Indian Pharmaceutical Industry

Report Submitted on: September 04, 2010

Submitted By: PGP/14/270 Chhavi Anand PGP/14/277 Kritika Gupta PGP/14/286 Pooja Gandhi PGP/14/289 Preetha Subramanian

Indian Pharmaceutical Industry

Contents
EXECUTIVE SUMMARY ......................................................................................................... 3 GLOBAL SCENARIO OF PHARMACEUTICAL INDUSTRY.......................................................... 4 HIGH SALES GROWTH ...................................................................................................... 4 STRONG EMPHASIS ON R&D............................................................................................. 5 GEOGRAPHICAL PERFORMANCE OF THE GLOBAL PHARMACEUTICAL INDUSTRY............... 5 INDIAN SCENARIO ................................................................................................................ 7 CHANGING DISEASE PATTERNS ........................................................................................ 8 INSURANCE SECTOR ......................................................................................................... 8 EMERGING MARKETS ......................................................................................................... 10 KEY SEGMENTS OF INDIAN PHARMACEUTICAL INDUSTRY .................................................. 11 GENERIC DRUGS: ........................................................................................................... 11 CRAMS ......................................................................................................................... 11 VACCINES ...................................................................................................................... 12 API MARKET .................................................................................................................. 12 THE OTC MARKET ......................................................................................................... 13 BIOSIMILARS .................................................................................................................. 14 REGULATORY LAWS AND POLICIES AFFECTING THE PHARMACEUTICAL INDUSTRY............ 16 REGULATORY FRAMEWORK OF INDIA ................................................................................ 17
Indian Pharmaceutical Industry | 9/4/2010

OVERVIEW ..................................................................................................................... 17 THE DRUGS PRICE CONTROL ORDER (DPCO), 1995...................................................... 17 PRICING REGULATIONS .................................................................................................. 17 POST-2005 PERIOD ......................................................................................................... 18 TARIFF STRUCTURE ........................................................................................................ 18 SALES TAX ..................................................................................................................... 18 OTHER POLICIES AFFECTING PHARMACEUTICAL SECTOR ............................................... 18 DRUG REGULATORY ENVIRONMENT IN INDIA IN TRANSITION ......................................... 19 EXISTING DRUG REGULATORY SYSTEM ....................................................................... 19 PROPOSED NEW SYSTEM ............................................................................................. 19 CDA INDIAS NEW DRUG REGULATOR ......................................................................... 20 KEY PLAYERS IN THE INDIAN PHARMACEUTICAL INDUSTRY ............................................. 21

KEY TRENDS ...................................................................................................................... 25 CHANGING GROWTH FUNDAMENTALS OF DOMESTIC MARKET ........................................ 25 EXPANSION OF PRIVATE SECTOR HEALTHCARE DRIVING ACCESSIBILITY .................... 25 INCREASING PENETRATION OF MEDICAL INSURANCE .................................................. 26 RISING DISPOSABLE INCOME TO DRIVE DRUG CONSUMPTION .......................................... 26 FOCUS OF INDIAN COMPANIES SHIFTING FROM THE US .................................................. 26 INCREASING QUEST FOR NEW CHEMICAL ENTITIES (NCE) ............................................ 26 BIG PHARMA COMPANIES JOIN OUTSOURCING QUEUE ..................................................... 27 INNOVATORS- JOINING HANDS WITH GENERIC COMPANIES ............................................. 27 KEY CONCERNS ................................................................................................................. 29 PRICING PRESSURE INTERRUPTING THE GROWTH OF KEY ECONOMIES .......................... 29 SWOT ANALYSIS .............................................................................................................. 30 PORTERS FIVE FORCE ANALYSIS ....................................................................................... 31 REFERENCES ...................................................................................................................... 32

Indian Pharmaceutical Industry | 9/4/2010

Executive Summary
There has been a quantum leap in the global pharmaceutical sector in the last ten years. A similar trend has been observed in the Indian pharmaceutical sector as well. The Indian pharmaceutical industry is the 3rd largest in the world in terms of volume and 14th in terms of value. An especially important indicator of its growth is that the industry is expected to double in the next two years. The mounting ageing population, increase in income and a significant demographic shift are expected to be the driving factors for the growth of this sector in the coming decade and making its presence felt globally. The Indian generic players are making their presence felt across regulated and semi regulated market through merger & acquisition, alliances and agreement with big pharmaceutical MNCs. Shift from process patenting to product patenting regime offers huge opportunity for the pharmaceutical MNCs as it will not only position India as an important market to launch their block buster drugs, but also as a strategic destination for conducting clinical trials. The alliance and partnerships model will help Indian companies to foray into new markets and geographies as it would help them to capitalize on the on the latter companys knowledge as well as understanding of the local market and technical know-how. The increasing cost dried up research pipelines and increasing pricing pressures have led the companies to outsource the R&D activities. The increasing outsourcing in the pharmaceutical industry has led the Indian players focus on outsourcing opportunities from their international counterparts.

Indian Pharmaceutical Industry | 9/4/2010

Global Scenario of Pharmaceutical Industry

With a Compound Annual Growth Rate (CAGR) growing at almost 8% per year, the pharmaceutical industry is one of the fastest growing industries in the global marketplace. If the CAGR continues to grow at this pace, the global pharmaceutical market is expected to reach upwards to 1045 Billion in 2012. The growth is credited to previously untapped markets, the Asia Pacific market like India and China, as being one of the most lucrative pharmaceutical markets of the future, as also the recent growth in Latin American markets, such as Mexico and Brazil, as being key players in the pharmaceutical industry, over the next 20 years. Many pharmaceutical consulting firms are suggesting many other global trends that are factoring into this large boost in the pharmaceutical industry. Some of these factors include growing market size, favorable government policies, expanding health coverage, and new developments in drug developing technology, just to name a few However, many life sciences consulting firms are pointing out, that as patents held to key drugs begin to expire in the next ten years, it could hurt the growth of the North American pharmaceutical market. Coupled with the growing prevalence of generic drugs all over the world, as well as dwindling drug pipelines, and the development of less blockbuster drugs and less and less economic cooperation, these factors may challenge the growth of the global marketplace in times to come. The majority of the largest pharmaceutical companies are not diversified. They are either concentrated exclusively on pharmaceutical products (Eli Lilly and AstraZeneca are good examples with virtually 100% of their revenues coming from sales of pharmaceutical products) or, although they develop and manufacture other health care products, they still have pharmaceutical divisions as the core of their business that provide more than 50% of their revenues. Other products manufactured by these companies usually include medical devices, nutritional products, consumer healthcare products and products for animal health. Only two out of these 15 major pharmaceutical companies, Johnson & Johnson and Bayer have revenues from sales of pharmaceutical products that are lower than 50% of their total sales. Geographical headquarters of major pharmaceutical companies are approximately evenly distributed between the U.S. and Western Europe with only one Asian company in the list.
Indian Pharmaceutical Industry | 9/4/2010

High Sales Growth

According to IMS Health as restated in the 2004 AstraZeneca Annual Report, the United States, the European Union and Japan comprise the three major pharmaceutical markets which together represent 88% of world sales; and the U.S. market alone accounts for about 47% of world sales. Not surprisingly, all Big Pharma companies to a significant extent concentrate their resources on these markets, especially on the U.S. market. At the same time, although the share of world pharmaceutical sales in developing countries at this point of time is much lower, they show much faster growth rate than developed countries do. For example, the China, 9th largest world market, showed a 26% sales increase in 2004, followed by Thailand (16% growth) and Egypt (15%). Some Latin American countries, such as Mexico, Brazil, Argentina and Venezuela also show much faster sales growth rate than average worldwide. Therefore,

developing countries contain a significant potential for further expansion of pharmaceutical industry in the future. The pharmaceutical industry showed high sales growth rates in the recent past, and a number of factors suggest that this trend will continue in the future. Increased life expectancy:

Advancements in science and technology, including those in the health care industry, life expectancy in the developed countries has been steadily growing. As a result, growing proportion of elderly people promises further growth of demand for healthcare products. Access to healthcare:

Moreover, according to various studies, a significant portion of elderly population does not receive proper treatment. For example, even in the U.S., only about one third of the population who requires medical therapy for high cholesterol is actually receiving adequate treatment. As it is expected, the Medicare Prescription Drug Improvement and Modernization Act starting from the beginning of 2006 will increase access of senior citizens to the prescription drug coverage, thus increasing pharmaceutical sales. Growing Economies

Although developing countries at the moment have a small portion of world pharmaceutical sales, these countries also have a significant potential for the pharmaceutical industry in the future. Fast growing economies in Asia, South America and Central & Eastern Europe suggest an increasing solvency of population and make these markets more and more attractive for Big Pharma companies. Further reforms of legislation systems in the countries of these regions, especially regarding patent protection issues, will inevitably result in growing pharmaceutical sales. Strong emphasis on R&D
Indian Pharmaceutical Industry | 9/4/2010

One of the distinctive characteristics of the Big Pharma companies is a very high level of investments in research and development. On average, it takes about 10-15 years, and millions of dollars to develop a new medicine. According to industry statistics, only about one in ten thousand chemical compounds discovered by pharmaceutical industry researchers proves to be both medically effective and safe enough to become an approved medicine, and about half of all new medicines fail in the late stages of clinical trials. Not surprisingly, according to Research and Development in Industry: 2001 report of the National Science Foundation, in 2001 the pharmaceutical industry had one of the highest R&D expenditures as percentage of net sales. Geographical performance of the global Pharmaceutical Industry

USA: The largest generic market and the most sought after target for Indian companies involved in the generic business, is the US. As more companies gained the expertise to file for FDA approval, the number of ANDAs approved increased dramatically. In 2005, the number increased to 52 and subsequently increased year-on-year, to reach 132 in 2008. In 2009, the total number of ANDA approvals was 125. In the first quarter of 2010, a further 20 were approved. UK: Over 80% of prescriptions in the mature UK market are written generically. The UK has always been a focus for Indian companies with 9 companies running 11 manufacturing sites. Between January 2009 and January 2010, Indian companies had more than 260 marketing authorisations approved by the UKs Medicines and Healthcare Regulatory Agency (MHRA) for a wide range of products. During this period, Ranbaxy received 55 approvals; Dr. Reddys received 54; Aurobindo received 39; and, Lupin received 25. Europe: Beyond the UK and Germany, significant European markets have been slow to adopt a vigorous generics drugs policy. However, pressure on governments to cut costs in the face of burgeoning drugs bills and economic recession, are seeing countries such as France, Italy and Spain exploring the increased use of generics. A number of Indian companies are either monitoring them from the sidelines or have already identified growth potential; Ranbaxy, for example is established in France, Germany, Italy and Spain.

Source: ICRA Report, February 2010

Indian Pharmaceutical Industry | 9/4/2010

Indian Scenario
The Indian pharmaceutical industry is the 3rd largest in the world in terms of volume and 14th in terms of value. More significant is the fact that it is expected to grow by over 100% in next two years according to an IBEF report to become a USD 20 billion market by 2015. The current industry CAGR is pegged at 13% driven by increasing expenditure of healthcare; changing disease profile; rising disposable income levels and growing penetration of health insurance besides regulatory reforms. New product introductions contribute to around 6-8% of the total growth, with the rest being contributed by a combination of volume and price increase. Tier II cities (with population less than 1 lakh) and rural areas currently account for 40% of the market, and are expected to grow much faster than the rest of the country. The organized sector consists of 250-300 companies, the top 10 companies of which control about 30% of the market and the rest control 70% of the market. However, the total sector is estimated at nearly 20,000 businesses, some of which are extremely small. There are over 20,000 pharmaceutical rms, 60,000 distributors and 700,000 to 800,000 retailers involved. Approximately 75 percent of India's demand for medicines is met by local manufacturing. However, the leading players continue to retain their market share owing to their strong distribution reach, strong field force and new product launches. While the domestic branded formulations business continues to offer high gross margin, many of the innovator companies are now aggressively targeting this segment, which is likely to increase the competitive pressures. The profitability indicators of leading formulations companies have remained fairly stable over the past six quarters except for marginal fluctuation during October-March 2009, which was largely on account of spike in input material prices and foreign currency fluctuations during the same period. In spite of competition, profitability in the domestic branded business remains healthy supported by new product launches; investments on branding; increasing presence in chronic segments and above all an efficient operating cost structure.
Indian Pharmaceutical Industry | 9/4/2010

Changing Disease Patterns Its also likely that India will require different types of drugs in the future. Like almost every other emerging economy, India is experiencing epidemiological changes. Amongst therapeutic areas, chronic segments such as anti-diabetics, CVS, CNS and oncology have been growing at fairly strong rates owing to changing lifestyle patterns and have been the key drivers of growth. Thanks to greater affluence and better hygiene, the population is ageing; by 2028, an estimated 199 million Indians will be 60 or older, up from about 91 million in 2008. Besides that, it has the largest pool of diabetic patients, for example, with more than 41 million people suffering from the disease. The pattern of demand for medicines is shifting accordingly. In 2001, anti-infective and gastrointestinal drugs and vitamins accounted for 50% of the domestic market. By 2012, they are expected to account for just 36%. Conversely, drugs for cardio-vascular problems, disorders of the central nervous system and other chronic diseases will account for 64% of total sales, up from 50% in 2001.

Insurance Sector

India currently spends 4.5 to 5.0 percent of its GDP on health care, but public spending accounts for just 0.9 percent, putting the nation among the 20 lowest-spending countries worldwide. The balance of spending is also iniquitous; while the poorest 20 percent of the population has double the mortality

Indian Pharmaceutical Industry | 9/4/2010

rates, malnutrition and fertility of the richest quintile, the latter group receives about three rupees for every one rupee spent on the former. Two-thirds of what the government spends on health care goes to secondary and tertiary care rather than basic services. Ninety-four percent of all private health spending is out of pocket, mostly at the time of the incident, and more than 40 percent of hospitalized people borrow money or sell assets in order to cover their expenses. The remaining 6 percent of spending is provided by insurance -3.7 percent social, 1.6 percent employer-sponsored and 0.7 percent private insurance. Just 15 percent of the population has some form of insurance; an estimated 800,000,000 people in India have none. The health insurance market was opened up to the private sector in 2000 and, since then, growth has been fast. A 40 percent compound annual growth rate (CAGR) is forecast for the health insurance sector over the coming years, making it a significant driver of the domestic pharmaceutical industry.

Indian Pharmaceutical Industry | 9/4/2010

Emerging Markets
Brazil: Brazil is perhaps the most notable emerging generic market in recent years. According to the Brazilian generic industry association, Pr-Genricos, prices of generic medicines have to be at least 35% cheaper than prices of original medicines but, in practice, they are up to 50% cheaper. In 2009, generic medicines represented 19.4% of the pharmacy sector by volume, increasing 19.0% over the previous year to 330.0 million units. In value terms, pharmacy sales of generic medicines increased by 24.0% to R$4.5 billion (US$2.2 billion). Indian companies have been present in the Brazilian market for several years. In 2008, Indian pharmaceutical exports to Brazil were valued at around US$166 million per year and made up a significant part of all trade between India and Latin America. Australia: Due to low prices of branded products, Australia is not yet a major market for generics. A number of leading drugs are due to lose patent protection, but price competition tends to be muted for off-patent drugs. The government is, however, currently looking at ways to boost generic consumption in an effort to rein in the overall drugs bill. The market is beginning to attract Indian companies, a number of which have gained approval from the Therapeutic Goods Administration for their manufacturing facilities and a range of products.

10

Indian Pharmaceutical Industry | 9/4/2010

Key segments of Indian pharmaceutical industry

Generic Drugs: The Indian pharmaceutical industry is a leading producer of high quality, low cost generic drugs. India now produces more than 20% of the worlds generics and has a significant market share in the US$80 billion world Generic market and is expected to increase it to 50% by 2010. After the recession, demand for generic drugs has significantly soared due to the low cost factor. The generic drugs market in India is projected to grow at a CAGR of around 16.3% during FY 2011-FY 2013. India is conveniently placed, with the advantage of cost competitiveness, ability and experience in reverse engineering, availability of skilled scientific and engineering personnel and the capability to produce raw materials for a wide range of drugs from the basic stage. Moreover, around US$70 billion worth of drugs are expected to go off patent in the US over the next three years, and India is wellpositioned to take a substantial share of the resulting new generics markets. India tops the world in exporting generic medicines worth US$ 11 billion and currently the Indian pharmaceutical industry is one of the worlds largest and most developed. The European and African countries have been added as new destinations for exports. The US and East Asian countries will remain a vital importing destinations for Indian generic products. In future, the exports are expected to pick up pace as healthcare reform in the US and other countries will inflate demand for generic drugs. Indias generic houses are now entering into strategic alliances with global pharmaceutical companies to strengthen their generic portfolio and jointly market these drugs globally. Mr. Anand Sharma, Union Minister of Commerce and Industry and Lim Hng Kiang, Minister for Trade and Industry, Singapore, have signed a 'Special Scheme for Registration of Generic Medicinal Products from India' in May 2010, which seeks to fast-track the registration process for Indian generic medicines in Singapore. CRAMs
Indian Pharmaceutical Industry | 9/4/2010

India is a major destination for contract research and manufacturing services, owing to its low costs, (as drug development and manufacturing can be done in India at 40% of the expenses in the US and Europe) skilled manpower and manufacturing capability, with a number of USFDA-approved plants operating in the country. API manufacturing, clinical research and basic research are the major facilities currently offered by domestic service providers. The pharmaceutical outsourcing in India is expected to grow to around US$7 billion by 2013, as global firms seek to leverage advantages related to cost and quality the country possess. The MNC pharmaceutical and biotech companies spend significant portion of their R&D budgets on the outsourcing services offered by CRO (Contract Research Organization) industry, which was approximately $ 15 billion in 2007 and is expected to grow at 15% over the next few years to touch US$20 billion by 2010. Crams is the fast growing segment in Indian pharmaceutical sector. During 2004-08 the segment has grown at a remarkable rate of 39%. The growth in this sector is mainly due to the acquisitions and

11

global outsourcing. Indian Crams segment is divided into contract research and contract manufacturing. Globally, the outsourcing trends are expected to grow further with the contract manufacturing market size at US$ 45 billion (US$ 29 billion from Dosage Forms and US$ 16 billion from APIs) whereas the Contract research market size is estimated to be at ~ US$ 38 billion (US$ 11 billion from Drug Discovery and US$ 27 billion from Clinical Research).

Other Services (5%) Contract research (29%) Contract Manufacturing(66%)

Vaccines Vaccines are another prominent area of growth. India is one of the largest vaccine producers in the world, with many new vaccines set to be launched in the next five years. The vaccines segment was around US$780 million in March 2008, growing at a compounded annual growth rate (CAGR) of 15%. India currently exports vaccines to about 150 countries. It also meets around 40-70% of the World Health Organization (WHO) demand for the DPT and the BCG vaccine and almost 90% of its demand for the measles vaccine. The Serum Institute of India is a leading player which produces and supplies low-cost, lifesaving vaccines for children and adults.

API market
Indian Pharmaceutical Industry | 9/4/2010

India plays an important part in the global API market as it ranks fourth in the world in terms of API output. The API output value of India was $4.1 billion in 2007 and the sector is set to grow at a CAGR of 24.07 per cent from 2008 to 2020. The API industry in India meets around 70 per cent of the country's demand for bulk drugs, drug intermediates & chemicals and is registering a growth of around 18-19 per cent annually. India currently has about 3,000 API factories and 5,000 reagent factories. The key API producers include Ranbaxy, Dr Reddys, Cipla, Cadila Healthcare and Matrix. These companies produce more than 400 types of APIs and around 10,000 types of reagents, satisfying over 90 percent of Indian domestic demand. Pharmaceutical companies such as Dr Reddys, Wockhardt and Sun Pharmaceuticals are also producing APIs. The API export of India will enjoy a rapid growth in the coming years and will increase to $12.75 billion in 2012 from $3.75 billion in 2007.

12

Several factors make India an attractive alternative for sourcing active ingredients. The low-cost innovations and manufacturing coupled with skilled manpower and cutting-edge R&D has helped in the growth of Indian API market. Moreover Indian firms are able to tackle complex synthesis in relatively shorter periods with cost-efficiency. The factors that favor Indias pharmaceutical industry in general include stability of supply, high quality of products and firm governmental policies. The size of the pharmaceutical chemicals industry is estimated to be around Rs 35000 crore, of the total Rs 78,000 crore Indian pharmaceutical industry turnover. Out of the total API business, around Rs 18000 crore comes from exports. Even though the API units are doing well, they are looking for assistance from the government in terms of environmental protection norms. The manufacturing of intermediates requires large-scale chemical activities which goes against the current environment norms. At present India relies on China for almost 60 to 70 per cent of its intermediate needs despite the competition between the two countries in API sector. India and China have to work closely for mutual benefits through partnerships and collaborative approaches. The OTC market The global OTC market over the past eight years has grown rapidly and is expected to continue. Globally, the Indian pharmaceutical industry ranks third in terms of volume and 14th in terms of value. Currently, India ranks 11th in terms of the OTC market size globally. In 2009, the Indian OTC market was estimated to be worth $1.8 billion with an annual growth rate of 18%. Some pharmaceutical players with prominent OTC franchises include Johnson & Johnson and GlaxoSmithKline, Pfizer and Merck & Co. OTC or non-prescription medicines in India continue to grow faster than the global average of approximately 5% despite being perceived as less effective than prescription drugs. This sustainable growth is driven by strong socio-economic drivers, primary drivers being the historically low per capita spend on OTC, the widespread prevalence of untreated common ailments, greater penetration of OTC drugs in rural areas, increasing medical costs, rising consumer confidence in the ability of OTC drugs to control common ailments and increased advertising by manufacturers. Indian consumers are also placing more emphasis on prevention and wellness, which should contribute to continued increases in sales of OTC vitamins and minerals. Profitable OTC drugs for some of Indias largest pharmaceutical companies include artificial sweeteners, emergency contraceptive pills and nutritional supplements. The popularity of Ayurvedic therapies should also contribute to the sales of related OTC formulations. Some of the leading OTC brands in India are registered as Ayurvedic Medicines because of their plant-based natural active ingredients and there being no price controls on Ayurvedic Medicines.

13

Indian Pharmaceutical Industry | 9/4/2010

Currently about half of OTC sales come from chemists, while grocery stores and general stores account for over a third of the sales. Pharmaceutical companies are also targeting post offices to sell OTC drugs in rural India. This move could substantially increase the access of OTC drugs, especially in areas where there are no pharmacies. OTC proprietary drugs are regulated by the Drugs and Cosmetics Act and the Drugs and Cosmetics Rules. Only a few OTC active ingredients, e.g. acetylsalicylic acid and ephedrine and its salts, fall under the current DPCO price control. Counterfeits of popular OTC drugs are however a major issue. Indias regulatory framework permits advertising for OTC products, and consumers can buy them without a doctors prescription. Some global pharmaceutical companies are already launching OTC products in India or buying OTC products. Novartis India launched Calcium Sandoz as an OTC supplement in 2000 and has now come out with Otrivin nasal drops in a spray form. Pfizer has launched Listerine, Benadryl, Caladryl and Benylin in India, which were later sold to Johnson and Johnson. In the future, India may also serve as a manufacturing location for OTC products destined for other markets.

Biosimilars The global pharmaceutical market is seeing rapid increase in penetration of biologic drugs. These drugs accounted for more than 10% of the global pharmaceutical markets revenues in 2007, up from almost nil a decade ago. The global biosimilars market is expected to be worth $19.4 billion by 2014, growing at a CAGR of 89.1% from 2009 to 2014. The early commercialization and high absorption rate of biosimilars products has made Asia the dominant market in 2008 occupying 34.1% share of the global biosimilars product market.

In a short term, biosimilar market growth will be driven by drug classes including erythropoietin, filgrastim, human growth hormone (HGH) and insulin. Gradual expiry of patents will create significant market opportunities for developers through to 2016. Between 2012-19, the market will see a patent expiry of a whopping $60 billion of biotech drugs. In India biosimilars spell big opportunities especially for companies like Dr Reddys Labs, Ranbaxy, Biocon, Shantha Biotech and Intas Biopharmaceuticals, who are actively involved in the space. The

14

Indian Pharmaceutical Industry | 9/4/2010

Indian biosimilars market in 2008 was about $200 million, with an expectation to reach about $580 million by 2012. The interest in biosimilars has been spurred on by multiple factors. Firstly, under the Trade Related Intellectual Property Rights (TRIPS) agreement, pre-1995 product patents were exempted thus granting some biologicals, the rights to continue manufacturing. Secondly, biotechnology drugs (besides insulin) are free from the governments price control act, allowing independence in price setting. Also there seem to be signs of acceptance of locally manufactured biosimilars among healthcare professionals within the country. The upcoming oncology market is one of the prime targeted areas for many companies. The current size of the Indian oncology market is about $18.60 million, which is expected to be over about $50 million by the end of 2010.

15

Indian Pharmaceutical Industry | 9/4/2010

Regulatory Laws and policies affecting the Pharmaceutical industry

Regulatory Control of Pharmaceutical sector

Major Pharmaceutical policies Drug Policy 1986 Pharmaceutical Policy 2002 National Pharmaceuticals policy 2006

Quality Control

Price Control

IPR Control

On prices

On margin

Bulk Drugs GMP Issues

Formulations Amended Patent Issues

Governing Policies

Drugs and Cosmetics Act, 1940 Schedule M

Patent Act, 1970 Product Patent, 2005

Source: Adapted from Dun & Bradstreet (D&B) 2007

16

Indian Pharmaceutical Industry | 9/4/2010

Essential Commodities Act,1955 DPCO, 1995

Regulatory Framework of India

Overview Over three decades ago, Indian government introduced price controls with the objective of making medicines affordable. India is a signatory to GATT and is committed to the implementation of TRIPS. The country introduced product patents from 2005 onwards. Introduction of product patents without relaxing price controls will hurt the competitiveness of the Indian companies in the long term. FDI limit through automatic route has been raised from 51 per cent to 74 per cent in March 2000 and further to 100 per cent in May 2001.

A foreign pharmaceutical player can enter Indian market through following ways: Importing Drugs In To India Imports constitute only 5 per cent of the total market. Foreign companies cannot promote subsidiaries for marketing their products in India. Entry through joint venture/subsidiary Foreign company is allowed to invest up to 100 per cent in any new or existing pharmaceuticals company in India under automatic approval route. In such cases, RBI needs to be informed only after the capital has been remitted into India.

The Drugs Price Control Order (DPCO), 1995 The order lists price controlled drugs, procedures for determining drug prices, method of implementing prices fixed by Government and penalties for contravening provisions among other things. Now only 74 out of 500 commonly used bulk drugs are under statutory price control. Prices excluding local taxes of scheduled bulk drugs are fixed to provide a post tax return of 14 per cent on net worth or a 22 percent return on capital employed.

Indian Pharmaceutical Industry | 9/4/2010

Pricing Regulations Price Approval is given by NPPA (National Pharmaceutical Pricing Authority). NPPA fixes the ceiling price of scheduled drugs. Manufacturer must file a price list of all the prices fixed with the State Drug Controllers, dealers and Government along with NPPA official price notification reference. Packages of formulations (the outer container) must bear the retail price (whether fixed by NPPA or not).

17

Post-2005 Period In 2005, India amended its patent laws to comply with the World Trade Organizations (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS), an international treaty mandating minimum standards for trade and intellectual property protection. These amendments allowed, for the first time, patent protection in India for pharmaceutical products. The earlier law provided patent protection only for the process of making the drug, not for the drug itself. January 1, 2000, companies were granted Exclusive Marketing Rights (EMRs) for their products that have been patented in any other WTO signatory country. Patents of outside companies will be protected through EMR in India. EMR will not be given for items based on Indian system of medicine (Ayurvedic or Unani) or if the items are already in the public domain. Indian residents are permitted to apply for patent abroad without permission of the Controller.

Tariff Structure Life-saving drugs are allowed at zero tariffs. Bulk drug, intermediaries and formulation imports attract a basic customs duty of per cent To encourage research, the excise duty on drugs and materials for clinical trials has been exempt from excise duty, which had hitherto been levied at 16 per cent. Basic customs tariff rate now ranges from 0 to 40 per cent plus additional duty of 2 per cent.

Sales Tax The rate of sales tax is same for both Indian and imported items. Sales and local taxes vary from 4 to 10 per cent of the price depending on item and location
Indian Pharmaceutical Industry | 9/4/2010

Other Policies affecting Pharmaceutical sector

For licensable drugs and pharmaceuticals manufactured by recombinant DNA technology and specific cell/tissue targeted formulations, FDI needs prior government approvals The industry is undergoing consolidation due to recent legislation and policy updates: Manufacturing unit should adhere to good manufacturing practices (GMP) outlined in Schedule M of the Drugs and Cosmetics Act Manufacturing units are required to comply with the WHO and international standards of production

Source: India Pharmaceuticals and Healthcare Report Q2 2008, Business Monitor International

18

Drug regulatory environment in India in transition Existing drug regulatory system India has a bifurcated drug regulatory system. Regulatory functions are divided between the Centre and state authorities Existing infrastructure at the Centre and the state is inadequate to perform the assigned functions of drug administration with efficiency and speed.

Proposed new system The Central Cabinet approved the formation of the Central Drug Authority (CDA) in January 2007 Proposed organizational structure of the CDA would be analogous to the US FDA It would be a strong, well equipped, empowered, independent and professionally managed body It is expected to facilitate up-gradation of the national drugs regulator, uniformity of licensing, and enforcement and improvement in drug regulations Efficiency and efficacy of drug administration is expected to be much after this transition

19

Indian Pharmaceutical Industry | 9/4/2010

CDA Indias new drug regulator

Existing
Central Government Drug Controller General India (expert committees) Responsibilities: Broad policy issues of

Proposed

Central Drug Administration Three joint drug controllers Two deputy drug controllers Six Assistant drug controllers 50 drug inspectors 5 technical experts 1 administrative officer 1 accounts officer Responsibilities: Regulatory affairs and environment New drugs and clinical trials Biological and biotechnological products Medical devices and diagnostics Imports Organizational services Training and empowerment Quality control affairs Legal and consumer affairs

State Government State Drug Authorities (State drug controllers and food and drug inspectors) Responsibilities: Licensing and monitoring manufacturing Legal cell Spurious Drug monitoring Pharmacies

20

Indian Pharmaceutical Industry | 9/4/2010

Key Players in the Indian Pharmaceutical Industry

Competition is mainly from the domestic manufacturers and imports from China because of the low manufacturing cost. With the new patent regulations the industry expects to see a major structural shift with the entry of foreign pharmaceutical manufacturers. There are five government-owned companies the Indian public sector. These companies are the Indian Drugs and Pharmaceuticals, Hindustan Antibiotics Limited, Bengal Chemicals and Pharmaceuticals Limited, Bengal Immunity Limited and Smith Stanistreet Pharmaceuticals Limited. Some of the major Indian private companies are Alembic Chemicals, Aurobindo Pharma, Biocon, Cadila Healthcare, Cipla, Dr. Reddys, IPCA Laboratories, Jagsonpal Pharma, J.B. Chemicals, Kopran, Lupin Labs, Lyka Labs, Piramal Healthcare, Matrix Laboratories, Orchid Chemical and Pharmaceuticals, Sun Pharmaceuticals, Ranbaxy Laboratories, Torrent Pharma, TTK Healthcare, Unichem Labs, and Wockhardt. The foreign companies in India include Abott India, Astra Zeneca India, Aventis Pharma India, Burrough-Wellcome, GlaxosmithKline, Merck India, Novartis, Pfizer Limited, and Wyeth Ledele India. Comprehensive analysis of some of these companies is tabulated below.
Company Name Company Profile Ranbaxy Ranbaxy is among the top 100 pharmaceuticals in the world and that it is the 15th fastest growing company. It is consolidating its position to become the top 5 generics producer in the World, with the purchase of French firm RGP Aventis in 2003. It keeps a dedicated research facility staffed with over 1100 scientists. They currently have two molecules in Phase II trials and 3-5 in pre-clinical testing. The Company is aggressively pursuing its internationalization strategy it has also gained market leadership in India, leveraging its strong brand building skills. Companys Global Sales were at USD 1,340 Million. Overseas markets accounted for around 80% of global sales. The Companys largest market, USA with the sales of USD 380 Million, while Europe and BRICS (Brazil, Russia, India, China, South Africa) countries contributed USD 194 Million and USD 477 Million to global sales By 2012, Ranbaxy hopes to be one of the top 5 generics producers in the world. The Company will focus on increasing its momentum in the generics business in its key markets of US, Europe, BRICS and Japan through organic and inorganic routes.

Sales revenue/ Turnover

Indian Pharmaceutical Industry | 9/4/2010

Future prospects

21

Company Name Company Profile Sales Revenue/Turnover

Future Prospects

Dr. Reddys The company was Founded in 1984 with USD 160,000 Dr. Reddys is a vertically integrated, global pharmaceutical company with proven research capabilities and presence across the pharmaceutical value chain. They manufacture Active Pharmaceutical Ingredients (API) and Finished Dosage forms. In addition, the drug discovery arm of the company conducts basic research in the areas of diabetes, cardiovascular, inflammation and bacterial infection. Dr. Reddys was the first Asia-Pacific pharmaceutical outside of Japan and the sixth Indian company to be listed on the New York Stock Exchange. 58 per cent of Dr. Reddys revenues come from generic drugs. Dr. Reddys has long been a research-oriented firm. It had set up a New Drug Development Research (NDDR) in 1993 and outlicensed its first compound just four years later. Dr. Reddys has since out licensed two more molecules and currently has three others in clinical trials. Revenues for fiscal 2007 were USD 1.51 billion. Open to brand acquisitions. Bulk prices havent bottomed out as yet Nicholas Piramal Nicholas Piramal started its existence with the 1988 acquisition of Nicholas Laboratories and grew through a series of mergers, acquisitions and alliances. The company has formed a name for itself in the field of custom manufacturing. It cites its 1700-person global sales force as core strength. It is well-poised for the challenge of surviving in the aftermath of product patent protection. The company has respected intellectual property rights since its inception. The company grossing USD 350 million per year Nicholas Piramal is well-poised for the challenge of surviving in the aftermath of product patent protection. It decided to make its own intellectual property and opened a research facility in Mumbai with hopes of launching its first drug in 2010 at a cost of USD 100,000.

Company Name Company Profile

Sales Revenue/Turnover Future Prospects

22

Indian Pharmaceutical Industry | 9/4/2010

Company Name Company Profile

Sales Revenue/ Turnover

Future Prospects

Cipla In 1935, The Chemical, Industrial & Pharmaceutical Laboratories was set up, which came to be popularly known as Cipla. It was officially opened on September 22, 1937 when the first products were ready for the market. Today they have 31 world-class manufacturing facilities spread across the country, with dedicated plants for Oncology products, Hormones, Inhalers, Carbapenems, and Cephlosporins, among others. They more than meet the stringent international standards, such as that of US FDA, MHRA-UK, TGA Australia, Bfarm-Germany MCC-South Africa, WHO, TPDCanada. Cipla produces one of the widest range of products and dosage forms in the world today, everything from metered-dose inhalers, pre-filled syringes, trans-dermal spray patches, lyophilized injections, nasal sprays, medical devices, and thermolabile foams. Whether it is constantly extending our product range or consistently introducing innovations, the mission is always to make the life of the patient better. Revenue in 2004 totaled USD 552 million (using Rs 43.472 = USD1) about 75 per cent of which was derived in India. Cipla started with a vision to build a healthy India. And along the way realized, that in their own small way, they could contribute to making the world a healthier place. They will continue to bring a smile on as many faces as they can to heal the world as much as they can.

23

Indian Pharmaceutical Industry | 9/4/2010

Company Name Company Profile

Biocon India Biocon India is incorporated as a joint venture between Biocon Biochemicals Ltd. of Ireland and an Indian entrepreneur, Kiran Mazumdar-Shaw in 1978. Biocon is Indias premier biotechnology company. Headquartered in Bangalore Biocon has evolved from an enzyme company to a fully integrated biopharmaceutical enterprise, focused on healthcare. Biocon strategically focuses its activities on its bio-pharma business verticals that include APIs, biologicals and proprietary molecules. Biocon Limited and its two subsidiary companies, Syngene International Limited and Clinigene International Limited form a fully integrated biotechnology enterprise specializing in biopharmaceuticals, custom research and clinical research.

Sales Revenue/Turnover Future Prospects

Total Revenues are Rs 9.9 billion. Consistent with their long-term growth strategy, Biocon remains committed to building biotherapeutics franchise through their own R&D efforts. To further enhance their IP and technology platforms, they have made an investment of Rs. 764 million in R&D, which is a 76% increase over the previous fiscal.

Turnover of some of the major companies has been graphically represented below.

Sales Turnover
4500 4000 3500 3000 2500 2000 1500 1000 500 0

24

Indian Pharmaceutical Industry | 9/4/2010

Key Trends

Changing growth fundamentals of domestic market Expansion of private sector healthcare driving accessibility Medical value travel has led to an investment spurt in the private healthcare services in the country There has been accelerated investment from the private sector in healthcare facilities across tier-I and tier-II cities in the country Estimated one million beds would be added by 2012 taking the total beds available in the country to over two million** Estimated US$ 69.7 billion would be invested by private sector in healthcare infrastructure by 2012 Number of patients visiting Indian hospitals is expected to rise by 30 per cent to 22 million by 2015 ** Source: E&Y FICCI Healthcare Report

25

Indian Pharmaceutical Industry | 9/4/2010

Increasing penetration of medical insurance Penetration of medical insurance would grow at a higher pace due to increasing influx of foreign players Favorable regulatory changes such as permitting Foreign Direct Investment (FDI) of 51 per cent in the stand-alone health insurance companies and setting the minimum capital requirement at US$ 5.4 million would drive growth in this segment. Indian middle class with its increasing purchasing potential is expected to become a major buyer segment Increasing penetration of customized insurance plans would drive the affordability, influencing the consumption of medical and healthcare products Rising disposable income to drive drug consumption High purchasing potential of the burgeoning

Focus of Indian companies shifting from the US Pricing pressures and shrinking margins in the generics space and the increasing litigation instances in the US are compelling Indian companies to consider opportunities beyond US Indian companies have invested more than US$ 1.2 billion in the European markets

Increasing quest for New Chemical Entities (NCE)

Indian pharmaceutical companies striving to move up the value chain and make place for themselves in the innovator league Enhanced level of investment in R&D capabilities and infrastructure by the industry and the Government Dr. Reddys Laboratories NCE Balaglitazone is Indias the first indigenously developed molecule to enter the Phase III trial.

26

Indian Pharmaceutical Industry | 9/4/2010

Growing R&D pipeline of Indian companies presents significant in-licensing opportunities for global companies.

Big pharma companies join outsourcing queue India emerging as a big global destination for contract manufacturing,unlike R&D outsourcing. Some of the reasons why India is emerging as an inviting destination for outsourcing drug production Over 80 per cent of the 38 big and medium-sized pharma companies across the world rated India higher than China, Eastern Europe, Puerto Rico, Singapore and Ireland. Offers a significant cost-quality proposition in end-to-end research and development, with potential savings of over 60 per cent as compared to the US, coupled with a strong supply of skilled manpower and capital efficiency Has close to 100 manufacturing facilities approved by the US Food and Drug Administration (FDA), the largest after the US Drug production outsourcing industry to grow over 43 per cent annually, thrice the global growth rate Diminishing numbers of new drugs, as against existing drugs going off-patent, high research and development costs, and pressure to reduce healthcare costs are forcing Big Pharma to rope in strategic partners to contain manufacturing and drug development expenses

Innovators- joining hands with generic companies Over the last few years the global pharmaceutical industry has witnessed innovator company entering into alliances with generic companies thus clearly signaling their plans of venturing in the generic space.

27

Indian Pharmaceutical Industry | 9/4/2010

*Acquisition is yet to complete. A$ means Australia dollar. E- Estimated value.

28

Indian Pharmaceutical Industry | 9/4/2010

Key Concerns
Pricing pressure interrupting the growth of key economies The main concern for the global generic market is the increased pricing pressure. The low entry barrier of the segment has led to an increase in the number of players resulting in an increase in the level of competition. Generic pharmaceutical companies compete based on their comparatively low cost and therefore do not mount sizable sales campaigns. Because these companies do not rely on sales representatives, heavy advertising, and relationships with referral sources (i.e., physicians), some of the most stringent compliance concerns in the pharmaceutical industry publicized over the past 10 years do not impact the generic pharmaceutical companies to the same extent as their proprietary competitors.

29

Indian Pharmaceutical Industry | 9/4/2010

SWOT Analysis

Strengths
- Low cost manpower in science and technology - Non infringing process of Acive Pharmaceutical ingredients (API) - Increasing liberalization of government policies - Excellent clinical trial centers

Weakness
- Low investment in R & D - Fragmentation of installed capacities - Low share of India in world pharmaceutical industry - Non availability of intermediaries for bulk drugs

Opportunities
- Increasing income levels - Growing health awareness - With globalization, export potential is increasing - Large number of patent expiry - New markets opening

Threats
- Strict registration process - Competition from other generic drug manufacturers - Non tariff barriers imposed by developed countries - Counterfeit drug industry

30

Indian Pharmaceutical Industry | 9/4/2010

Porters five force Analysis

Bargaining power of suppliers: -- Numerous suppliers lead to low switching costs -- Volume benefits occur -- Suppliers can go for forward integration -- Raw material costs consist major portion of total expenses

Threat of new entrants: -- High number of domestic and international players in the market -- Economies of scale exist -- Advent of product patent regime supportive for entry of pharmaceutical MNCs -- High degree of development cost involved

Competitors -- Highly competitive industries with top 10 companies controlling about 30 % of the Indian market -- High fixed and exit costs add to the competition -- Companies tend to establish facilities in lower labor cost areas, leading to increased competition -- Major players are large multinationals with huge working capital Bargaining power of buyer -- End consumers do not have much bargaining power as practitioners act as gatekeepers -- Buyers are less price sensitive -- Highly fragmented market so buyer concentration v/s industry is low Threat of Substitutes -- Biotechnology is a threat to synthetic pharma products -- Generics are the biggest threats to propreitary drugs -- Increased popularity of alternative medicinal techniques poses a threat for the OTC market

31

Indian Pharmaceutical Industry | 9/4/2010

References
http://www.dancewithshadows.com/pillscribe/indian-pharmaceuticals-market-will-grow10-14-to-touch-40-billion-by-2015-mckinsey/ Indian Pharmaceutical Industry- Worlds Destination !!, report by KRChoksey, 2009 Global Pharma looks to India: Prospects for growth, report by PWC 2010 Pharmaceuticals: The next big opportunity (biosimilars), report by IIFL 2010 India Pharma 2015-A Mckinsey Report http://www.kpmg.fi/Binary.aspx?Section=174&Item=2888 http://www.icra.in/files/PDF/SpecialComments/2010-February-%20Pharma.pdf http://www.ibef.org/industry/pharmaceuticals.aspx http://www.duke.edu/web/soc142/team2/segments.html http://www.smartconsultinggroup.com/blog/articles/emerging-trends-in-thepharmaceutical-industry http://www.sourcejuice.com/1292062/2010/01/04/2009-Review-global-pharmaceuticalindustry/ http://www.economywatch.com/world-industries/pharmaceutical/ S&T Industry www.ibef.org www.pharmainfo.net

32

Indian Pharmaceutical Industry | 9/4/2010