mnc Pharma Looks to India Final

5/28/2018 mnc Pharma Looks to India Final

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Global pharma looks to India:Prospects for growth

Pharmaceuticals and Life Sciences


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Table of contents

Introduction 03

Background 04A fast growing economy

An expanding pharmaceutical market

Government-provided healthcare improving, but private healthcare dominates

Domestic market overview 09Background

Consolidation underway, despite challenges

Contract manufacturing

Vaccines

Over the counter market holds signicant potential

Reaching the untapped rural market

Growing Research & Development 15Overview

Clinical trialsBiotech and biosimilars on track for growth

Other growth areasBioinformatics

Stem cell research

Medical devices

Global Pharmas evolving business models and options in IndiaBackground

Export-oriented business (Contract Research and Manufacturing Services)

LicensingFranchising

Joint ventures

Wholly-owned subsidiaries

Practical concerns 27Infrastructure

Tax environment

Counterfeiting

Intellectual property

Conclusion 30Related reading: Pharma 2020

References 32

Acronyms 38

31

20

23


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Global pharma looks to India: Prospects for growth 3

Introduction

The pharmaceutical industrys mainmarkets are under serious pressure.North America, Europe and Japan jointlyaccount for 82% of audited andunaudited drug sales; total salesreached US$773 billion in 2008,according to IMS Health. Annual growth

in the European Union (EU) has slowedto 5.8%, and sales are increasing at aneven more sluggish rate in Japan (2.1%)and North America (1.4%).1Impendingpolicy changes, promoting the use ofgenerics in these key markets areexpected to further dent the top- andbottom-line of global pharma majors.The industry is bracing itself for somefundamental changes in themarketplace and is looking at newerways to drive growth.

Further, higher R&D costs, a relativelydry pipeline for new drugs, increasingpressure from payers and providers forreduced healthcare costs and a host ofother factors are putting pressure on theglobal pharmaceutical companies.Pharma companies are looking for newways to boost drug discovery potential,reduce time to market and squeezecosts along the whole value chain.

How can industry leaders best facethese challenges? Analysis byPricewaterhouseCoopers (PwC) showsthat several regions offer considerable

promise, either as places with untappeddemand for effective drugs or assuitable areas for conducting researchand development (R&D) and/or clinicaltrials. In this paper we shall examine theopportunities available in India.

Indias population is growing rapidly, asis its economy creating a large middleclass with the resources to affordWestern medicines. Further, Indiasepidemiological prole is changing, sodemand is likely to increase for drugsfor cardio-vascular problems, disordersof the central nervous system and otherchronic diseases. Together these factorsmean that India represents a promisingpotential market for globalpharmaceutical manufacturers.

More than that, India has a growingpharmaceutical industry of its own. It islikely to become a competitor of globalpharma in some key areas, and apotential partner in others. India hasconsiderable manufacturing expertise;Indian companies are among the worldleaders in the production of genericsand vaccines. As both of these areasbecome more important, Indianproducers are likely to take a large role

on the world stage and potentiallypartner with global pharma companiesto market their wares outside of India.

Indian companies have also startedentering into the realm of R&D; some ofthe leading local producers have nowstarted conducting original research.India has the worlds second biggestpool of English speakers and a strongsystem of higher education, so it should

be well-positioned to serve as a sourcefor research talent. A new patent regimeprovides better protection of intellectualproperty rights, although some issuesremain. Clinical trials can also beconducted here much more cost-effectively than in many developednations, and some local companies arebeginning to develop the requiredexpertise. All of these factors add up toa strong case for partnering with Indiancompanies around R&D, including

clinical testing.

Further, healthcare has become one ofthe key priorities of the IndianGovernment and it has launched newpolicies and programmes to boostlocal access and affordability toquality healthcare.

Global players in the pharma industrycannot afford to ignore India. Thecountry, many predict, will be the most

populous in the world by 2050. India willmake its mark as a growing market,potential competitor or partner inmanufacturing and R&D, and as alocation for clinical trials.


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4 PricewaterhouseCoopers

A fast growing economy

The Indian economy is worth aboutUS$1,243 billion and rapidly gettingbigger.2Real GDP growth reached 9%in the year to March 2008.3The rate ofincrease has since slowed down due tothe global nancial crisis; in the year toMarch 2009, growth eased to 6.7%.4Even so, most forecasters believe thatIndia will continue to show robustgrowth over the long-term; a survey ofprofessional forecasters performed forthe Reserve Bank of India (RBI)anticipates growth improving to 6% inthe year ending March 2010,5andexpects robust growth of 7.8% p.a forthe next ten years.6Previous forecastssuch as those of Goldman Sachs

suggest that India will be the onlyemerging economy to maintain such anoutstanding pace over the longer term,i.e. to 2050 (see Figure 1).7

Two factors underlie this favourableoutlook: Indias demographic prole anda robust services sector. Indiaspopulation is currently just over 1.1billion and projected to rise to 1.6 billionby 2050 a 45.5% increase that will seeit outstrip China as the worlds most

populous state.8

India has also utilisedits strengths in IT to become a majoroffshore business services provider, inmarked contrast with most of Asia,which has relied on manufacturing forits recent growth. As a result, servicesnow account for 64.5% of Indias GDP(see Figure 2).9While a strong servicessector heralds well for continuedeconomic prosperity, it also suggestswhy India looks to be important forresearch and development as well asdrug manufacture; the countrysexperience delivering on outsourcingopportunities in other knowledge-criticalareas such as IT should serve it well inits bid to offer such services in pharma,biotech and related areas.

Figure 1: India is forecast to grow by at least 5% a year for the next 41 years

Source: BRICs and Beyond, Goldman Sachs, November 2007.

Figure 2: India is shifting from agriculture to services

Source: Reserve Bank of India Annual Reports.

Background


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An expanding pharmaceuticalsmarket

Indias pharmaceuticals industry looksset for a solid long-term growth. Italready ranks fourteenth in the globalleague table, with sales of almostUS$19 billion in March 2009.10However,PwC estimates that it will rise toapproximately US$50 billion by 2020 a 163% in the space of eleven years.11Indeed, in our report, Pharma 2020:The vision,we anticipate that India willbe one of the industrys top 10 marketsby 2020.

This growth will be driven by theexpanding economy and increasing percapita GDP. In 2008, Indias middle

class constituted 13% of thepopulation, according to the NationalCouncil of Applied EconomicResearch.12While this remains a fairlysmall proportion of the total population,it represents a substantial increase froma mere 3% in 1995.13If the economycontinues to grow faster than those ofthe developed world and the literacyrate keeps rising, around a third of thepopulation (34%) is expected to join themiddle class in the near future.14While

these consumers still earn substantiallyless than their US or Europeancounterparts, they are rapidly acquiringthe buying power necessary to affordmodern healthcare, particularly ifpurchasing power parity is considered.One source estimates that at least 60million Indians a market as big as theUK can already afford to buy Westernmedicines.15Aggressive pricingstrategies will be necessary, however, tomake in-roads into Indias price-sensitive market.Indias federal Government currentlymandates price controls on essentialdrugs, however, these are under review.Price controls are carried out on certain

The bottom line:Increased buying

power andepidemiologicalchanges shouldspur dramaticgrowth in salesvolumes, but Indiaremains a price-

sensitive market.

drugs by virtue of the Drugs PriceControl Order (DPCO), supervised bythe National Pharmaceutical PricingAuthority (NPPA). The 347 price-controlled drugs included in 1979 werereduced to 143 in 1987.16At present, 74bulk drugs are covered under the

DPCO.17The Governments draftpharmaceutical policy in 2006 sought toexpand the scope of essential drugsand evoked a sharp reaction from theindustry. They argued that it wouldadversely affect R&D activities in India,as companies would stay away frominvesting in new drugs. To date, nofurther action on the proposed policychanges have been taken and itcurrently looks unlikely that the DPCOwill be expanded.

The Indian Governments Department ofPharmaceuticals has also initiatedoperations for a peoples medicinesshop, called Jan Aushadhi, in variouslocations. These shops sell genericmedicines at much cheaper ratesthan the price of correspondingbranded medicines.18

Some multinational pharma companiesare already taking measures to reach a

larger patient population by reducingdrug prices and increasing affordability.One example: Merck & Co. haslaunched differential pricing throughJanuvia, its anti-diabetic drug, which ispriced at approximately US$1 per dosein India a fth of its price in the US.19Indian companies like Biocon have alsofollowed a similar pricing strategy.Biocon has launched its monoclonalantibody BIOMAb EGFR at one-fourthof its price in the global markets.20

Its also likely that India will requiredifferent types of drugs in the future.Like almost every other emergingeconomy, India is experiencingepidemiological changes. Thanks to


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greater afuence and better hygiene,the population is ageing; by 2028, anestimated 199 million Indians will be 60or older, up from about 91 million in2008.21 Besides that, it has the largestpool of diabetic patients, for example,with more than 41 million people

suffering from the disease (see sidebaron Indias insulin dependence).22Thepattern of demand for medicines isshifting accordingly. In 2001, anti-infective and gastrointestinal drugs andvitamins accounted for 50% of thedomestic market. By 2012, they areexpected to account for just 36%.Conversely, drugs for cardio-vascularproblems, disorders of the centralnervous system and other chronicdiseases will account for 64% of

total sales, up from 50% in 2001(see Figure 3).These factors help to explain why Indiais expected to be among the topmarkets for many pharmaceutical

Indias insulin dependence

The number of Indians withdiabetes is projected to reach73.5 million in 2025. The directand indirect costs of treating

such patients are currently aboutUS$420 per person per year. Ifthese costs remained the sameas they are now, Indias totalbill for diabetes would be aboutUS$30 billion by 2025. But asits economic wealth grows andstandards of care improve,treatment costs are likely to rise.

The US spends an averageUS$10,844 per year on eachpatient with diabetes. If Indiasper capita expenditure rose to

just one-tenth of this level, thetotal cost of treating all patientswith diabetes would be US$79.7billion by 2025. The value ofprophylaxis in India alone wouldthus be substantial; preventing10% of the population fromdeveloping diabetes would save

nearly US$8 billion a year.

Source: PricewaterhouseCoopers,Pharma 2020: The vision

companies. It currently represents about8% of the global drugs market byvolume and only around 1% by value,23but the Indian consumers rapidlyincreasing purchasing power and thecountrys changing epidemiologicalprole could jointly improve its price/

volume mix.

In order to get drugs to consumers atthe right price, though, improvements tolocal supply chains will need to takeplace. One source estimates thatlogistics comprise 45-55% of the costsin the Indian pharmaceutical supplychain from factory to shelf.24India hashistorically had a pharma supply chainwith a number of stops between theinitial production and nal consumer.

The arrival of Goods and Services Tax(GST) may prove to be a strongincentive for greater streamlining, assuch middle men could potentially addsubstantially to the nal cost ofmedications in a price-sensitive market.

0%

20%

40%

60%

80%

100%

2001-02

Source: ORGIMS Data, Crisil Research, Pharmaceuticals: Review Indian formulation market (2008)

Figure 3: Indias therapeutic needs are changing

2006-07 2011-12

Anti-infectives

Vitamins/Minerals

Others

Respiratory

Gastrointestinal

Neuro/CNS

Antidiabetic

Cardiovascular

Pain/Analgesics,

Gynaeclogical &

Dermatology

15%

3%

8%

5%

24%

14%

12%

10%

9%

13%

4%

10%

5%

18%

9%

11%

9%

20%

13%

5%

10%

6%

17%

8%

11%

9%

21%


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Further, the consolidation of the pharmaindustry and emergence of pharma retailchains are likely to lead to moreconcentration in the supply chain. Theincreasing requirements posed by someformulations like biologics, whichrequire advanced expertise such as the

ability to maintain the cold chain andavoid shocks during the distributionprocess, will also play a role. Inventoryreduction and the reduction of ordercycle time will be key objectives forcompanies looking to optimise theirsupply chains in order to offer theirdrugs at affordable prices.25

Government-providedhealthcare improving, butprivate healthcare dominates

The Indian Government is currentlyin the throes of a much neededprogramme to reform the health caresystem. After years of under-funding,most public health facilities provide onlybasic care. Moreover, three quarters ofmedical facilities are located in urbanareas, leaving the majority of rural

The bottom line:Indias healthcare

system isstruggling tomeet the needsof its vastpopulation, butgovernmentprogrammes and

reforms in thehealth insuranceindustry shouldimprove thesituation.

workers without access to hospitals orpharmacies (see Table 1).26Many ofthe poor rely exclusively on alternativeforms of treatment such as Ayurvedicmedicine27, Unani28and Acupuncture.

The Indian Government has made the

provision of healthcare as one of its

Doctors 60 per 100,000 people29

Nurses 80 per 100,000 people30

Pharmacies 367,000 (urban),

183,000 (rural)31

Hospitals 30,000 (67% public,

23% private)32

Hospital

beds

1.7 million

(one per 1,000 people)33

Healthcenters

171,687 (including145,272 sub-centres

with basic facilities)34

Sources: World Health Organisation (2008)Modern Pharmaceuticals (December 2008);Health System in India: Opportunities andChallenges for Improvement (July 2005)Expresspharmaonline.com (2007); andWorld Health Organisation (2007).

Table 1: India healthcare facilities


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who do have some insurance, themain provider is the Government-runGeneral Insurance Company (GIC),along with its four subsidiaries, butprivate insurance is on the rise. Thehealth insurance market in India hasundergone liberalisation in recent years.

Further, the Insurance Regulatoryand Development Authority (IRDA)eliminated tariffs on general insuranceas of January 1, 2007, and sales havebeen going up accordingly. In 2007-08,almost US$1.2 billion worth of medicalinsurance policies were sold in India up from US$160 million in 2001-02.42

But widespread use of health insurancecould take many years, not leastbecause the insurance companies lackthe data they require to assess health

risks accurately and the only productsthey sell work on an indemnity basis that is, they reimburse the patientafter he or she has paid the healthcareproviders bill, making such policiesless attractive.

2010-11 also allocated US$ 2,920million under the National Rural HealthMission (NRHM), an increase of 15%over the previous year.40

However, critics suggest that theauthorities are doing too little too

late, and those who can afford it haveturned to the private sector instead. In2008, fee-charging private companiesaccounted for 80% of Indias US$48.6billion expenditure on healthcare,while central and local Governmentaccounted for only around 20%. Privaterms are now thought to provide about80% of all outpatient care and as muchas 55% of all in-patient care.41

Some costs for care may be covered

by the insurance industry in the future,although the current lack of generalcoverage remains a challenge. In 2007,only 11% of the population had anyform of health insurance coverage.For the small percentage of Indians

key priorities. It launched a new policyto build more hospitals, boost localaccess to healthcare and improvethe quality of medical training, andpromised to increase public expenditureon healthcare to 2-3% of GDP, up froma current low of 1%.35The 2008-09

Union Budget highlighted a ve yeartax holiday for setting up hospitalsanywhere in India, especially in tier-2and tier-3 towns.36The Governmentfurther allocated US$51 million for anew health insurance scheme to providea health cover of US$745 for everyworker (including his/her family) in theunorganised sector falling belowpoverty line (BPL),37which wasincreased to US$76 million in 2009-10budget.38The recent budget (2010-11)

extended the coverage to another 20%of the Indian population covered by theNREGA (National Rural employmentGuarantee Act) programme, who haveworked for more than 15 days duringthe preceding nancial year.39Budget



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The bottom line:2008 saw M&A

in the pharmasector in Indiamore thandouble againstthe previousyear, despitethe challenges

posed by theglobal recession.

BackgroundIndias domestic pharmaceuticalindustry was worth around US$11 billionin March 2009 and PwC estimates itwill rise to approximately US$30 billionby 2020.43The domestic market is veryfragmented; more than 10,000 rmscollectively control about 70% of themarket.44Many of the local playersare generics producers specialisingin anti-infectives. In 1972, the federalGovernment passed a law allowing localproducers to manufacture drugs thatwere still under patent, as long as theyused different processes.45The lackof a patent system that conformed tointernational standards helped spawna domestic industry that excelled in

reverse engineering novel drugs andlaunching copycat versions at home andin other emerging markets. Wholesalemarketing of generic versions of drugspatented since 1995 and still underpatent has not been permitted since

2005 (see Intellectual Property Rightson page 29), so market strategies arechanging and some genericsproducers are looking further aeldfor new markets.

Indias manufacturing clout has made it

a massive threat to established genericsrms India now produces morethan 20% of the worlds generics.46Moreover, around US$70 billion worthof drugs are expected to go off patentin the US over the next three years,and India is well-positioned to takea substantial share of the resultingnew generics markets.47Indiancompanies today account for 35% ofthe Abbreviated New Drug Application(ANDA) approvals granted by the US

Food and Drug Administration (FDA)until February 2009.48Indias generichouses are now entering into strategicalliances with global pharma companiesto strengthen their generic portfolioand jointly market these drugs globally,

Domestic market overview


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for example Pzer has entered intoalliances with Aurobindo and Claris tomarket their drugs in offshore markets.Similarly, GlaxoSmithKline (GSK) hasacquired exclusive rights for Dr. ReddysLaboratories (DRL) pipeline of over 100generics for sale in emerging markets.

In addition to partnering with globalpharma, some Indian companies arealso setting up their own marketingsubsidiaries abroad.

Indias pharmaceutical exports totalledaround US$8 billion in 2009 and PwCestimates they will rise to approximatelyUS$20 billion by 2020.49Over thepast several years companies suchas DRL, Cipla and Lupin have growninternationally in their own right as well.

Other Indian pharma companies likeGlenmark Pharma, Orchid and Aurobindoalso have wholly owned subsidiaries indifferent parts of the globe.

DRL has grown from a small rm intoan international business with annualsales of more than US$1.4 billion,about 84% of them outside India.50Thecompanys acquisition of GermanysBetapharm positioned it as one of thelargest generics companies in the world;

it is currently one of the largest suppliersof drugs to the US. It is also one of the

largest active pharmaceutical ingredient(API) manufacturers globally.Cipla is another company withrevenues of over US$1.1 billion, 56%of which come from outside India.51

It is one of the largest manufacturers

of antiretroviral drugs in the World.52In 2007, an Avesta-Cipla jointventure acquired Siegfried Biologics,a Switzerland based company, tomanufacture US FDA and EuropeanMedicines Agency (EMEA) compliantbiopharmaceuticals for the globalmarkets.53Meanwhile, Lupin is thebiggest producer of Lisinopril, an APIused in the treatment of hypertension.54Lupins acquisition of MulticarePharmaceuticals of Philippines has

propelled it into position as a topgenerics player in the Phillipines.55The deal represented Lupins sixthacquisition since 2008.

Consolidation underway, despite

challenges

The Indian pharma industry as a whole ismoving on a consolidation path. The year2008 saw 57 mergers and acquisitions,56a 128% increase over the previous year.57

Total investment in pharmaceutical,healthcare and biotechnology sectors

was second among industry sectors interms of deal value at US$5.57 billion,marginally below the Telecommunicationsector which had total transactions worthUS$5.78 billion in 2008. In the same year,Indias largest pharma company, RanbaxyLaboratories, was acquired by Japans

Daiichi Sankyo. This was a landmarkdeal in the Indian pharma history, whereRanbaxys promoters relinquishedtheir entire stake to the acquirers. Thetransaction paved the way for otherpromoters to consider whether they arebetter served growing their businessesindependently or by realigning with otherpartners who may be able to help themto take their businesses to the next levelof growth.

In 2008, the world went through a creditcrunch, followed by a prolonged globaleconomic downturn in the last quarter of2008 and throughout 2009, both of whichhave also had a negative impact on theIndian pharma industry. The impact ofthe downturn, coupled with volatility inthe Rupee, depleted the nancialposition of several Indian pharmacompanies, especially those which hadsubstantial foreign borrowings on theirbalance sheets.

Sustaining acquisition heavy structuresbecame increasingly difcult in 2008.



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Some Indian companies which madesignicant acquisitions were now ndingit difcult to integrate their foreignacquisitions with the Indian operationsdue to severe pricing pressures.Legislative reforms imposed inacquisitions home markets also had an

impact. Further, some companiesbooked losses on foreign currencyconvertible bonds (FCCBs), negativelyimpacting overall protability.

Nonetheless, investor condence hasremained fairly stable and deals continuedespite challenges. The average deal sizein 2008 was around US$15.34 million,20% higher than US$12.82 million in2007. The pharma sector had 57 deals,of which 17 deals were domestic. There

were a total of 22 pharma private equity(PE) deals worth US$337.41 million.Private equity players and investmentfunds played an active role in the dealmarket. Some of the investments werethose of Citi Venture and Everest Capitalof about US$23.6 million in NectarLifesciences.58Similarly, Kotak PrivateEquity Group, an arm of Kotak MahindraBank, invested about US$10 millionin Intas Biopharmaceuticals.59GujaratBiotech Venture Fund invested US$12.7

million in Century Pharmaceuticals andSME Growth Fund invested US$7 millionin Centaur Group.60

Further, in 2009 another landmark dealwas announced, with sano-aventisacquiring controlling stakes in theleading Indian vaccine manufacturerShanta Biotech.

Elsewhere we discuss some of the

strategies that Indian companiesemployed to stay aoat during the crisis,including greater focus on leveragingtheir strengths in newer structures likeContract Research & ManufacturingServices (CRAMS), biotech & clinicaltrials, and increasing penetration inrural markets.

Contract manufacturingContract manufacturing is a strong

segment of the domestic market. Indianrms have several advantages over theirWestern rivals. The expertise gained inmanufacturing generics through reverse-engineering has helped some companiesstreamline the process for gettingmanufacturing up and running. Costs arevery competitive; indeed, they are onlytwo-fths of those involved in settingup and running a new manufacturingfacility in the West.61They can operateon signicantly lower margins, given

their low development and labour costs.Currently their key area of strength in

The bottom line:2008 saw M&A

in the pharmasector in Indiamore thandouble againstthe previousyear, despitethe challenges

posed by theglobal recession.


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outsourcing is the manufacture of APIs.Some Indian pharma companies couldprobably benet signicantly by movingtowards specialty APIs in the future.

The Indian contract manufacturingsegment was worth around US$605

million in 2008 and is expected to reacharound US$916 million in 2010.62TheUS FDA has already approved over100 manufacturing sites more thanin any country except the US (seeFigure 4).63Among six ofces that theUS FDA has overseas, two are locatedin India, in Delhi and Mumbai.64Alldomestic producers are also obliged tocomply with Indias Good ManufacturingPractices, under Schedule M of theDrugs and Cosmetics Act, 1940.

Indian manufacturers are currently facingsome scrutiny around quality issues. In2009, the US FDA took action against afew Indian companies after conducting aseries of inspections and issuing warningletters against these drug makers.

While such sanctions clearly posesignicant challenges, some analystssee an opportunity as well. Indiancompanies are aggressively improving

their manufacturing standards inresponse, and are therefore likely tobe better positioned to take advantageof the upsurge in generics production

The bottom line:Indian pharma

companies havesolid expertisein contractmanufacturingand recentscrutiny aroundquality issues is

driving signicantimprovement inmanufacturingstandards.

Figure 4: India has more US FDA-approved manufacturing plants than any country

except the US

Source: Crisil Research, Bulk drug exports to scale up in the regulated markets (December 2008) for India;ICICI Securities, Indian Pharma Sector: Sector Update (December 2008) for Italy, China, Spain, Taiwan, Israeland Hungary.

expected as patents expire over the nextve years.65

Some Indian manufacturers are also nowincorporating Lean Manufacturing andSix Sigma principles to help them boostoperational efciency and further improve

quality, while facilitating compliance.66

Vaccines

Vaccines are another prominent areaof growth. India is one of the largestvaccine producers in the world, withmany new vaccines set to be launchedin the next ve years. The vaccinessegment was around US$780 million inMarch 2008, growing at a compoundedannual growth rate (CAGR) of 15%.67India currently exports vaccines toabout 150 countries. It also meetsaround 40-70% of the World HealthOrganisation (WHO) demand for theDPT (diphtheria, pertussis or whoopingcough, and tetanus) and the BCG(bacille calmette-gurin) vaccine againsttuberculosis, and almost 90% of itsdemand for the measles vaccine.68The Serum Institute of India, foundedin 1966, is a leading player whichproduces and supplies low-cost, life-

saving vaccines for children and adults.The Institute is also the worlds largestproducer of measles and DPT vaccines.


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It has been commissioned by the WHOto develop vaccines against the lateststrain of H1N1. An estimated two outof every three immunised children inthe world have received a vaccinemanufactured by the Serum Institute.69As the risk of global pandemics

grows, so do potential markets fornew vaccines.

OTC market holds signicant

potential

Globally, over-the-counter (OTC) drugsales have been increasing in recentyears. This trend is driven in part byaggressive efforts of global pharmacompanies to leverage the brand equity

that major products have attainedduring the patent period. Other majorwinners in the OTC category includeproducts where patients continue to buyparticular remedies following an initialdoctors prescription.

OTC drugs may have even strongerpotential in India. An increasing numberof Indians are already dipping into theirown pockets to buy OTC drugs. TheOTC market was worth about US$1.8billion in 2009 and is expected to grow

at 18% a year to reach about US$3billion in 2012.70The Government isnow considering plans to expand thelist of drugs which can be sold outsidepharmacies, since many commonhousehold remedies are more difcultto obtain in India than in otherdeveloping countries. An expansion ofthe list would substantially increasethe potential market opportunity inthis segment.

Although the term OTC has no legalrecognition, all the drugs that are notincluded in the list of prescriptiononly drugs are considered as non-

The bottom line:OTC sales

are on theincrease, offeringopportunitiesto achieve highvolumes andenhance pharmabrands in India.

prescription drugs (or OTC drugs). OTCproprietary drugs are also regulated bythe Drugs and Cosmetics Act and theDrugs and Cosmetics Rules. However,as they do not require a drug licensethey can be sold by non-chemists, sosales channels are more extensive. As

discussed, much of Indias populationrelies on self-medication, and thepurchasing power of the middle classis growing. These trends should drivegrowth in cough and cold formulations,gastrointestinals, analgesics, anddermatologicals. Only a few OTCactive ingredients, e.g. acetylsalicylicacid and ephedrine and its salts, fallunder the current DPCO price control.Counterfeits of popular OTC drugs arehowever a major issue.

Indian consumers are also placing moreemphasis on prevention and wellness,which should contribute to continuedincreases in sales of OTC vitaminsand minerals. The market is alreadygrowing strongly. Protable OTC drugsfor some of Indias largest pharmacompanies include articial sweeteners,emergency contraceptive pills andnutritional supplements.

The popularity of Ayurvedic therapiesshould also contribute to the sales ofrelated OTC formulations. Some ofthe leading OTC brands in India areregistered as Ayurvedic Medicinesbecause of their plant-based naturalactive ingredients. There are no pricecontrols on Ayurvedic Medicines.

Some global pharma companies arealready launching OTC products in Indiaor buying OTC products. Novartis Indialaunched Calcium Sandoz as an OTC

supplement in 2000 and has now comeout with Otrivin nasal drops in a sprayform.71Pzer has launched Listerine,Benadryl, Caladryl and Benylin in India,


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which were later sold to Johnson andJohnson.72In the future, India mayalso serve as a manufacturing locationfor OTC products destined for othermarkets. In August 2009, US-basedOTC manufacturer Perrigo announcedthe purchase of 85% of Indian contract

manufacturer Vedants. The companyplans to shift some of its currentproduction from facilities in Israel andGermany to India by 2011.Indias regulatory framework permitsadvertising for OTC products, andconsumers can buy them without adoctors prescription. However, a widerdistribution network will also boost thegrowth of such products. Currentlyabout half of OTC sales come from

chemists, while grocery stores andgeneral stores account for over a thirdof the sales.73Pharma companies arealso targeting post ofces to sell OTCdrugs in rural India. This move couldsubstantially increase the access ofOTC drugs, especially in areas wherethere are no pharmacies.

Reaching the untapped rural

market

Although urbanisation continues,around 70% of Indias population stillresides in rural areas. As already noted,the population residing in villages hassignicantly reduced access to qualitytreatment and medicines. Many pharmacompanies are thinking beyond largercities and targeting rural sectors.While urban markets are currently

more lucrative and will continue torepresent a focus for the industry,the untapped potential of Indian ruralmarkets is now seen as the next volumedriver. Rising income levels leadingto more affordability, improving healthinfrastructure, and increasing incidence

of lifestyle diseases along with the useof health insurance are fuelling thegrowth in rural areas.Indian companies are devising anumber of strategies to increase ruralpenetration. For instance, Lupin hasa strong brand franchise in the anti-infective, pain management, andgastrointestinal segments these threeareas account for 40% of domesticformulations sales. The company

has a dedicated rural eld force ofmore than 300 people and is rapidlyexpanding it. Piramal Healthcare hasalso announced a new initiative to targetthe mass market, focused on generalpractitioners, to cater to rural markets.Piramal plans to employ a eld-force ofapproximately 800 people.Companies looking to access ruralmarkets face many hurdles, includinglack of communication, language

barriers, high penetration of spuriousdrugs, lack of adequate infrastructure,such as marketing and distributionchannels for niche therapeuticsegments in particular, poor storagefacilities, and insufcient salespersonnel deployment. Global pharmacompanies eyeing rural markets willneed to forge alliances and partnershipsto overcome these obstacles.

The bottom line:While urban

markets willremain the focusin the near-term,getting treatmentout to the 70%of the populationresiding outside

of these areasrepresents thenext volumedriver.


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OverviewPwC estimates that Indias 10 largestdrug rms spent US$480 million on R&Din 2008. The bulk of this investmentwent towards developing new

formulations, however R&D in the Indianpharmaceuticals industry is changing.The new patent regime meanscompanies need to be more innovative,rather than relying solely on reverse-engineering existing formulations. Thereliance on anti-infectives is also likelyto lessen. As already noted, as theillnesses of afuence and age increase,the demand for many other types ofpharmaceuticals will rise, and Indianpharma companies need to begintransforming their portfolios accordingly.

India has widely acknowledgedchemistry skills. Several leadingdomestic producers have begun toconduct original research into newchemical entities and novel drugdelivery systems. Amongst others,Ranbaxy has commenced phase-IIIclinical trials for its new anti-malarialcombination drug. Other companies arelooking to shift to clinical areas with agrowth opportunity, such as diabetes

(see sidebar on Indias insulindependence on page 6). Piramal LifeSciences has initiated phase-I trials ofa new experimental drug for diabetes-metabolic syndrome in Canada. DRL isconducting phaseIII trials for its Type IIdiabetes drug. Other areas of innovationare also being explored; Biocon has 7and Wockhardt has 10 new chemicalentities in their R&D pipelines.

However India offers limited capabilitiesin preclinical and complex Biologyresearch. Preclinical capabilities inIndia are limited to clinical trials inrodents and dogs, with almost nonefor primates. The capabilities mostlyreside with Indian pharmaceutical

companies, developed through in-house R&D programmes Governmentinvolvement in this area is minimal.Some Government institutes do offerbasic biology services, but the level ofinnovation generated by such facilitiesis fairly modest. Multinationals willneed to partly/completely own orshare technology with available IndianContract Research Organisations(CROs) in order to achieve innovativeresults. The Indian contract research

segment was estimated at aroundUS$485 million in 2008 and is expectedto reach around US$1 billion in 2010.74

Despite Indian pharma companiesgrowing expertise in later stages ofthe R&D process, many of the drugcandidates initially formulated in Indiaare likely to be further developed byWestern drug makers, because fewIndian companies can afford the highcosts and failure rates associated

with pushing a drug right throughthe pipeline. Several Indian rmshave already entered into researchpartnerships with multinationals; DRLand Torrent have joined forces withNovartis, for example, while Ranbaxyhas formed alliances with GSK andSchwarz Pharmaceuticals. Glenmarkhas formed an alliance with NapoPharmaceuticals and Piramal Healthcare

has formed an alliance with Eli Lilly. Byselling developing and licensing rightsfor the US, Japan and Western Europe,but retaining rights within emergingmarkets, some Indian pharmaceuticalcompanies are able to gain immediaterevenues, while retaining future access

to Indias growing domestic market.A number of Indian pharma companieshave spun off their R&D divisionsinto separate units in order to scaleup resources and to attract focusedinvestments. DRL started the trendin R&D spin-offs in 2005. Piramal LifeSciences, Piramal Healthcares R&Ddivision, was recently demerged fromthe latter. Sun Pharma AdvancedResearch and Ranbaxy Life Science

Research have also been demergedfrom their parent companies SunPharma and Ranbaxy respectively.Some spin offs have faced difcultiesstemming from uncertain resourcesand declining PE interest in research.Several companies are now seeking acollaborative approach towards drugdiscovery, in order to mitigate therisk associated with failure of adrug molecule.

Indias R&D base is still small, but it hasseveral advantages that should serveit well in the future. Some 70 millionpeople speak English75 more than inany other country except the US andit has an excellent tertiary educationsystem; every year, it turns out about115,000 scientists with Mastersdegrees, and 12,000 with PhDs.76Manyof these scientists have traditionally

Growing Research& Development


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gone abroad, but companies likeRanbaxy are now actively trying tolure them back with the prospect ofopportunities for original research.Salaries are also very much lower thanthey are in North America or WesternEurope. Wage costs within the Indian

pharmaceutical industry are about one-third of those in developed countries.77

To achieve its potential and convertthese opportunities into globalsuccess stories, the Indian pharmaindustry requires the support andcollaboration of all stakeholders,including the Government, academiaand nancial investors. Collaborationwill be essential; but to date only a fewIndian pharmaceutical companies have

partnered with academic institutesto carry out basic research.78Suchcooperations can help acceleratethe research process in some areas.Partnering with academia can alsohelp develop the sophisticated skillsneeded for high-level research.Pharma players who can leverage theresearch capability of academic andGovernment institutes, through mutuallybenecial collaborative models, will gainsignicant competitive advantage.

Amongst emerging economies, Indiahas the unique advantage of its recent

successes in the global software andIT services market. In this respect,India offers one of the very fewexamples of an emerging economythat has managed to attract ForeignDirect Investment (FDI) in the areaof high-tech software development,

while successfully inserting itself asa competitive presence in the veryheart of Silicon Valley. Biotech, anotherknowledge-based sector, is nowexperiencing a similar boom. Drawingon the success of IT enterprise parks,the Government also inaugurated therst phase of its rst biotech-IT park Bangalore Helix in June 2007. Theproject is part of efforts to positionIndia as a global hub for bioinformaticsand biotech.

Clinical Trials

Indias developing research skills arematched by its growing involvement inclinical testing. The country historicallylacked the expertise to perform clinicaltrials because most companies onlytested different processes for producingcopycat versions of Western productsand the rules were quite lenient. Severaldrug makers have also been caught

behaving unethically or even illegally.The Supreme Court and Drug ControllerGeneral of India (DCGI) have criticised a

few India pharma companies for testingnew drugs without getting patientsconsent or for violating protocol.However, during the past few yearsa number of big contract researchorganisations have set up businessesin India, including Quintiles, Omnicare,

PharmaNet and Pharm-Olam. Mostof the multinationals, Novo Nordisk,sano-aventis, Novartis and GSKamong them, have likewise startedrunning clinical trials here and some,such as Pzer and Eli Lilly, have beenconducting tests locally for a while.

In January 2005, the federalGovernment amended Schedule Yof the Drugs and Cosmetics Act tomake the rules on clinical trials more

consistent with international practice.79The Health Ministry is planning to adda new Schedule Y-1 to the Drugs andCosmetic Rules 1945 to further improvethe situation.80Early stage testing ofmolecules discovered outside India isstill restricted, but multinationals cannow conduct trials where, previously,they could only conduct trials in anyparticular phase after completing thesame phase of testing elsewhere.81

At present, though, the industry stilllacks a strong regulatory framework.Good Laboratory Practices (GLP)certication remains a voluntary


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The bottom line:Insufcient

regulatoryoversight iscurrently a barrier,however Indiasmany advantages- overall costsare only 50%

of comparableUS-basedprogrammes- should spurdramatic growthin clinical testingin the next 2-5

years.

process, although most Indian pharmacompanies dealing with internationalclients or exporting to foreign regulatedmarkets look to attain such certication.The National Good Laboratory PracticeCompliance Monitoring Authority wasestablished under the Department

of Science and Technology in April2002. While this was undoubtedly astep in the right direction, there arestill only about 33 GLP inspectors82and about 12 GLP certied labs in thecountry.83In addition, the ruling onwhether a trial design violates ethicalprinciples is left to individual local ethicscommittees. There is no central registerof Ethical Committee decisions. Betterinfrastructure for regulation, ethicsreview and monitoring is required.84

Registration of new clinical trials is nowmandatory on the Indian council ofmedical research's (ICMR) web basedclinical trials registry. The governmentplans to make inspection of clinical trialsites an ongoing activity by increasingthe number of inspectors, training themfor site inspection and developinga checklist for audits. Further, thegovernment is also working on aproposal to register CROs in India.85

This type of more rigorous regulatoryoversight, together with increasinginterest from foreign rms, should help

to boost the Indian clinical trials market.Expectations are already high; someobservers expect the market couldreach US$2 billion annually by 2012, upfrom just US$300 million in 2008.86The strong anticipated growth reectssome of the attractions India holds

for this market. According to a studyby Rabo India Finance, a subsidiaryof the Netherlands based Rabo Bank,the huge patient population offers vastgenetic diversity, making the countryan ideal site for clinical trials. Further,many people are treatment-nave andrelatively easy to access. The UnitedNations reports that around 30% of thepopulation lives in urban areas;87andover 67 million people live in Indias sixbiggest cities alone (see Table 2).

Population(Data in 000)

City 2005 2010

Bangalore 6,465 7,229

Kolkata (Calcutta) 14,282 15,577

Chennai (Madras) 6,918 7,559

Delhi 15,053 17,015

Hyderabad 6,117 6,761

Mumbai (Bombay) 18,202 20,072

Table 2: Urban India

Source: United Nations, World Urbanization Prospects(2007)


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The ratio of doctors to patients at60 per 100,000 people is alsorelatively high, although the qualityof medical training is not as good asit is in some other emerging nations.The countrys 289 medical collegesare over subscribed and the emphasis

is on quantity rather than quality.88These problems are compounded bylack of experience. India has only 500to 1,000 investigators in the countryas compared to 50,000 in the UnitedStates, suggesting that most companieswould need to make a major investmentin training during study start-ups.89

Some Indian pharma companies arealready developing a reputation fora nimble, rapid approach to clinical

testing that looks to streamline theclinical trial process and bring newdrugs to market faster. For example,Glenmark now routinely looks toincorporate proof of mechanism intoevery phaseI study.90Most pharmacompanies save this step for phaseII.

But the most obvious benet ofconducting clinical trials in India is thepotential for cost savings. Clinical trialsaccount for over 40% of the costs of

developing a new drug.91

In terms ofcost efciency, India offers substantialadvantages the cost of conductinga trial here is lower by 50% than in theUnited States.92The federal Governmentis alive to the strength of this argument.Drugs and materials imported for clinicaltrials are exempt from customs duties.Clinical trials also remain exempt from

service tax.

Biotech and biosimilars on track

for growth

India is home to a small biotechnology

industry, based largely in Karnataka,with other clusters of activity in WestBengal, Maharashtra, Andhra Pradesh,Hyderabad, Kerala and Ahmedabad. In2008-09, the sector generated sales ofUS$2.64 billion93representing a CAGRof 26%, but both the federal and stateGovernments have been activelypromoting biotech research initiativesand are targeting revenues of US$5billion by 2010 -11.94The leadingdomestic players include Serum

Institute of India, which focuses onimmuno-biologicals and vaccines;Biocon, which concentrates onrecombinant DNA technologies,bioprocesses, fermentation-basedsmall molecules and enzymes; andPanacea Biotec, which specialises innovel drug delivery techniques andpharmacogenomics (see Table 3).Several initiatives have been launchedby the Government to give impetusto the thriving biotech industry. The

Biotechnology Industry PartnershipProgramme (BIPP) has been launchedby the Department of Biotechnology(DBT) to support high-endbiotechnology research programmescapable of generating globallyrecognised intellectual property. Itspecically focuses on transformational

research and development. TheDBT has also drafted the NationalBiotechnology Regulatory Act in orderto set up the National BiotechnologyRegulatory Authority (NBRA). The NBRAis expected to be an autonomous bodyformed specically to regulate thebiotechnology segment and reduceregulatory overlap.96

Further funding support from theGovernment will be critical in ensuringcontinued growth in the biotechindustry. The Government can play avital role in funding incubation and earlystage ventures.

A growing biotech industry shouldhelp India to gain a share of the globalopportunity currently emerging aroundbiosimilars. The biosimilars market is

Revenues(US$ million)

200809

Serum Institute of India 242.12

Biocon 198.29

Panacea Biotec 129.79

Rasi Seeds 81.63

Nuziveedu Seeds 79.11

Novo Nordisk 71.72

Siro Clinpharm 60.86

Novozymes South Asia 54.34

Shantha Biotech 53.68

Jubilant 52.60

Source: Biospectrum ABLE, 2009 95

Table 3: Indias top 10 biotech rms

Company


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The bottom line:Indias developing

biotech industryand costadvantagesshould drivesignicantgrowth in localdevelopment of

biosimilars for theglobal market.

glaritus. DRL has already launchedlgrastim and rituximab in emergingmarkets and has a pipeline of 10biogenerics in various stages.104

The challenge for the development ofbiosimilars arises from the fact that

biologics are more complex than smallmolecules and chemically synthesiseddrugs; therefore their replica are incontrast to traditional small-moleculegenerics similar but not identical tothe original drug. Consequently, theregistration of biosimilars requires moredata than is required for generics, andmanufacturers have to demonstrateefcacy and safety in pre-clinicaland clinical studies. This makes theregistration of biosimilars a costly and

time-consuming process, and lessensthe chances of a successful launch.Developing biosimilars is costlier thandeveloping chemical based generics,requires a greater capital investmentand operating costs of manufacturingare higher. These factors mean thatdeveloping biosimilars represents ahigher risk area of R&D.

Pharma companies need to balancethe risks and rewards when considering

whether to enter the biosimilarsmarket. The decision to enter themarket should only be made based ona clearly dened long-term biosimilarstrategy, including development andmanufacturing capabilities, marketing,pricing and regulatory expertise. Indiascost advantages in many of these areas

likely to grow by around US$2 billionby 2014, to reach a total of US$19.4billion, following key patent expirationfor epoetin alpha, lgrastim, interferonbeta 1a, interferon alpha, human growthhormone (hGH), and insulin-glargine.97This represents a CARG of 89.1% from

2009 to 2014. All told, around US$25billion worth of biologics are expectedto go off patent by 2016.98Thesepatent expirations open the route forbiosimilars, the equivalent of genericsfor biologics.

Indian biotech companies are slowlybuilding capabilities in developmentand manufacturing of biosimilars. IntasBiopharmaceuticals is now developinga biosimilar of a protein used to treat

the side effect of cancer therapy,for example.99Biocon has initiatedregistration of its human recombinantinsulin with the European regulatoryagency, EMEA and intends to launch itby 2011.100Reliance Life Sciences haslaunched three biosimilarsReliPoietin(Erythropoietin), ReliGrast (GCSF),and ReliFeron (Interferon Alpha 2b) inthe domestic market in 2008 and iscurrently conducting clinical studiesfor erythropoetin and granulocyte

colony stimulating factor (GCSF) inEurope.101Wockhardt has launchedits recombinant erythropoietin, Wepoxand insulin, Wosulin in the domesticmarket102and is conducting clinicaltrials in the US for Wosulin.103It has builtcapacities in erythropoetin, hepatitisvaccine, recombinant insulin and insulin


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could help it gain a stronghold globallyin this growing market.

Bioinformatics in India

The modern process for drug discoveryand testing now generates very large

quantities of data through computermodeling and simulations, geneticsequencing, and other data-intensiveprocesses. Further, as we noted in Pharma2020: The vision, pharma companies areunder increasing pressure to documentthe efcacy of their products; trackingpatient outcomes represents a furthersource of large quantities of data. In orderto facilitate the storage, management,retrieval and analysis of this large poolof data, a new subsector of the IT sectorhas emerged bioinformatics. Tools have

been developed which can help lowercost, improve efciency, and streamlinethe process of documenting a drugsefcacy throughout development untillaunch and beyond.

Indias strength in the IT sector and itsgrowing pharmaceutical sector are drivinggrowth of this emerging area. Revenuesfor the Indian bioinformatics industrywere around US$48 million as of March2009. It is an export driven segment with

earnings of around US$37 million fromoverseas. Domestic revenues contributearound US$11 million.105Some companiesprovide only specialised bioinformaticsservices; in other cases, local life sciences

companies are integrating bioinformaticsservices into a complete portfolio ofresearch capabilities.India is now actively targeting thebioinformatics market, with theconstruction of its rst biotech-IT parkin Bangalore, at a total cost of about

US$87 million.106The rst phase of thepark has been completed and a tender forthe development for phaseII is expectedsoon from the local state Government.Several Indian companies, including theBangalore based Strand Genomics andOcimum Biosolutions, have already madeforays into the bioinformatics industry.Recently, Ocimum was granted a patentfor its method and system to manageand query gene expression data basedon quality.107

The Institute of Bioinformatics has alsodeveloped a comprehensive databaseof all known human proteins and theircharacteristics, and the Centre forDNA Fingerprinting and Diagnostics inHyderabad along with Sun Microsystemshas operationalised a Centre ofExcellence focusing primarily on medicalbioinformatics.108Some global pharmacompanies are already drawing on theemerging resources. Tata Consultancy

Services has signed a deal with GSKto set up a support centre in Mumbaifor the companys global drugdevelopment programme. Biocon hastaken its tie-up with Bistol-Myers Squibb

The bottom line:Indias existing

knowledgecapital in ITprovides a naturalbase for thedevelopment ofbioinformaticsresearch and

operations.

Other growth areas


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The bottom line:India has made

considerableprogress in stemcell researchand is well-positioned toleverage growingcapabilities in this

area.

the National Centre for Cell Sciences inPune and the National Brain ResearchCentre near Delhi, are investigating theuse of stem cells to regenerate nerve,heart and adult muscle cells, and repairdamaged bone tissue. The L.V. PrasadEye Institute has also treated blindness

using stem cells derived from the eye.

While the Indian Government is stronglypromoting biotech generally, concreteGovernment funding for stem cellresearch in India still lags far behindthat provided in other countries suchas the US. There are also no lawsper se governing stem cell research,although there are specic guidelineswhich classify stem cell use into threecategories: permissive, restricted,

and prohibited. The Indian Council ofMedical Research is currently drawingup plans for a national stem cellinitiative to promote clinical applicationsof stem cell research in ophthalmology,cardiology and spinal cord repair,and build links between scientistsand doctors. Indias ex-president Dr.A.P.J. Abdul Kalam had also identiedstem cell research as one of theareas on which the country shouldfocus its efforts.

Given Indias growing presence inbiotech, drug discovery, and clinicaltesting, the country may be well

further by setting up a dedicatedresearch facility, through its subsidiarySyngene International.

Stem cell research

Stem cells are seen by many as a

powerful tool for improving the researchand development process in the pharmaindustry. Stem cells are being used todevelop some types of direct therapeuticapplications; they are also becomingincreasingly important as a tool to testpotential drug toxicity.

India has already made considerableprogress in this area. Indias entry intostem cell research has progressedfrom a few institutions to currently

over 40 institutions and hospitalsinvolved in stem cell research.109In2008, Stempeutics, a leading stemcell company, launched its secondstem cell laboratory on the ManipalUniversity campus for advanced stemcell research in human embryonic stemcells.110Further activities followed in2009 one example is a joint ventureformed by StemCyte in India with ApolloHospitals and Cadila Pharmaceuticalsto provide stem cell therapies.111Severalmajor research institutes, such as theNational Centre for Biological Sciencesin Bangalore, the Centre for Cellularand Molecular Biology in Hyderabad,


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about 50-60%, implantable deviceswhich are around 20-30%, and simpleplastic disposables which arearound 20%.The sector became regulated in 2005under the Drugs and Cosmetics Act.The Ministry of Health and Family

Welfare declared 10 products to beclassied and listed as drugs under theAct. The list was expanded in March2009 to include 19 more products.Under the Act, import registrationrequires product approval from anothercountrys regulatory organisation suchas the US FDA or the EU medicaldevices directive.114The manufactureof any new type of a medical device isnot covered under the Act and requiresapproval from an expert committee put

together for the purpose.

In contrast to other biotech-relatedareas such as stem cell research andbioinformatics, the medical devicessector lacks the necessary regulatoryand R&D support. Institutional supportis also required for testing and validatingfacilities, as well as human resource

The bottom line:Medical devices

represent asignicantpotential market,however thesector currentlylacks theregulatory and

R&D supportnecessary toachieve itsfull potentialand faces stiffcompetitionfrom Europe and

China.

positioned to take a leading role inleveraging the potential of stem celltechnology throughout the pharmavalue chain.

Medical devices

Many pharmaceutical companiessuch as Bayer Healthcare, Johnsonand Johnson Medical India (JJMI),Roche, and Piramal Healthcare are alsolooking to medical devices as a pathto growth. The Indian medical devicesand supplies market is at a nascentstage and was estimated at US$2.75billion in 2008. This is about 1.25% ofthe global medical devices and suppliesmarket of around US$220 billion in2008. By 2012, Indias medical devicesmarket is expected to nearly double to

around US$5 billion.112Improving healthinfrastructure such as an increasingnumber of hospitals, clinics andclinical laboratories and telemedicineservices are expected to drive demand.The production of low value medicalsupplies and disposables is dominatedby domestic manufacturers, whereasthe high end medical equipment isgenerally imported.113The sectorconsists of the large medical-dental-surgical equipment segment which is


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Global Pharmas evolvingbusiness models andoptions in India

development. In the future the industryis expected to face stricter regulationand competition from Europe as wellas China.

Background

The global pharmaceutical industry ischanging. In a report by PwC Pharma2020: Challenging business models,we describe how the pharmaceuticalbusiness model is witnessing aparadigm shift from a fully integratedcompany structure towards a futurewhere companies use a wide rangeof outsourcing, partnership initiativesand other contractual and relationshiparrangements to create networks ofcollaboration and discovery. Eli Lilly,

for example, is currently transformingitself from a traditional fully integratedpharmaceutical company into a fullyintegrated pharmaceutical network,in order to leverage on a wider rangeof resources beyond its physical

The bottom line:Global pharma

players can takeadvantage of avariety of optionsto maximisetheir investmentin India. Asmany pharma

companiesturn to morecollaborativebusiness models,Indian companiesare likely to playan increasingly

importantpartnering role.

boundaries. It aims to get betteraccess to innovation, reduce its costs,manage its risks effectively andimprove productivity.

This evolution in pharma businessmodels has enormous repercussions

for the Indian pharmaceutical sector,and related sectors like biotechnology.Indian companies now have anunprecedented opportunity topartner with global players acrossa wide range of activities, fromcontract manufacturing and licensingarrangements, to franchising andjoint venture opportunities. The rangeof option spans a wide spectrumof levels of ownership and control,from straightforward outsourcing

of manufacturing to licensingarrangements to more involved jointventures and partially or wholly-ownedsubsidiaries(see Figure 5). The amountof investment risk varies accordingly.

Figure 5 : Evolving business models

Out-licensing-e.g.

Ethypharm -Solvay;Glenmark - Forest,Glenmark- Teijin

In-licensing -e.g.Elder- Enzymotec,

Elder - Daiwa;

Lupin -ItalFarmaco

From India-e.g. Dishman,Glenmark,Orchid

and Aurobindo

Into India-e.g. Pfizer,

GlaxoSmithKlineand Novartis

E.g.Fortis Healthcare, Medicine Shoppe

E.g. Novavax-Cadila; Novotech- ETI Klinical

E.g. Cipla,

DRL,

Dishmanand GVK

EvolvingBusinessModels

Partially orwholly owned

subsidiaries

ExportOriented

Business

-

CRAMS

Licensing

FranchisingJoint

Ventures


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Big Pharma is already well aware ofIndias importance. Many of themhave been sourcing products fromIndian manufacturers for some years,but have now started setting up theirown production facilities. Sandoz,the generics arm of Novartis, has two

manufacturing plants and a researchcentre for developing formulationsand processes, based in Thane,near Mumbai. Pzer also operates amanufacturing base in Thane. GSKhas facilities based in Mumbai andNashik; Apotex has a research centreand manufacturing plant in Bangalore;and Teva has an R&D centre inGreater Noida, having already boughta manufacturing operation in UttarPradesh in 2003. Mid-tier global pharma

companies are present as well WatsonPharma, Lonza, Eisai Pharmaceuticals,Ethypharm and Astellas all havemanufacturing or research facilities inIndia. While their presence is certainlyon the increase, only two foreignmultinationals rank in the top 10 Indiancompanies, measured by sales andeven they only have 6.4% of the marketbetween them(see Table 4).

Export-oriented business:

CRAMSOutsourcing has been the traditionalmethod of doing business with Indiancompanies. Historically, the focus forthe pharmaceutical industry has beenon lower value add manufacturing

Country sales,12 monthsto Q4 2008,US($millions)

Country sales,12 monthsto Q4 2007,US($millions)

Growth, 12 monthsto Q4 2008/2007,Fixed rate US$(%)

Cipla 510 468 9.0%

Aurobindo 477 416 14.5%

Sun Pharmaceuticals 449 340 31.9%

Piramal Healthcare 428 354 20.9%

GSK 399 395 1.2%

Ranbaxy (Daiichi) 368 385 -4.5%

Cadila Healthcare 357 324 10.4%

Lupin 286 261 9.2%

Dr. ReddysLaboratories

232 218 6.3%

Glenmark 134 146 -8.5%Source: Annual Reports (2009) & Company Reports115

Table 4: Only two foreign multinationals rank among the top 10 pharmaceutical

companies in India

activities such as APIs and generics,and India continues to play an importantrole in these segments.In recent years, Indias pharmacompanies have also begun to moveup the value chain. Foreign companiesare now increasingly tapping Indiasgrowing research skills in addition toits manufacturing skills. Players such

as Dishman and GVK-Biosciencesundertake contract research for westerncompanies. Low costs, availability ofskilled talent and a large patient poolcontinue to be growth drivers for theCRAM segment in India. Ensuring thatproducts and research comply with

all relevant regulatory frameworkscontinues to be a challenge whenoutsourcing to Indian pharmaceuticalplayers, although the situationis improving.

Licensing

Multinationals are also striking licensing

agreements to get a share of theIndian pie. For example, ElderPharmaceuticals has entered intoan exclusive in-licensing dealwith Israels Enzymotec to sell thelatters cholesterol-reducing dietarysupplement, CardiaBeat, in India.116

Major pharmacompany


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Elder has also entered into another dealwith Daiwa Pharmaceutical of Japanto introduce Daiwas nutraceuticalsinto the Indian markets.117Lupin hasin-licensed Lupenox, a cardiovasculardrug from ItalFarmaco, an Italianpharmaceutical company.118

In recent years, a wide array of out-licensing arrangements have alsoemerged. Ethypharm out-licensedand entered into a supply agreementfor Mesalazine with Solvay Pharma.119Glenmark has out-licensing deals withForest, Teijin, Eli Lilly and Merck &Co.120Claris sealed a deal with Pzerto license out 15 injectable genericmedicines for pain, infections andother conditions.121

Most developmental costs are borne bythe licensor in licensing arrangements,resulting in the licensee paying a highunit cost and having little control overmanufacture. However, licensing can beeffectively used to establish a commonplatform in order to gain rapid in-marketacceptance and create a completetherapy range through arrangementssuch as cross-licensing.

FranchisingIndias retailing industry also offers hugeopportunities for foreign companies toeither set up their own retail franchiseeor enter into collaboration with existingplayers. Medicine Shoppe India,

the master franchisee of US-basedMedicine Shoppe International hasalready forayed the market and plansto expand 1,000 stores by 2010.122Fortis Healthcare plans to open a chainof 1,000 stores by 2012, of which theUS$200 million has been committed.123

Franchising arrangements canleverage on purchasing power from thefranchisor buying in large quantities andpassing down savings to franchisees.Continued business support fromthe franchisor such as technology,products, training and marketing isan added advantage. However, thereare restrictions on how the businessmust be managed in order to retainconsistency among franchises. Allfranchisees are obligated to conform

accurately to the initial business model.

Joint Ventures

Joint ventures (JVs) are becominga more prevalent option forcompanies looking to capitalise onthe opportunities presented in India.Foreign companies are increasinglylooking at local partners to work within order to increase their presencein India. Domestic partners bring

together extensive local expertise dueto their familiarity with the businessenvironment, knowledge support andthe networked capabilities of otherlocal pharmaceutical companies. Theseadvantages, along with low productioncosts, skilled labor and faster drug

development can be productivelyutilised by western pharmaceuticalcompanies coming into India. As noted,India is home to more then 100 US FDAapproved plants, so foreign companieslooking for local partners can access asubstantial manufacturing base.

R&D joint ventures are also growingin popularity. Some Indian companiesare collaborating with overseas playersto enhance their vaccine developmentcapabilities, for example. PanaceaBiotech has a joint venture with Chironfor development and marketing ofvaccines.124Similarly, Novavax andCadila Pharmaceuticals have a jointventure for the development andmanufacture of vaccines and other

biopharmaceutical products in India.125

Other joint ventures focus on biotechor new biosimilars technologies.Novavax and Cadila Pharmaceuticalssigned an agreement in March 2009to form a joint venture, CPL Biologicals.CPL will develop and manufacturevaccines, biological therapeuticsand diagnostics in India usingtechnology contributed from Novavaxand Cadila Pharmaceuticals.126

Clinical testing also offers opportunities.In 2009 Novotech, an Australia basedclinical research company, entered intoa strategic venture with ETI Klinicalto service the growing demand forclinical research and clinical and data


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management services in India.127

Joint ventures offer many ways forpartners to pool their IntellectualProperty (IP) and to share risks andrewards equally. These types ofarrangements can be particularlyattractive to biotechnology or national

pharmaceutical companies who wish toretain some control over developmentand to sell the resulting product insome markets, but who lack the abilityto undertake global development andcommercialisation. However, the protand/or sales split may be determined asmuch by the companies relative marketstrengths as by the value of their

initial IP.

Partially or Wholly owned

subsidiaries

Some multinational companies havealso increased their stake in their Indiansubsidiaries to take advantage of theIndia opportunity. Pzer has been ableto increase its stake in its Indian arm,Pzer India, from 41.2% to around72%.128Similarly, Novartis AG hashiked its stake to 76.42% in its Indian

subsidiary Novartis India from 50.9%.129Other companies are using localsubsidiaries to set up their own salesand marketing organisations, eitherorganically or through acquisitions. GSKhas headquartered its wholly-ownedsubsidiary SB Asia in India. Novartis has

two wholly owned companies in India Novartis Consumer Health PrivateLimited and Sandoz India PrivateLimited. Pharmacia India PrivateLimited remained as a wholly ownedsubsidiary and was not consolidatedwith Pzer India during Pzersacquisition of Pharmacia.130

Unlike in some other sectors,fully owned subsidiaries in thepharmaceutical industry offer little risk

in terms of sharing critical data andcompetitive advantage, as most aresubject to strong control by the parentcompany. Pharmaceutical companieswilling to have wholly owned operationsin India can gain value from beingpresent across the value chain, fromdrug discovery to clinical trials throughto manufacturing. Other benets mayinclude tax advantages.

Requirements of a JV

Foreign companies forming a JVin India can invest directly viathe automatic route i.e. no priorapproval of the Government is

required. Foreign direct investmentup to 100% is permitted inpharmaceutical sector under theautomatic route. In cases wherethe foreign investor has an existingventure or tie-up in India in thesame eld as on 12 January2005, prior Foreign InvestmentPromotion Board (FIPB) approval isrequired. The FIPB generally grantsits approval on the basis of a noobjection certicate (NOC) from theexisting JV partner.



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Infrastructure

Insufcient energy infrastructure andinadequate transport infrastructurehas historically posed challenges forcompanies operating in India. The

situation is denitely improving, asthe Government focuses attentionon infrastructure needs. The Indianinfrastructure sector continues to beviewed as an investment opportunity,despite the global slowdown.

In early 2009, the Indian Governmentwas reported to be mulling over a planto use part of its foreign exchangereserves to fund certain forms ofinfrastructure spending. It is alsokeen to encourage public-private

partnerships (PPPs) in infrastructuredevelopment projects. The UnionMinistry of Health and Family Welfare,along with the pharmaceutical industryand airport developers GVK and GMR,plan to set up dedicated cargo zones tohandle the import and export of pharmaproducts.131Such initiatives could spursubstantial improvements in Indiasinfrastructure over the medium-term.

Tax environment

India is expected to implement a newDirect Tax Code, pending approval,by April 2011, which should simplifythe existing tax structure. The newtax code proposes a reduction in thecorporate tax rate from the current 30%to 25% and an unlimited carry forwardof business losses. A dual systemGST has also been proposed for April2010. The implementation of the newGST may face delays. The new system

Practical concerns

would impose taxes at both federal andstate levels and differentiate betweengoods and services. The new dualGST is designed to aggregate differentindirect taxes currently levied, in orderto simplify and integrate the currentsystem of indirect taxation.

India already offers a variety of taxconcessions to the pharmaceuticalsector, including tax holidays forindustrial operations established infree trade zones or under-developedareas; deduction of prots earned fromexports; liberal depreciation allowances;deduction of capital R&D expenditure;and relief on all contributionsto approved domestic researchinstitutions. For pharma manufacturing

units, there is an additional weighteddeduction of 200% for expendituresrelating to in-house R&D.132Further,recently, a new provision has beenadded to provide 125% weighteddeduction for expenditure incurredtowards outsourcing of R&D activities.

At present, foreign direct investmentin manufacture of drugs andpharmaceuticals including thoseinvolving use of recombinant DNA

technology is freely permitted up to100% under the automatic route,i.e., without obtaining any priorregulatory approval.

Of particular interest for pharmacompanies may be the specialeconomic zones (SEZs). In order toincentivise the countrys export sector,the Government has formulated theSEZ policy, which offers cost and taxbenets. On the corporate tax front,units set up in SEZs enjoy 100%

The bottom line:India offers

some attractivetax benetsfor pharmacompanies andreductions incustoms dutiesshould also

help globalmanufacturerscompete in theprice-sensitiveIndian market.


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income tax exemption on export protsin the rst ve years of operation, 50%exemption for the next ve years, and50% exemption on the reinvestedexport prots in the following ve years.Companies located in SEZ also benetfrom various Indirect Tax benets such

as exemption from payment of CustomsDuty; Excise Duty; Central Sales Taxand refund and exemption ofService Tax.

Currently, SEZs must adhere to apositive net foreign exchangeobligation policy (i.e. where the totalvalue of exports should be more thanthe total value of imports) under theImport Export policy, in order to retainSEZ status. A proposal has been

made to exempt pharma SEZs fromthis requirement.133

In an effort to attract companies toSEZs, some of these are located inmodern industrial areas. The JawaharlalNehru Pharma City, Indias rst andlargest pharma industrial estate,includes a SEZ. The facility is locatednear Visakhapatnam, in close proximityto many chemical manufacturing hubs,and offers common infrastructure

for resident pharma companies.There are three other pharma SEZs

located in Andhra Pradesh, and fourin Maharashtra, as well as one on theoutskirts of Dehra Dun in Uttarakhand,so global pharma companies have arange of options.

At this stage, it may also be pertinent

to note that the draft Direct Tax CodeBill published by the Governmentpresently does not provide for SEZ-related incentive schemes. However,recent press releases suggest thatthe Finance Minister has identiedproposed incentive provisions as one ofthe areas for detailed examination priorto nalisation of the Direct Tax Code.134

Overall, India offers a favourableenvironment as far as taxation policies

for pharmaceuticals are concerned. Inaddition to the attractive tax benetsfor companies pursuing innovativeR&D in India, the recent budget 2010-11 has provided certain benets topharmaceutical industry. In this budget,a uniform, concessional basic dutyof 5%, countervailing duty (CVD) of4% with full exemption from specialadditional duty has been prescribed onall medical equipment, while the partsand accessories for manufacture of

these equipment has been prescribedonly the basic custom duty of 5%

and exempted from CVD and specialadditional duty. Specied inputs oforthopaedic implants and medicalequipment and devices such asassistivedevices, rehabilitation aids, etc. are fullyexempted from import duty.135The 2009-10 budget reduced the customs duty

on import of inuenza vaccine and ninespecic life saving drugs and bulk drugsused for the manufacture of such drugsto 5%. This will better enable foreigndrug-makers to sell products at a lowerprice point and better compete in Indiashighly price sensitive market.

Counterfeiting

Counterfeit drugs have been a seriousissue in India. The Organisation ofPharmaceutical Producers of India(OPPI) has spearheaded variousinitiatives to combat the problem. It hasconducted several seminars and workedclosely with the Ministry of Health todevelop policies for controlling theproduction and sale of spurious drugs.It has also published a series of anti-counterfeiting guidelines for the industryas a whole. Surprisingly, a recentnationwide survey conducted by thehealth ministry, published in December

2009 nds a much lower incidenceof spurious drugs in the country than


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previous industry estimates. It found theprevalence of spurious drugs at 0.046%of all medicines sold to customers, incontrast to results of an earlier surveyfunded by the WHO and undertakenby the International PharmaceuticalFederation, which concluded that 3.1%

of drugs in India were counterfeit.136While such ndings are a positivesign, companies should remain alert topossible counterfeiting issues.

Intellectual Property Rights

The federal Government introducedproduct patents for all industrial sectorsunder the Patents (Amendment) Act,2005 in line with the commitmentIndia made when it signed up to theTrade-Related Aspects of IntellectualProperty Rights (TRIPS) Accord in 1995.This regulation aims to balance theinterests of domestic and multinationaldrug makers. It represents a majorimprovement on the previous rules, butsome issues remain. Firstly, it does notapply to drugs patented before 1995.137Copies of drugs patented between1995 and the introduction of the law willprobably not be withdrawn.

The Ordinance also allows third partiesto oppose an application for a patent,

which will prolong the period requiredto issue a grant. It permits compulsorylicensing in some circumstances otherthan national emergencies and publichealth crises provisions that could beabused for commercial gain.

Further, patent rights for mail boxapplications led will only accruefrom the date the patent is granted.138Lengthy delays are common, as theIndian Patent Ofce lacks sufcientresources to process applications veryrapidly. While a mail box applicationis pending, generic manufacturers canfreely produce the same drugwithout fear of incurring any liabilityfor damages.

Post 2005 India has made severalamendments to better protectintellectual property rights and enableglobal pharma companies to bringtheir patented products to India,while protecting the interest of homegrown companies. The Satwant Reddycommittees report on data protectionhas recommended pro-patentamendments and data exclusivity for aperiod of ve years.139The enforcementregime is also changing, but the legal

system is currently too overburdenedfor these improvements to beimmediately effective.

In December 2008, the Delhi HighCourts landmark judgment infavor of Bristol-Myers Squibb, thepatent holder for the leukemia drugDasatinib, restrained Hetero Drugsfrom manufacturing and marketinggeneric versions of the drug. In the past,

marketing approvals were sometimesgranted by the DCGI independentlyof the patent status of the drug inquestion. The judgment establishesa link between patent and marketingapprovals granted by the IPR ofceand the DCGI.140

In June 2009, Novartis cancer drugGlivec was not awarded a patentfor lack of improved efcacy undersection 3(d) of the Indian Patent Act

and its high price as ruled by theIntellectual Property Appellate Board(IPAB).141The former justication hassince come under scrutiny. In August2009, the Government accepted therecommendations of the Mashelkarcommittee supporting patenting ofincremental innovation. The Mashelkarreport also pointed that efforts wererequired to provide drugs at affordableprices to the people of India and toprevent the granting of frivolous

patents and evergreening.


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Conclusion

The Indian market is impossible toignore, given its economic prospects.Foreign companies view India as apotential signicant contributor offuture sales and are ramping up theirinvestments in the country accordingly.Indias domestic market looks promising

for global pharma looking to launchnew products. The countrys growingcapabilities in contract manufacturing,R&D and clinical trials also make it apreferred outsourcing partner for globalpharma at every stage of the valuechain. So what strategy should foreignpharmaceutical companies eagerto enter the country or expand theirexisting operations adopt?

One approach is to call on Indiasincreasing expertise in biotechnology,

bioinformatics and clinical testing.Several overseas companies haveoutsourced research and clinical trialsto Indian contractors, while othershave entered into collaborative R&Darrangements to supplement their R&Dproductivity. Many foreign companieshave also already initiated research onneglected diseases. We believe thatmany more will do so, as the patentregime is strengthening. This will enablethem to capitalise on the cost savings tobe gained from shifting some research

activities to India, without jeopardisingtheir most valuable intellectual property.

Another approach is to tap into thegrowing domestic market. Foreigncompanies with a product portfoliospanning across different therapeuticssegments can look at bringing newerproducts in India by entering intocollaborative networks across the valuechain, from sourcing and manufacturingto marketing and distribution. Thesecompanies will have to understand

how to get their product to market anddevelop a realistic pricing strategy,particularly as India is still far awayfrom a widespread shift to an insuredpayer model.

Indias pharma market is highlyfragmented and remains extremelyprice sensitive. Affordable healthcarecontinues to pose a challenge, althoughthere are a number of healthcareinitiatives by the Government underwayto improve the situation for Indias vast

population. Indian courts and regulatoryauthorities are very sensitive to pricingissues in making decisions aroundintellectual property. Pharma companiescoming into India may need to considera differential pricing. They will needto evaluate access to medicines, avolume-based pricing strategy andtake into account gradually increasingper capita incomes to come up withacceptable price levels for their drugs.Global pharma companies will thenneed to decide how to manufacture

their products, and identify and developstrong local partners.

One way to build a presence in Indiamay be through an increased presencein the OTC market. Promoting a rangeof OTC products could serve as meansof building brand awareness and as asource of new revenues. Indigenousproducers dominate the genericsbusiness, and about 97% of all drugssold in India are already off patent. TheOTC market is, by contrast, relatively

undeveloped. Indian consumers alreadypay privately for the lions share of theirhealthcare, and the Government is toohampered by budgetary constraintsto reverse this pattern. In future, then,it seems likely that access to OTCmedicines will be improved and themarket will continue to expand.

The pharmaceutical business modelis witnessing a paradigm shift, movingfrom a fully integrated companystructure towards a future where

companies use a wide range ofoutsourcing, partnership initiativesand other contractual and relationshiparrangements to create networks of

collaboration and discovery. Investingin India will be a vital component ofthis networked future. Companiesthat will be most successful in doingbusiness in India will be those that aremost adept at managing and mixing arange of contractual relationships and

partnership strategies.

Some practical issues will need to beaddressed, regardless of the businessmodel selected. Infrastructure decitscontinue to exist, although some arebeing addressed. Intellectual propertyprotection has improved substantiallybut some holes remain. And whilethe regulatory environment in Indiahas improved substantially in recentyears, the industry still faces a numberof question marks. Finalisation of

Government policies around drugprice control, access to OTC drugs,tax policy, intellectual propertyprotection and infrastructure spendingis still pending.

Nonetheless, Indias appeal is growingrapidly in a number of respects. Ithas long been a formidable player inpharmaceutical manufacturing, butits socio-economic strengths provideeven greater grounds for optimism. Ifthe economy outpaces that of every

other emerging country for the nexthalf century, as many commentatorsexpect, large portions of the populationwill be able to afford modern medicines.Indias increasing scientic expertisewill also equip it to play a signicantrole in researching and developingthose drugs. It has a large pool ofhighly educated, English speakingscientists who can undertake researchand conduct trials more cheaply and insome cases faster than their Westernpeers. These are major advantages in

a world where drug developmentcosts are soaring

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mnc Pharma Looks to India Final

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