MesylateSolvay PharmaceuticalsDishman Pharma

Nizatidine (anti-ulcerant)IvaxWockhardt

Eye ProductsAdvanced Medical

Bulk & FormulationsAllerganNicholas Piramal

Cefuroxime Axetil, Lisinopril (Bulk)Apotex

CefiximeFujisawaLupin Labs

ProductMultinationalIndian Company

Contract manufacturing deals of select Indian pharmaceutical companies

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Shared Services. The global market for early stage drug discovery and chemical synthesis isestimated at roughly US$4 billion. Analysis conducted by the Bangalore-based biotech company,Biocon, and published in January 2004, indicated that India held a 0.7% share of that market.However, excluding clinical trial companies, the contract research industry in India was growing at 40-50% annually.

The business models of drug discovery and development industry in India takes two forms, includingthose that: conduct product-based research, and; develop the tools, analytics, and services needed toassist in drug discovery. In both categories, certain companies focus on target identification whileothers focus on lead identification and validation.

Multinational pharmas are also relying increasingly on the services of contract research organization.Those offering discovery and development services generally take on formulation and manufacturingscale up activities.

In many instances, multinationals are pursuing collaborative research agreements to for the discoveryphase, whereas contracts for custom synthesis, process chemistry and toxicology activities tend tofall under a third-party fee-for-service model. In the future, more multinational pharma companies maychoose to establish their own in-house R&D facilities as they become more confident in the newpatent regime. India offers limited good clinical practice investigators and certified central labs.

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Ownership and Financing. As previously mentioned, the Indian pharmaceutical has seen animpressive spike in VC spending during the past two years. The following table highlights some of thekey deals:

MAJOR HEALTHSCIENCES DEALS IN INDIA

No. Date Acquirer

Company

Target Company Transaction Type

(India's

Perpective)

Transaction Value (In

USD mn)

Sales of Target

Company (In USD Mn)

Sales Multiple

(Approx.)

FY 2005 - 06

1 Sept' 2005 ICICI Venture Ranbaxy's allied

business

Domesticacquisition

28.4 34.1 0.8

2 August,

2005

STRIDES

Arcolab Ltd

Un-named polish

pharma company

and Italy based

Beltapharm SpA

OutboundAcquisition

10.0 NA NA

3 July, 2005 Bilcare Limited ProClinical

Pharmacuetical

OutboundAcquisition

NA NA NA

4 July, 2005 Jubilant

Organosys

Trinity Laboratories

Inc

OutboundAcquisition

24.7 NA NA

5 June, 2005 Torrent Pharma Heumann Pharma

Generics, Germany

OutboundAcquisition

NA NA NA

6 June, 2005 Matrix

Laboratories

Docpharma,

Belgium

Outbound

Acquisition

263 NA NA

7 June, 2005 Ranbaxy Efarmes, Spain Brand Acquisition NA NA NA

8 April, 2005 Dishman

Pharmaceutical

s & Chemicals

Synprotec, UK OutboundAcquisition

NA NA NA

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“The possibility for us to in-license a brand newmolecule from an Indian company in theforeseeable future is very, very slim.” – KaliSubrana, GSK India, Interview, August, 2005.

In a recent landmark VC financing deal, Dr. Reddy’s Laboratories, one of India’s leading innovatorcompanies, is receiving US$ 56milion in funding from ICICI Venture Funds. It will be used for thedevelopment and commercialization of ANDAs to be developed and filed over the next two years,reducing the risk associated with product development in the light of increasing competition in thegenerics market and funding research costs without weighing heavily on the company’s bottom line.Under the agreement, ICICI Venture Funds will receive five years of royalties on the sales of theseproducts from Dr. Reddy’s.

Other private equity funds are also interested in investing in some of the leading Indian companies tocover the costs of clinical trials and development of new chemical entities.

Transactions/Valuations

The industry has been witnessing a compoundedannual growth rate of 15% over the last decade, withthe top 20 players increasing their market share from

28.6% in 1995 to over 56% in 2004, clearly indicating the industry’s increasing consolidation.

The patent law in India was recently harmonized with global standards as committed to the World TradeOrganization. With the product patent regime in place, there is a renewed focus on innovation and henceincreased spends on R&D. Most large Indian companies now spend on an average 6% of their sales inR&D/Product development. To remain competitive, many companies need to upgrade theirmanufacturing facilities in line with the Good Manufacturing Practices (GMP) guidelines made mandatoryin January, 2005. Since compliance to the GMP standards is a capital intensive process, many smallsize firms which cannot cope, become a part of the consolidation process.

Several Indian companies are adopting the acquisitions route to enter new markets and also to positionthemselves as global companies. During 2003-2004, Indian pharmaceutical companies spent US$200million on acquiring foreign companies.

Some companies are selling off brands that are not profitable in the Indian market. GSK sold five brandsbetween 2000-2005 as the Glaxo and SmithKline Indian operations merged and prepared for the re-introduction of product patents. GSK also increased its in-licensing activity to plug holes in the productpipeline.

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A New,“Traditional” Opportunity

In recent years, the growing demand for herbal products have led to a quantum jump in volume ofplant materials traded within and across the countries to an estimated US$60 bn and growing atan annual rate of 7% (EXIMbank). India will need partners to help it get the most out of thisopportunity.

The country has a rich history in this sector, with millions of rural households using medicinal plants ina self-help mode, and over 1.5 million practitioners employing the plants in preventive and curativeapplications. The growing demand is putting a heavy strain on existing resources, because, despiteIndia’s biodiversity, about 90% of medicinal plants used by industry are collected from the wild. Fewerthan 20 plants species (out of 800 used) are under commercial cultivation.

While countries like Canada are strengthening restrictions against marketing and distribution of thesedrugs, constraining market growth, several organizations are now getting these products approvedand registered in Western countries where the potential is huge. These initiatives are the key driverfor this segment.

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The field is not a complete mystery to Western nations. China has a head start in terms ofcommercializing its own traditional medicine system globally, beginning to add a dose of biotech to it,creating a database of 9,000 traditional herbs and 150,000 recipes. In Hong Kong, the BiotechnologyResearch Institute is screening molecules isolated from traditional Chinese remedies.(Source: DFIDHealth Systems Resource Center-June 2005)

While opportunities presented by modernization of traditional medicine are attractive, considering thatthe approach is outside the usual core competencies of most MNCs, there should be noted a word ofcaution regarding quality control: The UK’s Medicines and Healthcare Products Regulatory Agencywarned consumers and the herbal sector about the poor quality of some traditional Chinesemedicines (TCMs) on the UK market.

Nevertheless, the Indian government is taking initiatives to promote this sector. The planningcommission gave permission to the department of AYUSH (Ayurveda, Yoga & Naturopathy, Unani,Sidha and Homeopathy) to increase spending by US$34.18 million during FY06-07, to a total ofUS$79.75 million.

This will be used in incentive schemes such as reimbursing 20% of the expenditure of companieswhich intend to setup GMP compliant plants. In addition, the government is creating a US$13.6million fund to sponsor herbal drug research to enable companies to validate their existing drugs andcreate new ones in line with the product patent regime. (Source: Economic Times–February 2005)

Multinationals Coming Back

Most multinational pharmaceutical companies, to varying degrees, gave up on the Indian market inthe 1970s and 1980s, finding too many negatives working against their trying to be profitablebusinesses. Some companies kept no presence at all, while others continuously maintained and grewtheir manufacturing and sales infrastructures.

One of the questions certain multinationals are now facing is: How did our absence from the marketaffect our ability to succeed in the current environment vis-à-vis competitors that remained?

Lead time. Those that remained in the market contend that they have the lead time in understandingthe health care system, including knowledge of how products are distributed, which governmentofficials they must know to effectively lobby their positions, and so on. While this may be true, itremains unclear how long this edge can last.

Influencers. One other potential problem for those trying to return to the market: the ultimateconsumers and influencers—the doctors—may be more skeptical of the commitment of certaincompanies to the market. They may be thinking: Okay, these companies have returned, but are theygoing to stay or are they merely testing the waters? It’s reasonable to think that doctors with long-term relationships with certain companies will show some loyalty, at least initially. However, theopportunities in new therapeutic areas are so great, and they physicians are so eager to enter intoclinical trials sponsored by any of the multinationals, that any advantage is likely to be short-lived.

Distribution reach. Companies that stayed may also have greater distribution reach. GSK maintainsthat in one month it can reach close to a quarter of a million pharmacies in India with any product thatit launches.

13

The Road Ahead: Exciting But Bumpy

It is clear is that companies, whether they kept a significant presence in India during the last decadesor are building one anew, need to stay abreast of the rapidly changing environment. This meansunderstanding local R&D as well as sales & distribution, and taking into account the shift from acutecare markets to chronic care such as cardiovascular and diabetes.

Any MNC contemplating any kind of venture, whether acquisition, alliance or clinical trial must askmany questions before going forward, including:

What’s the best way for us to take advantage of local capabilities to increase presence in this market?

Have we done our due diligence about possible partners?

How exactly should we structure relationships to best advantage?

Are opportunities in regulation and taxation as good as they look—or are there pitfalls that only localadvisors can tell us about?

Are there opportunities to import ideas into other markets, including our own?

Clearly, “Timing is everything” does not apply when trying to partner with the talent and resources of acomplex environment like India. “Know thy neighbor” is closer to the essence of the work ahead—butthe effort can be worth it.

1 WPM Outlook, January 2005, 174.2 WPM Outlook, January 2005, p. 174.3 IMS Health, Knowledge Link, 2004.4 WPM Outlook, January 2005, p. 172.5 WPM Outlook, January 2005, p. 183.6 How R&D is Changing Indian Pharma and Auto Companies, Wharton, p. 4.7 WPM Outlook, January 2005, p. 172.8 How R&D is Changing Indian Pharma and Auto Companies, Wharton, p. 79 WPM Outlook, January 2005, p. 182.10 Aluri Srivivasa Rao, director-investments, IVF, quoted in How R&D is Changing Indian Pharma and AutoCompanies, Wharton, p. 7.11 James Foley, BMS, BioCollaborations Asia Conference, May 19, 2005.12 “Toning Up Glaxo,” Business India, June 16-19, 2005, p. 52.