India Pharmaceutical-Industry as an Export Sector

Sumeet Shekhar Neeraj,

GITAM School Of International Business
Formerly, GIFT Vizag
Registration No. 1226110122
Date: 17-01-2011
Abstract

India has emerged as a preferable manufacturing destination for global pharma majors
namely Roche, Eli Lilly, Johnson & Johnson etc, the world leaders who have already planted
themselves deep into the Indian market in line with Indian majors like Cipla, Dr. Reddys
Labs, Ranbaxy and various others savouring high quality, cost effective production
capabilities of India for their exports to the world market. The Indian Pharmaceutical industry
has grown from a $333.33m turnover in 1980 to approximately $22.33bn by Sept. 2009 and
the country now ranks 3rd in terms of volume of production (10 per cent of global share) and
14th by value. Exports ($12bn) of pharmaceuticals have consistently outstripped imports
($6.5bn). India currently exports drug intermediates, active pharmaceutical ingredients
(APIs), finished dosage formulations, bio–pharmaceuticals and clinical services. The sooner
India manages to close the infrastructure gap (major central infrastructure projects mainly
roads, ports, airports and power plants, 55% delayed, 2009 data), the financial gap (huge
costs and time for international approvals and registration processes) the faster the growth
will be in Indian pharmaceutical industry (Economic Survey of India 2010). The focus
markets of Indian pharmaceutical exports industry needs of R&D spending, financial aids,
policy in action, mergers and acquisitions to be improved, reviewed and critically identified,
modulated and studied respectively to grab the largest pie of the export market plethora for
the future growth.
INTRODUCTION

India's pharmaceutical sector is currently undergoing unprecedented changes and has seen a
remarkable growth in its exports (pharmaceutical exports occupy a share of 4.4% to 5.2% of
India's total exports over the last 5 years [2]) and exports grew at a compounded annual growth
rate of 21.98% during the five year period of 2004-05 to 2008-09.

The industry in the country now ranks 3rd in terms of volume of production (10 per cent of
global share) and 14th by value. Exports ($12bn) of pharmaceuticals have consistently
outstripped imports ($6.5bn) [Economic Survey of India, 2010].

India’s growth story vindicates its potential, it had a $333.33m turnover in 1980 to
approximately $22.33bn by 2009-10 and a number of the country's largest pharmaceutical
companies are attaining global-player status (viz. Cipla, Ranbaxy, Dr. Reddy’s Labs, Lupin,
Sun Pharma, Cadila etc) as existing markets expand (less regulated markets LRMs viz.
Thailand, Cambodia, Malaysia, Pakistan, Vietnam, Ukraine, Belarus and Moldova, with other
importing LRMs in Azerbaijan and Kyrgyzstan), and new ones open up (Iran, Saudi Arabia,
China, Georgia , South Africa etc), for high quality, affordable generic drugs in the highly
lucrative markets.
Approximately $123bn of generic products is at risk (subject to patent renewal approvals by
regulators) of losing patents by 2012. Even at a conservative estimate of 15% opportunity this
translates into $18.4bn opportunity for India [2]. However the figures need to be appropriately
deflated since Indian opportunity will lie in generics equivalent of branded drugs, which
would be cheaper.

Ageing populations of the US (plus the 2010 US Healthcare Reforms in action), China &
European economies leading to the more and more expenditure on medicines and
appreciation in the per capita consumption value of the drug products with cheaper rates,
which is India forte (an astounding e.g.: In India, 100 tablets of Zinetac, a drug used in
common peptic ulcers cost $2 while, in Chile, same costs as much as $ 196).

Generics business: The aforesaid companies have boosted their capacities, as demand
continues to grow for the generics offered in the fields of antiretroviral therapy (Cipla),
oncology (Cipla and Dr. Reddys), antibiotic therapy (Micro Labs, Santha Biotech), insulins
and vaccines (Biocon, Serum Institute of India) and other hormonal drugs; India
manufactures more than 96 generic group drugs offered to the global market.

Regulations: A 100% foreign direct investment, liberalisation of rules related to foreign

technology agreements as well as of the import regime, the introduction of Schedule-M,
Schedule-T and revision of Schedule-Y (to permit conduct of phase II-IV clinical trials in
India) of The Drugs and Cosmetics Act, 1940 had put upon a great impulse to the industry.

PHARMEXCIL: The creation of PHARMEXCIL as well as a National Pharmaceuticals

Policy with the objective of, among other things, has been rendering India as a preferred
global destination for pharmaceutical R&D and manufacturing followed by exporting the
[5]
drugs has proved successful . The recent creation of a separate Department of
Pharmaceuticals is only a manifestation of the importance government of India has accorded
to the sector.

Markets & regulations: Currently India exports full basket of pharmaceutical products
comprising intermediates, APIs, Finished Dosage Combinations (FDCs), biopharmaceuticals,
vaccines, clinical services, etc., to various parts of the world. India is among the top 20
pharmaceutical exporters world-wide and with the largest number of US FDA inspected
plants (119 plants), outside the USA. Various other agencies like MHRA (Medicines &
Healthcare Regulatory Agency) UK, MCC (Medicines Control Council) South Africa, TGA
(Therapeutic Goods Administration) Australia, HPB (Health Promotion Board) Canada have
[2]
approved scores of plants in India . Notably the global pharmaceutical markets are
estimated at $773.1bn (2008) growing at 4.8% over the previous years.

Pg. 2
Broadly, Asia is the largest importing region from India with a share of 30% of India's
pharmaceutical exports followed by Europe (24%) and North America (21%). During 2008-
09 United States of America had been the top export destination with a share of approx 18%
in India's pharmaceutical exports valued at $1.55bn followed by Russia’s valued at $0.33bn
with a share of 3.84%, Germany ($0.31bn and 3.65%), Austria ($0.31bn and 3.58%) and UK
($0.27bn and 3.12%). In the year 2008-09, 58% of India's pharmaceutical exports comprised
formulations valued at $5.03bn followed by Bulk Drugs (48%) valued at $3.6bn and herbals
exports 3% valued at $251m [2].

Pharma SMEs: According to the CII (Confederation of Indian Industries), there are around
80,000 small-scale units engaged in the areas of pharmaceutical formulations and bulk drugs.
The present decade has opened up newer opportunities for the SMEs (Small- to Medium-
Sized Enterprise) in the field of CRAMS (Contract Research and Manufacturing Services),
Clinical trials etc. A number of them have received approvals from international regulatory
authorities mentioned below for facilities and expertise; they can avail opportunities in
CRAMs (e.g. Macleods Pharmaceuticals, Micro Labs, Alkem Ltd, Hetero Drugs, Ankur
Drugs etc). The product launches may help SMEs to secure manufacturing contracts and
opportunities to supply Active Pharmaceutical Ingredients (APIs) and allied chemicals. The
German Technical Cooperation has entered into a memorandum of understanding (MoU)
with the Drugs & Pharmaceuticals Manufacturers Association (DPMA) of India to help
pharma-SMEs that need interventions to brave the intense competition. India government has
been making every attempt to support SMEs through several incentives. One such effort is
the development of SMEs clusters in various parts of the country (e.g. Indore- SEZ, Baddi-
Export Promotion Industrial Park- EPIP).

Pricing & policy controls: The uncertainty in the pricing policy (governed by the National
Pharmaceutical Pricing Committee and the Drug Price Control Order 1995) of drugs imposed
by the Indian government at various levels of the industry on a number of essential drugs
despite an increase in the price of raw material has taken a toll on the bottom lines of
manufacturing companies, thereby hampering its R&D initiatives.

A significant boost in certain critical areas such as manufacturing regulatory infrastructure

(The Drugs and Cosmetics Act 1940 recent amendments in Schedule M, guiding the Good
Manufacturing Practices have come in line with the standards of USFDA regulations) and
new drug discovery programme (Schedule Y of the act), the improvised Indian
Pharmacopoeial Compendia (in quasi equal standards to the United States Pharmacopoeia
and the British Pharmacopoeia) can place India among the top pharmaceutical industries in
the world.
Pg. 3
Bilaterals and International agreements: Post liberalization, the pharmaceutical export
industry has had to reorganize itself to keep pace with the economic reforms that were taken
on by India, the abolition of industrial licensing as well as the international export
commitments mainly the bilaterals and agreements and/or pacts signed which testify a lot of
decisive work and agreement on pharmaceutical tariff lines curb e.g. India-Ghana, India-
Peru, India-Russia, India-Kenya, India-South Africa, India-Singapore, India-Mongolia, India-
Japan EPA, other comprehensive treaties and joint workings with almost all of the developing
economies of the world for pharmaceuticals trade and businesses, now has begun exploring
the greener pastures of countries like African countries (Nigeria, Kenya and various others
etc), India-Japan EPA (Economic Partnership Agreement, September 2010) would boost the
industry as Japan is one of the global leaders in per capita drug consumption i.e. more than
$412 followed by Germany- $222 and USA- $191). India exported $1.38bn worth drugs &
Pharmaceutical to Asia (approx 19% of India’s total pharma exports) and ASEAN countries
accounted for $497.73m (approx 36%) [6].

Labour Costs: Skilled scientists/technicians/management personnel at affordable costs have

kept India one of leading in the list, as studied by BLS (Bureau of Labour Statistics) Hourly
labour compensation costs in India are among the lowest when compared with the 36
countries which are huge cost advantages (in 2005, India’s average hourly compensation cost
for all employees in manufacturing i.e. $0.91 was approximately 3.1% of the level seen in the
United States i.e. $29.74) for the Western pharmaceutical companies of up to 60-70% aptly
have made the country to be the choicest manufacturing & exporting destinations in the
sector.
Comparison of Cost Advantage in India (%) [2]
Costs in the Western Countries (Taking) 100.0%
Production costs 50.0%
R&D Costs 12.5%
Clinical Trials Cost 10.0%
Source: Pharmexcil Research

Manufacturers’ Internal Infrastructure: The Indian skilled workforce and Western-

equivalent research infrastructure owned by the Indian MNCs (Multi National Companies)
viz Lupin, Cipla, Ranbaxy, Dr. Reddys Labs etc with well equipped R&D labs with advanced
imported technologies such as Nuclear magnetic resonance (NMR), advanced
Chromatography (HPLC- High Performance Liquid Chromatography, Gas Chromatography
etc) based equipments, Infra Red (IR) Spectroscopes etc, Clinical Research facilities and tie-
ups with major clinical services providers viz. Clingene (Biocon), Quintiles, and various
other Clinical Research Organizations (CROs) for their outsourced researches and clinical
trials.

Pg. 4
Scientific & Educational Institutions: The quality knowledge dissemination by institutions
like Council of Scientific and Industrial Research (CSIR), National Research Development
Corporation, Central Drug Standard Control Organization (CDSCO), Indian Council of
Medical Research (ICMR), Indian Drug Manufacturers Association (IDMA) and various
others, during the last few years there has been phenomenal growth in the number of
institutions imparting pharmaceutical education and combined admission capacity of the
courses is about 61,000 seats scored through 500 plus colleges (teaching 2 years Diploma, 4
years Graduation, 2 years Post Graduation and 5 Plus years in PhD etc regulated jointly by
Pharmacy Council of India and All India Council of Technical Education).

Expertise from institutions viz. CDRI (Central Drug Research Institute), IISc (Indian Institute
of Science), NIPER (National Institute of Pharmaceutical Education and Research), NRDC
(National Research Development Corporation) and various others, R&D capabilities,
Science-Technology infrastructure and industry during the last five decades have also
selectively developed to extraordinary levels as compared to that in most developing nations
impelling greatly to the exports sector of the industry.

India Pharma Patent Regime: The improved Intellectual Property protection after the
introduction of TRIPS (Trade-Related Aspects of Intellectual Property Rights) and
compulsory licensing (such licenses provide generics companies with restricted access to
intellectual property in order to manufacture generic versions of patented medicines in good
faith of the country’s health) [7], protected patent regime after the TRIPS (commitments taken
by India under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights
(TRIPS) forced a change in The Patents Act regime in 2005, bringing to the fore a major
challenge for the country’s pharmaceutical industry to comply with the TRIPS guidelines, the
Product patent was reintroduced after 35 years again) provided a safe platform on which
pharmaceutical exporters has helped them grow in India and also meet the need for increased
production rather than relying on imports, which was once critical for the infant Indian
[7]
national economy . The fact of the matter is that Indian manufacturers are still not able to
encash the opportunity due to the lack of investments and government promotion in the
Pharmaceuticals research (only a handful of government clinical and manufacturing research
promotion and development institutions exist as mentioned above) and Public Private
Partnership in the sector for promoting Orphan Drugs research and other similar projects as
opportunities for the sector.

Government’s Schemes & Initiatives: Reduced pro-manufacturing, CAPEX costs by duty

exemption upto zero percent by EPCG scheme of Foreign Trade Policy) and expenditure to
run cGMP compliance facilities and high quality documentation and process understanding is
Pg. 5
grossly being supported by the Government (DGFT & Deptt. Of Commerce) by the
promotional policies viz. EPCG (Export Promotion Capital Goods), DEPB (Duty Entitlement
Pass Book), MAI (Market Access Initiative, financial assistance is also provided for
contesting litigation(s) in the foreign country concerning restrictions/anti dumping duties etc.
on particular product(s) of Indian origin), MDA (Marketing Development Assistance) DGFT
(Directorate General of Foreign Trade) has been supportive to the exporters by leveraging the
zero duty benefits and schemes of the Foreign Trade Policy 2009-2014, revised 2010.

To promote pharmaceutical exports PHARMEXCIL-Hyderabad (works closely with the

Department of Commerce and the Export Promotion Cell in the Department of Chemicals
and Petrochemicals to undertake activities such as promoting exports, preparing country-
profiles, assessing export potential across the countries and to have greater degree of
interaction internationally), EXIM Bank (indulged in leveraging cheaper loans to the
exporters and also does contract rating of importers), the creation of Pharma Parks, SEZs’
(Special Economic Zones) and EPZs’ (Export Processing Zones) dedicated to pharmaceutical
manufacturers, export dedicated SEZs’ e.g. Indore EPZ, Pune SEZ, Vizag Pharma City
(largest) etc have helped promoting the exports.

Tax Environment: In SEZs for the corporate taxes front, pharma units set up in SEZs enjoy
100% income tax exemption on export profits in the first five years of operation, 50%
exemption for the next five years, and 50% exemption on the reinvested export profits in the
following five years. Companies located in SEZ also benefit from various Indirect Tax
benefits such as exemption from payment of Customs Duty; Excise Duty; Central Sales Tax
and refund and exemption of Service Tax. The bottom line is that India Govt. and EPCs
(Export Promotion Council) offer attractive tax benefits, reimbursements and reductions in
customs duties which also help global manufacturers compete in the price-sensitive LRMs
environment.

Key Challenges:

R&D & Investments: Low investments by Indian drug makers (e.g. Ranbaxy maximum
12.6%) in innovative R&D compared to the Global players investing upto 20% (Eli Lilly
maximum 20%) of their sales revenue continue to be a major weakness of Indian
pharmaceutical exporters lacking capacities for filing more and more ANDA’s and
penetrating into the generic markets globally only and not in the Novel Drug Delivery
Systems.

The diffused nature of the Indian pharmaceutical industry has also been a concern that only
about 20 to 30 companies (viz. Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, Sun

Pg. 6
Pharmaceuticals, Nicholas Piramal, Zydus Cadila, Biocon, Glenmark Pharmaceuticals,
Wockhardt Ltd, Torrent, Biocon, Matrix Labs etc. [2] are large enough to bear the transactions
costs associated with sustained exports to and compliance with entry regulations of the
developed markets which scores to crores.

Non Tariff Measures: The importing countries’ regulations have been one of the bothering
concerns, e.g. insistence on completing long process (e.g. average 3-4 years for a ANDA
Stability Batch, for generics, till the Product’s launch after approval, Novel Drug Delivery
Systems call for average 10-16 years for a drug development till launch after NDA filing and
approvals) for registration to the international (country specific) quality auditing agencies
such as the USFDA (USA), MHRA (EU), TGA (Australia), EMEA (EU), MOH (Ministry of
Health)-Thailand, China SFDA (State Food Drug Administration), GCC (Gulf Cooperation
Council), MCC (South Africa), Canada FDA, MOH-Mexico, etc. and the mandates on
allowing imports of only those drugs which are registered in some developed countries etc.
The multiplicity of drug approval agencies in various countries has raised drug registration
costs and site inspections costs. These regulatory agencies insist on pharmaceutical standards
& quality procedures of their country, which often varies from country to country and ask for
discrete quality audits to be conducted by their agencies independently.

Indian manufacturers are prevented from bidding for government contracts as US permits
bidders only from countries that are signatories to WTO Agreement on Government
Procurement [2]. The have to submit separate state level applications for marketing drugs in
the United States as there is no nation-wide system of application even where FDA approval
has been received

Indian firms have often been accused of making counterfeit drugs by drug makers in the US
and European markets unanimously cited to be allegations used to erect non-tariff measures
for restricting competition from Indian companies who sell their low-cost drugs in the
developed markets. As per a health ministry study, about 0.3% of drugs in with ‘Made in
India’ tag are spurious, while about 5% are counterfeit and not actually ‘Made in India’. The
Supply of spurious drugs, fake drugs with “Made in India” claims e.g. cases of such exports
from China containing Indian Manufactured tags being caught in Nigeria.

Data Exclusivity: In 2006, the USA placed India on the Special 301 Priority Watch List for
not granting monopoly rights for clinical trial data (data exclusivity) that would give the
patent holder five years of marketing exclusivity. Some pharmaceutical companies also
pressured the Indian government. This occurred even though India’s current law is TRIPS
compliant. It allows the Indian drug regulatory authority to use the patent holder’s clinical
data to approve generic medicines rapidly. Implementing data exclusivity would reduce
Pg. 7
generic competition and devastate the ability of poor Indians to access affordable medicines
[7]
.

Monetary Resources: Majority of Indian SMEs lack the ability to compete with MNCs for
New Drug Discovery, research and commercialization of molecules on a worldwide basis due
to lack of monetary resources compared to the risk associated (research costs, patent
litigations post-discovery, registration costs etc).

FUTURE TRENDS

All in all Indian drug sales are expected to rise by an annual 8% to nearly $26.59bn between
2006 and 2015[3]. To be sure, this growth rate is higher than that seen for Germany (+5% p.a.)
and the entire world (+6%). Nonetheless, India’s share in world pharmaceutical sales will rise
only marginally to a good 2%.

It is likely that many of the Indian small companies will merge or disappear from the market
altogether. The Commerce Ministry is mulling to formulate a policy on mergers and
acquisitions by multinationals in the pharma sector e.g. Ranbaxy by Daichi Sankyo Japan,
Dabur Pharma by Fresenius Kabi AG Germany, Piramal Healthcare by Abbott Labs USA.

In the coming years, opening up of US generics market and antiretroviral therapy of AIDS
market in Africa will boost exports since in the absence of a medical support. [Notably each
day, 6,000 Africans die from AIDS. Each day, an additional 11,000 are infected.]

The Pharma market in Thailand is fastest growing in Asia-Pacific region. It has a strong
pharma Industry producing mostly generics. It depends on imports for patented drugs. The
market is expected to be worth US $1 .82 billion by 2012 [6].

Contributions from unconventional markets in Latin America, Australia and the emerging
markets in the Middle East and African Region and increased Abbreviated New Drug
Applications (ANDAs) approvals in the US would lead the industry to shine in the upcoming
[4]
days , SMEs will benefit from boosted contract production for western firms as gradually
they would learn to comply the standards of the developed nations e.g. Dishman and GVK-
Biosciences undertake contract research for western companies, Sun pharma manufacturing
for Eli Lilly. Acquisition of foreign companies will lead to a strong increase in foreign
production by Indian manufacturers, which will have a dampening effect on exports.

SUMMARY
[1]
The global state of affairs direct us to the fact that tackles the non tariff measures namely
the strict quality regulations to exports of pharma products in various countries and the
lengthy documentation processes demanded by the importing country regulatory authorities

Pg. 8
etc need to be addressed through consistent efforts and greater interaction with the concerned
agencies of the choicest markets for the exporters. The Indian companies are putting their act
together to tap the generic drugs markets in the regulated high margin markets of the
developed countries. The US market remains to be the most lucrative market for the Indian
companies led by its market size and the intensity of blockbuster drugs going off patent [4].

Based on the retrospective data USA, Germany, Russia, UK, China, Brazil, Canada, South
Africa, Nigeria, Netherlands, Spain, Turkey, Ukraine, Viet Nam, Israel, Italy, Mexico, UAE,
Singapore, Iran had been potential importers of Indian Drugs. Countries like South Africa,
Israel, Turkey, Kenya, Singapore, UK, China, Russia, Italy and Vietnam etc have been
identified to be potential prospective markets with high growth rates of imports from India [2&
3]
. Africa, Latin America, ASEAN and CIS countries with huge demands deem them to be put
in the category of focus countries as these are the emerging markets and have a huge potential
with day in day out incremental growth rates of per capita drugs consumptions supported by
treaties like SAFTA (with SAARC), treaties with GCC, EU, Japan, Korea etc.

If India is able to take a 10% slice in the emerging market in developed countries it will open
an opportunity of around $50bn at current prices of patented and branded drugs and shall be
able to surpass the major exporters of the world.

REFERENCES

1) Non Tariff Measures: (http://www.commerce.nic.in/trade/international_ntm.asp?id=4&trade=i)

2) Report of the Task Force on Pharmaceuticals 25 February 2009:
(http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17)
3) Mc Kinsey Report on Indian Pharma Industry 2015:
(http://bw.businessworld.in/PDF_upload/Indian_Pharma.pdf)
4) Overview of Indian Pharma Industry:
(http://www.cci.in/pdf/surveys_reports/indias_pharmaceutical_industry.pdf)
5) The introduction of Pharmaceutical patents in India- NBER Working Paper:
(http://www.nber.org/papers/w6366)
6) Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector, July
2009:
(http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf)
7) TRIPS: India - Patent Protection for Pharmaceuticals:
(http://www.pharmainfo.net/reviews/trips-india-patent-protection-pharmaceuticals)
8) Oxfam India Comments on DIPP Paper on Compulsory Licensing- September 30th, 2010:
(www.dipp.nic.in/ipr.../Feedback_OxfamIndia_30September2010.pdf)

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