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India's fine chemicals industry- a force to be reckoned with

Indis's bulk medicinals industry could present an opporruniU, or a threat to

westem mdnufacturcrs, but ds Dr Rob Bryant reports, international companies

will ignore it at their peril.

he growth of India's pharma-ceutical industry over the past25 years has been phenomenal.From sales valued at US$100million in 1965 it grew to

US$2.52 billion in 1994. But while thisemerging economy could offer the pharma-ceutical industry a much needed opporhr-nity to expand into a new market, as a lowcost manufacturing base it could also repre-sent a potential tkeat. So what has causedsuch rapid growth, what is the future for theindustry in India, and what will be the likelyimpact on the global pharmaceutical busi-ness over the next few years?

Growth of the pharmaceutical industryin India has been almost entirely due to the

expansion of the domestic industry, whichhas fuelled the development of the Indianbulk medicinals industry (a selection ofIndian bulk pharmaceutical companrestogether w ith their products is given in Fig-ure 1). According to the Ministry of Chemi-cals and Fertilisers, the 1994-1995 produc-tion ofbulk drugs totalled US$483 million,an increase of l57o on 1993-1994. The lib-eralisation of the Indian economy duringthe nineties has further boosted this growthand 'unleashed' the Indian pharmaceuticalindustry.

The major producers of pharmaceuticalsin India have invested in their bulk drugbusinesses not only to assure supplies ofrea-sonably priced active ingredients, but also

because these operations produce good prof-its, especially expofts. This contrasts withthe economics ofmost multinational compa-nies. The relatively low profitabili$, of thefinished pharmaceuticals business is a resultof the Indian govenrment's restrictive drugpricing policy, which ensures that the ovemllprofit of pharmaceutical companies does notexceed 8-13% of prc-tax sales. This disad-vantage has been effectively counter-bal-anced by the favourable patent policy andregulatory climate for bulk medicinals man-ufachrc in India. These policies, which willbe discussed later, have helped the establish-ment of a strong, Iocally owned companysector (accounting for 70o% ofdom€stic salesand 85% of bulk medicinal sales). This rs rnsharp contrast to the industries in much ofthe developing world, where multinationalcompanies tend to dominat€.

The manufacturing operations of mostIndian pharmaceutical companies are ofmuch greater conmercial importance thanis generally the case in the West, due totheir higher relative profitability. Since thesales of the bulk and finished businessesare not usually separated, the task ofdefin-ing the size ofthe industry and the rankingof its major players is difficult. In order toachieve reasonable profits companies havea mix of new and older products. Themajor companies' bulk medicinals busi-nesses contribute between 10-20% of theirtotal sales and profits (see Figure 2).

Among the leading producen of bulkmedicinals (which nevertheless include sub-stantial finished product sales), profitabilitycan be as high as that for the companies spe-cialising in finished formulations. It is alsointeresting that the tumovers ofthe bulk drugproducers are comparable with the biggest inthe world, whereas the low pdces of Indianpharmaceuticals reduces lhe country's majorplayers to companies of very modest sales,judged on a global basis (see Figure 3).

Conprny Locltion Bulk &tives rnd irternedirtes prod[c0d

Alembic Vadodara (Baroda) er,'lhmmy€in, kanamycin, penicillin G, azithromycin,roxilhromYcin

Cipla Bangalore, Patalganga, aciclovir, vincritine, vinblastin€, etoposide, danazole,Vikhroli,Kurkunbh pentoxifrlline,salbutamol,omepmzole,

amlodipine, finasteride, lansoprazoleCheminor Drugs Peddade\Ila Palli* diltiazem, terfenadin€, famolidine, ranitidine, azacyclonal,

NMSM, D-l+)-acidKopran Khopoli, Saki Naka amoxicillin, rifampicin, cefadroxil, ampicillin, cloxacillin,

roxitluomycin, 6-APALupin Ankreshwar' Manideep

:?ffiTl;]*#l:J'fffff."T';'o??fl".1'i*ooto'Max India Cbandigar 7-ADCA, 6-APA

Merind Bbandup vilamin Bl2, cyproheptidine, amitryptiline

Natco Laboratories Kolhur Mandal ciprofloxacin, terfenadine, diclofenac, fluoxetine, sumatriplan.ondansetron. k€torolac, salmelerol

Neuland Laboraiories Veerabhadraswamy salbutamol, terbutaline, labetalol, ciprofloxacin, ranitidine

Ranbaxy Laboratories Mohali, Dewas, Toansa fluoroquinolones, cefalexin, cefaclor, 7-ADCA, ranitidine

Sckhsaria Chemicals Dombivli ibuprofen, diclofenac, piroxicam, mefanamic acid

Shasun Pondicherry, Cuddalor€ ibuprofen, ranitidine, d,pyrone, NMSM

Siris Hyd€rabad ibuprofen,iipyrone, sulfamethoxazole. norfloxacin,

Sumitra Hyd€rabad ciprcfloxacin, enrofloxacin, ibuprofen, diltiazem, ranitidine

Unichem Bombay buprenorphine, met.onidazole, sulbactam, hydrochlorothiazide

Woclhardt Anllcshwar, Aurangabad dextropropox)?hene, captopril, pefloxacin, dextromethorphan

Figurc l: A sclcction oflndian bulk pharmaceutical comp$ics.

46 Scrip Magazine November 1995

A wide range of bulk pharmaceuticalsare rnanufactured in India, with very fewactually needing to be purchased abroad.With over 2,000 companies producingbulk drugs, India is well able to supply itsneeds and those of many export mark€ts.Indeed, the export surplus on bulk medici-nals has been very healthy for many years(1993-1994 imports were US$235 mill ion,compared to exports of US$650 million).Traditionally, India's mdn export marketshave been its neighbours, Russia, the Mid-dle East and South America. The ma.;orcompanies are now selling incrcasingly towestem count es: Germany, Italy, Spainand other EU countries and the US.

A recent feature of the supply of inter-mediates is the growing importance ofChina as a supplicr. This reflects the needto reduce costs as much as possible, in theface of the cut throat competition that pre-rails in the domestic market. There is agrowing awareness of the need to improv€India's production of basic intcmediates,in order to preserve its competitive edge.

The legal, fiscal and regulatory fiame-work that has brought about lndia's unusualindustry structure has been much discussed

lig[re 2: Sales in r99.1 for top phrnaceutical prodncers in lndia. Figures

arc in (US$ nillionsfSource: ORG and the C€ntre for Monitoring IndiaD Induslry (profits lre

Figure 3: Sales in 1994 for selected Indian bulk medicinal chenical pro_

ducers (US$ millions).Sourc€: Centre for Monitoring Irdian Industry (prolils are belor€ ta\).

Scrip Magazino November 1995

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With over 2,000 companies in India producing bulk drugs, the countrl is able lo supply its

own domestic needs and those ofnany erport m{rk.ts.

as a role model for othcremerging economies. Thepincipal factors that havchelped the Indian bulk medi-cinals industry to prosperhave been:.Al absence of productpatent legislation since 1972,which has meant that Indianphamaceutical companiescould launclr effeclive newproducts at a Ii-action of thccost of the originators. Inaddition to the advantage thisgives in home markets, com-panies have been able to sup-ply bulk and finished materi-als to other unregulatedmarkets well ahead of patentexpiry. Subsequently theyare able to supply westerngeneric markets fiom astrong production base, uponpatent exprry..The govenunent defines two

rypes of private lndian manu-facturing company: large-scale and small-scale. Thelatter category of company,which dominates the supplyof phannaceutical intermedi-ates and active ingedients,

enjoys very favourable treatment. They arehardly regulated and are consequently able tooperate at a very substantial cost advantagc..The go\emmenl has imposed very highimpofi tariffs on most chernicals. This hasenabled Indian fine chemical prcducers tosupply export markets on a marginal costbasis, sincc intemal prices have been somuch higher. This advantage depends criti-cally upon thc high volume of the localmarkeq which effectively supports theexport sales. Steady reductions in impolttariffs since 1990 havc lowered thesedomestic pricing advantages (see Figurc 4)..Profits on phannaceuticals and bulk medi-cinals exports are tax-free, which has fur-ther encouraged the industry.

Other factors that havc helped the coun-try's development include low capital andrunning cosls and an excellent pool ofchemical technologists.

There bave been dnwbacks to the govem-ment's shong participation in the rcgulationofrhe pharmaccutical industry. However. lhenet result has been positive, as the rapidgrowth ofthe industry clearly demonstrates.

Technology and processesIn the early days of the industry, many

start-up companies bought poorly definedprocesses from third parties. Often theprocess€s were not very effective and were

Comp!try ltrdiar drug Totd srles Pmfrtstrles (%tolrl sales)

Claxo India 95 251 5.6Ranbaxy Laboratories 6'7 219 9.5CIPLA 59 78 1.9Pfizer 50 68 8.3Candilar 46 100Boots Phamaceuticals 43 56 '7.9

Hoechst India2 41 115 6.3

Torrent Pharmaceuticals 40 72 9.8Ambalal Sarabhai 36 66 (0.03)

Burroughs wellcomc (lndia) 35 54 5 0

lCadila was splil into two conpanies in June 1995 following an intemal

strategy d;agreemenl.2Hoechsl's total sales include a$ochenicals, dyes and olherchemicals

Conpsry Total srles Pmfrts(% total sdet

Dr Reddy's Laboratories 56 11 9Kopran 5l I3.9 (net tax)

Cheminor Drugs (inc Globe) 29 16.'7

Sumitra 20 10.2Shasun 16 8 3Nalco I I

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usually unable to deliver the highest qualityproduct. Indian chemists were able todevelop these basic slnthetic rcutes and thencreate a profitable business liom operatingthem. Early pioneers included Cipla,Cadila, Alembic, Unique and Unichem,some of which are now leading phamaceu-tical producers. More recently Dr Reddy'sGroup, Lupin and Kopran have been respon-sible for successful process developments.This ability to develop good processes hasdistinguished th€ Indian bulk medicinalsindustry and enabled it to succeed whereothers have failed. While generalisationsalways reprcsent over-simplifications, it istue to say that India's fiercely entreprenewialculture is probably one of the major factorsfor this success. wlere state intervention allbut crippled the chemical industries of coun-tries like the former Soviet Union and itsallies and China, the Indian industry hasmanaged to survive and prosper, in spite ofgovemment bureaucracy.

The other side of this same coin is thatthe business ethics of many Indian compa-nies leave much to be desired, even by thestandards of its Asian neighbours. In par-ticular, the readiness ofemployees to trans-fer processes from one employer to thenext is so $eat that no rcal protection ofknow-how is possible in India. This has ledto too many producers ofpopular productsand low margins for all. This is clear fromthe number of export producers of impor-tant bulk phamaceutical products.Although the number of significant prc-ducers in each case is much smaller, thereare still far too many (see Figure 5).

PatentsMuch has been said and written about

India's stance on product patents, not leastin India itself. Useful summaries of theIndian situation appeared last year in arti-cles by Heinz Redwood (Scrip Magazine.June 1994) and by Prof Michael Davis(Scrip Magazlne. December lg94). Essen-tially. product patents have not been inforce since l9'/2, whet the 1970 PatentAct was introduced. This law was enactedto reduce the prices of drugs, improve theavailability of newer inventions and tostimulate the development of a domesticphamaceutical industry.

Having helped to create a strong domes-tic pharmaceutical industry, in 1994 theIndian govemment judged that the benefitsof re-imposing product patents would out-weigh the drawbacks. That the rc-inhoduc-tion of product patents was linked withobtaining agreement in the Geneml Agree-ment on Tadffs and Trade talks, was apowerful influence for change. Essentially,

Scrip Magazine November 1995

Inporttrriffs

Date Inport Datetrriffs

1992 1300/a 1995 40-50%

1993 85% 1996 30-40%

1994 65% 1997 (expected) 25%

Figure 4: IDdisn importtariffs for bulk nedicin,iDtermediates 1992-1997.

the new Patent Act brings Indian intellec-tual property rights into line with that ofmuch ofthe developed world, with 20 yearpatent terms being introduced from 1995onwards. A ten year transition period willcushion the effect on its industry. Sinceproduct patent legislation will not be retro-spective, India will be able to take advan-tage of opportunities rcpresented by'pipeline' products unavailable to othercompetitors, such as China and Canada,where the cut-offyear was 1986.

The effect that the Patents (Amend-ments) Rules 1994 will have on the Indianbulk medicinals industry will probably notbe as traumatic as has been anticipated,even if it is finally mtified by parliament.The main concems have been:.The price of finished pharmaceuticalswould go up sharply. The govemment'snew price control agency, the NationalPharmaceutical Pdcing Control Authority(NPPA) has been set up as pa11 of its newdrug policy, which was introduced thisyear. Its task will be to ensure that pricesare kept und€r control..The domestic industry will be taken overby the multinationals. There may begr€ater justification for this concem. How-€ver, the greatly improved quality of thebulk pharmaceutical production facilitiesbeing set up in India suggest that the indus-rry \ri l l take a rapidly increasing share insupplying the world generic market, set toreach around US$60 billion by 2000.Whether the companies are in Indian ormultinational hands, increasing investmentin the industry will be madeby foreign companies. How-ever, the more successfuldomestic companies will alsomake acquisitions abroad.The balance seems certain tobe in India's favour on pre-sent form..The poor in India will bedenied essential drugs. Thisconcem appears to be hard tosupport, since the govemmentcontinues to ensure that suchdrugs are available at very low

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prices (many needy people still do not haveaccess to these cheap drugs, in any case).

Despite continuing opposition to the act,industry appears to have reluctantlyaccepted that product patents will become afeatue of life. Most are taking this prag-matic view, and have made new rcpresenta-tions to govemment through the bulk pro-ducers association, the IDMA. This bodyhas been a staunch opponent ofthe rg-intro-duction of product patents, mairtaining thatIndia cannot afford monopolies. It is stillpushing for compulsory licences as a wayof ensuring that prices are kept low. Theyhave also recently asked for a package ofincentives for industrial research: the pointof imposing product patents is to stimulatethe research-based industry, therefore itseems reasonable to introduce some taxbreaks to help fund research. The largercompanies are already investing heavily inR&D, both at the fundamental level and atthe process development level.

0ut lookFor the future, it is impossible to justif,

an)'thing other than a very positive outlookfor India's bulk medicinals industry, as itcontinues to record groMh of 15-20% peryear. Scarcely a week passes without anannouncement of yet another bulk medici-nal plant being set up (see Figure 6). Bycontrast, it would be hard to think of a sin-gle new bulk medicinal chemicals com-pany being set up in Europe.

Many newer plants are being built tointemationally acceptable standards andoperated under Good Manufacturing Prac-tice. Specialist bulk medicinal producerssuch as Sekhsaria and Shasun have opera-tions that would stand comparison with any-where in the world. The industry will makefull use ofthe advantages that its recent his-tory has bequeathed it. The main trends thatare already discemable will continue:.The larger pharmaceutical groups willcontinue to expand and intemationalis€(many leading companies have already setup foreign production operations and/or

Figure 5: Technology transfer: overcapacity in the IDdiatr bulk nedici-

nah industrv,

Product Number of Product Number ofpioducers producers

Atenolol 20 Amoxicillin 22

Cefalexin 19 Chloramphenicol 33

Ciprofloxacin 19 Diclofenac 15

Er'tkomycin salts 17 lbuprcfen 19

Norfloxacin 25 Paracetamol 25

Sulfamerhoxazole lc Trimelhoprim 28

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Figure 6: New or proposed Indi8 bulk pharmaceutical plaDts (fromChenical Weeklr n€ws itens MryJune 1995).

established cooperative projects with west-em producers). Relaxation of govemmentcurbs on export ofcapital has enabled suchactivities to proliferate since 1991..The bulk medicinal producers will rapidlydevelop thet share of the westem genencmarket as the quality of their products andplants continues to improve. (India isalready a major force in ibuprofen,ciprofloxacin, rifampicin, and ethambutol

and will quickly emerge as themajor supplier of mnitidine,naproxen, diltiazem, amoxi-cillin and many others)..Partnerships with westemcompanies will increase greatlyas each side takes advantage ofthe other's shengths. The betterIndian producers will prove tobe secure, cost-effective sourcesof bulk medicinals and theirintermediates, and will provideaccess to a huge, rapidly grow-ing market..The bulk medicinals industrywill rcstructue, with smallerscale producers becoming con-solidated into larger groups, dueto increasing govemment pres-

sule on investments in envircnmental andsafety concems. The larger companies willforward integate into finished dosage forms(many already have) and will strike dealswith foreign companies which will result insome being acquired and others becominglarger, intemational organisations.

The emergence of India as a force to bereckoned with will have a profound impacton the int€mational pharmaceutical indus-

try. Pharmaceutical companies in the Westcannot afford to ignore the opportunitiesthat India can bring. These include: asource ofcompetitively priced bulk medici-nals produced in well equipped and runmanufacturing plants, ready access to alarge and expanding phamaceutiaal mar-ket, thrcugh direct investment or partner-ships with existing companies, and newproducts and process technologies, avail-able fiom entrcpreneurial companies look-ing for intemational tie-ups.

Producers of bulk medicinals and theirintemediates in the West, be they divi-sions of larger companies or independentplayers, will need to come to tems wlththe Indian indusfty. The wise ones willf ind ways to work with Indian companiesby entering into technical or commercialpartnerships. The unwise will find it diffi-cult to compete with them and will ignorethem at their peril. M

.Dr Rob Bryant runs Brychem, a UK-based ftne chemical consaltancy thstundertakes matket studies and techno-economic evaluetions lor companies sup-plling the intentatio al pharmaceuticalindusW.

Comprtry

Betanaphthol

Proven

Orchid

Shrishma

Roopa

Inveshert(US$ nillon)

norfloxacin,€nrofloxacin,pefloxacin, 21nalidixic acid, N-methylpiperazine,TMBA, l-amino-4-medrylpiperazine

diltiazem, ranitidine 4

cefalexin, cefadroxil, cefradin€,cefiaxone, c€fotaxime, cefazolin

naproxen, X-ray conrast media

cefadroxil,cloxacillin,ampicillin 2.6

ampicillin, trimethoprim, amoxicillin,cloxacillin, ibuprofen

50 Scrip Magazine November 1995