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PREFACE | FOREWORD | EXECUTIVE SUMMARY | METHODOLOGY | INDUSTRY REPORT | SME INSIGHTS| COMPANY LISTING| SPONSORS
 

The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years, driven by rising consumption levels in the country and strong demand from export markets. The pharmaceutical industry in India is estimated to be worth about US$ 10 bn, growing at an annual rate of 9%. In world rankings, the domestic industry stands fourth in terms of volume and 13th in value terms. The ranking in value terms may also be a refl ection of the low prices at which medicines are sold in the country.

The industry has seen tremendous progress in terms of infrastructure development, technology base and the wide range of products manufactured. Demand from the exports market has been growing rapidly due to the capability of Indian players to produce cost-effective drugs with world class manufacturing facilities. Bulk drugs of all major therapeutic groups, requiring complicated manufacturing processes are now being produced in India. Pharma companies have developed Good Manufacturing Practices (GMP) compliant facilities for the production of different dosage forms.

In addition to having GMP, WHO, several Indian companies have also been getting plant approvals from international regulatory agencies like US FDA, MCA (UK), TGA (Australia), MCC (South Africa). India possesses the highest number of US FDA approved manufacturing facilities outside the USA and currently tops in filing the drug master files (DMF) with the US FDA. This has also facilitated the domestic industry to attract contract manufacturing opportunities in the rapidly growing generics market.

A paradigm shift occurred in the Indian pharmaceutical industry with India becoming a signatory to the WTO order, ushering in the Product Patent Regime. Earlier, with the enactment of The Patent Act, 1970, only process patent was applicable for pharmaceuticals.

With the introduction of the product patent beginning 01-Jan-05, which has now made India TRIPS compliant, the Indian market has become an attractive option for the introduction of research-based products. As a result, the Indian companies are now exploring new business models such as contract research, for drug and discovery research & development, as well as contract manufacturing.

However, it poses a challenge to the generics industry as it would no longer be able to freely continue with the production of generics of the new patented molecules without license/payment of royalty to the innovator company.

Industry Trends

A highly fragmented industry, the Indian pharmaceutical industry is estimated to have over 10,000 manufacturing units, as given by the Organisation of Pharmaceutical Producers of India. The organized sector accounts for just 5% of the industry with around 300 players, while a huge 95% is in the unorganized sector. A large number of players in the unorganized segment are small and medium enterprises and this segment contributes 35% of the industry’s turnover.

In calendar year (CY) 2005, turnover of the organized sector companies aggregated to Rs 302 bn, of which 19% came from MNCs while the remaining 81% was contributed by Indian companies. Turnover of players in the unorganized segment, though difficult to assess, is estimated to be around Rs 160 bn.

The Indian pharmaceutical industry consists of manufacturers of bulk drugs and formulations. Bulk drugs include the active pharmaceutical ingredients (APIs) which are used for the manufacture of formulations. According to estimates, the proportion of formulations and bulk drugs is in the order of 75:25. There are believed to be over 60,000 formulations manufactured in India in more than 60 therapeutic segments. More than 85% of the formulations produced in the country are sold in the domestic market. India is largely self-sufficient in case of formulations, though some life saving, new-generation-technology-barrier formulations continue to be imported.

Among the therapeutic segments, the anti-infectives top domestic production in volumes. In 2005, the chronic therapy segment accounted for around 26% of the domestic formulation business, growing at a rate of 10%; faster than the acute therapy segment. The chronic therapy segment includes anti-diabetics, cardiac and neuro-psychiatry formulations.

Bulk drug manufacturing is largely concentrated in Andhra Pradesh, which accounts for more than one-third of the country’s total bulk drug production, followed by Gujarat. The Indian bulk drug industry has lately been gaining signifi cant presence in the global market as foreign and multinational companies are looking to sourcing APIs and intermediates from Indian manufacturers. Factors favouring the industry are a vast resource of technical people, stateof- the-art manufacturing facilities, low cost and the advantage of the English language. As part of government’s support to increase exports, duty free zones have been set up and several manufacturers of bulk drugs have been shifting their facilities to these areas. As a result, the diverse spread has now started getting consolidated and concentrated in certain regions across the country.

India has a significant share in the global generics market and is ranked third. In recent years, this segment has been facing stiff competition which makes the scale of production important to improve profitability. India has pre-dominantly been a generic player and has the potential to gain a global presence for the following key developments:

Generic companies in India are recognizing the importance of patent expiries and are making significant incremental investments in research and drug development.

Production and Trade

The domestic bulk drug and formulation industry has been able to largely meet the domestic demand for these products. Besides, it also exports to several regions, including the EU and US. Exports currently constitute nearly 48% of the industry’s turnover, and have been growing at an average 22% annually since 1994. In FY06, exports grew by an impressive 21% touching Rs 215.8 bn.

The growing demand from the domestic market and increased manufacturing activities has led to rising imports during the past few years. In FY06, imports were worth Rs 45.2 bn as against Rs 31.7 bn in FY05. The nature of imports has undergone a significant change over the years, from finished doses imported prior to the 1970s, to largely bulk drugs today.

Domestic demand has been showing significant growth; the rise in consumption being primarily attributed to the rising population, rise in income levels and increasing health awareness among people. New product launches by the Indian and multinational companies have also catalyzed market demand. Moreover, the favourable regulatory environment, increased expenditure on R&D and improved technical skills in the fi eld of chemical synthesis has also played an important role.

The increasing alliances and tie-ups of Indian companies with global players has further given a boost to Indian exports.

Key Drivers for the Pharmaceutical Industry

Growing orientation towards Research and Development (R&D)

The introduction of product patent in India has brought some fundamental changes in strategies of Indian pharmaceutical companies, with focus shifting more towards R&D.

The original Indian patent law, which recognized only process patent, gave Indian companies the opportunity to produce products under patent in overseas markets, particularly regulated markets, by adopting new processes. Consequently, companies were in advantageous position to produce drugs through reverse engineering at relatively very low cost that helped the domestic industry to grow faster during the initial stages of development. On the other hand, this discouraged multinational companies from launching their new products in India, fearing duplication of their new drug discovery through reverse engineering. As a result, MNCs’ market share declined from 70% prior to 1972 to 20% at present.

The introduction of product patent has led the domestic industry towards exploring new avenues of drug development, which would require higher capital investment in R&D, and greater thrust towards innovation. Current trends indicate that R&D expenditure of top domestic companies has increased from a mere 2% of total turnover in CY00 to nearly 4% in CY05. Though this is the average for the industry, top-line players have spent in the range of 8-10% during FY06. This level of expenditure is however low compared with the spending of 12-16% of turnover on R&D by international leaders.

R&D by Indian pharmaceutical companies is backed by a favourable policy environment and availability of surplus skilled technical workers at low costs. This is to the advantage of the sector and will see a significant thrust in coming years.

Leveraging CRAMs opportunities

The global pharmaceutical industry is increasingly facing cost pressures on various counts, and R&D productivity of these players has gone down significantly in recent years, under rising manpower costs and higher regulatory risk. In fact, the process of getting approval of new products in regulated market requires strict compliance of quality norms, which is stringent and is also subject to high legal risk. This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low cost destinations like India and China.

India is emerging as the global hub for contract research and manufacturing services (CRAMs) due to its low cost advantage and world class quality standards. The Indian pharma industry possesses world standard manufacturing facilities as per the GMP norms which are approved by various regulatory agencies across the globe. The diverse disease profile and abundance of patients in India provides better ground for clinical trials. India has leveraged this advantage to attract clinical trials process outsourced by the companies involved in innovation.

Majority of the contract manufacturing deals relate to production of active pharmaceutical ingredients (APIs) and intermediates, in which India possesses competence. Nicholas Piramal, Shasun Chemicals, Divi’s Lab, Dishman Pharma, Cadila Healthcare, Lupin, Matrix Lab and Aurobindo Pharma are some of the companies which have witnessed impressive growth in revenues from their CRAMs business under various tie-ups with global pharmaceutical majors.

Growing exports

Exports have been the major growth enabler of the Indian pharmaceutical industry in recent years. India exports pharmaceutical products, APIs and intermediates to more than 200 countries across the world. Traditionally, Russia, Germany, Nigeria and India’s neighbouring countries like Sri Lanka, Nepal, and the Middle East were the major markets for Indian pharmaceutical exports. Most of these markets are not highly regulated and are considered to be low-value markets.

Remarkably, the proportion of exports in domestic turnover has been increasing over the years, despite the growing domestic demand. Currently, exports constitute 48% of estimated turnover of the industry as compared to nearly 35% during CY02.

Expanding presence in regulated market

Over the years, India has shown better regulatory awareness and superior technical skills, which has enabled Indian companies to penetrate the high-value markets like the US and EU. Exports of pharmaceutical products (finished products as classified under heading 30 of ITC-HS code) to the US grew by an impressive 33% to Rs 23 bn and by a whopping 62% to Rs 35 bn to the EU during FY04-FY06. Regulated markets, though difficult to penetrate due to stringent regulations, are known to give better value and margin to exporters

The increasing presence in high-value markets like the USA and Europe has strongly boosted the overall growth of the Indian pharmaceutical industry. However, with competition getting stiffer in the regulated markets and the consequent pressure on margins, Indian players are also expanding their geographical reach to high-growth regions such as the CIS and Latin American countries. Although considered as low-value markets, these markets are witnessing impressive growth and therefore it provides great opportunity for Indian players.

Rise in new product launches

In the pharmaceutical industry, new product launches create new demand. After the introduction of product patent in India, the domestic industry has witnessed a fresh spell of new product launches. New products launched since 2005 accounted for around 12% of the overall market growth. These launches have been done by both domestic and international players and some of them are first time launch of new chemical entity (NCE).

The Regulatory Control of the Pharmaceutical Industry

Source D&B Research

The rise in new launches of products has emerged as one of the important factors, which has driven the growth in recent past. In fact, the rate of launching new molecules had come down during the process patent era.

Key issues facing the Pharmaceutical Industry

Some of the issues the domestic industry is facing are as under:

Increasing span of price control

The draft National Pharmaceuticals Policy, 2006, currently underway and awaiting approval from the Parliament, intends to bring 354 drugs under price control, which is in addition to the 74 bulk drugs already notified under price control. The price control as proposed in the Policy is likely to cover at least 50-60% of the domestic market under price control. The proposed control on prices is set to impact the industry margin significantly, especially those players having only local operations. However, to secure the profitability, firms will have to increase their scale of production.

The number of drugs under price control had come down from nearly 400 in the 1970s to 72 in 1995, and further reduced to 29 in 2002. This decision was however stalled by the Supreme Court, asking the Department of Fertilisers and Chemicals, GoI, to identify the essential and life saving drugs that need to continue remaining under price control. The Department listed 354 items that it purchases for its hospitals called the National List of Essential Medicines (NLEM). The new draft policy consists of these 354 drugs that are likely to be under the cost based price control.

Price erosion in generics

Indian generics market is witnessing a margin pressure in most of the product categories due to two main reasons: the proposed price control likely to be imposed by the Government and the stiff competition among domestic players. In fact, India has witnessed a fast rise in the number of players over a period of time. Moreover, the expansion of capacities by certain leading players has also fuelled competition in certain product categories, which restricts margins of the smaller players.

The fall in prices of generic drugs are not limited to India only. The US, which is the world’s largest pharmaceutical market, is also experiencing a sharp reduction in prices of generic drugs due to stiff competition. Some other developed countries like the UK and Germany have also witnessed the same scenario. The erosion in prices is to the extent of 90% in some cases. Indian players, which have been operating in these markets, have also witnessed erosion in margins in certain therapeutic segments.

Low R&D productivity

Despite the increasing expenditure on R&D, the introduction of new molecules by Indian players has been limited. It is, in fact, a hit-and-miss situation in the field of discovery and developments of new chemical entity (NCEs), where misses are more than hits. Very few discoveries reach the fi nal stages of approvals, and in most of the cases, the claim for patent gets stuck in legal battles.

In spite of the rising expenditure in R&D, the level of investment in R&D is still low, at average 4% as compared to the global practice of spending 12-16% of sales on R&D.

The changing global pharmaceutical industry has transformed prospects of Indian pharmaceutical companies. The leading pharma companies in India have been actively extending the frontiers of scientific knowledge and going global through mergers and acquisitions. In 2005, acquisitions by the Indian pharmaceutical companies were the highest, with 20 buyouts abroad. A similar trend was observed during 2006, which include Dr Reddy’s buyout of Germany’s Betapharm and Ranbaxy’s purchase of Romania’s Terapia. Europe has emerged as the most preferred destination for acquisitions by Indian companies.

The European generics market has emerged as a major attraction for acquisitions by Indian companies. According to reports, margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic.

Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players. The Government has estimated that by year 2010, the industry has the potential to achieve a size of US$ 28 bn.

Foreign Acquisitions by Indian Companies in 2006

Source D&B Research