authors and do not necessarily reflect the views of UK Essays.
Among the various science oriented sectors in India, the pharma industry leads the chart owing to its diverse capabilities in the difficult areas of drug production and technology. The pharma industry in India is a highly complex and yet organized sector with its total worth estimated to be around US$ 4.5 billion and an estimated growth rate of 8-9% annually. Among the third world countries, India is ranked the highest for its technology and the wide and diverse types and qualities of medicines that it manufactures – ranging from simple headache tablets to sophisticated cardiac formulations and antibiotics.
India is expected to feature in the top 10 pharma markets globally by revenue by the year 2020. This is largely due to its huge population base (2nd largest in the world), changes in patient profiles, increase in consumption related to health care, increase in the average life expectancy of an Indian, rapid increase in the number of urban centres and an evolving and highly active contribution by the private sector enterprises.
Indian pharma industry has seen robust and explosive growth in the past two decades owing to some of the reasons mentioned above. Indian market for pharma products is highly fragmented with around 20,000 registered units and characterized by extreme price competition and price control mechanisms imposed by the government. The organized sector is composed of roughly 250-300 companies which make up the 75% of the market with the top 10 firms making up 30% alone. Approximately 75% of the nation’s demand for various drugs, formulations, tablets, etc. is fulfilled by way of local production.
The Indian pharma industry became the point of debate when Cipla (India’s second biggest pharmaceutical firm) offered AIDS drugs in Africa at $300 as against $12,000 which the American companies would charge for the same drug. The low cost was possible due to the fact that Cipla could manufacture a single drug which contained all the three chemicals needed in the treatment of AIDS. It is not possible to manufacture such a drug in other countries globally as the patents for the three substances are held by three different firms. The low price was as a result of weak patent protection laws in the nation and hence in 2005, the country had to overhaul its patent legislation.
Till 1970s, India’s demand was mainly met by the major international corporations as only cheap drugs were manufactured in India by the public sector companies started with help from WHO. The government tried to reduce dependence on imported drugs by making the Indian industry self-reliant and having flexible but lax patent legislations. High import tariffs and regulations surrounding investment by foreign majors in Indian subsidiaries led to India being an unattractive destination for foreign players
The weak patent system, decline of public sector firms and various protections offered by government led to the quick development of a private sector pharmaceutical industry which made it possible to meet the healthcare demands of India’s ever increasing population. Indian firms used alternative manufacturing techniques and copied various products manufactured by foreign firms and manufactured the “generics” in India. An almost zero patent protection and negligible financial risk (as there were no R&D requirements), led to this industry being highly cost efficient. Currently, India ranks 1st in the world in generics production with a 20% market share, even though the market share in the pharmaceuticals sector is a mere 2%. This is of particular significance as the average disposal income of a majority of the Indian population is low to afford such expensive western preparations.
Prior to the amendments of 2005, India followed a process patent legislation wherein only the production and manufacturing process was protected for a period of 7 years and not the actual product. This had led to several legal disputes with major US firms in the past over patent legislations. Now though, the legislations are very much in line with the international norms and even Indian industry follows 20 year validity for product and process patents since the government signed the TRIPS agreement. The Indian industry has been in a process of transition since then and now the focus is more on indigenously developed drugs and contract based R&D and production for the foreign MNC firms.
Revenues from the sale of Indian pharmaceuticals in the Indian subcontinent are up 9% per annum between 1990s and today as compared to the global average of 7% p.a. Anti-infectives account for approximately 25% of the total turnover followed by cardio-vascular formulations (10%), pain-killers (10%) and cold treatments (10%). Lifestyle drugs which are major sales drivers in the west are actually of little significance in India currently.
Indian Pharmaceutical Industry
Very few pure Indian pharma companies exist in the global market today. The industry is mainly operated and controlled by dominant foreign players having subsidiaries in India due to the availability of cheap labour and that too at the lowest possible cost. India arrived on the global scene with its innovative generic drugs and active pharmaceutical ingredients (API) and is poised to be the major player in clinical research outsourcing and contract research and manufacturing. The major publicly listed players in India (sorted by revenue) are as below:
Revenues – 2011
$ 1,373 million
$ 1,246 million
Dr. Reddy’s Laboratories
$ 1,194 million
$ 957 million
$ 765 million
$ 563 million
$ 472 million
$ 420 million
$ 419 million
$ 371 million
The competitive pressure in the domestic market has been on a constant yet steady rise mainly due to increased investments by the local firms in marketing related expenses as well as due to the renewed interest shown by the global firms in India (covered later). A few smaller firms are also trying to establish themselves in this market as they offer huge incentives to the various participants of the supply chain and doctors. While the competition and hence the related pressures don’t look to go away soon, the growth story is back on track led by the therapy segment. Despite the smaller term ups and downs, it looks like the structure of the industry and its demand drivers will continue to provide long term growth support to the sector.
The domestic market is valued at ~ $10 billion (ranked 3rd in volume and 10th in value worldwide) and has grown at a cumulative average growth rate (CAGR) of ~ 14-15% over the past 5 years. Major reasons contributing to this CAGR are as follows:
Higher expenditure on healthcare due to higher disposable income in the average Indian household
Increasing penetration in the inner and rural pockets of India
Innovations in health care delivery and infrastructure
Rise in life-style related diseases
It is clear that the Indian pharma sector growth story is driven not by increasing prices of medicines (which would normally be the case given inflationary pressures prevalent in the economy) but due to higher sales and new product developments.
Source: ICRA website, company data, capitaline database
Even though the industry is undergoing a constant and steady consolidation, the sector is still very much fragmented with the top 10 companies still controlling only 35-40% of the local market. The major players have managed to hold on to their markets owing to well established distribution, well managed marketing efforts and a continuous stream of new product announcements.
Global players in India
The pharma industry experienced rapid growth worldwide in the past two decades largely owing to the high demand from North American and European continents. The scenario for pharma companies in these locations has however changed over the past few years. Their patents are approaching expiry, expenditure on research and development isn’t yielding as much as it did in the past, increase in regulations and price control mechanisms, etc. have slowed down growth in these markets. These companies are now looking for opportunities to revive their growth story and improve upon their operations. Emerging markets, represented majorly by Brazil, India and China among others, present a huge opportunity as a growth driver for this industry. Pharma sector in the emerging markets contributed 8% to the global pharmaceutical market in 2003 and the share has now gone up to almost 40%+ in 2012-13. Globally, the pharma multinational giants have now adopted the path of expanding their market share in these emerging economies and hence revive their growth story.
The week IP environment and the government regulations of 1970s had forced the global MNC majors to quit the Indian markets. But the new patent regime from 2005 has led these global MNCs to return back to India. India now presents them with not only the well-developed strengths of contract based manufacturing but also unlimited opportunities as a preferred location for R&D especially for clinical trials. These firms have registered strong and rapid growth in the recent past and with higher investments in the local Indian market these companies are well poised to accumulate 35%+ share of the domestic Indian market by 2017 as against 28% in 2005.
Source: Capitaline databases, ICRA estimates, company website
Numerous M&A deal activity, steady introductions of new products (more prominently in the branded segment where the difference between global and local prices is pretty steep) and a continuous increase in field force to boost marketing efforts clearly indicate that major MNCs have revived their commercial interests in Indian pharma sector. A pricing difference aids these global giants to further increase their market penetration by making the drugs more affordable to lower income class (which is large) in India. Drugs such as Januvia by MSD, Galvus and Diovan by Swiss pharma giant Novartis are being sold at 20% of global prices.
While M&A has been a preferred way for cementing position in India for the global MNCs, a lot of these firms are also exploring avenues for growth by way of in-licensing deals with the local players for domestic and emerging markets. Such deals help in leveraging on the lower research expenses (product/market authorizations) and production capabilities of the domestic generic firms as also on the wide and established marketing and distribution network of the MNCs in the different other markets. These companies consider India as an ideal strategic outsourcing partner due to services like Contract research manufacturing and clinical services to S&M, IT, CRM and finance and accounting.
Firms with relatively diversified therapeutic portfolio, wide distribution network, robust R&D capabilities and healthy positioning in the rapidly expanding chronic segments would continue to operate and perform in a stable manner although some sector wide issues and challenges would still persist.
Source: Capitaline, ICRA estimates, www.moneycontrol.com
IPR and Patent laws
There was little protection for patent holders between 1970 and 2005. Consequently, many domestic manufacturers reverse engineered patented drugs developed after extensive R&D and produced the generic versions using alternate processes of production. This was much cheaper and profitable with the financial risks associated minimal. This changed with TRIPS (Trade related aspects of IP rights), adopted in 1995 by the WTO specifies that all member nations enforce laws to permit patenting of both products and processes. In essence, TRIPS aims to allow extension of patents to an international level. The India parliament passed ‘The Patents (3rd Amendment) Act’ in 2005 with modification from the act of 1972, which exempted pharmaceuticals from process patents in attempt to develop indigenous industry (allowing several Indian manufacturers to produce drugs already in the market using a different process). However, the delay in adopting TRIPS allowed Indian manufacturers to produce and sell low cost drugs to India and other developing countries. The industry grew at a rapid pace prior to the introduction of product patents and several of the drugs that were protected in the western world were reverse engineered.
The amendment in the act granted CL (compulsory license) for a patented drug in cases when the drug was not obtainable in sufficient magnitude, and priced unreasonably and not produced domestically. This, in essence, has presented the generic producers with a loophole that they can exploit. Section-84 of the act allows a domestic firm to apply for a CL at the IPO if the company that holds the patent does not produce the drug nor does it allow the applicant to produce the drug (on payment of royalty)..
Since the adoption of TRIPS, several global firms have re-entered India through joint ventures or wholly owned subsidiaries. It forces domestic players to focus on R&D and innovation as the market becomes more competitive. It has also allowed global research to gain a strong foothold in India and several pharma R&D centers have been setup in India by MNCs. However, there have been several disputes in several incidents the Indian courts have turned down appeals from MNCs to disallow domestic competitors from marketing products that are close variants of their own. These developments send bad signals to the world on the limitation of patent protection in India. Several medicines for terminal patients as Novartis’ Glivec (cancer), Roche’s Tarceva (cancer), Bayer’s Nexavar and Gilead’s Viread (HIV) have not been able to receive protection from IPO (Indian Patent Office) or the judiciary. In response to criticism, Indian regulators and companies have hailed the patent offices in US and other western countries as too lax and accused them of granting patents in the absence of noteworthy innovation.
Apart from products patents, TRIPS agreement required standards on protection of data that is given to the regulatory agencies for obtaining marketing license. Another issue was the case of generic manufacturers. One who currently manufacture the drug and whose product patent file lies in the ‘mailbox’. They would have to stop marketing the drug if product patent was granted to a competitor.
Another notable area in IPRs is provision for the ‘Bolar exemption’ which essentially tries to make such regulations as to allow generic manufacturers to produce the drug as soon as the product patent expires. This exemption allows generic manufacturers to start the marketing approval process to produce generic versions of a patent that is soon to expire. Since the introduction of TRIPS, several major generic firms have sprung into action and are eager to compete. India witnesses consolidation of several firms since early 90s till the next decade. R&D spending of Indian firms has increased tremendously led by companies as Ranbaxy and Dr Reddy’s. This increase in R&D spending has helped them market more number of drugs in countries like US and UK. Both the companies have forged relationships for R&D and testing with the best in the world. India is being seen as an attractive destination for contract manufacturing and research. A large number of pharmaceutical giants have formed joint ventures with Indian generic producers.
The introduction of TRIPS and the introduction of product patents in India has led to the industry being much more competitive. One can argue that it has hurt the domestic industry and benefitted the MNCs. However, domestic manufacturers, which were primarily producing generic drug in the pre-TRIPS era, have become much more dynamic and competitive. The R&D sector has been booming like never before and there is substantial increase in the quality of research in the country. This has attracted latest advancements in technology to India and R&D giants have been setting up research facilities in India. These advancements have enabled Indian firms to compete in not only in developing markets as Africa but also developed markets as US, UK and Europe. Several Indian players have filed and obtained patents outside of India and are competing with big pharma on their own turf. In all essence, changing regulations have helped the globalization of the Indian pharmaceutical industry.
China constitutes a fifth of the world population but accounts for only 1.5% of the global drug market. China being infamous for reverse engineering patented medicines is the leading manufacturer of counterfeit drugs with about 80% of them being consumed in the rural areas claim thousands of lives every year. With the phenomenal growth of this market and the prevalent counterfeit drugs the government has adopted a few measures and has been able to crack down on the counterfeit drugs. Currently 90% of the drugs are estimated to be counterfeits and the research and development barely forms 2.4% of the total revenue from the drug sale. The pharmaceutical industry has been growing at 16.72% over the past few decades i.e. the fastest growing market across the world, but is plagued by outdated manufacturing technology and structure, lack of patented domestically produced drugs. When China joined the WTO in December 2001 and had to conform to the Trade Related Intellectual Property Rights agreement it caused a major revamp of the whole system leading to improved transparency and strengthening of legal procedures associated with it. The treaty entails tightening of IP rules, tariff concession and providing market access to non-Chinese suppliers. TRIPS agreement consists of enforcement procedure so as to permit effective action against any act of infringement of intellectual property rights covered by the WTO agreement. The Chinese govt. has adopted a number of measures to protect the IP rights and to encourage investment such as: they amended the patent law to include pharmaceutical substance patent -1993;joined patent cooperation treaty in 1993 and added provision on Patent linkage and data exclusivity for a 6 year term in 2002. Others were : All manufacturers are GMP compliant by 2004, reducing drug sales through hospitals, implementing a national healthcare insurance system, providing SFDA (State Food and Drug Administration) supervision. Policies were aimed to make the distribution system more sufficient, to improve drug safety standards and differentiate medical care from retail.
Investment in RND has improved due to the increasing demand, lower labour cost. The govt. is spending an estimated $600 million to promote Pharmaceutical Research with the state and local governments also being part of the funding channels. For e.g. The Shanghai Centre of Research and Development for new provides assistance and financing for Joint Ventures in the Pharmaceutical sector. Collaboration between Academic Institutions, the industry and the government to develop building blocks for RND in the medicine world has been rapidly increasing especially in the area of genome chip.
Patents in the United States are regulated by the US Patent and Trademark Of¬ce (PTO). The PTO allows patenting for both, the drug’s chemical formula as well as the production process i.e. patenting of the product and the process. However, in contrast with other nations, patents in the US were granted to the first inventor and not to the first applicant of the patent. This was amended recently in 2011 to follow a ‘first to file’ system. Also, only an individual inventor of the drug can apply for a patent in the US. It is commonplace for the individual patent holder to subsequently transfer the patent to an organization for a nominal token amount. The US patent system also contrasts with other countries in disallowing opposition to patents.
In the United States, drug patents are given preferential treatment over other patents. For instance, patent extensions are more frequent for such patents, as also for longer validity periods. The Waxman-Hatch Act provided for extension of a patent’s validity period by up to five years to compensate for exclusivity period lost due to delay in regulatory processes. For encouraging pharmaceutical patents, R&D in the industry is provided 20% tax credit.
The WTO-initiated General Agreement on Tariffs and Trades (GATT) increased the exclusivity period of US patents from 17 to 20 years. The US Patent Act itself provides for a 3 year extension to manufacturers for undertaking further studies on change in dosage and exclusivity for 7 years for orphan drugs for uncommon diseases. The maximum period for which a patent can be extended is limited to fourteen years.
However, the Waxman-Hatch Act dilutes the purpose of extension of patents by allowing generic drug manufacturers to test the product for the purpose of developing alternatives. Such alternatives can be developed even during the extended patent period. Such manufacturers are even granted an exclusivity period of 180 days in certain cases, with just one manufacturer allowed to produce the generic version, such as in the case of Ranbaxy for the drug Lipitor. This provision is often misused by manufacturers to prevent other manufacturers from venturing into the drug.
32% of patents filed by Indian companies in the US relate to pharmaceutical drug manufacturing and composition. Of the top 10 Indian companies which files for patents, five releated to the pharmaceutical industry, with Ranbaxy laboratories and Dr Reddy’s Research Foundation leading the list.
Evergreening of Patents
‘Evergreening’, or extending the patent life of a drug, is common in the pharmaceutical industry for manufacturers to safeguard their right to their patents and prevent such generic manufacturing of drugs. Manufacturers often adopt extensive litigation to restrict development of the drug by competitors. Both Sun Pharmaceuticals and Ranbaxy Laboratories have been sued by US pharmaceutical companies for challenging their patents. Drug companies may also make incremental developments to the drug and patent these to create an alternate patent with a later expiry date. Prominent manufacturers have used nanotechnology to develop advanced versions of the same drugs and patent them. There are approximately 2000 nanomedicine patents reserved for development by generic manufacturers after expiry of exclusivity period.
United States is the biggest pharma market valued at USD 320 billion. In this market, the volume share of generic substitution is a high 75% making it the biggest generic market as well. Being a highly mature and competitive market, the decline in price of a drug post expiry of its patent is also very steep in US. According to an ASSOCHAM report, prescription drug market worth total $ 100 billion in the US is expected to lose patent protection in the next five years and hence generic businesses (Indian firms mostly) have strong growth prospects in this market. Apart from patent expiry, the US govt. health reforms aiming to bring down the health expenditure and bringing an increasing percentage of population under medical care also provides further growth prospects for the Indian generic firms.
Source: Company reports, SEC filings, ICRA estimates
At 74 facilities, India had the highest United States FDA approved drug production facilities outside the US. Indian local companies now account for ~35% Drug Master File applications and 25% of all US Abbreviated New Drug Application (ANDA) filings. The filings have improved not only in terms of quantity but quality as well as complex formulations, Para IV/FTFs and varied and non-regular categories like inhalers, oral contraceptive, injectable, etc. form a higher share of their filings list.
Lupin is now the 5th biggest Indian generic company in terms of prescriptions. 14 of its products are the market leader while 27 out of its 30 products are among the top 3 in their individual category.
25 products from Dr. Reddy’s rank among the top 3 in their market categories. The OTC business is generating revenues of ~ USD 60 million.
Sun Pharmaceuticals has one of the highest ANDA filings among the India generics.
Source: United States FDA, company reports. Para IV opportunities data not available for Sun and Cadilla
Patent expirations would be maximum in the year 2012 but the growth would continue as the local Indian firms have a well distributed and spread-out product launch pipeline till the year 2014. The segments of oral contraceptives, inhalers, injectables, etc. are set to lose patents in 2012 and early 2013. These segments involve highly complex manufacturing processes and hence requiring higher spending on research and production. Therefore, these segments present high entry barriers and an opportunity to enjoy higher profitability owing to limited competition. India’s traditional generics export market might take a hit owing to reasons like stagnant prices (no upward change) of generics in the US, threats of competition from “authorized generics” manufactured by major US players as also the new medium-size firms, Chinese and EU players and fully integrated generic firms. This clearly points to an urgent need for Indian firms to move up the value chain and manufacture innovative and superior generics – “branded generics” and not the traditional “generic generics”.
Source: United States FDA, ICRA research
While Indian players have gained significant market in the US generics space by having a wide product portfolio, they still are insignificant as compared to the generic giants such as Sandoz, Mylan and Teva. These companies have a competitive edge owing to their scale in these businesses. While scale is important, product pipeline and strong distribution are equally important too in the mature markets like that of America.
Indian and Chinese firms will probably be the first globally to bring bio-generics into the regulated markets of United States and the likes and that too at a pace which is much faster than expected. The first bio-generic product received its approval from the European Medicines Agency (EMEA) in the April of 2006. This agency refers them as bio-similars. Biotech products accounted for ~ USD 55 billion in worldwide sales. Patents from the first generation of biotech pharmaceuticals will soon start to expire and the sky reaching costs of these products would imply that the market for bio-generics will have immense growth opportunities. Sales for such products are already flourishing in the unregulated markets globally.
It is estimated that the market for bio-similars will grow from USD 243 million in ’10 to USD 3.7 billion by ’15. The fast paced growth in bio-similars is expected to be driven by patent expirations for 30+ biologic medicines, with revenues of $ 51 bn in the next 5 years.
Wockhardt would be an early beneficiary of the bio-generics approval by the regulated markets. It was one of the first Indian drug producers to enter the EU market by way of multiple M&A deals acquiring Wallis Labs in ’97, CP Pharma in ’03 and Esparma in ’04. Wockhardt’s growth strategy is centralized around biopharma products and its one of the few players locally and globally to have the necessary expertise in biopharmaceuticals production.
India’s biotechnology market is still in its nascent stages of development. But with a huge emphasis on the development of bio-services and vaccines, the market is fast growing. The top ten companies in terms of annual sales in 2011 are as below:
Revenues – 2011
$ 265 million
Serum Institute of India
$ 186 million
$ 166 million
Nuziveedu Seeds Pvt. Ltd.
$ 109 million
Reliance Life Sciences
$ 88 million
$ 85 million
$ 83 million
$ 66 million
$ 65 million
$ 63 million
Like most of the cases globally, majority of the biotechnology companies in India have developed along the contract or collaborative research models. Government incentives are particularly important in terms of regulations and reforms, tax benefits for R&D, planning and development of biotech parks and SEZs, etc.
There is a high probability that India’s nascent biotech sector would face particularly strong competition from China, which is the only country from the developing world to contribute to the international project on decoding the Human Genome. Another aspect which adds credibility to this fear is the fact that the Chinese firms are backed by ample state investments which has led these firms to now produce recombinant insulin, hepatitis vaccines and other generic biopharmaceuticals. It is an industry-wide established fact now that India does enjoy an edge over China as it has higher number of qualified, employees who can speak English and a stronger history of IPRs and judicial and quality standards.
India has established a mark for itself in the Information Technology industry and is considered to be a superpower which possesses access to specialist skills and provides round the clock working hours for 7 days a week. India has established its position as the country of choice for contract based activities which include research, including drug discovery. India has been ranked as the premier outsourcing destination by 82% companies in the United States. IT and ITES firms in India have been widening their horizons in India to bring new segments such as bio-informatics and life sciences under their business purview. Some of these Indian firms are TCS, Accenture, Tech Mahindra, IBM, Oracle and Cognizant.
India’s rich and diverse talent pool, operational flexibilities, time-to-market, technological innovations, competitive advantage and credible quality has allowed it to position itself as a highly promising centre for clinical data management.
Cognizant Technologies is the preferred provider to the biometrics division of Pfizer
Accenture has partnered with Wyeth for clinical trials related data management
Novartis has a software development facility in India for specialized drug research and development programme
The global pharma industry represents an approximately $55 billion opportunity for India by the year 2013 in the below mentioned forms:
Outsourcing of production – supplying intermediates and APIs
Outsourcing of drug development – performing preclinical and clinical trial tests
Contract based research services for the formulations prior to their launch
Globally, contract based manufacturing and contract based research services have cont