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Globalization Of The Indian Pharmaceutical Industry Economics Essay

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Introduction

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.

Overview

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.

Post 2005

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:

Rank

Name

Revenues - 2011

1

Ranbaxy Labs

$ 1,373 million

2

Cipla

$ 1,246 million

3

Dr. Reddy's Laboratories

$ 1,194 million

4

Lupin Limited

$ 957 million

5

Aurobindo Pharma

$ 765 million

6

Cadilla Healthcare

$ 563 million

7

Jubiliant Lifesciences

$ 472 million

8

IPCA Labs

$ 420 million

9

Glaxo Smithkline

$ 419 million

10

Torrent Pharma

$ 371 million

Source: www.moneycontrol.com

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.

Source: www.expresspharmaonline.com

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

India

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

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.

United States

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.

* estimated

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.

US Generics

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.

Biotechnology generics

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.

Biotechnology

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:

Rank

Name

Revenues - 2011

1

Biocon

$ 265 million

2

Serum Institute of India

$ 186 million

3

Panacea Biotech

$ 166 million

4

Nuziveedu Seeds Pvt. Ltd.

$ 109 million

5

Reliance Life Sciences

$ 88 million

6

Quintiles

$ 85 million

7

Novo Nordisk

$ 83 million

8

Rasi Seeds

$ 66 million

9

Mahyco

$ 65 million

10

Trans Asia

$ 63 million

Source: www.moneycontrol.com

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.

Outsourcing

IT outsourcing

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

Contract Manufacturing

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 contributed revenues worth USD 100 billion in the year 2004 which is estimated to grow at an average annual rate of 8.8% to USD 230 billion by the year 2014. In this figures, the worldwide market for contract based manufacturing of prescription drugs is estimated to double in value from USD 26 billion to USD 52 billion. The OTC market and the market for the sale nutritional products will still continue to show the highest growth worldwide though.

Indian and Chinese firms would very probably occupy a 35-40% market share in the production of APIs and other various intermediates. Domestic Indian drug producers are well poised to gain from the outsourcing boom in the global pharmaceutical industry. This is primarily due to two reasons - a number of blockbuster drugs approaching patent protection expiry and the fact that a change in the patent regime in India from the traditional process patent system to product patent system has boosted India's image as a highly trustworthy outsourcing destination due to higher confidence in the western counterparts. Also, the Indian firms that lack the required financial muscle to invest heavily in research and development will be able to exploit the synergies that they have developed as the world's foremost supplier of cheap and necessary drugs.

Contract Research

It is estimated that the custom manufacturing business will see a significant growth in the coming years owing to high and ever increasing costs for manufacturers in the United States and EU. There will be an increasing number of joint collaborations between domestic Indian firms and global MNCs in the domestic market especially involving the biotech sector in the areas of collaboration based research and development which includes discovery of drugs and clinical trials, manufacturing and co-marketing.

India has been rightly termed as the research and development hotspot owing to a) excellent links with the academic research facilities, b) ease of commercialization, c) innovation friendly environment and lastly d) ability to tap into already existing networks for expertise in technical and scientific areas.

It is estimated that the expenses for innovation are almost one-seventh of what they are in Europe and other mature markets and the clinical research industry of India is growing at an average annual rate of 40-50% and is expected to be worth USD $ 4 billion by 2013. Similarly the expenses that a firm needs to incur for clinical trials in India is one-tenth of what they would have to pay in the United States and the industry is expected to be worth $ 1 billion to India by 2013.

Clinical trials

Clinical trials constitute a key component of the drug development process that ensures the safety of a drug. Although there are strict guidelines laid down for conducting clinical trials, sometimes it is looked as an area of humanitarian concern. As part of the WTO agreement, India is seen as an attractive country to conduct clinical trials. Reasons for that include a larger population, wide range of diseases, availability of skilled professionals, lower cost and IP & patent laws. Clinical trials are either conducted directly by companies or through contract research organizations (CROs). CROs in India are gaining popularity because of local specialization, worldwide reach and lower pricing. Several international CROs have setup operations in India for the same reason.

There are, however, a number of hindrances that include safety of the patients'. Others are the regulatory framework, issues related to ethics, quality of data and unavailability of qualified personnel. These issues are common to most developing countries and need to be addressed. A segment of critics believe that clinical trials constitute a grave threat to the society. For reasons such as patent safety, regulatory conformity, unscrupulous trials and issues pertaining to training and infrastructure.

Rights and safety of patients: The drug development process takes approximately 10-12 years to reach the marketing stage. Clinical trials allow terminal patients to enjoy the benefits of the drug before it enters the market. In case of terminal patients, they may provide advanced health care well before it is actually available in the market. By tweaking of the eligibility criteria, clinical trials can provide otherwise inaccessible healthcare to patients that need it the most. In fact, a well designed and executed trial is generally more safe that normal medical procedures. The clinical trials process is divided into phases. Phase-2 only commences after the 1st is complete and so on. Thus patients in later stages of the trial are that of minimal risk for the subject.

Regulatory framework: In India, there exist several roadblocks in infrastructure at regulatory body level. Despite these several CROs and multinational pharmaceutical companies have been able to conduct high quality testing because of high standard of personal ethics and concern for health and safety of the patients. There has been a change of mindset from situational ethics to holistic ethics.

Illegal and unethical trials: Indian authorities have been setting up teams to monitor and control illegal and unethical trials. This problem is not specific to India - the FDA in the US has been doing so for quite some time. Indian clinical investigators have been subject to several trials and time and again have proved their competence and compliant with international standards.

Infrastructure and training: The development of the clinical trial industry has helped aid development of infrastructure in India. Hospitals in India being increasingly competent in managing trials both from technical and ethical standards. Further, Indian manufacturers were used to generic drugs with little development of indigenous research. The introduction of clinical research has exposed Indian scientists and doctors to global expertise which can be used to develop care and cure for several local ailments. Clinical trials thus have played a major part in lifting Indian medical research, in attempt to be at par with international standards.

Pricing: Premium drugs constitute about ten percent (by value) of the market while the other ninety percent comprises of off-patent drugs. These off patent drugs have several generics available and prices are low. Clinical trials will help increase use of premium drugs in India and will bring down healthcare costs.

Health Insurance

Huge potential exists for both public and private sector in the health insurance space. Health insurance, in fact, is the second largest among non life insurance segment in the country. It accounts for about 20% of the general insurance sector and around 3% of the overall insurance sector. However, it accounts for only 5% of the total healthcare expenditure. The penetration has increased from 0.07% in 2011 to 0.19% in 2011. Only 15% of the population has access to any form of indirect or direct health cover. Post liberalization in 2000 and further in 2007 when IRDA did away with the tariff on general insurance, this sector has witnesses tremendous growth and is expected to grow at CAGR of approximately 30% for the coming years. On an average, 80% of the medical spending is derived out of the patient's pocket. Several factors are responsible for this - rise in average income, growth in GDP, increase in spending power of the middle class, urbanization, increase in families with double income, increase in FDI allowed and the ever expanding distribution system among others.

Public sector dominates this space, however, private players are fast catching up. Last 5 years have seen the total market share by the top 6 of the firms has increased from 17% to 29%. Government has been pushing to increase coverage with several schemes being introduced and formulated. Many experts, however, believe that the expansion of health insurance would lead to a marker where there no distinction between branded generic products - something that is seen as a key success element. Although, the spread of insurance would make the drugs more accessible and affordable, many argue that it will lead to a fall in price owing to greater institutional sales.

The reshaping of the health insurance sector, however, has several roadblocks. First is the concept of adverse selection - only the unfit or one who knows that he/she will fall sick will try to acquire health insurance. This will drive up the costs for insurance companies and consequently increasing the premiums that the consumers will have to pay. This might make the premiums too high for a larger chunk of the population and growth will be hampered. Second is (and has been) the low coverage in both diseases and hospitals. Third is lack of centralized databases and systems to make the facility 'cashless' for the patient. Claims after the patient has paid for the medical service will discourage adoption of health insurance. Several other problems haunt the health insurance industry currently. Despite these, the sector is showing robust signs of growth and it is driving other sectors as pharmaceuticals, medical devices etc in its strides of growth.

European Pharmaceutical Industry

The market for generics in the European countries is much diverse and different from its US counterpart primarily due to the wide variation in the competitive environment, penetration of generics, policies surrounding reimbursement and pricing and the regulatory framework across various markets. Some markets like the Netherland and the United Kingdom as also Germany boast of a high level of penetration in the generics market - almost upto 50% whereas in other key European markets like Spain and France and Italy, the penetration of generics is usually low at around 25%.

Source: IMS Health, ICRA Research

In the current times of economic turbulence across the global markets, a lot of governments in Europe have implemented measures to bring down the expenditure on healthcare. A few of the European markets have shifted focus to unbranded generics and the tender market from the traditional days of branded generics. This has led to steep erosion in the pricing power of the generic companies which is further negatively impacted by the increasing bargaining power of entities in the supply chain and also the insurance companies.

Government regulations and incentives by the insurance companies have led to branded drugs being increasingly replaced by the cheaper generic alternatives, which is an important growth driver. As compared to the ~75-80% penetration in US, the penetration of in the EU markets is generally lower, but there is headroom for growth in the local markets within Europe.

The dependence of Indian pharmaceutical firms on the European generic markets is relatively low as compared to that for United State. Wockhardt has the maximum exposure to Europe markets as ~37% of its revenues are contributed by European consumption. Dr. Reddy's after the acquisition of the German company Betapharm has increased its footprints in the European markets considerably and so have Cipla and even Ranbaxy.

Most of the Indian firms have established presence across the region but many of these have carved out a niche market for themselves in some important markets by way of constant expansion in the portfolio of product offerings, the supply chain and relationship with entities in the supply chain. Indian companies have also bought out the local firms with an aim to get access to front-end marketing capabilities like relationships with the distributors and supply chain entities and market authorizations and also research and production in certain cases.

Unexpected changes in the market environment and the pressures due to pricing have led to the performance of Indian firms being below par in the European markets. But these markets still form an integral and important part of the growth strategy for these companies and hence companies have been steadily trying to establish firm footprints in this regional markets.

Pharmaceutical Industry in China

China's pharmaceutical industry finds itself poised for a giant leap, with many multinationals eyeing China as the key to the future health of this industry. Projections and market analysis indicate that China is all set to overtake Japan as the leader in the Asia Pacific pharmaceutical industry by 2017, constituting a third of the total market in the region. Aggressive healthcare reforms launched in 2009, further boosted by the 12th Five Year plan, have sought improvements in medical coverage, health infrastructure and grassroots delivery. These coupled with China's increasing problems of an ageing population and chronic disease growth have led to this overhaul in the Chinese pharmaceutical industry. Moreover, given China's prowess in manufacturing and high-quality research, it has now turned into a hot spot for foreign investors.

China's domestic drug industry has always been highly fragmented, and hence the main focus for the last few years has been an effective consolidation of this industry. As of 2010, China has an estimated 4000-7000 domestic pharmaceutical manufacturers, and domestic distributors exceeding 16000. The domestic market has always been plagued by problems of Intellectual Property Rights violations, higher preference to international brands, flawed drug approval procedures, etc. In an unexpected turn of events, the recent healthcare reforms in China have led to a government crackdown on expensive medicines, which in turn has led to a 20% growth in the traditional Chinese medicine industry.

Foreign players in China's pharmaceutical industry account for about 15-20% of the market, and include around 2000 foreign-funded enterprises. As of 2012, the world's top 20 pharmaceutical companies have established a base in China, either through self-owned facilities or joint ventures.

Indian companies as global MNCs

The global generics industry is undergoing a major consolidation phase wherein top 10 companies will cover almost 35% of the worldwide sales. When Teva purchased IVAX and Novartis's Sandoz unit took over Hexal, a wide gap has been created in the market between these two global giants and the rest of the industry. Ranbaxy has been constantly putting in efforts to fill this void and occupy a third position by forging alliance with major companies on a global platform. An important factor which has led to increased activity by Indian companies in the acquisition space is the high availability of funding in the form of FCCBs and PE funds which have led to increased liquidity. Indian drug manufacturers are aggressively pursuing overseas acquisitions for the below reasons:

Enhancing competitiveness on the global platform

Moving higher up in the value chain of pharma industry

New market entry

Widening the product portfolio

Acquire assets and newer products to improve outsourcing

Market share consolidation

Compensation for domestic market sluggishness

Acquisitions by Indian firms in 2011-12

Company

Acquisition

Market

Details

Zydus Cadila

Biochem

India (branded)

Strengthen position in the domestic anti-biotic segment.

Lupin Ltd

I'rom Pharma

Japan

Strengthen position in generics along with diversification into speciality injectable

Zydus Cadila

Bremer Pharma

Mainly Europe

Presence in animal healthcare business

Zydus Cadila

Nesher Pharma

US (Generic)

Presence in controlled-release drugs segment and strengthen presence in generics

Dr. Reddy's

GSK's Penicillin unit

US (Generic)

Diversify its generic portfolio and enter anti-bacterial market segment

Source: company releases, ICRA research

In the recent past, Indian companies have slowed down upon their pace of acquisition of assets in the international markets as joint ventures and alliances with specific focus on certain markets and selected segments have taken an important position in their growth strategy. Unexpected changes in the market environment, cancellation of contracts and the inability to source from cheaper locations have affected the performances adversely. The changes that the German pharma sector went through as it transitioned from branded generics to unbranded generics led to huge setbacks for some companies. Companies have been unable to sign newer contracts especially in the areas of contract manufacturing and research services. As a result of this, Indian companies have become more careful and time consuming in making investments than they did in the past.

Joint ventures and alliances by Indian firms

Joint venture

Market

Details

Sun Pharma - Merck

Emerging

R&D, manufacture and marketing of branded generics in the emerging markets

Dr. Reddy's - GSK

Emerging

DRL would manufacture and GSK to distribute generics in Latin America, Asia, Africa, Europe

Cadila HC - Bayer

India

Co-marketing arrangement with highlight being the therapy segment

Cadila HC - Abbott

Emerging

Cadila to license generics (branded) to Abbott for 15 emerging markets

Lupin - Eli Lilly

India

Co-marketing (Lupin) arrangement with focus on the insulin segment (Eli Lilly)

Biocon - Bristol Myers

-

Early stage research and development cycle. Research on the development of NCEs

Source: company releases, ICRA research

Challenges

R&D expenditure

Indian pharmaceutical companies spend approximately 6% of its total sales on R & D. The figure for major domestic players are: Lupin -7.5%, Biocon - 7.5%, Glenmark Pharma - 7.25%, Dr. Reddy's - 6.8%, Cadila Healthcare - 6.4%, Ranbaxy - 6.1%, Sun Pharma - 5.4%, Cipla - 4.2% , and IPCA Labs -3.8%. This, however, is much lower than the global players which spend from 10-20% of their sales on R & D. India ranks 8th worldwide with $ 30 billion spent on R & D in the previous year. Another point to note that while global pharma spends mainly on NCEs (new chemical entities), their Indian counterparts spend mostly on generics development. There are some companies such as Glenmark and Biocon which have pledged to develop more original drugs and have allocated almost 60% of their R & D budget in the cause. Recently, smaller companies have also started investing in new drug development which is a good indicator for the industry as a whole.

Lack of quality academic research is hurting India too. The 'brain drain' is still a very real phenomena and every year India loses thousands of researchers to the US. The number of papers published and patents filed by Indian universities is very low - there is no Indian university or company in the top 50 list of patents filed. Focus is required on academic pharma R & D and it should be leveraged to support the industry.

IPRs and patents

Despite the onset of the product patent regime, several issues plague the industry. The level of trust in the government's regulatory policies is not very high. One prime reason is that India does not provide effective data protection . China, with a larger domestic market, hand has a superior patent protection regime and consequently India is losing out on investment to the worlds' largest population. Compulsory licensing is another issue that haunts drug companies. Elsewhere in the world, CL is given only in cases of national emergencies or endemics. Other areas of concern includes limiting the patentability only to New Chemical Entities (NCEs). Early action by regulators is key in building confidence in pertaining issues.

Regulatory issues

Data protection, tax incentives, patent protection and clinical trials are key areas of concern for the industry. The government has been criticized for its lax policies in data protection which has led several generic manufacturers to take advantage and reverse engineer patented products. The government has begun focus on clinical trials and investment has been made in this sector. There is still need for tax incentives to attract foreign investment and outsourcing opportunities. Government also needs to focus on PPPs rather than price control to provide access to low cost drugs. The Union budget for the next year is expected to support the industry with increase in the budget allocated for healthcare and also provide incentives for R & D spending

Pricing

At present 40% of the drugs sold in retail are regulated by the DPCO (Drug Price Control Order) with NPPA (National Pharmaceutical Pricing Authority) being the regulatory body. The government affordability for the masses as the primary reason for heavy price regulation and plans to take the number to 60% - which would account for almost 80% of the retail sales. Further, The Ministry of Chemicals and Fertilizers plans to freeze prices of drugs currently under control and change the limit annual price hike for unregulated drugs from 10% o 15%. Industry is opposing this move citing low prices (which stand at approximately 10% of that in the US) and market sustainability as issues. They also claim that this move would discourage R & D expenditure by companies. This move will affect the MNCs and major domestic players - who produce premium drugs - the most and it could hamper FDI in this sector.

Domestic outlook

Perhaps the most daunting challenge is the outlook that the sector has developed. Historically being a low cost producer of generic drugs, with little focus on patented and premium products. This was aided by lower public health spending -2.5% of GDP (China - 5%, US- 18%) and nationalist regulations. SMEs are risk averse and the big players are slow to adapt. Health insurance penetration is on the rise adding fuel to the pharma sector. Incomes and purchasing power will creating a booming market like never before. A well-educated middle class can provide the required manpower and the IT prowess will complement its growth. At this junction, the industry requires extensive coordination between the manufacturers - both Indian and MNC- and the government

Conclusion

This is a very important juncture for the Indian government and the pharma companies - MNCs and local, to develop long running partnerships for the betterment of the industry and the nation. India enjoys varied characteristics - low operational costs, enhanced regulatory framework and a well-educated and skilled English speaking workforce which puts is at an advantage and allows it to establish and position itself as the regional hub of pharma and biotech R&D, manufacturing and healthcare services in the next decade or two.

It is necessary that the regulations in the country are improved upon and to look at the Chinese model where the state's policies have developed a highly conducive product patent regime based environment for the drug companies which provide them with enhanced data protection too. India needs to develop a positive pricing environment in order to provide affordable and high quality healthcare to its 1 billion plus population. For the global MNCs, partnerships with India in the areas of joint production for worldwide sales and supplying the domestic market will help them explore the immense opportunities for growth available.


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