original final project

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Final Project Report

On

“Detail study of Indian pharma companies Vs

European pharma companies”

A report submitted to Ishan Institute of Management &

Technology, Greater Noida, as a partial fulfillment of full time Post

Graduate Diploma in Business Management.

Under the Guidance of

Mr. Shivnath Mishra

SUBMITTED TO, SUBMITTED BY,

Dr. D.K. Garg Sanjeev Kumar

Chairman Enr : 14047

IIMT, Greater Noida Kumar Akhilesh

Enr : 14022

Batch- 14th

BM (Marketing)

ISHAN INSTITUTE OF MANAGEMENT & TECHNOLOGY

1A, KNOWLEDGE PARK-1, GREATER NOIDA

DISTT. G.B. Nagar (U.P)

Website- www.ishanfamily.com

E-mail- [email protected]

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PREFACE

As a student of management, apart from theoretical studies we need to get a deeper

insight into the practical aspects of those theories by working on various projects. So

these projects have high importance in management studies to enhance the knowledge

and skills.

Management in India is heading towards a better profession as compared to other

professions. The demand for professional managers is increasing day by day.

Working on this project has been an enriching experience. This project will help me a

lot in the professional growth. It has given us the confidence to prepare for ourselves

as fully fledged international marketing professional in the eminent future. A

comprehensive understanding of the principle will increases the decision-making

ability and sharpens the tools for this purpose. .

The demand for professional managers is increasing day By day. To achieve

profession competence, manager ought to be fully occupied with theory and practical

exposure of management.

A comprehensive Understanding of the principle will increases their Decision making

ability and sharpening their tools for this purpose. The scope of the work under

taken by us includes introduction to basic & major things about the Impact of

pharmaceutical industry on the customer and also their own future aspects.

We would like thank our Respected Chairman Dr. D. K. Garg Sir, who always been

a source of motivation and support to all the students of PGDBM. We pay our

gratitude to Prof. M. K. Verma and all faculty members of the institute without

whose help it would have been impossible to conduct such a study. We must

acknowledge our heartiest thanks to the respondents who spared their precious time to

us.

We have put our maximum effort to gain the information. If any error or mistake is

found in collection data kindly ignore.

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CERTIFICATE

This is to certify that the project work done on “Detail study of Indian pharma

companies Vs European pharma companies” submitted to Ishan Institute of

Management and Technology, Greater Noida by Sanjeev Kumar & Kumar Akhilesh

in partial fulfilment of the requirement for the award of degree of Post Graduate

Diploma in Business Management is a bonafide work carried out by them under my

supervision and guidance. This project work is the original one has not been

submitted anywhere else for any other degree/diploma.

Date: 18/06/10

Name of the guide:

Place: Delhi Mr. Shivnath Mishra

(Area Manager)

Apex Lab Pvt. Ltd.

Sidco Garment Complex,

3rd Floor, Chennai-600032

Seal/Stamp of Guide

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ACKNOWLEDGEMENT

No research can blossom from single person’s mind without proper guidance,

assistance and inspiration from various quarters. Our project was given its

present shape by assistance of many people whom we are greatly indebted to.

We owe deep intellectual debt to the numerous people who through their rich

and various contributions have greatly improved our understanding of various

concepts of our project.

We express our sincere thanks to hon’ble Mr. Shivnath Mishra(Area Manager,

Apex Lab Pvt. Ltd.) for his stimulate discussion, constructive and valuable

suggestions that helped us in this endeavour. We would like to thank all those

people who graciously helped us by sharing their valuable time, experience &

knowledge for completion of this project.

We take an opportunity to express our sincere thanks to Dr. D.K.Garg

(Chairman, IIMT), Dean Sir Prof. M.K.Verma and all the staff members of the

PGDM department for making available all the facilities in fulfilling the

requirements for this reasonable work.

Finally, we thank our parents for their moral support and financial help.

Sanjeev Kumar

Enr. – 14047

Kumar Akhilesh

Enr. – 14022

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DECLARATION

The Final Project project on “Detail study of Indian pharma companies Vs

European pharma companies” is the original work done by me. This is the

property of the institute and use of the report without prior permission of the

institute will be considered illegal and actionable.

Date: 18/06/10

Sanjeev Kumar

Enr. – 14047

Kumar Akhilesh

Enr. – 14022

BM (Marketing)

BATCH – 14th

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TABLE OF CONTENTS

S.No. TITLE PAGE NO.

1. INTRODUCTION

� Overview

� Objective of study

� Significance of study

� Plan of the study

13

2. Growth of pharmaceutical Industry

� India’s Pharmaceutical Industry -

Independence to 21st Century

� European Pharmaceutical Industry - In

Present Era

� Comparison of growth

29

3. Regulatory Environment of India’s and

European Pharmaceutical Industry

� The Patent Act

� Drug price control

� Patent (Amendment) Act

72

4. Industry Production

� Indian Pharmaceutical Manufacturers

� European Pharmaceutical

Manufacturers

124

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5. Scope of pharmaceutical Industry

� Contract Research and outsourcing and

Other services

� Research and Development

133

6. Mergers, Acquisition and Other Alliances in last

two years

153

7. SWOT Analysis

� Indian Pharmaceutical Industry

� European Pharmaceutical Industry

198

8. International business of Pharmaceutical

Industry

� Import

� Export

� Role of import/export in U.S. Market

223

9. Generic drugs in the U.S. Market

� Role of Indian and European generic

drugs in the U.S. Market

� Impact of generic drugs on U.S. Market

247

10. � Conclusion

� Findings

� Suggestions

264

11 � Comparison of five top pharmaceutical companies’ profile-world wide

273

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Executive Summary

The project is concerned with the “Detail study of Indian pharma companies Vs

European pharma companies” Work procedures are dealt in detail along with their

drawbacks and scope of improvements in this sector. All the work instructions are

dealt in detail and suggestions are made wherever there is a scope of improving on the

quality of the product and services provided to the market and consumers.

As Pharmaceutical companies in India are growing at a very fast pace and this has

made the Indian pharmaceutical industry as the second largest growing industry. Also

the pharmaceutical industry in India is the third largest in the world, which will be of

US$20 billion by 2015.

But in starting phase, The Indian pharmaceutical industry traces its roots to the 1903

formation of Bengal Chemical and Pharmaceutical Works in Calcutta by Professor

P.C. Roy. During the first half of the twentieth century, however, and despite modest

efforts on the part of the colonial government to spur local production, India remained

largely dependent on the UK, France, and Germany for medicines. The government

took its first concrete steps toward self-reliance in pharmaceuticals with the

establishment of Hindustan Antibiotics Ltd. (HAL) in 1954 and Indian Drugs and

Pharmaceuticals Ltd. (IDPL) in 1961. IDPL (in spite of its grossly inefficient

character) became instrumental in the development of the industry by serving as the

vehicle for a comprehensive Soviet-sponsored program in which Russians supplied

machinery, personnel, and technical know-how to produce antibiotics.

Prior to the Patent Amendment Bill, not the substance itself but merely the

manufacturing process was protected for a period of seven years. India’s patent

legislation had frequently been the reason for legal disputes with large western drug

firms, especially from the US. In line with international standards, the sector is now

subject to product and process patents valid for a period of 20 years. Indian

companies seeking to copy drugs before the patent expires are forced to pay high

licence fees. This became necessary following the signing by India's government of

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the TRIPS Agreement (Agreement on Trade-Related Aspects of Intellectual Property

Rights).

India has the advantage of the cost, as the cost of labor, the cost of inventory is much

lower than U.S. The multinational companies, investing in research and development

in India may save upto 30% to 50% of the expenses incurred. The cost of hiring a

research chemist in the US is five times higher than its Indian counterpart and the

manufacturing cost of pharmaceutical products in India is nearly half of the cost

incurred in US. The cost of performing clinical trials in India is one tenth of the cost

incurred in US as well as the cost of performing research in India is one eighth of the

cost incurred in US.

As the Final Project is the part of the management study. It is plays a very important

role in the management student life. It gives the practical experience of the market

and chance to understand the behaviour of Industry.

In every management training scheme there is a provision for real experience within

the academic time period. The purpose of this training is to apply the theoretical

knowledge which is taken by the students in the class and apply them in the real world

and sees the implementation of this knowledge. It is well said phrase that “nothing is

much practical than a good theory” but on the same hand we cannot deny that

“practical is better than theory”. We can say both the phrases are not opposing each

other but they are complementary to each other. Experiencing both in a good and

dedicated manner really pays a lot in one’s professional career.

Marketing management is creating a revolution in marketing of products and services

providing to the market and consumers of the organization throughout the world. This

is one of the leading Indian media sectors organizations which have grasped quality

mettle and have successfully, ridden business recessions and annihilate the

competition.

Marketing management is a powerful tool for achieving organizational goals and

gaining competitive advantage. Final project goal is to help students become effective

managers in competitive, global environment.

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Emphasis is given on discovering the challenge of both managing and understanding

the interrelatedness of activities throughout the industry, and how the marketing

functions fits into the organization

Field exposure is very much necessary for a student of marketing. In this stream of

business the application of theory is very frequent. Marketing is now diversified that

it can be done by cell phone or internet.

With my honest efforts and some great luck I got a chance to complete my Final

project on “Detail study of Indian pharma companies Vs European pharma

companies”. There I had worked hard and my work was to understand the real picture

of pharma industry and compare the Indian and European pharma style and status. I

meet with various professional people and analyze market competition. I also get their

feedbacks about my work.

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LITERATURE REVIEW

It has been purely a practical exposure to real business in general and of marketing in

particular. Through the entire tenure of project have learned the practical implication

of business. We must say that, through this practical exposure that is Final Project on

“Detail study of Indian pharma companies Vs European pharma companies”

which enable me to get an in depth sight of the reality show of the business.

Doing project was really an opportunity before me when I could convert my

theoretical knowledge into practical and of real world type. Fortunately, the industry I

got is a true follower of the various principles of management and also one of the

leading segment of the industry. The working environment that I was being provided

was extraordinary and helped me a lot in delivering my work properly and with full

potency of mine.

The graph of sales of these respective product lines is the best in the industry as

compared to other. Here I found all the professionals are very much committed to

their work as well as they were all professionals enough. This helped me a lot in

getting a good deal of exposure. As I had to consult the Channel partners, I felt

myself, in the beginning, in a bit problem. But the cooperation of my superiors at the

work induced confidence in me to deal with my problems whenever they came.

Since I had to complete my project within a limited time frame, this made me

experience the actual stress of the workplace. This I think will work as real booster

when I will go to work after the completion of the PGDBM course at IIMT, Greater

Noida. The way the Guide supported me and his other subordinates was a good

example of co ordination and good manager. This shows that in the corporate world

the superior officer should not only take care of the target fulfilled but also the

behavioral aspect of the subordinates.

Working with the professionals was a great experience as I came to know that how a

person can work as a team in a multifarious industry to achieve the organizational

goal. Many a times, while working, I had to sacrifice my personal feelings and

aspirations just to keep the project interests in my mind by giving it the top most

priority.

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Indeed, I always tried to do justice with my duties even at the cost of my personal life

for the time being. But this could be a success, as I got continuous support from my

guide as well as other officers & Colleagues.

So, at last I would like to thank my institution for providing me with the opportunity

to do final project. I’m also grateful to my guide Mr. Shivnath Mishra, Area Manager

for providing me all the assistance in completing my project.

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CHAPTER-1

INTRODUCTION

Overview

The pharmaceutical industry-global view

Origins and evolution

The modern pharmaceutical industry is a highly competitive non-assembled global

industry. Its origins can be traced back to the nascent chemical industry of the late

nineteenth century in the Upper Rhine Valley near Basel, Switzerland when dyestuffs

were found to have antiseptic properties. A host of modern pharmaceutical companies

all started out as Rhine-based family dyestuff and chemical companies e.g. Hoffman-

La Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba and Geigy),

Novartis etc. Most are still going strong today. Over time many of these chemical

companies moved into the production of pharmaceuticals and other synthetic

chemicals and they gradually evolved into global players. The introduction and

success of penicillin and other innovative drugs in the early forties institutionalized

research and development (R&D) efforts in the industry. The industry expanded

rapidly in the sixties, benefiting from new discoveries and a lax regulatory

environment. During this period healthcare spending boomed as global economies

prospered. The industry witnessed major developments in the seventies with the

introduction of tighter regulatory controls, especially with the introduction of

regulations governing the manufacture of ‘generics’. The new regulations revoked

permanent patents and established fixed periods on patent protection for branded

products, a result of which the market for ‘branded generics’ emerged.

GLOBAL SCENARIO

The global pharmaceutical market can be classified into two categories: regulated and

unregulated/semi regulated. The regulated markets are governed by government

regulations like intellectual property protection, including product patent recognition.

As a result, they have greater stability in both volumes and prices like the United

States. The unregulated/semi-regulated markets have lower entry barriers in terms of

regulatory requirements and hence, they are highly competitive. The global

pharmaceutical companies till 2010 will be closely regulated by emerging issues like

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patent safety, side effects, adverse action reporting, strengthening harmonization and

regulations and stronger clinical evidence. Global pharmaceutical market has

increased its focus on novel drugs, good delivery system, and new chemical entities.

The other factor which is driving the growth of global pharmaceutical market is

speeding up regulation in bio-generic segment. Moreover there will be shift in growth

from top ten markets to emerging economies. The global pharmaceutical market will

change its shape from primary care driven to specialty care driven that is oncology

and biotech. The global pharmaceutical industry will take a shape of virtually

integrated pharmaceutical company. There is a widening gap between mature market

performance and emerging market performance, which will require many

pharmaceutical companies all over the globe to make changes throughout their

operations from shifting their sales and market, revising their strategies, changing

their business models to fuel their growth.

For the global pharmaceutical industry, 2008 will be a year of softening growth and a

widening gap in performance between the increasingly generalized and cost

constrained mature markets, as well as the burgeoning ‘pharmerging’ sectors where

demand is growing and economies and access to healthcare are expanding at record

levels. Marking an important inflection point for the industry, for the first time the

world’s seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will

drive less than half of the industry’s growth in 2008, while the pharmerging markets

will contribute nearly a quarter of growth worldwide (Figure 1). Further divergence

will be apparent between primary care-driven and specialist-driven therapy areas, and

between therapy classes with major unmet needs and innovations, and those

dominated by generics.

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Pharmaceutical growth will slow to 4-5% in 2008, marking an all-time low for this

market. This is due in part to a lessening of the volume growth generated by the

Medicare Part D prescription drug benefit. It also reflects the continued high level of

generalisation in this market with approximately $15 billion in branded products

expected to lose patents in the 2008 timeframe. The US will also continue to feel

the impact of heightened safety scrutiny, as the US FDA acquires more power,

slowing the introduction of new medicines. A similar level of growth is

anticipated in the top five European markets (France, Germany, UK, Italy and

Spain), as the industry faces significant generics exposure and governments

struggle to manage their aging populations and embrace new treatment

innovations (Figure 2). Increasing therapeutic substitution can be expected in

these markets, along with an upturn in parallel trade, particularly with specialist

driven products. Cost-saving initiatives are likely to become more aggressive

and will include price cuts, contracting and rebating, as well as the expansion of

reference pricing schemes in Germany, Italy and Spain. Value growth in these

markets will be limited to areas of unmet needs. In Japan, cost-containment drives –

including incentives for prescribing generics – will also impact market performance

as the country embarks on another year of national health insurance price cuts.

Growth of 1- 2% is anticipated, compared with 4-5% in 2007. Notwithstanding this

RECORD LOW GROWTH FOR THE US

In the US,�

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downturn, Japan remains in economic recovery and access to drugs continues to

improve for its aging population. A rise in the level of new product launches is

expected as the Pharmaceutical and Medical Devices Agency becomes fully staffed

and focuses on accelerating approvals. This will be particularly noticeable in areas of

unmet needs, such as oncology, where approvals have already been granted for

Avastin and Tarceva.

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ACCELERATING GROWTH IN EMERGING MARKETS

By contrast, much stronger growth of 12-13% is expected in the seven pharmerging

markets of China, India, Brazil, Russia, Mexico, Turkey and South Korea, driving

sales of $85-90 billion in 2008. Although these markets have their own unique

characteristics, common to each is a rising GDP and expanding access to both generic

and innovative new medicines as primary care improves and extends through rural

areas, and private health insurance becomes more commonly available. China will be

a particularly strong performer in 2008, reflecting the country’s booming economy

and greater government involvement in healthcare policy. This involvement extends

to annual price cuts, enforced generic prescribing and an anticorruption campaign that

targets promotional activity, product approvals and manufacturing.

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Overall, the global pharmaceutical market will grow 5-6% to over $735 billion in

2008, down from 6- 7% in 2007 (Figure 3). Key dynamics shaping this growth are the

continued wave of generalisation, expanded use of innovative specialty products,

increasing reliance on value-based medicine and higher levels of uncertainty around

safety issues.

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TOP TEN PHARMACEUTICAL COMPANIES BY WORLDWIDE SALES

(2007-08)

Sales (US$ billions)

Source: IMS Health. Intelligence 360 Global Pharmaceutical Perspective

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TOP TEN PHARMACEUTICAL COMPANIES WORLDWIDE BY TOTAL

R&D EXPENDITURE

Fourteen pharmaceutical companies featured in the top 50 R&D spenders according

to European Commission research in 2007-08, including 3 in the top ten: Pfizer,

Johnson & Johnson, and GlaxoSmithKline. Other companies to feature were

Sanofiaventis, Roche, Novartis, Merck, AstraZeneca, Amgen, Bayer, Eli Lilly, Wyeth

and Abbott.

• Pharmaceutical companies ranked as the highest sector of R&D investment across

the world’s top 1400 companies, spending over �70 million euros.

• In 2007, Pfizer spent nearly US$7.6 billion on R&D globally, followed by Johnson

& Johnson (US$7.1 billion) and GlaxoSmithKline (US$6.9 billion).

• Of the top ten pharmaceutical companies, Amgen spent the largest proportion on

R&D with expenditure equalling over 24% of total sales.

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THERAPEUTIC MARKET SEGMENTATION

Commencing with repackaging and preparation of formulations from imported bulk

drugs, the Indian industry has moved on to become a net foreign exchange earner, and

has been able to underline its presence in the global pharmaceutical arena as one of

the top 35 drug producers worldwide. Currently, there are more than 2,400 registered

pharmaceutical producers in India. There are 24,000 licensed pharmaceutical

companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured

here. India has more drug-manufacturing facilities that have been approved by the

U.S. Food and Drug Administration than any country other than the US. Indian

generics companies supply 84% of the AIDS drugs that Doctors without Borders uses

to treat 60,000 patients in more than 30 countries. However total pharmaceutical

market is as follows:

It is very much evident from above figure that chronic therapy area (Gastro Cardiac,

Respiratory, Neuro Psychiatry and Ant diabetics) is dominating the market in long

run.

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Objectives of the Study

The main objectives of the study are:

• To evaluate the performance of a few leading pharmaceutical companies

especially in terms of their ANDA filings and approvals as well as DMF

filings with USFDA in post-TRIPS period.

• To evaluate the R&D expenditure of a few leading pharmaceutical companies

in post-TRIPS period.

• To evaluate the patents granted to a few leading pharmaceutical companies by

USPTO in post-TRIPS period.

• Indian drug firms could no longer simply copy medicines with foreign patents

by using alternative manufacturing processes and offer them on the domestic

market. As a consequence of the major changes to India’s drug patent

legislation, the country’s pharmaceutical industry is undergoing a process of re-

orientation.

• To know Government Initiatives for growth of Indian Pharmaceutical Industry

likes:Tax breaks are offered to pharma industry, New procedure for the

development drugs, Proper clinical procedures, New Millennium Indian

Technology Leadership Initiative and the Drugs and Pharmaceuticals Research

Programme - Two schemes launched by the government.

• Comparison of top pharmaceutical companies’ profile world wide and analyse

their different strategies, working culture, new opportunities and their

competitive edge.

• The US has become its most important sales market. Sales to the US recently

amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to

Europe came to nearly 20%. Overall, approx. 80% of the manufacturer’s total

sales are generated abroad.

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• Revenues from domestic market dominated the total pharmaceutical revenues

in current year. Exports contribution is expected to surpass the domestic

turnover by 2010

• The pharma sector would witness an upswing in the revenues from service

segment due to the increase in outsourcing of Contract research &

manufacturing services (CRAMS) to India

• To take the steps to overcome the obstacles for different pharmaceutical

companies and how to explore the opportunities.

• Growth and future prospects of pharmaceutical industry worldwide.

Significance of The Study

The growth of Indian Pharmaceutical industry in terms of a few parameters has been

envisaged in a few studies but a firm level comprehensive work on the growth of

Indian Pharmaceutical industry taking many parameters simultaneously has not been

done so Compared with western industrial nations, energy prices are low but

companies must expect repeated power cuts and offset fluctuations in the electricity

network with the help of emergency power generators. In many areas, the hot and

humid climate makes high demands on climate technology at production plants and

on the refrigeration of finished products. Insufficient energy supply also leads to a

situation where production hours must be handled very flexibly. This shortage can

only be eliminated in the medium term and will require maximum effort. However,

India’s government Besides the positive outlook for India’s drugs industry, there are

also a number of adverse factors. These include, above all, serious shortcomings in

infrastructure.

Compared with western industrial nations, energy prices are low but companies must

expect repeated power cuts and offset fluctuations in the electricity network with the

help of emergency power generators. In many areas, the hot and humid climate makes

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high demands on climate technology at production plants and on the refrigeration of

finished products.

Government take so many Initiatives for growth of Indian Pharmaceutical Industry

likes:Tax breaks are offered to pharma industry, New procedure for the development

drugs, Proper clinical procedures, New Millennium Indian Technology Leadership

Initiative and the Drugs and Pharmaceuticals Research Programme - Two schemes

launched by the government.

institutional obstacles to overcome first. More often than not, Indian medicines fail

because doctors and pharmacists in other countries are reluctant to prescribe or hand

out drugs produced in India. There is a tendency to favour locally/nationally produced

drugs. For this reason, drug companies from India are finding it hard to gain a

foothold in western markets.

Besides the positive outlook for India’s drugs industry, there are also a number of

adverse factors. These include, above all, serious shortcomings in infrastructure.





finished products. Insufficient energy supply also leads to a situation where

production hours must be handled very flexibly. This shortage can only be eliminated

in the medium term and will require maximum effort. However, India’s government

besides the positive outlook for India’s drugs industry, there are also a number of









intends to expand power generation capacities to roughly 240 GW by the end of the

11th five-year plan in 2012. This would mean a more than 100 GW, or nearly 90%,

increase on today's total.

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Recent globalization and the development of the information superhighway have

brought the countries of the world closer. From a business perspective, the world is

one marketplace. The American pharmaceutical industry has played a pioneering role

in the development of the drug industry through in-depth, timely, and useful research

and bulk manufacturing of drug products. Although the US pharmaceutical industry is

enjoying the leadership position, it can no longer be content to focus only on the US,

Japanese, and European markets.

Benchmark of performance against the leading Eastern European pharmaceutical

companies using market share data by company and comprehending their

strategies.Benchmark the top 10 generic companies over the 2004-07 period, and use

detailed company analysis to measure the performances and outlooks of major players

including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-Aventis,

Watson, Bayer and Stada.

Lack of incentives in Europe. Pricing and reimbursement pressures in Europe have

created greater boundaries to innovation, leading to fewer undervalued latestage

products. As a result, traditional specialty companies are likely to face future

difficulties in this region.

Pricing pressure, authorized generics, a lack of patient awareness and distrust among

healthcare prescribers. Increasing incidence of parallel traded products will impact

companies operating in the region resulting in potential loss of sales eventually

affecting cash flows and lowering innovation in drug development.

India has the advantage of the cost, as the cost of labor, the cost of inventory is much

lower than U.S. The multinational companies, investing in research and development

in India may save up to 30% to 50% of the expenses incurred. The cost of hiring a

research chemist in the US is five times higher than its Indian counterpart and the

manufacturing cost of pharmaceutical products in India is nearly half of the cost

incurred in US. The cost of performing clinical trials in India is one tenth of the cost

incurred in US as well as the cost of performing research in India is one eighth of the

cost incurred in US.

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Plan of the study

The report is written based on the in-depth investigations and studies of

pharmaceutical outsourcing industries in both Europe and India. It first carefully

selected, among a large pool of companies, top 50 best outsourcing service providers

in each country. It then conducted detailed comparisons among these selected

companies in more than twenty different areas.

The comparison is performed in four different ways:

• Head-to-head comparison of two countries including advantages and

disadvantages of each country in pharmaceutical outsourcing;

• Head-to-head comparison of pharmaceutical outsourcing industries between

the two countries including their development history and pattern, current

market sizes and service capabilities, strengths and shortcomings, and future

growth potentials including the growth drivers and resistors;

• Head-to-head comparison of top outsourcing service providers of each

country;

• Head-to-head comparison of popular outsourcing models in each country.

The objective of the comparison is to provide readers an unbiased depiction of the

pharmaceutical outsourcing industry in each country with the emphases on revealing

each country’s strengths, weakness, advantages and disadvantages in outsourcing.

A comprehensive Understanding of the principle will increases their Decision making

ability and sharpening their tools for this purpose. The scope of the work under

taken by us includes introduction to basic & major things about the Impact of

Pharmaceutical Industry on the customer and also their own future aspects. We

have put our maximum effort to gain the information.

Since I had to complete my project within a limited time frame, this made me

experience the actual stress of the workplace. This I think will work as real booster

when I will go to work after the completion of the PGDBM course at IIMT, Greater

Noida. The way the Guide supported me and his other subordinates was a good

example of co ordination and good manager. This shows that in the corporate world

the superior officer should not only take care of the target fulfilled but also the

behavioral aspect of the subordinates.

��

�

Working with the professionals was a great experience as I came to know that how a

person can work as a team in a multifarious industry to achieve the organizational

goal. Many a times, while working, I had to sacrifice my personal feelings and

aspirations just to keep the project interests in my mind by giving it the top most

priority.

We stimulate discussion, constructive and valuable suggestions that helped us in this

endeavour. We would like to thank all those people who graciously helped us by

sharing their valuable time, experience & knowledge for completion of this project.

With my honest efforts and some great luck I got a chance to complete my Final

project on “Detail study of Indian pharma companies Vs European pharma

companies”. There I had worked hard and my work was to understand the real picture

of pharma industry and compare the Indian and European pharma style and status. I

meet with various professional people and analyze market competition. I also get their

feedbacks about my work.

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CHAPTER 2

Growth of Pharmaceutical industry


















in the medium term and will require maximum effort. However, India’s government.

Competent workforce: India has a pool of personnel with high managerial and

technical competence as also skilled workforce. It has an educated work force and

English is commonly used. Professional services are easily available.

Cost-effective chemical synthesis: Its track record of development, particularly in the

area of improved cost-beneficial chemical synthesis for various drug molecules is

excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk

drugs.

Legal & Financial Framework: India has a 53 year old democracy and hence has a

solid legal framework and strong financial markets. There is already an established

international industry and business community.

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Information & Technology: It has a good network of world-class educational

institutions and established strengths in Information Technology.

Globalisation: The country is committed to a free market economy and globalization.

Above all, it has a 70 million middle class market, which is continuously growing.

Consolidation: For the first time in many years, the international pharmaceutical

industry is finding great opportunities in India. The process of consolidation, which

has become a generalized phenomenon in the world pharmaceutical industry, has

started taking place in India.

India's US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent

per year. It is one of the largest and most advanced among the developing countries.

Over 20,000 registered pharmaceutical manufacturers exist in the country. The

domestic pharmaceuticals industry output is expected to exceed Rs260 billion in the

financial year 2002, which accounts for merely 1.3% of the global pharmaceutical

sector. Of this, bulk drugs will account for Rs 54 bn (21%) and formulations, the

remaining Rs 210 bn (79%). In financial year 2001, imports were Rs 20 bn while

exports were Rs87 bn.

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Indian Pharmaceutical industry independence to 21st century

A Brief History (1900–1999)

The Indian pharmaceutical industry traces its roots to the 1903 formation of Bengal

Chemical and Pharmaceutical Works in Calcutta by Professor P.C. Roy. During the

first half of the twentieth century, however, and despite modest efforts on the part of

the colonial government to spur local production, India remained largely dependent

on the UK, France, and Germany for medicines. The new and independent

government in 1947—which emphasized industrialization to achieve self-reliance—

invested heavily in pharmaceuticals (among other industries) and curbed imports. 2

Yet, in contrast to its policies toward other sectors, the government did not discourage

foreign firms from competing in India. In other sectors, self-reliance was pursuing at

high cost, but pharmaceutical policies emphasized national health. Because there was

no local substitute for MNCs’ technology, the government did not discourage their

presence in the country. In fact, until 1970, the Indian pharmaceutical industry

consisted almost entirely of MNCs, most of which maintained minimal physical

operations in India.

The government took its first concrete steps toward self-reliance in pharmaceuticals

with the establishment of Hindustan Antibiotics Ltd. (HAL) in 1954 and Indian Drugs

and Pharmaceuticals Ltd. (IDPL) in 1961. IDPL (in spite of its grossly inefficient

character) became instrumental in the development of the industry by serving as the

vehicle for a comprehensive Soviet-sponsored program in which Russians supplied

machinery, personnel, and technical know-how to produce antibiotics. The IDPL

development program helped self-reliance in several ways. First, it showed that it was

possible to produce drugs in India at competitive costs. Second, it developed human

and physical capital, some of which moved in due course to other companies. Third, it

spurred the existence of a network of support institutes, pharmacy colleges, and up

and down stream businesses.

The IDPL program alone was insufficient to jumpstart local industry. Local

companies needed a way to compete with more experienced and better endowed

foreign firms; only then would the industry have the critical mass to sustain itself. The

1970 Patent Act made headway toward this end by recognizing patents on processes

but not patents on products, which in turn enabled local firms to legally produce

compounds that were patented elsewhere.

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Consequently, scores of Indian pharmaceutical companies evolved to reverse-

engineer and cheaply sell copies of all major drugs. Although many Western

observers criticize the 1970 Patent Act on ethical grounds, it cannot be denied that the

legislation helped to develop India’s pharmaceutical industry. Over the next thirty

years, the industry would grow from a handful of MNC players to today’s 16,000

licensed pharmaceutical companies. From 1970, local Indian firms reverse-engineered

bulk drugs, which they either sold wholesale or processed into simple formulations.

Meanwhile, MNCs—reluctant to expose their IP in such a lawless market—limited

their exposure to India. By 1997, MNCs had come 14 to account for 30 percent of

bulks and 20 percent of locally produced formulations.4 Most MNCs did the bare

minimum needed to stay in the Indian market (such as producing simple formulations

from imported bulks), while awaiting the arrival of stronger patent protection. The

few MNCs that have been bullish toward India over the past thirty years have local

managers to thank for their aggressive posture. Even without strong patent protection,

the Indian pharmaceutical industry matured during the 1980s. In particular, local

companies grew less reliant upon reverse-engineering for revenues. By increasingly

focusing on attributes such as novel delivery systems, Indian firms were on their way

to creating revenues based on their own added value. Companies also started to

produce products better tailored for their markets than typical MNC products. For

example, Lupin Labs introduced its AKT-4 kits, which combined four

antituberculosis (anti-TB) drugs that were generally administered together into a

single package. The AKT-4 kits were well received by TB patients, who no longer

had to worry about the lack of availability of any one drug. (Selective discontinuation

of anti-TB drugs can lead to resistance and even relapse in TB patients.) While

impressive in terms of growth and development, the past thirty years have been

relatively uneventful for the Indian pharmaceutical industry. However, as 2005

approaches, fundamental structural changes are likely, if not inevitable. As of 2005,

India has agreed to enforce product patents on drugs. Consequently, it will no longer

be possible for companies to collect rents on competitors’ IP.

At present, there are many questions surrounding the post-2005 patent regime.

Industry participants wonder about both the will and ability of patent courts to

implement and enforce decisions. They also worry about the potential for price

controls to limit the profitability of first generation drugs (see 3.1.1 and 3.1.2).

However, the proposed (and already enacted) changes to which India agreed by

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signing the Agreement on Trade-Relate Aspects of Intellectual Property Rights

(TRIPS) 5 on April 15, 1994, have been sufficient to motivate much change within

the industry. Some companies will continue in their old ways for as long as possible,

but others are in the midst of transitions that will enable them to remain profitable in a

changed industrial environment.

India's pharmaceutical industry in the spotlight

In 2001, India’s pharmaceutical industry became the focus of public debate when

Cipla, the country's second-largest pharmaceuticals company, offered an AIDS drug

to African countries for the price of USD 300, while the same preparation cost USD

12,000 in the US.

This was possible because the Indian company produced an all-inone generic pill

which contains all three substances required in the treatment of AIDS. This kind of

production is much more difficult in other countries as the patents are held by three

different companies.

In the final analysis, the price slump was a result of India's lax patent legislation. In

2005, patent legislation was tightened, so India’s pharmaceutical sector had to adjust.

1. Development of India’s pharmaceutical industry

Up until the 1970s India’s pharmaceuticals market was mainly supplied by large

international corporations. Only cheap bulk drugs were produced domestically by

state-owned companies founded in the 1950s and 60s with the help of the World

Health Organisation (WHO). These state-run firms provided the foundation for the

sector’s growth since the 1970s. Back then, India’s government aimed to reduce the

country’s strong dependence on pharmaceutical imports by flexible patent legislation

and to create a self-reliant sector. In addition, it introduced high tariffs and limits on

imported medicines and demanded that foreign pharmaceutical companies reduce

their shares in their Indian subsidiaries to two fifths. This made India a less attractive

location for international companies, many of which left the country as a

consequence. Especially India Drugs and Pharmaceutical Ltd. (IDPL) are credited

with speeding up the development of a national pharmaceutical industry. Several

IDPL staff has successfully founded their own firms, which now belong to the top

group among India’s pharmaceutical companies. In the 1980s, however, the decline of

state-run companies began − among other things because of increasing central

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government bureaucracy and insufficient corporate governance. Today, there are no

(entirely) state-owned pharmaceutical companies left. By contrast, the weakening of

the patent system and numerous protectionist measures sped up the development of a

major national pharmaceutical industry on a private-sector basis, which made it

possible to provide the population with a large number of drugs.

Current situation

India’s pharmaceutical industry has been in transition for several years now. This is

the result mainly of the changes to drug patent legislation in 2005. Prior to the Patent

Amendment Bill, not the substance itself but merely the manufacturing process was

protected for a period of seven years. India’s patent legislation had frequently been

the reason for legal disputes with large western drug firms, especially from the US. In

line with international standards, the sector is now subject to product and process

patents valid for a period of 20 years. Indian companies seeking to copy drugs before

the patent expires are forced to pay high licence fees.

This became necessary following the signing by India's government of the TRIPS

Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights). So

Indian drug firms could no longer simply copy medicines with foreign patents by

using alternative manufacturing processes and offer them on the domestic market. As

a consequence of these major changes to India’s drug patent legislation, the country’s

pharmaceutical industry is undergoing a process of re-orientation. Its new focus is

increasingly on self developed drugs and contract research and/or production for

western drug companies.

Pharmaceutical companies in India are growing at a very fast pace and this has made

the Indian pharmaceutical industry as the second largest growing industry. Also the

pharmaceutical industry in India is the third largest in the world, which will be of

US$20 billion by 2015. Mergers and acquisitions are the part of this growth. The

compounded annual growth rate of pharma in India is 12-15% and the global figures

are 4-7% for the period of 2008-2013. With such a profound growth of

pharmaceutical companies in India numerous pharmaceutical jobs can be seen. This in

turn is helping biotechnology industry and booming the biotechnology jobs in India.

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Angel Broking has done a research on the growth of pharmaceutical industry and

found that by 2015 the pharmaceutical industry in India will be in the top 10 markets.

Yet another finding of FICCI-Ernst & Young study reveals that the population of high

income group in India is rising which will give rise to more influx of MNCs and

expensive drugs.

Pharmaceutical companies along with native companies are also competing with the

top MNCs. Such a profound growth is because of the heavy population figures and

with the increasing number of middle class people and their income the access to

drugs and medicines is also increasing. But still the low-priced generics are popular in

Indian pharmaceutical industry.

From India in year 2007-08 total of US$ 8.25 billion were exported and there was

seen 29% rise in this figure in 2009. MR Anand Sharma, Union Minister of

Commerce said that pharmaceutical sector in India has grown and it is the major

contributor to exports from India. In 1990 the amount was meagre as compare to

today's massive figures.

Initiatives by Government

1. Tax breaks are offered to pharma industry

2. New procedure for the development drugs

3. Proper clinical procedures

4. New Millennium Indian Technology Leadership Initiative and the Drugs and

Pharmaceuticals Research Programme - Two schemes launched by the

government.

Some Vital Information on Pharmaceutical Companies in India

• In terms of volume - India's pharmaceutical industry is the third largest in the

entire world.

• In terms of value - India's pharmaceutical industry ranks fourteenth

• By 2015 - It will be in the list of top 10 global pharmaceutical markets and it

will touch US $ 20 billion.

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• 2008-2009 - Saw 29% growth in exports of pharmaceutical drugs as compared

to 2007

• 2013 - Indian formulation market is expected to touch US$ 13.7 billion

Pharmaceutical Industry in India is one of the largest and most advanced among the

developing countries. It is ranked 4th in volume terms and 11th in value terms

globally. It provides employment to millions and ensures that essential drugs at

affordable prices are available to the vast population of India. Indian Pharmaceutical

Industry has attained wide ranging capabilities in the complex field of drug

manufacture and technology. From simple pain killers to sophisticated antibiotics and

complex cardiac compounds, almost every type of drug is now made indigenously.

Indian Pharmaceutical Industry is playing a key role in promoting and sustaining

development in the vital field of medicines. Around 70% of the country's demand for

bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,

capsules, orals and vaccines is met by Indian pharmaceutical industry. A number of

Indian pharmaceutical companies adhere to highest quality standards and are

approved by regulatory authorities in USA and UK.

The Indian pharmaceutical industry traditionally relied on “reverse engineering” i.e.

product copying, through which vast profits were made. In recent years, however, the

larger domestic companies have realised the need to undertake original research and /

or penetrate into the regulated generics markets in the USA/EU in order to survive in

the global market. At the same time, the Indian pharmaceutical industry is renowned

for supplying affordable generic versions of patented drugs for illnesses like

HIV/AIDS to some of the world’s poorest countries.

Some of the strategies that have been followed by Indian pharmaceutical companies

for their growth in the global markets have been as follows:

� Geographic diversification with few companies focussing on increasing

presence in the regulated markets and others exploring the developing/under-

developed markets of the world.

� As a part of diversification strategy, some of the companies have acquired

brands, facilities and businesses overseas. Some companies have even started

their local marketing in foreign markets.

� Partnerships for supply of bulk drugs and formulations with the generic

companies as well as innovators.

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� For regulated markets such as the US, there are companies focussing on value

added generics, niche segments or patent challenges in the US.

� Focus on offering research and manufacturing services on a contractual basis

(CMOs and CROs).

Apart from these strategies Indian companies have to devise newer strategies

continuously to survive in the highly competitive global market in an industry that is

characterised by - high capital requirement, high technical requirement, high process

skills, high value addition prospects, high export volumes, high market sophistication.

Indian companies are following the route of mergers and acquisitions to make inroads

in the foreign markets. They need to consolidate further in different parts of the world

to become trans-national players. Indian companies will have to rise above the

statement of Michael Porter (1990), that most multi-national firms are just national

firms with international operations. They shall certainly be at an advantage, as their

strong national identities will give them a competitive advantage in the global

markets.

TYPES OF DRUG SYSTEM IN INDIA

Ancient civilization allowed India to develop various kinds of medical and

pharmaceutical systems. In addition to the allopathic system, which is prevalent in the

United States, Japan and Europe, the following types of medical and pharmaceutical

systems are used by the Indian people:

Ayurveda: Ayurveda translates as the “science of life”. It encompasses fundamentals

and philosophies about the world and life, diseases and medicines. The knowledge of

Ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative

treatment lies in drugs, diet and general mode of life.

Siddha: The Siddha system is one of the oldest Indian systems of medicine. Siddha

means “achievement”. Siddhas were saintly figures who achieved healing through the

practice of yoga. The Siddha system does not look merely at a disease but takes into

account a patient’s age, sex, race, habits, environment, diet , physiological

constitution and so forth. Siddha medicines have been effective in curing some

diseases, and further work is needed to truly understand why this system works.

Unani: The Unani system originated in Greece and progressed to India during the

medieval period. It involves promotion of positive health and prevention of disease.

The system is based on the hum oral theory i.e. the presence of blood, phlegm, yellow

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bile and black bile. A person’s temperament is accordingly expressed as sanguine,

phlegmatic, choleric or melancholic. Drugs derived from plant, metal, mineral and

animal origins are used in this system.

Homeopathy: Homoeopathy is a branch of therapeutics that treats the patient on the

principle of “SIMILIA SIMILIBUS CURENTUR” which simply means “Let likes

be cured by likes”. Homeopathy seeks to stimulate the body's defence mechanisms

and processes so as to prevent or treat illness. Treatment involves giving very small

doses of substances called remedies that, according to homeopathy, would produce

the same or similar symptoms of illness in healthy people if they were given in larger

doses. Treatment in homeopathy is individualized (tailored to each person).

Homeopathic practitioners select remedies according to a total picture of the patient,

including not only symptoms but lifestyle, emotional and mental states, and other

factors.

Yoga and Naturopathy: Yoga and Naturopathy are ways of life. In naturopathy one

applies simple laws of nature. It advocates proper attention to eating and living habits.

It also involves hydrotherapy, mud packs, baths, massage and so forth. Yoga consists

of eight components: restraint, observance of austerity, physical postures, breathing

exercises, restraining of the sense organs, contemplation, meditation and Samadhi.

Increasing interest exists in revisiting these ancient drug systems.

INDUSTRY SEGMENTATION

Indian pharmaceutical industry can be widely classified into bulk drugs, formulations

and contract research. Bulk drugs are the Indian name for Active Pharmaceuticals

Ingredients (API). Formulations cover both branded products and generics. Indian

pharmaceutical sector is self sufficient in meeting domestic demand and exports

successfully to various markets globally. The existence of process patents in India till

January 2005 fuelled the growth of domestic pharmaceutical companies and

developed them in areas like organic synthesis and process engineering, as a result of

which, Indian pharmaceuticals sector is able to meet almost 95 percent of the

country’s pharmaceutical needs. India is globally recognized as a low cost, high

quality bulk drugs and formulations manufacturer and supplier. Contract Research, a

nascent industry in India has witnessed commendable growth in the last few years. As

per Yes Bank /OPPI report (2007-08), formulation segment (including domestic

formulation and formulation exports) constituted 72%of the total pharmaceutical

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industry (in terms of sales) while bulk drugs and contract research constituted 25%

and 3% of pharmaceutical industry respectively.

Fig: Segment

BULK DRUGS

Bulk drug industry is the backbone

Indian bulk drug industry in the last five decades has been impressive and highest

among developing countries. From a mere processing industry, Indian bulk drug

industry has evolved into sophisticated indust

production, technology and quality control. Today, India stands among the top five

producers of bulk drugs in the world. The market is fragmented with far too many

players. About 300 organised companies are involved in

in India. Over 70 percent of India’s bulk drug production is exported to more than 50

countries and the balance is sold locally to other formulators. Indian bulk drug

industry is mainly concentrated in the following regional b

Ankleshwar, Hyderabad to Madras and Chandigarh. Around, 18000 bulk drug

manufacturers exist in India. Some major producers of bulk drugs in Indian

pharmaceutical industry are Ranbaxy Laboratories, Sun Pharma, Cadila, Wockhardt,

Aurobindo Pharma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals &

Chemicals, Nicholas Piramal, Lupin, Aristo Pharmaceuticals, etc. Most are involved

in bulk as well as formulations while a few are solely into bulk drugs.

India is the world’s fifth largest p

to grow at higher percentages in future years with more and more international


and 3% of pharmaceutical industry respectively.

Fig: Segment-wise sales

Bulk drug industry is the backbone of the Indian pharmaceutical industry. Growth of



industry has evolved into sophisticated industry today, meeting global standards in



players. About 300 organised companies are involved in the production of bulk drugs



industry is mainly concentrated in the following regional belts




harma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals &



India is the world’s fifth largest producer of bulk drugs. The market size is expected


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of the Indian pharmaceutical industry. Growth of



ry today, meeting global standards in



the production of bulk drugs



elts - Mumbai to




harma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals &



roducer of bulk drugs. The market size is expected


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companies depending on India to meet their bulk-drug supply needs. Moreover, India

is way ahead of competitors in the total number of Drug Master File (DMF) filings.Of

the overall DMF filings to US FDA, the portion of filings by Indian players has

jumped from around 14% in 2000 to 46% of total filings in 2008(January-June) This

growth in proportion speaks volumes about the quality standards followed in Indian

manufacturing facilities.

Fig: Increasing share of Indian companies in DMF filings (US FDA)

(SOURCE: CRISINFAC, YES BANK/ OPPI)

The growing number of DMF filings signifies the increase in number of contracts that

Indian players have garnered. While India has recorded 1671 DMF filings, China

shows a tally of 520, the second largest number of DMF filings after India. In 2008

(January-June), India’s DMF filings were around 3.5 times that of China -187 from

India vis-à-vis 51 from China. The bulk drug segment is a low-margin and volume-

driven business. The thrust is on manufacturing. In manufacturing operation,

efficiency through better process skills to reduce both manufacturing time and cost is

critical. Low cost manufacturing is a distinct advantage gained by Indian companies

over a period of time with a steep learning curve. Bulk Drugs exports have grown

significantly in the past on account of growth in generic industry, increasing share of

Indian companies in DMF filings and contract manufacturing opportunity. Bulk drugs

exports grew robustly by 28% CAGR between 2001 02 and 2007-08 to reach an

estimated USD4.2 billion.

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Fig. India’s Bulk Drug Export (CRISINFAC, YES BANK/ OPPI)

As already explained, India has carved a niche for itself by being one of the largest

bulk drug suppliers. India offers a number of distinctive advantages in the

pharmaceutical industry, as illustrated in the figure below:

Fig: Advantage India-API

(SOURCE: CRISINFAC, YES BANK/ OPPI)

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India has many local manufacturing equipment manufacturers. These equipments are

of high quality and low cost, thus reducing the cost of capital. According to industry

estimates, Indian companies are able to reduce the upfront capital cost of setting up a

project by as much as 25-50%due to locally manufactured equipment and high quality

technology/engineering skills. Competition in the India’s domestic formulation

market has made it inevitable for API suppliers to continuously develop alternative

production methods to improve yield or reduce costs. This ensures that India has a

significant cost advantage due to process engineering.

Apart from availability of a high number of skilled chemists, India also offers

scientists with vast experience and unmatched skills. The scientific staff in India

though equivalent or better qualified are also available at a fraction of the cost. This

makes Indian research firms more competitive than many international firms while

being cost competitive. Labour costs are also low in India, being almost 1/7th of that

in many developed countries and offer an obvious cost advantage.

Outlook for India’s pharmaceutical industry up to 2015

All in all we expect India to see drugs sales rise by an annual 8% to nearly EUR 20 bn

between 2006 and 2015. 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%. Growth of India’s

pharmaceutical industry and thus its share in global drugs manufacturing could even

be slightly higher if the infrastructure problems could be remedied quickly. While the

pharmaceutical industries of China and Singapore will likely continue to show much

higher growth, India looks set to even lose market share in Asia. Mainly affected by

this development are smaller Indian companies with sales of up to EUR 10 m which

focus on traditional Indian medicines. It is likely that many of these companies will

merge or disappear from the market altogether. By contrast, large pharmaceutical

companies with sales volumes of over EUR 50 m will be able to increase their sales as

they will be better equipped to adjust their product ranges to the demands of

international markets. These firms will expand their capacities in India – mostly in the

sector’s clusters surrounding Delhi and Mumbai – but will also take over firms in the

industrial countries. Medium-sized businesses will benefit from increasing contract

production for western firms. All in all, the share of pharmaceuticals in the total

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chemicals industry in India will come to roughly 17% in 2015 (2006: 18%), compared

with 28% in Germany (from 24% in 2006). For the world as a whole, the ratio will

likely be only slightly lower than the German level (25%). Although India’s

pharmaceutical sector is growing strongly, the population’s demand for drugs cannot

be met by the country’s own production in all segments. At EUR 1.5 bn, India’s total

drugs imports are comparable in size to Norway’s entire pharmaceuticals market.

Imports look set to continue to rise strongly. On a medium-term horizon, one-fifth of

the world’s pharma sales will be accounted for by the emerging markets. China will

then be among the group of the five largest manufacturers, while India will join the

group of the ten largest suppliers.

High sales growth

India is gaining in importance as a manufacturer of pharmaceuticals. Between 1996

and 2006, nominal sales of pharmaceuticals were up 9% per annum and thus

expanded much faster than the global pharmaceutical market as a whole (+7% p.a.).

Demand in India is growing markedly due to rising population figures, the increasing

number of old people and the development of incomes. As a production location, the

country is benefiting from its wage cost advantages over western competitors also

when it comes to producing medicines. Between 1996 and 2006, nominal sales of

pharmaceuticals on the Indian subcontinent were up 9% per annum and thus expanded

much faster than the global pharmaceutical market as a whole (+7% p.a.). Indian

companies strongly expanded their capacities, making the country by and large self-

sufficient. Nonetheless, with total sector sales of roughly EUR 10 bn, India

commands a less than 2% share in the world’s pharmaceutical market (1966: 1.5%).

This puts the country in twelfth place internationally, even behind Korea, Spain and

Ireland and before Brazil, Belgium and Mexico. Among the Asian countries, India’s

pharmaceuticals industry ranks fourth at 8%, but has lost market share to China, as

sales growth there was nearly twice as high and sales volumes nearly four times

higher than in India.

India’s pharmaceutical industry currently comprises about 20,000 licensed companies

employing approx. 500,000 staff. Besides many very small firms these also include

internationally well-known companies such as Ranbaxy, Cipla or Dr. Reddy’s. With

sales of roughly EUR 1 bn, Ranbaxy is currently the world’s seventh largest generics

manufacturer.

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Currently the most important segment on the domestic market is anti-invectives; they

account for one-quarter of total turnover. Next in line, and accounting for one-tenth

each, are cardio-vascular preparations, cold remedies and pain-killers. By contrast,

medicines against civilisation diseases (such as diabetes, asthma and obesity) or so-

called lifestyle drugs (anti-depressants, drugs to help smokers to quit and anti-wrinkle

formulations) are of little significance at present.

Indian pharmaceutical companies increasing investment abroad

In the coming years, Indian drug makers will likely continue to look to foreign

countries to expand their operations. An example for the global orientation of Indian

pharmaceutical companies is Ranbaxy. Currently, Ranbaxy exports its products to 125

countries, has subsidiaries in nearly 50 countries and production plants in more than

10 countries. The US has become its most important sales market. Sales to the US

recently amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to

Europe came to nearly 20%. Overall, approx. 80% of the manufacturer’s total sales

are generated abroad.

According to PwC, about half of all larger Indian drug makers are looking to expand

abroad through take-overs, whereas less than 20% of their Chinese competitors pursue

that strategy. Targeted markets are still the US and Europe. In many cases, there are






Over the past few years, for instance, Ranbaxy has bought companies in Romania,

Belgium, Italy and France, and intends to become the world’s fifth largest

manufacturer of generics by 2012. Wockhardt is operating in Germany and the UK, as

is Cadila in France. At the beginning of 2006, Dr. Reddy’s bought Betapharm, a

German generics manufacturer, for almost EUR 500 m. The German market is

particularly attractive for Indian companies as generics prices there are relatively high

by international standards.Compared with the UK, a generic drug costs nearly 50%

more in Germany. So it cannot come as a surprise that Indian producers are loath to

leave the lucrative German market to the large German generics companies such as

Ratiopharm, Hexal and Stada alone.

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FORMULATIONS

Formulations are broadly categorized into patented drugs and generic drugs. A

patented drug is an innovative formulation that is patented for a period of time

(usually 20 years) from the date of its approval. A generic drug is a copy of an expired

patented drug that is similar in dosage, safety, strength, method of consumption,

performance and intended use.

Formulation Industry can be subdivided into two segments:

� Domestic Formulation Industry

� Indian Formulation Exports

Domestic Formulation Industry

Between 2002 and 2007, the domestic formulation industry grew at a CAGR of 14%

from around USD4.3 billion in 2002 to USD 8.4 billion in 2007. Demand in India is

growing markedly due to rising population, increasing per capita income, increasing

access to medicine, especially in the rural areas and an increasing population of over

sixty years of age.

Presently, the growth of a domestic pharmaceutical company is critically dependant

on its therapeutic presence. In terms of end-use, the pharmaceutical industry is

subdivided into several therapeutic segments. These segments are broadly defined on

the basis of therapeutic application. Some of these segments are low-volume, high

margin segments, while the others are high-volume with relatively low margins. The

new lifestyle categories like Cardiac, Respiratory and Vitamins are expanding at

double digit growing rates. The long term ailment, chronic therapies is now

accounting 24% of the market. The only growth driver for acute therapies is the new

product introduction under this segment. Today, anti-infective which used to be the

single largest therapeutic segment in Indian pharmaceutical industry is increasing.

Anti infective segment is now 1st in terms of value contribution followed by

Gastrointestinal and Cardiac.

The key therapeutic segments include:

� Anti-infective

� Cardio vascular

� Central nervous system drugs

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Anti-infective is currently the largest therapeutic segment in India. It accounts for one

fifth of total market turnover. Next in line, and accounting for one-tenth each, are

cardio-vascular preparations, cold remedies, pain killers and respiratory solutions.

INDIAN FORMULATION EXPORTS

Indian formulation exports grew at a CAGR of 23.2% touching around USD 4 billion

in 2007-08. The growth has been spurred mainly due to the focus on regulated

markets by most Indian companies, thereby increasing revenues.

Fig: Indian Formulation Exports

DOMESTIC GROWTH DRIVERS:

Pharmaceutical sector is one of the most globalized sectors among the Indian

industries. The downside is pharmaceutical sector traditionally has been immune to

business cycles. The upside of Indian pharmaceutical sector, however, is influenced

by a mix of global and local factors. Global factors are important as most Indian

companies ship a major portion of their production to overseas markets. Also,

multinationals operating in the Indian market follows the central research and global

marketing model. Their actions are largely dictated by global trends although local

issues are given due importance. The domestic market is critical for both Indian

companies and multinationals. For Indian companies, the domestic market lends

stability to bottom line and offer means to cope with fluctuations in global demand.

The growth drivers for Indian pharmaceutical market are:

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Growing Population and Improving Incomes: Household incomes are rising in

India; the proportion of middleclass in Indian population is also increasing. Statistics

show a clear migration of population towards middle and upper classes. Rise in

income levels is always accompanied by greater demand for medical facilities and

pharmaceutical products. Middle class is already 70 million strong and is expected to

grow even fast, accounting for a higher share of total population. Increase in living

standards will lead to longer life expectance and higher consumption of drugs and

health care services.

Changing lifestyles: Rising incomes and improving literacy rates are leading to

change in lifestyles. While incomes provide the means to access medical facilities and

products, improving literacy boost awareness about diseases and lead to higher

consumption of drugs. Changing lifestyles, however, is leading to a change in disease

profile especially in urban areas. Hectic lifestyles and high cholesterol diets are

resulting growing incidence of diseases such as cardio vascular diseases and cancer.

Research and Development: The R&D efforts of Indian companies have been

largely focussed on chemical synthesis of molecules and their cost effective

production thereof. India has a large pool of technical and scientific personnel with

good English language skills. Indian scientists have developed a high degree of

chemical synthesis skills while engineers have developed competencies in producing

molecules cost effectively. These skills have helped Indian companies tap generic

markets abroad successfully in the past and will continue to do so.

Healthcare Expenditure: Indian healthcare system is largely run by the govt with

private sector playing a small, but important part. The healthcare system in India

comprises government hospitals in cities and towns and a network of health centres in

rural areas. This is supplemented by a string of private hospitals and clinics in largely

urban areas. The public expenditure on health has been growing at a decent rate while

private expenditure has been recording marginal growth.

(a) NEW PRODUCT DEVELOPMENT

Pre 2005: New product development efforts of Indian pharmaceutical companies in

process patents era were limited to reverse engineering molecules discovered by other

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companies. Thanks to absence of product patents, Indian companies did not have to

go through long winded drug development process. Nor did Indian companies have to

expend any effort on research focus. Indian companies simply zeroed in on

blockbuster drugs and tried to come up with an alternative process as fast as they

could. The focus of the Indian companies was to launch a copy of a blockbuster drug

ahead of their rivals in India and abroad.

Key areas to focus on R&D for Indian companies:

1. Potential product identification

� Complex API

� Complex finished product

� Commercial potential of products

� Out-licensing opportunity to MNCs

2. Novel Drug Delivery System (NDDS)

3. New Drug Development

Post 2005: A large number of drugs are going “off patent” in the next few years.

According to IMH Health, more than $60 billion worth of drugs are going “off

patent” by 2011. Thus, Indian companies will not be short of new products for at least

another two years. In the long run, however Indian companies may find it hard to

make money from drugs coming off patent. Already competition in generic market is

intense and likely to increase further in the future. Hence, new molecules rather than

generics will drive revenues and profits in the product patents area. Indian companies

need to discover new drugs either through their own efforts or research alliances.

Perhaps licensing deals with multinationals could also provide Indian companies

access to new drugs. Focus on basic research will come with its own issues. Indian

companies will have to acquire the skills of identifying research areas that offer

excellent revenue and profit potential. This will entail a closer tracking of disease

profiles and related therapies as well as keeping a close tab on the research

programmes of rivals. Besides, Indian companies will have to pay more attention to

economics of drug development process. A product patent is granted for a period of

20 years.

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(b) THERAPEUTIC COVERAGE

Pre-2005: In the absence of product patents, Indian pharmaceutical companies did not

feel the need to focus on specific therapeutic areas. Most Indian pharmaceutical

companies eschewed narrow focus and tried to cover as many therapeutic areas as

possible. Now the product portfolio of many Indian companies has considerable

breadth and depth. Given the price controls in the market, diversification worked to

the advantage of companies in the domestic markets. In the export markets, a wider

product portfolio gave companies the option of picking and choosing from an array of

opportunities.

Post 2005: Opinion is divided over the therapeutic strategy that Indian companies

should pursue in product patent era. Some companies believe that focus on select

therapeutic segment will fetch them greater dividends in terms of new chemical

entities and market share. Other companies believe such a strategy is risky given the

size of Indian companies and that a big setback in research could sink the company.

Instead such companies are pursuing a de-risking strategy of building a wide product

portfolio. In the domestic market, such a strategy will result in economies of scale at

production and marketing stage, putting the company in a better place to weather

competition from multinationals. In the export markets even after the introduction of

product patents, products under patent protection will comprise only 15 percent of the

market. So a vast chunk of the market will be still open for competition although

margins will be wafer thin.

EXPORTS

Pre-2005: Most Indian companies focused on exports. Exports improve the valuation

of companies owing to higher margin in overseas markets. Indian companies built

fortunes by making cheaper versions of blockbuster drugs and selling them in

domestic and export markets. Indian companies built especially strong position in

manufacture of bulk drugs. Out of the total exports, formulations constituted 55

percent and bulk drugs constituted 45 percent. Success in export market allowed some

Indian companies to build a strong position in the domestic market organically and

through acquisitions of brands and companies.

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Post 2005: Exports has continued to be a priority for Indian companies. Major

blockbuster drugs will come off patent in the near future, creating a big generic

opportunity for Indian companies. Also, a growing demand for anti-AIDS drugs in

Africa will keep Indian companies busy. Exports have and will continue to provide

Indian companies with the strength to withstand the onslaught of multinationals in the

domestic market.

(d) LOW COST PRODUCTION THROUGH SCALE

Pre-2005: Indian pharmaceutical companies have mastered the science of producing

drugs cheaply. Thanks to benign patents regime, Indian companies have developed a

high level of chemical synthesis skills. The absence of development costs together

with efficient production has enabled Indian companies to establish a solid position in

bulk drug manufacturing. But scale did not receive as much importance as it should

have, because the cost of Indian pharmaceutical companies was already low owing to

aforesaid reasons. Many Indian companies did not find the return on investment of

world class plants compelling enough.

Post 2005: By 2011, drugs worth $60 billion will come off patent, presenting a huge

generic opportunity to Indian companies. But the competition in the generic market

will be brutal, resulting in thin margins. The cost of production will hold the key to

success in the generic market. The production cost in turn depends on scale. Indian

pharmaceutical companies need to build global scale to stand a chance in the generics

market.

PHARMACEUTICAL REGULATORY BODIES IN INDIA

National Pharmaceutical Pricing Authority (NPPA)-

� NPPA is an organization of the Government of India which was established, to

fix/ revise the prices of controlled bulk drugs and formulations and to enforce

prices and availability of the medicines in the country, under the Drugs (Prices

Control) Order, 1995.

� The organization is also entrusted with the task of recovering amounts

overcharged by manufacturers for the controlled drugs from the consumers.

� It also monitors the prices of decontrolled drugs in order to keep them at

reasonable levels.

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Central Drugs Standard and Control Organization (CDSCO) -

CDSCO lays down standards and regulatory measures of drugs, cosmetics,

diagnostics and devices in the country. It regulates clinical trials and market

authorization of new drugs. It also publishes the Indian Pharmacopeia. The main

functions of the Central Drug Standard Control Organization (CDSCO) include

control of the quality of drugs imported into the country, co-ordination of the

activities of the State/UT drug control authorities, approval of new drugs proposed to

be imported or manufactured in the country, laying down of regulatory measures and

standards of drugs and acting as the Central Licensing Approving Authority in respect

of whole human blood, blood products, large volume parenterals , sera and vaccines.

The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port offices.

The four Central Drug Laboratories carry out tests of samples of specific classes of

drugs.

Department of Chemicals & Petrochemicals (DCP)

DCP is responsible for the policy, planning, development, and regulation of the

chemical, petrochemical, and pharmaceutical industries in India. This department

aims:

� To provide impartial and prompt services to the public in matters relating to

chemical, pharmaceutical and petrochemical industries;

� To take steps to speedily redressal of grievances received;

� To formulate policies and initiate consultations with Industry associations and

to amend them whenever required.

INDIAN PHARMACEUTICAL SECTOR: FUTURE SCENARIO

The dream of Indian pharmaceutical companies for marking their presence globally

and competing with the pharmaceutical companies from the developed countries like

Europe, Japan, and United States is now coming true. The new patent regime has led

many multinational pharmaceutical companies to look at India as an attractive

destination not only for R&D but also for contract manufacturing, conduct of clinical

trials and generic drug research. With market value of about US$ 45billion in 2005,

the generic sector is expected to grow to US$ 100billion in the next few years.

The Indian companies are using the revenue generated from generic drug sales to

promote drug discovery projects and new delivery technologies. Contract research in

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India is also growing at the rate of 20-25% per year and was valued at US$ 10-

120million in 2005. India is holding a major share in world's contract research

Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118

million per year in India, is estimated to grow to US$ 380 million by 2010, as MNCs

are entering the market with ambitious plans. By revising its R&D policies the

government is trying to boost R&D in domestic pharmaceutical industry. It is giving

tax exemption for a period of ten years and relieving customs and excise duties of all

the drugs and material imported or exported for clinical trials to promote innovative

R&D.

The future of Indian pharmaceutical sector is very bright because of the following

factors:

• Clinical trials in India cost US$ 25 million each, whereas in US they cost

between US$ 300-350 million each.

• Indian pharmaceutical companies are spending 30-50% less on custom

synthesis services as compared to its global costs.

• In India investigational new drug stage costs around US$ 10-15 million,

which is almost 1/10th of its cost in US (US$ 100-150million).

WHAT IS IN STORE FOR THE FUTURE?

• We can expect a significant level of consolidation- a major portion of small

players are likely to be wiped out.

• Many of the existing players are family owned businesses .No one should be

surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come

through. It is the classic “bird in the hand” principle –if the founders can earn

a few billions without too much effort, why should they spend hundreds of

millions and ten years or more in trying to develop new drugs.

• The present scenario presents an excellent opportunity for multinational

enterprises to establish manufacturing bases in India through the take-over

route. The availability of talented scientists at a relatively low cost makes

India an ideal location for manufacturing quality drugs. A word of caution is

necessary though such enterprises may have to follow a dual pricing policy,

one for the local market and another for the global market.

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• The Indian government would do well to take another look at its policies

.There is not much incentive for companies to invest in new drugs. The

corporations engaged in R&D need tax breaks and innovative incentives.

SPECIAL ECONOMIC ZONES - To play an important role in the future of the

pharmaceutical industry

Influx of outsourced work from global pharmaceutical companies has given the

necessary impetus for the creation of pharmaceutical Special Economic Zones

(SEZ),which would be one of the key drivers of outsourced pharmaceutical services

growth in the coming future'

It was in February 2006, when plans matured and finally the Special Economic Zone

Act came into force. The Act brought along many promises of creating an

internationally competitive and hassle free environment for exports. Consequently,

with the setting up of SEZs, India witnessed a revival of interest amongst many

players from the pharmaceutical and biotech sector. SEZs are instrumental in

attracting companies to set up manufacturing facilities and rendering a base for

services in India. SEZs served as a big boon for the Indian pharmaceutical industry,

which has a strong focus on exports, and derives 50 percent of its revenues from

exports, With the Act in place, the confidence of investors was reconfirmed. As a

result, many big pharmaceutical companies and biotech players like Ranbaxy,

Wockhardt, Dr Reddy's, Lupin, Jubilant, Biocon, Divi's Lab, Zydus and Nicholas

Primal joined the camp. SEZs are instrumental in bringing in fast globalisation by

establishing close global contacts. SEZs, therefore, offer distinct advantages to export

oriented pharmaceutical companies who are present in these zones. These companies,

through their SEZ units, can remain in contact with markets globally and add to the

growth of globalisation. Besides, unlike those outside SEZs, companies which have

located units in an SEZ are able to reflect the advantages they get in terms of tax sops

and better technology in the final selling price of their products.

The Draft National Pharmaceutical Policy, 2006 has recognized the need and benefits

of developing pharmaceutical parks/SEZs in India and proposes a scheme for setting

up separate SEZs for bulk and formulations. "It is proposed to set up 25

pharmaceutical parks over five years in India. This kind of a development will

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strengthen India's competitiveness, develop world class infrastructure for the industry

and fuel the growth of pharmaceutical exports considerably," opines Gajaria.

Although Indian pharmaceutical companies continue to view SEZs as an opportunity

to further facilitate India's integration in the global pharmaceutical industry, it still

remains to be seen if these estimates and perceptions stand the test of time.

ISSUES AND CHALLENGES

1. Attracting and retaining a skilled workforce

The pharmaceutical business is knowledge and experience business and people have

always been one of the most important resources for any pharmaceutical or Biotech

Company. We can talk about brand but the people in a company, in particular in their

behaviour, represent a living brand. We can focus on intellectual property but that is

the creation of the people, and people joining or leaving a company will add to or

reduce the sustainable intellectual property. We can talk about markets, but to access

any market you need people with a good understanding of that market and the culture

and values of customers and suppliers. Increasingly we talk about regulation and

compliance as thought they are some abstract function of a company. In practice we

are describing the collective values and integrity of the individual members of staff,

and the way they are motivated to behave in particular situations. So people are key

but how any organisation ensure that it can attract, recruit, develop, and motivate

those individuals with the competencies that will set that business apart from those of

competitors. The first challenge is that there are increasing signs that the labour

market is moving in favour of the employee rather than the employer. There is

growing demand for skilled people but traditional labour markets are providing fewer

new people with the right qualifications and experience; and companies are still trying

to recruit people with ever-more-specialised knowledge. It is possible to recruit from

new markets, but this is a new competence for many companies.

2. Controlling operating costs

It is accepted knowledge that the pressure to control and reduce costs is one of the

next major challenges to be faced by the pharmaceutical industry. But how is this

done and what is the best approach? Understanding and controlling operating costs is

a critical first step to developing or sustaining competitive advantage. Increasing

generic competition, imminent patent expiries (revenue can decrease by up to 60% at

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patent expiry), shorter pipelines and the emergence of China as a low cost

manufacturing base all contribute to constantly eroding margins. To maintain or

increase margins in the future, leading pharmaceutical companies have to start taking

a proactive approach immediately to understanding costs. As the pharmaceutical

industry embraces these new challenges, the companies that emerge at the forefront

will be those who address the issues now and are able to account for all the costs

throughout their organisation. To achieve this advantage, companies have to start

recognising and targeting costs today. Research & Development (R&D) costs are

spiralling as companies race to discover the next blockbuster, but where is the money

to fund this research going to come from? These questions are important as the costs

of operations are concerned.

• How are costs distributed throughout your company?

• Where should you focus your cost reduction efforts for greatest benefit?

• How are you going to use to tackle these costs?

• Have you identified all the hidden costs?

• How do you compare to the best-in-class?

• What is your baseline and what can you achieve?

• Where are you going to start?

Cost is complicated, ranging from back office through manufacturing and quality to

sales. To gain real benefits a structured programme of cost identification and

improvement has to be in place.

3. Infrastructure










increase on today's total. Moreover, the country’s lacking transport infrastructure is

increasingly turning into a major obstacle. The pharmaceuticals industry is especially

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dependent on road transport. However, the major transport links are chronically

congested and many are in a poor state of repair. Of the total road network covering

just over 3.3 million kilometres, only about 6% are relatively well built National and

State Highways. In many cases, there are no paved surfaces or there is only one lane

for all traffic. But the government has launched an extensive investment programme

entitled the National Highway Development Programme, to be implemented by the

middle of the next decade.

4. Impact of new patent law

Legal changes in India in 2005 made it considerably more difficult to produce “new”

generics. Foreign pharmaceuticals, which enjoy 20 years of patent protection, can no

longer be copied by means of alternative production procedures and sold in the

domestic market. Hence, a reorientation was required in India’s pharmaceutical

industry. It now focuses on drugs developed in-house and contract research or

contract production for western drug makers. Thus this transition phase of

reorientation is a challenge for the industry.

INDIAN PHARMACEUTICAL INDUSTRY: VISION- 2020

The pharmaceutical industry in India is expected to grow from $5.5 billion now to

$25 billion by 2010 and $75 billion USD by the year 2020. By 2020, global

integration of most sectors in the world economy would be much more pronounced,

and the pharmaceutical industry will not be an exception. In fact the Indian

pharmaceutical industry, which currently has strong linkages with the global

pharmaceutical market, will become even more strongly integrated. Globally the

pharmaceutical market is undergoing a transformation led by change in demand

patterns, realignment of supply chains, and global regulatory shifts. In order to predict

the state of the Indian pharmaceutical market in 2020, it is useful to understand the

current global environment of the pharmaceutical market and its key trends and

analyse the implications that these factors will have on the global as well as on the

domestic pharmaceutical market. Key trends of global pharmaceutical industry are

declining R&D productivity, increasing spread of generics and increasing

outsourcing.

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India is expected to host 30% of the world's contract research within the next 10-15

years, driven by the attractions of low cost and high quality standards, says the India

Brand Equity Foundation, IBEF. The IBEF quotes a McKinsey forecast for the value

of pharmaceutical clinical trial outsourcing in India at $1.23 billion by 2010. This

would represent 7% of the total world market, projected by Biopharm at $18.5 billion

in 2010.

India offers a huge cost advantage in clinical trials compared with Western countries.

A multinational company moving R&D to India could save as much as 30-50%, IBEF

says. Indian companies can conduct clinical trials at less than one-tenth of US costs.

The US National Institutes of Health trial registry (www.clinicaltrials.gov) lists 272

trials actively recruiting patients in the country, of which 60% are Phase III. There are

currently 70 CROs in India, according to Biopharm’s Contract Research Annual

Review 2006 - a number that is projected by to increase in the coming years. Several

western CROs, including Aptuit (US), Synergy Research Group (Russia) and ethical

Clinical Research (Canada) have formed alliances or joint ventures with their Indian

counterparts in recent months. Investment has also flowed in the opposite direction,

with US CROs Radiant Research and Taractec both being acquired by Indian groups

this year.

India is likely to be in the league of top 10 pharmaceutical markets by 2020. As per

the Government of India's annual report 06-07 the Indian pharma industry is worth

about $12 billion (over Rs 55,000 crores) as of now which includes $4.5 billion in

exports of drugs, pharma and fine chemicals. The pharma industry needs to focus

more on R&D and better productivity to capitalise on the immense existing

opportunities. India, with its inherent competitive advantages and cost-effective

manufacturing capabilities, has now become one of the most preferred destinations for

Contract Research and Manufacturing Services (CRAMS). As per the KPMG report,

India holds huge potential to tap the $20 billion CRAMS business, which is expected

to reach $ 31 billion by 2010. India with its intrinsic competitive advantages remains

as one of the most preferred outsourcing destinations and is now playing a vital role in

manufacturing as well as drug development value chain of various innovator

companies.

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The Indian Pharmaceutical Industry is entering an era where the value chain

components are reassessed and redesigned to realize optimum value. While the cost of

doing business is increasing, the customers are demanding more innovative

pharmaceutical products at more competitive prices. The change in patent regime has

also become heralded a change in the industry dynamics. On one hand, patents on

blockbuster drugs are expiring and on the other hand, there are insufficient drugs in

the pipeline. The changing industry dynamics both at the domestic level as well as the

international level has forced the pharmaceutical players to rethink their traditional

business strategies.

European Pharmaceutical industry-in present era

For the European pharmaceutical industry, the time has come to think again. In the

past, most companies adopted a pure "size sells" strategy. Ever-growing armies of

sales representatives seemed to be the fast track to higher sales. Sales force volume, it

seems, was the only thing that mattered. The outcome is that, today, marketing and

sales expenditures at drug companies can account for over 30% of revenues – far

more than R&D spending. While expansion of some 10% annually over the past five

years has pushed the European pharmaceutical sales force above 100,000, statistical

evidence from the USA suggests that it may after all be possible to buck the trend. In

America, the number of sales visits to doctors fell by 13% in 2005.

In Europe too, size is evidently no longer the all-important issue. Instead, a different

factor is gradually emerging as the new secret of success: sales force effectiveness

(SFE), or sales excellence. Aware of this, more and more pharmaceutical companies

are reviewing their existing sales models in an attempt to answer one central question:

Do we still see the right customers at the right intervals, communicating the right

message and using the right promotional mix? As the industry grapples with dynamic

development, weak product pipelines and pressure on margins, some of the traditional

answers just don't seem to fit any more. Our study highlights the challenges and

opportunities that arise from this development. It gives pharmaceutical companies a

platform from which to review their own sales models. The study is based on a survey

conducted by Roland Berger Strategy Consultants at the eye for pharma Sales Force

Effectiveness Europe 2006 conference in Barcelona. More than 200 managers took

part, representing the world's leading producers of ethical drugs, generics and OTC

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products. These companies were split into two size categories: large companies (with

global revenues upward of USD 15 billion) and midsized companies (USD 1 to 15

billion).

Taking stock: Where the pharmaceutical industry stands

In the quest for sales excellence, it is crucial to understand what drives change in the

pharmaceutical industry. Why has the traditional pharmaceutical sales model come

under such pressure? For the purposes of this study, three main causes can be

identified:

> Growing financial pressure

> Regulatory changes

> Changes in buyer behaviour

Several components contribute to mounting financial pressure. The first is a general

drive to contain healthcare costs across Europe. Due to "enforced" annual price

reductions, pharmaceutical companies are faced with lower margins, which increase

the need for a transparent return on investment. This pressure is being augmented by

steadily growing generic competition across Europe. In addition, weak product

pipelines are insufficient to replace products that are going off-patent. For small to

midsized drug firms, this will increasingly become an existential threat, triggering a

further wave of consolidation across Europe. Yet the pharmaceutical industry also has

to respond to regulatory changes.

On the one hand, such changes can impose constraints on existing sales methods. On

the other, they can also level the playing field and/or open up new opportunities for

first movers in the industry. Some of the changes involve stricter self-regulation

mechanisms, such as the British code of conduct that recently came into force and that

seeks to further limit access to physicians.

The third challenge lies in the way buyer behaviour is changing. General practitioners

(GPs) are experiencing mounting pressure to prescribe lower-cost drugs, for example.

Hospitals are adopting a more professional approach to procurement and must

therefore be served by key account managers. Meanwhile, countries such as Italy or

Spain are effectively breaking up into multiple regional markets as budgets come

under local control.

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Different countries, different causes

As usual, there is no one-size-fits-all solution to these challenges. On the contrary,

even a cursory view of the industry's five leading European markets shows that the

causes of these changes vary from country to country. Country specific adaptation of

sales and marketing processes is thus becoming an imperative.

In Germany, a strict policy of reference pricing is causing drug prices to drop as low

as generic levels. In addition, GPs are under heavy pressure to stay within annual

prescription budgets. New regulations have introduced Diagnosis Related Groups

(DRG) that will drive the future evolution of hospital demand. The number of

consultations has dropped now that patients have to pay a fee when seeking advice

from a physician. Buyer behaviour in Germany is essentially determined by two

factors. First, patients themselves must pay the often considerable difference ("co-

payments") for drugs that cost more than the reference price. Second, powerful

hospital purchasing groups have begun to negotiate prices across all products.

In France, reference pricing is based on unmet medical needs, identified market

potential and the cost of both research and development and marketing and sales.

Prices for medication are gravitating toward minimum levels, while low-cost generic

alternatives are abundant. Recently introduced marketing regulations aim to limit the

frequency of visits to physicians. Furthermore, the French government wants to

increase taxes on pharmaceutical promotional expenditures. Buyer behaviour is being

influenced by high co-payments and a three-tiered reimbursement system that refunds

100%, 65% or 35% of the price of medication. Private hospitals now handle over 50%

of all operations and are thus gaining in importance.

In the United Kingdom, primary care trusts are offering incentives to cut branded

prescription. Additional financial pressure arises from a price regulation arrangement

that is renegotiated every five years between the Department of Health and the

pharmaceutical industry. In addition, the Association of the British Pharmaceutical

Industry (ABPI) introduced a new code of conduct on January 1, 2006, that includes

further restrictions on access to health professionals. The National Institute of Clinical

Excellence (NICE) is yet another hurdle to product use. To ease the burden on

doctors, nurses have been given greater powers to prescribe drugs. Also, substantial

investment by the National Health Service has raised the number of hospital-based

physicians, whereas the number of GPs is stagnating.

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In Italy, financial pressure stems from a singularly opaque process that requires prices

to be negotiated on the basis of a European Union average every six months.

Additionally, reference prices for therapeutic classes are adjusted automatically if the

prices for generics are 20% lower than those for patent-protected new chemical

entities (NCE). A new regulation is planned that would introduce co-payments for

visits to specialists and laboratory tests. At present, Italy is the only top-five country

that does not yet operate an aut-idem substitution model. Since Italy has the highest

density of medical practitioners in Europe, this increases the need for potential-based

targeting. In addition, buyer behaviour has been affected by the fact that Italy has

been decentralized into 21 regions with local budget control.

In Spain, the use of generic drugs will be promoted further following the recent

approval of aut-idem substitution regulation. Reference prices are based on the

average European drug price over the past six months. A new code of conduct

implemented in June 2005 has expanded self regulation mechanisms. A further focus

on price reductions for drugs will follow. Structural reforms have transferred

autonomous control over purchasing budgets to 17 regions. In addition, planned

advances in privatization in the hospital sector could offer job opportunities to 20,000

physicians who are currently unemployed.

The story so far

In the past, the industry reacted to similar developments by focusing on products for

common chronic diseases. These were typically marketed to general practitioners.

Product launches took place globally to maximize sales in as many countries as

possible and as quickly as possible. Another standard response to such challenges was

to increase the size of the sales force. Huge armies of sales representatives were seen

as a competitive advantage. One negative side-effect, however, was that sales and

marketing became the industry's biggest expense item at over 30% of revenues, even

ahead of R&D. Today, two new sales and marketing trends are emerging. Pure "size

sells" strategies are being abandoned. Furthermore, drug companies consciously tailor

their sales and marketing strategies to individual stakeholders.

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Abandoning pure "size sells" strategies

Apparently, size is no longer the critical issue. Recruiting a never-ending stream of

sales reps is evidently no longer regarded as the best way to increase sales. In the

survey conducted by Roland Berger Strategy Consultants, respondents were asked

how their sales force had evolved over the past two years and how it would develop in

the next two years.

The change of direction is striking. Although 44% of respondents had swelled their

ranks of sales representatives in the past two years, only 9% planned to do so in the

next two years. Indeed, more than 30% expected to see a significant decrease in the

size of their sales force. The unclear and volatile revenue situation in the

pharmaceutical industry obviously necessitates more flexible sales resources. As in

any industry, such headcount reductions must nevertheless be executed with great

circumspection to minimize the negative impact on customer relationships.

Tailoring sales and marketing strategies to individual stakeholders

The second trend concerns the relative importance of individual stakeholders in the

healthcare market. Roland Berger Strategy Consultants asked study participants which

group had been the most influential in the past and whose influence they expected to

increase most in the next two years Specialists are in short supply. All drug

companies want to win their custom. Accordingly, this group has been the most

influential in the past and is expected to remain so in the next two years. Conversely,

the influence of general practitioners is expected to stagnate. 26% of respondents

citedzthem as the most influential group in the past, but only 2% believed their

influence would increase most in the future.

Payors, on the other hand, are emerging as a new group of highly influential

stakeholders. Although they are very sensitive to price, they offer the opportunity to

deliver value across the entire healthcare system. To compete successfully within the

new stakeholder context, pharmaceutical companies must develop tailor-made sales

and marketing strategies that meet the differing demands of these individual

constituents. Exclusive relationships with specialists and the ability to visibly add

value for payors, will become the key sources of competitive advantage in the future.

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Sales excellence levers that deliver a competitive edge

Pharmaceutical companies are rethinking their sales strategies and considering what

market approaches will best enable them to deal with fiercer pressure on margins,

increasing stakeholder complexity and a changing healthcare market. This is where

sales excellence comes into play. Sales excellence gives companies a fresh angle on

the pivotal sales question now facing the pharmaceutical industry: Do we still see the

right customers at the right intervals, communicating the right message and using the

right promotional mix? In response to this question, Roland Berger Strategy

Consultants has identified five major areas that are critical in shaping sales

excellence: change, customers, the company, employees and information technology.

Focusing on these five areas, we have developed a holistic model that can be tailored

to the needs of each pharmaceutical company. Each area groups various levers of

sales excellence, each of which is itself underpinned by a clear set of key principles.

Organizing for sales excellence

Consistent implementation of a clearly defined operating model is an essential

prerequisite for sales excellence. This model must combine adequate financial

resources with an organizational set-up that balances broad geographic reach with

local implementation capabilities. Aware of this, we were eager to see how theory

compared with practice on this score.

Budgets for European sales force effectiveness

We asked the participants in our interactive survey how much their companies

planned to spend on SFE in Europe in 2006 and how this budget compared with that

of the previous year. Clearly, budgets are tight, so investments require great prudence.

Although 19% of all budgets are over EUR 5 million, 28% of the midsized companies

involved in the study have SFE budgets of less than EUR 1 million. Notwithstanding,

38% of SFE budgets are expected to increase. It is noticeable that the narrower the

scope of geographic responsibility, the fewer managers knows about their company's

SFE budget. More than 40% of participants did not know the budget of their company

– a clear indication that transparency is lacking in this vital area.

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Organizational structure

The majority of SFE initiatives are launched on a European or global level. Midsized

companies place primary responsibility in the hands of their European or global

general managers, whereas large companies designate a special European/global SFE

manager. Country management handles implementation.

But what are the major obstacles that prevent people from buying into sales

excellence projects? More than a quarter of all firms point the finger at firstline

managers as the most important impediment to achieving defined SFE targets . These

managers should therefore be involved in SFE programs from an early stage. Ideally,

first-line managers should be integrated right from the outset – when the key levers of

SFE are being identified, say. This practice should ensure that they engage in the

project. And it will also help higher-level SFE managers to identify and leverage

selected first-line managers as change agents. The influence of this class of managers

on the motivation of their sales representatives should not be underestimated. Given

that over a quarter of all participants answered "other/don't know", there would also

seem to be more complex situations where further pockets of resistance exist or

multiple stakeholders are blocking change.

Exploring new sales models

At the same time, pharmaceutical companies are increasingly experimenting with

innovative sales models. Not all these ideas will be appropriate for every industry

player. Each company must therefore identify which approach is most suitable in light

of its own strategic context and priorities.

One strategy is to draw significant distinctions within the sales force structure. The

initial step involves hiring sales representatives who have a less sophisticated

educational profile and deploying them to cover general practitioners. Their lower

skill profile will significantly reduce costs. Then, over the next five years, these reps

could possibly be replaced by more costeffective communication media. In a second

(simultaneous) step, companies are also building a small "elite" sales force that will

target specialists – the drug companies' "true partners". Investing in significant skill

development and differentiation beyond a mere knowledge of diseases and products

may prove to be necessary as this model unfolds. In this context, some companies are

going in the opposite direction. They develop their sales reps into true "business reps"

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that are measured by their territory results (incl. e.g. return on investment) and make

them fully responsible for all activities in their territories, across all stakeholders.

Another strategy currently being explored is to focus on new, more cost-effective

promotional channels. This involves concentrating the primary sales channel on the

top 10% of physicians while using more cost-effective channels to serve lower

potentials. The latter channels could include interactive e-mails or e-detailing. Direct-

to-consumer (DTC) advertising for indications can be applied if it proves to be

necessary for the patient flow, e.g. to increase symptom/treatment awareness. As we

have seen, the business environment within which pharmaceutical companies operate

is changing rapidly. Accordingly, it is vital to keep a close watch on regulatory

changes and to specifically address and cultivate emerging stakeholders and

influencers, such as nurses (in the United Kingdom) or payers. Some of the

interviewed managers have already started to explore this option by demonstrating,

communicating and delivering greater value to payers. There are many ways in which

this can be done. Companies can improve their regulatory affairs and lobbying work,

for example, or invest in evidence-based medicine trials and pharmacoeconomic

studies. Either way, there is no question that the trend toward greater customer

concentration must be monitored carefully and addressed appropriately. New hospital

(purchasing) groups, for instance, will almost certainly require key account

management. In addition, the interviewed companies are placing more and more

emphasis on catering to the needs of patients and identifying ways to generate value

for them, such as through disease management programs. Increasingly, companies are

systematically measuring their return on investment in order to optimize the

promotional mix. This practice involves focusing on individual campaigns but

including multiple promotional elements. To observe real impact, it may be necessary

to invest heavily in such "measured campaigns". Pilot projects in relevant local

markets could help to identify which tools work best, so that key success factors can

then be adapted for international roll-out. Once the actual impact and corresponding

return on investment have been observed, budgets can be reallocated accordingly.

Another trend is to synchronize the promotional mix across all channels.

Pharmaceutical companies are beginning to explore new channels to complement

their existing sales force. Closer collaboration between Sales and Marketing can be

extremely beneficial, as appropriate CRM platforms help to automate campaign

management. Last but not least, a number of companies have started to make thei

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Another case in point is Lupin's recent acquisition of Hormosan in Germany and a

substantial stake in Generic Health, one of the leading generic pharma companies of

Australia. Last year they had successfully acquired Kyowa in Japan and thus

positioned themselves amongst the top ten generic companies in that market and

similarly the company's acquisition of Rubamin, renamed Novodigm in India has

helped them establish its presence in the CRAMS arena. The pursuit, therefore, is to

move up the value chain either in terms of geography, business or products.

Global Pharma Companies are experiencing an ever changing landscape ripe with

challenges and opportunities. In this challenging environment Ranbaxy is enhancing

its reach leveraging its competitive advantages to become a top global player.

Contract sales organizations (CSOs), for example, can be leveraged especially in

countries with restrictive labor laws, as they can potentially reduce hiring risks.

Moreover, pharmaceutical companies can guarantee the productive use of detailing

resources by in-licensing products if the sales force is underutilized. Similarly,

detailing peaks can be covered by leveraging external partners – through collaboration

with CSOs or co-promotional partners, say. Some companies are also looking to

identify new solutions for latest age products – for example through performance-

based out-licensing – in order to free-up resources for new launches.

Comparison of growth

Capabilities Comparison

Because different companies have different strengths and weaknesses, two companies

may well put forth identical analyses of the post-2005 patent environment, yet react in

completely different ways. This subsection attempts to highlight some of the features

that differentiate companies from one another. Figure 1 presents a qualitative snapshot

of the functional capabilities of the companies that comprise this paper’s sample.

According to the sample, in all four areas of the product cycle, the most prominent

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Discovery

Clinical

Trials

Bulk

Manufacture

Formulation

Manufacture

Marketing

&

Distribution

India Globa

l

India Globa

l

India Global India Global India Global

Indian

Firms

A 3 1 2 1 2 2 2 1 3 2

B 2 1 0 0 2 1 1 1 2 1

C 2 1 0 1 2 1 2 1 3 1

D 3 2 3 2 3 3 3 2 3 2

E 1 1 0 0 3 2 2 2 2 2

F 2 1 0 0 3 2 2 1 3 2

G 1 1 0 0 3 2 2 2 3 2

H 1 1 0 0 3 2 2 1 3 1

MNC’

S

I 1 3 0 3 2 3 2 3 1 2

J 1 2 0 3 2 3 2 3 3 2

K 1 3 0 3 3 3 2 3 2 3

L 1 3 2 3 3 3 2 3 2 2

Indian

Averag

e

1.88

1.13

0.63

0.50

2.63

1.88

2.00

1.38

2.75

1.63

MNC’

S

Averag

e

1.00

2.75

0.25

3.00

2.50

3.00

2.00

3.00

2.00

2.25

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Size Comparison

Historically, large companies have dominated the global pharmaceutical industry.

This has been the case primarily because certain phases of the product cycle (see

section 2.2), such as clinical trials and (global) marketing, require substantial

investment. In India, three factors have reduced the importance of companies’ size, as

compared with elsewhere in the world.

Local companies did not have to engage in discovery and clinical trials, limited their

operations to India and its neighbors, and finally, were offered substantial protection

under the drug price control order (DPCO). For these reasons, bigger did not

necessarily mean better in India

Total Assets Market Cap Turnover Employees

Indian Firms

Ranbaxy 500,141* 880,283* 333,425# 5,104@

DRL 101,756* 3,756* 82,900#

Wockhardt 260,230* 194,385* 79,113* 2,400@

Lupin 18,564* 17,957* 3,000#

NPIL 185,172* 122,013* 117,150* 1,500#

Dabur 121,875# 176,700#

Sun 6,578# 7,043#

MNCs

Glaxo 8,526,000@ 13,087,000@ 54,000@

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Merck 31,853,400@ 26,898,200@ 57,300@

Novartis 34,552,000# 21,134,000# 87,239#

HMR 55,899,000@ 22,346,000@ 97,100@

Legend: All monetary figures in USD ($1,000s). * = 1996 or 96–97 (36 INR/USD); #

= 1997

Or 97–98 (40 INR/USD); @ = 1998 or 98–99 (43 INR/USD).

Growth of Pharmaceutical Industry in India-

• As per the present growth rate, the Indian Pharma Industry is expected to be a

US$ 20 billion industry by the year 2015

• The Indian Pharmaceutical sector is also expected to be among the top ten

Pharma based markets in the world in the next ten years

• The national Pharma market would experience the rise in the sales of the

patent drugs

• The sales of the Indian Pharma Industry would worth US$ 43 billion within

the next decade

• With the increase in the medical infrastructure, the health services would be

transformed and it would help the growth of the Pharma industry further

• With the large concentration of multinational pharmaceutical companies in

India, it becomes easier to attract foreign direct investments

• The Pharma industry in India is one of the major foreign direct investments

encouraging sectors

Role of Pharmaceutical Industry in India GDP-CRAMS

• The Indian Pharmaceutical Industry is one of fastest emerging international

center for contract research and manufacturing services or CRAMS

• The main factors for the growth of the CRAMS is due to the international

standard quality and low cost

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• The estimated value of the CRAMS market in 2006 was US$ 895 million

• Indian already has the biggest number of US Food and Drug Administration

(USFDA)

• standardized manufacturing units outside the territory of United States

• Around 50 more new manufacturing units are to be set up in accordance to the

USFDA and UK Medicines and Healthcare Regulatory Agency (MHRA)

standards

• With all these development India is posed to become the biggest producer of

drugs in the world

• Some of the major domestic players in this sector are Paras Pharma, Bal

Pharma, Unijules Life Sciences, Flamingo Pharma, Venus Remedies, Surya

Organics and Chemicals, Centaur Pharma, Kemwell, Coral Labs

• The contract manufacturing market in India pertaining to the multinational

companies is expected to worth US$ 900 million by the year 2010

Comparison with the U.S.

The Indian biotech sector parallels that of the U.S. in many ways. Both are filled with

small start-ups while the majority of the market is controlled by a few powerful

companies. Both are dependent upon government grants and venture capitalists for

funding because neither will be commercially viable for years. Pharmaceutical

companies in both countries have recognized the potential effect that biotechnology

could have on their pipelines and have responded by either investing in existing start-

ups or venturing into the field themselves.[36] In both India and the U.S., as well as in

much of the globe, biotech is seen as a hot field with a lot of growth potential

• India has the advantage of the cost, as the cost of labor, the cost of inventory is

much lower than U.S.

• The multinational companies, investing in research and development in India

may save up to 30% to 50% of the expenses incurred

• The cost of hiring a research chemist in the US is five times higher than its

Indian counterpart

• The manufacturing cost of pharmaceutical products in India is nearly half of

the cost incurred in US

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• The cost of performing clinical trials in India is one tenth of the cost incurred

in US

• The cost of performing research in India is one eighth of the cost incurred in

US

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Chapter-3-

Regulatory environment of Indian and European

pharmaceutical industry

Regulatory Environment

It is almost impossible to engage in a discussion about pharmaceuticals without

addressing regulation. This is true for two reasons. First, since drugs affect the health

and well being of so many citizens, government has an interest in assuring their

adherence to medical standards and availability. Second, in light of the fact that

patentable research can represent up to ten percent of a given drug company’s cost

structure, IP protection is essential to provide firms with incentives to develop new

drugs.

Approval Process

Unlike other products, drugs must undergo extensive approval procedures before they

may be marketed. India’s domestic approval standards are quite low, but export

products must comply with standards in all destination markets. Approvals are

required for both products and processes. After a new drug is developed, regulatory

authorities oversee clinical trials, which determine efficacy, toxicity, and side effects

(see section 2.2.2). Companies are free to manufacture and formulate all approved

products for which they have production rights (whether newly patented molecules or

off-patent substances) as long as the relevant authorities determine that their

production facilities comply with global GMP standards. GMP standards apply to

equipment, sanitation, and documentation. Indian pharmaceutical companies often

employ foreign consultants to help bring factories into GMP compliance. Because

India’s own regulations are less stringent than those of the FDA in the United States,

or the DHSS in the UK, many Indian firms have opted to limit their operations to

domestic sales and exports to other countries with approval standards similar to

India’s.

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Price Controls

Price controls are not nearly as important in today’s pharmaceutical sector as are other

regulatory issues. This is partly because market-clearing prices for controlled drugs

have typically fallen at or below price-controlled levels since the late 1970s. In cases

where price controls did pose problems, companies simply adjusted their product

portfolios accordingly, toward no controlled drugs. But price controls are still worthy

of mention insofar as past price control orders have shaped current pharmaceutical

operations. Furthermore, it is plausible that price controls will assume a role of

increasing importance in the near future. In 1970, the government introduced the Drug

Price Control Order (DPCO) to guarantee public access to “essential” drugs, to

provide a reasonable rate of return to companies, and to ensure quality.9 In response

to the DPCO, many firms concentrated on production of (nonessential) drugs outside

its scope. Some even divested themselves completely of controlled drugs. In this

sense, the DPCO undermined its own objective of providing public access to essential

drugs, which were more difficult to procure after it was introduced. Another

derivative effect of the DPCO was that it exempted smaller firms from price controls,

thereby encouraging them to participate in the pharmaceutical industry. Not

surprisingly, this caused small companies to be represented more prominently than

might otherwise be expected.

To address the aforementioned problems (e.g., the lack of incentive to produce

essential drugs and the overrepresentation of small companies), while still adhering to

its objectives, the government issued a revised DPCO in 1995. The 1995 DPCO

declassified 70 out of 146 drugs, dropped some clauses that favored small companies,

and exempted newly (locally) produced products from price controls. Recent evidence

suggests that, as it enacts new patent legislation, the government may be positioning

itself to backtrack on the progress made in the 1995 DPCO. New price controls would

arguably serve to defend consumers and local companies against the potentially

destabilizing effects of India’s obligations under TRIPS. The EMR amendment, for

example, contains explicit provisions for compulsory licensing and fixing prices of

newly registered drugs. Insofar as the EMR amendment provides insights into New

Delhi’s agenda, it is reasonable to assume that price controls may emerge as a new

menace to producers of patentable drugs in the future.

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Intellectual Property Protection

Prior to 1970, India employed Western-style patent legislation, and recognized

product patents in addition to process patents on drugs. Under that environment,

MNCs prospered while local companies lacked the resources to enter the industry.

The 1970 Patent Act, which represented a change in favour of local producers,

consisted of the following key clauses:

1) No pharmaceutical product patents are admissible, only process patents are

acknowledged;

2) The term for a process patent is fourteen years;

3) Three years from filing, patents are deemed to be endorsed as license of right;

4) Patents must be worked within three years of filing;

5) The Indian government may use or authorize others to use the patented

invention.13

By ignoring product patents, the 1970 Patent Act permitted companies to reverse

engineer their (MNC) competitors’ products. In addition to India, such products are

freely sold in Russia, the Commonwealth of Independent States (C.I.S.), Africa,

China, and South America. Furthermore, Indian companies were free to ship reverse-

engineered drugs to patent-recognizing countries on or after the day of expiry (with

no lag time). Such a liberal patent environment benefited Indian firms at the expense

of MNCs, causing some MNCs to opt for minimal presence in India.

In 1995, the government amended the 1970 Patent Act to conform to the TRIPS

accord of the Uruguay round of GATT. The main provisions of the 1995 ordinance

were:

1) The recognition of product patents;

2) Exclusive marketing rights (EMR) for new products from 2000–2005;

3) A mailbox provision for filing product patent applications during the transitional

period from 1995–2005;

4) Twenty-year patent life;

5) Shifting of the burden of proof to the alleged infringer;

6) The extension of protection to include imported materials and products.14

Thus far, the EMR clause and the mailbox provision have been officially incorporated

into India’s patent legislation. Although it is too early to evaluate the effectiveness of

the EMR amendment, U.S. and EU officials were reasonably pleased with the April

19, 1999 legislation, and the U.S. delegation that advised India on EMR felt the

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amendment adequately addressed its concerns. The 1995 ordinance caused an

enormous rift in the pharmaceutical industry. Firms immediately aligned themselves

according to their positions on IP. In particular, two major industrial associations in

the Indian pharmaceutical sector—the Indian Drug Manufacturers Association

(IDMA) and the Organization of Pharmaceutical Producers of India (OPPI) — locked

horns. The two associations share similar agendas, except on the subject of IP: the

IDMA opposes to stringent IP protection, while the OPPI favours it. The IDMA was

victorious over the OPPI in 1995 because it was able to hold the ordinance in

suspension, but the dynamics of the current global economy bode well for the OPPI in

the future. First, the Uruguay GATT resolution established a ten-year grace period for

developing countries to implement protection. In light of the grace period clause, it

was inevitable that less developed countries would delay implementation of new

patent laws to allow producers time to reorient themselves. After 2005, however,

delays will no longer be permissible, and India will have to comply with

GATT/TRIPS requirements, or risk a return to isolation. Since the second scenario is

unlikely and undesirable, the industry can probably look forward to product patent

protection in 2005. The precise future of India’s drug patent regime remains hazy, but

stronger protection is presumably on the horizon

Other Regulatory Issues

Aside from approvals, price controls, and patent policies, the Indian government has

used other tactics to regulate the pharmaceutical and other sectors. These are

primarily those of classic protectionism (e.g., tariffs on imports, mandatory licensing,

restrictions banning imports, etc.). Liberalization efforts of 1991–1992 sought to

disassemble projectionist barriers and allow foreign firms to compete on more even

footing with their Indian counterparts. The main components of this 1991–1992

liberalization included:

a) MNCs treated as equal to Indian companies.

b) Automatic approval for 51 percent foreign equity proposals.

c) Automatic approval for foreign technology agreements.

d) Most bulk drugs (and their forms) deli censed.

e) Provision for a higher rate of return for companies undertaking production from

basic stages.

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Interviews with firms, as well as supporting literature suggest that, aside from the

important move to GATT/WTO compliance, the pharmaceutical industry was largely

unaffected by liberalization. Several explanations seem relevant. First, because it

valued health more than industrial self-sufficiency, the government had never kept

foreign firms wholly out of the pharmaceutical sector in the first place. Second,

industry-specific regulations are simply far more important than classic projectionist

measures to the pharmaceuticals sector.

Regulatory issues in the Indian pharmaceutical industry. Understanding the regulatory

scenario in this sector is extremely crucial not only due to the rapid and ongoing

changes at the global level, largely with reference to good manufacturing practices

(GMP), good clinical practices (GCP) and good laboratory practices (GLP) but also

due to the onus on the regulatory bodies to ensure a healthy supply of quality drugs at

affordable prices to the Indian masses.

The present section begins with a brief description of the major regulatory bodies

monitoring the Indian pharmaceutical sector. It then undertakes a review of the

prevailing mechanisms for drug regulation and temporal progression of some

predominant policy measures and Acts. The section subsequently provides a

comprehensive account of the status and key guidelines pertaining to the dimensions

of drug pricing, patent related issues, GMP and clinical trials, in addition to a brief

review of standards for medical devices and biotech products. It concludes with an

assessment of the deficiencies of present regulatory regime and some new initiatives

by the State to ensure the production and marketing of safe and efficacious drugs at

affordable prices in the domestic sphere and to sustain current growth prospects in the

global markets.

Major bodies regulating drugs and pharmaceuticals

The principal regulatory bodies entrusted with the responsibility of ensuring the

approval, production and marketing of quality drugs in India at reasonable prices are:

The Central Drug Standards and Control Organization (CDSCO), located under the

aegis of the Ministry of Health and Family Welfare. The CDSCO prescribes standards

and measures for ensuring the safety, efficacy and quality of drugs, cosmetics,

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diagnostics and devices in the country; regulates the market authorization of new

drugs and clinical trials standards; supervises drug imports and approves licences to

manufacture the above-mentioned products;

The National Pharmaceutical Pricing Authority (NPPA), which was instituted in 1997

under the Department of Chemicals and Petrochemicals, which fixes or revises the

prices of decontrolled bulk drugs and formulations at judicious intervals; periodically

updates the list under price control through inclusion and exclusion of drugs in

accordance with established guidelines; maintains data on production, exports and

imports and market share of pharmaceutical firms; and enforces and monitors the

availability of medicines in addition to imparting inputs to Parliament in issues

pertaining to drug pricing.

The Department of Chemicals and Petrochemicals also oversees policy, planning,

development and regulatory activities pertaining to the chemicals, petrochemicals and

pharmaceutical sector. The responsibilities assumed by this body are relatively

broader and varied in comparison to the other two bodies. The main aspects of

pharmaceutical regulation are thus divided between the above two ministries. The

Ministry of Health and Family Welfare examines pharmaceutical issues within the

larger context of public health while the focus of the Ministry of Chemicals and

Fertilizers is on industrial policy. However, other ministries also play a role in the

regulation process. These include the Ministry of Environment and Forests, Ministry

of Finance, Ministry of Commerce and Industry and the Ministry of Science and

Technology. The process for drug approval entails the coordination of different

departments, in addition to the DCGI, depending on whether the application in

question is for a biological drug or one based on recombinant DNA technology. Issues

related to industrial policy such as the regulation of patents, drug exports and

government support to the industry are governed by the Department of Industrial

Policy and Promotion and Directorate General of Foreign Trade, both under the aegis

of Ministry of Commerce and Industry and the Ministry of Chemicals and Fertilizers.

With respect to licencing and quality control issues, market authorization is regulated

by the Central Drug Controller, Ministry of Health and Family Welfare, Department

of Biotechnology, Ministry of Science and Technology (DST) and Department of

Environment, Ministry of Environment and Forests. State drug controllers have the

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authority to issue licences for the manufacture of approved drugs and monitor quality

control, along with the Central Drug Standards Control Organization (CDSCO).

Prevailing Mechanisms

This sub-section primarily focuses on major regulatory policies and mechanisms in

relation to drug pricing and development of standards for ensuring safety and

efficacy.

In India, drug manufacturing, quality and marketing is regulated in accordance with

the Drugs and Cosmetics Act of 1940 and Rules 1945. This act has witnessed several

amendments over the last few decades. The Drugs Controller General of India

(DCGI), who heads the Central Drugs Standards Control Organization (CDSCO),

assumes responsibility for the amendments to the Acts and Rules. Other major related

Acts and Rules include the Pharmacy Act of 1948, The Drugs and Magic Remedies

Act of 1954 and Drug Prices Control Order (DPCO) 1995 and various other policies

instituted by the Department of Chemicals and Petrochemicals.

Some of the important schedules of the Drugs and Cosmetic Acts include: Schedule

D: dealing with exemption in drug imports, Schedule M: which, deals with Good

Manufacturing Practices involving premises and plants and Schedule Y: which,

specifies guidelines for clinical trials, import and manufacture of new drugs

In accordance with the Act of 1940, there exists a system of dual regulatory control or

control at both Central and State government levels. The central regulatory authority

undertakes approval of new drugs, clinical trials, standards setting, control over

imported drugs and coordination of state bodies’ activities. State authorities assume

responsibility for issuing licenses and monitoring manufacture, distribution and sale

of drugs and other related products.

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

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Temporal Progression of Drug Policies & Acts

The Patents Act of 1970, Drug Price Control Order 1970 and Foreign Exchange

Regulation Act 1973 played a significant role in terms of the building of

indigenous capability with regard to manufacture of drugs. The New Drug

Policy of 1978 provided an added thrust to indigenous self-reliance and

availability of quality drugs at low prices.

DPCO 1987 heralded the increasing liberalization in the industry. One of the

important features of this act was the reduction of the number of drugs under

price control to 143.

The major objective of DPCO 1995 was to decrease monopoly in any given

market segment, further decrease the number of drugs under price control to 74

and the inclusion of products manufactured by small scale producers under

price control list.

In 1997, the National Pharmaceutical Pricing Authority was constituted in order

to administer DPCO and deal with issues related to price revision.

The Pharmaceutical Policy 2002 carried forward earlier governmental

initiatives in terms of ensuring quality drugs at reasonable prices, strengthening

of indigenous capability for cost-effective production, reducing trade barriers

and providing active encouragement to in-house R&D efforts of domestic firms.

In 2003, the Mashelkar Committee undertook a comprehensive examination of

the problem of spurious and sub-standard drugs in the country and

recommended a series of stringent measures at Central and state levels. The

regulatory body came in for censure with the committee noting that there were

only 17 quality-testing laboratories, of which only seven laboratories were fully

functional.

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The National Pharmaceuticals Policy 2006, among other initiatives, has

proposed a slew of measures such as increasing the number of bulk drugs under

regulation from 74 to 354, regulating trade margins and instituting a new

framework for drug price negotiations in a move to make drugs more affordable

for the Indian masses.

TRIPS AND PHARMACEUTICAL INDUSTRY: ISSUES AND PROSPECTS

Trade Related Aspects of Intellectual Property Rights (TRIPS) were brought in with

the prospects purpose of universalising the standards of Intellectual Property Rights

and frame the rules of the game of the developing countries on par with the developed

countries. Several factors like the continuous advancement in science, new

breakthroughs in bio-technology, the growing participation of the private sector in the

cost intensive research and development in the knowledge based pharmaceutical

sector and the relative strength demonstrated by the developing nations in adapting

the results of the scientific innovations to the local environment have prompted the

industrialised nations to seek stronger protection for their innovations in all the

countries.

The Paris convention of 1883, one of the oldest treaties governing the protection of

industrial intellectual property was fairly liberal in protecting the Intellectual Property

Rights (IPR). Under this convention, member countries were free to determine the

standards of protection, the subject matter of protection and the period of protection

and thus maximum divergence were observed in the case of protection of innovations

in the pharmaceutical sector. Several countries fearing that the patent protection in

pharmaceuticals will limit the spread of knowledge and thus prevent the scientific

innovations reaching the general and the needy public neither protected the processes

of manufacturing a drug nor the final drug. This is because, once a product is patented

(product patents), the same product cannot be produced by an alternate method or

process during the protection period. However, if the process alone is protected

(process patents), then an alternative process which is mostly invented’ around the

earlier process could be used to produce a similar product, since in pharmaceuticals, a

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product can be produced by more than one method. Under the Paris Convention

differences were observed in the term and duration of protection too. For instance,

while some countries granted protection from the date of filing the patent application

yet others did so from the date of the grant of patent. Many developed countries had a

period of protection that ranged from 14 to 16 years.

While many of the industrially developed resource rich countries chose to reward the

innovators and adopted product patents to promote further innovations, some of the

developing countries realised the potential of the process patents in developing the

domestic industry and adopted the same. Thus, the developing countries with process

patent protection were able to take advantage of the innovations made by early

innovators. When a subsequent product is based on an innovation made earlier, the

late entrant enjoys the reduction in the cost of developing the product without of

course sharing the benefits/profits derived by the new product with the early

innovator. But the capacity to exploit the earlier innovations to its advantage depends

on the technological development of the country, capacity of the domestic industry,

the market size and the type of technology that is used in developing the product. Of

the many countries that adopted process patents, developing countries like India,

China, Korea and Brazil have developed expertise to develop new products, which

were mostly around the earlier innovations of the developed countries. It is assessed

that the deficiencies in India’s intellectual property system alone are estimated to cost

US companies around $500 million a year.

As per the minimum standards mentioned in the TRIPS agreement, patent shall be

granted for any inventions, whether products or processes, in all fields of technology

provided they are new, involve an inventive step and are capable of industrial

application without any discrimination to the place of invention or to the fact that

products are locally produced or imported. Accordingly, now patents will have to be

granted in all areas including pharmaceuticals and the effective period of protection is

for twenty years from the date of filing the application. With the implementation of

TRIPS agreement by most of the developing countries by 2005, a stronger patent

regime or product patents will be uniformly applicable on the pharmaceutical

innovations among the member countries1 of the World Trade Organisation.

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The implications of TRIPS for the pharmaceutical sector are that: patents will be

granted both for products and processes for all the inventions in all fields of

technology; the patent term will be twenty years from the date of the application

(compared to the seven years under the 1970 Act), which is applicable to all the

member countries and thus rules out all the differences in the protection terms

prevailed in different countries; patents will be granted irrespective of the fact

whether the drugs were produced locally or imported from another country; though

the grant of the patent excludes unauthorized use, sale or manufacture of the patented

item, yet there are clauses which provide manufacturing or other such rights of the

patented item to a person other than the patent holder. In the case of a dispute on

infringement the responsibility (to prove that a process other than the one used in the

patented product has actually been used in the disputed product) lies with the accused

rather than with the patent holder (in the 1970 Act, the responsibility is with the patent

holder). This is the broad framework, which will guide the pharmaceutical industry

of India in the WTO regime.

However, in order to smoothen out the differences in the level of protection and to

make necessary amendments in the national laws to adopt product patents,

Countries with different developmental status have been given a transitional period to

bring in reforms in the desired areas and make the laws comparable with other

countries. Countries with different developmental status have been given a

transitional period to bring in reforms in the desired areas and make the laws

comparable with other countries. Thus developed countries had one year to make the

suitable amendments and for the developing and least developed countries, the time

provided was 10 and 15 years respectively. As per this even US had to amend its

patent law since, the effective term of protection was for a period of 17 years from the

date of grant. India has to enforce the system of stronger patents from January 2005.

During the transitional period of 1995-2005, India has to start accepting applications

for product patents from 1995 and provide exclusive marketing rights (EMR) for the

products that were granted patent protection elsewhere.

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Within India, the opinion on stronger patents on the pharmaceutical industry is

divided, some emanating from the country’s prior experience with product patents and

others from countries, which have recently adopted product patents. These evidences

suggest that a country’s level of IPR influences a variety of social and economic

factors which range from common peoples access to medicine to the functioning of

the domestic industry, investment in R&D, technology etc. Developing countries

particularly, India, Argentina and Brazil were the strongest opponents of the TRIPS

agreement and India was more vocal in voicing her views on issues raised by the

developed countries. Now due to pressures from various quarters, all the three

countries have accepted the TRIPS agreement and India currently looks for flexibility

within the TRIPS framework that would have positive impact on the people, industry

and economy.

The universal TRIPS regime is expected to result in free flow of trade, investment and

technical know-how among the member countries by resolving the barriers that exist

in the form of differences in the standards of intellectual property. There is a rich

amount of literature available, which has looked into the various impacts of universal

IPR regime.

In this paper a modest attempt is made to highlight the issues of relevance for India

that emerge from various studies on the probable impact of product patents on the

pharmaceutical industry. It also presents some of the important provisions within the

TRIPS agreement that are favourable for developing countries like India. These are

presented in sections 2 and 3. Section 3 also presents the initiatives taken by the

government of India in adopting the product patents. The last section presents the

future scenario of the pharmaceutical industry.

Product Patents and Prices of Medicines

Much of the debate on the impact of product patents on the pharmaceutical industry in

India has centred on the issues of price of the patented product and their accessibility.

While it is true that a positive association is observed between stronger protection and

prices of drugs, it is also true that prices decline with the expiry of patent. In the US,

Frank and Salkever (1995) report a rapid reduction in the price of drugs after the

expiration of the patent. Though more competition among generic drug producers

results in substantial price reductions for those drugs, yet increased competition from

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generics does not result in aggressive response in price behaviour by established

brand name products. Danson and Chao (2000) on the contrary observe that generic

competition has a significant negative effect on price of the branded products in the

US and other countries with relatively free pricing like UK, Germany and Canada,

whereas for the countries with strict price regulation like France, Italy and Japan the

number of generic competitors has either no effect or a positive effect on prices of

branded products.

In India when amoxycilin was first introduced by a multinational the price of the drug

was very high. However, with the local manufacturers stepping in to produce the

indigenous version of the amoxycilin, the price of the same declined rapidly. It should

be admitted that adoption of the process patents along with the domestic regulations

that restricted the role of the multinationals resulted in the growth of the domestic

industry. In the late ‘90s the pharmaceutical industry of India has reached a position

of near self-sufficiency in formulations. After a long time experience of having a

negative balance of trade in pharmaceutical products, India started enjoying positive

balance of trade from the late ‘80s (Table 1). In production volume India accounts for

8 per cent of world’s pharmaceutical production and is the fifth largest country in the

world after the US, Japan, Europe and China. The number of pharmaceutical

manufacturers increased from a mere 200 in 1950-51 to more than 6000 in the ‘80s,

which reached a phenomenal figure of 23,790 in 1998-99. Of this a sizeable

percentage of firms belong to the small-scale sector. It is estimated that out of the 28.6

million workforces in the pharmaceutical industry, about 4.6 million is employed in

the organised units and the rest are engaged in distribution and ancillary industry.

These units produce drugs that are not under patent protection and are analogous to

products that are already there in the market. Hence competition is severe among the

pharmaceutical units in India, which is one of the important reasons for the relatively

lower prices of the medicines in India.

Irrespective of the competition, because of the socio-welfare implication of the

pharmaceutical prices, all over the world other than in the US, the prices of medicines

are subject to government regulations. However, the methods used to regulate prices

differ from country to country. In USA and Canada, the cost is charged in full to

patients. Even in the US, a law allowing the pharmacists to import the drugs from

Canada that would be cheaper by 30-50 per cent was proposed but was not passed due

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to pressures mainly from the industry quarters (Sanfransisco Chronicle, January 1,

2001). (Industry observers however note that the high rate of return made possible by

the free pricing policy of the US government is responsible for half of the new drugs

that are invented there). In some nations the government meets part of the bill. Most

of the governments list the drugs, which qualify for reimbursement and the extent to

which they do so. In most OECD member countries, price is fixed according to the

therapeutic value of the drug, its cost of production and the price of similar drugs.

In France and Italy, the manufacturers’ price must be approved for a product to be

reimbursed by the social insurance programme. The UK price system favours

domestic firms that would locate corporate headquarters and R&D in UK. Among

multinationals it favours those that have significant sales to National Health Service.

Further in UK no attempt is made to control the prices of individual drugs. Instead

annual arrangements are made with companies to determine the total sum to be paid

by the National Health Service for its products. This assures the firms a reasonable

rate of return. Germany follows reference pricing of pharmaceuticals. This classifies

drugs into groups with similar therapeutic purpose and sets a common reimbursement

price for all products within a group. The consumer pays the difference between the

reference price and the manufacturers’ price. Hence demand is highly elastic at above

the reference price. In all these countries majority of the people are also covered by

some health security schemes.

In the absence of such health security schemes and with the very low purchasing

power of the people in India, the government of India has brought certain essential

drugs under the price control. The price control along with the amendment of patent

laws in early ‘70s resulted in a declining impact on prices. Three factors have

contributed to the lower costs of production viz :(1) the process development capacity

of the units; (2) severe competition among the firms and (3) relatively lower costs of

production. Based on India’s own experience and on a selective comparison of prices

of a few drugs in countries where product patents is in force, intellectuals forewarn

that the stronger protection would result in increase in the prices of the drugs and thus

medicines will be inaccessible to common people. Their comparison of patented drugs

introduced elsewhere in the world shows that prices of the drugs had increased

manifold after the protection. This fear about the rise in the prices and the probable

exploitation by the multinationals among the developing world grew high when the

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vested multinationals tried to prevail on the South African government to stop the

passing of the bill to permit parallel import of the HIV-AIDS drugs which would

ensure the availability of those drugs at a lower rate.

The other side of the argument on prices of the drugs is that, developing countries

may not be affected by the increase in the price of the drug due to low participation of

patented drugs (Watal, 1996; Lanjouw, 1998). This is because so far the dynamic

domestic players in India have managed to introduce substitutes of the patented

product within four or five years after their appearance in the world market. This lag’

is to observe, the feedback on the product in the international and other markets

(Lanjouw, 1998). Thus, the welfare loss of non-introduction of a patented drug is

minimised by the introduction of such drugs though after a lag, so far made possible

by the weaker regime, will not be possible in the product patents regime. It is also

possible that the monopoly would adopt a discriminatory pricing strategy to fully

exploit the different markets.

One of the major advantages of the universal system is that, it would facilitate access

to new medical products. While the welfare loss due to the possible price increase in

the post WTO regime is highlighted in most of the studies, the welfare loss due to the

non-introduction of new-patented drugs in India due to the weak protection regime is

not discussed adequately. In this context, one of the advantages of the product patents

is that the stronger patents will provide access to the latest inventions in drugs, which

the developed world will not shy away from introducing in India. It is observed that,

though Pakistan also has process patent regime, some of the new drugs that were

introduced in Pakistan by the MNCs were not introduced in India at all even though

these MNCs were present in the country (Basant, 2000). This is because the MNCs

feared about the competition from the counterfeit products in India, whereas in

Pakistan MNCs are stronger than the domestic firms.

It is also possible that higher prices charged by the MNCs may not really affect the

consumers because; the research activities undertaken by the MNCs are totally

different and not pertain to the LDC market. Hence it can be said that the percentage

of population affected by the price rise would be very less. SenGupta (1998) presents

a different picture. His analysis shows that prices of older drugs’, which are not

patent protected are much higher in India compared to other countries, while prices of

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drugs that are patent protected or recently off patent are cheaper in India compared to

the prices of drugs in the same set of countries. This anomaly he attributes to the price

control mechanisms that are in operation in India. Basant ‘s (2000) comparison of

various medicines from 14 MNCs operating both in India and Pakistan show that

about 70 per cent of the various medicines are cheaper in Pakistan than in India.

A related issue is the wider use of cost effective generic drugs. In US and some parts

of Europe, the pharmacists are authorised to dispense generic drugs in the place of a

prescription drugs, which will cost less than the prescription drug. Thus, the

consumers have the option to choose between the generic and the branded drug.

However, if the doctor writes it as dispense as written’ then the pharmacist cannot

change the drug. In India, the Over the Counter’ market is restricted to a few

common medicines and prescriptions bearing the generic name are also uncommon.

Unlike the other consumer items, in the case of drugs, the consumer goes by what has

been prescribed by the physician. Hence, in the post WTO regime, the physicians will

play a crucial role in choosing between a patented drug and a generic drug, in cases

where alternatives are available and help the consumers from being exploited by the

market forces.

The drug prices in India were brought under control based on the recommendations of

the Hathi committee, which observed that since the drugs industry has a social

responsibility, it should operate much above the principles of trade for profit.

However, due to the repeated plea of the industry that the drug production was

becoming unprofitable, in 1986, government reduced the number of drugs under

control from 347 to 166. Yet in spite of the price reductions in India, over a period of

15 years from 1980, there has been a general rising trend in prices especially of

essential life-saving drugs (Rane, 1995). Recently, whereas the finance ministry under

which the Drug Price Control Order (DPCO) is monitored has announced the decision

to reduce the number of drugs under the price control, the report on pharmaceutical

pricing set up by the government, after studying the scenario in different countries

where some form or the other of price control exists, has recommended that drugs

should be under the price control. The Pharmaceutical Policy 2002 indicated a drastic

reduction in the number of drugs under price control. According to the industry

sources, the new DPCO would cover about 34 bulk drugs and their formulations

under control (Lalitha, 2002a).

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Despite the price controls, monitoring and enforcing such prices has been very poor in

India (Rane, 1996) where, significant differences persisted between the prices charged

by different manufacturers for the same formulation. Mostly companies with

substantial market power charged higher prices and the impact of DPCO did not

percolate to the consumers at all (Chaudhuri, 1999). While stressing the fact that the

present price controls will be applicable on patented products too and such controls

would definitely benefit the customers, Watal (1996) warns that costs of establishing

and maintaining an effective price control over all patented drugs may be very high.

There is nothing in the GATT treaty, which prevents India from continuing to use

price regulation to protect the consumers against exploitation through high prices. The

drug price control mechanisms prevalent in India are applicable on the patented drugs

too. Under the Drug Policy (1994) of India, a drug is subject to price control if annual

turnover in the audited retail market is more than Rs.40 million. A drug turnover

above this minimum revenue level may be exempted if there are at least 5 bulk

producers and at least 10 formulators, none with more than 40 per cent of the audited

retail market. Any bulk drug with a turnover above Rs.10 million with a single

formulator with 90 per cent or more of the market is also subject to price control.

Given this last criterion, all patented drugs would be subject to price control, unless

they are widely licensed, a highly unlikely scenario (Watal, 1996).

While it is clear from the above arguments that the patented products can be subject to

price controls yet it is not very clear, whether the products that enter the country

through the Exclusive Marketing Rights’ (EMR) route will also be under these price

controls. As per the TRIPS agreement, during the transitional period, developing

countries like India will also have to provide Exclusive Marketing Rights’ for

products patented elsewhere (any other member country) till the patent application for

that product is approved or rejected in India. Kumar (2001) points out that while

there is a possibility of getting a product produced locally, if we accept the product

patents, under EMR, the import monopoly is sanctioned before examining whether a

product is worthy of patent or not. Actually in the TRIPS agreement, the scope and

effects of EMRs are not specified2. EMR has no legal precedent anywhere in the

world but for one case in Argentina. Though as of May 1999, 13 WTO members like,

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Argentina, Brazil, Cuba, Egypt, India, Pakistan, Turkey, Uruguay, Kuwait, Morocco,

Paraguay, Tunisia and the United Arab Emirates have notified the establishment of a

mailbox, yet only India and Argentina have gone for EMR. In India no EMR so far

has been granted. There is an interesting case of EMR in Argentina. The Argentine

patent office confirmed EMR on a US company, since the said application satisfied all

the stated conditions. However, the patent examination later revealed that the patent

application did not cover a new legal entity but which was already in the public

domain and a patent for this product was granted in Luxembourg where patents are

granted without prior examination (Correa, 2000).

Hence, to avoid abuse of EMRs, developing countries should ensure that EMRs if

granted (a) apply only to new chemical entities, since the rationale of the said article

is clearly to provide protection to such entities and not to a simple new form or

formulation of a known product and (b) require that a patent in any other WTO

Member country that serves as a basis for the EMRs be granted in a country with a

serious examination procedure (Correa, 2000). But India should allow introduction of

products under EMR only after they are certified that the product is suitable to the

Indian environment and the consumers. Hence, one way to reduce the monopoly

powers enjoyed by such drugs could be to improve the speed of processing the EMR

applications and decide on their patent status soon so that domestic controls can be

enforced on such drugs.

Regulatory framework

• The main regulatory body in India is the Central Drug Standard Control

Organization (CDSCO) under the Ministry of Health and Family Welfare.

• CDSCO is presided over by the Drug Controller-General of India (DCGI),

who is in charge of approval of licenses for drugs at both the Central and state

levels.

• India introduced the product patent regime, in accordance with the TRIPS

agreement, in January 2005 with an amendment to the patent act.

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• Foreign direct investment (FDI) up to 100 per cent is permitted through the

automatic route in drugs and pharmaceuticals.

• For licensable drugs and pharmaceuticals manufactured by recombinant DNA

technology and specific cell/tissue targeted formulations, FDI needs prior

government approvals.

• The industry is undergoing consolidation due to recent legislation and policy

updates:

–Manufacturing units 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.

• The National Pharmaceutical Pricing Authority (NPPA) is responsible for

fixing and controlling the prices of 74 bulk drugs and formulations under the

Essential Commodities Act.

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 in states is inadequate to perform the

assigned functions of drug administration with efficiency and speed, though

there is a renewed focus on the same.

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Proposed new system

• The Central Cabinet approved the formation of the Central Drug Authority

(CDA) in January 2007.

• The proposed organisational structure of the CDA is to be analogous to the

USFDA.

• It will be a strong, well-equipped, empowered, independent and professionally

managed body.

• It is expected to facilitate up gradation of the national drugs regulator,

uniformity of licensing, and enforcement and improvement in drug

regulations.

• The efficiency and efficacy of drug administration is expected to be much

higher after this transition.

Product Patents and Research and Development

One of the advantages of the universal patent regime is that private venture capital

firms become willing to invest in technology based start up companies; technical

knowledge flows more readily from university laboratories to the market place and

local firms become willing to devote substantial resources to internal research

(Sherwood, 1993). Available evidence shows that patents are important for chemicals

and particularly for pharmaceuticals basically because of the huge R&D costs

incurred by the firms (Nogues, 1990). Also, the purpose of the patent is to provide a

form of protection for the technological advances and thereby reward the innovator

not only for the innovation but also for the development of an invention up to the

point at which it is technologically feasible and marketable.

The higher cost of the R&D proves to be an effective entry barrier for new firms and

hence only firms with large flow of funds become responsible for industrial inventive

activity (Grabowski, 1968). In developing countries, only a few firms have

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sophisticated R&D facilities and others benefit mainly from the spillovers of the

resultant R&D. But, in order to move on to the higher echelon, firms need to invest in

R&D. More often small firms shy away from investing in R&D because; R&D is

based on trial and error. Though small firms are also capable of innovations, for

successful commercialisation of the innovation, size of the firm matters. For instance,

cost of developing one new drug in the US increased from $54 million in 1970 to

$231 million in 1990. Recent studies indicate that 1 out of 5000 compounds

synthesized during applied research eventually reaches the market. Other estimates

indicate that of 100 drugs that enter the clinical testing phase 13, about 70 complete

phase 1, 33 complete phase II, and 25-30 clear phase III. Only two-thirds of the drugs

that enter phase III is ultimately marketed. This suggests that attrition rates are

especially severe in earlier research stages. Compounds that overcome clinical trials

of Phase II have a relatively good chance of becoming new drugs. However, as phase

III is the more costly R&D stage, one failure out of three produce may still imply a

considerable loss of resources (Gambardella, 1995). Though global investment in the

R&D has been increasing rapidly, R&D efforts need not necessarily result in new

products and innovations. According to a US FDA report 84 per cent of new drugs

placed on the market by large US firms during the period 1981-88 had little or no

potential therapeutic gain over existing drug therapies. Similarly in a study of 775

New Chemical Entities introduced in to the world during the period 1975-89, only 95

were rated to be truly innovative (Lanjouw, 1998).

Because of these reasons and due to the protected policy regime, the R&D investment

in India has been very low and started picking up only in the early ‘90s as evident

from Table 24. Of the Rs.1, 800 crores spent on R&D in 1998, 35 per cent belongs to

the public and joint sector and that of the private sector is about 65 per cent (IPR,

September 2000). In spite of the growing investment in R&D, R&D as percentage of

sales ratio stagnates around 2 per cent. Further of the 1261 Department of Science

and Technology recognised R&D units, 256 have spent more than Rs. 1 crore every

year. 350 have spent between Rs.25 lakhs and Rs. 1 crore and the remaining below

Rs. 25 lakhs (Report on Currency and Finance, 1998-99). This indicates that most of

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the R&D investment was perhaps directed towards process improvements and

adapting the technology to local conditions thus resulting in technology spillovers

rather than in new product developments. For instance, the UK multinational Glaxo

was faced with several local competitors on the first day when its subsidiary marketed

its proprietary drug Ranitidine in India (Lanjouw, 1998), because the competitors

enabled by the weaker patent regime were ready with the indigenous version of

Ranitidine. The more recent case of adapting the technology developed elsewhere to

local conditions enabled by the process patent regime is the case of viagra introduced

by Pfizer. A patent for this drug was granted by the US patent office to Pfizer in 1993.

The company spent about 13 years and several millions of dollars to develop the drug.

Apparently what took Pfizer 13 years and millions of dollars in R&D to perfect, the

Indian firms have managed to do in weeks, for a fraction of costs. Of the 30 raw

materials used in this drug, 26 are available locally. Utilising the information that was

available on the Internet, US patent records and industry literature some of the Indian

firms started their work on the indigenous version of viagra, which was available in

the market within weeks of Pfizer formally launching the product. However such

reverse engineering is not possible with products that have got patents after 1995.

Absence of stronger protection in the chemical and pharmaceutical sector in

developing countries like India is cited as one of the reasons that holds back foreign

investment especially from countries like the US, Japan and Germany (Mansfield,

1995). However, with the change in scenario, domestic companies, which had

invested in biotechnology, were finding the lack of protection as a problem to

commercialise their innovations (Lanjouw, 1998), because in DNA recombinant

technologies, novelty is the product. The process of discovery is complicated, but

once the product is obtained, its propagation can be achieved in many ways (Reddy

and Sigurdson, 1997). Globally now factors favour the internationalisation of R&D as

the multinationals review their core competencies. This is resulting in vertical

disintegration of R&D, product development, and clinical trials, manufacturing and

marketing activities. The severity of the US regulatory bodies has also been one of the

strong factors in encouraging US firms to set up R&D and manufacturing facilities

else where (Kumar 1996). Recent research done in this area also suggests that besides

the level of IPR in a country, factors like the host country’s policy on foreign direct

investment, availability of human resources and physical infrastructure, market size,

play an important role in the decision to locate the R&D activities by a multinational

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enterprise (MNE) in other countries (Kumar 1996 and 2001). Contrary to the

perception that stronger IPR is necessary for attracting R&D investment, an

insignificant relationship between patent protection and location of R&D activity

emerges in the analysis of Kumar. On the other hand factors such as availability of

technological resources and infrastructure were found to be more important in

attracting or improving R&D (Mehrotra 1989, Kumar 1996) than the IPR protection.

For instance, problems like non availability of basic tools of DNA recombinant

technology and lack of technology and expertise among the local recipients to develop

diagnostic kits on a mass scale have been faced by units which have set up their R&D

facilities in India (Reddy and Sigurdson, 1997). Even in the weaker patent regime of

India, MNEs such as Ciba, Hoechst, ICI, Uniliver, Cadbury and Astra had set up their

R&D, though they protected their innovations by patenting them in their home

countries. Basically as Kumar (1996) observes, if the overseas R&D is not directed to

new product development but is restricted to local adaptations and providing support

to local production of MNE, then IPR will not have much influence on the decision to

locate R&D by an MNE.

Rising R&D costs imply that only giant corporations with formidable R&D,

marketing and financial capabilities will be able to afford extensive new drug

developments and commercialisations. Since it is difficult for each unit to invest in

R&D, to economise on scarce R&D resources and to avoid the probable duplication,

pooling of R&D resources and mergers of firms have been identified as possible

solutions. Where joint efforts of firms were involved as in the case of Japan, clear

logistics have been worked out. In Japan the locus of ownership of intellectual

property rights flowing from a consortium is determined by the nature and degree of

governmental subsidy. Under the hojokin formula, the government provides 40-60 per

cent financing, using conditional loans whose repayment are tied to profits. Under the

itakusi formula, the government provides full contract financing of research. This

formula was used in the case of ICOT, and under this patent belongs to the Ministry

of International Trade and Industry, which can be licensed to the members of the

consortium and foreign firms’ (Ordover, 1991 P 51). Mergers and amalgamations

are also taking place to pool the resources and R&D advantages, which reduce the

duplication of research and wastage of resources. Hence to avoid such costs and to

take advantage of the resources, several consolidations of firms have occurred in the

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US in the 1980’s. In India also several mergers started taking place from 1995

onwards. Some of these mergers were: Crossland Research Laboratories merged with

Ranbaxy Laboratories in 1995; Sandoz (India) was merged with Hindustan Ciba-

Geigy to form Novartis (India) in 1996; Sumitra Pharma was merged with Nicholas

Piramal in April 1995; Cadila Healthcare had acquired the business of Cadila

Laboratories, Cadila Chemicals, Cadila Antibiotics, Cadila Exports and Cadila

Veterinary Private Ltd in June 1995; John Wyeth (India), Wyeth Laboratories and

Wyeth (India) Pvt Ltd were amalgamated with Cyanamid India in April 1996 and

now is known as Wyeth Lederle Ltd. Tamilnadu Dadha Pharma was amalgamated

with Sun Pharmaceuticals Industries in April 1997. Nicholas Piramal, Boehringer

Mannheim, Piramal Health care were merged in April 1996. Roussel India (Erst) was

merged with Hoechst Marion Roussel in April 1997 (CMIE, Industry, Market Size

and Shares, August, 2000).

There has been an apprehension that in the wake of globalisation the focus of research

in the LDCs could change and the major R&D firms may be more involved in drug

discovery that addresses the global diseases and neglect the research that is more

relevant for the LDCs. In this context, the concern is will the developing countries

such as India benefit by the global R&D efforts or the R&D efforts that might get

stimulated within the country? A study done in the context of India observes that of

the firms that are both Indian owned and subsidiaries of multinationals, 46.2 per cent

of the research funds are targeted at LDC markets. However, they are for products

targeted at developing country markets and not for diseases where 99 per cent or more

of the burden is on low and middle-income countries. Also, there are differences in

the diseases pattern prevalent in the developed and developing countries. For instance,

the percentage of mortality in developing countries in infectious and parasitic

diseases, circulatory diseases and cancer is 43, 24.5 and 9.5 per cent respectively. The

corresponding figures for the developed countries are 1.2, 45.6, and 21 per cent

respectively (Report on Pharmaceutical Research and Development Committee,

(PRDC) 1999). Therefore, anticancer research and cardiovascular diseases have been

the main focus of research of the pharmaceutical firms of the West. There were 1,422

anti cancer projects in development by the worldwide pharmaceutical industry in May

1999. In contrast, pneumonia, diarrhoea and tuberculosis that account for 18 per cent

of the global disease burden are subject of less than 0.2 per cent of global medical

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research and third world diseases such as malaria, chagas disease, tetanus, and

lymphatic filariasis have so far not attracted the developed countries’ attention.

The patenting activity by the Indian inventors in the US and Europe and other primary

data of study suggest that any discovery research is and would be on global diseases

and on products for the worldwide market. But Indian firms are allocating a non-

negligible portion of their R&D budgets to tropical diseases research and LDC

products and that the fraction of this going towards the discovery of new products,

rather than development may well are increasing’ (Lanjouw, 2000, P.20).

The number of patents filed and granted also indicates the level of inventive activity

and the R&D capabilities of a country. The developing countries’ R&D declined to

about 4 per cent in 1990 from nearly 6 per cent in 1980 despite the steady increase of

R&D outlays in Asian countries particularly in South Korea and Taiwan. This

negligible R&D also reflects in the number of patents filed by them. 95 per cent of the

16, 50,800 patents granted in the US between 1977 and 1996 were conferred upon

applications from 10 industrialised countries. The developing countries accounted for

less than 2 per cent of the total number of patents (Correa 2000). Table 4 presents the

number of patents filed by Indians and others in the patent office of India. Invariably

the number of patents filed and granted by others is higher than those of Indians.

Interestingly, there is a huge gap between the number of applications filed by Indians

and the actual number of patents. Implicitly a large number of applications are turned

down because such inventions already exist or the inventions lack non-obviousness or

industrial applicability. It suggests that the companies with inventing ability should

keep themselves updated of the developments taking place elsewhere and try to make

their inventions distinct from others. This suggests the important role that will be

played by information technology in searching for evidence and prior art.

Patent applications by industry during 1995-2000 indicate that pharmaceuticals rank

the highest with 396 applications followed by chemicals (337) and electronics ranks

the least with 23 applications (IPR, Vol.6, No.9, 2000). Table 5 gives the number of

patents filed by some of the Indian pharmaceutical companies with the Indian patent

office. Though many of them could be for the processes developed, yet it indicates

that the impending WTO regime has stimulated the R&D activity and importantly

filing of patent applications also.

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In view of the importance of the R&D in a knowledge-based industry like

pharmaceutical sector, there needs to be a close relationship between the industry and

the academic institutes. One of the reasons for the western world’s dominance in

R&D is due to the strong research collaboration that exists between the universities

and the industry where the research lead provided by the university is taken up for

further research by the industry both to explore new areas as well as to work on the

existing knowledge available in the public domain. This is very much essential for a

country like India, which is opening up now, so that further research is done on areas

that are most essential for the welfare of the people. The following example of Merck

will be useful in this context. Merck is a US based pharmaceutical company and has a

very high in-house R&D expertise. Between 1972 and 1974, two scientists Michael S

Brown and Joseph L Goldstein of the University of Texas identified the key steps in

the production of Cholesterol, work for which they were awarded Nobel Prize in

1985. Their findings motivated Merck’s scientists to launch research on cell culture

assays for cholesterol inhibitors as early as 1975. In 1978, Merck isolated Lovastatin

the Mevacor compound from a microorganism of the soil. Mevacors NDA was

approved for marketing in August 1987. The product reached $260 million sales in

1988, the first full year of marketing and it reached $ 1 billion sales in 1991. As soon

as Brown and Goldstein’s discovery was made, it was publicly available. Yet Merck

was the only company that effectively exploited their findings (Gamberdalla, 1995).

This is a very heuristic illustration. There could be several such findings that may be

effectively explored. In India also such strong association between the academic

institutes and industry needs to be established. Academic institutes can serve the role

of research boutiques where basic research or further research based on knowledge

that is available in the public sources may be undertaken and industry can proceed

with further development or commercialisation of the compound identified by the

university. Since 1995, there has been a steady improvement in the patents filed by

the academic institutions in India, which is presented in Table 6. Until recently, the

culture of protecting the inventive work through patenting was almost non-existent in

the academic institutions as most teachers felt that the knowledge should be shared

freely through publications and seminars. This was no different than the thinking

prevailed in the R&D institutions. After India became a member of the WTO, a new

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thinking has started taking routes in universities and academic institutions regarding

patents (Intellectual Property Rights, Vol. 5. No.8, 1999) and these institutions have

started filing patent applications.

Besides patenting the innovations, sound licensing practices are essential to enhance

the utility of research done by universities. For instance, University of California at

Sanfransisco and Stanford University jointly hold a patent that covers the technique

for combining genetic materials. Rights for this patent were not sold exclusively but

were available to any one for a reasonable fee. This patent brought the universities

more than $100 million in licensing revenues over the years and has been widely

credited with the emergence of the biotechnology industry. On the other hand

assigning the rights to one company might have slowed the evolution and

commercialisation of biotechnology (Zilberman et al, 2000). Therefore, a strong

collaboration with research institutes and the industry could reduce the research cost

in the industry like the expenditure in screening and synthesising the chemicals and

the university could provide the research lead. Gamberdalla (1995) observes that

university research had a positive and significant effect on corporate patents and

industry R&D and geographical proximity increases the strength of the effect of

university research on corporate patents. The contribution of university research is

greater if the industry and university scientists can interact more easily.

Patents, Foreign Direct Investment and Technology Transfer

One of the expected outcomes of strengthening the IPR is the increase in foreign

direct investment (FDI) in R&D, direct manufacturing or joint ventures. However, the

impact of stronger patents on FDI remains inconclusive from the available evidence

since IPR is only one of the factors in attracting FDI. FDI flows depend on skills

availability, technology status, R&D capacity, enterprise level competence and

institutional and other supporting technological infrastructure (UNCTAD, 1996;

Correa, 2000). Highlighting the FDI flows to countries with allegedly low levels of

IPR protection, Correa (2000) observes that the perceived inadequacies of intellectual

property protection did not hinder FDI inflows in global terms. Thus FDI increased

substantially in Brazil since 1970 until the debt crisis exploded in 1985, while in

Thailand FDI boomed during the eighties. In contrast developing countries that had

adopted stronger protection have not received significant FDI inflows. He further

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observes that FDI in the pharmaceutical industry outpaced FDI in most other sectors

in Brazil after patent protection for medicines was abolished in that country. In Italy

after the introduction of process patent protection in 1978, FDI increased. Hence, it

appears that patent production does not have significant impact on FDI. After the

abolition of protection on pharmaceuticals in Korea, though no new subsidiary was

set up, in the existing companies, foreign capital had increased and the pharmaceutical

industry accounted for 23 per cent of total foreign capital. Foreign investment did

increase because, FDI was not allowed in formulations. So the only way to enter the

country was to collaborate with a local firm (Kirim, 1985). In the case of India after

the adoption of process patents in the pharmaceutical sector, the number of foreign

collaborations increased from 183 in 1970 to 1041 in 1985 (Mehrotra, 1989) perhaps

because of the fact they were catering to a larger market.

Kumar (2001) argues that in developing countries like India, focus of the FDI policy

should be to maximise its contribution to the country’s development rather than on

merely increasing the magnitude of inflows. In other words, attracting FDI in specific

sectors is more important than aiming at increasing the FDI per se and that alone is

not going to improve investments in R&D. Multinational enterprises (MNEs) have so

far come to India primarily for exploiting her large domestic market and their

contribution to India’s exports is negligible. During the stronger patent regime before

the ‘70s, and after that also, the market share of the MNEs in vitamins and other

nutrients was more than 90 per cent while in the case of anti T B drugs it was only 18

per cent (Sen Gupta, 1996). In contrast, MNEs account for nearly 40 per cent of

China’s manufactured exports.

Several studies quoted by Dunning (1992) point out that US affiliates in Canada

consistently spent less on technology creating activities than did their indigenous

counterparts. Other Canadian studies have found that foreign ownership is either not

significantly or is negatively correlated to R&D performance. He also observes that

the R&D intensity of foreign controlled firms in the Canadian pharmaceutical

industry was less than that of their locally controlled counterparts.

In the case of India, total FDI flow has been stagnating, due to various forms of

regulatory framework and the government control over production that was prevalent

for a long time. These regulations have been relaxed as part of the liberalisation

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measures and currently 100 per cent foreign equity is allowed in the pharmaceutical

industry. Table 7 provides information on the total FDI and FDI in the pharma

industry. Vast differences are observed between the amount approved and the actual

inflow, which suggests that a large number of proposed investments do not

materialise and perhaps wither away due to the bottlenecks encountered at the time of

implementation. In pharmaceutical industry till 1999 it has been less than 0.50 per

cent. However, with the measures towards adopting stronger patents and increasing

the FDI limit in the pharmaceutical industry from 74 per cent to 100 per cent should

attract more FDI over a period of time. The FDI approved in pharmaceutical sector

accounted for Rs.1614.6 though the actual inflow could be much lower than this.

Patents and Technology Transfer

To qualify for the patent, an invention should be novel, non-obvious and capable of

industrial application. As per this, the applicant reveals the content of the patent in

the patent application, which is in the public domain. However, such disclosure could

undermine the competitive advantage of the invention encouraging the innovator to

protect the invention as a trade secret rather than with a patent. For as detailed earlier

in the case of Viagra, it is possible to get access to patent information from the patent

office of any of the countries and develop a new product based on the information

obtained in the patent application form thanks to the rapid development of

information technology. A sizeable level of technology currently available is due to

spill overs’ or developing an alternative process that is very close to the existing one.

This is the reason why the actual technology in a patent is often kept as a trade secret

(Correa, 2000; Mehrotra 1989) and which leads to entering in to a separate licensing

agreement with the innovator for the transfer of that technology.

The high cost of development and rapid obsolescence may prevent the transfer of

technology and the patent holder may prefer direct exploitation or import of products

than transferring the technology or know-how. Fear of competition also dissuades the

transfer of technology or demands a high royalty for the transfer, but huge royalties

may have a negative impact on the expenditure on R&D. In the case of India, though

in the pre’70s era, the technology transfer by the big TNCs did not support the

indigenous technological abilities, yet in the post ‘70s, a large number of small and

medium size firms have also been transferring their drug technologies to India, thus

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encouraging an atmosphere of competition in technology transfer (Mehrotra, 1989).

But India has encountered difficulties in getting access to technology for a component

known as HFC 134 A, which is considered the best available replacement for certain

chlorofluorocarbons. Patents and trade secrets cover this technology, and the

companies that possess them are unwilling to transfer it without majority control over

the ownership of the Indian company (Correa, 2000).

The presence of multinationals did not lead to large-scale technology transfer.

Between 1965-1982, top 10 multinationals introduced technology for production of

only 9 bulk drugs, while 4 public sector companies introduced technology for 51 bulk

drugs and the top Indian private sector companies for 36 drugs. Even in drugs that

were open for MNCs, they were not particularly keen to introduce technology in

essential drugs (Mehrotra, 1989). In the pharmaceutical industry technological self-

reliance can be obtained if bulk drugs are indigenously produced from their basic

stage. There has been a notable increase in the manufacturing of bulk drugs from the

basic stage onwards which increased from Rs. 240 crores in 1980-81 to Rs. 3148

crores in 1998-99. Besides improvements has also been achieved in new drug

delivery systems, basic research and development.

While the available evidence on product patents impact on R&D is inconclusive, one

of the minimum standards mentioned in the TRIPS agreement is that import of a

patented product in a host country will be treated as equivalent to producing the same

in the host country. Intellectuals strongly oppose this since by allowing such a

provision developing countries will not benefit by way of R&D or technology transfer

and it will also lead to exploitation of the consumers and therefore recommend

working of the patent in the host country. This fear is more valid in countries where

the domestic industry is not strong or where the major part of the consumption is met

by imports alone. In such circumstances the working requirement’ will not achieve

anything since, unless the patent holder cooperates, transfer of technology will not

take place. In such cases, compulsory license will be a useful instrument, which is

elaborated, in the following pages.

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FLEXIBILITY IN THE TRIPS AGREEMENT

In the foregoing session, the probable impact of product patents on some of the

important aspects like prices, R&D, foreign direct investment and technology inflow

was highlighted. Stronger patents because of the exclusive rights effectively rules out

competition and ensures the monopoly power of the patent holder throughout the

period of protection. The scepticism regarding the access by the developing countries

to important breakthroughs in medicine made by the developed countries however

linger on. Hence it is feared that it will have adverse effects on trade and may impede

the transfer of technology and know-how. Article 7 of the Agreement states the

objectives of the IPR as the protection and enforcement of intellectual property rights

should contribute to the promotion of technological innovation and to the transfer and

dissemination of technology to the mutual advantage of producers and users of

technological knowledge and in a manner conducive to social and economic welfare

and to a balance of rights and obligations’. As per this, flexibility to define the

national laws within the TRIPS framework is available under the clauses of

compulsory licensing, exceptions to exclusive rights and the principle of exhaustion,

which are discussed below.

A compulsory licensing (CL) system is incorporated in the patents, whereby a person

other than the patentee or the government is authorized to produce a patented product.

Even under the Paris convention, the provision for CL was there, where a CL cannot

be granted before the expiration of four years from the date of filing the application or

three years from the date of grant of the patent whichever is longer. But this provision

was hardly utilised by the industry because even before the end of the third year of the

grant, the process was known. The TRIPS agreement does provide certain grounds

(though not limited to them) for a country to exercise the CL option.

The link between IPR and high domestic prices provided the main justifications for

weakening the level of protection for drugs by means of comprehensive compulsory

licensing practices (Brago in Siebeck et al, 1990). Greece and Yugoslavia have also

evolved compulsory licenses. Canada is one of the countries, which frequently

adopted CL to check the price of the patented drugs. In Canada, CL of products to

local firms is encouraged, though the innovating firms view compulsory licensing and

renewable patents as restrictions on their rights.

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CL in the US has more often been used to restrict the anti competitive practices and as

a remedy in more than 100 antitrust case settlements. The use of CL5 is allowed

under specific grounds and contains detailed conditions under which a CL can be

granted. Like for instance, the CL could be issued under the grounds for (a) refusal to

deal by the patent holder, (b) emergency and extreme urgency, (c) anticompetitive

practices, (d) non-commercial use, and (e) dependent patents. The TRIPS Agreement

does not limit the members’ right to issue CL only on these grounds. For example, the

German patent law has provided that CL could be issued in the interest of public

while the Brazilian patent law allows for CL in cases of insufficient working (this is

under debate). Though the US is against any country using the CL and the drug cartel

of the US is against the issuance of the compulsory licensing, yet ironically under the

US law, the US’s own patent legislation is far more liberal than that which it is trying

to impose on developing countries. Under the US law, if the government wants to use

a patent, it can do so without the need for a CL and without negotiating with the

patent holder. The patent holder can ask for compensation but has no other rights. In

addition, the Bayh Dole Act gives the government wide ranging powers to issue CL’

(Scrip’s Year Book, 2000, Vol.1: 165). In fact, in the US, many compulsory licenses

have also been granted in order to remedy anti-competitive practices. In some cases,

the licenses have been granted royalty free. CL has been used as a remedy in more

than 100 antitrust case settlements, including cases involving Meprobamate, the

antibiotics Tetracycline and Griseofulvin, synthetic steroids and most recently, several

basic biotechnology patents owned by Ciba-Geigy and Sandoz, which merged to form

Novartis. Statistical analysis of the most important compulsory licensing decrees

found that the settlements had no discernible negative effect on the subject

companies’ subsequent research and development expenditures, although they

probably did lead to greater secrecy in lieu of patenting’ (quoted in Correa, 2000:91).

Article 40.2 of the TRIPS agreement spells out that nothing in this Agreement shall

prevent Members from specifying in their national legislation licensing practices or

conditions that may in particular cases constitute an abuse of intellectual property

rights having an adverse effect on competition in the relevant market. A member may

adopt, consistently with the other provisions of this Agreement appropriate measures

to prevent or control such practices which may include for example exclusive grant

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back conditions, conditions preventing challenges to validity and coercive package

licensing in the light of the relevant laws and regulations of that member’ (GATT

Agreements). In China, any entity which is qualified to exploit the invention or

utility model has made requests for authorisation from the patentee of an invention or

utility model to exploit its or his patent on reasonable terms and such efforts have not

been successful within a reasonable period of time, the patent office may, upon the

application of that entity, grant a compulsory license to exploit the patent for

invention of utility model’ (as quoted in Keayla, 1994b: 196).

Some of the developing countries have argued that working of the patent should not

include importation and thus have put forth the case for compulsory licensing of a

patented product in the event of non-working’ in the host country. Watal (2001)

however argues that it is not clear what developing countries hope to achieve by

using this condition of local manufacture. It clearly helps domestic industry in getting

access to the technology but would this force the pace of transfer of technology? By

itself, working’ requirements are not likely to encourage the transfer of technology,

as right holders are not likely to cooperate in giving the required know-how. Where

such cooperation is not required, local licenses can be obtained by making refusal to

deal’ or public interest’ a ground for compulsory licenses, without confronting the

non-discrimination clause in Article 27.1. Similarly if the problem is lower prices i.e.,

to force the use of local labour and materials, thus enabling the manufacturer to offer

the patented invention at lower prices, it can also be tackled directly by making the

sale of patented inventions on unreasonable terms a ground for compulsory licenses.

If working’ were the only ground for compulsory licenses, by working’ the patent

within three years from its grant, and selling the resultant product at unreasonably

high prices for the entire patent term, the right holder saves himself from compulsory

licensing’

Article 30 allows limited exception to patent rights. It states that members may

provide limited exceptions to the exclusive rights conferred by a patent, provided that

such exceptions do not unreasonably conflict with a normal exploitation of the patent

and do not unreasonably prejudice the legitimate interests of the patent owner, taking

account of the legitimate interests of third parties. Accordingly, the following types

of exceptions may be provided: acts done privately and on a non-commercial scale or

for a non-commercial purpose; use of the invention for research or teaching purposes;

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experimentation on the invention to test or improve on it; preparation of medicines

under individual prescriptions; experiments made for the purpose of seeking

regulatory approval for marketing of a product after the expiration of a patent; use of

the invention by a third party that had used it before the date of application of the

patent and importation of patented product that has been marketed in another country

with the consent of the patent owner’ (Correa, 2000:75). Another exception known as

Bolar exception also permits the pre-market testing of generic products during the

patent term, so that they can be marketed immediately upon expiration of the patent.

The other important aspect that is gaining attention is the parallel trade. Objectively,

the patent owner loses his rights once the product is on the market or when the patent

owner has sold his innovations. This principle is known as the principle of exhaustion

of rights or commonly known as parallel trade. TRIPS leave the decision on rights of

national or international exhaustion to national laws. The US adopts a national

exhaustion principle whereby the patent owner will have no control over the product

once it is placed in the domestic market. But he can exercise his rights outside the US

market regarding the price and quantity of the product. The European Union applies

the regional exhaustion principle whereby the rights are exhausted within the EU

region. International exhaustion gives no right to the patent owner once he has sold

his product. The international exhaustion is consistent with the objective of TRIPS

agreement mentioned in Article 7. The advantage of international exhaustion is that

developing countries such as India can scout for cost advantages of the patented

product. Both national and international exhaustion has its own merits and demerits.

For instance while the international exhaustion disallows the exclusive rights of the

patent owner globally and thus can gain access to the patented product, but an

unscrupulous patent owner/manufacturer can restrict the supply of the product that is

exported. In those cases exercising the compulsory license option can lead to getting

the patented product in required quantity. Besides, using the international exhaustion,

lot of grey’ goods could also be traded.

All these provisions suggest that patented product can be manufactured, traded and

used for experimental purposes, within the provisions of the TRIPS Agreement. The

national laws will have to clearly define the cases in which such provisions could be

used to benefit the people and the industry.

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Steps Initiated by the Government of India

Through the first amendment to the Patent Act made in 1999, the Government of

India (GOI) has facilitated the Mail Box’ system and the Exclusive Marketing Rights

for products patented elsewhere. The mailbox has initiated the process of accepting

the patent applications from January 1, 1995, which will be processed in 2005. The

EMR has so far not attracted many applications.

The Doha6 declaration has made it clear that each member has the right to grant CL

and the freedom to determine the grounds upon which such licences would be

granted. This is however subject to certain conditions like: authorisation of such use

will have to be considered on its individual merits; the proposed user will have to

make efforts over a reasonable period of time to get a voluntary license on reasonable

commercial terms (except in cases of national emergencies); legal validity of the CL

decision and the remuneration will be subject to judicial or other independent review

and the CL can be terminated if and when the circumstances which led to it cease to

exist and are unlikely to recur.

In the amended Patent Act of India Sections 82 to 94 in Chapter XVI deal with CL.

These sections provide details of: general principles applicable to working of patented

inventions; grounds for grant of CL; matters to be taken into account by the controller

of patents while considering applications for CL; procedures for dealing with CL

applications; general purposes for granting CL and terms and conditions of CL.

Under Section 87, when the controller is satisfied that the application for the grant of

a CL or the revocation of the patent after the grant of CL has a prima facie merit, the

applicant will have to serve copies of the application to the patentee and to advertise

the application in the official gazette. The patentee or any other person may oppose

the grant of the CL within the period specified by the controller, who can also extend

the time. Thereafter the controller will decide on the case after hearing both sides.

Any decision by the controller to grant a patent can be contested. Under Section 117

A, an appeal can be made to the Appellate Board. The applicant will be able to use the

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CL only if and after the Appellate Board turns down such appeals. The problem with

the amended provisions is that the entire process is excessively legalistic and provides

the patentees the opportunity to manipulate by litigation. The huge expenses involved

in fighting the large pharmaceutical companies holding the patents may dissuade the

non-patentees from applying for licenses in the first place. Chaudhuri suggests that

there is enough justification to carry out further amendments to simplify the general

provisions of CL in the Act to enlarge its use, such as listing the medicines eligible for

CL in public health crises (inclusion of such drugs can not be a ground for opposition

and appeal). For any drug in the public health list, the controller may immediately

after receiving an application grant the CL, fixing a royalty rate using the royalty

guidelines.

THE PATENT ACT

WHAT IS A PATENT?

Patent is a legal document granted by the government giving an inventor the exclusive

right to make, use and sell an invention for a specified period of time. It is also

available for significant improvements on previously invented articles. The

underlying idea behind granting patents is to encourage innovators to advance the

state of technology. According to the UN definition, a patent is a legally enforceable

right granted by country’s government to its inventor. Patent Law represents one

branch of a larger legal field known as intellectual property rights. Patent Law centres

on the concept of novelty and non-obvious inventions. The invention must me legally

useful. The imitators and all independent devisors are prevented from using the

invention for duration of patent.

BACKGROUND OF PHARMACEUTICAL INDUSTRY WITH RESPECT TO

PATENTS:

Indian Pharmaceutical industry is undergoing fast paced changes. The Indian

Generics market is witnessing rapid growth opening up immense opportunities for

firms. This is further triggered by the fact that generics worth over $40 billion are

going off patent in the coming few years which is close to 15% of the total

prescription market of the US. The Indian pharmaceutical companies have been doing

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extremely well in developed markets such as US and Europe. The quality and

affordability of generic drugs have made India a virtual pharmacy to the world.

Nearly 70 percent of generic drugs manufactured in India are exported to other

developing countries. The expansion of AIDS treatment over the past few years has

been driven by the accessibility and affordability of generic ARVs (anti-retro viral

drugs) from India. Pharmaceutical multinationals have maintained a low-key presence

in Indian market due to absence of product patents and rigid price controls. In the

domestic market, the share of Indian companies has steadily increased from around 20

per cent in 1970 to 70 percent now the industry has thrived so far on reverse

engineering skills exploiting the lack of process patent in the country. This has

resulted in the Indian pharmaceutical players offering their products at some of the

lowest prices in the world. The quality of the products is reflected in the fact that

India has the highest number of manufacturing plants approved by US FDA, which is

next only to that in the US. Patents Act 1970 in its original form does not differentiate

between Process and Product patents for medicines, food and chemicals. One of the

important features of the Act was that it did not provide product patents for the three

mentioned industries. These industrial sectors were covered by product patent only. In

addition the Drug Price control Order, 1970 put a cap on the maximum price that

could be charged and ensured that the life saving drugs are available at reasonable

prices. The Act of 1970 safeguards the interests of the inventor and consumer in an

even-handed manner. The Act has been promulgated in keeping with the Socialistic

Principles outlined in the Directive Principles of State Policy. Therefore with a

regulatory system focused only on process patents, helped to establish the foundation

of a strong and highly competitive domestic pharmaceutical industry which in the grip

of a rigid price control framework transformed into a world supplier of bulk drugs and

medicines at affordable prices to common man in India and the developing world.

PATENTING' INDEPENDENCE: 1972

The Indian Patents Act of 1972 granted independence to the Indian pharmaceutical

industry. There was nothing much that Cipla or any other Indian pharmaceutical

company could do before that.

The hands of all the Indian pharmaceutical companies were tied by the then patent

law that put the interest of foreign monopolies before the health of millions of

suffering Indians. April 20, 1972 was a red-letter day for India. It was the day when

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the Patents Act (Act 39 of 1970) came into force, replacing the Indian Patents and

Designs Act of 1911. The new Patents Act abolished product patents and allowed

process patents for seven years only.

Come to think of it, the rationale behind the patent amendment of 1972 was not very

different from the rationale behind the Independence movement. Our freedom-fighters

essentially fought for the right to decide what was best for our country rather than be

dictated to by foreign powers.

The Indian Patents Act of 1972 granted the pharmaceutical sector the right to produce

any drugs the country needed. It did away with the shackles imposed by monopoly. It

refused to let multinational corporations (MNCs) wear the noble garb of intellectual

rights.

If IT professionals give a thought to the significance of this old law they can easily

imagine what could have been the plight of the Indian IT industry if Microsoft and

other software giants were to prevent any Indian from doing any developmental work

on their software platforms???

There are no two opinions on the view that the Amendment brought by the Act in

1972, played an important role in avoiding the health care catastrophe.

In 1971, MNCs had an over 70 per cent share of the Indian pharmaceutical industry.

In 2007, in a reversal of roles, Indian companies commanded 83 per cent. In 1971,

Alembic was the only Indian among the top 12 companies in the Indian

pharmaceutical market. In 2007, there are only three MNCs in the top-12 list.

Pharmaceutical business models are changing. The world is now discovering India as

a preferred place for clinical research. In more ways than one, the industry appears set

to keep up its growth and progress, but for the 2005 Act.

Now we shall see in the next section of the report what exactly does the Patent Act

2005 indicate and suggest.

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Number of patents filed and granted to Residents and Non-Residents

Applications for patents filed Patents Granted

Year Residents Non-

residents

Total Residents Non residents Total

1994 1588 3212 4800 448 1287 1735

1995 1545 5021 6566 415 1198 1613

1996 1660 6632 8292 359 661 1020

1997 10155

Notes: Break ups are not available for the year 1997

Source: World Intellectual Property Organisation, Industrial Statistics, 1997

Patent Applications by Units with R&D

Recognized R&D Units Number of Applications

Panacea Biotec Ltd 95

Ranbaxy Laboratories Ltd 51

Lupin Laboratories Ltd 28

Cipla Ltd 26

Sun Pharmaceutical Industries Ltd 20

Tablets (India) Ltd 18

Hoechst Marion Roussel Ltd 17

Ajanta Pharma Ltd 15

Dr. Reddys Research Laboratories 14

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Natural Remedies Private Ltd 13

Natco Pharma Ltd 12

Kopran Ltd 11

Source: Intellectual Property Rights, (IPR) Vol. 6. No.9, September 2000.

PATENTS AMENDMENT ACT (2005)

The Patent Amendment Act 2005 passed by the Parliament in its budget session of

2005 brings the Indian Patent Act in full conformity with the intellectual property

system in all respects. The major amendments introduced in Sections 2 and 3 of the

India patent Act suggest:

An invention in order to be patentable, should:

(i) Involve an inventive step capable of industrial application;

(ii) Involve technical advances as compared to the existing knowledge or having

economic significance or both; and

(iii) Not be obvious to a person skilled in art. Section 3 outlines various situations

where an invention (properly so called) can yet be not patentable.

Section 3(d) of the Patents Act 1970 has been amended under the new Act to

prescribe a class of discovery which cannot be subject matter of patent under the

following clauses:

• Mere discovery of a new form of known substance which does not result in the

enhancement of the known efficacy of that substance

• Mere discovery of any new property or new use for a known substance

• Mere use of a known process, machine or apparatus unless such known

process results in a new product or employs at least one new reactant.

Product Patents have been extended to fields of technology such as drugs, food and

chemicals but granting of patents are subject to restrictions as mentioned above

(Section 3(d)). This section prevents frivolous inventions from being patented. The

amendments introduced in the Patents Act exhibit the essence of patentability in the

pharmaceuticals and chemicals is inventive ingenuity, novelty and existence of

industrial application or economic significance of the new product or process.

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SCENARIO POST TRIPS:

The amendment of 2005 extends full TRIPS coverage to food, drugs and medicines.

It requires patents to be provided to products as well. The other implications for the

pharmaceutical sector under the new act are as follows

• The term of a patent protection has been extended to twenty years compared

to the seven years which was provided by the act of 1970.

• If the law of the country provides so, then the use of the subject matter of the

patent shall be permitted without the authorization of the patent holder,

including use by the government or any other third party authorized by the

government. However such use shall be permitted only if prior to such use,

the user has made efforts to obtain the authorization of the patent holder and

such efforts have not been successful within a reasonable period of time. This

requirement can be waived in case of a national emergency after notifying the

patent holder.

• The onus of proving on a legal complaint that the process used by one

enterprise is totally different from that which has been used by another would

lie on the defendant. Prior to the amendment the responsibility was on the

patent holder to establish patent infringement.

WHAT IMPLICATIONS DOES TRIPS HAVE FOR INDIAN

PHARMACEUTICAL INDUSTRY?

If 1972 was motivated by national interest, 2005 was prompted by international

pressure, by an ill-perceived need to "belong" to the international community. The

Patents Act 1972 resurrected a flagging domestic pharmaceutical industry. This Act

had a much wider purpose; to help the Indian who had to fight TB, diabetes and a

multitude of diseases with affordable medicines. Every country has its own specific

need-based patent laws, which are national laws. There is no harmonization in patent

laws of different countries. Each country has to decide for itself its own destiny.

Today we have a population of over 1,100 million. The diseases that used to worry us

the most are still around. There is the additional scourge of HIV/AIDS. Millions of

Indians need medicines. Most of them cannot afford to pay high prices.

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Going by global experience, product patents that are now again enforced, can only

lead to monopolies and these, in turn, to high prices. Africa and the AIDS issue of

1990-2000 is a clear example.

India needs to build in enough safeguards even in our current patent law. Perhaps in

our haste to join WTO, we neglected many important issues.

A product patent system will make India dependent on the multinational companies

for technology and for permission to produce the patented drug. Exorbitant prices will

be charged and the Indian pharmaceutical industry will become subservient to the

MNCs. They will lose the position that they had gained in the wake of the Act of

1970.

The immediate and the most drastic effect that TRIPS compliance and introduction of

the new Act of 2005 will have will be with respect to the health sector in India.

The patients are the ultimate beneficiaries of the pharmaceutical research and

development. By denying product patents India will be able to encourage bulk generic

drug production at cheap prices.

However generics are not the only solution to counter the problem of access to

medicines. Generic production of drugs will not necessarily result in the innovation of

new and more effective drugs and by not acknowledging innovation India will run the

risk of not having access to future medicines which will in turn affect public health.

The actual problem lies in the fact that the product patents not only increase the cost

of the drugs and medicines, but that most of them fail to introduce research and

development in the neglected diseases. Hence while on one side the introduction of

product patents will help in development of new and more effective drugs, the

problem still remains that the research and development undertaken by the drug

manufactures evade the neglected diseases and the diseases which are region specific

such as medicines for malaria and tuberculosis which are found prevailing in

developing countries like India.

A DEBATE ON PRODUCT PATENT AMENDMENT- NOVARTIS CASE.

Protestors marched in India against Novartis. WHY?

Nearly a quarter of a million people from 150 countries voiced concerns over the

negative impact of a legal challenge brought by Novartis that could have on access to

medicines in developing countries and had asked Novartis to drop the case. Had the

challenge been won by Novartis it would have been a major blow to production,

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domestic use and exports of generics to the world. The drug at issue was a cancer

drug (Glivec) which Novartis sold at US$2500 per patient per month while generic

versions of Glivec in India only cost about US$175 per patient per month. A court

case brought by Swiss drugs giant Novartis in India could define how the industry

distributes discount medicine to the developing world while maintaining profits.

Novartis moved the court on contesting that India's patent law could leave millions

without access to affordable drugs. Opponents accused the Basel-based firm of

squeezing the competition.

In 2005, the Indian government introduced patent protection for drugs for the first

time. But the law only protects completely new compounds that were invented after

1995, a deviation of the industry standard.

The Novartis leukaemia drug Gleevec (Glivec in some countries) fell foul of this

ruling as it was deemed to be a new form of an existing treatment that was developed

before the cut-off date.

This opened the door for generic pharmaceutical companies to copy the treatment,

which was earlier distributed free to thousands of patients in India, at a fraction of the

cost.

"We are deeply convinced that patents save lives. If the patent law is undermined the

way it is happening in India, there will be no more investment into the discovery of

lifesaving drugs," said Novartis head of corporate research Paul Herrling.

The company insisted that it will continue to offer Gleevec free to patients in India

who cannot afford it.

Watchdog groups such as Médicins sans Frontières, said generic competition has

dramatically reduced the cost of drugs. They launched a petition against Novartis

while hundreds of activists protested in the streets of the Indian capital, New Delhi.

Lot at stake

The Geneva-based International Federation of Pharmaceutical Manufacturers and

Associations (IFPMA) was "very concerned" about the Indian patent law.

Companies need to have assurances that they can obtain adequate patent protection

that gives a fixed period of legal monopoly in which they can recoup what they have

invested in research so that they can continue their research.

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Otherwise they would not have a sustainable industry and that will preclude their

ability to improve treatments.

But the Médicins sans Frontières argued that blocking cheaper generic copies would

keep the cost of treatments such as Gleevec artificially high.

The consequence of a ruling in favour of Novartis would have led to fewer and fewer

drugs in the market. In the long term it would have killed the competition from

generic drugs.

However it was admitted that even the Indian generic drug companies, although

capable of producing Gleevec at a tenth of that charged by Novartis for a monthly

dose, were also looking to make a profit.

Thus it cannot be said that Novartis are the bad guys of the movie and that the

generic.

A POSSIBLE SOLUTION TO THE PRODUCT PATENT ISSUE

The most practicable solution to the problem which at the same time allows for TRIPs

compliance would be granting of dual licenses. This would mean that the patent

would be partly product patent and after a reasonable time being given to the inventor

to make a reasonably large profit it would be converted to a process patent whereby

the patented drug can be manufactured by competing manufacturers using an

alternative process. This would solve the problem of excessive hike in prices and

would render the drugs more accessible to the millions suffering. Collaboration with

the MNCs on various fronts such as research and development, manufacturing and

marketing will help Indian Pharmaceutical companies make profitable breakthroughs.

As far as India’s pharmaceutical industry is concerned, various options are possible in

the WTO regime. But ultimately, the path currently is followed by international

standards for patent protection moves inevitably toward a clash between public health

and intellectual property.

Stringent intellectual property protection for pharmaceuticals would only retard public

health initiatives in the coming years. Given the rapid evolution of the AIDS crisis

throughout the world, with more than 35 million cases alone in India, a twenty year

term of market exclusivity for new treatments is not reasonable if we expect to make

real progress in containing the disease. It might well be appropriate for a governing

body to clearly define a list of essential medicines, such as antiretroviral (ARV)

agents, that would be subject to somewhat more relaxed patent protection compared

to other drugs.

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DRUG PRICE CONTROL

PRICING OF DRUGS- PRINCIPLES AND LAWS

The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to

ensure proper market conditions –

• Turnover

• Market monopoly

• Market competition.

Under this, prices of 74 bulk drugs and their formulation are being controlled

representing approximately 20% of the pharmaceutical market. Bulk drugs, with a

turnover of over Rs40 million, are under the purview of the DPCO, excluding those

drugs with sufficient market competition. Sufficient market competition is defined as

the presence of at least five bulk producers and 10 formulations, with no producer's

market share exceeding 40 per cent. In case a single producer controls about 90 per

cent of the market for a drug, which has a turnover in the range of Rs.10-40 million,

the drug is considered to be under the purview of the price order (ICRA, 2000).

Industrial licensing has been abolished for all drugs, formulations and drug

intermediates except for the five drugs which are reserved for public sector.

Moreover, price controls have been waived for a period of five years for drugs which

have been developed indigenously there is a price controls under DPCO, still a

majority of drugs in the market are not regulated and the price rise during this period

is still considered to be minimal. In short, while the DPCO has evolved in a step-by-

step ad hoc fashion, it has managed to strike a rough balance between regulating

prices to ensure adequate access to essential medicines for the rural and urban poor,

while allowing the emergence of a globally competitive Indian domestic drug

industry. The new research environment has added important new elements to the risk

environment of pharmaceutical research as a by-product of the dramatic exploration

of entirely new areas of application. Manufacturers that venture into new territory are

less certain of what they will find and less confident of what it will be worth when

they find it—they face new uncertainties over both supply and demand.

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I. HOW TO DETERMINE THE PRICE OF DRUGS?

As a developing country, India has much more limited fiscal and economic resources

alongside a much larger population of low-wage urban workers and small farmers. As

a result, establishing a European-style drug reimbursement scheme, even with a

combination of public and private financing, would require a vast expansion of public

subsidies by the Indian Government.

Although reference pricing is the most common international cost-containment tool,

adopting a European drug pricing system and referencing prices to foreign prices also

would have serious disadvantages in an Indian context. Even if Indian prices were

referenced to, the prices of most advanced drugs would still be prohibitively high and

likely well beyond the reach of the common man. While a European-style universal

health insurance system and a comprehensive public drug benefit could be used to

alleviate the burden on the common man through a public subsidy, it would impose a

massive long-term fiscal burden on the Indian Government. According to the OECD,

in 2003 per capita drug expenditures averaged $606 in France, $507 in Canada, $393

in Japan, $353 in Australia, $284 in the Czech Republic, and $225 in Poland. Even if

these costs were partially subsidized by the Indian Government or the states, the cost

would be prohibitive and would likely displace other vital government programmes.

On the other hand, if the prices of advanced drugs were referenced to other

developing countries, or domestic generic drug prices, such controls would keep drug

prices lower, but undermine the global competitiveness of India's world-class

pharmaceutical companies, and deter future private sector investments in advanced

biopharmaceutical discovery. In such a situation, research by Indian companies and

patenting activity of scientists would likely shift offshore, probably to the U.S. or to

the U.K.

II. WHY PRICES OF PATENTS AND GENERICS DIFFER?

If a government sets the same price for generic and patented medicines, consumers

naturally tend to choose the more advanced product, since it provides better value or

greater quality assurance. Accordingly, demand for unbranded generics in price

controlled markets tends to be artificially reduced.

It is universally acknowledged that drug discovery is an extremely expensive process;

That for every molecule that finally makes it into a product, there are several that are

abandoned on the road to discovery;

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Thus the patenting system provides an opportunity to recover developmental costs

over the patent period. The new research environment has added important new

elements to the risk environment of pharmaceutical research as a by-product of the

dramatic exploration of entirely new areas of application.

Manufacturers that venture into new territory are less certain of what they will find

and less confident of what it will be worth when they face new uncertainties over both

supply and demand.

REASONS FOR THE UNCERTAINTY OVER DEMAND FOR NEW DRUGS

Of the numerous factors that create uncertainty over the demand for new drugs, two

stand out. First, many new drugs address conditions that have not been systematically

treated. Data on the prevalence, health consequences, and social costs are sparse

because conditions that are not treated tend not to be studied. Second, even if one

does know the number of those suffering from a condition and the health

consequences of that condition, we still may have only a vague idea of what people

are willing to pay for the drugs that alleviate those conditions.

• Uncertainty over the health benefits from a new drug is therefore one

problem,

• Uncertainty over what consumers are willing to pay for those benefits is

another

INFEASIBILTY OF PRICE CONTROLS

Price controls on pharmaceutical products produce a variety of negative consequences

for national health systems and reduce social welfare by depressing the number of

new drugs added to the global pharmacopoeia. It can also reduce the availability of

some innovative medicines in foreign countries, with the effect of limiting

competition and requiring national health system to forgo the benefits of those

innovations in reducing health care costs.

The economic models also indicate that benefits of lower prices to consumers were

less than the benefits to society of new drugs foregone.

III. PRICE FIXING AND CONTROLS FOR PRICING – ISSUES AND

SUGGESTIONS

The new pharmaceuticals pricing policy envisaged that all patented drugs that would

be launched in India after 1 January 2005 would be subject to price negotiations

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before granting them marketing approval, and that the Drugs and Cosmetics Act 1940

would be suitably amended to provide for this. The Department of Chemicals and

Petrochemicals in consultation with the Department of Health would lay down

necessary guidelines for determining the negotiated prices. Government on 18

January 2007 notified a committee to examine the issue of price negotiations for

patented drugs. The committee was to interact with industry and to propose a system

of reference pricing/price negotiations/differential prices that could be used for price

negotiations of patented drugs and medical devices before their marketing approval in

India. The committee submitted its report by mid April 2007.The considerations

weighed by the committee were-

• An approach was one that would determine the price premium enjoyed by the

drug in the lowest price market abroad compared with the closest therapeutic

equivalent in the same country, and to apply that same premium to the closest

therapeutically equivalent prevailing in the domestic market. That is to say,

the same premium factor prevailing in the domestic market would become

one of the markers.

• Another approach under consideration was the principle of purchase parity

pricing being used in Europe between member countries. Under this

methodology, the price arrived at could be at a substantial discount to the U.S.

prices, even less than 50%.

• There was a push towards looking at prices charged abroad with a view to

determining the lowest of the prices charged overseas.

But every one of these approaches was market distorting, and suffered from several

shortcomings:

The National Pharmaceutical policy therefore suggested that all patented drugs that

would be launched in India after 1 January 2005 would be subject to price

negotiations before granting them marketing approvals, and for this the Drugs and

Cosmetics act was amended and was enacted in 2008.

Given the high number of pharmaceutical firms in the informal/unorganized sector,

domestic and foreign drug companies in India also run a large risk that their patented

drugs will be pirated even with protected product patent system. Price controls benefit

health delivery in countries that have a well regulated public health delivery system.

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Public health expenditures in Indian states continue to be low, with a wide disparity in

effectiveness of delivery between states. There is a large private sector and

unorganized access to medicines. In these circumstances, price controls would lead to

market distortions, excessive regulation and the development of grey markets. High

duties and transaction costs impose a heavy burden on the consumer—there are

examples where these distort prices enormously, against imported drugs. A mindset

that creates negativity towards imported drugs needs to be changed.

III. WHY DOES INDIAN DRUG PRICING SYSTEM NEEDS TO BE

DIFFERENT FROM EUROPEAN STYLE AND OTHER DEVELOPING

COUNTRIES” PRICING SYSTEM

The above analysis makes clear that India should develop a new approach that avoids

the costs of European-style drug price controls, while also avoiding the inequities of a

free market style.

The issue of drug availability is to ensure that-

• the latest clinical treatment and drugs must be available

• these should be accessible to the entire population

• there should be incentives for development of new drugs through R&D that

would require adequate compensation for development costs.

India presents a unique situation. Absence of product patents for over three decades, a

large indigenous industry, coupled with political economy requirements of a welfare

state; require a balance between incentives and control. It is important that the latest

drugs and formulations are available, that they can be reached to all, whether in the

public health or the private health systems. It is equally important that there be an

environment for industry and research to grow, and that global firm are comfortable

using the talent pool in India for R&D and drug discovery, assured of reasonable

returns.

Given wide income disparities, a range of public health and private care systems, and

freedom of choice, and the distortions likely to be caused by the price fixing for

patented products, it is important to consider creative solutions that would suit a

developing country like India. A possible alternative that could be adopted in India for

patented drugs is the adoption of a two tier price system.

For example, in some states like Tamil Nadu, drug purchases for public hospitals by

the government are negotiated with the companies. Each tablet carries a distinctive

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mark and the strips are separately labelled to indicate that they are not for sale, but

part of the public health care system. The same drugs are available in the open market

at market prices. Such a twin pricing system has the advantage of delivering drugs at

low costs to the public health care system without distorting the market mechanism.

In the case of patented drugs it is conceivable that producers may be willing to accept

prices that are close to marginal costs of production plus fixed returns, if allowed to

access the market for pricing that covers development costs. In this approach, the

Department of Petrochemicals would finalize a list of patented drugs that it intends to

be used in the public health system. Using this approach, the producing companies

would be invited to convey the prices at which these drugs would be made available

to government hospitals and dispensaries. These would be distinctively packaged and

labelled and supplied to the health departments of the states against invoices raised by

them, and accepted terms of payment. Outside this, firms would be free to charge

market prices, and enjoy IP protection in full for their products.

Such an approach might offer a short term solution to drug access concerns, while

longer term structural reforms are explored. In the long-term, any solution to India's

drug access problem requires major structural reforms to the health care system. In

formulating such reforms, a balance must be struck between the markets for free sales

and government supplies. The government cannot supply the entire demand for drugs

unless it is prepared to commit to massive public subsidies and drastic price controls.

A fresh approach is needed.

IV. CHALLENGES FACED BY THE GOVERNMENT TO DEVELOP A

NEW APPROACH TO PHARMACEUTICAL PRICING.

• The Government has an overriding responsibility to ensure that the citizens of

India – especially the common man -- have access to affordable medicines for

treating the most common and important disease conditions.

• At the same time, any new policy must maintain a world-class Indian life

sciences capability. India is a world leader in the advanced life sciences. The

Indian pharmaceutical industry dominates global generics markets and has

begun making serious investments in innovative drug discovery. Given

adoption of the Product Patents Act and increasing competition from Chinese

generic companies in the international generics marketplace, the future of the

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Indian biopharmaceutical industry rests on its ability to innovate. Thus, any

new policy must balance improved access to key medicines for the common

man with support for India's continued capability to discover and develop

advanced medicines, which represents a long-term national asset.

V. KEY FEATURES OF THE NEW PRICING APPROACH

Such a solution requires a two-track approach.

• First, the government should strengthen the public health infrastructure to

ensure that rural and urban poor have universal access to treatments for basic

medical needs. Such a system should be built around government bulk

purchases of low-cost generic medicines. Also, instead of seeking to provide

the latest state-of-the-art treatments for the rural and urban poor, the focus

should be on the low-cost delivery of high-quality, essential care for all.

• While patients in the public health system should be free to purchase more

expensive patented or branded drugs, this could be achieved through a

"balanced-billing" arrangement in which the government would subsidize

only the cost of the basic generic drug, with the remainder being contributed

by the patient. Such an approach would avoid the prohibitive cost of have the

Central or State governments subsidize state-of-the-art foreign medicines,

allowing government funds to be allocated to an expansion of basic care to a

larger number of people.

• A second way is that the government should aim to facilitate the continued

evolution of private health care markets, including private hospitals, private

insurance, and high-cost patented drugs. Creating a separate private market

would ensure that the cost of such advanced care would be borne by middle

income household. This two-track system would avoid the bureaucratic

complications and prohibitive cost of transferring a European-style

government health care system to a developing country like India.

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Chapter-4- Industrial production

INDUSTRY PRODUCTION

INDIAN PHARMACEUTICAL MANUFACTURERS

The Indian Pharmaceutical Industry today is in the front rank of India’s science-

based industries with wide ranging capabilities in the complex field of drug

manufacture and technology. A highly organized sector, the Indian Pharma Industry is

estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks

very high in the third world, in terms of technology, quality and range of medicines

manufactured. From simple headache pills to sophisticated antibiotics and complex

cardiac compounds, almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of

medicines, Indian Pharma Industry boasts of quality producers and many units

approved by regulatory authorities in USA and UK. International companies

associated with this sector have stimulated, assisted and spearheaded this dynamic

development in the past 53 years and helped to put India on the pharmaceutical map

of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000

registered units. It has expanded drastically in the last two decades. The leading 250

pharmaceutical companies control 70% of the market with market leader holding

nearly 7% of the market share. It is an extremely fragmented market with severe price

competition and government price control.

The pharmaceutical industry in India meets around 70% of the country's demand for

bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,

capsules, orals and injectibles. There are about 250 large units and about 8000 Small

Scale Units, which form the core of the pharmaceutical industry in India (including 5

Central Public Sector Units). These units produce the complete range of

pharmaceutical formulations, i.e., medicines ready for consumption by patients and

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about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production

of pharmaceutical.

Following the de-licensing of the pharmaceutical industry, industrial licensing for

most of the drugs and pharmaceutical products has been done away with.

Manufacturers are free to produce any drug duly approved by the Drug Control

Authority. Technologically strong and totally self-reliant, the pharmaceutical industry

in India has low costs of production, low R&D costs, innovative scientific manpower,

strength of national laboratories and an increasing balance of trade. The

Pharmaceutical Industry, with its rich scientific talents and research capabilities,

supported by Intellectual Property Protection regime is well set to take on the

international market.

Indian bulk drugs market in 2006 was about US$3.29 billion, witnessing a growth of

19% over 2005 at CAGR of 18.81% in the last six years. India ranks 4th in terms of

volume, among the top 15 drug manufacturing countries worldwide. Indian

companies have the distinction of developing cost-effective technologies for

manufacturing bulk drugs and intermediates, conforming to global standards. India

has over 80 US FDA approved plants, the second highest in the world.

Indian bulk drug market is fragmented with top 10 companies contributing 44% of the

market and about 1,323 companies accounting for the balance 56%. Nearly 70% of

the bulk drugs, manufactured are exported to more than 50 countries. Contract

manufacturing in India in 2006 was USD658.6 million, registering a growth of 48%

over previous year. Indian companies have filed 408 DMF's during 2006 out of a total

704. By 2010, Indian bulk drugs market is projected to grow to about US$6.54 billion

and contract manufacturing to USD1.5billion. The Pharmaceutical Industry in India is

increasingly being recognised as a reliable source of quality medicines at affordable

prices and is emerging as a global powerhouse. As we enter the Knowledge Economy,

speedy and efficient exchange of reliable information will be a prime requirement for

the efficient management of our intellectual capital. The Indian manufacturers of bulk

drugs have taken the advantage of the prevalent economic conditions and have

accordingly carved their markets. During the times when the import duty was as high

as 115%, the Indian bulk drugs were positioned as import substitutes and when the

duty fell they have become exporters.

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The growth which the Indian Pharmaceutical Industry has achieved is mainly due to

the Indian Patents Act, 1970 which was one of the achievements of IDMA in

strengthening the national sector.

The main Industry Associations in India are:

1. Bulk Drug Manufacturers Association (India), A-24, 2nd floor, View Towers,

Lakadi Ka Pul, Hyderabad-500004, Tel : 3322142 /3316328

2. Indian Drug Manufacturers Association (IDMA), 102-B, Poonam Chambers,

Dr.A.B.Road, Worli, Mumbai - 400 018, Tel: 2494 4624 / 2497 4308, Fax: 91-22-

24950723, Email: [email protected] / [email protected]

3 Organization Of Pharmaceutical Producers In India (OPPI): (established in 1965),

Peninsula Chambers, Ground Floor, Ganpatrao Kadam Marg, Lower Parel, Mumbai

400 013., Tel: +91 22 24918123, 24912486, 66627007, Fax: +91 22 24915168, E-

Mail : [email protected]

4Unilab Chemical & Pharmaceuticals Pvt Ltd:

Unilab Chemicals & Pharmaceuticals Pvt. Ltd. is a manufacturing company

established in 1978. It is a quality manufacturer of bulk drugs & formulations, APIs

(active pharmaceutical ingredients), API intermediates, quaternary compounds and

fine chemicals . The Company specializes in the manufacture of antiseptics and

disinfectants. Unilab holds all necessary

licences and a Good Manufacturing Practices (GMP) certificate granted by the Food

and Drug Administration, Maharashtra State.

M/s Blue Circle Ltd.:

Blue Circle has three strong manufacturing sites located in the industrial belt of

Thane, having close proximity to Mumbai. Jet Chemicals Pvt. Ltd. (JCPL)

incorporated in 1969 is the oldest unit built over an area of 12000 Sq. Mtrs. Blue

Circle Speciality Chemicals Pvt. Ltd. (BCSCPL) incorporated in 1989, occupies an

area of 3000 Sq. Mtrs. Blue Circle Organics Pvt. Ltd. Came into being in July 2004.

They have a strong presence in the global market with their expertise being

1. Gomberg and related reactions and formations of biaryl compounds

2. Sandmeyer reaction

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3. Grignard reaction

4. Hydrogenation with nobel metal catalyst

The company is recognised in four major areas:

1. Pharmaceutical intermediaries/ Fine chemicals

2. X Ray Contrast Media Intermediaries

3. Polymer Modifiers

4. Custom Synthesis and Toll manufacturing

Their production facilities can take up multi-step synthesis. Their facilities are

equipped with glass-lined and stainless steel multi-purpose reactor, safety and control

system installation. All manufacturing operations are carried out as per ICH Q-7A

guideline. Blue Circle also aims at manufacture of products with flexibility and with

the regulations in force concerning the environment, safety & health.

Innovation strategies employed: Unilab Chemicals & Pharmaceuticals Pvt. Ltd.

(UCPL) started with the production of Cetrimide and Chlorhexidine Gluconate. It is

in the transition from the third stage (market penetration) to the fourth stage

(accelerated growth) of the business growth cycle. UCPL & Blue circle have gone for

combination growth strategies. Both the companies are engaged in international

business at the very first rung of direct exports. They went for intensive expansion at

varying levels. Markets were carefully carved in the developing countries like Africa,

Latin America rather than developed countries from Europe & USA. Advantage was

that these countries were initially importing from Europe at a much higher price and

are behind India in terms of technology by approximately 10 years. Also, this is an

industry where profits lie in volumes and these countries will not have market large

enough to even achieve break even if they start manufacturing themselves.

UCPL & Blue circle have resorted to forward integration by also producing the

intermediaries and for some chemicals the packaged product for the end user eg

phenolic cleaners. They are also helping their existing customers to set up

manufacturing units while ensuring life time partial dependence for the generation of

continuous income. Sustainable competitive advantage in the bulk drug industry

where the technology gets copied relatively in advance as compared to other

industries; comes in the form of continuous innovations. This competitive advantage

is derived from the combination of two basic themes viz (i) Competitor Centred & (ii)

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Customer Centred

Product related innovations are in general customer centred and process related

innovations are generally competitor centred. As a result of these innovations it is

observed that there is either an increase in the price or decrease in the price along with

increase in the volume. In any of the cases, the result has been an increase in the

return on investment. The process innovations help reduce the cost and hence increase

the margins.

One of the processes to obtain 98% purity of a molecule, it had to undergo reflux

reaction in which Naphtha was used as a solvent, took 125 hours for a batch of 500

cc. They introduced a new wax process by which though the purity was reduced by

three percent to 95%, the reflux would be completed in 8 hours. As a result of this

twelve batches could be produced instead of just one batch in the same period of time.

This amounted to 30% utility cost reduction The factory forward process involves

Business Competency Process, Channel Management, Customer Account and Order

Execution. It is the most complicated & difficult process. As the Indian Bulk Drug

industry relies a lot on direct exports, the complications get compounded. Effective

debtor management becomes vital.

The financial analyses give a clear picture of the problem areas of the firm. E.g. a

high level of debtors indicates that the 4Ps need to be relooked; a high level of raw

material inventory may imply that the supply chain needs to be modified.

Initially, the import duties were 115% of FOB value and the landed price of the raw

material worked out to be almost 2.5 times of the actual price. Market for the bulk

drugs was growing in India and witnessed an increase in the number of manufacturers

and hence the competition. Unilab Chemicals & Pharmaceuticals Pvt. Ltd. And M/s

Blue Circle employed continuous innovations in order to maintain the price level and

remain in the market.

Financial performance of Unilab Chemicals & Pharmaceuticals Pvt. Ltd.

Accounting Year Turnover in Crores

2000-01 5.1

2001-02 7.24

2002-03 9.23

2003-04 11.48

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2004-05 12.70

2005-06 12.62

2006-07 14.50

2007-08 15.09

CONTRACT RESEARCH AND MANUFACTURING:

Increasing costs of R&D, coupled with low productivity and poor bottom lines, have

forced major pharmaceutical companies worldwide to outsource part of their research

and manufacturing activities to low-cost countries, thereby saving costs and time in

the process. The global pharmaceutical outsourcing market was worth USD57.2

billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by

2010. Global market for Contract Research and Manufacturing Services (CRAMS) in

2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market,

contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract

manufacturing was USD38.89 billion accounting for the major share (approximately

68%) of the total global pharmaceutical outsourcing market. India, with more than 80

US FDA-approved manufacturing facilities, is one of the most preferred locations for

outsourcing manufacturing services in India by the multinationals and global

pharmaceutical companies. The Indian pharmaceutical outsourcing market was valued

at USD1.27m in 2007 and is expected to reach USD3.33 billion by 2010, growing at a

CAGR of 37.6%. The Indian CRAMS market stood at USD1.21 billion in 2007, and

is estimated to reach USD3.16 billion by 2010.

India holds the lion's share of the world's contract research business as activity in the

pharmaceutical market continues to explode in this region. Over 15 prominent

contract research organisations (CROs) are now operating in India attracted by her

ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in

the field of new drug discovery and the rest 65 per cent of business is in the clinical

trials arena. India offers a huge cost advantage in the clinical trials domain compared

to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of

hiring a chemist in the West.

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EUROPEAN PHARMACEUTICAL MANUFACTURERS

The Evolution of Drug Production in European Countries

The pharmaceutical industry is very important to the economy of every

country. Pharmaceuticals, especially drugs, are so priceless that no nation can

survive without them and every serious-minded government pays great

attention to drugs. Drugs are so important that the World Health Organization

(WHO) recommends a National Drug Policy for every country. Most

progressive countries have formulated and implemented their national drug

policies, thereby ensuring good health for their citizens and great wealth for

their nation. The development of pharmaceuticals in European Countries has

undergone significant evolution from the concoctions infused from a cocktail

of leaves, fruits, barks and roots to small tablets made through chemical

synthesis. Modern science and technology has turned drugs into extremely

valuable products and continues to aim at delivering them in forms with

enhanced efficacy, precision in action, safety and appearance. This poses a

great challenge to the pharmaceutical industry as there is always a need to

improve on previous inventions and develop even better drugs. As a result of

this evolution, many new entrants into the pharmaceutical industry have

emerged globally since the mid-1930s.

This has led to intense competition with its attendant problem—products of

suspect quality infiltrating the markets as players in the industry struggle to

get more of the market shares. The problem is exacerbated by the double

regulatory standards adopted by exporting countries, as well as the lack of

inbuilt security measures that should be included during product development

by drug manufacturers to forestall counterfeiting.

The pharmaceutical industry in European Countries has passed through a

tortuous path, from the rudimentary era of pre-957 to the foundation-laying

era of the 1960s, through the oil boom era of the 1970s, to the harrowing

experience of the 80’s and 90’s and into the potentially bright era of the

2000s. This path traversed by the industry is not peculiar to European

Countries but is the same as in other developing countries. The development

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of the European Countriesn pharmaceutical industry has evolved over time in

five phases. Each phase depicts the stages of growth that took place in the

industry.

Phase I (Pre 1957 Era)

The first phase started with the establishment of the first pharmacy in

European Countries by Dr. Zacheus Bailey in Lagos.1 During this time, the

pharmaceutical business involved distribution of imported drugs by

representatives of different multinationals in the country. Some of the

multinationals were Beecham, May and Baker, Pfizer, Glaxo and J. L.

Morrison. This meant that there was no local manufacturing of modern

pharmaceutical products in European Countries before 1957.

Phase II (1957-1980)

This phase covered the era when the multinational companies started

establishing production plants in European Countries. These include Glaxo

(1958), Pfizer (1962), Sterling (1963), Wellcome (1967), PZ (1968), and

Pharchem (1968), SmithKline Beecham (1973), May & Baker (1977), and

Hoechst (1982). This phase was seen as the golden era as many companies

expanded and some of them built modern factories. With the end of the

European Countries-Biafra Civil War in 1970 and the emergence of the oil

boom, this era could not have been better for the companies and the economy

as profits, employment and foreign exchange swelled. However, these

companies were solely owned and operated by foreigners with no European

Countriesn indigenous participation.

Phase III (1980-1982)

The enactment of the Indigenization Policy in 1978 brought about the third

phase in the evolution of drug production in European Countries. The policy

forced most of the multinational companies to sell 60% of their shares to

European Countriesn investors. The period also saw the emergence of

indigenous companies such as Biode, Rajrab and Leady Pharma (1980),

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Biomedical Services (1981) and many others. The Federal and the then

Bendel State Governments also set up manufacturing facilities in the country.

Indigenous companies began to combine the formulation of simple dosage

forms with the manufacture of more sophisticated dosage forms. By 1980, the

local production of drugs had increased from less than 5% to 20%.3 This

stage of the evolution was a very positive stage for the country’s

pharmaceutical industry. It engendered prospects for many European

Countriesn investors and improved the chances of expansion with consequent

positive growth impact on the European Countriesn economy.

Phase IV (1983-1986)

Excessive unmanaged dependence on imported finished products resulting

from the oil boom era had a severely damaging effect on the economy. With

the dwindling economy and severe shortages of foreign exchange, goods

became scarce and the scarcity of pharmaceutical products became a new

phenomenon. The government introduced the infamous import license for all

imported goods, including drugs, and with it, the course of the history and

development of the Pharmaceutical Industry was altered. The introduction of

the structural adjustment programme as recommended by the International

Monetary Fund (IMF) further exacerbated the fragile economy.

The European Countriesn government’s implementation of the import license

regime was done mainly on the basis of political patronage. Many people

who had no business with drugs and pharmaceuticals got the licenses and

became importers, while pharmacists, genuine manufacturers and importers

were denied access to foreign exchange or forced to repurchase the import

licenses from those whose plants and offices were located in their briefcases.

With the introduction of this regime, the drug importation and distribution

system in European Countries became chaotic. The country’s markets were

flooded with all sorts of fake/counterfeit and substandard products.

However, two positive results happened during this period. More indigenous

pharmaceutical manufacturers, such as Emzor, Mopson, Barewa,

Geonnasons, Continental, Ashmina, and Afrik came into the scene. In

addition, the proportion of local manufacture grew to 40 percent

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Chapter-5-

SCOPE OF PHARMACEUTICAL INDUSTRY

CONTRACT RESEARCH AND MANUFACTURING OUTSOURCING AND

OTHER SERVICES

Increasing costs of R&D, coupled with low productivity and poor bottom lines, have

forced major pharmaceutical companies worldwide to outsource part of their research

and manufacturing activities to low-cost countries, thereby saving costs and time in

the process. The global pharmaceutical outsourcing market was worth USD57.2

billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by

2010. Global market for Contract Research and Manufacturing Services (CRAMS) in

2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market,

contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract

manufacturing was USD38.89 billion accounting for the major share (approximately

68%) of the total global pharmaceutical outsourcing market. India, with more than 80

US FDA-approved manufacturing facilities, is one of the most preferred locations for

outsourcing manufacturing services in India by the multinationals and global

pharmaceutical companies. The Indian pharmaceutical outsourcing market was valued

at USD1.27m in 2007 and is expected to reach USD3.33 billion by 2010, growing at a

CAGR of 37.6%. The Indian CRAMS market stood at USD1.21 billion in 2007, and

is estimated to reach USD3.16 billion by 2010.This report gains significance in view

of the growing prospects of CRAMS and the increasing interest of Indian pharma

companies in exploiting the current opportunities. CRAMS report provides a brief

introduction on CRAMS industry, market overview, India-china emerging players.

CRAMS report updates on industrial applications in Pharma, Biotechnology and data

management industry. It also highlights the growth drivers, issues and challenges in

CRAMS industry. It has profiled 20 companies providing introduction, operational

details excluding financial details of the companies. CRAMS report presents

information about the regulatory issues involved including regulatory systems in India

and the government policies. CRAMS report identifies critical success factors

involved in the manufacturing/production and research. At the end the report presents

future outlook for CRAMS industry.

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Drivers for Contract Manufacturing

Manufacturing Strategies

Drug manufacturing represents typically 25-30% of total cost of producing drug and

so achieving the agility in production process has become essential for pharmaceutical

companies, which are expected to align their supply chains with constant shift in

global demand. Pharmaceutical companies are increasingly adopting the “virtual”

model and outsourcing their manufacturing functions to optimize manufacturing cost

and focus more on core activities like research and marketing.

The key objectives and drivers for outsourcing the manufacturing functions are as

follows:

• Improving cost

• Better capacity management with flexibility to handle business needs

• Effectively utilizing internal core expertise and other resources (including

financial) and more opportunity to focus on core competencies

• Quick time-to-market

• Leveraging external expertise (and addressing the challenge of non-

availability of internal resources and capabilities)

• Investing less capital (and leveraging financial resource in other core

activities)

• Leveraging vendor’s innovative, state-of-the-art process and production

technologies to support the rapid technical transfer of products from R&D to

full scale commercial manufacturing.

Contract manufacturing approach is adopted for improving cost, process and

capabilities as Contract Manufacturing Organizations (CMO) can leverage their skills

and competencies to improve process, provide volume discounts on raw material and

deploy units in low cost countries. In case of small companies, the knowledge and

experience of CMO helps to deploy the best practices and leverage experiences in

manufacturing their products.

Also CMO provides a range of services like pre-clinical development, commercial

batch manufacturing, active manufacturing, packaging and other related services.

CMO employs latest manufacturing facilities and techniques and has the capability to

understand and deploy multiple regulatory requirements. CMO brings maturity while

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integrating with customer process and system. To provide efficient and integrated

services, CMO integrates with supply chain activities of the pharmaceutical

companies.

Manufacturing Strategies

During the complete development cycle of the drug, the manufacturing’s

requirements come at multiple stages. In addition to manufacturing of drug at the

commercial scale, there is also a need during the pre-clinical supplies as well as

during the clinical trial supplies (but on a smaller scale). So companies adopt the

different manufacturing strategies for manufacturing outsourcing based on the stage

of drug development, as the objective and business needs (such as volume, cost, time)

are different in different stages of drug development. In addition to this, companies

also considers various others factors for outsourcing decision, such as products related

risks, internal competencies & capabilities, cost of operations and others.

Some manufacturing functions are completely outsourced, while some are partly

outsourced. If specific manufacturing function(s) are not outsourced, then for any

additional capacity need, or for any new drug manufacturing need, the company needs

to either expand the existing facilities, or acquire the additional facilities.

The key manufacturing strategies considered by companies are as follows:

• Complete In-house Manufacturing

- Drug is completely manufactured internally. This drug can be for

commercial purpose or a drug manufactured during pre-clinical and clinical

trial stage.

• Complete Contract Manufacturing

- All the manufacturing functions are outsourced to the vendor.

• Part In-house and Part Outsourced (Hybrid Approach)

- A combination of in-house and outsourced manufacturing is used to address

the company’s need.

Most large companies adopt hybrid approach. The approach taken in hybrid

outsourcing is as follows:

• Part of manufacturing steps like early/late stage ingredients, API are

outsourced and later stage steps like final formulation are performed in-house.

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• All manufacturing steps are performed internally, expect additional capacity as

it requires outsourced partner.

• For commercial use (large quantity), manufacturing is outsourced and for

clinical trial or pre-clinical trial, products are manufactured in-house (small

quantity).

• API process development and clinical supply manufacturing is performed in-

house and the scale-up to commercial and commercial manufacturing is

outsourced.

Companies as a whole may adopt different strategy for different drugs in their

portfolio, for example Company may outsource the complete manufacturing of old or

generic drug (stable and less risky drug), and may adopt hybrid approach or complete

in-house manufacturing strategy for other drugs.

Contract manufacturing especially sees extensive outsourcing for specialized skills

like biopharmaceutical manufacturing, sterile manufacturing and others. For bio-

manufacturing and API, most outsourcing is done to matured markets like US, Europe

and countries like India and China are used for raw material and intermediates

contract manufacturing.

The global pharmaceutical industry is at the cross roads. With many of the

blockbuster drugs getting off-patented and with increasing R&D costs, it’s hard by the

companies to maintain their bottom-line and remain unaffected. They have found

recourse to outsourcing some of their research and manufacturing activities and

saving cost in the process. This has led to the growth of contract research and

manufacturing services or CRAMS making the companies in India to rejoice.

Business of CRAMS has come as a boon to the mid-cap pharma companies in India,

these companies are merrily embracing CRAMS taking full advantage of the features

enjoyed by India as a country of diverse origin and strong manufacturing base in

pharma for years. India could potentially capture 10% of the global CRAMS market

of almost US$ 168 billion by 2009. Overall the CRAMS segment is expected to have

grown at 40-50 percent in the last few years. This comprehensive report has the

objective of equipping you with the cutting edge analysis across countries and product

segments and keeping you abreast of the latest developments. This report on the

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scenario of contract research and manufacturing in India comes at a time when

business is pregnant with greater possibilities, new players are coming up on a regular

basis and overseas companies are taking great interest in outsourcing their clinical

trials or manufacturing of APIs in India.

This report is going to be enlightening and resourceful to all those involved with

CRAMS in India, be it the present players, the players in the offing, the policy makers

or the academicians. Global pharma and biotech companies are taking increasing

interest in India to outsource their activities in bio-pharma, clinical trials, health care

(Telemedicine) and contract manufacturing. Companies in India involved in CRAMS

are mainly involved in clinical trials, research and development and manufacturing.

Over the last decade outsourcing has become an important strategic issue for

pharmaceutical companies due to declining R&D productivity, increased generic

competition, blockbuster drugs going off-patent, rising drug development costs and

fewer new drugs discoveries. Under pressure to protect their margins, innovators are

outsourcing non-core activities like manufacturing of intermediates and APIs to low

cost destinations like India, which is likely to gain momentum over the next Decade.

India currently accounts for a miniscule proportion of the US$ 27 billion global

outsourcing industry and is set to capitalize on the mega opportunity.

Global Outsourcing Scenario

Current market for outsourcing in the Pharmaceutical and Biotechnology Industry is

valued at $100 billion in 2006 growing at around 10.8 percent to reach $168 billion by

2009. API Manufacturing is the largest contributor to outsourcing market with a 55

percent share. Clinical Research with a 35 percent share of the market is the second

largest segment contributing to more than one-fourth of the revenues in this industry

followed closely by Drug discovery and Dosage form Development at 25 percent and

20 percent, respectively.

The more established segments like API manufacture and clinical research have

acquired more than 30 percent share of their potential, which also reflects in their

contribution to the total outsourcing revenue. However, emerging segments like basic

research and developmental activities for drug substance and dosage form are yet to

cross the 20 percent threshold of their total potential.

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Contract Research

Some of the known facts in drug discovery are:

• 370 Biotech medicines to treat 200 diseases are in the development pipeline

from 144 companies.

• 178 for cancer, 47 for infectious diseases, 26 for autoimmune diseases, 21 for

HIV/AIDS.

• Of every 5,000 compounds only 5 make it to clinical trials.

• In spite of a sluggish economy R&D spending is on the rise.

• For the first 8 pharma companies there is 6.8 percent increase in the R&D

spending. Approximately $8 billion spent on R&D in 2002.

• Contrary to popular perception FDA approval time has come down from 2.4 to

1.9 years from 1960s to 1999.

All these factors have accounted for Innovator companies trying to reduce cost by

outsourcing components of the Drug Discovery Process.

The global pharma industry has been under pressure to bring out blockbuster drugs to

strengthen its drying pipelines, as well as overcome loss of sales to generics due to

best-selling drugs going off-patent. Managing the drug discovery process and

technologies has become one of the top challenges faced by the global pharma

industry in the recent past; herein lies the opportunity for a spate of companies

focusing on contract research in drug discovery.

Let us consider the threat of generics to blockbuster drugs going off-patent. In the

span of five years from 2001 to 2006, about 40 blockbuster drugs with combined

annual sales of $45 billion will go off-patent in the U.S. These include E. Merck’s

Zocor (off-patent in 2005; for hyperlipidemia; annual sales of $2.8 billion), Takeda-

Abbot’s Prevacid (off-patent in 2005; for peptic ulcers; annual sales of $3.1 billion),

Bayer’s Cipro (off-patent in 2003; for infections; annual sales of $1.3 billion), and

AstraZeneca’s Losec with sales of $4.6 billion (off-patent in 2001). Consider the

R&D cost of drugs; according to a recent study by the Tufts Center for the Study of

Drug Development, it takes $895 million and 10 to 15 years to get a drug to market.

The pharma industry desperately needs strategies to bring down the cost of drug

discovery and outsourcing has become one of the most favored strategies being

adopted globally. The most important benefit of outsourcing is that global majors can

outsource processes related to biology, chemistry, screening, and lead optimization, to

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name a few. Many of the processes involved in drug discovery are time-consuming,

laborious, and non-strategic in nature and can be outsourced to save on costs.

While it provides the global majors the much needed cost-benefit, it is a huge

opportunity for smaller companies that do not have a well developed drug discovery

program to get a toehold, making it a win-win strategy. With biotech companies

joining the drug discovery race, the outsourcing of research to keep costs low, as well

as gain other strategic advantages has become a high point in the last five years and is

expected to gain momentum in the next decade. Contract work in basic research has

evolved from low-end research activities to more value-added high-end research. The

numbers of alliances formed for basic research collaboration are growing steadily;

however, most of them are concentrated in the pharma and biotech hubs of U.S. and

Western Europe. Alliance activity in Asia, Eastern Europe, and Latin America is

growing; however, growth lags the U.S. and Western Europe. Growth of outsourcing

continues to be fueled by the need for drug developers to contain costs and speed

products to market, increasing globalization of pharmaceutical and biotech firms, and

technological demands from drug developers. Reputation for research quality and

thoroughness, speed to project completion, and strong client relationships are the key

to success in research partnering. Domain expertise as an entry barrier is restraining

contract research partnering opportunities. Availability of top of the line infrastructure

and manpower is a defining factor for success in drug discovery contract research.

Understanding and respecting sanctity of patents is critical for growth. Outsourcing in

basic drug discovery occurs mainly in the following 10 segments:

O Broad-based screening

O Oncology

O Infectious diseases

O Genomic Targets

O Chemistry

O Central Nervous System disorders

O Cardiovascular System disorders

O Gene Therapy

O Autoimmune/Inflammation

O Metabolic diseases

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In the period from 1997 to 2004, these 10 segments accounted for cumulative alliance

payouts of

$8.02 billion. Genomics, Broad-based screening, oncology, and are the three

segments exhibiting higher payouts than the remaining segments. In all the segments,

big pharma is the largest outsourcer, accounting for more than 50 percent of the

payouts on an average. In the cardiovascular disease segment, big pharma dominated

completely with 92.3 percent share. For the period 1997 to 2004, the

autoimmune/inflammation and CNS segments, mid-size pharma was prominent with a

share of 37.4 percent and 24.1 percent, respectively. In the oncology and metabolic

segments, big biotech is prominent with a share of 21.1 percent and 29.1 percent,

respectively. Outsourcing by biotech companies has been minimal in the

autoimmune/inflammation segment for the period 1997 to 2004.

The Global Contract Research Market was worth $18.7 billion with a YOY growth

rate of 14.7 percent. This represents a significant 23 percent of the total Global R&D

expenditure currently being outsourced. The market is expected to grow to $47 billion

at a faster pace in the period 2006 to 2011 (at a CAGR of 16.6 percent) when

compared to the projected global R&D spend. India's drug discovery outsourcing

market amounted to just $470 million in 2005. But its expected to grow 30 percent a

year, hitting $800 million by end 2007.

Clinical Research

Clinical Research is the second largest segment, which is being outsourced with

nearly a 35 percent share of the outsourcing activity. The global CRO market was

worth $15.2 billion in 2005 with a YOY growth rate of 23 percent. The market

includes services provided to the pharmaceutical and biotechnology companies in the

clinical development process for innovative molecules (NCEs) as well as generics.

Specifically these services would be clinical, bio analytical, bio statistical, data

management services, biomarkers, regulatory submissions, medical writing, and site

management services for the four phases of clinical development of a NCE and the

bio-analytical / bio-equivalence services for generics.

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Phase IIb-III is the single largest segment in the global CRO market accounting for 40

percent of the total market revenue. The segment is also the most established

component of clinical development that has seen earliest outsourcing efforts from

companies primarily to:

O Tap expertise in patient recruitment and monitoring.

O Leverage cost and skill advantages offered by Site Management Organizations

(SMOs) for Multi-site trial management

O Leverage cost and skill advantages in bio analyses

However, the segment exhibiting highest YOY growth is that of biomarkers. The

clinical leverage provided by biomarkers in predicting probable end points and

challenges drives this segment to be a significant contributor in the next decade and is

expected to revolutionize the way early clinical development will be conducted.

Phase I and IV are expected to maintain the pace of growth with the current focus on

ADR monitoring and more rigorous evaluation in early clinical development.

The Bioavailability/ Bioequivalence (BA/BE) outsourced market was worth $1.56

billion with a in 2005 with a YOY growth of 16.8 percent. A robust pipeline of patent

expiries in the forecast period, potential growth in authorized generic efforts and

technology enhanced generics are expected to drive the growth in this market. Most of

the outsourcing in this segment is currently on a project basis and has not evolved

towards a preferred partnership model.

India, with second largest population in the world, and with every sixth patient in the

world being an Indian, is going through an upheaval economically, socially and

scientifically. Increasing globalization has brought about fundamental changes in the

way clinical trials are conducted here. Increased awareness of Good Clinical Practices

(GCP) requirements, stronger desire of international acceptability of research done in

India has brought favourable changes in the attitude of clinicians in India towards

participation in clinical trials. Investigators are eager to take part in GCP clinical trials

and are also willing to adhere to constraints of the protocol. As per Frost & Sullivan

analysis Current outsourced clinical trial activity in India is at around $118 million

and is estimated to go up to $379 million by 2013. Just 800 people are full time

employees, while an additional 1,500 people work as site staff. The total number of

patients undergoing clinical trials is close to 10,000. The clinical trials legislative

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requirements are guided by specifications of schedule Y of the Drugs and Cosmetics

Act in India. Recently, the Ministry of Health, along with DCGI and Indian Council

for Medical Research (ICMR) came out with draft guidelines for research in human

subjects. These are essentially based on the Declaration of Helsinki, WHO guidelines

and ICH requirements for GCP. The Department of Science and Technology has

taken the initiative for establishing quality requirements by setting up the National

Board for Accreditation of Testing and Calibration Laboratories for clinical and

diagnostic laboratories.

India has more than 50 Contract / Clinical Research Organizations (CROs) with many

Pharmaceutical companies having their own CROs, conducting trials in close to 80

government and private hospitals. MNCs like Aventis, Pfizer and Novartis are already

outsourcing their global clinical trials to India. Indian companies such as Doctor

Reddy’s Labs and Biocon have made significant investments in R&D infrastructure

and have partnered with MNCs for contract research and licensing of the R&D

pipeline.

CONTRACT MANUFACTURING

Large pharmaceutical companies increasingly turn to contract manufacturing

organizations (CMOs) solely to achieve efficiencies in cost, capacity and time-to-

market, or to obtain a specific expertise not available in-house. Today, these factors

still play a role, but now the most dynamic driver behind the use of CMOs in the

pharmaceutical industry rapidly is becoming the unique, innovative, and state-of-the-

art process and production technology they offer. More and more pharma companies

are leaning towards outsourcing to concentrate on marketing their products, without

spending time in drug discovery and the process of manufacturing. This applies to

those virtual companies that exist by the simple fact they can rely on contract

manufacturers and researchers.

As per Frost & Sullivan research the worldwide revenue for contract manufacturing

and research for the pharmaceutical industry was estimated at $100 billion in 2004

and is expected to increase at a CAGR of 10.8 percent to $168 billion in 2009.

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Contract manufacturing of prescription drugs for 2004 was estimated at $26.2 billion,

and is expected to rise to $43.9 billion by end of 2009. Contract manufacturing of

OTC and nutritional products is the largest and fastest growing segment, expected to

rise at a CAGR of 11.3 percent to $102 billion by 2009. The contract research market

is expected to reach $21.9 billion by 2009, rising at a CAGR of 8.6 percent from

$14.5 billion in 2004.

The global pharmaceutical contract manufacturing market for finished dosage

formulation has been traditionally strong in North America and Europe. North

America accounted for 50.5 percent of the global pharmaceutical contract

manufacturing market followed by Europe and Asia. Due to the outsourcing boom in

Asia, contract manufacturing has been witnessing significant growth in finished

dosage formulations, active pharmaceutical ingredients (API’s) and intermediates.

The global pharmaceutical contract manufacturing market is segmented into

injectables, solid and liquid dosage forms spanning across North America, Europe,

and Asia. Injectables are expected to show the highest growth during the next five

years. Solid dosage forms represented 47.0 percent of the global market in 2004.

Liquid dosage forms are projected to grow the slowest during the next five years.

The demand for specialized technologies and services such as sterile products,

biopharmaceuticals, and lyophilization is likely to drive the market to a significant

extent.

Within the contract manufacturing segment, that for the cardiovascular drugs is the

largest among all other application categories with worldwide revenue of about $2.56

billion in 2004, it is rising at a CAGR of 8.7 percent through the next five years.

Analgesics seem to be rising at the highest pace in the contract manufacturing

business with the expected annual average growth rate of 11.9 percent over the period

from 2005 – 2010. Many CMOs have gone far above and beyond the immediate

needs of their customers to create innovative home grown processes and to implement

the latest, technologically advanced equipment-technology that frequently surpasses

that available at Big Pharma's own facilities. The total cost of pharmaceutical

production includes not only the cost of building new plants. It includes the cost to

maintain them, stay up-to-date on equipment advances, and to maintain a workforce

of highly-skilled operators with more than just the knowledge to run them, but with

the expertise and experience necessary to continually update and improve them.

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The CRAMS advantage to India

The advantages offered by India to support the growth of the CRAMs model are

briefly summarized below:

1. Cost Advantage

• India has always been looked forward (to) for its cost advantage for

outsourcing opportunities. Along with the cost benefits, India offers much

more that makes it an attractive destination for outsourcing.

• Clinical Trials in India can cost less than 50 percent of those conducted in

western countries.

• Capital efficiency: Indian companies are able to reduce the upfront capital

cost of setting up a project by 25-50 percent due to access to locally

fabricated equipment and high quality local technology/engineering skills.

This benefit can be passed on to customers.

• Labor cost in India is typically in the range of 10-15 percent of similar costs

in the US.

2. Efficiency and Infrastructure

• India has 3-4 million English speaking scientists, the second largest

concentration in the world following the US.

O A huge patient population, genetically distinct groups, specialty hospitals with

state-of the-art facilities, nearly 700,000 hospital beds and 221 medical colleges, and

skilled, English speaking investigators are some of the advantages.

• Indian manufacturers are skilled in rapid reverse engineering, complex

molecule synthesis and process development. Central laboratories that are

certified by international organizations are available. They cannot only

service studies conducted in India, but also, in due course of time act as

central laboratory for all countries in Asia where global clinical trials are

conducted.

• India has more than 75 FDA approved plants and 200 manufacturing facilities

certified as having good manufacturing practices.

• The manufacturing plants have state-of-the-art technologies with cost

competitiveness ensured during plant development, maintenance and

operation including labor, raw materials sourcing and equipment costs.

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3. Regulatory

• Compliance with International regulatory standards: India today has a rich

resource pool of GCP compliant ethics committees and GCP compliant

investigators; moreover the effort towards greater harmonization is ongoing.

Nearly 100 ICH GCP compliant clinical trials have already been conducted in

India.

• The introduction of the new patent regime in India from January 2005 has

boosted the confidence of multinational companies looking to outsource the

manufacturing of branded drugs with the protection of intellectual property

rights (IPRs).

• Amendment to Schedule Y to allow parallel phase clinical trails to be

conducted in India and also the reduction in custom duties for clinical trial

samples being imported will boost clinical research outsourcing to India.

• The Indian Biotechnology Policy announced in 2005 will furnish easier

procedures for regulatory clearance (Single window clearance) as well as

exemptions from Import duties and service taxes encouraging foreign

investment in India.

Indian companies have shifted focus on R&D in the pharmaceutical sector in the

recent times. Many companies now spend 8 percent or more of revenues on research.

Many pharma companies are concentrating on international companies for contract

research and manufacturing (CRAM) deals. Medicinal chemistry, custom synthesis,

and clinical studies are some areas in which Indian firms are attracting new business.

Ranbaxy has two ongoing collaborative research programs. An anti-malarial

molecule, Rbx 11160, is being developed in collaboration with the Medicines for

Malaria Venture (MMV), Geneva and a collaborative research program with

GlaxoSmithKline plc (GSK). Nicholas Piramal India Ltd. (NPIL) runs a clinical

research unit and does contract synthesis as well. This involves lead optimization of

compounds prepared in very minute amounts. Other large companies like Zydus

Cadila and Dr Reddy's all have either active programs or intentions of entering the

area of CRAMs. CRAMs are an important area for some medium-sized pharma

companies. For example, Shasun Chemicals and Drugs positions itself as an

"integrated research and manufacturing solutions provider". Divi's Laboratories, a

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similar sized pharmaceutical company, has been associated with innovative

multinational companies for contract research and custom synthesis.

Besides these pharma companies there are also specialized contract research

organizations (CROs) in the pharma sector, which do just outsourced research. Some

are international CROs, like Quintiles, which came to India in 1997. It has facilities in

Mumbai, Ahmedabad and Bangalore, with close to 900 people.

Biotech companies also show a lot of prominence in terms of opportunities available

to them. Most biotech companies are built on a contract or collaborative research

model. Syngene, which is a subsidiary of Biocon, carries out contract research for

drug discovery. Syngene has a threeyear agreement to carry out research projects to

support new drug discovery and development, primarily in the early stages and

involving small molecules in the areas of oncology and cardiovascular disease with

Novartis. Avesthagen has established itself as an RPO - a research process

outsourcing company. It works on a collaborative model with partners in development

and shares the Intellectual Property rights. Avesthagen is into agricultural research

and medical research of plants and spanning across genomics, proteomics,

sequencing, and metabolics. Reliance Life Sciences does contract clinical research

and chemistry and biology research.

Conclusion

India has strong chemistry and regulatory skills, which have helped it emerge as a top

destination for Research and Development. India’s cost of manufacturing is 30-40

percent lower as compared to western countries and its labor cost is 1/7th of that of

the USA. India has the highest number of US FDA approved plants outside the USA

and has 6 times the number of trained chemists as the US, available at 1/10th of cost.

Already MNCs like AstraZeneca, Merck, GSK, Solvay, Eli Lilly and others have

started sourcing products from India. MNCs are likely to scale up operations

gradually as they get more experienced with Indian partners. Although India scores

over China on most fronts, the Chinese companies pose a significant threat to India.

Over the years, Chinese companies have been aggressive in filing DMFs. Chinese

companies have filed over 60 DMFs in 2005 as compared to 40 in 2004. Over the

next 2-3 years, Chinese companies are likely to move up the value chain by venturing

into high-end intermediates and formulations. Leveraging on its low cost advantage

and strong Government, backing China poses a significant threat of making major

inroads into the US market as well as commanding a better share of the CRAMS

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industry. Other Asian countries like Taiwan and Korea could also pose a threat to

Indian companies. India is likely to account for 3-4 percent of the global contract

outsourcing industry. From the above estimates, it is evident that the Indian CRAMS

story has just scaled the ‘tip of the iceberg’ and ‘sky is the limit’ for the companies

that have ventured into this space.

Research and Development

Recent concerns about escalating drug prices and rising health care spending have

sparked considerable interest in how new drugs are discovered, tested, and sold—and

in how well those processes serve the interestsof U.S. consumers. Public dialogue on

those issues, how-ever, suggests that the complex economic forces that gov-ern the

drug-discovery process are not widely understood.Even some of the basic economic

facts about the pharma-ceutical industry have been subject to debate. This

studydescribes the current state of pharmaceutical research anddevelopment (R&D),

analyzes the forces that influence it, and considers how well markets are working to

deliver new drugs.

Much of the public interest in pharmaceutical R&D concerns the relationship between

drug prices, drug firms’ costs, and the pace and direction of innovation. Average

prices of new drug products have been rising much faster than the rate of inflation,

and annual R&D spending has grown faster still. Nevertheless, introductions of

innovative new drugs have slowed. At the same time, drug companies have been able

to charge high retail prices for new drugs that are only incrementally different from

older drugs whose prices have fallen. With consumers paying more for new drugs in

the United States than almost any where else in the world, and with the perception

that the drug industry has become less innovative, many observershave wondered

whether some kind of policy interventionis warranted.

Pharmaceutical markets, however, are extremely complex in many respects. Large

public-sector investments in basic biomedical R&D influence private companies’

choices about what to work on and how intensively to invest in research and

development. The returns on private-sector R&D are attractive, on average, but they

vary considerably from one drug to the next. Consumer demand for prescription drugs

is often indirect, mediated by doctors and health insurers. New drugs must undergo

costly and time-consuming testing before they can be sold. Moreover, it may cost

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hundreds of millions of dollars to develop an innovative new drug that then will cost

only a few cents per dose to manufacture and the price of the drug will have no

obvious connection to either cost. Comparative information about drug quality from

unbiased, head-to-head clinical trials of competing drugs is seldom published,

although it would help drug purchasers make the best choices—and in turn improve

the market signals that guide private companies’ decisions about research and

development. An understanding of how such factors interact with the industry’s R&D

process is necessary to recognize the underlying causes of anyfailure of the market to

encourage a socially optimal levelof drug R&D.

This study presents basic facts about the pharmaceutical industry’s spending on

research and development and about the types and numbers of new drugs that result

from it. The study also analyzes several major issues related to pharmaceutical R&D:

• What explains the cost of developing new drugs?

• Does federal investment in R&D stimulate or displace private investment?

• Has the drug industry’s innovative performance declined?

• How profitable are drug firms, and how do profits affect the amount and type

of R&D that companies conduct

The Role of Federal Research and Development

The federal government spent more than $25 billion on health-related R&D in 2005.

Only some of that spend ing is explicitly related to the development of new pha

maceuticals. However, much of it is devoted to basic research on the mechanisms of

disease, which underpins the pharmaceutical industry’s search for new drugs.

The primary rationale for the government to play a role in basic research is that

private companies perform too little such research themselves (relative to what is best

for society). In general, the information generated by basic research can be readily

replicated at low cost. Thus, many of the benefits of that research accrue not to the

company that performs it but to the public and to other firms. With pharmaceuticals,

those spillover benefits can be significant because the development of new drugs

depends on scientific advances. Federal funding of basic research directly stimulates

the drug industry’s spending on applied research and development by making

scientific discoveries that expand the industry’s opportunities for R&D.

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Government-funded basic research can also stimulate private-sector R&D indirectly.

By supporting graduate students and postdoctoral researchers in academic labs

where basic research is conducted, federal grants help totrain many of the researchers

who are hired by drug companies. That training enhances the productivity and

profitability of the companies’ R&D investments, while also allowing researchers to

command higher salaries.

Given the extent of federal funding for life-sciences research, however, there is a risk

that some of that funding could crowd out private-sector investment in R&D.

In general, the government tends to focus on basic research, whereas private firms

focus much more on applied research and development. That difference diminishes

the risk of direct crowding out. But the distinction between basic and applied research

is not well defined, and the division of labor between the two has become less

pronounced as the potential commercial value of basic life-sciences research has

become more widely recognized. Government and private R&D efforts have

sometimes overlapped (as in the race to finish ma ping the human genome); thus, the

government may have funded some research that the private sector otherwise would

have financed. Identifying specific cases where direct crowding out has occurred is

difficult, but it is probably most likely to happen when the government funds research

whose potential commercial applications are obvious and valuable. Federal R&D

spending can also crowd out private spending indirectly by causing labor costs to rise.

Although students and postdoctoral researchers form part of the workforce for

federally funded research, the government and the drug industry both draw on the

same supply of trained professional researchers. That supply is relatively fixed in the

short run, and higher R&D spending in either sector can cause salaries to rise by

increasing the demand for researchers. That is more likely to occur when R&D

spending is growing rapidly. In recent years, both real (inflation-adjusted) salaries for

biomedical researchers and total employment in biomedical research have increased

along with real R&D spending. When R&D spending is growing more slowly,

however, there is probably little such effect on labor costs for professional

researchers. Assessing the Drug Industry’s R&D Performance Total spending on

health-related research and development by the drug industry and the federal

government has tripled since 1990 in real terms. However, the number of innovative

new drugs approved by the Food and Drug Administration each year has not shown a

comparable upward trend. NME approvals shot up for a few years in the mid-1990s

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and then fell again; on the whole, such approvals have consistently ranged between

about 20 and 30 per year. Measured by the number of drugs approved per dollar of

R&D, the innovative performance of the drug industry appears to have declined.

However, if new drugs were of higher quality than older drugs, on average, that

improvement would partly or fully make up for a decline in the raw number of drugs

per R&D dollar. Drug quality is multidimensional and difficult to measure, however.

As a result, no careful and comprehensive estimate exists to show how changes

in quality have affected the industry’s actual R&D performance.

Other factors have contributed to the impression that the pharmaceutical industry’s

innovative performance has declined. Over the past decade, a growing share of the

industry’s R&D output has consisted of incremental improvements to existing drugs

rather than new molecular entities. Performance measures that consider only

entirely new drugs such as the number of NME approvals per year miss that shift and

undervalue the industry’s R&D output. Moreover, comparing output per R&D dollar

over long spans of time can be misleading because of shifts in the types of drugs

being developed. Notwithstanding concerns about innovative performance and how to

measure it, the range of illnesses for which drug therapies exist has never been

broader, and technological advances have yielded new drug treatments of

increasing sophistication, convenience, and effectiveness. Even so, it is difficult to

determine whether the returns to society from the money spent on drug R&D have

declined or not. There are several possible reasons why the industry’s R&D

performance could have slipped. Companies may not yet have fully mastered the

complex new research technologies with which they work; the pool of relatively

inexpensive research discoveries may be temporarily depleted, pending further

advances in basic science; and strong consumer demand for new drugs may have

encouraged firms to invest in R&D beyond the point of diminishing returns.

Furthermore, the frequency with which leading drug companies have merged with

one another over the past decade which may have resulted partly from a decline in the

number of new drugs in development—has sparked concerns about the indus-

try’s R&D productivity. According to some observers, large firms tend to be less

innovative than smaller firms. Those mergers have had little initial effect on the

combined firms’ total R&D spending, although the ultimate impact on the

introduction of innovative new drugs remains uncertain.

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If the industry’s R&D performance has slipped, recent advances in basic sciences

(such as molecular and cellular biology and biochemistry) could eventually reverse

that trend by stimulating the development of more new drugs.

In addition, new-drug approvals could increase simply because of the rising number

of potential new products that have entered the development pipeline in recent years,

according to drug companies. The greater commercialization of basic R&D and the

increased specialization that has occurred in the drug industry may also enhance

productivity. At the same time, though, the greater role of the private sector in basic

R&D may have made the pace and direction of progress in drug development more

dependent on financial factors in the industry

The Drug Industry’s Profits and R&D Investment By standard accounting measures,

the pharmaceutical industry consistently ranks as one of the most profitable industries

in the United States. Those measures, however, treat most R&D outlays as

expenditures rather than as investments that add to the value of a firm. Thus, they

omit from a firm’s asset base the value of its accumulated stock of knowledge. For

R&D-intensive industries, such as pharmaceuticals, that omission can significantly

overstate profitability. Adjusted for the value of its R&D assets, the drug industry’s

actual profitability still appears to be somewhat higher than the average for all U.S.

industries, but not two to three times higher, as standard measures of profitability

indicate.

The notion that pharmaceutical companies enjoy extra ordinary profits is reinforced

by the relationship between prices and costs in the drug industry. The industry’s high

R&D spending and relatively low manufacturing costs create a cost structure similar

to that of, for example, the software industry. Both industries have high fixed costs

(for research and development) and low variable costs (to put a software application

onto a CD-ROM or to produce a bottle of prescription medication). Consequently,

prices in those industries are usually much higher than the cost of providing an

additional unit of the product, because revenue from sales of the product must ulti-

mately cover those fixed costs.2 Even though conventional accounting measures

overstate the profitability of the drug industry, strong growth in the industry’s R&D

spending over many years suggests that the returns on pharmaceutical R&D have

been attractive.

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Ultimately, how adequately prices and profits indicate the kinds of drugs that

consumers want to buy determines the extent to which the pace and direction of drug

innovation are themselves adequate. High prices on new drugs encourage continued

innovation. But because health insurance (private plans as well as Medicaid and

Medicare) keeps consumers from bearing the full weight of those prices, the demand

for new drugs is higher than it otherwise would be at any given price. That effect is

magnified because employment-based health insurance benefits are not subject to

income or payroll taxes, which reduces their cost to consumers. As a result, more

people have health insurance, and many have higher levels of coverage, than would

be the case otherwise.

The effect of health insurance on drug companies’ revenues combined with strong

patent protection that helps firms maintain higher prices—may sometimes create

incentives to invest too much in R&D (from the stand point of the amount of

investment that is optimal for society). The role of health insurance can be tempered

in several ways, however. Insurers and other large buyers of drugs may be able to

exercise more power to negotiate lower prices, and insurers can give patients and

doctors stronger incentives to consider price differences between drugs. The more

accurately a drug’s price reflects its value to consumers, the more effective the market

system will be at directing R&D investment toward socially valuable new drugs.

However, prices can only serve that directing role to the extent that good information

exists about the comparative qualities of different drugs and that consumers and

health care providers use that information.

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Chapter-6-

Major Mergers, Acquisition and Other Alliances in the last

two years

A merger, acquisition, or Alliances deal between pharmaceutical companies may

occur as a result of complementary capabilities between them. A small biotechnology

company might have a new drug but no sales or marketing capability. Conversely, a

large pharmaceutical company might have unused capacity in a large sales force due

to a gap in the company pipeline of new products. It may be in both companies'

interest to enter into a deal to capitalize on the synergy between the companies.

Merger, the combining of two or more companies into a single corporation. In

business, a merger is achieved when a company purchases the property of other firms,

thus absorbing them into one corporate structure that retains its original identity. This

differs from a consolidation, in which several concerns are dissolved in order to form

a completely new company. In a merger the purchaser may make an outright payment

in cash or in company stock, or may decide on some other arrangement such as the

exchange of bonds. The purchaser then acquires the assets and liabilities of the other

firms.

Mergers are often accomplished to revive failing businesses, to reduce competition, or

to diversify production. In the U.S., however, fairly stringent antitrust laws are

enforced to be sure that mergers do not result in monopolies.

IMPACT OF MERGERS AND ACQUISITIONS ON INDIAN

PHARMACEUTICAL INDUSTRY

The healthcare sector in India has experienced a paradigm a shift due emerging trends

in globalization, developing markets, industry dynamics and increasing regulatory and

competitive pressures.

Companies across the world are reaching out to their counterparts to take mutual

advantage of the other’s core competencies in R&D, Manufacturing, Marketing and

the niche opportunities offered by the changing global pharmaceutical environment.

The pharmaceutical sector offers an array of growth opportunities. This sector has

always been dynamic in nature and the pace of change has never been as rapid as it is

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now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology

companies have evolved distinctive business models to take advantage of their

inherent strengths and the "Borderless" nature of this sector. These differentiated

business models provide the pharmaceutical and biotechnology companies’ the

necessary competitive edge for consolidation and growth.

DRIVERS IN MERGERS AND ACQUISITIONS

Today, there is a global trend towards consolidation and going forward, as pressures

on the pharmaceutical industry increase, this trend will continue. The driving factors

for mergers and acquisitions in the global pharmaceutical industry are:-

• The lack of research and development (R&D) productivity

• expiring patents

• generic competition

• high profile product recalls

This sector is unique in the sense that it traverses across geographies, as health has no

boundaries, and this very boundary-less nature supports consolidation in this Industry.

With the easy availability of capital and increased global interest in the

pharmaceutical and biotech industry, the sector has become quite a mergersand-

acquisitions' favourite.

Apart from the patented pharmaceutical and biotech companies scouting for newer

geographies to launch their patented molecules, the global generics market also has

undergone an unprecedented consolidation wave in the past three years. In 2007, Teva

acquired US generics major IVAX for $7.4 bn, to become the world’s largest generics

company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz is the

generics arm of the Swiss pharmaceutical group. Novartis, has been buying small

generics companies to grow in size. Sandoz bought Hexal and Eon Laboratories in

Germany, as well as Croatia’s Lek, Canada’s Sabex and Denmark’s Durascan in 2004

and 2005. Deflation in the generic industry would lead to displacement of weaker

players leading to consolidation. The trend has gathered momentum with the $1.9bn

buyout of Andrx by Watson to create the 3rd largest specialty pharma company.

There are three levels of integration that are currently being sought in the generics

industry

• Back-end manufacturing capability (API/formulation)

• Product integration (ANDA pipeline)

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• Front-end (marketing and distribution) in the developed world

The US and European generics companies are scouting for alliances/buyouts at the

back end of the chain, which would allow them to offset any manufacturing cost

advantage held by companies in the developing markets. The Indian companies are

looking at the front-end integration as building a front-end distribution set-up from

scratch could take significant time. The product side integration is common to both

sides, with weaker US/European generics companies looking at anyone that could

offer a basket of products. This is because the US/European pipeline is weak while

Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly,

and are looking for geographic expansion.

MERGERS AND ACQUISITIONS TREND IN INDIA

Mergers and Acquisitions (M&A) interest in India is currently very high in the

pharmaceutical industry. Size and end-to-end connectivity are major detriments in the

global markets. To achieve them, Western MNC’s have to look to Indian companies.

India’s changing therapeutic requirements and patent laws will provide new

opportunities for big pharmaceutical for launching their patented molecules. While,

India’s strong manufacturing base will stand global generic companies in good stead

as a low-cost development and manufacturing destination.

Besides consolidation in the domestic industry and investments by the US and

European firms, the spate of mergers and acquisitions by Indian companies has

ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning

curve through partnerships and alliances with international pharmaceutical firms,

Indian pharmaceutical companies have now moved up a step in the value chain and

are looking at inorganic route to growth through acquisitions. Many top and mid tier

Indian companies have gone on a global "shopping spree" to build up critical mass in

International markets. Also, given the easy access to global finance the Indian

companies are finding it easier to fund their acquisitions.

Internationally, Indian pharma companies are on a prowl. And this can be seen by the

fact that in 2007, the Indian pharma industry witnessed 25 mergers and acquisitions

(M&As), with 15 cross border transactions. According to data compiled by

international consultancy Grant Thornton, India Inc recorded M&A deals worth $940

million in November 2007, taking the total for first 11 months of 2007 to $50.79

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billion. M&As were an important trend of 2007 for India Inc, with the total deal value

crossing $50 billion mark.

The need to consolidate

Consolidation is restricted not only to India but global pharma market has also been

witnessing the same. India, particularly in the past few years, has seen a lot of activity

in this arena. Indian companies have stepped up their acquisition activity in different

parts of the world. "In terms of business, national boundaries have become permeable

and going forward you will see Indian firms getting more aggressive in this arena,"

feels Dr D B Gupta, Chairman, Lupin. The increase in worldwide M&A activity in

the pharma sector can be attributed to the drying New Chemical Entities (NCE)

pipeline which is putting pressure on the innovator companies. Secondly, as over $65

billion worth medicines are expected to go off patent during next five to seven years,

the generic opportunity seems to be looking better for Indian companies.

To take advantage of this, companies across the world are reaching out to their

counterparts to take mutual advantage of the other's core competencies in R&D,

manufacturing, marketing and the niche opportunities offered by the changing global

pharmaceutical environment.

Over the past few years, several Indian companies have targeted the developed

markets in their pursuit of growth, especially via the inorganic route. Companies such

as Ranbaxy, Dr Reddy's Laboratories, Wockhardt, Cadila, Matrix, Torrent Pharma

and Jubilant have made one or more European acquisitions.

Besides gaining a faster entry into the target market, one of the basic strategies behind

the acquisitions remains that of leveraging India's low cost advantage by shifting the

manufacturing base to India. At the same time, the acquired companies also serve as

an effective front end for Indian companies in these markets.

Trends pre and post 2005

The M&A strategy for Indian pharma companies has not changed with change in the

patent regime. Comparing the situation pre-2005, immediately after 2005 and today,

there has been a strategic rationale driving acquisitions and alliances made by Indian

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pharma companies worldwide. A particular trend has been observed in the deals. Most

outbound deals done by Indian companies can be categorised in two major themes—

CRAMs oriented or geographical market entry. And this may remain the same over a

period of time, feels Navroz Mahudawala, Associate Director, Healthsciences

Practice, Ernst & Young. He remarks, "Most large Indian companies have seen their

valuations drop in the last few months. Also, few Indian pharma companies have

Foreign Currency Convertible Bond (FCCB) overhang; which makes it difficult for

them to attempt any aggressive move for outbound M&A at this point in time. Indian

companies would continue to pursue strategic entry opportunities in order to enter or

consolidate presence in Europe or Latin America. Australia and South Africa are

other geographies of interest."

As Indian companies continue cross boundaries for various strategic tie ups, lack of

research and development (R&D) productivity, expiring patents, generic competition

and high profile product recalls will drive the M&A growth.

Moreover, as the US and European generics companies look for alliances/buyouts at

the back end of the chain, this will enable Indian companies to gain an entry in these

markets. Secondly, today there is a global trend towards consolidation and going

forward, as pressures on the pharma industry increase, this trend will continue.

Historically, many of the generic players have only been regional contenders. A prime

attribute of several major deals in the generic sector is that they extend the acquirer's

international coverage. Many top and mid tier Indian companies have gone on a

global 'shopping spree' to build up critical mass in international markets. The business

model and size of the company determines the acquisition rationale. Indian companies

are either looking for brand acquisitions, marketing of brands or acquiring assets.

They are doing so to ensure and build critical mass in terms of marketing,

manufacturing and research infrastructure, to establish front end presence,

diversification into new areas--tap other geographies/therapeutic.

Segments/customers/business models (e.g services), enhance product, technology and

intellectual property portfolio and catapult market share.

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Big ticket acquisitions to smaller ones

The major pharma M&As in 2007 were Wockhardt's acquisition of the French

company Negma Laboratories for $265 million (Rs 1,045 crore) and the US-based

Morton Grove Pharma's for $38 million (Rs 150 crore), Jubilant Organosys'

acquisition of Hollister-Stier Laboratories of the US for $122.5 million (about Rs 500

crore), Alembic's buyout of the entire domestic non-oncology formulation business of

Dabur Pharma for Rs 159 crore.

Looking at these deals overall, Indian majors were not so active on the M&A front in

2008, as compared to smaller and mid-sized firms, although these deals were

comparatively small. For example in July, Elder Pharma acquired 20 percent stake in

Neutra Health of UK for $11.55 million and 51 percent stake in Biomeda Group of

Bulgaria in an all-cash deal worth Euro 5 million, Plethico Pharma acquired US-based

Natrol for about $81 million, Strides Arcolab's acquired Italian firm Diaspa's

fermentation assets.

The Indian pharma segment has shown great maturity in inking deals at an

international level. Instead of aiming for high-maintenance targets, they have

restricted their focus to small, manageable deals with a focused market strategy. For

instance, Piramal Healthcare does not stick to the conventional approach followed by

its counterparts. Instead, it focuses exclusively on development in the custom

manufacturing segment for overseas buyers. Besides, it has also targeted the German

supply chain of blood plasma products. Then there are companies like Glenmark that

have built their presence in particular countries like Poland. In recent months,

Glenmark has acquired seven Polish brands. The largest products in the new portfolio

are Cital (citalopram), the leading anti-depressant brand in Poland, and Lamotrix

(lamotrigine), treatment for the management of epilepsy.

Another important development observed is that Indian firms are acquiring many

foreign pharma firms or brands outside India since the latter half of the 90's.

According to estimates there are 31 such cases noticed between 1997 and March

2005, which shows how competitive the Indian firms are. The main reason for this

increasing number of foreign acquisitions is part of the market expansion strategies of

the Indian companies. For example, Ranbaxy, acquired Ohm Laboratories in the US

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and Rima Laboratories in the Ireland in 1996. With these acquisitions, Ranbaxy aimed

at strengthening its overseas infrastructure, as it expanded globally and also to

facilitate a quick entry into overseas market, by enabling the company to cope with

the much more stringent regulatory framework. This also gave Ranbaxy the capacity

and manufacturing facility needed to compete in the overseas markets. Ranbaxy's deal

with Ohm helped them to get rid of the 'made-in-India' image for their very discerning

US customer. And the acquisition of Rima Laboratories helped them to have access to

the product licenses for the UK market and cut short registration services.

Another case in point is Lupin's recent acquisition of Hormosan in Germany and a

substantial stake in Generic Health, one of the leading generic pharma companies of

Australia. Last year they had successfully acquired Kyowa in Japan and thus

positioned themselves amongst the top ten generic companies in that market and

similarly the company's acquisition of Rubamin, renamed Novodigm in India has

helped them establish its presence in the CRAMS arena. The pursuit, therefore, is to

move up the value chain either in terms of geography, business or products.

On the flip side

Big Pharma is at a stage where it needs to re-invent itself. The current situation

prevailing in Big Pharma is unsustainble, as these companies are spending

increasingly more on R&D, while at the same time, getting fewer results. Difficult

conditions have meant major drug producers have undergone massive mergers to find

cost savings and critical mass in R&D and marketing. More emphasis has also been

placed on internal discovery and development of new products.

However, more recently, mergers have slowed down and strategic alliances between

pharma and biotech are becoming more prominent. Consequently, the acquisition

mode of market consolidation is not being considered effective. Consolidation among

the main pharma participants has meant that big pharma companies need to explore

other partnering options and new ways to integrate with other companies. Many

pharma companies are working on the basis of a network model as the need for more

pipeline products increases.

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This means as the number of projects increase, the risk reduces, thereby, making

many partnering options an optimal choice. There are many factors in the pharma

industry that are driving the need for collaboration. Some key issues are the high cost

of drug development, threats to intellectual property, pricing pressure, product

liability issues and the potential of personalised medicine.

Till date, most pharma collaborations within sales and marketing have been directed

to improve market access and reach. For example, the collaboration between

Wockhardt and Ranbaxy or JBchem and Arrow to get access to the untapped global

markets or the use of telemedicine to access the rural population. The allied industries

like diagnostics liasoning with the pharma companies to support their efforts on

access and reach. For example—the deal between Roche Diagnostics and Mankind

where Mankind has exclusive marketing and distribution rights for the Accuchek

Go—blood glucometer device of Roche. Yet another example is DxTech and Piramal.

The alliance includes a license and development agreement relating to DxTech's

proprietary technology, a distribution agreement and an agreement to establish a joint

venture between the companies for the marketing and sales of the commercial

product.

But all these alliances have been directed to gain access and reach as they work on the

assumption that access equates reach which in future would no longer remain true

with the evolved consumers, customers and channels. The transformation observed in

many industries have been triggered by an external player encashing on the need of

the consumer need gap.

Indians go on shopping spree

Indian companies are looking strongly at US and Europe, as the rationale for

acquisitions in Europe is to establish front end marketing and distribution

infrastructure in these lucrative generic markets. The case in point is of Reliance Life

Sciences' acquisition of UK-based GeneMedix--the first-ever overseas acquisition of a

listed biopharmaceutical company by an Indian company. For Reliance, the life

sciences arm of India's largest conglomerate, the acquisition provides an opportunity

to enter the European market, expand its growing portfolio of therapeutic proteins

under development with a complementary portfolio from GeneMedix, and leverage

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the UK company's manufacturing facilities, whereas India's acquisition in lesser

regulated markets serve as an entry strategy for these markets, apart from building

product portfolio, backward integration and diversification/growth in emerging

opportunities such as CRAMS and biotech.

Future trends

Indian companies would continue to pursue strategic entry opportunities in order to

enter or consolidate presence in Europe or Latin America. Australia and South Africa

being other geographies of interest. Europe is clearly geography of comfort as Indian

companies have traditionally done business with European companies. Further,

Europe was the first regulated market foray for various Indian companies.

"There can be a slowdown in outbound M&A. However, we expect activity to

substantially pickup on the domestic front (domestic M&A and inbound) in the next

12-24 months. We also expect substantial consolidation in the Indian Active

Pharmaceutical Ingredients (API) industry," feels Madhuwala.

Indian companies are likely to take ever larger steps globally, particularly in the US

and Europe, while the scale of domestic Indian companies will continue to attract both

strategic and private equity interests, the latter fuelled by the growing funds raised

from Western investors seeking high returns. Growth through inorganic route has

become an integral part of companies' strategy and there is a clear drive to gain in

scale and size.

Therefore, Indian pharma companies will be compelled to actively consider cross

border acquisitions to maintain their growth momentum, take on global competition

and to acquire global visibility and international brands.

Incentives for Mergers and Acquisitions by Indian companies

• Build critical mass in terms of marketing, manufacturing and research

infrastructure

• Establish front end presence

• Diversification into new areas: Tap other geographies / therapeutic segments

/customers to enhance product life cycle and build synergies for new products

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• Enhance product, technology and intellectual property portfolio

• Catapulting market share

The Indian companies excel as far as the back end of the pharmaceutical value chain

is concerned i.e. manufacturing APIs and formulations. Over the past few years the

Indian pharmaceutical companies have also stepped up their efforts in product

development for the global generic market and this is visible with the DMF filings at

the US FDA. About 30% of the new DMF filings at the US FDA are being filed by

Indian companies. What the Indian companies are short of is the front-end distribution

and marketing infrastructure in the developed world. The current stress is on bridging

this gap through any / or all of the following strategies. The type of tactic employed

would depend on the companies’ existing capabilities, available resources, nature and

scale of expansion planned and on the targeted geographical market. The following is

a table of major mergers and acquisitions involving Indian companies.

Acquisitions are the quickest way to front end access. What is interesting is the fact

that apart from market access – i.e. marketing and distribution infrastructure, the

acquiring company also gets an established customer base as well as some amount of

product integration (the acquired entities generally have a basket of products) without

the accompanying regulatory hurdles.

There are also entry barriers for companies from the developing countries and

acquisitions make it easy for these organizations to find a foothold in the developed

markets. Over the last two years, several Indian companies have targeted the

developed markets in their pursuit of growth, especially via the inorganic route.

Companies such as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one

or more European acquisitions, while others such as Torrent are also scouting for

potential targets.

Mergers In Pharma Sector - Cynosure Of The New-Age Takeovers

The past two decades have effectuated a wave of change in India- liberalization,

technological advancements, globalization, and sustainable development to name a

few. This includes a major corporate development called Mergers and Acquisitions

(M&A). Takeovers, as it is commonly known, are an ever-green field in the corporate

sector. Although the 1956 Companies Act did envisage the concept of amalgamation,

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in the present day, mergers and acquisitions connote a much wider meaning than a

few mere provisions. Albeit the concept remains the same.

Merger, in common parlance, is a combination of two or more commercial

organizations into one. It is a tool for expanding activities of a company or to augment

their future profits. The terms Mergers and Acquisitions are used inter-changeably.

However there is a difference between the two- a friendly takeover is addressed as a

merger whereas a hostile takeover is termed as an Acquisition.

Takeovers used to be mainly concentrated on stable and profitable industries like

steel, automobiles, banks etc. But the past few years have seen the trend digressing

towards newer and more competitive sectors. The onset of the 21st century initiated a

drift toward unexplored territories like the pharmaceutical sector.

Global Takeovers

In the last year of the decade, the world saw the biggest merger of this industry i.e. the

Pfizer buyout of Wyeth for a staggering $68bn. The combined company will create

one of the most diversified companies in the global health care industry. Operating

through patient-centric businesses that match the speed and agility of small, focused

enterprises with the benefits of a global organization’s scale and resources, the

company will respond more quickly and effectively to meet changing health care

needs. The combined company will have product offerings in numerous growing

therapeutic areas, a strong product pipeline, leading scientific and manufacturing

capabilities and a premier global footprint in health care.

Further the takeover of Solvay pharmaceuticals by US drug maker Abbot

Laboratories and the proposed merger of Novartis AG and Alcon Inc.2 has sent the

share markets on a high tide. The reason behind such bullish response is mainly the

excitement among investors that the imminent merger of these companies will create

a multi-national drug maker in India3. Other major global takeovers in the

pharmaceutical sector are shown in the following table:

Sr. No Company (Acquirer) Company (Target) For Amount Segment Involved

1. Roche (Swiss) Genentech (USA) $46.8bn R&D, Cancer

Drugs

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2. Daiichi Sankyo (Japan) Ranbaxy (India) $4.2bn Generic Drugs

3. Fresenius Kabi (German) Dabur Pharma (India) Rs.1000 Cr. Oncology

4. Abbot (USA) Wockhardt (India) $22.5mn Nutrition

5. Merck (USA) Schering Plough

(USA) $41.1bn

Cardiovascular

Meds

Though global mergers have positive ramifications on markets, profitability and

consumer base, it has its flipside also. Takeovers may ensue in stifling of competition

and thereby creating monopoly in the market. The Patented drugs become available to

the acquirer company and the R&D of those drugs may also suffer in the process.

Indian Scenario

The Indian Pharmaceutical industry is a favourite one when it comes to cross border

M&A. This is hugely due to the fact that such takeovers are beneficial in-house quick

growth strategies. The desire to gain foothold in the market of another country is

another major reason behind such mergers. Such transactions help the company save

itself from the pain-staking procedure of establishing a noveau entity in an alien

country. Entry into a domestic market is a key driver of cross-border mergers. It helps

companies save significant time that may be needed to build the green-field

businesses of similar scale.4 At times M&A also cater as ego enhancers of MNCs.

Other factors associated to such transactions include lack of research and

development, productivity, expiring patents and generic competition.

The Indian pharmaceutical industry is known for its generics, cost effectiveness and

competitiveness5. The nature of diseases in India is varied and the market is ever

expanding. Large global pharmaceutical companies aim towards establishing a low-

cost base out of the country. A number of Indian companies have made acquisitions in

the global market. With domestic drug sales of almost $5bn, Indian companies have

also developed a considerable service industry for the global pharmaceutical market.

Approximately 32 cross border transactions worth $2000mn have been executed by

domestic pharmaceutical companies.6 There are likely to be more acquisitions in

regulated markets in the US and Europe.7 A few examples of outbound M&A are

illustrated in the following table:

Sr. No. Company (Acquirer) Company (Target) For Amount Segment Involved

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1. Biocon Axicorp (German) $ 30 million Biosimilars

2. Dr. Reddy’s Labs Trigenesis Therapeutics (USA) $ 11 million Speciality Drugs

3. Wockhardt Esparma (German) $ 11million Branded Generics

4- Wockhardt C. P. Pharmaceuticals (UK) Rs. 83 crore Healthcare Products

5. Wockhardt Negma Laboratories (France) $ 265 million R&D

6. Wockhardt Morton Grove Pharma (USA) $38 million Liquid Generics

7. Zydus Cadilla Alpharma (France) 5.5 million Euros Formulation Business

8. Ranbaxy RPG Aventis (France) $ 70 million Generic Drugs

9. Nicholas Piramal Biosyntech (Canada) $4.85mn Regenerative-Heel Pain

Nevertheless, in the last two years, there has been a slow down in the out-bound

M&A and more MNCs are being seen acquiring Indian Pharmaceutical Companies.

This is mainly done to gain access to the generic drug market. Earlier the lack of

patent protection made the Indian market undesirable to the multi-national companies

that had dominated the pharmaceutical market. Since the multinational companies

streamed out of the Indian Market, the Indian domestic companies started to take their

place and carved a niche in both the Indian and world markets with their expertise in

reverse-engineering new processes for manufacturing drugs at low costs. Now the

Indian companies face a threat of takeover under the new IPR regime8 which makes

product patents finally available for the Indian Pharmaceutical industry. The advent of

pharmaceutical product patent recognition in January 2005 changed the ground rules

for Indian companies. In the run up to the new post-patent era and since, the Indian

industry has been evolving. R&D departments are moving away from reverse-

engineering in favour of developing novel drug delivery systems and discovery

research.* This has resulted in the need of new investments and R&D. It also provides

for compulsory licensing which allows countries to import cheaper generic versions

of patented drugs in the interest of public health. This reduces the profitability of the

Indian drug companies. A few more takeovers in the generic industry will lead to

neutralization of the India’s generic revolution which in itself is a stumbling block for

the Indian economy. The reason for such interest of foreign companies in the generic

market is the strategy for the innovators to retain the innovation potential while

acquiring huge generic potential.9

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The year 2009 saw the biggest merger in the generic market when Japan’s 3rd largest

drug maker Daiichi Sankyo took over India’s Ranbaxy Laboratories. Daiichi

purchased 63.9% of the stake at Ranbaxy’s for $4.2 billion. This was done by way of

tender offer, private placement of new share and purchase of outstanding shares from

the founding family.10 The Japanese firm bought Ranbaxy seeking to secure revenue

over a long run amongst intensifying competition and price pressure in the branded

drug market globally.

“This deal is speculated to be a win-win for Ranbaxy and Daiichi Sankyo. Daiichi

Sankyo will be able to leverage the low cost advantage offered by India

complimented by world class infrastructure while Ranbaxy will benefit from product

pipeline of Daiichi.” said Sarabjit Kaur Nangra- VP Research, Angel Broking.

According to Frost and Sullivan’s, “Daiichi Sankyo will be amongst the largest

generic manufacturers globally after the merger. The company would be a strong

contender in both the generic as well as innovator space.”

However the Daiichi-Ranbaxy merger has sent out alarms in the pharmaceutical

industry. In a letter to the department of pharmaceuticals, Indian Pharmaceutical

Alliance has said “lack of available funding is the main reason for the recent spurt in

the sale of stakes in domestic companies”. This has urged the Government to fund

R&D activities of the pharmaceutical companies in order to safeguard their

businesses from takeovers.

Indian companies need to attain the right product-mix for sustained future growth.

Core competencies will play an important role in determining the future of many

Indian pharmaceutical companies in the post product-patent regime after 2005. Indian

companies, in an effort to consolidate their position, will have to increasingly look at

merger and acquisition options of either companies or products. This would help them

to offset loss of new product options, improve their R&D efforts and improve

distribution to penetrate markets.

Research and development has always taken the back seat amongst Indian

pharmaceutical companies. In order to stay competitive in the future, Indian

companies will have to refocus and invest heavily in R&D.

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The Indian pharmaceutical industry also needs to take advantage of the recent

advances in biotechnology and information technology. The future of the industry will

be determined by how well it markets its products to several regions and distributes

risks, its forward and backward integration capabilities, its R&D, its consolidation

through mergers and acquisitions, co-marketing and licensing agreements

Table: Merger and Acquisition in Recent Years

Announ

ce data

Target Acquirer Reason Deal

Value

Target

Country

Feb-06 Betapharm Dr.Reddy’s

Labs

Front end

line in

Germany

570 Germany

Dec-05 Bouwer

Barlett

Glenmark Front end

line in SA

NA South Africa

Dec-05 Able Labs Sun

Pharma

Mfg facility

in US,

Turnaround

potential

23 US

Nov-05 Nihon

Pharma

Ranbaxy Increasing

stake to 50%

to

take

advantage of

Japanese

Generic

Oppurtunity

NA Japan

Nov-05 Roche’s API

Facility

Dr.Reddy’s

Labs

Increasing

presence in

Contract

Mfg

58.97 Mexico

Oct-05 Avecia Nicholas

Piramal

Increasing

presence in

17.1 UK,Canada

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Contract

Mfg

Oct-05 Servycal SA Glenmark NA NA South Africa

Oct-05 Target

Research

Jubilant

Organosys

Capitalizing

on CRO

oppurtunity

33.5 NA

Sep-05 Explora

Labs

SA

Matrix

Labs

Explora’s

expertise in

biocatalyst

would help

in dev of

high

potency

API’s

NA Switzerland

Sep-05 Valeant Mfg Sun

Pharma

Controlled

substance

mfg

facility

NA US

Jul-05 Trinity Labs

Inc

Jubilant

Organsys

US FDA

Facility

inUS,

pipeline of

ANDA’s

12.3 US

Jun-05 Heumann

Pharma

Gmbh & Co

Torrent Entry in

German

market

NA Germany

Jun-05 Doc Pharma

NV

Matrix Lab Front-end in

Europe

263 Belgium

Jun-05 Generic

Prod

Portfolio

Ranbaxy Spanish

Generic

Market-18

products

NA Spain

Jun-05 Biopharma Strides Entry into 1 Latin

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Arcolab new market

Venezuela

America

Mar-05 Uno-Cicle

Hormonal

Brand

Glenmark Establish

brand

presence in

Brazilian

market

4.6 Brazil

Feb-05 Strides

Latina

Strides

Arcolab

Additional

12.5% stake

to

establish

presence in

Brazilian

market

6 Brazil

Feb-05 Mchem

Pharma

Group

Matrix Lab Backward

integration,

ARV

mfg in

China

NA China

Dec-04 Rhodia

Anathetic

Business

Nicholas

Piramal

International

Product line

14

Jun-04 Psi

SupplyNV

Jubilant

Organsys

NA NA Belgium

May-04 Trigenesis

Therapeutics

Dr.Reddy’s

Labs

Niche

Technology

11 US

May-04 Espama

Gmbh

Wockhardt Front end

line in

Germany

11 Germany

Apr-04 Laboratories

Klincer Do

Glenmark Entry in

Brazil

5.2 Brazil

Dec-03 RPG

Aventis

Ranbaxy Front end in

France

84 France

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SA

Jul-03 Alpharma

Saa

Cadila

healthcare

Front end in

France

6.2 France

Jul-03 CP Pharma Wockhardt Front end

and mfg in

Europe

17.7 UK

Mergers & Acquisitions Review 2005-2010 Pharma Biotech

A review of the recent acquisitions and mergers of the industry indicate the following

trends:

Consolidation in medical device, generic and consumer health segment of the

healthcare industry. Mergers and acquisitions were successful if driven by a

blockbuster marketed products like Lipitor (Pfizer- Werner Lambert), Cialis (Lilly-

ICOS) and Erbitux (Lilly-ImClone). If a company was acquired for its R&D pipeline

and development projects or platform technology, in majority of cases, the acquiring

company failed to derive full benefits and most of the projects were later discontinued

or terminated. Diversified companies like Roche, J&J, Abbott and Novartis with

devices, generics and diagnostic performed better as compared to pure pharmaceutical

R&D driven company like Pfizer and Merck. With the $68 billion bid by Pfizer for

Wyeth, $41billion for Schering Plough by Merck and $47 billion bid by Roche for

Genentech has given a great start to 2009 M&A activity. Sepracor was acquired for

$2.6 billion by Dainippon Sumitomo of Japan. Novartis has started the year 2010 by

acquiring 77% of Alcon the eye care unit of Nestle and has paid a total of $50 billion (

$ 10 billion in 2009 + $28 billion in 2010 ). Merck KGA $6 billion OPA for Millipore

and Astellas $ 4 Bn bid for OSI pharma bring the focus back to biotechnology. Teva

buyout of German generic Ratiopharm for $ 5 billion once again shows the

importance of generics.

Drew raised concerns about the low R&D productivity gap in spite of the mergers in

the early and late nineties. These mergers in fact resulted in reduced R&D

productivity to produce new approvals and blockbusters. Glaxo Smith Kline was

formed from Glaxo; Burroughs Wellcome, Smith Kline French, Beecham, Beckman,

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Affymatrix, Sterling and a host of other smaller companies. Similarly Sanofi-Aventis

was a merger of the following component companies Hoechst, Rhone Poulenc,

Marion Merell Dow, Roussel Uclaf, Roger Bellon, Dakota, Rorer, Fisons, Winthrop,

Sanofi, Connaught Labs, Merieux and Synthelabo. Johnson & Johnson is composed

of over 250 companies like Alza, Centocor, Cilag, Cordis, Depuy, Ethicon, Janssen,

Life Scan, McNeil, Mitek, Neutrogena, Ortho, Scios, Therakos and Tibotec Pfizer

acquired Pharmacia, Monsanto, Werner Lambert, Parke Davis, Searle, Kabi,

Farmitalia, Sugen, Upjohn and a host of other smaller companies. Bristol Myers

Squibb was formed from Bristol Myers, Squibb and Du Pont Pharmaceutical. Abbott-

Knoll, This applies to most of the top pharmaceutical companies and even Merck has

joined in. Mergers have started within the biotechnology industry like Amgen taking

over of Abgenix, Immunex and Tularik, Biogen-Idec and pharma companies like

Roche taking over Chugai, and Genentech, Novartis-Chiron. Astellas was formed

from the merger of Fujisawa and Yamanouchi and Daichi and Sankyo merged in

2005. Wyeth is American Home Products, Ayerst, Cynamide, AH Robins. Bayer-

Schering merged in 2006 and the German Merck bought Serono.

As several competitive pharma R&D units were merged, several projects were

terminated or given low priority and funds, R&D staff reduced or shifted resulting in

high turnover and low morale. The bigger company centralized R&D units became

more risk averse. Several once promising areas of research like combinatorial

chemistry produced huge chemical libraries with minor structural variations, High

Throughput Screening (HTS), gene therapy, proteomics, antisense, vaccines for

AIDS, Sepsis, RSV and Malaria, Alzheimer’s disease, Parkinson’s disease have

increased our knowledge and understanding and the number of targets. However no

breakthrough blockbuster medicine has emerged out of these new high speed and

costly technologies. Demain attributes such failure to the elimination of natural

products and extracts from the HTS screening and recommends including natural

products in HTS screens. The partnership between different companies to for R&D

and marketing alliances/joint ventures to develop products have a higher probability

of blockbuster success.

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Analysis of Recent M&A

A review of the recent acquisitions and mergers indicates acceleration of the

following trends:

Consolidation in medical device, generic and consumer health segment of the

healthcare industry and consolidation in the European and Japanese pharmaceutical

industry. FDA new drug approvals in 2008 were 21 in comparison to 18 in 2007.

With low R&D productivity and patent expiry of several blockbuster drugs, big

pharmaceutical companies were diversifying into medical devices (J&J, Roche),

generics (J&J, Novartis, Sanofi Aventis, and Daiichi Sankyo) and diagnosis (Roche).

Biotechnology companies were acquired for monoclonal antibodies, RNAi and stem

cells technology platform and R&D pipeline of oncology projects.

Genentech rejected a $44 billion offer from its majority shareholder Roche for the

remaining shares in 2008 but Roche has not given up and offered only $47 billion due

to uncertain market conditions in early 2009. Pfizer bid of $68 billion for Wyeth and

Merck 41 billion bid for Schering Plough show the push of traditional pharma into

biologics. These bids have revived the M&A market. Companies like Amgen, BMS

and Lilly need to act fast to grow, to acquire, merge or become a target. Mergers and

acquisitions were successful if driven by a blockbuster marketed products like Lipitor

(Pfizer- Werner Lambert), Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS). New

product derived mergers based on potential blockbuster marketed cancer drugs like

Erbitux (Lilly-ImClone), Velcade (Takeda-Millenium) and Aloxi, Salagen; Hexalen

(Eisai-MGI Pharma) will be successful. Roche potential takeover of Genentech will

be a success. Pfizer takeover of Wyeth and Merck of Schering Plough will not

resolve the low productivity of combined R&D to produce blockbuster drugs to

replace Lipitor, Zocor and Fosamax. Analysts have termed it more a cost cutting

effort and a shock absorber to patent expiry of Lipitor in 2011 as merger will dilute

the affect of patent expiry . Wyeth only brings the best selling vaccine Prevnar and

marketing rights to the best selling biotechnology(biologic) Enbrel to the combined

company and has a week R&D pipeline and facing patent expiry of its blockbuster

brands like Pfizer. I think that several of the combined R&D projects will be

terminated. Why Pfizer did not go for Amgen, Genzyme or Biogen Idec?

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J&J is one of the most successful acquiring company and with a Warren Buffett like

approach of leaving the company management in place and benefiting from

innovation. Its acquisition of Centocor and monoclonal antibody provided it with

Remicade, the second top selling biologics and best selling monoclonal antibody in

2008. If a company was acquired for its R&D pipeline and development projects or

platform technology, in majority of cases, the acquiring company failed to derive full

benefits and most of the projects were later discontinued or terminated. Diversified

companies like Roche, J&J, Abbott and Novartis with devices, generics and

diagnostic performed better as compared to pure pharmaceutical R&D driven

company in 2008.

Teva has grown by smart acquisitions in the generic drug business and is now the top

Generic drug company.It started with minor acquisition of Copley pharma in 1999

followed a year later of Canadian Novopharm. In a major move Teva bought for

$3.4 Sicor which was strong in injectable generics and biogenerics and IVAX in 2006

for $7.4 billion. The biggest M&A in generics was Teva offer of $7.5 billion for Barr

and Pliva. These acqusitions have made Teva a strong generic company in Europe and

USA. It has now shifted its focus in the emerging markets as well.

As biologic drugs move into multibillion dollar annual sales, are priced higher with

respect to synthetic products and patent expiry had little effect on sales, and biosimilar

or follow on biologic, unlike generics, need more time to gain market share.

Pharmaceutical companies’ outright acquisition of biotechnology companies and

licensing of technology/late stage projects in development has increased significantly

despite market downturn and significant loss of market value of many biotechnology

companies. This was evident by Merck acquiring Serono, Astra Zeneca absorbing

MedImmune, Takeda taking over Millenium and Roche making a failed offer of 44

billion for the remaining shares of Genentech.

There was a strong emphasis on biologics in R&D pipeline of big pharma companies

and partnership and deals with biotechnology companies. Merck announced its entry

into biosimilar biologics and the entry of 6 biosimilar erythropoietin in Europe and

black box warnings and restrictions in dosage and clinical use resulted in loss of sales

of all blockbuster EPO brands. The market and sales data in 2008 provides once again

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strong support for the R&D paradigm shift to biologic and within biologic towards

human monoclonal antibodies, vaccines, erythropoietin, insulin’s and interferon.

Major Historical Mergers

Company Target company Year Deal $ Billion

Novartis (Ciba

Geigy)

Sandoz 1996 26

Astra Zeneca 1999 35

Pfizer Werner Lambert 2000 90 Lipitor

GSK

(Glaxo Wellcome)

Smith Kline French 2000 55

Pfizer Pharmacia 2003 57 Celebrex

Sanofi Aventis

(Sanofi)

Aventis 2004 62

Major Acquisitions in 2005-2010 Medical Devices/Diagnosis

Company Target company $ billion Technology/product

Novartis Alcon 39 in 2009

28 in 2010

Eye care

Boston Scientific Guidant 27.5 Medical Devices

GE Healthcare

Life Sci Technol

Abbott diagnostic

Applied Biosyst

8.1

6.7

Diagnostic

DNA sequencing

Merck KGA Millipore 6.0 Equipment

Fresenius Renal Care 4 Dialysis

Fresenius APP Pharm 3.7 Abraxane (Nanotech)

Roche Ventana 3.4 Diagnosis

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Blackstone Cardinal health 3.3 Healthcare

Abbott Advanced Medical 2.8 Eye Care, Lasik

Kinetics Concepts LifeCell 1.7

Quagen Digene 1.6 Diagnostic

Charles River WuXi Pharma 1.6 Drug testing

J&J Mentor 1.03

GE Health Vital Signs

Whatman

0.86

0.71

Table 4. Major Acquisitions in 2005-2010 Generics/OTC/Consumer Health


J&J Pfizer OTC 16.6 Consumer health

Teva Barr-Pliva 7.5 Generics

Teva Ivax 7.4 Generics

Novartis Eon 6.8 Generics

Mylan Merck KGA generic 6.7 Generics

Novartis Hexal 5.3 Generics

Teva Ratiopharm 5.0 Generics

Daiichi Sankyo Ranbaxy 4.0 Generics

Teva Sicor 3.4 Biosimilars

Sanofi Aventis Zantiva 2.6 Generics

Barr Pliva 2.5 Generics

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Reckitt Benckiser Adams respiratory 2.3 Generics

Watson Andrx 1.9 Generics

Watson Arrow 1.75 Generic Lipitor

King Alpharma 1.6 Generics

Richter Gedeon Polypharma 1.3 Generics

Novartis Ebewe 1.3 Generics

Table 5. Major Acquisitions in 2005-2010 Pharmaceuticals


Pfizer Wyeth 68 Prevnar, Enbrel

Pharmaceuticals

Merck

Bayer

Schering Plough

Schering

41

19.7

Pharmaceuticals

Pharmaceuticals

Schering Plough Organon 14.5 Pharmaceuticals

Sankyo Daiichi 7.7 Pharmaceuticals

Abbott Solvay 7 Tricor, Trilipix,

vaccines

Nycomed Atlanta 6 Protonix

UCB Schwartz 5.8 Pharmaceuticals

Abbott Kos 3.7 Humira, Niaspan

Abbott Piramal 3.7 Generics

GSK Steifel 3.6 Dermatology

Shire New River Pharma 2.6 Pharmaceuticals

Dainippon

Sumitomo Sepracor 2.6 Lunesta, Xopenex

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Lilly Icos 2.3 Cialis

Dainippon Sumitomo 2.1 Pharmaceuticals

Toyama Fujifilm, Taisho 1.4 Pharmaceuticals

GSK Reliant Pharma 1.65 Pharmaceuticals

Solvay Fournier 1.4 Pharmaceuticals

Shionogi Sciele 1.1 Pharmaceuticals

J&J Cougar 1.0 Cancer drugs

Table 6. Major Acquisitions in 2005-2010 Biotechnology


Roche Genentech 47 Rituxan, Avastin,

Herceptin, MoAbs,

Oncology

AstraZeneca MedImmune 15.6 Monoclonal

Antibodies

Merck Serono 13.5 Biologics

Takeda Millennium 8.8 Velcade, Oncology

Lilly ImClone 6.0 Erbitux, Oncology

Novartis Chiron 5.8 Vaccines

Abraxis American

BioScience

4.2 Oncology

Astellas OSI Pharma 4.0 Tarceva, oncology

Eisai MGI Pharma 3.9 Aloxi, Salagen,

Hexalen, Oncology

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Celgene Pharmion 2.9 Oncology

Gilead Myogen 2.5 Biotechnology

BMS Medarex 2.4 Monoclonal

antibodies

Amgen Abgenix 2.2 Monoclonal

antibodies

Gilead CV Terapeutics 1.4 Cardiovascular

Genzyme Osiris 1.4 Prochymal, Stem cells

GSK ID Biomed 1.3 Biologics

AstraZeneca Cambridge

Antibody

Technology

1.3 Monoclonal

Antibodies

Merck Sirna 1.1 RNAi

* Espicom, 5th May 2009- ‘The Indian Pharmaceutical Industry 2009-

Diversification, Expansion& Ambitions’

1.Pfizer.com, 26th January 2009.

2. Wall Street Journal, 30th September 2009- ‘Abbot Solvay Rise On Takeover’;

Aurora Sentinel, 04th Jan 2010- ‘Novartis Looks To Buyout Alcon for $38.5 billion’.

3. Wall Street Journal, 30th September 2009- ‘Abbot Solvay Rise On Takeover’.

4. ExpressPharmaOnline.com, 1-15 October 2008- ‘The Making of a Merger’

5. Express Healthcare Management, 1st-15th September 2005- ‘Mergers and

Acquisitions in Pharma’.

6. ExpressPharmaOnline.com, 1-15 October 2008- ‘The Making of a Merger’

8.Financial Express, 5th May 2009

9. Financial Express, 5th May 2009- ‘Indian Drug Firms Face Takeover Threats’

10.Financial Express, 7th Nov 2008

11. The Hindu Business Line, 17 October 2006.

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MERGERS AND ACQUISITIONS- CHALLENGE

The challenges faced by companies in executing a merger can be broadly categorized

under the following applicable laws:

1. The Companies Act, 1956

2. Securities and Exchange Board of India (SEBI) Takeover Code

3. Foreign Exchange Management Act, 1999.

4. Competition Act, 2000

While the Indian Companies Act, 1956, usually governs mergers in India,

international deals involve additional compliances with rules laid down under the

FEMA (Foreign Exchange Management Act, 1999) and associated law.11 Further,

listed companies are also subject to the rules and regulations laid down by the SEBI

(Securities and Exchange Board of India). Compliances under the Companies Act

require the Acquirer Company to prepare a scheme of amalgamation under section

393 of Companies Act, 1956. The draft scheme has to be agreed to by Target

Company and submitted to the High Court. Both company’s Board of Directors

should approve the scheme and authorize the directors to make an application to the

High Court under section 391 of Companies Act, 1956. The copy of order is to be

filed with the Registrar of companies within 30 days of passing of orders by the court.

The compliances under SEBI involve the following steps:

1. Acquirer must make a public announcement of- the offer price, the number of

shares to be acquired from the public, identity of acquirer, purpose of acquisition,

plans of acquirer, change and control over the target company and period within

which the formalities would be completed.

2. The acquirer must make a public announcement through a merchant banker within

4 working days of entering into an agreement of acquiring shares or voting rights of

the target company.

3. Relevant documents should be filed with the SEBI which include a copy of the

public announcement in the newspaper, the draft, letter of offer and a due diligence

certificate.

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4. Correct and adequate information must be disclosed and comments should be

incorporated by SEBI.

5. Letter of offers to shareholders of the target company must be sent within 45 days

of the public announcement. The offer remains open for 30 days for acceptance by the

shareholders.

6. The acquirer should determine the offer price after considering the relevant

parameters.

Once an offer is made an acquirer cannot withdraw it except unless the statutory

approvals have been refused, the sole acquirer has died or if the SEBI merits the

withdrawal of the offer.

In case of cross-border mergers, the Foreign Exchange Management (Transfer or

Issue of Security by a person Resident outside India) Regulations 2001 will be

applicable.

Although the compliance of these rules and regulations seems easy, a lot of

difficulties are faced during the actual application of those rules n procedures, and a

lot more when the merger is a cross-border one. “There are often occasions when

interplay between SEBI regulations and those of FEMA can make it difficult for deals

to be structured.” said Mr. Diljeet Titus, Titus and Titus Co., Delhi.

There are numerous challenges faced by companies during cross-border mergers. A

major obstacle is the legal disparity between the two merging entities, since these

companies follow statutes of different countries. Hence even if the merger is a

friendly one, the legal disparity creates a major road-block in structuring and

finalizing the deal. Another issue is that of the complex legal set up especially in the

financial sectors of any of the merged entities, thereby causing a problem in decision

making processes.

Misuse of supervisory powers by the shareholder of the merged entity may also put

the new business model at risk. There are other barriers like lack of funds, economical

imbalance at the time of execution, political interference, shareholder’s reluctance,

labour issues etc. Apart from this, there are extra costs incurred like the off-costs and

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on-going costs during any cross border merger which are absent in domestic mergers.

Consumer protection rules, differences in employee legislations, different accounting

systems, data protection directives, cross-border business policies employed in

different countries could cause obstructions to cross border M&A and can further

escalate the cost. Exchange of share mechanism also proves to be more expensive in

case the 2 merged entities are listed in different stock exchanges.

These fundamental intricacies of the cross border M&A make it a Byzantine deal.

Cross-border mergers place Indian companies on the global map. Being a significant

part of the global pharmaceutical sector will help the Indian companies to take further

steps in maintaining the global pharmaceutical standards which would be beneficial

for them in all segments including exports, increased profitability, increase in the

R&D laboratories, funding received by the companies, increased number of patented

products, expansion of their market share etc. This in turn will be beneficial to the

global pharmaceuticals as well since the cost effective techniques used by Indian

companies and the huge market India provides to this sector can help enhance the

research and creation of newer and improved drugs.

Although there always remains the risk of losing individual identity of such

companies or exposing the industry to a threat of rampant takeovers, on the whole

Mergers elevates the economic graph of the country.

The technicalities involved in an M&A transaction are humongous and often falls

apart midway. If the SEBI and the RBI (Reserve Bank of India) each establishes an

effective legal cell to respond to questions raised by the parties to a merger on a

timely basis, it can help make the M&A a lesser painful process. Regarding the Indian

Pharmaceutical industry cross-border mergers are healthy only so long as it does not

take away its innovation revolution.

While growth via acquisitions is a sound idea in principle, there are challenges as

well, which relate mainly to the stretched valuations of acquisition targets and the

ability to turn them around within a reasonable period of time. The acquisitions of

RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of

acquisitions proving to be a drain on the company’s profitability and return ratios for

several years post acquisition. In several other cases acquisitions by Indian generic

companies are small and have been primarily to expand geographical reach while at

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the same time, shifting production from the acquired units to their cost effective

Indian plants. A few have been to develop a bouquet of products. Other than

Wockhardt’s acquisition of CP Pharma and Esparma, it has taken at least three years

for the other global acquisitions to see break-even.

Most of the acquiring companies have to pay greater attention to post merger

integration as this is a key for success of an acquisition and Indian companies have to

wake up to this fact. Also, with the increasing spate of acquisitions, target valuations

have substantially increased making it harder for Indian companies to fund the

acquisition

The Role of Pharmaceutical Alliances

Alliances in business have a long history, but over the past couple of decades they

have become an important feature of business organisation to such an extent that

Dunning, a prominent researcher of multinational enterprises since the 1950’s, has

described this new trend which gives increased emphasis to cooperation as well as

competition between firms as ‘alliance’ capitalism. In his view this has been brought

about by globalisation and a series of landmark technological advances (Dunning

1995).

The pharmaceutical industry provides a good example of these developments. It has

been

subject to rapid technological change and significant restructuring. Pharmaceutical

companies have been a prominent agent of globalisation, partly through international

mergers but just as importantly in establishing global sales programs for their

products. In addition the pharmaceutical industry, in which R&D is a core activity,

has experienced breakthrough technological advances in biotechnology. Dunning

outlines five reasons for the growth of alliances arising from the impact of

technological advances, several are particularly relevant to the pharmaceutical

industry.

These are to:

• enhance the significance of core technologies;

• increase the interdependence between distinctive technologies for joint supply

of a particular product;

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• truncate the product life cycle; and

• upgrade core competencies as a means of improving global competitive

Advantages:

Breakthrough advances in biotechnology has had a significant impact on core

pharmaceutical technologies. Bioinformatics has resulted from the convergence of the

distinctive technologies of biotechnology and IT. The impact of the shortening of the

market exclusivity period has been to effectively truncate the product life of many

new drugs. These both increased the pressure for additional drugs from

pharmaceutical company product pipelines and intensified the search for new

compounds from the biotechnology companies. The alliance framework seems an

obvious structure to satisfy the objectives of the research rich but cash poor biotech’s

and the better resourced but discovery hungry pharmaceutical companies.

Accordingly academic consideration of pharmaceutical alliances has focused on

strategic technology partnering (see for instance Narula and Hagedoorn 1999)

between the funder of R&D typically a large pharmaceutical company and the biotech

or university suppliers of technology.

In the view of Arora and Gamberdella (1990) technology alliances arise as a the result

of:

‘The increasing complexity and multi disciplinarity of resources required for

innovation, and of the stock of knowledge itself [which] tend to make technological

innovations the outcome of interactions and cooperation among fundamentally

autonomous organisations commanding complementary resources.’

Alliances had become such a feature of technology driven industries that in a more

recent paper (Arora et al. 2000) remarked on the rise of ‘markets for technology’ in

which smaller high tech firms supply specialised technologies to larger established

companies using various forms of alliance structures.

The framework of incomplete contracts has been used to examine technology

alliances (see Aghion and Tirole 1994) in which the relationship between a research

unit and a customer for the research is analysed. In such a framework, a ‘research

unit’ is characterised as performing the creative task while the ‘customer’ who

expects to benefit from the innovation, provides the financing. The framework is used

to predict thatresearch activities are more likely to be conducted in a research unit

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independent of the customer when the intellectual inputs are substantial relative to the

capital inputs and the customer is in a weak position because of a scarcity of research

capability – a position increasingly found in the pharmaceutical industry.

Lerner and Merges (1997) have used this framework to undertake an analysis of a

small number of biotech alliances to determine the balance of control of the alliance

between the biotech (research unit) and established pharmaceutical company

(customer). Their main finding, in keeping with the Aghion and Tirole framework, is

that the biotechs ceded the greatest proportion of the control rights when their

financial position is weakest. The study also examined which party was likely to

control particular aspects of the alliances. This indicated that the pharmaceutical

company was most likely to control the marketing and manufacturing aspects as well

as the power to terminate the alliance. The biotech was more likely to retain control

over the patents and related litigation.

While this work undoubtedly offers important insights into the nature of

pharmaceutical alliances, there are some possible difficulties with this analytical

approach. The first is that alliances are formed for many reasons, not just to transfer

technology.

Reflecting this OECD has defined alliances in the following terms:

‘Strategic alliances take a variety of forms, ranging from arm’s-length contract to

joint venture. The core of a strategic alliance is an inter-firm co-operative relationship

that enhances the effectiveness of the competitive strategies of the participating firms

through the trading of mutually beneficial resources such as technologies, skills, etc.

Strategic alliances encompass a wide range of inter-firm linkages, including joint

ventures, minority equity investments, equity swaps, joint R&D, joint manufacturing,

joint marketing, long-term sourcing agreements, shared distribution/services and

standards setting.’ (OECD 2001)

Two surveys of alliances published in the early 1990’s reported that while sales and

marketing alliances were 41% and 38% of all alliances respectively, R&D alliances

accounted for only 11% and 13%. (Narula and Hagedoorn 1998). Indeed it might be

expected that R&D activities would be too cloaked in secrecy, the IP considered too

valuable, to trust to collaborative arrangements have grown rapidly since the 1980s

indicates that some of these inhibitions have been overcome. Moreover alliances are

occurring within a broader context – one in which global firms have been shedding

‘non core’ activities along and between their value chains as they concentrate on their

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‘core’ competencies. Large multinational companies, which for decades have pursued

various types of integration strategies, have found defining the boundary between core

and non-core functions a difficult process. It has required careful consideration of the

advantages and disadvantages of outsourcing each function. Large global

pharmaceutical companies have been as involved in this evaluation process as any of

the large corporations. It has led some observers to suggest that the core competitive

advantage possessed by global pharmaceutical companies is their organisational and

resource management capabilities to develop and distribute new pharmaceutical

products and that, not only research, but other functions such as sales and marketing

should be outsourced using alliance and other structures (Kay 2001).

For all these reasons this study adopts a broad definition of alliances. It is important in

considering Australia’s future role in the global pharmaceutical industry that while

technology development and transfer is an important part of the industry’s

development path there may be other potential roles for European capabilities

potentially facilitated through alliance structures. The second ‘complication’ with the

alliance model between large pharma and small biotech is that as will be shown in this

paper the most rapid growth in alliance numbers has been between biotech companies

rather than between pharmaceutical and biotech companies. This paper will examine

the different features of these two types of alliances.

This has particular relevance to the European situation. Despite lacking global scale

pharmaceutical companies, indigenous concerns such as CSL, Faulding etc have taken

on increasingly international roles through alliances and other arrangements. At the

same time a number of indigenous bioteches, some listed on the Australia Stock

Exchange, have emerged owning the patent to a new compound of potential interest to

the global pharmaceutical industry. To transform the patented discovery to a

marketable drug requires a daunting amount of money and expertise (Di Masi 2001)

which is likely to be beyond the capabilities of the European firms and capital

markets. Accordingly alliances with global players represent the prime development

path for Australia’s fledgling biotech’s and research institutes.

Geographically the European industry is far removed from the centres of

pharmaceutical and biotech research activity, namely the United States and Europe.

Are alliances with international companies realistic given this remoteness? A study of

research collaboration in the Swedish biotechnology / pharmaceutical sector

(McKelvey, Alm, Riccaboni 2002) is encouraging. Although Sweden has a more

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significant and longstanding pharmaceutical industry than Australia – two of its

pharmaceutical companies have only recently participated in international mergers to

form Astra Zeneca and Pharmacia, study shows that research collaborations on a firm-

to-firm basis tend to be international while the links between firms and universities

tends to be more strongly local.

The purpose of this paper is to provide a broad overview of the extent and nature of

alliances. It seeks to answer some basic questions about alliances. Are alliances as

extensive as the discussions and anecdotal evidence suggests? How have their number

and character changed over time? Who are the participants? Are the most common

alliances between big pharma and little biotech? How are they structured and how

much money is involved? Is licensing the main game or are there other aspects of

structuring alliances that are important? Are alliances concentrated in particular kinds

of technologies or therapeutic groups? How do European alliances compare with the

patterns in the rest of the world? Does it seem realistic to expect European companies

to develop their operations through alliance formation?

Number of alliances

While pharmaceutical alliances have been under discussion and academic study for

more than a decade it is only in the last few years that their number has increased to a

significant level. The number of alliances has increased almost fourfold since 1997.

The largest increase, 59.4% has occurred in 2001 to about 1000. For the large

pharmaceutical companies this means entering into one new alliance about every

month, although one company, Glaxo was on average announcing two new alliances

every month in 2001.

For every one new alliance announced involving a drug company, there were in 2001

more than twice that number involving biotech companies. By far the largest single

category of alliance and the fastest growing was between biotech companies. Until

1997 this had been an insignificant category. The majority of allianceswere with

universities or between pharmaceutical companies. From 1997, alliances involving

biotech companies grew rapidly to dominate in numerical terms. Alliances by contrast

between pharmaceutical companies declined. Even those involving universities

showed little growth, perhaps suggesting that increasingly biotech companies are

taking on the role of commercialising university research.

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Trends in alliances in Australia

The trends in the number of alliances and the parties involved appear to be

remarkably similar to ‘global’ trends reported above. The ReCap database does not

provide details of the nationality of the alliance parties. To gain a picture of the

position for Australia a list of potential parties was compiled based on the

biomedoz.com.au database of European owned biotech’s and research institutes

supplemented by any missing listed biotech’s taken from the Deloittes Biotech Index.

This was tested for completeness against a number of other directories. The total list

was 205 companies, institutes, universities and major hospitals. Each name was

searched on the Recap database. As a result, 143 alliances were identified. This

includes pre-1993 alliances but excludes several concerned with veterinary

applications.

The same qualifications apply to this European list as for the ‘global’ one. It includes

only announced alliances. While doubtless many alliances remain secret there is

nonetheless the same pressure to report progress and for listed biotechs to release

price sensitive information under the ‘continuous disclosure provisions’ in Australia

as in the US and other countries. As discussed above the database may have a US bias

because SEC filings are a major source of alliance information. Nonetheless the

Recap sourced list seems to be remarkably complete when checked against European

biotech company web sites for alliance information. A search through archival press

releases on these sites failed to turn up any significant missing alliances. A couple

with universities had been not been included.3

As for the total alliance chart above the number of alliances involving European

parties grew rapidly in 2001. The 40 alliances recorded in the 2001 is many times the

level of the early 1990’s. As for the total number of alliances, the last two years and

the late 90’s were very active in terms of alliance formation.

Compared with the total database of almost 1000 alliances in 2001, 40 is a modest

total. Nonetheless it is higher than that based on our share of world GDP and

demonstrates encouraging activity levels in the biotech sector.

In parallel with overseas trends, European alliances were predominately driven by

biotechs. Given the limited number of local pharmaceutical firms – it is not surprising

that few alliances have been between pharmaceutical companies. However as in the

United States alliances between pharmaceutical companies and biotech’s have

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remained at relatively low levels. Alliances with universities (including research

institutes) have also remained at modest levels.

Although over 200 European organisations were surveyed on the Recap database only

a small number had a significant number of alliances recorded. Those with the largest

number are set out below.

Organisation Alliances listed on ReCap

Faulding (incl. Soltec) 29

Amrad (incl. Cerylid) 24

Proteome Systems 16

Biota 12

CSL 10

Several companies not included above have been very active in the last year or two.

These include BresaGen (6), Axon Instruments (7) and Agen Biomedical (9, 4 in two

years).

The Nature of Alliances

The Recap database categorises the characteristics of each alliance announced

according to about 30 attributes. These include licensing, research, development,

distribution, marketing, merger, asset purchase and acquisition. Each alliance may be

categorised as having a number of these attributes. The more complex alliances for

instance may involve some combination of licensing, distribution and an equity

injection. By far the dominant attribute as shown below is licensing. About two thirds

of alliances contain some form of licensing. Research, development and collaboration

are also important.

Many of the licensing arrangements concern new compounds. For instance Xenova

and Millennium announced in December 2001 a licence agreement to develop

Xenova’s molecules for cancer treatment that had entered Phase 1. Millennium would

acquire development and marketing rights in the US in return for a payment of

US$11.5m. Others involve licensing arrangements for new technologies and

information. For instance, Proteome Systems entered into an agreement with Johnson

& Johnson to provide access to its newest databases for human genome research.

Alliance structures reflect the objectives of their partners. Although licensing is the

dominant aspect of alliances, this varies between the parties. For instance alliances

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between pharmaceutical companies and biotech have a greater tendency to contain

licensing arrangements (72%) than those between one pharmaceutical company and

another (55%) or between bio techs (60%). Drug development has a greater tendency

to drive alliances with pharmaceutical companies than between bioteches.

European alliance attributes

Perhaps reflecting the stage of maturity of the biotech sector in Australia, licences

while prominent, featured in a significantly lower proportion of alliances than for the

total database with only 51% of European alliances in 2001 involving licences

compared with 65% for the total database. A check of earlier years indicated that this

difference has been the case for some time. There were other signs of the relative

immaturity of European alliances. The proportion involving early stage research and

collaboration was higher in Australia and no alliances involved manufacturing. One

other difference was the higher proportion involving asset purchases and acquisitions.

There were an abnormally high number of asset purchases and acquisitions in 2001.

Faulding was involved in several of them, both buying and selling various product

lines and part businesses in deals totalling over $1billion although one these did not

proceed. CSL purchased the antibody collection and testing lab business from NABI

and Biota purchased NuMAX Pharmaceuticals.

Otherwise there were strong similarities. The proportion undertaking research,

development and distribution was about the same as the total database. This indicates

that European companies and research institutes are participating in the global

technology market place with a similar purpose as their peers in other parts of the

world. The under representation of alliances with licensing is the greatest cause for

concern.

Alliance Payouts

The database provides information, where details are released, about the dollar value

of the alliance. This may be a payment upfront for a licensing, marketing, or

distribution arrangement or a payment for equity or outright acquisition. These

payments are described by Recap as alliance ‘payouts’. Not surprisingly payments

made as part of acquisitions form the largest single component of alliance payouts Up

until and including 2000 the overwhelming majority of dollars spent on acquisitions

was between pharmaceutical companies, the largest being the Pfizer

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merger/acquisition of Warner Lambert in 2000 totalling $US90b. However the

character of acquisitions changed dramatically in 2001. More than half of the value of

acquisitions involved biotech firms – between themselves or with pharmaceutical

companies

The largest biotech transaction is the announced acquisition of Immunex by Amgen

totalling $16b, but there are many transactions exceeding $1b such as the $3.3b deal

involving Medtronic and MiniMed and the takeover of Block Drug by Glaxo for

$1.2b. Whether the 2001 experience represents a watershed or a one-off aberration

only time will reveal, but the mixed fortunes of biotech companies and their need for

partnerships provides a fertile ground for M&A activity.

The payouts for acquisitions however conceal the trend evident in the discussion

above about the number of alliances and in particular the rapid growth in payouts

involving biotech companies since 1997. By excluding the dollar value of acquisitions

the increasing importance of alliances with biotech companies is revealed. As the

chart below shows the size of alliance payouts involving biotechs has grown

substantially over the last five years with those in 2001 particularly high. In other

words the value of payouts give financial substance to the growth in the number of

alliances announced. While the alliance payouts involving biotechs cover a broad

range of types of collaboration – research, development, distribution etc, the payouts

between the pharmaceutical companies, other than acquisitions, are for asset

purchases – typically the purchase of a particular product line.

The number of European alliances with reported payouts was fairly small and

therefore there is a need for caution in drawing conclusions. After excluding alliances

involving acquisitions about 20 alliances reported alliance payouts totalling about

$280m, generally in the form of licence fees and estimates of milestone payments

made at the time of the alliance announcement. About 45% of this amount was for

alliances between biotechs, with the proportion moving closer to 50% in 2001.

Alliance Technologies

It was suggested in the Introduction to this paper that one of the motivations for

alliances is to gain access to new drug discovery and development technologies. The

human genome project in particular has created firms with specialist sources of

databases of information that can provide this on a commercial basis to other biotech

and pharmaceutical firms. There are other technologies that can facilitate drug design

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or improving targeting. Others are supporting technologies. For instance gaining

information (bioinformatics) is one of the fastest growing and most significant

technology related reasons for entering into an alliance.

ReCap categorises alliances according to about 50 technologies. The database

identifies the technologies involved in each alliance. As with other alliance attributes

multiple technologies are possible for a single alliance. The main drug technologies

involved in alliances for 2001 are shown in the table below. In addition to

bioinformatics already mentioned gene expression and sequencing are both

prominent. Various technologies relating to drug design are also important such as

monoclonal.

To gain an overall perspective of the recent growth in these principal drug related

technologies, those above were grouped into four categories:

Drug target related Drug design Drug testing Supporting

and other

TECHNOLOGIES

Proteomics Monoclonals Combinatorial

Pharmcogenomics

Gene expression Oligonucleotide Microarrays

Drug delivery

Gene sequencing Recombinant DNA Screening

Device

Synthetics

Bioinformatics

As can be seen the four categories are indicative rather than prescriptive with a

number of the technologies having applications in more than one category. Alliances

involving drug targeting and various supporting technologies have shown the most

rapid growth over the last few years (see chart below). Supporting technologies

include bioinformatics which has shown the most rapid growth. About 20% of

alliances in 2001 involved bioinformatics. The category also includes alliances invo

lving devices, some of which pertain to the drug discovery and development process,

but in other cases involve less relevant diagnostic and other devices. The largest

number of alliances involving drug targeting technologies is related to gene

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expression and sequencing – with about 20% of alliances in 2001 involving gene

expression. In this category, alliances involving proteomics increased from about 10

in 1999 to over 90 in 2001. Overall the number of alliances involving drug testing

remained fairly even through the period although alliances involving screening

showed significant growth in 2001.

In 2001 about 1000 alliances were announced and recorded on the Recap database

compared with just over 600 in 2000 and the 200-300 recorded for much of the 1990s.

This growth has been largely the result of the increase in the number of alliances

entered into with biotech firms. The largest component of this growth was in alliances

between biotech companies.

In terms of alliance attributes in 2001, 65% involved licensing arrangements, although

it would appear that their purposes vary widely. Over 20% involve research,

collaboration, or development, while 10% involve distribution. Only a small

proportion involves equity or other payments.

The data suggests that alliances between pharmaceutical companies and biotech are

more serious business arrangements than those between biotech. They are more likely

than others to involve licensing and a higher proportion involve drug development,

equity injections, distribution and marketing.

In this sense they are closer in form to those contemplated in the theoretical

framework developed by Aghion and Tirole and tested by Lerner and Merges referred

to in the introduction. However the framework appears to be less relevant to

explaining the motivation and behaviour of the parties in the rapidly growing alliances

between biotechs which appear not to involve large amounts of money, but where

there are technological collaborations supporting advances in platform technologies.

European alliances, particularly given the small number recorded on the Recap

database, follow a remarkably similar pattern. There is some evidence however that

they are at an earlier stage of development to the average for the rest of the world. For

instance a significantly lower proportion involves licensing (51% vs. 65%). An

analysis of alliance payouts confirms the increasing importance of alliances with bio

techs which was evident from the number of alliances. For much of the 1990s payouts

(excluding those for acquisitions) were dominated by transactions between

pharmaceutical companies. In contrast in 2001 payouts involving alliances with bio

techs reached over $7billion exceeding payouts involving pharma/pharma alliances.

In terms of technologies involved in the alliances, those involving drug targeting and

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various supporting technologies particularly bioinformatics have shown the fastest

growth. Of those involving drug targeting gene expression and sequencing is the most

important. In the field of bioinformatics Australia is reasonably placed. Proteome

Systems are prominent with 16 alliances recorded on Recap. The results presented in

this paper indicate that the market place for pharmaceutical discoveries and

technology through alliances is a significant part of the industry’s development

process and that its importance has grown remarkably in the last few years. Those

European alliances listed on Recap demonstrate a tentative participation in this

marketplace by a small number of European bio techs and research institutes.

I. ANALYSIS OF WOCKHARDT’S ACQUISITION

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by

leveraging two powerful trends in the world healthcare market - globalization and

biotechnology.

Acquisition Management

The company has a strong track record in acquisition management, with three

successful acquisitions in the European market and two in the domestic space.

The acquisitions in Europe and the subsequent integration of their operations have

strengthened Wockhardt’s position in the high-potential markets of UK and Germany,

and have expanded the global reach of the organization.

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The growth drivers for Wockhardt’s European business include exports, new product

launches, penetration in the European Union through mutual recognition, and strategic

acquisitions.

• Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10

largest generics companies in UK and the second largest hospital generics

supplier.

• The Company has a comprehensive, FDA-approved manufacturing facility

for injectables that plays a strategic role in driving the company’s growth

through partnerships in contract manufacturing

• Wockhardt UK has built up a critical mass in the segments of Retail Generics,

Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care

(denture cleaning tablets, powders and fixative creams)

• The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic

entry point into Germany, the largest generics market in Europe

• Esparma has a strong presence in the high-potential segments of urology,

neurology and diabetology, assisted by a dedicated sale & marketing

Infrastructure.

The key to Wockhardt’s successful acquisition management is the management’s

ability to turnaround the acquired company in record time and thus create value out of

the acquisition. The company believes in value buys that would have a tactical fit with

its core competencies and key strategic objectives. The acquisitions are mainly driven

by market access since Wockhardt has an extensive pipeline of generics and bio

generics and needs a strategic front-end for the same. The company has plans for

further acquisitions in the developed markets of Europe and US to further consolidate

and strengthen their positions in these geographies.

II. IMPLICATIONS OF THE MERGER OF RANBAXY AND DAIICHI

We will study the implications of the merger between Ranbaxy and Daiichi Sankyo,

from an intellectual property as well as a market point of view.

Why did Ranbaxy go in for a merger with Daichii?

Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy

Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to

operate as Daiichi Sankyo’s subsidiary but was managed independently. The main

benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing

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infrastructure and supply chain strengths. Ranbaxy gained access to Daiichi Sankyo’s

research and development expertise to advance its branded drugs business. Daiichi

Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the

generics segment and both companies acquired a broader product base, therapeutic

focus areas and well distributed risks. Ranbaxy is now functioning as a low-cost

manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a smoother

access to and a strong foothold in the Japanese drug market. The immediate benefit

for Ranbaxy was that the deal freed up its debt and imparted more flexibility to its

growth plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi

Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical

market.

Synergies

The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their

respective presence in the developed and emerging markets. While Ranbaxy’s

strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the

potential of the generics business, Ranbaxy’s branded drug development initiatives

for the developed markets will be significantly boosted through the relationship.

To a large extent, Daiichi Sankyo will be able to reduce its reliance on only branded

drugs and margin risks in mature markets and benefit from Ranbaxy’s strengths in

generics to introduce generic versions of patent expired drugs, particularly in the

Japanese market.

Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and

have profound strength in striking lucrative alliances with other pharmaceutical

companies. Despite these strengths, the companies have a set of pain points that can

pose a hindrance to the merger being successful or the desired synergies being

realized.

With R&D perhaps playing the most important role in the success of these two

players, it is imperative to explore the intellectual property portfolio and the gaps that

exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by

both companies in the period 1998-2007. While Daiichi Sankyo’s patenting activity

has been rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in

its patenting activity until 2005. In fact, during 2007, the company’s patenting activity

plunged by almost 60% as against 2006.

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Post-acquisition Objectives

In light of the above analysis, we see that Daiichi Sankyo’s focus is to develop new

drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. In a global

pharmaceutical industry making a shift towards generics and emerging market

opportunities, Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of

its global counterparts Novartis and local competitors Astellas Pharma, Eesei and

Takeda Pharmaceutical.

Post acquisition challenges included:-

• Managing the different working and business cultures of the two

organizations

• Undertaking minimal and essential integration

• Retaining the management independence of Ranbaxy without hampering

synergies.

BENEFITS TO RANBAXY AND DAIICHI FROM THE MERGER

• Daiichi Sankyo’s move to acquire Ranbaxy has enabled the company to gain

the best of both worlds without investing heavily into the generic business.

• Furthermore, Daiichi Sankyo’s portfolio has broadened to include steroids

and other technologies such as sieving methods, and a host of therapeutic

segments such as anti-asthmatics, anti-retroviral, and impotency and anti-

malarial drugs.

• Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic

drugs across 17 diverse therapeutic indications.

• Through the deal, Ranbaxy has become part of a Japanese corporate

framework, which is extremely reputed in the corporate world. As a generics

player, Ranbaxy is very well placed in both India and abroad.

• Given Ranbaxy’s intention to become the largest generics company in Japan,

the acquisition provides the company with a strong platform to consolidate its

Japanese generics business. From one of India's leading drug manufacturers,

Ranbaxy can leverage the vast research and development resources of Daiichi

Sankyo to become a strong force to contend with in the global pharmaceutical

sector. A smooth entry into the Japanese market and access to widespread

technologies including, plant, horticulture, veterinary treatment and cosmetic

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products are some things Ranbaxy can look forward as main benefits from the

deal.

• Through the deal, Ranbaxy has become part of Japanese corporate

framework, which is extremely reputed in the corporate world. As a generics

player, Ranbaxy is very well placed in both India and abroad.

• Given Ranbaxy’s intention to become the largest generics company in Japan,

the acquisition provides the company with a strong platform to consolidate its

Japanese generics business. From one of India's leading drug manufacturers,

Ranbaxy can leverage the vast research and development resources of Daiichi

Sankyo to become a strong force to contend with in the global pharmaceutical

sector. A smooth entry into the Japanese market and access to widespread

technologies including, plant, horticulture, veterinary treatment and cosmetic

products are some things Ranbaxy can look forward as main benefits from the

deal.

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CHAPTER-7

SWOT ANALYSIS

Indian Pharmaceutical Industry

A scan of the internal and external environment is an important part of the strategic

planning process. Environmental factors internal to the firm usually can be classified

as strengths (S) or weaknesses (W), and those external to the firm can be classified as

opportunities (O) or threats (T). Such an analysis of the strategic environment is

referred to as a SWOT analysis. The SWOT analysis provides information that is

helpful in matching the firm's resources and capabilities to the competitive

environment in which it operates. As such, it is instrumental in strategy formulation

and selection. The following diagram shows how a SWOT analysis fits into an

environmental scan:

SWOT Analysis Framework

Environmental Scan

/ \

Internal Analysis External Analysis

/ \ / \

Strengths Weaknesses Opportunities Threats

|

SWOT Matrix

Figure 17

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Strengths

A firm's strengths are its resources and capabilities that can be used as a basis for

developing a competitive advantage. Examples of such strengths include:

• patents

• strong brand names

• good reputation among customers

• cost advantages from proprietary know-how

• exclusive access to high grade natural resources

• favourable access to distribution networks

Weaknesses

The absence of certain strengths may be viewed as a weakness. For example, each of

the following may be considered weaknesses:

• lack of patent protection

• a weak brand name

• poor reputation among customers

• high cost structure

• lack of access to the best natural resources

• lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a

firm has a large amount of manufacturing capacity. While this capacity may be

considered a strength that competitors do not share, it also may be a considered a

weakness if the large investment in manufacturing capacity prevents the firm from

reacting quickly to changes in the strategic environment.

Opportunities

The external environmental analysis may reveal certain new opportunities for profit

and growth. Some examples of such opportunities include:

• an unfulfilled customer need

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• arrival of new technologies

• loosening of regulations

• removal of international trade barriers

Threats

Changes in the external environmental also may present threats to the firm. Some

examples of such threats include:

• shifts in consumer tastes away from the firm's products

• emergence of substitute products

• new regulations

• increased trade barriers

The SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may

have a better chance at developing a competitive advantage by identifying a fit

between the firm's strengths and upcoming opportunities. In some cases, the firm can

overcome a weakness in order to prepare itself to pursue a compelling opportunity.

To develop strategies that take into account the SWOT profile, a matrix of these

factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is

shown below:

SWOT / TOWS Matrix

Strengths Weaknesses

Opportunities S-O strategies W-O strategies

Threats S-T strategies W-T strategies

Figure 18

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S-O strategies pursue opportunities that are a good fit to the company's

strengths.

• W-O strategies overcome weaknesses to pursue opportunities.

• S-T strategies identify ways that the firm can use its strengths to reduce its

vulnerability to external threats.

• W-T strategies establish a defensive plan to prevent the firm's weaknesses

from making it highly susceptible to external threats.

SWOT Analysis of Indian Pharmaceutical Industry

Recent liberalization, globalization and development of software information have

brought the countries of the world closer. It is a global market place all-about.

The American Pharmaceutical industry has placed a pioneer role in the development

of the drug industry through in depth, timely and useful research and bulk

manufacturing of the drug, although the US Pharmaceutical industry is enjoying the

leadership position in the world pharmaceutical market.

This article analyzes the current information available about the Indian

pharmaceutical industry with special emphasis on Swot Analysis & what strategy

Indian Pharmaceutical Co. should take to complete with MNC Co.

For the empirical study of SWOT in pharmaceutical industry of India, we have

considered the following hypothesis: -

1. R&D expenditure of Indian Pharmaceutical Organization is low.

2. Export of generic product in US and Europe will be a strategically important

step for Indian Pharmaceutical Company.

3. The cost of manufacturing, conducting clinical trial, and research are lower in

India than US.

4. Clear sense of strategic vision is required.

5. Human assets are abundantly available in India.

6. Indian Pharmaceutical Company has to consider licensing, joint venture,

contact research etc.

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The pharmaceuticals industry's activities span a wide spectrum ranging from R&D to

production to marketing. Companies with limited resources in finance, manpower and

facilities need to prioritise and make decisions as to what can be done in-house

against what needs to be outsourced. In that context, there is much hesitancy on the

part of most R&D based pharmaceutical companies to outsource drug discovery

research from third parties for several reasons. First, it has been reported that in spite

of declining pipeline of new products, the returns on R&D calculated over a seven

year period has been shown to be still much higher than returns on capital employed

for manufacture or marketing . Secondly, for reasons of confidentiality and the tricky

issues of sharing IPRs with the outsourcing partner, companies are generally averse to

outsourcing drug discovery from third parties. This, however does not apply to

developmental or clinical research since, by the time the candidate molecule reaches

these milestones, patent applications would have been in place and confidentiality

issues would no longer be of concern. It is for this reason hat the MNCs restrict

outsourcing to developmental R&D, custom synthesis, formulation development and

clinical research from third parties who have necessary skills, infrastructure, resources

and capabilities to maintain quality standards required by Regulatory Agencies.

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 let’s 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.

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*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-

India today is the 4th largest producer of bulk drugs and formulations in the World

with domestic market of Rs 22,000 crore and an export market of Rs 12000 crore.

Exports are over five times imports and have been growing at > 20% annually over

the last several years. India has the largest number of FDA approved plants outside

the U.S. and 20% of all ANDAs filed in the U.S. are from Indian companies. These

companies dominated in DMF filings with U.S. FDA as well, with 74 of the 198

filings during the 1st quarter of 2005 being from India. The phenomenal growth of the

Indian sector of the industry has been primarily due to the Indian Patents Act 1970

which prohibited the filing of product patents in pharmaceuticals. That the Indian

sector benefited is obvious from the fact that while in 1970 two thirds of the market

share was held by the MNCs in 2004 the order has been reversed. Similarly while in

12970, there were only 3 Companies in the top ten which were solely Indian

Companies today there are only three MNCs in the top ten in India. As a sequel to

India signing the GATT and WTO and with the ushering in of the New Patent Act in

March 2005 introducing a product patent regime, Indian companies are moving into

the area of new drug discovery research. During the last five years between the top ten

companies investments in new drug research has reached Rs 1200 crores in 2004.

With over a 100 patent applications filed in India and abroad and over a dozen

candidate molecules reaching an IND stage and various phases of clinical trials the

cost effectiveness of Indian new drug research is no less than in any other Country.

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Over half a dozen candidate molecules have been the subject of licencing for

development by international companies.

1. India with a population of over a billion is a largely untapped market. In fact the

penetration of modern medicine is less than 30% in India. To put things in

perspective, per capita expenditure on health care in India is US$ 93 while the same

for countries like Brazil is US$ 453 and Malaysia US$189.

2. The growth of middle class in the country has resulted in fast changing lifestyles in

urban and to some extent rural centres. This opens a huge market for lifestyle drugs,

which has a very low contribution in the Indian markets.

3. Indian manufacturers are one of the lowest cost producers of drugs in the world.

With a scalable labour force, Indian manufactures can produce drugs at 40% to 50%

of the cost to the rest of the world. In some cases, this cost is as low as 90%.

4. The fact that despite the low level of unit labour costs India boasts a highly skilled

workforce has enabled the country's pharmaceutical industry at a relatively early stage

to offer quality products at competitive prices. Each year, roughly 115,000 chemists

graduate from Indian universities with a master’s degree and roughly 12,000 with a

PhD.4 The corresponding figures for Germany just fewer than 3,000 and 1,500,

respectively – are considerably lower. After many chemists from India migrated to

foreign countries over the last few years, they now consider their chances of

employment in India to have improved. As a result, a smaller number is expected to

go abroad in the coming years; some may even return.

5. Indian pharmaceutical industry possesses excellent chemistry and process

reengineering skills. This adds to the competitive advantage of the Indian companies.

The strength in chemistry skill helps Indian companies to develop processes, which

are cost effective.

6. Efficient technologies for large number of Generics.

7. Large pool of skilled technical manpower.

8, Increasing liberalization of government policies

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WEAKNESS-

While considering the weaknesses of the Indian industry as destinations for

outsourcing, there are perceptions and realities. The major areas of concern are, lack

of adequate skills and infrastructure in many areas of R&D, imprecise documentation

systems, low track record of performance in the relevant fields, ambiguities in the

interpretation and implementation of global regulatory and Intellectual protection

standards, issues on maintenance of confidentiality, protection of data submitted for

regulatory clearances (data exclusivity), non-adherence to time schedules and secrecy

modalities. While some of these fall under the category of perceptions, most of the

real ones are not insurmountable considering the intellectual and entrepreneurial

capabilities of the Indian companies.

1. The Indian pharmaceutical companies are marred by the price regulation. Over a

period of time, this regulation has reduced the pricing ability of companies. The

NPPA (National Pharmaceutical Pricing Authority), which is the authority to decide

the various pricing parameters, sets prices of different drugs, which leads to lower

profitability for the companies. The companies, which are lowest cost producers, are

at advantage while those who cannot produce have either to stop production or bear

losses.

2. Indian pharmaceutical sector has been marred by lack of product patent, which

prevents global pharmaceutical companies to introduce new drugs in the country and

discourages innovation and drug discovery. But this has provided an upper hand to the

Indian pharma companies.

3. Indian pharma market is one of the least penetrated in the world. However, growth

has been slow to come by. As a result, Indian majors are relying on exports for

growth. To put things in to perspective, India accounts for almost 16% of the world

population while the total size of industry is just 1% of the global pharma industry.

4. Due to very low barriers to entry, Indian pharma industry is highly fragmented with

about 300 large manufacturing units and about 18,000 small units spread across the

country. This makes Indian pharma market increasingly competitive. The industry

witnesses price 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%

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but due to price competition, the growth in value terms was 8.2% (prices actually

declined by 2.2%).

5. Low technology level of Capital Goods of this section.

6. Non-availability of major intermediaries for bulk drugs.

7. Lack of experience to exploit efficiently the new patent regime.

8. Very low key R&D and Low share of India in World Pharmaceutical Production

(1.2% of world production but having 16.1% of world''s population).

9. Very low level of Biotechnology in India and also for New Drug Discovery

Systems.

10. Lack of experience in International Trade.

11. Low level of strategic planning for future and also for technology forecasting.

OPPORTUNITIES –

Indian pharmaceutical companies have three major opportunities in the global scene.

They are:

1) As a major supplier of Generic Bulk Drugs and Formulations to the Regulated and

Less Regulated Global markets.

2) As a destination for contract research, custom synthesis, contract production and

clinical research.

3) New drug research including discovery of candidate drugs, protecting them through

the patent system and licensing on commercial terms for development by third parties.

Of these the one which is relatively a new activity for Indian companies and therefore

requires serious consideration is the potential for India to be a major destination for

global pharmaceutical industry's outsourcing activities. Large pharmaceutical

companies are increasingly looking for off-shore outsourcing to increase their

competitiveness by reducing costs as well as 'time to market' in addition to utilizing

expertise of the partner in areas where in-house capabilities are inadequate. At the

same time outsourcing also enables them to utilise their resources to capitalise their

own internal strengths.

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What can Indian industry offer? India has unique strengths in areas of chemical

technology to develop innovative processes, custom production of synthetic drugs

involving highly sophisticated technologies and clinical research. In all these areas

Indian companies can indeed develop strategies for entry into long term contractual

arrangements with leading R&D based pharmaceutical companies and develop

synergistic collaboration ventures. Since all these activities happen after exclusivity is

guaranteed though the patent system, confidentiality issues are not important.

India presents major opportunities for multinational pharmaceutical companies in

clinical trials, contract research and manufacturing. The licensing opportunities for

big pharmaceutical companies as well as the collaborative business model including

services give access to low cost smart intelligent base, indigenous technology and

most importantly the large domestic market. The most important advantage India

presents is low cost that includes the low development costs, low fixed asset costs,

low clinical trial costs and low cost workers.

Several improvements have been seen in India in contrast to the image it presented to

world until recently. Infrastructure in India is improving and there are investments in

huge projects such as the golden quadrilateral road project. The significant growth

and capability is demonstrated by Indian IT industry. The Indian biotechnology sector

is developing with government initiatives and private sector participation with

tremendous opportunities to be explored and paving ways to more fruitful

partnerships with biotechnology companies and world class research institutes.

Ministry of Health and Family Welfare in India have initiated several measures to

ensure the quality of drugs available in India. Steps have been taken against

counterfeit drugs which accounts for 15-30 per cent products in the market.

New health insurance initiatives in India have increased the affordability of the

middle class population. There are about half a million people who can afford good

quality healthcare expenditure. However, the problem remains as urban areas are the

important private sector investment centres and the rural areas still do not have access

to good healthcare system. Due to India’s vast rural population, only one third of the

country’s inhabitants have access to medical care. Although the government is

investing in healthcare for the underprivileged, around 65 per cent of hospitals and 85

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per cent of hospital beds are in urban areas. This situation is expected to improve in

future with access to better medical facility.

The OTC segment is expected to grow with the increasing collaborative

pharmaceutical industry and government initiatives along with proper regulatory

framework, which will enhance the business. The new DPCO and National Health

policy post patent reform 2005 is expected to encourage investment for drug R&D in

India. The growth opportunities can be seen in the chronic segments such as diabetes,

cardiovascular, central nervous system disorders, cancer and other maladies. As

second largest population base India presents significant clinical trial opportunities

because of the low cost and large diverse pool of untreated patients.

Major pharmaceutical companies such as Aventis, Novartis, GlaxoSmithKline, Eli

Lilly, Pfizer and Novo nordisk have started clinical trials across India especially in

Andhra Pradesh and Gujarat States. What is required in India is strategic

identification of market viability. The estimation of opportunities and forecasting the

market is an important step towards assessing the commercial viability for drug

development and clinical trials. Segmentation is important as for clinical trial

opportunities, segmenting the clinical trial service providers will help in estimating

the market. Large and small hospitals and contract clinical trial providers could be a

plausible segmentation for clinical trial service providers in India.

An area Indian companies including dedicated ones have great potential to be

involved in is clinical research. While several estimates are available, it is fair to

assume that 30-35% of total drug discovery and development costs are today

deployed for clinical research. Such costs could be reduced to half when clinical

research activities are outsourced from low cost economies such as India. There are at

any point in time over 500 molecules undergoing clinical trials in various phases in a

large number of centres around the World in addition to many more for new

indications of marketed drugs and post marketing surveillance for safety and efficacy.

Indian advantages apart from lower costs rest with availability of large and diverse

patient populations, skilled clinicians, ability to meet global ICH guidelines etc. The

recent changes in Schedule Y of the Drugs & Cosmetics Act also permits on the merit

of each case the conduct of trials in a concurrent phase with those carried out in

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centres abroad... English being the language of Science and Medicine in India,

excellent communication facilities and adequate documentation and analytical

systems are the other advantages that India provides. During the last ten years , over a

dozen Clinical Research Organisations have been set up in the Country and many

trials have been carried out meeting FDA standards.

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.

5. Growing incomes and growing attention for health.

6. New diagnoses and new social diseases and Spreading prophylactic approaches.

7. New therapy approaches and new delivery systems.

8. Spreading attitude for soft medication (OTC drugs) and Spreading use of Generic

Drugs

9. Globalization, New markets are opening and easier international trading.

THREATS-

The real threats for the Indian companies come from within the country as well as

from outside. Proliferation of CROs with short term goals and little understanding of

the intricacies of global regulatory requirements leads to erosion of standards,

unhealthy competition, price wars and consequently credibility loss among the

international partners. Wherever Chinese industrial units are able to offer products

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and services, they have invariably undercut India on the price front. Lower costs of

utilities including power, lower costs of finance, large Government subsidies for

exports, dual exchange rates are all responsible for lower costs of Goods and Services

in China. While in the area of chemical technology, India has a lead over China or

even all other Countries, the same is not the case in fermentation related

(biotechnology products) areas. Wherever Raw Materials are to be imported,

fluctuations in their prices adversely affect costs of production. When outsourcing is

seen as a threat to domestic industry and employment opportunities, countries may

opt to bring in legislations to control them as has been done in some states in the US.

Non-tariff barriers including imposition of phyto and phyto-sanitary measures and

standards on labour and environment could stand in the way of growth of the

outsourcing opportunities in India.

Overall balance is in favour of India attaining a dominant position as an outsourcing

destination for international pharmaceuticals companies. Apart from becoming a

global player for contract research, custom production of intermediates and

development of candidate drugs for pre-clinical and clinical testing and clinical

research are areas where major strides are possible. After all, of the $ 170 Billion

estimated as the global outsourcing market by 2010, if India can get even a 10%

market share, it will still be, in value terms, double the current turnover of the entire

Indian Pharmaceutical industry. And that indeed is an achievable target.

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.

4. Containment of rising health-care cost and High Cost of discovering new products

and fewer discoveries.

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5. Stricter registration procedures and Competition, particularly from generic

products.

6. High entry cost in newer markets and High cost of sales and marketing.

7. More potential new drugs and more efficient therapies.

8. Switching over form process patent to product patent.

PORTER’S FIVE FORCES MODEL

(a) INDUSTRY COMPETITION

Pharmaceutical industry is one of the most competitive industries in the country with

as many as 10,000 different players fighting for the same pie. The rivalry in the

industry can be gauged from the fact that the top player in the country has only 6 %

(2006) market share, and the top 5 players together have about 18 % (2006) market

share.

Thus, the concentration ratio for this industry is very low. High growth prospects

make it attractive for new players to enter in the industry. Another major factor that

adds to the industry rivalry is the fact that the entry barriers to pharmaceutical

industry are very low. The fixed cost requirement is low but the need for working

capital is high.

The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells

us that in bigger companies this ratio is in the range of 3.5-4 times. For smaller

companies, it would be even higher.

Many small players that are focussed on a particular region have a better hang of the

distribution channel, making it easier to succeed, albeit in a limited way.

An important fact is that, pharmaceutical is a stable market and its growth rate

generally tracks the economic growth of the country with some multiple (1.2 times

average in India). Though volume growth has been consistent over a period of time

value growth has not followed in tandem.

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The product differentiation is one key factor which gives competitive advantage to the

firms in any industry. However, in pharmaceutical industry product differentiation is

not possible since India has followed process patents till date, with loss favouring

imitators. Consequently product differentiation is not a driver, cost competitiveness is.

However, companies like Pfizer and Glaxo have created big brands over the years

which act as product differentiation tools.

Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical

products discovered by MNCs at a lower cost and make good profit. But today the

scene is different with the arrival of the patent regime which has forced Indian

companies to rethink its strategies and to invest more on R&D. Also contract research

has assumed more importance now.

(b) BARGAINING POWER OF BUYERS

The unique feature of pharmaceutical industry is that the end user of the product is

different from the influencer (read doctor). The consumer has no choice but to buy

what doctor says. However, when we look at the buyer’s power, we look at the

influence they have on the prices of the product. In pharmaceutical industry, the

buyers are scattered and they as such do not wield much power in the pricing of the

products. However, govt with its policies plays an important role in regulating pricing

through the NPPA (national pharmaceutical pricing authority).

(c) BARGAINING POWER OF SUPPLIERS

The pharmaceutical industry depends upon several organic chemicals. The chemical

industry is again very competitive and fragmented. The chemicals used in the

pharmaceutical industry are largely a commodity. The suppliers have very low

bargaining power and the companies in the pharmaceutical industry can switch from

their suppliers without incurring a very high cost. However, what can happen is that

the supplier can go for forward integration to become a pharmaceutical company.

Companies like Orchid Chemicals and Sashun Chemicals were basically chemical

companies who turned themselves into pharmaceutical companies.

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(d) BARRIERS TO ENTRY

Pharmaceutical industry is one of the most easily accessible industries for an

entrepreneur in India. The capital requirement for the industry is very low; creating a

regional distribution network is easy, since the point of sales is restricted in this

industry in India. However, creating brand awareness and franchisee among doctors is

the key for long term survival. Also, quality regulations by the government may put

some hindrance for establishing new manufacturing operations. The new patent

regime has raised the barriers to entry. But it is unlikely to discourage new entrants, as

market for generics will be as huge.

(e)THREAT OF SUBSTITUTES

This is one of the great advantages of the pharmaceutical industry. Whatever happens,

demand for pharmaceutical products continues and the industry thrives. One of the

key reasons for high competitiveness in the industry is that as an ongoing concern,

pharmaceutical industry seems to have an infinite future. However, in recent times the

advances made in the field of biotechnology, can prove to be a threat to the synthetic

pharmaceutical industry.

CONCLUSION

This model gives a fair idea about the industry in which a company operates and the

various external forces that influence it. However, it must be noted that any industry is

not static in nature. It’s dynamic and over a period of time the model, which have

used to analyse the pharmaceutical industry may itself evolve.

Going forward, we foresee increasing competition in the industry but the form of

competition will be different. It will be between large players (with economies of

scale) and it may be possible that some kind of oligopoly or cartels come into play.

This is owing to the fact that the industry will move towards consolidation. The larger

players in the industry will survive with their proprietary products and strong

franchisee.

In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key

players. Smaller fringe players, who have no differentiating strengths, are likely to

either be acquired or cease to exist.

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The barriers to entry will increase going forward. The change in the patent regime has

made sure that new proprietary products come up making imitation difficult. The

players with huge capacity will be able to influence substantial power on the fringe

players by their aggressive pricing thereby creating hindrance for the smaller players.

Economies of scale will play an important part too. Besides government will have a

bigger role to play.

SWOT Analysis of European Pharmaceutical Industry

The Pharmaceutical industry has a lot of yet untapped potential and it will be

interesting to see how the industry matures over the long term. Undoubtedly, the long

history and global expertise of firms like Pfizer, GSK and Merck will stand them in

good stated to create and benefit from emerging global opportunities.

Notwithstanding it’s strengths, complacency must be guarded against because

smaller, agile and innovative firms are on the prowl and all it takes for the small

upstarts is a super drug that can change the entire face of the industry. We’ve seen it

in happen in the Information & Communications industry, for all we know

pharmaceuticals may just be next.

Strength of European pharma companies

1. R&D innovation with a broad therapeutic coverage

2. Marketing strength in major geographical and therapeutic areas

3. Existing Patent protection for a number of years on key products

4. Opens a huge market for lifestyle drugs

5. High level of Biotechnology in India and also for New Drug Discovery

Systems.

6. Good experience in International Trade.

7. High level of strategic planning for future and also for technology forecasting.

8. The Eastern European market registered sales growth of 19.9% from 2007 to

2008 and witnessed a CAGR of 19.6% during the period 2004–08.

9. Benchmark your performance against the leading Eastern European

pharmaceutical companies using market share data by company and

comprehending their strategies.

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10. Benchmark the top 10 generic companies over the 2004-07 period, and use

detailed company analysis to measure the performances and outlooks of major

players including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-

Aventis, Watson, Bayer and Stada.

Weakness of European pharma companies

1. High cost of production.

2. Not Efficient technologies for large number of Generics.

3. Less pool of skilled technical manpower.

4. Increasing liberalization of government policies

5. Discontinuation of products in the latter stages of development

6. Co-marketing agreements can limit European pharma companies global

presence

7. �Increased size and operational complexity make European pharma

companies less agile companies

8. pricing pressure, authorized generics, a lack of patient awareness and distrust

among healthcare prescribers.

9. Increasing incidence of parallel traded products will impact companies

operating in the region resulting in potential loss of sales eventually affecting

cash flows and lowering innovation in drug development.

10. Complex drug pricing, reimbursement and purchasing policies will affect the

development of new drugs thus affecting the growth of Eastern European

pharmaceutical market.

Opportunities of European pharma companies

1. Decreasing development time through favourable R&D collaborations and

internal efforts

2. Emergence of integrated global markets and globalisation for new products

3. Co-marketing agreements with companies wishing to capitalize on European

pharma companies marketing strengths, providing Companies with strong

products and therefore revenue growth

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4. 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.

5. 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.

6. Aging of the world population.

7. Growing attention for health.

8. New diagnoses and new social diseases.

9. Spreading prophylactic approaches.

10. New therapy approaches and new delivery systems.

11. Spreading attitude for soft medication (OTC drugs).

12. Spreading use of Generic Drugs,

13. Globalization

14. Easier international trading.

15. Opening of new markets

Threats of European pharma companies

1. Increased competition for core products like Viagra as its high cost

encourages use of cheaper alternative treatments. An increase in the

number of safety issues surrounding Viagra

2. 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.

3. Threats from other low cost countries like China and Israel exist.

However, on the quality front. So, differentiation in the contract

manufacturing side may wane.

5. Containment of rising health-care cost.

6. High Cost of discovering new products and fewer discoveries.

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7. Stricter registration procedures.

8. High entry cost in newer markets.

9. High cost of sales and marketing.

10. Switching over form process patent to product patent.

11. Increasing due diligence and compliance with standards leads to cost

overruns and delays in new product launches

Environmental Analysis (PEST)

Technological advancements, tighter regulatory-compliance overheads, rafts of patent

expiries and volatile investor confidence have made the modern pharmaceutical

industry an increasingly tough and competitive environment. Below is an analysis of

the structure of the pharmaceutical industry using the PEST (political, economic,

social and technological) model?

Increasing Political Attention:

Over the years, the industry has witnessed increased political attention due to the

increased recognition of the economic importance of healthcare as a component of

social welfare. Political interest has also been generated because of the increasing

social and financial burden of healthcare. Examples are the UK’s National Health

Service debate and Medicare in the US..

Economic Value Added:

In the decade to 2003 the pharmaceutical industry witnessed high value mergers and

acquisitions7. With a projected stock value growth rate of 10.5% (2003-2010) and

Health Care growth rate of 12.5% (2003-2010), the audited value of the global

pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004. Only

information technology has a higher expected growth rate of 12.6%. Majority of

pharmaceutical sales originate in the US, EU and Japanese markets. Nine geographic

markets account for over 80% of global pharmaceutical sales these are, US, Japan,

France, Germany, UK, Italy, Canada, Brazil and Spain. Of these markets, the US is

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the fastest growing market and since 1995 it has accounted for close to 60% of global

sales. In 2000 alone the US market grew by 16% to $133 billion dollars making it a

key strategic market for pharmaceuticals.

The Social Dimension:

Good health is an important personal and social requirement and the unique role

pharmaceutical firms’ play in meeting society’s need for popular wellbeing cannot be

underestimated. In recent times, the impact of various global epidemics e.g. SARS,

AIDS etc has also attracted popular and media attention to the industry. The effect of

the intense media and political attention has resulted in increasing industry efforts to

create and maintain good government-industry-society communications.

Technological Advances:

Modern scientific and technological advances in science are forcing industry players

to adapt ever faster to the evolving environments in which they participate. Scientific

advancements have also increased the need for increased spending on research and

development in order to encourage innovation.

Legal Environment:

The pharmaceutical industry is a highly regulated and compliance enforcing industry.

As a result there are immense legal, regulatory and compliance overheads which the

industry has to absorb. This tends to restrict it’s dynamism but in recent years,

government have begun to request industry proposals on regulatory overheads to so as

not to discourage innovation in the face of mounting global challenges from external

markets.

3. Structural Industry Analysis (Porter’s Five Forces)

This section provides a summary positional analysis of the pharmaceutical industry

using

Porter’s Five Forces model (see diagram below)

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Figure: Porter’s Five Forces Model for Industry Analysis8

� Barrier to entry: High (Pharmaceuticals). Cost of R&D and patent limitations

� Industry Competition: High. Advantages gained by first mover advantage

(patents)

� Suppliers: supplier power is low

� Buyers: buyer power is low

� Substitutes: low (with patents) medium (after patent expiry)

Overall, the pharmaceutical industry shows an upward trend in its core markets. The

industry remains highly valued has a favourable market position with strong financial

make-up and strong earnings growth. Its future potential demand trend is positive and

despite increased competition the industry still shows a continuing upward growth

momentum. Datamonitor’s9 forecast of the leading 16 pharmaceutical companies for

2001 to 2007 suggests that combined sales will grow at a minimum rate of 5.2 percent

based on the potential of their product pipeline.

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4. Strategic Issues Facing The Industry

The strategic issues shaping the modern pharmaceutical industry are:

Industry Consolidation:

Merger activity has been intense within the industry in the last decade. Analysts

believe that three firms; GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely

candidates to be directly involved in the next round of industry consolidation. Eli

Lilly and AstraZeneca would make the best partners for GlaxoSmithKline, combining

the latter's commercialization strengths with a partner's valuable portfolio and

pipeline. A merger with Merck and Johnson may provide a complementary portfolio

and a short-term revenue boost, but the long term consequences of such a deal would

be a cause of concern if pursued due to the monopolistic consequences such a merger

could have.

Science and Innovation:

Over the last decade the knowledgebase of the pharmaceutical sciences has changed

dramatically and continues to change at a fairly high rate. As new technologies and

bodies of scientific knowledge emerge, whole new sets of opportunities and threats

are being introduced.

Breakthroughs in science, innovation and technology continue to create novel

opportunities for new products and processes. This has increased the pace of the

industry and major players must keep up with changes else become vulnerable. Over

the last decade, we have seen this happen as companies that were not very effective in

research and new product development were acquired.

Increased Competition:

A major issue facing the industry is the intense competition and the changing face the

pharmaceutical market. The industry has seen a legion of new market entrants,

increased competition among key players and industry consolidation. A host of large-

scale mergers and acquisitions have taken place over the last two decades.

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Competitive advantage within the industry is being constantly redefined and to

maintain their presence, key industry players are

being forced to revamp their organisational structure, overcome huge barriers in

R&D, clinical trials simply to ensure continuity and maintain profitability.

Changing Consumer Profile:

The profile of the pharmaceutical consumer has changed. Consumers are now better

informed

and there are expectations on the industry to show that their products deliver better

health and

greater economic value. Also, in previous decades governments were either the sole

or major purchasers of pharmaceutical products but the current trend shows that

healthcare costs are being constantly being shifted away from the government, which

acted as the traditional social purchaser, over to health insurance companies and

common individuals. The increasing price sensitivity of the common consumer and

financial muscle of healthcare agencies and health insurance companies is forcing

firms in the industry to cut product prices thereby reducing margins. In the future, as

government shifts more healthcare costs to the end consumer, consumers will

increasingly pay more for access to healthcare and medicines and this will further

increase their price sensitivity.

Ageing Populations:

Due to ageing global populations there is external pressure on the industry to reduce

the price

and long-term dependence on pharmaceuticals. This, in addition to the market

requirement for the industry to improve current new medicines and lower product

costs is increases the pressure on industry to aggressively reduce it’s cost base without

compromising gross spend on research and development which most firms require to

maintain competitiveness.

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Changing Geo-political Environment:

The political environment worldwide has become a major force. Due to the socio-

political consequences of healthcare and medicines, the pharmaceutical industry is

facing increasing political pressure to reduce prices and control costs. In certain geo-

political areas, particularly in developing economies, government are increasing

pressure on pharmaceutical firms to act in the social interest and this is likely to

intensify in the future. Examples are issues around AIDS in Africa. African

government's policies are becoming increasingly stringent with regards to the conduct

of pharmaceutical firms.

Decreasing Consumer Influence:

A unique feature of the pharmaceutical market is that the final consumer has little or

no say in the choice of medicines and treatments. Medical doctors, general

practitioners and pharmacists usually act as agents of the final consumer and they are

largely responsible for the consumer’s purchasing decisions. As a result of this

pharmaceutical companies’ direct a sizeable proportion of their marketing efforts at

these agents. With the advent of the internet, consumer enlightenment has the capacity

to erode the influence of the medical agents as consumers have easier access to

medical information and treatments.

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CHAPTER-8-

INTERNATIONAL BUSINESS OF PHARMACEUTICAL

INDUSTRY

The impact of IPR will largely depend on the developmental status of the economy

such as the availability of technical manpower and infrastructure, capacity of the

domestic industry, and so on. A country with a strong domestic industry such as India

is in a relatively advantageous position than a country where domestic industry does

not have much presence and depends on multinationals. It is true that the impending

WTO regime has stimulated the R&D investment in India. Some of the big units have

started strengthening their R&D and have also filed number of applications for

patents. There is some evidence available regarding the mergers and amalgamations

to pool the human and financial resources (CMIE, 2000) to strengthen the R&D in

new product development. These firms will definitely benefit by the stronger

protection. Some of the R&D and manufacturing facilities set up in these firms meet

the international standards, and they have already been approached by multinationals

for conducting research and undertaking manufacturing on their behalf. Besides the

R&D investment in traditional chemical based screening, some of the R&D firms are

looking for breakthroughs in biotechnology research. With TRIPS allowing the

patenting of the living organisms, research in biotechnology is the latest buzzword in

the Western pharmaceutical industry. Significant breakthroughs have already been

made in the area of stem cells and cloning which have potential cure for some of the

dreaded diseases like cancer, Parkinson disease, Alzheimer’s and nervous disorders.

Cloned animals have been patented and are being used for research purposes. The

human genome project or the sequencing of DNA, which has already spent about $3

billion, will be highly beneficial for the pharmaceutical companies to identify the

toxicity of the new drugs on different population or in knowing the reasons for

prevalence of certain diseases in specific regions or communities.

In contrast to this, in India biotech research is concentrated in the areas of vaccines,

diagnostics, molecular and cellular biology, cell culture, fermentation and hybridoma

technology. Lalitha (2001) observes that some of the research based pharmaceutical

firms have ventured into biotech research since the late ‘90s. Recombinant vaccines

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(for typhoid, rabies and hepatitis B), HIV 1&2 diagnostic test kit and gene probe test

for TB are some of the important areas where research is being currently carried out.

It is also observed that though simple diagnostic kits, were the first to arrive in the

biotech market elsewhere, in India only a handful of companies are engaged in the

production of TB diagnostic kit. Nevertheless, a few companies have developed

technology in enzyme immobilization used for conversion in the synthesis of semi-

synthetic penicillin like ampicilin and amoxcyline. In the case of DNA or r-DNA

research, research is at a basic level, for two reasons. India does not recognize

patenting living organisms and because of the moral and ethical issues concerning the

human stem cells and embryonic research, R&D firms tread cautiously in this area.

As part of trade liberalization though most of the drugs were delicensed yet, bulk

drugs produced by the use of re-combinant DNA technology and bulk drugs requiring

in vivo use of nucleic acid as the active principles and formulations based on use of

specific cell or tissue targeted formulations shall continue to remain under

compulsory licensing (Government of India, 2000). Also a committee set up under the

Department of Biotechnology scrutinizes each research application concerning

embryos and only embryos discarded in the fertility clinics can be utilized for

research purposes. This area being highly research and resource intensive currently

very few firms are engaged in this research.

The Indian Pharmaceutical Industry in 2009

Turnover: $6.02 billion, up 6.4 percent year over year

Exports: $3.72 billion

Imports: $985.3 million

Bulk drug production: $2.10 billion, with over 400 bulk drugs produced. Over 60,000

formulations produced, in 60 therapeutic categories

Capital investment: up 14.8 percent to $1.16 billion

Employment: 5 million direct, 24 million indirect

Pharmaceutical outsourcing is increasing world over and it is expected that contract

research and manufacturing would reach $6.4 and 22.5 billion respectively in 2001

(Scrip’s Year Book, 2000). These figures could increase still more with the vertical

disintegration of activities by the multinationals as they review their core

competencies. Henceforth, R&D could take place in one country, manufacturing in

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another and marketing rights could be given to a totally different country. Domestic

units with state of art facilities, infrastructure and manpower that matches the product

profile of the multinationals would derive the maximum benefits. These units could

flag off the foreign direct investment in manufacturing and R&D. This segment that

has been able to export its products to both developed and developing countries

(Table 3) can widen the market further in the universal patent regime provided the

manufacturing practices and the quality standards match the standards at the export

destination. While the medium and big units can adopt any of the or combination of

strategies that were mentioned above, at present the future of the thousands of small

units is not very clear. Under normal circumstances, units that are producing the

generic drugs should not get affected because these drugs are not patent protected.

But it is likely that, they may face competition from large producers who may

compete on larger volume and lower cost of production. Evidence from Jordan

indicate that the local industry had to suffer in terms of investment and production and

a number of small local firms had to close their operations (Correa, 2000).

In order to increase the global prospects of the pharmaceutical industry in the post

2005 period, the Central Government has fixed the deadline of December 2003, to

comply with the Good Manufacturing Practices set by World Health Organisation.

Since this is mandatory for all the units, it means incurring expenditures that could

range from Rs. 15 lakhs to 1 crore per unit. In some cases, it would involve shifting to

new premises altogether. A few units might exit from business because of this. As

contract manufacturers it is essential that both the parent unit and the loan licensee

meet these requirements in cases where the production is meant for exports. While

these standards improve the quality on par with international standards, it will also act

as potential entry barriers for new firms to enter (Lalitha, 2002b).

The strength of the Indian pharmaceutical industry is in reverse engineering. Such

units by utilising the provisions under compulsory licensing, exceptions to exclusive

rights and the Bolar exception should aim at producing the generic version of the

patented product and those that are nearing patent expiry. Such firms should also be

engaged in research leading to new drug delivery mechanisms and in identifying new

uses of existing drugs. In this context, it is also essential to protect the innovations

that have been introduced by the technology spillovers. Evenson (in Siebeck et.al

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1990) and Watal (1997) suggest that in order to develop domestic innovations,

developing countries require utility models or petty patents. These petty patents can

be available for a shorter period of time for process innovations made over an existing

product. The TRIPS agreement leaves members to introduce such legislation, as there

are no specific rules on this subject. Such patents will encourage the small firms.

One of the concerns regarding product patents is the access to patented products.

Some of the provisions within the TRIPS agreement mentioned in the above

paragraphs, clearly indicates that price controls could be imposed on the patented

products. However, exemptions from price controls has been suggested by the

government for the products that are produced domestically using the domestic R&D

and resources and are patented in India. Such exemptions will keep the prices high

and make access to the drugs difficult. It appears that who patents the product’

matters more for the government than what is patented. In the recently concluded

Doha meeting, a separate declaration on the TRIPS agreement has clarified that

members have the right to grant compulsory licence in the area of pharmaceuticals

and that they have the freedom to determine the ground upon which such licenses are

granted (Economic Times, 21 November, 2001) which can have a considerable

impact on the availability as well as on their prices. However, the amendments made

by the Government of India, make the procedures very cumbersome which needs to

be revised in the third amendment to the Patents Act. While parallel trade in

pharmaceutical may facilitate access to medicine, yet compulsory licence will be the

only course of option to facilitate flow of technology and R&D. Scherer and Watal

(2001) suggest that tax concessions should be provided to the pharmaceutical

manufacturers to encourage them to donate the high technology drugs to the less

developed and developing countries which is a viable option.

A majority of the population does not have access to the essential medicines (most of

which are off patent) either in the government or private health care systems because

they are not within their capacity to reach. Now that the percentage of drugs under

price control has been reduced drastically it is essential to keep the prices of the

essential drugs under check, especially those concerning the common diseases.

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Currently only a handful of pharmaceutical firms in India invest in R&D which needs

to be improved. The Pharmaceutical Research and Development Committee (1999)

has suggested that a mandatory collection and contribution of 1 per cent of MRP of all

formulations sold within the country to a fund called pharmaceutical R&D support

fund for attracting R&D towards high cost-low-return areas and be administered by

the Drug Development Promotion Foundation. The domestic universities and other

academic institutions can play the role of research boutiques or contract research

organisations (CRO), which can supply the technical know-how and manpower. Units

that already have such facilities can also function as a CRO for other firms.

In the post TRIPS era, the government will have to probe in to factors that contribute

to the widening gap between the proposed FDI and the actual FDI and rectify these

bottlenecks. Similarly the difference between the number of patents filed and the

patents granted calls for a detailed analysis to figure out where the Indian firms are

lacking.

Governments at various levels should take active part in disseminating knowledge

about the IPRs and the possible strategies that can be adopted by the industry. This

will remove some of the impediments. Lessons should be drawn from the Chinese

experiences where systematic efforts were taken to educate the bureaucrats, policy

makers and the industry about the WTO and product patents in the pharmaceutical

industry. India will have to strengthen the patent examination process and speed up

the processing procedures. This will help in checking the products that may enter the

country utilising the import monopoly route provided by the EMR. Besides a strong

institutional and judicial framework will have to be set up for monitoring the prices,

to prevent infringement and trade dress cases of patented products respectively.

As far as India’s pharmaceutical industry is concerned, various options are possible in

the WTO regime. These are to: (a) manufacture off patented generic drugs, (b)

produce patented drugs under compulsory licensing or cross licensing, (c) invest in

R&D to engage in new product development, (d) produce patented and other drugs on

contract basis, (e) explore the possibilities of new drug delivery mechanisms and

alternative use of existing drugs, and (f) collaborate with multinationals to engage in

R&D, clinical trials, product development or marketing the patented product on a

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contract basis and so on. Besides these strategies, India’s strength lies in process

development skills. This expertise utilised within the WTO framework with emphasis

on quality standards will provide India a competitive advantage over other Asian

countries.

Balance of Trade in Pharmaceutical Sector

(Rs. Crores)

Year Exports of

Drugs

Imports of Drugs Balance of Trade

1960-61 1.55 17.60 -16.05

1965-66 3.80 13.80 -10.00

1970-71 8.46 24.27 -15.81

1973-74 37.33 34.16 3.17

1980-81 76.18 112.81 -36.63

1987-88 289.99 349.44 -59.75

1988-89 467.6 446.91 20.69

1989-90 856.8 652.12 204.68

1990-91 1254.6 604.0 650.6

1991-92 1489.5 807.38 682.12

1992-93 1541.5 1137.4 404.1

1993-94 1991.7 1440.0 551.7

1994-95 2465.3 1537.0 928.3

1995-96 3443.2 1867.0 1576.0

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1996-97 4340.0 1039.2 3300.8

1997-98 5353.0 1447.1 3906.0

1998-99 6153.0 1446.8 4706.2

1999-00 6631.0 1502.0 5129.0

Sources: Pillai and Shah, 1988, Chaudhury, 1999, and 39th IDMA Annual

Publication 2001.

Foreign Direct Investment in India

(Rs. Crores)

Year Amount

Approved

Actual Inflow FDI Approved

in Pharma

% of Pharma

FDI to total

approvals

1991 534 351

1992 3888 675

1993 8859 1787 29.9 0.34

1994 14187 3289 163.0 1.15

1995 32072 6820 185.8 0.58

1996 30147 10389 118.2 0.33

1997 54891 16425 182.9 0.33

1998 30814 13340 91.1 0.30

1999 28367 16868 79.8 0.28

2000 37043 12763 1614.6 4.36

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Total 246802 82707 2465.3 1.00

Source: Handbook of Industrial Policy and Statistics, 2000, Foreign Trade and

Balance of Payments, CMIE, July 2001

Export

Exports constitute a substantial part of the total production of Pharmaceutical in India.

The formulations contribute nearly 55% of the total exports and the rest 45% comes

from bulk drugs. Pharmaceutical exports clocked $7.2 billion in 2007-08, accounting

for six per cent of the country’s total exports. Indian companies export drugs to over

200 countries, but the top 25 markets, which includes the US, Germany, Russia,

China and few European and African countries, account for about half of the total.

Indian drug makers exported medicines worth Rs 31,608 crore during April 2008-

January 2009 and exports shot up 30.7% as compared to last year due to a weak

Indian currency and increased demand for low-cost generic medicines. US is the

largest importer of drugs followed by Russia and Germany.

Indian pharma industry is set to defy recession by registering a 25% growth in exports

during the current fiscal. As per projections made by Centre for Monitoring Indian

Economy (CMIE) pharma exports from India is expected to touch the figure of

Rs36,471 crore in 2008-09 against the exports of Rs29,140 crore in the previous year.

Depreciation in Indian rupee and cost advantage will help the industry to post such an

exponential growth in overseas sales. The forecast seems quite optimistic, as the

industry posted just 8% growth in export in 2007-08 compared to Rs26,895 crore

recorded in 2006-07. However, depreciation in Indian currency is going to help them

in a big way to achieve the growth. In the first half of the current fiscal, rupee

depreciated by whopping 6.6% against the dollar and the trend is likely to continue till

the end of the fiscal. India's export of drugs and pharmaceuticals accounts for almost

40% of the sectors' aggregate sales.

Global recession is not expected to impact Indian pharma sector due to its low cost

manufacturing advantage. Indian companies are mostly into the manufacturing of

generic drugs and offers drugs at a price much lower than the patent holder company.

In fact, slowdown will prove to be a boon for Indian pharma companies, as foreign

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customers will look for cheaper products. However, growth of exports may slowdown

in last two quarters.

The first two quarters have been good for pharma sector and no significant impact of

slowdown was visible. However, last two quarters may not be same and the sector

may see some slowdown in export.

Those companies are feeling the pinch of slowdown that has exposure to the Latin

American market. Majority of Indian pharma export goes to Europe. Of the total

export in 2007-08, 25% went to European countries, 19% to Asia, 18.3% to North

America, 13.5% to African countries, 8% to CIS countries and rest to other regions.

India exported drugs and pharmaceuticals worth Rs1,872 crore to the US and Rs564

crore to Germany in 2007-08. This distribution is also likely to be same in current

fiscal. Country wise US gets largest exports from India followed by Netherlands, UK

and Germany.

Bucking the trend Pharma exports are expected to be around Rs36,471 crore this

fiscal against Rs29,140 crore in the previous year. Export accounts for almost 40% of

the aggregate sales of the industry. Indian pharma market is contributing 8% globally

in terms of production, 2% in terms of value by producing drugs worth $18 billion.

Pharmaceutical Exports in India till 2006-07

Source: E&Y Study

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According to the E&Y Report India’s exports should continue to show strong growth

through 2010 as $60 billion worth of patented drugs lose their patent protection in the

United States and Western Europe. As seen from the graph, the exports have shown a

steady growth through 2001-2007 and will continue to do so. Exports have grown to

constitute a major revenue source for India’s major pharmaceutical companies

including Ranbaxy, Cipla, and Dr. Reddy’s. Collectively, regulated markets

accounted for more than 50 percent of their total annual revenues. In 2005-06,

Ranbaxy derived nearly 80 percent of its sales revenues from exports, while exports

and international acquisitions accounted for 66 percent of Dr. Reddy’s sales and 50

percent of Cipla’s. The successful penetration of the U.S. and EU markets has

encouraged a growing number of Indian “copycat” companies to enter these markets.

India’s exports to the regulated Western markets are expected to remain strong in the

midterm, even though Indian companies will be challenged by declining prices in the

U.S. market, declining profit margins, growing competition from other low-cost

countries, parallel launches of authorized generics by Western innovator companies,

and the increasing power of large distributors in the U.S. and European markets.

About $60 billion in blockbuster drugs will open to generic competition between 2002

and 2010 and Indian companies are expected to vie for a significant percentage of that

business.

Our leading exporters include Dr. Reddy’s, Wockhardt, Sun Pharma, and Lupin Labs.

The vast majority of India’s exports, by value, are destined for the developed

economies of the West, particularly the United States, Germany, the United Kingdom,

and France. Exports to these countries consist primarily of bulk drugs that account for

nearly 60 percent of India’s pharmaceutical exports. The remainder, mostly

formulations, is exported to the countries of the former Soviet Union (CIS) and

developing countries (Southeast Asia, Africa, and Latin America). India continues to

be a leading supplier of less expensive antibiotics, cancer therapy, and AIDs drugs to

the developing world.

According to the Quick Estimates of Directorate General of Commercial Intelligence

and Statistics (DGCIS), Pharmaceuticals exports (valued in US dollar terms)

registered an impressive growth rate at 30.7% terms during April-October,2008

compared to the corresponding period of the last year. This growth further increases

to 38.5% when valued in rupees terms. Exports on account of Pharmaceuticals have

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been consistently outstripping the value of corresponding imports during 1996-97 to

2007-08. The trade balance increased from Rs. 2157 crores in 1996-97 to Rs. 13893

crores in 2007-08. Exports of pharmaceuticals registered a growth at the rate of

16.22% during 2007-08. The share of exports of Pharmaceuticals products to the total

national exports have been in excess of 2% during each of last 12 years ending 2007-

08. It has exhibited a long-term upward trend from 2.01% in 1996-97 to 2.55% in

2007-08.

After nearly 30 years of focusing inward, India’s pharmaceutical industry has

emerged as a global player satisfying a significant portion of the world’s generic drug

needs. Attracted by high drug prices in the West, India’s pharmaceutical exports grew

from $1.9 million in 1999 to $5.2 billion in 2005. In the last 5 years, India’s exports

more than doubled and account for approximately 40 percent of total industry

production and nearly 30 percent of its revenues. India also enjoyed a trade surplus

that increased from $3.1 billion in 2004 to $3.8 billion in 2005, or by 23 percent.

India’s exports should continue to show strong growth through 2010 as $60 billion

worth of patented drugs lose their patent protection in the United States and Western

Europe. Assocham predicts that Indian companies will capture at least 30 percent of

the replacement market of generic drugs.

According to Assocham, the importance of exports has grown dramatically over the

last 5 years due to declining profit margins and the extremely price-competitive nature

of the domestic Indian pharmaceutical market. Exports have grown to constitute a

major revenue source for India’s major pharmaceutical companies including Ranbaxy,

Cipla, and Dr. Reddy’s.

Collectively, regulated markets accounted for more than 50 percent of their total

annual revenues. In 2005-06, Ranbaxy derived nearly 80 percent of its sales revenues

from exports, while exports and international acquisitions accounted for 66 percent of

Dr. Reddy’sales and 50 percent of Cipla’s. The successful penetration of the U.S. and

EU markets has encouraged a growing number of Indian “copycat” companies to

enter these markets. India’s exports to the regulated Western markets are expected to

remain strong in the mid-term, event though Indian companies will be challenged by

declining prices in the U.S. market, declining profit margins, growing competition

from other low-cost countries, parallel launches of authorized generics by Western

innovator companies, and the increasing power of large distributors in the U.S. and

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European markets. About $60 billion in blockbuster drugs will open to generic

competition between 2002 and 2010 and Indian companies are expected to vie for a

significant percentage of that business. India exports pharmaceuticals to more than

200 countries and on a country-wise basis, India’s five largest export markets are the

United States (28 percent), Russia (11 percent), Germany (10 percent), the United

Kingdom (8 percent), and China (7 percent). All of India’s major pharmaceutical

companies are looking at the global market to accelerate their growth. They are

looking at all markets with potential including the regulated markets of the United

States, Japan, and Europe; the semi regulated markets of BRIC countries; and less

regulated markets of Africa, Middle East, and Southeast Asia. India has also become a

very important source of generic drugs for the developing world and is the leading

supplier of AIDs drugs to the world. Indian companies like Cipla and Ranbaxy have

driven the down the annual cost of anti-retroviral treatment from $15,000 per patient

in 1995 to $200 in 2005.57.

Other leading exporters include Dr. Reddy’s, Wockhardt, Sun Pharma, and Lupin

Labs. The vast majority of India’s exports, by value, are destined for the developed

economies of the West, particularly the United States, Germany, the United Kingdom,

and France. Exports to these countries consist primarily of bulk drugs that account for

nearly 60 percent of India’s pharmaceutical exports. The remainder, mostly

formulations, are exported to the countries of the former Soviet Union (CIS) and

developing countries (Southeast Asia, Africa, and Latin America). India continues to

be a leading supplier of less expensive antibiotics, cancer therapy, and AIDs drugs to

the developing world. In 2005, more than 90 percent of India’s exports are of drugs

that are no longer protected by patents. India’s largest single export market continues

to be the United States, which is the world’s largest generic drug market. Exports to

the United States grew from $429 million in 2003 to $589 million in 2005, or by 37

percent. The percentage of total exports represented by the United States declined

slightly from 12 percent in 2003 to 11 percent in 2005. This decline can be attributed

to the introduction of authorized generic drugs by domestic U.S. pharmaceutical

giants, lagging profits and declining generic drug prices, and growing competition

from other low-cost countries, particularly Israel, China, Korea, and those from East

Europe. To offset revenue losses from total sales in the United States during 2005- 58

06, India’s leading exporters have been aggressively shifting their attention to Europe

and Africa. Europe, the world’s third largest pharmaceutical market, behind the

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United States and Japan, had generic sales of approximately $100 billion primarily in

the UK, Germany, and France. As previously stated, Indian pharmaceutical

companies have made a number of acquisitions in Europe to gain a foothold in its

markets. European generics markets considered to be under served include Spain,

Italy, and France, and are expected to be important and growing markets for Indian

exporters in the next 5 years.

High export growth of Indian drugs makers

In the course of increasing contract production and low-cost manufacture of

proprietary medicines, exports are expected to receive a major boost in future.

However, Germany's very high export ratio of currently 55% will hardly be achieved

by 2015, as this would imply more than a trebling of total exports. In this context, it

should be considered that take-overs of foreign companies will lead to a strong

increase in foreign production by Indian manufacturers, which will have a dampening

effect on exports. A positive impact on exports is expected from foreign investment in

India, though. Competition between Indian firms and western drug makers will

probably be much fiercer as the companies from Asia are increasingly seeking to tap

the global markets. The generics market will grow in both the developed countries

and in the emerging markets. Most vital medicines are already exempt from patent

protection today. The manufacture of generic drugs in that segment is growing

strongly. In addition, patents for high-turnover drugs with a volume of EUR 100 bn

will expire in the next few years. Of these drugs, roughly one-third will likely be

produced by Indian companies.

Exports of Pharmaceutical Products from India*

Country 2004-05 2007-08

Total Exports 34432 66310

USA 4238 6718

Russia 3036 4932

Hong Kong 1919 3562

Germany 3418 3252

Nigeria 1199 2577

UK 1142 2568

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Singapore 868 2452

Netherlands 1436 2192

Iran 634 1796

Brazil 170 1627

Italy 721 1514

Vietnam 885 1413

China 361 1371

Spain 765 1287

Srilanka 825 1242

* Total Exports to top 15 countries 21617 38503

Source: IDMA Annual Publication,

Value of exports,

India is the second largest country in the world, with a population of approximately 1

billion. The population is expected to grow to about 1.5 billion by 2050. Life

expectancy at birth for males and females is 62.4 and 63.4 years, respectively, which

is much lower than that of the United States. The total admission capacities for

medical and pharmacy institutions of higher

learning are 17,000 and 5610, respectively. India has approximately 14,000 hospitals.

The number of registered doctors and nurses is about 490,000 and 600,000,

respectively.

India’s pharmaceutical market may not be impressive by international standards, but

considering the total Indian economy, it is one of the major economic sectors in India.

According to the Indian Drug Manufacturers’Association (IDMA) annual publication,

the estimated value of production of bulk drugs and formulations in India during

2000–2001 was approximately Rs 22,187 crores (~$4.5 billion) out of which Rs. 4344

crores is for bulk drugs and Rs. 17,843 crores for the formulations (currency

conversion rate used is Rs 49 _ US $1.00 or Rs. 1 crores _ $0.204082 millions)

Table summarizes the value of production of bulk drugs and formulations during the

past decade. The bulk drug production increased by nearly 20% every year,whereas

the value of formulations increased at an average rate of 15% per year.Table clearly

indicates the rapid growth of the pharmaceutical sector in the Indian market. Table III

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shows the total import and export values of drugs and pharmaceuticals during the past

decade. The value of imports and exports increased two-fold and four-fold,

respectively, during 1998 and 2007. For the years 2006 and 2007, the value of imports

and exports was $306.5 million and $1353.3 million, respectively. Table IV shows the

export values in terms of formulations and basic and crude drugs between 1998 and

2005. During the year 2005–06, the value of exports of formulations, basic, and crude

drugs was $632.9 million, $585.8 million, and $37.0 million, respectively. The export

of bulk drug underwent dramatic growth in the past decade, coming in at nearly 40%

each year. A comparison of values shown in Tables shows that _80% of the

formulations produced are consumed indigenously, whereas the majority of the bulk

drugs manufactured are exported. Lists the top 10 countries to which India exports

drugs and pharmaceuticals. The ranking is based on the export figures of 2006–2007.

Russia and the United States are the top two importers of bulk drugs and

pharmaceuticals from India ($100.7 million and $137.9 million, respectively).

However, countries such as Brazil, Singapore, and Iran experienced a tremendous

growth in the import of pharmaceuticals from India in recent years.

Total value of export of drugs and pharmaceuticals from 1998–1999 to 2007–

2008.

Rupees % Growth over

Year in Crores $ Million Previous Year

1998–99 1489.5 304.0 —

1999–00 1541.5 314.6 3

2000–01 1991.7 406.5 29

2001–02 2465.3 503.1 24

2002–03 3443.2 702.7 40

2003–04 4340.0 885.7 24

2004–05 5353.0 1092.5 23

2005–06 6153.0 1255.7 15

2006–2007 6631.0 1353.3 8

2007- 2008 6928.7 1465.2 9

Currency exchange rate: Rs 49 _ US $1.00 or Rs 1 crore _ $0.204082 million.

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Indian pharmaceuticals exports

• For 2007–08, export revenues are estimated to be around US$ 8.9 billion.

• Formulation exports are estimated to constitute 46 per cent of total revenue,

while bulk drugs are estimated to account for 54 per cent.

• Revenues from formulation exports are expected to surpass those from bulk

drugs by 2010–2011.

• By 2012, exports are expected to top US$ 23.5 billion, with most of the value

generated by generics and active pharmaceutical ingredients (API).

• Exports to regulated markets are expected to surge at a compound annual

growth rate (CAGR) of 25.4 per cent between 2007-08 and 2012-13. In

comparison, exports to semi-regulated markets clocked a CAGR of 14.6 per

cent from 2000 to 2005.

• Formulation exports to regulated markets are expected to grow at a high

CAGR of over 25.4 per cent to reach US$ 5.4 billion by 2012-13.

• Demand from semi-regulated regions is estimated to grow at a modest CAGR

of around 14.6 per cent and reach US$ 4.8 billion in the same period.

Generics to drive growth of exports from India

• By 2011-12, the share of Indian players in the US generic market is expected

to cross 6 per cent from 2.1 per cent in 2006-07.

• Formulation exports to the US are expected to grow at a CAGR of 38 per cent

and reach around US$ 3.03 billion in 2011-12.

• Exports of generic drugs to Europe are likely to grow at a healthy CAGR of 20

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per cent to reach US$ 1.8 billion by 2012-13.

• India is the world‘s fifth-largest producer of bulk drugs.

• Demand for bulk drugs has grown at a CAGR of 31 per cent since 2000–01 to

reach US$ 4.8 billion in 2007–08.

• The share of Indian companies in the total drug master files (DMF) filed with

the USFDA* increased from 14.5 per cent in 2000 to 48 per cent in 2008.

• Semi-regulated markets account for a majority of bulk drugs' exports with a 50

per cent share

The Export Promotion Cell in the Pharmaceutical Division acts as a nodal agency in

the matters related to export of pharmaceuticals. In order to give adequate attention to

day-to-day problems faced by the exporters, the Cell interacts with various

Ministries/Departments and our Missions abroad. The Cell also collects statistical

data on export and import of pharmaceuticals in the country and provides

commercially useful information on developing and increasing drugs and

pharmaceutical exports. The Cell has also been entrusted with organisation of

seminars and workshops on standards, quality control requirements etc. Of important

countries so as to prepare domestic companies for exporting their products.

The Cell communicates with 131 Missions abroad to collect information related to

pharmaceutical industry in these countries such as, status of the pharmaceutical

industry, details of documentation, guidelines for licensing of pharmaceutical

companies as well as registration for medicines, details of pharmaceutical market with

information on local production, demographic data, details of health care system,

health indicators and prevalent disease pattern, details of imports of pharmaceuticals

of these countries, details of joint venture units for pharmaceuticals operating in these

countries etc. The Cell has started providing commercially useful information to the

industry/exporters for boosting pharmaceutical exports.

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Pharmaceutical Export Promotion Council (Pharmaexcil)

• Objectives The objectives of the Council (Pharmexcil) are to extend all

assistance to the pharmaceutical industry in India to explore their

opportunities.

• Services Extended include:

a. Trade Enquiries received from foreign Embassies /Buyers

b. Market Development assistance as provided by Ministry of Commerce for

business tours to foreign countries.

c. Arrange one to one Buyer/Seller Meets in India/Abroad.

d. Arrange Exhibitions in India and Abroad for market promotion.

e. Assist in Regulatory matters with domestic and Foreign Government

agencies.

f. Provide financial assistance for Product Registration charges, Research and

Development, Product showcasing etc. as per rules.

g. Arrange Conferences/Seminars in domestic and foreign countries - for market

and technical up-gradation of information.

IMPORT

India’s consumption of imported pharmaceuticals accounts for only a minimal portion

of the world’s production. Its imports consist of mainly life-saving drugs and new

generations of formulations that are under patent by innovator companies. These

include anti-cancer, cardiovascular, and anti-hypertension drugs imported primarily

by major global pharmaceutical companies for sale in the Indian market. Within these

categories, leading imports consisted of penicillin (13 percent), antibiotics for

combating stomach infections (9 percent), and other medicines for retail sales in

dosage form (19 percent). Life saving drugs can be imported into India duty free,

whereas all other pharmaceutical imports faced a base duty rate of 30 percent and an

effective duty rate of 56.8 percent in 2002, compared with “zero” duty in the United

States. India’s imports of finished pharmaceutical drugs, intermediates, and APIs

nearly tripled in value from $516.1 million in 1999 to more than $1.3 billion in 2005.

India’s top 7 import source countries accounted for approximately 32 percent of the

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total during 2005, down from 37 percent in 2004. India’s leading import suppliers

included Switzerland (8 percent), Germany (6 percent), the United States (7 percent),

and France (3 percent). Although India’s pharmaceutical market is relatively small, at

least 45 MNC pharmaceutical companies are serving the market through subsidiaries,

other tie-ins, and imports. India’s imports from Switzerland, the United States, and

Germany consisted primarily of other medicaments in dosage form for retail sales.

India’s consumption of imported pharmaceuticals accounts for only a tiny portion of

the world’s production. Its imports consist almost entirely of life-saving drugs and

new generations of formulations that are under patent by innovator companies. These

include anti-cancer, cardiovascular, and anti-hypertension drugs imported primarily

by major global pharmaceutical companies for sale in the Indian market. Within these

categories, leading imports consisted of penicillin (13 percent), antibiotics for

combating stomach infections (9 percent), and other medicines for retail sales in

dosage form (19 percent). Life saving drugs can be imported into India duty free,

whereas all other pharmaceutical imports faced a base duty rate of 30 percent and an

effective duty rate of 56.8 percent in 2002, compared with “zero” duty in the United

States. India’s imports of finished pharmaceutical drugs, intermediates, 55 and APIs

nearly tripled in value from $516.1 million in 1999 to more than $1.3 billion in 2005

India’s top 7 import source countries accounted for approximately 32 percent of the

total during 2005, down from 37 percent in 2004 (table 13). India’s leading import

suppliers included Switzerland (8 percent), Germany (6 percent), the United States (7

percent), and France (3percent). Although India’s pharmaceutical market is relatively

small, at least 45 MNC pharmaceutical companies are serving the market through

subsidiaries, other tie-ins, and imports. India’s imports from Switzerland, the United

States, and Germany consisted primarily of other medicaments in dosage form for

retail sales.

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INDIA’S LEADING IMPORT SUPPLIERS

• SWITZERLAND

• GERMANY

• US

• FRANCE

IMPORT DATA FROM 1999 TO 2005

Total value of import of drugs and pharmaceuticals from 1998–1999 to 2007–

2008 .

Rupees % Growth over

Year in Crores $ Million Previous Year

1998–99 807.4 164.8 —

1999–00 1137.4 232.1 41

2000–01 1440.0 293.9 27

2001–02 1527.0 311.6 6

2002–03 1867.0 381.0 22

2003–04 1039.2 212.0 44

2004–05 1447.1 295.3 39

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2005–06 1446.8 295.3 0.02

2006–07 1502.0 306.5 4

2007- 08 1587.4 387.0 6

Currency exchange rate: Rs 49 _ US $1.00 or Rs 1 crore _ $0.204082 million.

GOVERNMENT INITIATIVES

GENERAL PROVISIONS

• Exports and Imports shall be free, except where regulated by FTP; free unless

regulated or any other law in force.

• All imported goods shall also be subject to domestic Laws, Rules, Orders,

Regulations, technical specifications, environmental and safety norms as

applicable to domestically produced goods

• Any goods, export or import of which is restricted under ITC(HS) may be

exported or imported only in accordance with an Authorization or in terms of

a public notice issued in this regard.

PROMOTIONAL MEASURES

• Central Government aims to encourage manufacturers and exporters and

Quality to attain internationally accepted standards of quality for their

products.

• Central Government will assist in modernization an up gradation of test

houses and laboratories to bring them at par with international standards.

• Exporters are eligible for STATUS CATEGORY

A Status Holder shall be eligible for following facilities:

i. Authorization and Customs clearances for both imports and exports on self

declaration basis

ii. Fixation of Input-Output norms on priority within 60 days

iii. 100% retention of foreign exchange in EEFC account

iv. Enhancement in normal repatriation period from 180 days to 360 days;

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EPCG SCHEME

• Under this scheme the exporter is allowed to import capital goods use during

Pre – production, Production and Post – production stage against payment of

5% customs duty subject to fulfilment of export obligation

• The export obligation is 8 times the duty saved

• The export obligation is 6 times in case of SSIs and agro units engaged in

exports.

• The period for fulfilment of export obligation is 8 years

• The period for fulfilment of export obligation is 12 years when:

• EPCG authorization > 100 crores

• Located in Agri export zone

• Unit under revival plan of BIFR

• Unit is a cottage or tiny sector unit

DUTY EXEMPTION SCHEME

• The export enterprise is allowed to make duty free import of inputs which are

directly used in the export product at the pre-shipment stage

• The details of the inputs are given in the Handbook of Procedures in the form

of Standard Input-Output norms (SION)

DUTY REMISSION SCHEME (DEPB)

• This scheme offers the facility for duty free import of inputs at the post

shipment stage under Duty Entitlement Passbook Scheme

• It is valid for 24 months from the date of issuance

• This facility is provided by way of grant of import duty credit against the

export product

• DEPB has been extended till 31st December of 2009

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OTHER PROVISIONS

• Import of Bonafide Trade Samples is allowed without limit except in case of

vegetable seeds, bees and new drugs

• Export of Bonafide trade and technical samples of freely exportable item is

allowed without any limit

• The exporter is allowed to replace damaged or defective good free of charge

• Exporter is allowed to import damaged goods for repair and later export them

back without any license based clearance

• The exporter is allowed to trade goods from another country to a third country

without license (if item is non restricted)

• Private bonded Warehouses for Export and Import

Role of import/export in U.S. Market

Next year, drug sales in China will outpace those of France and of Germany, while

Brazil will be buying more medications than Britain. The report was issued by IMS

Health, a research company based in Norwalk, Conn., that tracks prescriptions and

other data on drug sales.

Unless the world’s current leaders in brand-name drugs move more nimbly to expand

into those emerging markets, they will miss the big growth opportunities and cede

those markets to local players, the report said.

Annual growth of pharmaceutical sales in mature markets like the United States and

Western Europe has slowed to the low single digits in the last eight years. The

slowdown is a result of the worldwide economic crisis, but also of patent expirations

on a variety of name-brand drugs, growing use of generic drugs, reduced investments

in biotechnology and tighter government restrictions on the pharmaceutical market,

the report said.

The United States drug market had sales last year of about $300 billion, with an

annual growth rate of 5 percent, IMS said. And even if Congress passes health care

legislation, which, according to a recent Credit Suisse report, could increase drug

sales by $10.7 billion, the impact on the growth rate would be minimal.

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By contrast, IMS said, 17 emerging markets are poised for significant growth. The

report grouped the countries, which IMS has called the “pharmerging markets,” into

three tiers in descending order of market value growth. China alone occupies the top

tier. The second tier comprises Brazil, Russia and India, while the third tier includes

Venezuela, Poland, Argentina, Turkey and Mexico.

Last year, those countries accounted for $123 billion — about 16 percent — of more

than $770 billion in global drug sales, IMS said. The emerging market sales

represented 37 percent of industry growth.

By 2013, those same countries are estimated to bring in an additional $90 billion in

sales accounting for 48 percent of industry growth, the report said. Over all, emerging

markets will represent about 21 percent of total drug sales in 2013, IMS executives

said in an interview.

It estimated that China, the leader of the pack in emerging markets, would account for

$40 billion in additional sales by 2013. “These traditionally peripheral economies are

gearing up to turn the tables on the established pharmaceutical world order,” the

report said.

Certainly, developed markets like the United States and Japan still represent a vast

majority of pharmaceutical sales. Even so, the report urged leading drug makers to

move faster to capitalize on high-growth emerging markets, where they already face

competition from entrenched domestic producers with well-established brands.

A few European drug makers, including Novartis, Sanofi-Aventis and

GlaxoSmithKline, have been forging ahead by acquiring local companies or

increasing their local partnerships in those countries or by making major investments

in research and development in developing markets.

But, overall, the leading drug makers are underperforming in emerging markets. The

top 15 pharmaceutical companies, including Pfizer, Merck and Eli Lilly, together

derive less than 10 percent of their sales from emerging markets, IMS said.

To build profitable businesses in these countries, drug makers must tailor their

approaches to the specific dynamics and challenges of each market, Murray Aitken, a

senior vice president at IMS, said in an interview Tuesday. Some emerging markets

for pharmaceuticals have been particularly hard hit by the worldwide economic crisis.

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CAPTER-9.

GENERIC DRUGS IN THE U.S. MARKET

Although the pharmaceutical industry has always been an important part of the total

health care system in the U.S., the industry is becoming increasingly important in the

recent years due to the attention it has received from the government and the private

sector. Prescription drug spending and utilization in the U.S. has increased rapidly in

recent years. According to the Kaiser Family Foundation’s report on prescription

drug trends, U.S. spending for prescription drugs was $140.6 billion in 2001, which

represents more than a three-fold increase since 1990.7 The National Institute for

Health Care Management Foundation (NIHCM) reported that overall spending on

prescription drugs in the U.S. increased 17.1% from 2000 to 2001. Spending on

prescription drugs now represents 10-11% of health care expenditures in the U.S.

There are three main factors driving the increases in prescription spending as

mentioned in the NIHCM study:

1) The increasing number of prescriptions (utilization)

2) Changes in the types of drugs used

3) Manufacturer price increases for existing drugs

In addition, according to GAO, part of the increase is attributed to growth in the

number of patients diagnosed with conditions that can be treated with

pharmaceuticals, and the development of innovative drugs for some conditions.

According to a recent Bank of America report, pharmaceuticals are the fastest-

growing component of health care costs. The U.S. currently spends approximately

$150 billion on prescription drugs and some industry sources project this number will

reach $300 billion by 2010, equivalent to annual growth of approximately 9%. Due to

this increase in cost, managed care and other insurance providers are seeking to

control pharmaceutical expenses through generic substitution. With continued

pressure on cost, the aging demographics of the U.S. and the continuing rise in co-pay

hurdles, the generic drug industry is expected to grow in coming years.

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Definition of a Generic Drug

A generic drug is a prescription drug which is not manufactured by the originator of

the product; the molecule is off patent and available from multiple sources, and the

product is known by the chemical name, not a trade name.8 A generic drug should

possess the same active ingredients in the same dosage form and strength as the

original brand drug. For generic drugs to be marketed and sold, it needs to

demonstrate similar bioequivalence which means that there is a similar absorption rate

as the original brand drug. The generic drug also needs to produce the same

therapeutic effect and safety profile as the initial or innovator’s brand name product.

Equal standards apply for brand name and generic drugs in regards to drug safety,

efficacy, purity, stability, manufacturing, and labelling, which are set and enforced by

the Food and Drug Administration (“FDA”). Thus far, 7,000 generic drugs have been

approved by the FDA.

Developing and Marketing Generic Drugs

In developing generic drugs, the manufacturer only needs to demonstrate the

bioequivalence of its drug to the branded product, and that the manufacturing process

produces acceptable purity and consistency. The development does not involve

lengthy and costly clinical trials because generic manufacturers only need to prove

bioequivalence. On average, the development of generic drugs takes only three years,

in contrast to the six to seven years of development time spent on branded products.9

Benefits of Generic Drugs

The main benefit of generic drugs is the cost savings. According to Janney

Montgomery research, U.S. retail sales of generic prescription drugs totaled $11.1

billion in 2001 versus brand name prescription drug sales of $121 billion. However,

the generic drugs were dispensed in 47% of all prescriptions. These figures indicate

that generic drugs represented 47% of prescriptions but only 8.4% of the cost.10

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Major Trends in Generic Drugs Industry

• Favourable Economics: There has been upward pressure on health care costs in

recent years. With the ever-increasing cost, generic drugs are in a favorable

environment to grow in upcoming years.

• Healthy Growth: According to IMS health, relative to a branded market which

showed 0% growth in the U.S. last year, the generic drug group grew new

prescriptions by 8% and sales by approximately 16%. IMS predicts this growth

will continue, estimating that the generic drug industry will show approximately

15% compounded annual growth through 2005.

• Patent Expiration: A huge pipeline of patents will expire between 2003 and

2006 for some of the major drug companies. Enormous opportunity exists for the

generic drug companies to capture the increasing demand originally filled by

branded drugs.

• Competitive Environment: There is an increase of competition in the generic

drug market due to the appearance and growth of Indian, Chinese, and Eastern

European players. The long term sustainability for current pricing is in question.

• Acceleration in Industry Consolidation and Partnering: Industry analysts

predict that there will be increased consolidation in the near future and that the top

5 generic players will control more of the industry. They suspect that acquisitions

and partnering will focus more on increasing strategic cost advantages, production

capacity, and scale by adding local market presence and gaining pipeline products.

The generics pharmaceutical market is an attractive market for many

pharmaceutical companies, especially for the Indian pharmaceutical companies

who have two main competitive advantages; highly talented pool of chemists and

low costs. However, with fierce competition already in place, the Indian

pharmaceutical companies have to carefully select their market position within the

industry and further define their specialties. With some of the larger Indian

pharmaceutical companies already successful in the marketplace, the smaller

company should also take advantage of their competitive advantage and enter the

market. With disciplined approach to the market, and ability to plan longer term,

many smaller Indian pharmaceutical can find their niche to succeed in this

lucrative market.

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• Role of Indian and European generic drugs in the U.S. Market

As there was no efficient patent protection between 1970 and 2005, many Indian

drug producers copied expensive original preparations by foreign firms and

produced these generics by means of alternative production procedures. This

proved more cost-efficient than the expensive development of original

preparations as no funds were required for research, which contained the financial

risks. This spending block may come to as much as EUR 600 m for only one

drug. This kind of money could previously only be raised by large corporations in

the industrial countries. The competitiveness of generics producers is based on

cost-efficient production.

In this field, Indian companies are currently in top position. At one-fifth, India’s

share in the global market for generic drugs is considerably higher than its share

in the overall pharmaceuticals market (approx. 2%). At the same time, India’s

pharmaceutical companies gained know-how in the manufacture of generic drugs.

Hence the name “pharmacy of the poor” which is frequently applied to India.

This is of significance not least for the domestic market as disposable income is

as little as EUR 1,900 per year for roughly 140 million of the total of 192 million

Indian households1, which means the majority of Indians cannot afford expensive

western preparations.

Generic And Global Industry Dynamics

The modern generic pharmaceutical industry came into existence through the 1984

US Drug Price Competition and Patent Restoration (Hatch-Waxman) Act, which

provided for facilitated market entry for generic versions of all post-1962 approved

products in exchange for an extension of the patent period for the original drug. As

more generics became available, US health maintenance organisations and pharmacy

benefit management companies encouraged or mandated measures such as generic

prescribing, brand substitution by pharmacists, and reimbursement on the basis of

cheapest brand. In 2005, more than 60% of prescriptions in the US were filled with a

generic. Their established role in the US effectively debunks the disparagement of

generics that is still occasionally forthcoming from brand industry sources such as the

Pharmaceutical Research and Manufacturers of America (PhRMA) . Other countries

with highly developed generics markets include the UK, Germany, the Netherlands,

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Canada, and the Nordic countries, and generics markets are expanding rapidly, from a

lower base, in France, Spain, Italy, Russia, Latin America, Australia, and elsewhere .

As patents expire on many big-selling products, 'about $100 billion worth of brand-

name drugs will lose patent exclusivity [in the US] during the next five years,

including products going off patent in 2006 that will generate about $21 billion in

combined sales'. Recent examples include Pfizer's antidepressant Zoloft (sertraline)

and Merck's anti cholesterol drug Zocor (simvastatin), which both lost US patent

protection in June 2006. The world's largest generics company, Teva, headquartered

in Israel, and the Indian firm Ranbaxy (tenth in global generics rankings) obtained

180 days US exclusivity for generic simvastatin of various strengths. The availability

of generic simvastatin has flow-on implications across the anti-cholesterol market,

which in 2004 had a global value of about US$25 billion. In Australia, generic brands

of simvastatin were first listed on the PBS on 1 August 2005. It was envisaged

initially that the reference pricing system would trigger a price reduction for all

brands in the statin group of drugs, but the PBAC accepted a submission from Pfizer

for Lipitor to be excluded from the price cut on the grounds of being ' more effective

than simvastatin in lowering cholesterol'.

Plavix, one of the world's highest selling drugs at about US$4 billion in 2005,

marketed in the US by Bristol-Myers Squibb (BMS) for Sanofi-Aventis, is another

recent example of a major product going off patent. In August 2006, the Canadian

company Apotex after complex legal wranglings launched a generic version of Plavix.

Within days, close to 80% of new prescriptions in the US were filled with the Apotex

generic, and BMS and Sanofi-Aventis lost around US10 billion in market value.

The next big generics development is the introduction of regulatory pathways for

biogenerics. These are generic versions of biotechnology-based drugs

(biopharmaceuticals or biologics) such as insulin and human growth hormone, that is,

large-protein molecules derived from living cells. Bio generics involve a substantial

innovative input, and are therefore not strictly generic medicines in the traditional

regulatory sense, and are sometimes referred to as biosimilars or follow-on protein

products. But they are sufficiently similar to a product already approved to make

substitution possible. The cost of the original biologics is typically well in excess of

US$10,000 per patient per year, and this market is growing much faster than sales of

traditional drugs. In 2005 the value of biopharmaceuticals in the US was around

US$30 billion. Australia's Therapeutic Goods Administration (TGA) was the first

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regulatory agency, in 2004, to approve a biogeneric, namely Omnitrope for treatment

of growth disorders, supplied by Sandoz. Omnitrope has since been approved also in

the European Union and the US.

The complexity of bio generics manufacturing, and regulatory uncertainties, have so

far protected originator products from competition even when patents have expired.

Regulatory processes for bio generics are not yet streamlined but the case of Omni

trope is a sign of things to come. Several companies including Indian firms stand

ready to launch bio generics. Technical barriers to entry make this market, if anything,

more appealing to generics players with requisite technological capabilities. Major

originator products are expected to give rise to only one or two bio generics, likely to

be priced 25 to 40% below the original. This translates into profit margins much

higher than in generic small-molecule markets where price falls tend to be much

steeper.

To counteract the threat of generic competition, 'big pharma' applies a range of

sophisticated 'life cycle management' techniques, notably the 'ever greening' of patent

protection through the embedding of brands in intricate clusters of patents which

make challenges complex and expensive. Other techniques include the packaging of

two existing drugs, about to go off patent, into a single new patented drug. For

example, Pfizer's Caduet, containing both Lipitor and Norvasc, is expected to retain

patent protection in the US until 2018, long after competition has eroded the value of

its basic chemical ingredients . The patenting of a marginally modified version of the

original chemical substance, coupled with massive marketing campaigns to switch

patients to the newly patented product, has also proven commercially effective. The

industry standard in this type of strategy was set by AstraZeneca which successfully

launched Nexium when Losec/Prolosec was about to lose patent protection. Nexium

'has been found to be pretty much identical to Prilosec and about ten times more

expensive' . Other ways of managing the 'life cycle' of drugs include new delivery

technologies (such as once-a-day formulations), new indications which may bring

additional periods of exclusivity, switch to over-the-counter (OCT) status, and so-

called 'exclusion payments' made 'when a branded company shares a portion of its

future profits with a potential generic entrant in exchange for the generic's agreement

not to market its product’.

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Blurring 0f Originator And Generic Categories

This complex environment leaves little scope for 'traditional' generics companies

competing solely on price. Indeed, mergers and acquisitions have brought forth a

small number of multinational generics majors, with technological, legal, and

marketing capabilities approximating those of 'big pharma'. Firms in this group

include Teva, Mylan Laboratories, Actavis, Barr (which in 2006 acquired Pliva, the

largest drug company in Eastern and Central Europe), Watson (recently merged with

Andrx, another generics major), and the Indian companies Ranbaxy and DRL. These

are companies dealing also in proprietary products such a new drug delivery

technologies, and in some cases they engage in the development of new innovative

drugs. Merck KGaA, the parent company of Alphapharm in Australia, is a long-

standing member of this group, but has declared a full-scale shift into the innovator

category (following the acquisition of Serono, a large biotech company) and its

generics division has been off-loaded the US-based generics major Mylan

Laboratories. The blurring between the brand-name (originator, innovative) and

generics sectors is demonstrated most starkly by Sandoz, which ranks globally as the

second largest of the generics suppliers (after Teva). Sandoz was established by

Novartis (the world's fourth largest pharma company) in 2002 from a collection of

previously existing subsidiaries. Similarly, Sanofi-Aventis has created Winthrop

Pharmaceuticals 'to position the Group ... as a major actor on the generics market' It

makes good sense for Novartis and Sanofi-Aventis to supplement the core business of

patented products with a strong presence also in the generics market. In the US and

elsewhere, a capacity to supply an extensive range of products, including off-patent

drugs, can be a competitive advantage.

The phenomenon of authorised generics, also known as pseudo-generics or fighting-

brands, represents an intriguing form of life cycle management. This refers to brand-

name products given a generic label; the 'brand-name manufacturer either sell [s] the

authorized generic itself through a subsidiary or licens [es] a generic firm to sell the

authorized generic' . This practice is the subject of heated debate in the US and is

viewed by the Federal Trade Commission as potentially illegal anti-competitive

conduct. Pseudo-generics can be harmful to consumers 'because an expectation of

competition from authorized generics will significantly decrease the incentives of

generic manufacturers to pursue entry prior to patent expiration [through patent

challenges], especially for "non-blockbuster" drugs'. Authorised generics would seem

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to have become common also in Australia but a detailed analysis of their impact on

local market dynamics is yet to be undertaken [but see.

Patent expiries and the growth of the generics sector is only one of the factors which

explain the changing dynamics of the global biopharma industry. A major trend is the

expansion of outsourcing by the major companies across a range of functional areas,

including manufacturing, and R&D and clinical trials. It is striking that Asian and in

particular Indian firms are now highly competitive providers of outsourcing services

including supply of APIs.

Impact of generic drugs on U.S. Market

The global generics market grew at a faster pace than the global pharma market in

2007, with a CAGR of 16.4% during 2004–2007. Regular patent expirations of

blockbuster drugs are the primary growth driver of the industry.

Rising healthcare expenditure has also contributed to industry expansion, with

governments coming under growing pressure to provide low cost alternatives to

branded drugs. However, the generics market is changing due to the threat from

authorized generics, competition from players in emerging countries and increasing

consolidation. Teva’s acquisition of Barr Pharmaceuticals is the latest example of

companies attempting to improve their market strength and geographical reach via

divestments and acquisitions.

‘The Top 10 Generic Pharmaceutical Companies’ is a new report published by

Business Insights that analyzes the size, structure and competitive landscape of the

global generics market. The top 10 generics companies are assessed based on their

market shares, product performances, therapeutic focus and future outlook, and the

key issues and challenges facing these companies are examined. The latest industrial

trends and developments are assessed across the generics markets of the UK, France,

Germany, Italy, Spain and the US. This report also evaluates the strengths and

weaknesses of the leading players and provides insights into the opportunities and

threats that face them. Assess the structure, competitive landscape and latest

developments in the global generics market, compare the performances and portfolios

of leading companies and benchmark their strategies with this new report...Compare

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the performances and growth strategies of leading generics companies and discover

the business models that hold the key to future growth with this new report...

• Assess the market dynamics, sales volumes, growth drivers within major generics

markets with this report’s analysis of countries including France, Germany, Italy,

Spain, the UK and the US.

• Benchmark the top 10 generic companies over the 2004-07 period, and use detailed

company analysis to measure the performances and outlooks of major players

including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-Aventis,

Watson, Bayer and Stada.

• Evaluate the strategies of leading generics companies by using this report to measure

the success of their currently marketed products and identifying their geographic

expansion, product innovation tactics, major acquisitions and divestments and new

product launches in U.S. market.

• Identify the therapeutic focus of the top 10 generics companies, understand how

company product portfolios are evolving and examine future growth opportunities

within key therapeutic areas.

• Measure the industrial impact of the latest trends and issues including the

implications of patent expirations and the future potential of emerging generics

markets such as Brazil, Russia, India and China.

Some key findings...

• The US attained generics sales worth $25.4m in 2007, accounting for 26.3% of

global market. However, the generics markets of EU countries have a higher growth

rate than the US, and accounted for 14.2% of the global sales in 2007.

• The global generics market reached $90.7m in 2007, representing a three-year

CAGR of 12.1%. Sales of generic drugs are expected to increase by 14–15% in 2008,

as compared with branded pharmaceutical growth of 6–7%. Much of this growth will

be driven by the introduction of pro-generic reforms to major markets.

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• The top 10 generics companies accounted for 28.5% of the global market in 2007.

Many leading players are actively updating their product portfolios, seeking growth

opportunities in emerging markets, pursuing cost optimization and investing in R&D

capabilities.

• Generics companies are currently facing a number of major challenges including

continued pricing pressure, authorized generics, a lack of patient awareness and

distrust among healthcare prescribers.

• The nervous system (NS) and cardiovascular system (CVS) were the largest

generics therapy areas among the top 10 companies in this report, with a 2007 market

share of 31% and 28% respectively.

Key issues examined...

• Growing presence of branded companies. Branded Pharma companies are

increasingly involved in generics production to win back revenues that would

otherwise be lost due to patent expiry. After launching their own authorized generics,

branded companies are able to delay and inhibit the entry of pure generic players by

undercutting price and market share during the exclusivity period.

• Rising pressure on pricing. The long term sustainability of generic pharmaceutical

companies is coming under threat after government initiatives to promote low cost

generics have contributed to product devaluation and reduced profit margins.

• Increased consolidation. Generic manufacturers are consolidating in order to

compete with rising numbers of specialty pharma companies who possess greater

scale and R&D capabilities. The regulatory framework for authorized generics also

provides easy market access for specialty developers, forcing pure generic players to

consolidate in order to achieve greater vertical integration, scale and R&D skills.

• Genericization of specialty products. Specialty pharma products with orphan drug

status become vulnerable to genericization once this status has expired.

Biogenerics are increasing as a result of favourable EU legislation.

• Lack of incentives in Europe. Pricing and reimbursement pressures in Europe have

created greater boundaries to innovation, leading to fewer undervalued latestage

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products. As a result, traditional specialty companies are likely to face future

difficulties in this region.

Prescription drugs worth $40 billion in the U.S. and $25 billion in Europe are due to

lose patent protection by 2007-08. Indian firms will likely take around 30 percent of

the increasing global generics market, the Associated Chambers of Commerce and

Industry of India (Assocham) forecast. Currently, the Indian industry is estimated to

account for 22 percent of the generics world market. Low production costs give India

an edge over other generics-producing nations, especially China and Israel, says

Assocham's president Mahendra Sanghi. He suggests that it will be easier for Indian

firms to win larger generics market shares overseas than at home, particularly in the

U.S. and Europe.13 Indian drug manufacturers currently export their products to more

than 65 countries worldwide.14 Their largest customer is the U.S., the world's biggest

pharmaceutical market.

The use of generic drugs is growing quickly in the U.S. due to cost pressure by payers

and the introduction on January 1 this year of the Medicare Part D prescription

benefit, giving seniors and people with disabilities prescription drug coverage for the

first time. With 74 facilities, India has the largest number of U.S. Food and Drug

Administration (FDA)- approved drug manufacturing facilities outside the U.S. Indian

firms now account for 35 percent of Drug Master File applications and one in four of

all U.S. Abbreviated New Drug Application (ANDA) filings submitted to the FDA.15

Analysts at Credit Lyonnais Securities Asia say they expect the number of generic

drug launches by Indian companies in the U.S. to increase from 93 in 2003 to over

250 by 2008.16

In January 2006, the Indian exporters' representative body, the Pharma Export

Promotion Council (Pharmexcil) said it planned to raise a number of concerns with

the U.S. government over what it sees as barriers to trade with them. One is a U.S.

regulation that disqualifies Indian firms from bidding for government contracts, and

another is the requirement Indian drug manufacturers submit separate applications for

each U.S. state (there is no U.S.-wide regulatory requirement), even when the firms

have FDA-approved products and facilities However, India's traditional lucrative

export markets may be becoming a little less secure, for a number of reasons. For

example, generic prices have not been rising in the U.S.; the seniors' advocacy group

AARP (formerly the American Association of Retired Persons) says that, of the 75

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generic drugs widely used by older people that it monitors on a quarterly basis, none

had had a change in manufacturer list price during third quarter 2005 and only three

had had increases in list price at any time during January to September 2005.18 Also,

new competitive threats have arrived, such as authorized generics produced by major

drug producers, new mid-sized players, Chinese and Eastern Europe manufacturers,

and fully integrated generics firms, which are less reliant on Indian “back-end”

businesses.

Giants like Sanofi-Aventis and GlaxoSmithKline are not looking to enter the

commodity generics market in the United States, where chain pharmacies often

determine which generics they offer based on the lowest available price — and where

consumers often view generic makers as interchangeable.

Instead, the big drug makers are pursuing a growing consumer base in emerging

markets like Eastern Europe, Asia and Latin America where many people pay out of

pocket for their medicines but often cannot afford expensive brand-name drugs.

And, in some emerging markets, where the fear of counterfeit drugs or low-quality

medicines runs high, consumers who can afford it are willing to pay a premium for

generics from well-known makers, industry analysts said. These products are known

as company-branded generics, or branded generics. They carry the name of a trusted

local or foreign drug maker stamped on the package, seen as a sign of authenticity and

quality control.

“We are able to create different tiers of products at prices they haven’t previously

seen with our stamp of approval,” said Andrew P. Witty, the chief executive of

GlaxoSmithKline.

Last year, Glaxo bought a stake in Aspen, a generic maker in South Africa, and signed

agreements with Dr. Reddy’s, an Indian generic firm, to sell their products in

emerging markets.

Under the distribution agreement, the Dr. Reddy’s products are subject to Glaxo

quality control checks and, eventually, will carry a Glaxo logo, a company

spokeswoman said.

Until recently, many brand-name drug makers invested the bulk of their research and

marketing dollars in the development of blockbuster drugs, only to cede their

intellectual property and market share to lower-priced generic competitors once

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patents expired. But now, with an estimated $89 billion in brand-name drug sales in

the United States at risk to generic competition over the next five years, according to

IMS Health, some drug makers are selling generics to offset revenue declines — as

well as wring some post-patent profits from the innovative drugs they developed.

It is a topic sure to be discussed at the Generic Pharmaceutical Association’s annual

meeting, which begins Tuesday in Naples, Fla.

“It definitely represents a change in thinking,” said David Simmons, the president of

Pfizer’s established products business unit.

That recently started division sells off-patent brand-name Pfizer products like the

antidepressant Zoloft. It also markets generic versions of those off-patent drugs under

its own Greenstone label, and distributes a number of generic drugs licensed from a

few other producers.

In the last year, Pfizer signed licensing deals with three India-based generic makers to

sell those companies’ pills and injectable drugs in the United States and other

markets, adding more than 200 products to the company’s generic portfolio. Pfizer

said its Greenstone generic subsidiary had become the world’s seventh-largest

purveyor of generic medicines, as measured by number of prescriptions dispensed.

While drug sales in developed markets like North America have low single-digit

annual growth, emerging markets, including India, China, Russia and Brazil, have

growth in the midteens, said Doug Long, vice president for industry relations at IMS

Health, a health information firm.

As a result, some drug makers are pursuing a two-tiered strategy in developing

markets: selling their own lines of more expensive name-brand products to the more

affluent, as well as offering midpriced branded generic lines that include prescription

and over-the-counter medicines for the broader market.

Branded generics can give prominent drug makers a way to capitalize on those

markets without having to compete with no-name generic producers whose selling

point is rock-bottom pricing. Company-branded generics can charge more for the

promise of quality.

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“It’s an economic opportunity for Watson and Pfizer and Sanofi and Teva,” said Paul

M. Bisaro, the chief executive of Watson Pharmaceuticals, a leading generic maker.

“They have a reputation that says, ‘You can count on us.’ ”

Watson itself had primarily been focused on the United States market, but last year

the company spent $1.75 billion in cash and stock to acquire Arrow, a generic maker

that operates in 20 countries, Mr. Bisaro said.

And in markets that may need antibiotics and antifungal drugs more than quality-of-

life drugs like sleep aids or erectile dysfunction pills, there is a logic to branded drug

makers’ acquiring local generic makers or licensing generic products to tailor their

product portfolios to the local market.

Last year, for example, Sanofi-Aventis spent more than 1.5 billion euros to buy

Zentiva, a leading Czech generic maker; Medley, the leading producer of generics in

Brazil; and Laboratorios Kendrick, a generic producer in Mexico. Sanofi is now the

world’s 11th-biggest generics player in terms of sales, the company said.

“For me, the interest in Medley, Kendrick and Zentiva is to acquire a portfolio of

affordable medicines, recognizing that outside of the United States and Europe people

are really paying for medicines out of their own pocket,” said Christopher A.

Viehbacher, the chief executive of Sanofi-Aventis. “Therefore you have to have

medicines that fit the pocketbook and, to me, generics really fit the bill.”

Medley even has its own generic brand identity, Mr. Viehbacher said, which includes

mint-green packaging that is a visible logo on pharmacy shelves.

The Swiss drug maker Novartis, which unified its generic business in 2003 under the

name Sandoz, recognized the consumer interest and business opportunity in generic

drugs early on.

“In the beginning, of course, especially other pharmaceutical companies were very

skeptical about it,” said Dr. Daniel Vasella, the chairman of the board and former

chief executive of Novartis. “Some competitors said that this was not right to enter a

field that was competing with our own.”

Now, with organic growth and the acquisition of branded generics like the German

maker Hexal, Sandoz is the world’s second-largest purveyor of generic drugs, after

Teva.

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Branded generics may appeal to leading drug makers because they represent a hybrid

of the generic and name-brand models — allowing drug makers to use their existing

commercial distribution system and marketing skills to sell premium-priced generics

as if they were brand-name drugs, said Ronny Gal, an analyst at Sanford C. Bernstein

& Company.

Under this approach, manufacturers or distributors advertise branded generics.

Company sales representatives visit doctors and pharmacists to market them. And, in

emerging markets where government health coverage and private insurance are less

common, consumers who pay out of pocket for their own medicines would rather

spend on names they can trust, Mr. Gal said in an interview last month.

“Patients prefer brands,” he wrote in a note to investors last year, “and as long as they

are the main payers, they will continue to use branded generics.”

Still, branded generics may not be a diversification strategy for the long term.

Some companies are moving into branded generics as a short-term tactic to make up

for revenue shortfalls and capture near-term growth in emerging markets, Mr. Gal

said.

But as government health care programs and health insurers in emerging markets

develop further, consumers could be encouraged or required to switch from midpriced

branded generics to low-cost no-name generics, he said. He estimated that it would

take at least a decade for that to happen.

As drug multinationals from the United States demand a stronger intellectual property

(IP) regime that gives exclusive marketing rights for their patented medicines in India,

their own government has said the IP system is partly responsible for the

extraordinary increase in prices for some medicines in the US.

A recent study conducted by the United States’ Government Accountability Office

(GAO) has highlighted the importance of low-cost generic equivalents and said lack

of therapeutically equivalent drugs and limited competition have contributed to the

extraordinary rise in drug prices in the US during the past decade.

The other reasons cited for the increase in prices include transfer of drug marketing

rights to larger companies and mergers and acquisitions among drug companies.

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The study is significant for the Indian pharmaceutical industry, as domestic drug

exporters are the leading suppliers of low-cost, therapeutically equivalent medicines

in the US.

The study could also be an eye-opener for National Pharmaceutical Pricing Authority,

industry experts say.

Released on December 22, the GAO study said 416 branded drug products had

extraordinary price increases during 2000–2008.

The number of extraordinary price increases each year more than doubled from 2000

to 2008 and most such rises ranged from 100 percent to 499 percent, the report said.

More than half the branded drug products that had extraordinary price increases were

in just three therapeutic classes—central nervous system, anti-infective, and

cardiovascular.

The report said limited availability of therapeutically equivalent drugs could be a

result of patent protection and market exclusivity. Two of six case-study drugs that

had extraordinary price increases were patented at the time of the extraordinary price

increase, it said.

“Recently, drug companies have increasingly focused on speciality drugs that target

niche markets, or a smaller population of people with a narrow indication or medical

condition. According to experts and industry representatives, the pace of

consolidation among drug companies through mergers and acquisitions and transfers

of drug ownership rights has increased. Fewer companies producing and marketing

drugs can lead to greater market domination among certain companies and less

competition,” the report said.

While prescription drug pricing in the private sector is not subject to federal

regulation, drug companies are subject to anti-trust enforcement in the US.

The Federal Trade Commission (FTC), the enforcer of anti-trust laws in that country,

had recently come out with a study that revealed “pay-to-delay” settlements among

pharmaceutical companies to delay the entry of low-cost generic alternatives in that

market.

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FTC has filed cases challenging “pay-to-delay” settlements, in which a brand-name

manufacturer shares a portion of its future profits with a potential generic competitor

in exchange for an agreement to delay marketing the generic prescription drug.

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CHAPTER-10-

CONCLUSION

As Pharmaceutical companies in India are growing at a very fast pace and this has

made the Indian pharmaceutical industry as the second largest growing industry. Also

the pharmaceutical industry in India is the third largest in the world, which will be of

US$20 billion by 2015. India's US$ 3.1 billion pharmaceutical industry is growing at

the rate of 14 percent per year. It is one of the largest and most advanced among the

developing countries.

The compounded annual growth rate of pharma in India is 12-15% and the global

figures are 4-7% for the period of 2008-2013.

Over the next thirty years, the industry would grow from a handful of MNC players to

today’s 16,000 licensed pharmaceutical companies Legal & Financial Framework:

India has a 53 year old democracyand hence has a solid legal framework and strong

financial markets.

Angel Broking has done a research on the growth of pharmaceutical industry and

found that by 2015 the pharmaceutical industry in India will be in the top 10 markets.

From India in year 2007-08 total of US$ 8.25 billion were exported and there was

seen 29% rise in this figure in 2009

Indian drug firms could no longer simply copy medicines with foreign patents by

using alternative manufacturing processes and offer them on the domestic market. As

a consequence of the major changes to India’s drug patent legislation, the country’s

pharmaceutical industry is undergoing a process of re-orientation. Its new focus is

increasingly on self developed drugs and contract research and/or production for

western drug companies.

Government take so many Initiatives for growth of Indian Pharmaceutical Industry

likes:Tax breaks are offered to pharma industry, New procedure for the development

drugs, Proper clinical procedures, New Millennium Indian Technology Leadership

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Initiative and the Drugs and Pharmaceuticals Research Programme - Two schemes

launched by the government.

Indian bulk drug market is fragmented with top 10 companies contributing 44% of the

market and about 1,323 companies accounting for the balance 56%. Nearly 70% of

the bulk drugs, manufactured are exported to more than 50 countries. Contract

manufacturing in India in 2009 was USD658.6 million, registering a growth of 48%

over previous year. By 2010, Indian bulk drugs market is projected to grow to about

US$6.54 billion and contract manufacturing to USD1.5billion.

All in all, the share of pharmaceuticals in the total chemicals industry in India will

come to roughly 17% in 2015 (2006: 18%), compared with 28% in Germany (from

24% in 2006). For the world as a whole, the ratio will likely be only slightly lower

than the German level (25%).

At EUR 1.5 bn, India’s total drugs imports are comparable in size to Norway’s entire

pharmaceuticals market. Imports look set to continue to rise strongly. On a medium-

term horizon, one-fifth of the world’s pharma sales will be accounted for by the

emerging markets. China will then be among the group of the five largest

manufacturers, while India will join the group of the ten largest suppliers. India

commands a less than 2% share in the world’s pharmaceutical market (1966: 1.5%).

This puts the country in twelfth place internationally, even behind Korea, Spain and

Ireland and before Brazil, Belgium and Mexico. Among the Asian countries, India’s

pharmaceuticals industry ranks fourth at 8%, but has lost market share to China, as

sales growth there was nearly twice as high and sales volumes nearly four times

higher than in India.

India’s pharmaceutical industry currently comprises about 20,000 licensed companies

employing approx. 500,000 staff. Besides many very small firms these also include

internationally well-known companies such as Ranbaxy, Cipla or Dr. Reddy’s.

In the coming years, Indian drug makers will likely continue to look to foreign

countries to expand their operations.

According to PwC, about half of all larger Indian drug makers are looking to expand

abroad through take-overs, whereas less than 20% of their Chinese competitors pursue

that strategy. Targeted markets are still the US and Europe. In many cases, there are



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The German market is particularly attractive for Indian companies as generics prices

there are relatively high by international standards. Compared with the UK, a generic

drug costs nearly 50% more in Germany.

The US has become its most important sales market. Sales to the US recently

amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to Europe came

to nearly 20%. Overall, approx. 80% of the manufacturer’s total sales are generated

abroad.





















increase on today's total.

Moreover, the country’s lacking transport infrastructure is increasingly turning into a

major obstacle. The pharmaceuticals industry is especially dependent on road

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transport. However, the major transport links are chronically congested and many are

in a poor state of repair. Of the total road network covering just over 3.3 million

kilometres, only about 6% are relatively well built National and State Highways. In

many cases, there are no paved surfaces or there is only one lane for all traffic. But

the government has launched an extensive investment programme entitled the

National Highway Development Programme, to be implemented by the middle of the

next decade.

Recent globalization and the development of the information superhighway have

brought the countries of the world closer. From a business perspective, the world is

one marketplace. The American pharmaceutical industry has played a pioneering role

in the development of the drug industry through in-depth, timely, and useful research

and bulk manufacturing of drug products. Although the US pharmaceutical industry is

enjoying the leadership position, it can no longer be content to focus only on the US,

Japanese, and European markets.

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FINDINGS

• As per the present growth rate, the Indian Pharma Industry is expected to be a

US$ 20 billion industry by the year 2015 and this sector is also expected to be

among the top ten Pharma based markets in the world in the next ten years.

• The national Pharma market would experience the rise in the sales of the

patent drugs and the sales of the Indian Pharma Industry would worth US$ 43

billion within the next decade.

• India today is the 4th largest producer of bulk drugs and formulations in the

World with domestic market of Rs 22,000 crore and an export market of Rs

12000 crore. Exports are over five times imports and have been growing at >

20% annually over the last several years.

• With the increase in the medical infrastructure, the health services would be

transformed and it would help the growth of the Pharma industry further with

the large concentration of multinational pharmaceutical companies in India, it

becomes easier to attract foreign direct investments and the Pharma industry in

India is one of the major foreign direct investments encouraging sectors.

• 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 helps Indian companies to develop

processes, which are cost effective.

• The Indian Pharmaceutical Industry is one of fastest emerging international

centre for contract research and manufacturing services or CRAMS. The

estimated value of the CRAMS market in 2006 was US$ 895 million and the

contract manufacturing market in India pertaining to the multinational

companies is expected to worth US$ 900 million by the year 2010.

• In many cases, besides the positive outlook for India’s drugs industry, there

are also a number of adverse factors. These include serious shortcomings in

infrastructure. There are institutional obstacles to overcome first. More often

than not, Indian medicines fail because doctors and pharmacists in other

countries are reluctant to prescribe or hand out drugs produced in India. There

is a tendency to favour locally/nationally produced drugs. For this reason, drug

companies from India are finding it hard to gain a foothold in western markets.

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• 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.

• Problems related to frequent power cuts and lack of proper transport

infrastructure will slowdown the growth of the industry.Limited funding from

FIs, venture capitalists and the government may slowdown the development of

biotechnology industry in India.

• Low share of India in World Pharmaceutical Production (1.2% of world

production but having 16.1% of world''s population).Very low level of

Biotechnology in India and also Low level of for New Drug Discovery

Systems and Lack of experience in International Trade.

• According to the Kaiser Family Foundation’s report on prescription drug

trends, U.S. spending for prescription drugs was $140.6 billion in 2006, which

represents more than a three-fold increase since 1990. The National Institute

for Health Care Management Foundation (NIHCM) reported that overall

spending on prescription drugs in the U.S. increased 17.1% from 2005 to

2006. Spending on prescription drugs now represents 10-11% of health care

expenditures in the U.S.

• According to a recent Bank of America report, pharmaceuticals are the fastest-

growing component of health care costs. The Europe currently spends

approximately $150 billion on prescription drugs and some industry sources

project this number will reach $300 billion by 2010, equivalent to annual

growth of approximately 9%.

• According to Janney Montgomery research, U.S. retail sales of generic

prescription drugs totaled $11.1 billion in 2009 versus brand name

prescription drug sales of $121 billion. However, the generic drugs were

dispensed in 47% of all prescriptions.

• Evaluate the strategies of leading generics companies by using this report to

measure the success of their currently marketed products and identifying their

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geographic expansion, product innovation tactics, major acquisitions and

divestments and new product launches in European market.

• The Europe attained generics sales worth $25.4m in 2009, accounting for

26.3% of global market. However, the generics markets of EU countries have

a higher growth rate than the US, and accounted for 14.2% of the global sales

in 2009.

• The Eastern European market registered sales growth of 19.9% from 2007 to

2008 and witnessed a CAGR of 19.6% during the period 2004–08.

• Benchmark of performance against the leading Eastern European

pharmaceutical companies using market share data by company and

comprehending their strategies.Benchmark the top 10 generic companies over

the 2004-07 period, and use detailed company analysis to measure the

performances and outlooks of major players including Novartis, Teva, Mylan,

Apotex, Ratiopharm, Pfizer, Sanofi-Aventis, Watson, Bayer and Stada.

• Lack of incentives in Europe. Pricing and reimbursement pressures in Europe

have created greater boundaries to innovation, leading to fewer undervalued

latest age products. As a result, traditional specialty companies are likely to

face future difficulties in this region.

• Pricing pressure, authorized generics, a lack of patient awareness and distrust

among healthcare prescribers. Increasing incidence of parallel traded products

will impact companies operating in the region resulting in potential loss of

sales eventually affecting cash flows and lowering innovation in drug

development.

• India has the advantage of the cost, as the cost of labor, the cost of inventory is

much lower than U.S. The multinational companies, investing in research and

development in India may save upto 30% to 50% of the expenses incurred.

• The cost of hiring a research chemist in the US is five times higher than its

Indian counterpart and the manufacturing cost of pharmaceutical products in

India is nearly half of the cost incurred in US. The cost of performing clinical

trials in India is one tenth of the cost incurred in US as well as the cost of

performing research in India is one eighth of the cost incurred in US.

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SUGGESTIONS

• Government should take major steps to encourage pharmaceutical sector and

take the Initiatives for growth of Indian Pharmaceutical Industry likes:Tax

breaks are offered to pharma industry, New procedure for the development

drugs, Proper clinical procedures, New Millennium Indian Technology

Leadership Initiative and the Drugs and Pharmaceuticals Research

Programme.

• Consider the Problems related to frequent power cuts and lack of proper

transport infrastructure which slowdown the growth of the industry. Limited

funding from FIs, venture capitalists and the government may slowdown the

development of biotechnology industry in India and take the proper steps to

overcome these problems.

• Make aware Indians about serious diseases encourage to spend on their health

related issues because 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.

• Indian Pharma companies should to measure the success of their currently

marketed products and identifying their geographic expansion, product

innovation tactics, major acquisitions and divestments and new product

launches in European market.

• Increase the level of Biotechnology in India and also for New Drug Discovery

Systems and get/provide the good experience in International Trade and

Increase the share of India in World Pharmaceutical Production by using

better R&D and spend more on prescription drugs.

• Select Benchmark of performance and use it against the leading Eastern

European pharmaceutical companies using market share data by company and

comprehending their strategies.

• European pharma companies should outsource the skill labors from

developing countries like India, China etc. to overcome Pricing and

reimbursement pressures in Europe which created greater boundaries to

innovation, leading to fewer undervalued latest age products.

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• Cost of hiring a research chemist in the US is very higher than its Indian

counterpart and the manufacturing cost of pharmaceutical products in India is

nearly half of the cost incurred in US. The cost of performing clinical trials in

India is one tenth of the cost incurred in US as well as the cost of performing

research in India is one eighth of the cost incurred in US. So it must tie up or

business alliances with Indian companies.

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Chapter-11-

Comparison of five top pharmaceutical companies’ profile-

world wide

TOP FIVE COMPANIES

We have analyzed the top five companies in the Indian pharmaceutical industry for

the purpose of doing the quantitative analysis. Our rationale behind selecting the top

five companies has been the –SALES AND PROFIT.

We studied the sales and profit figures of the companies operating in this industry and

zeroed in on the following companies:

� CIPLA

� RANBAXY

� SUN PHARMA

� PIRAMAL HEALTHCARE

� Dr. REDDY’S LABORATORIES

BOTTOM THREE COMPANIES

On a similar basis, we chose the bottom three companies in the Indian Pharmaceutical

industry. These are:

� MOREPEN LABS

� SIRIS Ltd.

� KERBS BIOCHEM

We have analyzed the financial position of these companies using the RATIO

ANALYSIS. The first step was to identify the key ratios and study the performance of

the companies using these ratios as the base. After this, we made inter- firm

comparison of the companies, followed by detailed ratio analysis for the last five

years.

In the following pages, we will be studying the detailed analysis of all the above

mentioned companies.

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INTERPRETATION OF KEY FINANCIAL RATIOS

OF TOP 5 COMPANIES

YRC Aggregate Cipla Dr

Reddy's

Labs

Piramal

Health

Sun

Pharma.

Ranbaxy

Labs.

200803 200803 200803 200803 200712

Key

Ratios

Debt-

Equity

Ratio

0.98 0.1 0.09 0.43 0.18 1.37

Long

Term

Debt-

Equity

Ratio

0.69 0.1 0 0.28 0.18 0.92

Current

Ratio

1.58 2.66 2.37 1.54 3.04 0.98

Turnover

Ratios

Fixed

Assets

1.78 2.05 2.27 1.74 3.62 2.04

Inventory 5.02 3.9 6.11 8.34 8.88 4.64

Debtors 4.53 3.38 3.53 7.5 3.96 4.72

Interest

Cover

Ratio

5.82 47.45 40.76 5.61 208.94 9.29

INTER-FIRM COMPARISON

ANALYSIS OF THE DEBT EQUITY RATIO

Debt equity ratio is an important indicator of the solvency of a firm. This ratio

indicates the relationship between the external equities or the outsider’s funds and the

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internal equities or the shareholder’s funds. A wise mix of debt and equity increases

the return on equity because:

� Debt is generally cheaper than equity

� Interest payments tax deductible expenses, where as dividend are paid from

taxed profits.

� A high debt to equity ratio indicates aggressive use of leverage and a high

leveraged company is more risky for creditors.

� A low ratio on the other hand indicates that the company is making little use

of leverage and is too conservative.

If we compare the debt equity ratio, then Ranbaxy Lab, with its debt equity ratio of

1.37, establishes itself as the most risk taking company. The ratio is greater than the

satisfactory ratio of 1:1 and this indicates that the claims of the outsiders are greater

than those of the owners. Dr Reddy’s labs and Cipla with the ratio of 0.09 and 0.1

respectively indicates low debt financing and a higher margin of safety to the

creditors at the time of liquidation of the firm. But too low a ratio of these companies

also does indicate that they have not been able to use low cost outsiders’ funds to

magnify their earnings.

ANALYSIS OF LONG TERM DEBT EQUITY RATIO

From the long term creditors point of view, a low ratio is considered favourable,

which is why , Dr Reddy’s labs with a ratio of zero holds an edge overall others as a

high proportion of owner’s funds provide a larger margin of safety for them. Ranbaxy

with a ratio of almost equal to 0.92, which is almost equal to 1, may not be able to get

credit without paying very high interest and without accepting undue pressures and

conditions of the creditors.

ANALYSIS OF THE CURRENT RATIO AND INVENTORY TURNOVER

RATIO

Current ratio evaluates the liquidity of the business. It is a ratio of current assets to

current liabilities and is an indicator of a company’s abilities to pay its debts in the

short term. Current ratio is expected to be atleast2:1. And if we have a look at the

figures, we see that this criterion is met by Sun Pharma, Cipla and Dr.Reddy’s lab. On

the other hand the rest of the companies lag behind in their current ratio with Ranbaxy

having lowest current ratio of 0.98.

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But the most important aspect that cannot be ignored is that current ratio is

independently, can hardly convey any useful information. Even a high current ratio

may not be good news if the proportion of liquid assets in the total assets is far less

than the proportion of the stuck inventories. We shall therefore analyze the Quick

ratio and Inventory turnover ratio together.

The inventory turnover ratio indicates the no. of times the inventory of the company is

turned into sales. A high inventory turnover ratio means fast moving inventory and

thus a low risk of obsolescence.

From the Inventory turnover ratio, we have calculated the operating cycle or the

average time in which the inventory gets converted into sales for each company. This

is tabulated below:

RANBAXY CIPLA DR.REDDY’S

LAB

PIRAMAL SUN

PHARMA

77.5 92.3 58.9 43.16 40.5

Piramal has a current ratio of 1.54 which is almost half the current ratio Sun Pharma

with an average operating cycle of 43.16 days. Ranbaxy has a still lower current ratio

of 0.98 with an average operating cycle of inventory of 77.5 days Thus it shows that

Ranbaxy has less current assets and those current assets take more time to get

converted to sales which indicates less liquid assets’ proportion.

Cipla with a current ratio of 2.66, which is almost comparable to Dr Reddy’ s labs

ratio of 2.37, portrays a different picture, when it comes to inventory operating cycle.

Dr.Reddy’s Lab takes approximately 33 days less than Cipla to convert its inventory

to sales. Thus with almost the same amount of fixed assets , Dr Reddy’s labs shows

faster moving inventories as compared to Cipla. It shows that Cipla though has a good

amount of current assets yet the proportion of liquid assets is less as current assets

spend more time as inventory.

Sun Pharma tops the chart of current assets with a figure of 3.04 and also has the

highest inventory turnover ratio of 8.88. This shows that Sun Pharma has more

current assets than any other company, but is still managing its inventory so well that

its average operating cycle is the least i.e. 40.5 days.

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ANALYSIS OF THE FIXED ASSET TUROVER RATIO

Fixed asset turnover ratio measures the efficiency of the firm in utilizing its assets. A

fixed asset turnover ratio indicates that the company ids tuning over its fixed assets

such that it generates greater sales. A low fixed assets turnover ratio indicates that the

company has more fixed assets than it actually needs for its operations. Sun Pharma

has the highest fixed asset turnover ratio of 3.62 which indicates that it generates

highest sales than any other company. It may also mean that Sun Pharma has fewer

amounts of fixed assets than Cipla which has more of fixed assets but falls short on

fixed asset management.

ANALYSES OF THE DEBTOR TURN OVER RATIO:

It is measures the ability of a company to collect credit from its customers in a prompt

manner and enhance its liquidity. This ratio measures how efficient is firm’s credit

and collection policy and also says about the quality of firm’s debtors. If we look at

the figures, we see that Piramal has the highest debtor turnover ratio of 7.50 followed

by Ranbaxy and Sun Pharma. Cipla is the poorest performer in this category with a

debtor turnover ratio of 3.38. We have calculated the average debt collection period of

all these companies, as illustrated below:

RANBAXY CIPLA DR.REDDY’S

LAB

PIRAMAL SUN

PHARMA

76.20 76.20 101.98 48 90.90

The above mentioned figures clearly indicate that Cipla’s portfolio of debtors is

comparatively poor with Dr Reddy’s lab also following Cipla’s footsteps. These

companies have a debt collection period of more than 3 months and therefore run a

risk of debts becoming bad debts. A note must be taken care of that the average debt

collection period of a company is in sync with the company’s credit period. If the

former lags than the latter, it is an alarming sign. Piramal with an average debt

collection period of 48 days shows that debtors have a good credibility. Though

Piramal is far behind than any of the companies in management of fixed assets and

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also does not put up a good show as far as the amount of current assets is concerned,

yet its management of its limited resources to the maximum speaks volumes about the

company. Thus, no questions that Piramal’s growth, though slow, will be steady and

sustainable in the long run. A good portfolio of debtors is essential as granting of

credit to customers without taking a note of their credibility was the sole reason which

triggered the crash of banks in US.

ANALYSIS OF INTEREST COVER RATIO

The Sun pharma’s interest cover ratio is approximately four times more than that of

Cipla. This is an interesting fact as the debt equity ratio of Sun pharma is more than

that of Cipla. It means that inspite of more outside funds than Cipla it has low interest

cover ratio. It can happen only when the profits earned by Sun pharma are more than

those of Cipla. Thus, even though Sun pharma is a higher risk taker than Cipla it has

better margins of safety to cover up its interest expenses.

Ranbaxy’s figure of 9.29 is very low as it also has high debt equity ratio of 1.37. This

indicates that inspite of having a larger proportion of outside funds (debts) its profits

are not sufficient enough to cover the interest expenses.

Following is a comparison of the debt equity ratio & interest cover of Ranbaxy

Debt-Equity ratio = 1.37

Interest cover ratio = 9.29

The debt equity ratio is approximately 0.14 times more than the interest cover ratio.

In case of Sun pharma,

Debt equity ratio = 0.18

Interest cover ratio = 208.94

It is seen that the interest cover ratio is approximately 1160 times more than the debt

equity ratio. Thus we can infer that higher the interest cover ratio of a company in

comparison to debt equity ratio the more safe is the company to continue its

operations in conditions of decreased earnings.

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INTERPRETATION OF KEY FINANCIAL RATIOS OF BOTTOM

3 COMPANIES

Ratios Krebs Siris Morpen

DEBT EQUITY

RATIO

0.99 0.3 0

LONG TERM

DEBT EQUITY

RATIO

0.59 0.3 0

CURRENT RATIO 1.41 3.56 4.84

FIXED ASSET

TURNOVER

RATIO

0.35 0 0

INVENTORY

TURNOVER

RATIO

1.17 0 0

DEBTOR

TURNOVER

RATIO

1.98 0 0

INTEREST

COVERAGE

RATIO

-0.14 -88.55 0

INTER FIRM COMPARISON OF THE BOTTOM THREE COMPANIES:

ANALYSIS OF THE DEBT EQUITY RATIO:

Debt equity ratio of Kerbs, Siris and Morepen is very less, not even equal to 1 which

suggests that these companies are very conservative in their approach i.e. depend only

upon their shareholder’s funds.

Morepen’s debt equity ratio as well as long term debt equity ratio is zero, signifying

that the entire capital is contributed by the shareholders only. In spite of less outside

funds, Kerbs fares a bit well than the other two. Ratio for their low debt equity ratio

may be that creditors are unsure of getting back their amount and interests on the due

dates, which is why they are apprehensive of investing in these companies.

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ANALYSIS OF CURRENT RATIO:

Current ratio of Morepen and Siris exceeds the normally required 2:1 ratio. Only

Kerbs fall short of this specification. Current ratio does not portray a healthy and

sound position of the companies .We can also see that the debtor turnover ratio is zero

for Siris and Morepen which indicates that though the company has debtors( current

assets) but those debtors are not turning up with payments on due dates. Thus, the

current assets (debtors) are high but it is of no use because of their no chance of

getting recovered.

ANALYSIS OF FIXED ASSET TURNOVER RATIO:

The figures of the zero in case of Siris and Morepen suggest that the return from fixed

assets is nil. Also in case of Kerbs, it is minimal. This suggests that these companies

have though invested in fixed assets, yet are not gaining anything from those capital

expenditure. In short those fixed assets are not operational.

ANALYSIS OF INVENTORY TURNOVER RATIO:

Siris and Morepen figures suggest that the inventory is not at all getting converted in

to sales. This is an indication of permanently stuck inventory- a loss to the company.

Though Kerbs does have an inventory ratio figure of 1.17, it is no good as it indicates

that the operating cycle for inventory is a around 340 days, which is only slightly than

a year. Thus in a year, inventory gets converted into sales only once.

ANALYSIS OF DEBTORS TURNOVER RATIO:

For Kerbs, the debtor turnover ratio is approximately 2 , which means that the average

debt a collection period is somewhere around 180 days. In case of Siris and Morepen ,

this ratio is zero. This means that the debtors are not at all turning up or we can say

that the debts have become bad debts in this year.

ANALYSIS OF THE INTEREST COVER RATIO:

Morepen has interest cover ratio of 0, which shows that there are no profits at all and

it cannot cover up for its interest expenses. There is no margin of safety in case the

company has low earnings. In case of the other two companies the negative Interest

cover ratio indicates that the company is making losses. Thus we can say that in case

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of these companies the interest expenses are not covered. In addition the companies

are not even able to cover up their operating expenses.

Key Statistics about Ranbaxy

Top Locations

• New Delhi Area, India (362)

• Greater New York City Area (78)

Ranbaxy Headquarters Address

Plot No. 90 Sector 32

Gurgaon, Haryana 122001

India

Phone: +91-124-418-5000

Fax: 91 11 2646 5748

Headquarters Delhi Area, India

Industry Pharmaceuticals

Type Public Company

Status Operating Subsidiary

Company Size 12,000 employees

2006 Revenue 61,377 mil [INR] (16%)

Founded 1961

Website http://www.ranbaxy.com

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Mission & Vision

Ranbaxy's mission is to become a Research-based International Pharmaceutical

Company. The Company is driven by its vision to achieve significant business in

proprietary prescription products by 2012 with a strong presence in developed

markets.

Financials

Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2009, the

Company recorded Global Sales of US $ 1519 Mn. The Company has a balanced mix

of revenues from emerging and developed markets that contribute 54% and 39%

respectively. In 2009, North America, the Company's largest market contributed sales

of US $ 397 Mn, followed by Europe garnering US $ 269 Mn and Asia clocking sales

of around US $ 441 Mn.

Strategy

Ranbaxy is focused on increasing the momentum in the generics business in its key

markets through organic and inorganic growth routes. Growth is well spread across

geographies with focus on emerging markets. The Company continues to evaluate

acquisition opportunities in India, emerging and developed markets to strengthen its

business and competitiveness. Ranbaxy has forayed into high growth potential

segments like Biologics, Oncology and Injectables. These new growth areas will add

significant depth to the existing product pipeline.

R&D

Ranbaxy views its R&D capabilities as a vital component of its business strategy that

will provide a sustainable, long-term competitive advantage. The Company has a pool

of over 1,200 scientists engaged in path-breaking research.

Ranbaxy is among the few Indian pharmaceutical companies in India to have started

its research program in the late 70's, in support of its global ambitions. A first-of-its-

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kind world class R&D centre was commissioned in 1994. Today, the Company's four

multi-disciplinary R&D centers at Gurgaon, in India, house dedicated facilities for

generics research and innovative research. The robust R&D environment for both

drug discovery and development reflects the Company's commitment to be a leader in

the generics space offering value added formulations based on its Novel Drug

Delivery System (NDDS) and New Chemical Entity (NCE) research capabilities.

The new drug research areas at Ranbaxy include anti-infective, inflammatory /

respiratory, metabolic diseases, oncology, urology and anti-malaria therapies.

Presently, the Company has 8-10 programs including one Anti-malaria molecule for

which Phase-III clinical trials have commenced in India, Bangladesh and Thailand.

The Company has signed collaborative research programs with GSK and Merck.

NDDS focus is mainly on the development of NDA/ANDAs of oral controlled-

release products for the regulated markets. Ranbaxy’s first significant international

success using the NDDS technology platform came in September 1999, when the

Company out-licensed its first once-a-day formulation to a multinational company

Worldwide Operations of Ranbaxy

Global Pharma Companies are experiencing an ever changing landscape ripe with

challenges and opportunities. In this challenging environment Ranbaxy is enhancing

its reach leveraging its competitive advantages to become a top global player.

Driven by innovation and speed to market we focus on delivering world-class

generics at an affordable price. Our unwavering determination to achieve excellence

leads us to new global benchmarks. Our people have consistently risen above all

challenges maximized opportunities and positioned Ranbaxy as a leader in the global

generics space.

Ranbaxy’s global footprint extends to 46 countries embracing different locales and

cultures to form a family of 50 nationalities with an intellectual pool of some of the

best minds in the world.

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• The Company has pushed the frontiers of possibility, both horizontally and

vertically,

• Growth through scientific breakthroughs and strategic initiatives has been

achieved. This is more evident after the merger of RANBAXY with DAIICHI.

• The clear aspiration is to achieve global sales of US $ 5 Bn by 2012 and

position itself among the top 5 global generic companies.

ACHIEVEMENTS OF RANBAXY

• �Ranbaxy achieved Global Sales of US $ 1,619 Mn, a growth of 21%.

Emerging markets strengthened their presence in the Company's overall sales

mix, and comprised 54% of the total sales (49% in 2006).

• Went into merger with Daiichi in June 2008.

KEY FINANCIAL RATIOS OF RANBAXY

DETAILED RATIO ANALYSIS OF RANBAXY:

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2004 2005 2006 2007 2008

DEBT

EQUITY

RATIO

0.04 0.24 0.89 1.37 1.37

LONG TERM

DEBT

EQUITY

RATIO

0 0.03 0.5 0.92 0.92

CURRENT

RATIO

1.63 1.21 1.06 0.98 0.98

FIXED

ASSET

TURNOVER

RATIO

2.95 2.29 2.09 2.04 2.04

INVENTORY

TURNOVER

RATIO

4.72 4.1 4.44 4.64 4.64

DEBTOR

TURNOVER

RATIO

5.97 4.6 4.51 4.72 4.72

INTEREST

COVERAGE

RATIO

58.23 6.66 8.58 9.29 9.29

• Debt equity ratio and the long term debt equity ratio of the company have

increased from 2004 to 2008, indicating the aggressive strategy adopted by the

company to depend more on debt than on equity. The heavy dependence of

Ranbaxy on the debt took its toll as the company ran into losses on account of

non-payment of required interests and principal disbursements on time.

Because of this Ranbaxy was taken over by Daiichi – a Japanese

pharmaceutical company, which offered Ranbaxy, monetary assistance to

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overcome deep debts. Hence it is clear that playing too much risk without

foresight may force liquidation of the company or may result into a forced

acquisition or merger!

• Current ratio has decreased between 2004 -2007, indicating that the

company went into a current asset deficit. The current asset from 2005 went

even below the mean of the total current assets over 5 years. This current asset

ratio figure falls way short of the satisfactory ratio of 2:1.

• A continuous decline in the fixed asset turnover ratio over the 4 years

indicates acquisition of fixed assets. This acquisition of fixed assets does not

go in favour of the company as increase in fixed asset will also result in cost of

maintenance and for that the company is not showing an increase in the cash

in hand.

• Inventory turnover ratio, though reduced by around 13 % in 2005over 2004,

but showed an improvement in the operating cycle of inventory in the

successive years. This period was also marked by the amendments in the

Patent Act. Amendments in the act must have come as a respite as it checked

the inflow of generic drugs in the market.

• Debtor turnover ratio of Ranbaxy has increased over the years. Though the

company has bettered its average debt collection period by 4.65%in 2007 over

2006, yet its average debt collection at the end of 2007 showed an increase of

26.48% over the year 2004. (Being 76 days in 2007 and 60 days in 2004).

• Interest coverage ratio decreased considerably in 2005 by about 88.56% thus

reducing the safety margin to cover the interest requirements. It was when

Ranbaxy was taken over by Daiichi that Cipla made it to the top position in

2008.

In 2008–09, Dr.Reddy’s lab will complete 25 years of being in business.

It is a significant milestone.

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Between 1999–2000 and 2007–08, the Company has increased its revenues at an

exponential trend rate of growth (i.e. trend CAGR) of 27 per cent per year, measured

in US dollars.

During 2007–08, the Company successfully launched RedituxTM in India; a

monoclonal antibody used in the treatment of cancer and thus demonstrated its

technological prowess in manufacturing a product in the biologics space

Financial Highlights Consolidated Revenues

• Consolidated revenues decreased by 23% to Rs. 50,006 million or U.S. $. 1.25

billion in 2007– 08 from Rs. 65,095 million in 2006–07.

• Operating Income decreased by 70% to Rs. 3,358 million in 2007–08 from Rs.

11,331million in 2006–07.

• Profit before tax and minority interest decreased by 67% to Rs. 3,438 million

in 2007–08 from Rs. 10,500 million in 2006–07.

• Profit after tax decreased by 50% to Rs. 4,678 million in 2007–08 from Rs.

9,327 million in 2006–07.

• Fully diluted earnings per share decreased to Rs. 27.73 in 2007–08 from Rs.

58.56 in 2006–07.

The company launched 10 new products in the US generics market in 2007–08,

including two over-the- counter (OTC) products. The company had filed 122

cumulative Abbreviated New Drug Applications (ANDAs) in 2007-08.

Key Financial Ratios

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2004 2005 2006 2007 2008

DEBT

EQUITY

RATIO

0.02 0.08 0.28 0.19 0.09

LONG TERM

DEBT

EQUITY

RATIO

0.01 0.01 0.04 0.02 0

CURRENT

RATIO

3.73 2.49 1.85 2.21 2.37

FIXED

ASSET

TURNOVER

RATIO

2.33 1.79 2.05 3.45 2.27

INVENTORY

TURNOVER

RATIO

6.99 5.79 5.64 8.69 6.11

DEBTOR

TURNOVER

RATIO

3.97 3.78 4.21 4.94 3.53

INTEREST

COVERAGE

RATIO

72.71 3.82 10.39 27.29 40.76

DETAILED RATIO ANAYSIS OF Dr REDDY’S LAB:

• The debt equity ratio shows fluctuation with an increase in 2005, followed by

a decrease, again by an increase and then finally by a decrease. In spite of

these fluctuations, the range of debt equity ratio is from 0.02 to 0.19. This

range shows that the debt equity proportion of the company remained almost

constant. Long term debt equity ratio trends also hardly show any fluctuation

as the minimum of it is 0.00 and a maximum of 0.04. This signifies that the

company did not rely too much on either the debts or the equity, rather

maintained a balance between the two.

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• Current ratio also shows fluctuations with first an increasing trend till 2006

followed by a decrease and finally an increasing trend in the next two

successive years. We can infer that when the economy was hit in 2008 by

financial crisis then the company wisely decreased its debts and increased its

current assets, thus aiming to minimize the liquidity crunch.

• Fixed assets turnover ratio over the five years show a dip in 2008 over the

2007 figures revealing the fact that the company could not generate better

revenues from fixed assets in 2008 than in 2007. It can be attributed to a

decline in consumer demand in 2008 which led to a decrease in the efficient

utilization of the fixed assets.

• Inventory turnover ratio increased in 2007 over 2006 by 54% followed by a

sharp decline of approx 30%in 2008. Thus, in 2008 the inventory took longer

time to convert to sales than in 2007.

• Debtor’s turnover ratio increased consistently till 2007 showing a good trend

in average debt collection period but fell to 3.53 in 2008 showing that debtors

failed to turn up quickly as compared to previous years.

• Interest cover ratio though increased in 2008 over the last three years is a

positive sign in spite of the earnings of the company showing a dip. Hence the

company managed to keep a wide safety margin to cover up its interest

charges.

CIPLA PHARMACEUTICALS LTD.

CIPLA IS BORN

Dr. K Hameed set up in 1935 The Chemical, Industrial & Pharmaceutical

Laboratories, which came to be popularly known as Cipla. On August 17, 1935, Cipla

was registered as a public limited company with an authorised capital of Rs 6 lakhs.

Cipla was officially opened on September 22, 1937 when the first products were

ready for the market.

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ACHIEVEMENTS OF CIPLA

• Topped pharma rankings with 5.42% market share, a head of Ranbaxy and

GSK.

• Cipla Laboratories continues to be the largest pharmaceutical company in the

domestic market.

• According to an article published in Business Standard on Jan1, 2008 Cipla

topped the ORG-IMS rankings for with a market share of 5.42 per cent and

sales of Rs 146.32 crore, edging out Ranbaxy which stood at second position

with 5.09 per cent market share and Rs 137.49 crore sales.

• Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the

largest pharmaceutical company in the domestic market for the first time in

May 2008.

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TEN YEAR TREND IN SALES IN CIPLA

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Key Financial Ratio

2004 2005 2006 2007 2008

DEBT

EQUITY

RATIO

0.13 0.14 0.19 0.11 0.1

LONG TERM

DEBT

EQUITY

RATIO

0.11 0.12 0.16 0.1 0.1

CURRENT

RATIO

1.87 1.89 2.06 2.42 2.66

FIXED 3.19 2.73 2.59 2.24 2.05

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ASSET

TURNOVER

RATIO

INVENTORY

TURNOVER

RATIO

3.14 3.54 3.55 3.65 3.9

DEBTOR

TURNOVER

RATIO

4.63 4.29 4.13 3.71 3.38

INTEREST

COVERAGE

RATIO

30.28 39.73 45.17 73.4 47.45

DETAILED RATIO ANALYSIS OF CIPLA:

• The debt equity ratio over the five years is indicative of the fact that there has

not been any significant change in figures. Though this ratio first changed

from 2004 to 2006 with marginal increase, it again dropped back in 2007,

even below the 2004 figures. The 2008 figures are still lower. It shows that

from 2004 to 2006, the company relied more on debts from outside sources

than on equity from shareholders. The reason may be that the company

decided to restrain from dividend payment as these are taxed profits. In the

two successive years, the company’s less reliance on outside funds and more

on shareholder’s funds indicates a shift from aggressive to conservative

strategy. This move seems a sensible one in the wake of economic slowdown.

With drawl from risk debt financing, may though affect the returns on

investment, but is a better choice in the present scenario , where the companies

are finding it difficult to make interest payments on due days. Hopefully, for a

year or so, the companies will continue to rely more on equity.

• Long term debt equity ratio also follows the same trend; first an increase till

2006 and then a decrease till 2008, showing less dependency on long term

debts. This can be again attributed to 2 reasons

• Cipla is apprehensive of whether it’ll meet the interest payment deadlines.

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• No creditor is interested or rather resource sufficient to lend to the companies

because of the liquidity crunch in the market.

• An incessant and a significant increase in the current ratio indicates the

company is going strong each year in discharging its current liabilities or short

term obligations.

• On the other hand fixed asset turnover ratio has shown a consistent fall over

these years indicating that the returns from fixed assets have decreased or the

company has gone into more acquisition of fixed assets. It can be inferred that

the company has gone for expansion.

• Inventory turnover ratio’s consistent increase shows the improvement of Cipla

in the inventory management. A decrease of 13 % in the average operating

inventory cycle within 4 years is a testimony of the inventory getting

converted into sales more rapidly.

• The continuous decrease in the debtor turnover ratio is one area which needs

immediate attention as the average debt collection period has gone up from

2004 to 2008. A rise in this ratio must be checked else the company may fall

short of liquidity.

• Interest coverage ratio shows that the company performed well in keeping and

also increasing the margin of safety that it provides to its creditors. But a sharp

decline in the 2008 shows that the company’s profits have considerably

reduced. This sharp decline cannot be attributed to increased interest expense

because the debt equity ratio indicates the decline in the debts of the company

in the same year. It can be hence referred that profits are not sufficient to cover

the interest requirements, and this can be detrimental for the company, in case

the earnings of the company also drop. It is important the management thinks

twice before going for massive acquisition of fixed assets.

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SUN PHARMACEUTICALS INDUSTRIES LIMITED

AN OVERVIEW OF THE COMPANY

• Net sales for the year ending 31 March 2008, up 57%.

• International markets are at 55% sales, further strengthening its presence as an

international pharma generic company.

• India formulations continue to be a large part of our turnover, accounting for

43% of its business.

Ex- US branded generics grew 10% in value terms.

Sales of 76% subsidiary in the US, Caraco Pharma

• A total of 215 patents have been have been filed so far, of which 59 were

granted.

KEY FINANCIAL RATIOS OF SUN PHARMA

2004 2005 2006 2007 2008

DEBT

EQUITY

RATIO

0.21 1.08 1.39 0.72 0.18

LONG TERM

DEBT

EQUITY

RATIO

0.16 1.03 1.37 0.72 0.18

CURRENT

RATIO

1.92 3.34 5.46 4.62 3.04

FIXED

ASSET

TURNOVER

2.35 2.23 2.57 2.91 3.62

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RATIO

INVENTORY

TURNOVER

RATIO

6.3 7.2 7.74 7.72 8.88

DEBTOR

TURNOVER

RATIO

6.13 6.9 7.09 5.61 3.96

INTEREST

COVERAGE

RATIO

82.22 29.2 44.52 73.79 208.94

DETAILED RATIO ANALYSIS OF SUN PHARMA:

� Both debt equity ratio and long term debt equity ratio show the similar trend

of first increasing from 2004 to 2006 and hen decreasing till 2008. The mean

of these two ratios is 0.716 and 0.692 respectively. The figures of the last 2

years show that Sun Pharma has reduced on its debt and increased its equity.

Thus the company is playing safe by following a conservative approach.

� Current ratio also shows an increasing trend till 2006 before showing decline

till 2008. In spite of this decline, the current ratio has shown a net increase of

58.33% in 2008 over the figures in 2004.

� Fixed asset turnover ratio has consistently increased from 2004 till 2006, thus

showing an increase in revenue from fixed asset over these years. It shows

that the capital investment strategy of the company is quite sound because the

long term investments made, are generating returns for Sun Pharma.

� The continuous increase in the Inventory turnover ratio shows improvement

in the inventory management. The inventory operating cycle for 2008 is

approx 41 days which is 16 days less than which the company used to take to

convert its inventory to sales in 2004.

� Debtor turnover ratio shows a significant drop in 2008. The figure at 3.96 is

approximately 33% less than the mean debtor turnover ratio (5.94). Thus a

decrease in both current ratio and debtor turnover ratio indicates towards a

decline in cash in hand.

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� Interest cover ratio has increased manifold from 2004 to 2008, with a net

increase of about 2.5 times. It is indicative of an increase in the safety margin

for payment of interests from profits. One reason for this increase is the

decrease in the debts of the company, which has led to the decrease in the

interest payment liability.

PIRAMAL HEALTHCARE

The VISION of Piramal is to become the most admired Indian pharmaceutical

company with leadership in market share, research and profits by-

� Building distinctive sales & marketing capabilities

� Evolving from licensing to globally launching our patented products

� Inculcating a high performance culture

� Being the partner of choice for global pharmaceutical companies

MILESTONES ACHIEVED

• 2008 marked the 20th year of Piramal group’s foray into the healthcare space.

Since their acquisition of Nicholas labs in 1988, the company has come a long

way to stand tall as one the largest healthcare companies in our country.

• Revenues for the year grew 16.2% to Rs. 28.7 billion.

• Operating Profit grew 41.3% to Rs. 5.4 billion.

• Operating Margin increased from 15.5% to 18.9%.

• Net Profit grew 53.1% to Rs. 3.3 billion.

��In Healthcare Solutions:

(i) Thirty new products & line extensions launched, new products (launched during

the last 24 months) form 4.9% of sales.

(ii) Top-10 brands grew by 8.5% for financial year 2008.

��In Allied Businesses:

(i) Piramal Diagnostic Services (Pathlabs & Radiology) business grew by 71.8% to

Rs.1.2 billion.

(ii) Piramal Diagnostic Services acquired 16 new Laboratories during the year.

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(iii)New joint-venture formed with ARKRAY Inc. for marketing Diagnostic Products

in India.

Key Financial Ratio

2004 2005 2006 2007 2008

DEBT

EQUITY

RATIO

0.75 0.7 0.36 0.29 0.43

LONG TERM

DEBT

EQUITY

RATIO

0.65 0.49 0.18 0.17 0.28

CURRENT

RATIO

1.59 1.2 1.14 1.39 1.54

FIXED

ASSET

TURNOVER

RATIO

2.78 1.9 1.83 1.67 1.74

INVENTORY

TURNOVER

RATIO

7.84 5.58 6.25 7.78 8.34

DEBTOR

TURNOVER

RATIO

8.34 8.27 9.53 8.42 7.5

INTEREST

COVERAGE

RATIO

6.35 5.77 8.02 6.58 5.61

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DETAILED RATIO ANALYSIS OF PIRAMAL FOR THE PAST FIVE

YEARS:

• Both debt equity ratio and long term debt equity ratio have decreased over the

years except for a slight increase in 2008, indicating that Piramal has not

changed the mix of debt and equity significantly.

• Current ratio of Piramal decreased from 2004 to 2006 followed by an increase

till 2008. The trend of increase and decrease is such that whatever drop is seen

in current ratio till 2006 is recovered till 2008. Thus the current ratio at the end

of the year 2008 was restored to 1.54, almost equal to 1.59 in 2004.

• Fixed asset turnover ratio shows a decreasing trend till 2007 after which,

improvement is registered in 2008, thereby indicating greater revenue

generation from the amount invested in fixed assets.

• Inventory turnover ratio, apart from a decrease in 2005, shows a continuous

increase over the 5 years with a net decrease of 50% in the inventory operating

cycle of 2008 over 2004. From 2004 onwards the inventory operating cycle is

45days, 64 days, 57 days, 46 days, and 43 days respectively for each

successive year till 2008.

• Debtor turnover ratio decreased by a mere 0.83% in 2005 followed by an

increase of 15.23% in 2006. In 2007, again the debt turnover ratio decreased

by 13.18% followed by a further decrease of 11%in 2008. Thus we see the

average debt collection period varies from approximately 38 days to 48 days,

with a mean period of 43days.

• Interest coverage ratio also shows the fluctuating trend followed by alternate

increase and decrease. It shows that the company needs to manage its interest

expenses by keeping a sustained cover that is, margin of safety. This can be

achieved by one or all of the following:

• Decrease in debts

• Increase in profits

• Taking debt at low interest rate.

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Bibliography

· http://www.przoom.com/news/22383/

·http://www.business-standard.com/india/news/domestic-drug-makers-immune

toslowdown/351685/

· http://www.expresspharmaonline.com/20090331/market01.shtml

· www.companiesandmarkets.com

·http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000

224095.pdf

·http://www.pharmafocusasia.com/knowledge_bank/articles/when_borders_break_do

wn.htm

http://biotechpharmaceuticals.suite101.com/article.cfm/preparing_for_the_spring_alle

rgy_season

· Amelia Gentleman (August 7, 2007) Setback for Novartis in India Over Drug

Patent

Ref:http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000

000224095.pdf

· Uwe Perlitz( April 9,2009) India's Pharmaceutical Industry course for

globalization

· Jacob Heller and Gabriel Rocklin (2008) Promoting Pharmaceutical Research

under National Health Care Reform

· Manjeet Kripalani (March 25, 2008) Indian Pharma: Hooked on the Hard Sell

published in Business week, March issue, Volume 9 4th issue

· Uni Blake (8th March, 2009) Are Pro-biotics the Answer to Keeping Allergies at

Bay

· George Yeh When Borders Break Down

· http://www.ibef.org/artdisplay.aspx?cat_id=152&art_id=22103&arc=show

· http://www.pharmaceutical-drug-manufacturers.com/pharma-industry-statistics/

· http://blogs.wsj.com/health/2009/03/12/pharmas-150-billion-ma-trifecta/

142 |

· http://timesofindia.indiatimes.com/Business/Pharma-MA-wave-set-to-reach-

India/articleshow/4268808.cms

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WORD OF THANKS

We take the opportunity to pay hearty regards to Dr. D. K. Garg (chairman sir), Mr.

M. K. Verma (dean sir) and academic director for providing me their kind support for

completion of my project.

We am grateful to all those who directly or indirectly supported us in completion of

this project whether it was moral support, financial or providing appropriate support

during different phases of THE PROJECT. As a result we could accomplish my

project successfully.

At last but not the least we are thankful to Mr. Shivnath Mishra (Guide) , Area

Manager of “Apex Lab Pvt Ltd.” There guidance was a milestone in completion of

my project.

original final project

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