Indian pharmaceutical industry- an over view (industry

analysis

The achievements of the Indian pharmaceutical industry during the last three decades are
spectacular by any standards. From a mere processing industry, India's pharmaceutical
industry is today highly sophisticated possessing advanced manufacturing technology,
modern equipment and stringent quality control. The turnover of the pharmaceutical
industry at the end of the 9th five year plan is expected to touch the level of Rs. 25,000
crores. The investment needed to achieve this level of turnover is expected to be around
RS 10,000 crores. From being a major importer of bulk drugs and formulations, the
Indian pharmaceutical industry has today become a net exporter of pharmaceutical
products. Now, Indian pharmaceutical products are being exported to a large number of
countries including USA, Canada, Germany, France and Latin American Countries.

Sulpher-methoxazole, amoxycillin and its salt, ampicillin and its salts, menthol and
ibuprofen occupy a slot in the top ten products in terms of export turnover. The trade
balance of pharmaceutical import and export, which was negative for a long time, has
shifted to the positive side with a net inflow of foreign exchange from 1998-99 to 2003-
2004. Nearly 95% of the domestic demand for pharmaceuticals are met through
indigenous production. Presently, import of pharmaceuticals are limited to a few life-
saving drugs like anti-cancer, cardio-vascular, anti-hypertension and newer drugs, which
remain not cleared for indigenous production and marketing in the industry. At present,
there are 15,000-20,000 Pharma manufacturing units in the country, of which large scale
units are 5,000. Out of these 45 manufacturing units have an international presence. The
Indian pharmaceutical industry, today, ranks among the top-15-drug manufacturing
countries in the World.

Further, the structure and dynamics of the Indian pharmaceutical industry are unique
primarily on account of the following facts:

 The process patent regime;

 Price controls; and
 Exemptions to Small Scale Industries (SSIs).
In the Developed Countries (DCs) that recognise (i) product patents, (ii) R&D
capabilities, (iii) ability to develop; and (iv) launch products and product pipeline, have
been the bases for competition, especially in the branded drug segment. As the industry
needs huge R&D costs of US $ 350-400 millions for developing and launching a new
product, the industry has been dominated by a few large manufacturers. While in contrast
to this, the Indian pharmaceutical industry is highly fragmented both in terms of the
number of manufacturers and in number and variety of products. Yet, the Indian industry
accounts for only 1.8% of the global pharmaceutical market despite having almost 10%
of the World's population. The annual per capita expenditure on drugs in India is US$3
and it is almost the lowest in the World with only 30% of the population having access to
modern drugs. Here, it may be noted that India's Health Care Expenditure as a percentage
of its Gross Domestic Products (GDP) is only one-fifth of the Developed Countries.

The Indian Patents Act (IPA), 1970 was largely responsible for the change in structure in
the Indian context. The IPA recognised "process patents" as against "product patents"
which at present is prevalent in the Developed World. As a result, for the first time,
Indian manufacturers could produce internationally patented drugs within the country.
This could have been made possible by developing an alternative process for the drug,
after reverse engineering, using the relatively cheap and large manpower base of qualified
pharmacists and scientists available in the country.

It being a sensitive industry, almost all aspects of the Indian Pharmaceutical Industry
from Licensing to pricing were tightly controlled by the government till recently. With
the announcement of the drug policy in 1994, the industry is witnessing gradual
relaxation of controls. With the announcement in 1995, the New Drug Price Control
Order (DPCO'95) more relaxation were extended to the industry. In the new drug policy
government abolished industrial licensing except in five drugs, allowed foreign
companies to own 51% equity and proposed a one percent less on turnover of all
companies to promote research and quality controls for drugs. While, the number of
drugs under control was reduced from 142 to 76, and government still retains price
control over 50% of the industry's turnover.

However, the pharma industry as of today is entitled to upto 100% foreign equity
ownership. The New Drug Policy of 2002 has also further reduced the number of drugs
under Price Control to 38, enabling firms to reinvest a greater share of their profits in R &
D, a step towards adjusting to the new patent regime of 2005.

Performance of Pharmaceutical Industry

The Indian Pharmaceutical industry, now a $ 4 billion industry has shown tremendous
progress in terms of infrastructure development, technology base and wide range of
products. The industry produces bulk drugs belonging to all major therapeutic groups
requiring complicated manufacturing process and has also developed excellent Good
Manufacturing Practices (GMP) compliant facilities for the production of different
dosage forms. The strength of the industry is developing cost effective technologies in the
shortest possible time for drug intermediates and bulk actives without compromising
on quality. This is realized through country's strengths in organic synthesis and process
engineering. The country's fame as a low cost producer of Antiretrovirals and supplier of
the same to international organisations and more important by the needy African markets

Many Indian companies maintain highest standards in Purity, Stability and International
SHE requirements, namely, Safety, Health and Environmental protection in production
and supply bulk drugs to even innovator companies. This speaks of the high quality
standards maintained by large number of Indian companies as these bulk actives are used
by the buyer companies in the dosage forms which are again subject to stringent
assessment by various regulatory authorities in the importing countries. More Indian
Companies are now seeking regulatory approvals in USA in specialized segments like
Antiinfectives, Cardiovasculars, Central Nervous System Stimulants (CNS group). Along
with Brazil and PR China, India has carved a niche for itself by being a top generic
pharmaplayer.

Considering that the pharmaceutical industry is an industry involving sophisticated

technology and stringent GMP requirements, major share of Indian pharma exports itself
going to highly developed western countries speaks not only about excellent quality of
Indian pharmaceuticals but also about the reasonableness of the prices. More of Indian
companies, in addition to having WHO GMP, have also been getting plant approvals from
International regulatory agencies like United States Food & Drugs Administration
(USFDA), MCA UK, TGA Australia, MCC South Africa.

Production

During 2002-2003 several proposals for technology transfer includingjoint ventures,

proposals for foreign direct investment, setting up of newundertakings/expansion of
existing units (manufacture of new articles in theexisting units) have been received and
processed. Following the delicensingof the pharmaceutical industry, a number of
Industrial EntrepreneurialMemorandums (IEM) for the manufacture of various bulk
drugs/drugintermediates/formulations were received. The major items covered by the
IEMs include a wide range of bulk drugs, intravenous fluids, formulations etc.

Exports

Export of Drugs, Pharmaceuticals and fine chemicals during the last four years has been
as follows:

(Provisional) ( in Rs. Crores)

1999-2000 7230.16

2000-2001 8757.47

2001-2002 9834.7

2002-03 11925.4

Pharmaceutical exports have clocked a growth rate of 15.57% in 1999-

2000, 20.73% in 2000-2001 and 11.13% in 2001-2002 and 21.2% in
2002-03 (provisional).

ExportPromotionCell

An Export Promotion Cell in the Pharmaceutical Division has been functioning with the
objective of boosting pharmaceutical exports and to act as a nodal center for all
queries/issuesregardingpharmaceuticalexports.

The Cell also undertakes promotional activities for acceleration of pharmaceutical

exports and considers suggestions for modifications in EXIM Policy from the industry.
The Cell has also been entrusted with the organization of seminars and workshops on
standards, quality control requirements etc. of important countries so as to prepare the
domestic
companies for exporting their products. During the year, visits were undertaken to South
Africa and other African countries and discussions were held on various aspects of
pharma industry and ways and means of boosting exports to these countries. Database on
the status of Pharmaceutical industry in many countries is available in the cell for the
benefitofIndianexporters.

Imports

In accordance with the information available from D.G.C.I.S. imports of medicinal and
pharmaceutical products for the last three years have been as under:

(in Rs. Crores)

Year Import of medicinal & pharmaceutical products
2000-01 1701.46
2001-02 2026.58
2002-03 2717.82 (Prov.)

There have been no reports of shortages in recent years. As already indicated the country
is almost self-sufficient in case of formulations required by the consumers. It may also be
mentioned that industrial licensing for most of the drugs and pharmaceutical products
have been done away with. The manufacturers are free to produce any drug duly
approved by the DrugControlauthorities.

Imports of drugs and pharmaceuticals are allowed freely, except those in the restricted list
of import under the current EXIM Policy, which can be imported under an import licence.
In view of these steps, no shortage of medicines is likely to occur. Import can take place
from any part of the world, there being no general restrictions.
Research and development

The Department of Science and Technology has a dedicated programme for promoting
R&D in the drugs and pharmaceutical sector. A two-tier structure exists to manage the
programme, viz., an Apex Executive Committee at the Secretariat level, chaired by the
Secretary, Department of Science & Technology and an Expert Committee at the
operational level.

To be globally viable in R&D, high-level expertise and adequate human resources as also
modern facilities in specified areas of drug development are required. It was, therefore,
decided that the Department of Science & Technology Programme, besides assisting new
drug development projects, should also support creation of facilities that are essential for
new drug development.

Accordingly, facilities that are needed urgently and that would need to be created,
namely, (a) DHA gyrase screening facility; (b) Quantity- Structure-Activity-Relationship
(QSAR) facility; (c) immunomodulators modeling and screening and (d)
Pharmacological testing were identified. In the Department of Chemicals and
Petrochemicals, a budgetary provision of Rs.25 lakhs exists for the year 2003-2004 to
fund R&D projects and R&D
related studies in the pharmaceutical sector.

Government has taken several policy initiatives for strengthening Research &
Development in pharma sector. Due to measures such as fiscal incentives to R&D units in
pharma sector and steps to streamline procedures concerning development of new drug
molecules, clinical research and new drug delivery systems, this activity is seeing
progress and new R&D set ups with excellent infrastructure are coming up in the field of
original drug discovery and leading drug companies have licensed their NCEs to MNCs.
It
is gathered that a few products are expected to go for clinical trials in the next few years
in the areas of Anti-infective, Anti-cancer and life-style segments. Compared to the
reported average R&D spending of 2% of turnover in the sector, a few leading Indian
pharma companies have increased their R&D spending to over 5% of their turnover.

Product patent regime.

Come January 1 and the pharma industry will see a product patent regime. The new
regime brings both opportunities and challenges to the domestic pharma industry. Even
larger Indian companies lack the financial muscle to be major international player in
basic R&D, that involves discovery of new chemical entities (NCEs). They would be
helped by the government's decision not to restrict patenting to NCEs. The Patent
Ordinance issued recently defines the term patentability as per the TRIPS guidelines but
does not exclude patenting of incremental inventions like new drug delivery systems,
polymorphs etc, brightening the chances of Indian companies to benefit from the patent
regime.
This apart, contract research and loan manufacturing would also be lucrative business
areas for Indian companies, particularly those complying with Good Clinical Practices
(GCP) and having US-FDA certified manufacturing plants.
Industry players say that the patent regime will benefit the industry enormously in the
long-term. The new regime is expected to positively impact the flow of new drugs into
the Indian market. On the other hand, Indian companies will also benefit on account of
exports of generic drugs.

The recent Icra report on pharma industry states that exports are likely to continue to act
as sales drivers. It says in recent years some Indian companies have set up subsidiaries
and joint ventures, besides, entering into alliances, which will strengthen their position in
those markets. The report also says that areas like chronic therapy segment will benefit
along with mid-sized companies getting into contract research and manufacturing
(CRAMs). Besides multinationals, whose share in the domestic formulations market has
been declining, would consolidate their presence in India.

However, there are also risks that the Indian companies are exposed to. A large number of
Indian companies have shifted focus to the generics markets of the US and Europe seeing
tremendous opportunities. The key implications of this shift are increasing exposure to
regulatory policies in these countries.

Future prospects of PHARMA sector.

With the recent downgrading of pharma sector because of expected lower margins due to
intense competition in the generic market, only companies with strong R&D are expected
to perform well. Should one continue to hold investment in pharma funds for some more
time or scan the market for alternatives immediately.

We have a sanguine view of the prospects of the pharmaceutical sector over a two-to-
three year period. This view recognises the likely competition in generic markets, even as
drugs with a market potential of about $40 billion are expected to come off patent in the
US over the next four years.

The generic market would be substantially smaller in size; profitability levels would also
decline; there is also the risk of existing patent-holders resorting to every trick in the rule-
book to evergreen patents for a few more years. This could also shrink the market for
generics.

Even if one factors in these aspects, the market would still be large enough to offer scope
for Indian companies to pursue growth.

Serving as a source of outsourcing for several drugs and/or having a steady pipeline of
products to replace ones that are ravaged by competition — as in the case of Ranbaxy's
experience with Ceftin in the US markets — would provide a base of impressive growth.
Several Indian companies are well-placed to tap into this opportunity. As you have rightly
mentioned, strength in R&D would be crucial in this context. Quite a few companies
have also adopted practices that respect intellectual property rights and business models
that do not conflict with their customers.

These aspects are likely to strengthen the outsourcing story over the next few years; this
trend may gain momentum once the long-awaited changes to the Patent Act take effect in
January 2005.

Swot analysis

It is often said that the pharma sector has no cyclical factor attached to it. Irrespective of
whether the economy is in a downturn or in an upturn, the general belief is that demand
for drugs is likely to grow steadily over the long-term. True in some sense. But are there
risks? This article gives a perspective of the Indian pharma industry by carrying out a
SWOT analysis (Strength, Weakness, Opportunity, Threat).

Before we start the analysis lets look a little back in the industry’s last six years
performance. The Industry is a largely fragmented and highly competitive with a large
number of players having interest in it. The following chart shows the breakup of the
growth (YoY) of Indian pharmaceutical industry in last six years.

*Volume growth of existing products

The SWOT analysis of the industry reveals the position of the Indian pharma industry in
respect to its internal and external environment.

Strengths:

1. Indian with a population of over a billion is a largely untapped market. In fact the
penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the
same for countries like Brazil is US$ 453 and Malaysia US$189.
 2. The growth of middle class in the country has resulted in fast changing lifestyles
in urban and to some extent rural centers. This opens a huge market for lifestyle
drugs, which has a very low contribution in the Indian markets.

3. Indian manufacturers are one of the lowest cost producers of drugs in the world.
With a scalable labor force, Indian manufactures can produce drugs at 40% to
50% of the cost to the rest of the world. In some cases, this cost is as low as 90%.

4. Indian pharmaceutical industry posses excellent chemistry and process

reengineering skills. This adds to the competitive advantage of the Indian
companies. The strength in chemistry skill help Indian companies to develop
processes, which are cost effective.

Weakness:

1. The Indian pharma companies are marred by the price regulation. Over a period
of time, this regulation has reduced the pricing ability of companies. The NPPA
(National Pharma Pricing Authority), which is the authority to decide the various
pricing parameters, sets prices of different drugs, which leads to lower
profitability for the companies. The companies, which are lowest cost producers,
are at advantage while those who cannot produce have either to stop production or
bear losses.

2. Indian pharma sector has been marred by lack of product patent, which prevents
global pharma companies to introduce new drugs in the country and discourages
innovation and drug discovery. But this has provided an upper hand to the Indian
pharma companies.

3. Indian pharma market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on
exports for growth. To put things in to perspective, India accounts for almost 16%
of the world population while the total size of industry is just 1% of the global
pharma industry.

4. Due to very low barriers to entry, Indian pharma industry is highly fragmented
with about 300 large manufacturing units and about 18,000 small units spread
across the country. This makes Indian pharma market increasingly competitive.
The industry witnesses price competition, which reduces the growth of the
industry in value term. To put things in perspective, in the year 2003, the industry
actually grew by 10.4% but due to price competition, the growth in value terms
was 8.2% (prices actually declined by 2.2%)

Opportunities

1. The migration into a product patent based regime is likely to transform industry
fortunes in the long term. The new patent product regime will bring with it new
 innovative drugs. This will increase the profitability of MNC pharma companies
and will force domestic pharma companies to focus more on R&D. This migration
could result in consolidation as well. Very small players may not be able to cope
up with the challenging environment and may succumb to giants.

2. Large number of drugs going off-patent in Europe and in the US between 2005 to
2009 offers a big opportunity for the Indian companies to capture this market.
Since generic drugs are commodities by nature, Indian producers have the
competitive advantage, as they are the lowest cost producers of drugs in the
world.

3. Opening up of health insurance sector and the expected growth in per capita
income are key growth drivers from a long-term perspective. This leads to the
expansion of healthcare industry of which pharma industry is an integral part.

4. Being the lowest cost producer combined with FDA approved plants, Indian
companies can become a global outsourcing hub for pharmaceutical products.

Threats:

1. There are certain concerns over the patent regime regarding its current structure.
It might be possible that the new government may change certain provisions of
the patent act formulated by the preceding government.

2. Threats from other low cost countries like China and Israel exist. However, on the
quality front, India is better placed relative to China. So, differentiation in the
contract manufacturing side may wane.

3. The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the
short-term, the implications over the long-term are positive for the industry.