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Analysis of Pharma Industry
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Evolution of Pharma Industry : 3 Post-Patent Regime : 30
Industry Overview : 36
Review Indian Market : 50
Review Global market : 67 Player Profitability : 79
Future of Indian Pharma : 117
Manufacturing Opportunities : 145
Formulation Exports : 153
Bulk-Drug Exports : 205
Domestic Formulation : 233
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Evolution of Pharma Industry
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PRE-PATENT REGIMEPrior to 2005, the Indian regulatory system recognised only process
patents.
This helped to build the basis of a strong and competitive domestic
pharmaceutical industry.
The Indian pharmaceutical industry had price control mechanisms that
helped to deliver medicines at affordable prices to patients in India.
During that regime, multi-national companies (MNCs) were reluctant to
introduce new products in India and
Indian companies prospered by re-engineering the products of these
MNCs and marketing them in India.
Indian pharma industry was under the process patent regime until 2005
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Up-to 1970
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UPTO 1970
Until 1970, Indian pharma industry was dominated by MNCs and imports.
In 1970-71, the size of the pharmaceutical industry in India was nearly Rs4,000 million. The per capita spending on healthcare was restricted due tolow levels of income.It was mainly dominated by MNCs which largely imported formulationsfrom their parent companies and sold them in the domestic market.
Long before this, the government had realised the need for India to buildindigenous drug production capabilities so that the dependence on importscould be minimised and the country's population could have access toessential drugs at cheap prices.To fulfill this objective, it set up Hindustan Antibiotics Ltd in 1954 and
Indian Drugs and Pharmaceuticals Ltd (IDPL) in 1961.Soon these companies established themselves as major producers of criticaldrugs such as penicillin and other antibiotics which were being imported atthe time.
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1970-1979
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1970 to 1979
In 1970, India passed two regulations, Indian Patent Act and Drug PriceControl Order (DPCO) to achieve self-reliance.
In order to speed up the process of indigenisation and self-reliance, the
government introduced two landmark regulations in 1970, namely, the
Indian Patent Act and the Drug Price Control Order (DPCO).
These two regulations laid the platform for the domestic industry to take
off into a new growth spiral and be what it is today.Indian Patent Act, 1970
The rationale of the Indian Patent Act was to encourage domestic
producers to manufacture drugs and ensure self-sufficiency in medicines.
The Act granted patents only for the method and process of
manufacturing (globally patent protection is granted to new drugs,
irrespective of the process of manufacture.)
As a result, a number of Indian players began manufacturing products
based on the same bulk drug by varying the production processes.
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1970 to 1979
DPCO, 1970
The DPCO governed the prices of all bulk drugs and formulations
in order to ensure the widespread availability of medicines at
reasonable prices.In conjunction with the Indian Patent Act, the DPCO had a
significant impact on the structure and growth pattern in the
industry.
In 1970, India passed two regulations, Indian Patent Act and Drug PriceControl Order (DPCO) to achieve self-reliance.
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IMPACT OF INDIAN PATENTS ACT AND DPCO
MNCs share declined and the SSIs grew as the result of 1970 regulations.
Decline in the share of MNCs
The introduction of these two regulations caused great dismay among drug
MNCs. The reason for their annoyance was not difficult to fathom.
Since the regulations mandated price controls and did not recognise product
patents, most MNCs had little incentive to introduce new products in India.Not surprisingly, the share of multinationals in the total production of
formulations began to decline during this period.
The presence of multinationals in the industry declined further due to the
introduction of the Foreign Exchange Regulation Act (FERA), 1974, which
required all multinationals to dilute their equity holdings.
A combination of all these factors resulted in a dramatic reduction in the
share of multinationals in the total industry production.
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IMPACT OF INDIAN PATENTS ACT AND DPCO
MNCs share declined and the SSIs grew as the result of 1970 regulations.
Growth of small scale units
At the same time, the number of small-scale units (SSIs) in the industry
increased rapidly due to the following reasons:
The low entry barriers in the industry (a formulations unit can be set up
for Rs 120-150 million) Abundant availability of bulk drugs
Numerous incentives to SSIs, such as the absence of price control on
drugs produced by them
A vast geographically dispersed market.
In addition, many large producers began to outsource production to
smaller units in order to contain costs, which further encouraged the
growth of the small-scale industry.
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1979 to 1987
Relaxation in DPCO
Spread of research know-how
Increased bulk drug production
Continued decline in the share of multinationals
Indian pharma industry gained momentum during 1979 to 1987.
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1979 to 1987
RELAXATION IN DPCO
Nine years after DPCO came into existence, the government made
some changes to it.
In 1979, the number of products under price control was brought
down from 347 to 163.
Additionally, the government permitted a higher mark-up over the
cost of production, from 40-60 per cent in 1970, to 75-100 per cent in
1979.
The production of bulk drugs increased due to a surge in exports.
In 1970, DPCO was relaxed for more than 50% of the products and thegovernment permitted a higher mark-up which increased profitability.
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1979 to 1987
Indian companies began getting into research know-how during thisperiod
Spread of research know-how
The sales of many Indian pharmaceutical companies such as Cipla,
Ranbaxy, Lupin and Torrent rose significantly during this period.
Encouraged by the process patent regime and the availability of skilled
research personnel, some Indian companies gradually began investing in
research, and introduced new products through process reengineering.
Government research institutes such as CDRI (Central Drug Research
Institute) and CSIR (Council of Scientific and Industrial Research) also
contributed to the gradual build-up in the indigenous research base.The smaller players were also not left behind during this era of growth
ushered in by the Indian Patent Act and the DPCO.
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1979 to 1987
Proportion of bulk drug increased during this period.
Increased bulk drug production
Apart from controlling the prices of certain drugs, the DPCO also
regulated the production pattern of pharmaceutical companies by
fixing a ratio between the formulations and bulk drugs producedby the companies.
This led to greater investments in the production of key bulk
drugs such as antibiotics and cardiovascular drugs and hence,
ensured their availability
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1979 to 1987
Share of MNCs continued to decline and Indian players began to focuson exports.
Continued decline in the share of multinationalsThe share of MNCs in total production continued to slide.Many formulations imported and distributed by MNCs had a limitedmarket due to high prices (as a result of the high tariff structure).In addition, MNCs were unable to match the low prices offered by Indian
producers, who were more cost-competitive.Indian players leveraged the advantage to increase exportsAfter creating a niche for themselves in the domestic markets, a number ofIndian players such as Ranbaxy, Lupin, Torrent and Dr Reddy's turnedtheir sights on exports.
They initiated steps to capitalise on their technical skills of reverseengineering and low cost structure in order to tap the overseas markets.Statistics indicate that their efforts were fairly successful. The share ofexports in total bulk drug production soared from 5 per cent in 1980-81 to19 per cent in 1986-87.
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1987 to 1994
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1987 to 1994
The industry continued to build on its strengths in the late eighties and
the early nineties.
The period from 1987 to 1994 was one of high growth for the domestic
pharmaceutical industry.
The growth rate of formulation production went up from 10 per cent per
annum during 1980-1987 to 18 per cent per annum during 1987-1994, due
to a sharp rise in the number of new drugs introduced as well as low
prices.
Moreover, the per capita income rose and people were willing to spendmore on modern allopathic drugs.
Overall growth rate and the no. of new drugs improved between 1987 to1994
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KEY FEATURES : 1987 to 1994
Growth in Bulk drugs driven by exports
Increased investments
Renewed interest by multinationals
Growth of Indian Producers
Increased competition
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KEY FEATURES : 1987 to 1994
Growth in Bulk drugs driven by exports
Production continued to increase during the 1987-1994 period, led by
higher exports.
Bulk drug production rose at a compound annual growth rate (CAGR)
of 16 per cent and bulk drug exports grew at a CAGR of 40 per cent.
By 1994, the share of bulk drug exports in total bulk drug production
went up to 50 per cent.
Share of bulk drug exports went upto 50% of the total production in 1994.The investments also doubled during this period.
Increased investments
To meet the ever-growing demand, investments in new capacities went upsubstantially (largely by Indian players).
They increased from Rs 7,000 million in 1986-87 to nearly Rs 13,800 million
in 1994-95.
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KEY FEATURES : 1987 to 1994
Renewed interest by multinationals
A major turning point, as far as MNCs were concerned, was the
liberalisation programme initiated by the Narasimha Rao government in
1991.
As part of the reforms process, tariff barriers were lowered and Foreign
Exchange Regulation Act (FERA) regulations were relaxed.
This restored MNCs confidence to a certain extent and encouraged
greater foreign investment in the domestic pharmaceutical industry.
Most multinationals undertook comprehensive cost-containmentprogrammes through plant relocation and retrenchment of work force, and
enhanced the pace of their new product introductions.
Liberalization process made MNCs to re-look at India for pharmainvestment in manufacturing.
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KEY FEATURES : 1987 to 1994
Liberalization process also helped the Indian companies as they wereable to import large quantity of bulk drug intermediates.
Growth of Indian producers
The reforms process also benefited Indian producers who were
able to increase the rate of new bulk drug introductions (due to the
large quantity imports of bulk drug intermediates) as a result oflower tariff and non-tariff barriers.
Many Indian players also made efforts to heighten their presence
in the international markets by setting up branch offices and
subsidiaries.
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KEY FEATURES : 1987 to 1994
This period also saw increased competition with the number of unitsalmost doubled.
Increased Competition
Due to the surge in demand, the level of competition in theindustry also went up.The number of units rose from an estimated 10,000 units in 1987
to over 20,000 units in 1994.Most new producers introduced brands in large-sizedand fast growing categories such as antibiotics, NSAIDs andcough preparations.Hence, the number of competing brands in a single categorysoared to over 100 in many cases.
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1995 to 2004
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Further relaxation of DPCO and agreement to adhere to the productpatent regime were the major decisions taken in this period.
1995 to 2004
In 1995, the government again amended the DPCO and brought
down the number of drugs under price control from 146 to 74.
The share of the market covered by price control declined from 70
per cent in 1987-88 to 52 per cent in 1997 and further, to 40 per centin 2001.
The most important development during this period was that the
Indian government, as a member of the World Trade Organisation
(WTO), agreed in 1995 to adhere to the product patent regime from2005.
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KEY FEATURES : 1995 to 2004
Increased interest of multinationalsThe government's commitment to recognise product patents in drugs after 2005fuelled the expectations of MNCs.The parent companies of a number of multinationals began increasing theirequity stakes in their Indian operations. For instance, Sanofi-Torrent and EliLilly-Ranbaxy purchased the equity stake of their Indian partners in order to
increase their presence in the Indian market.Yet another factor that drew the attention of MNCs was the low cost ofproduction in India.Multinationals began increasingly looking at India as a market and amanufacturing base (the world over, multinationals are attempting to lower costsof production by shutting down uneconomic facilities and relocating plants to
low cost countries.)MNCs sped up the pace of new product launches and aggressively built marketshares by expanding their field force, in addition to reducing the cost ofproduction (by closing down high-cost plants and offering VRS to theiremployees).
Since 1995, MNCs have been increasing their presence both as amanufacturing base and a market for introducing new products.
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Indian Producers Leverage Strength
A major fallout of the product patent recognition is that the ability of Indianproducers to reverse engineer international proprietary drugs may no longer
prove to be a significant competitive advantage.
There is a flip side to it, though. A number of Indian producers have already
achieved a critical mass, in terms of the size of operations, and are increasingly
adopting a global view of their organisations.
To strengthen their presence in the domestic and international markets, Indian
producers have been following a number of strategies, such as:
Setting up manufacturing and marketing joint ventures (JV) overseas
Building world class facilities for bulk drug production, in order to tap the
fast growing market for generic drugs in developed countries
Entering into alliances with multinationals, in order to launch new drugs Conducting clinical trials in India in order to enable multinationals to reduce
the development costs of new drugs
Strengthening their brand (and market) franchises
Significantly expanding their geographical reach within the country
Though the benefits of reverse engineering capabilities no longer exist,Indian companies are emerging stronger through their strategic initiatives.
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Though the competition increased, the profitability remained high due tonew product launches and forward integration strategy of the players.
Competition and Profitability
The rate of introduction of new drugs grew consistently and the pressureto introduce new products at affordable prices rose in order to ensurereasonable volumes.New product prices are generally higher than those of older drugs.Hence, in spite of greater competition, the profitability of Indianpharmaceutical companies improved marginally.
Operating profit margins of the Indian pharmaceuticals industryincreased from 20.9 per cent in 1996- 97 to 21.6 per cent in 2001-02.In the bulk drugs segment, margins are lower due to intense pricecompetition in the domestic and export markets.Increased competition in the domestic market, especially in large and old
products led to heavy pressure on the margins of bulk drug producers.In order to maintain profitability, many bulk drug producers haveforward integrated into the manufacture of formulations.Large bulk drug producers have also increased exports of new moleculesto non-regulated markets where margins are relatively higher.
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Post-Patent Regime
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In line with its commitments to WTO, the government passed an
ordinance to introduce the product patent regime from January 2005.
It helped in integrating India into the global pharmaceutical market.
The amendment to the Indian patent act made copying of post-1995
patented drugs illegal in India.
While this discouraged the process reengineering of products patented
post 1995, it is expected to gradually increase the confidence of large
global players on Indian companies.
INTRODUCTION OF PRODUCT PATENTS
Product patent regime began in 2005.
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IMPACT OF PRODUCT PATENT REGIME
Product patent regime is expected to encourage drug discovery in the longterm.
While the process patent helped the Indian pharmaceutical industry toflourish into a world-class generics industry, the product patent regime isexpected to encourage new drug discovery in the long term. In the past, pharma multinationals have maintained a low-key presence inthe Indian market due to the absence of product patents and rigid price
controls. Hence, the recognition of product patents will gradually increase theconfidence levels placed by large global players on IndiaSince January 2005 to date, India has seen a total of 15 patented productlaunches. Pfizer has launched three of them, while Roche and GSK launchedtwo and one, respectively.The launch of patented products in India has been slow as the innovatorsare taking their time seeking clarity on data protection, patenting ofderivatives and pre and post-grant opposition. While not much has changedon this front, the attitude of MNCs is gradually changing.
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Indian pharma continue to look at exports as an important growth driver.
Rising focus on exportsIndia gained its foothold in the global arena with its
innovatively-engineered generic drugs and active pharmaceutical
ingredients (API), and it is now seeking to become a major player
in outsourced clinical research as well as contract manufacturingand research.
There are around 100 US Food and Drug Administration (FDA)
approved manufacturing facilities in India, more than in any other
country outside the US. In 2007, Indian companies received about24 per cent of all Abbreviated New Drug Applications (ANDA)
approvals by the US FDA.
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There has been series of regulations to bring down the taxation levels
VAT implementation
The government also introduced VAT from April 1, 2005.Under the VAT regime, pharmaceutical products would be charged at4 per cent lower than the past levels of 8-12 per cent sales tax.Besides, full credit would be available to companies for taxes paid onthe inputs used to manufacture goods.
Moreover, players would get full credit for inputs used to manufactureexport goods, thereby reducing the total cost to companies.
Reduction in customs duty on chemicalsThe government slashed the customs duty on APIs and intermediatesfrom 12.5 per cent to 7.5 per cent in the annual budget 2007-08.
As most of the bulk drug imports in India are from China, thecompanies that use imported bulk drugs from China for exportproduction benefited from the duty cut.
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There has been series of regulations to bring down the taxation levels
Reduction in excise duty of chemicalsThe government reduced the excise duty on formulation drugs from 16
per cent to 8 per cent and fully exempted the excise duty on the anti-
AIDS drug Atazanavir, as well as the bulk drug used for its
manufacturing.
Reduction in customs duty for specific drugs
The government has also reduced the custom duty on six drugs / drug
kits and bulk drugs for their manufacture from 10 per cent to 5 per cent.
These specific drugs are used in the treatment of diseases such as
cancer, diabetes, asthma and hepatitis B.
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Industry overview
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Overview
The Indian pharmaceutical industry is estimated to be worth $21.5 billion (including
exports) in 2009-10.
In value terms, the domestic formulations market contributed only 1 per cent to the
global pharmaceutical market in 2009-10, due to lower penetration of healthcare and
lower drug prices vis-a -vis the developed markets such as US and Europe.
India's healthcare spending is about 6 per cent of its total gross domestic product of
India.
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Pharmaceutical value chain
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Pharmaceutical value chain
Bulk drugs also known as or active pharmaceutical ingredients (APIs) are the raw
materials used to manufacture formulations, which in turn are the end products
administered to patients and are ready-to-use forms of bulk drugs (including
capsules, tablets, syrups and injections).
Bulk drugs made by combining more than two chemicals or intermediaries. They are
intended to directly affect on the diagnosis, cure, mitigation, treatment or prevention
of a disease.
in 2009-10, of the total domestic pharmaceutical sales (in value terms), formulations
accounted for 65 per cent, while bulk drugs contributed the balance.
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Highly fragmented domestic formulation industry
The domestic formulations industry is highly fragmented both in terms of the
number of manufacturers as well as the variety of products.
There are about 300-400 units in the organised sector and about 15,000 units in the
unorganised (small scale) sector that form the core of the segment.
These players together manufacture a over 100,000 drugs spanning across various
therapeutic categories.
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Supremacy of Indian companies vis-a-vis MNCs
Indian companies dominate the domestic formulations market by occupying seven
out of the top ten spots.
The formulations market in India is fairly concentrated at the top. In 2009-10, the top
five formulations companies, Cipla, Ranbaxy, GlaxoSmithKline, Cadila Healthcare,
and Piramal Healthcare, accounted for 22.5 per cent of total formulation sales.
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Market share of top 10 players in 2009-10
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Concentrated manufacturing
In geographic terms, Indian pharma companies carry out manufacturing operations
largely from Maharashtra, Gujarat and Andhra Pradesh.
However, many players have shifted their manufacturing bases to excise-free zones
like Baddi (Himachal Pradesh), Haridwar (Uttaranchal) and Sikkim, after the
government imposed the MRP-based excise duty system.
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Low per capita annual drug expenditure in India (2006)
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Low per capita annual drug expenditure in India (2006)
Per capita annual drug expenditure in India is very low at $3 as compared to $412
and $191 in Japan and US, respectively.
This can be attributed to India's large population and declining share of health
expenditure in total government expenditure.
This can be attributed to India's large population and declining share of health
expenditure in total government expenditure.
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Low coverage of health insurance in India (2006)
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Low coverage of health insurance in India (2006)
In India, a majority (around 80 per cent) of the patients pay out of their pockets. Only
3 per cent of the population is covered under health insurance.
Unlike US, India lacks a strong health insurance sector to share the healthcare cost
with the patients. Conversely, in the US, consumers do not directly pay for the
medicines.
Here, government organisations and managed care organisations reimburse most of
the drug costs to patients.
However, with rising drug expenditure in recent times, patients in the US are being
asked to take on a larger share of their healthcare expenses.
This has prompted consumers to opt for generic drugs over high priced branded
drugs.
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Market dynamics
Supply scenario
Unlike commodities, capacity formation in the domestic pharmaceutical industry
does not bunch-up due to a low capitalintensity and low gestation period.
Hence, companies expand capacities in line with market demand patterns.
A USFDA-approved API manufacturing facility can cost up to Rs 150-200 million as
compared to Rs 30-50 million for an unapproved facility.
The cost is higher in the case of the former owing as cost of compliance with the
USFDA norms is high. Setting up a USFDA approved formulations manufacturing
plant costs about Rs 200-300 million as compared to Rs 120-150 million for an
unapproved facility.
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Cost of setting up manufacturing plant
Also, unapproved units have lower gestation periods.
The average gestation period for a USFDA approved manufacturing facility is 18-24months as compared to 6-12 months for an unapproved facility.
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Review - Indian market
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Prominence of acute ailments in India
Chart 1: Types of ailments
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Prominence of acute ailments in India
Chart 1: Types of ailments
Ailments can be typically classified into acute and chronic.
An acute ailment is a condition characterised by sudden, severe exposure (usually a
single large exposure) and rapid onset.
Herein, the patient shows intense symptoms for a brief duration (not longer than 30
days).
Acute ailments are self-limiting and examples include infectious diseases such as
common cold, fever, etc.
However, acute ailments may turn chronic if left unaddressed. Chronic ailments are
characterised by prolonged or repeated exposures over many days, months or years.
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Prominence of acute ailments in India
Chart 1: Types of ailments
As per current medical knowledge, chronic diseases can only be alleviated with
treatments but not fully cured.
Chronic ailments don't usually resolve on their own accord, unlike acute ailments.
Examples of chronic diseases include diabetes, asthma, blood pressure, cancer, etc.
Due to the relatively poor sanitation facilities in developing countries (including
India), the proportion of acute diseases to chronic diseases is higher in developing
countries as compared to developed countries.
Thus, drugs addressing infectious (acute) diseases are predominant here. For
instance, in India, about 69 per cent of total drugs sold are for treating acute diseases.
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Review: Domestic formulations market
Domestic formulation sales grew by 17.9 per cent y-o-y to Rs 417 billion in 2009-10.
This growth rate was higher than the traditional growth rate of 12-14 per cent, owing
to a low base in 2008-09 (on account of inventory rationalisation at the retail level).
Among therapeutic categories, growth was primarily driven by chronic segments such
as cardiac, antidiabetic, gastrointestinal, gynaecology, while anti-infectives also grew
steadily.
Over the next few years, the therapeutic category mix is expected to gradually move
in favour of speciality therapies.
However, mass therapies such as antiinfectives and gastrointestinal will continue to
grow stably, due to rising demand from rural areas, which don't have proper
sanitation facilities and are thus more prone to acute ailments.
Currently, tier-II cities (with a population of less than 1 lakh) and rural markets
constitute about 40 per cent of the total market size. Demand from these markets is
expected to grow at a much faster rate than tier-I cities.
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Table 1: Domestic formulations (Sales of top 10 drug classes)
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Table 1: Domestic formulations (Sales of top 10 drug classes)
In 2009-10, the top 5 drug classes by size were cephalosporins, anti-rheumatic non-
steroidals, anti-peptic ulcerants, oral anti-diabetics and cough preparations.
Together, these contributed about 23.4 per cent of the total market share.
Fastgrowing drug classes largely included lifestyle-related drugs such as oral anti-
diabetics (28.4 per cent share), cough preparations (23.9 per cent), statins (23.6 per
cent) and anti-peptic ulcerants (20.2 per cent).
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Table 2: Domestic formulations sales by top therapeutic categories
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Chart 2: Classification of key therapeutic categories under acute and chronic
segments
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Acute segments
Anti-infectives
Anti-infectives sales posted a 2-year CAGR of 12.2 per cent to Rs 72.1 billion in 2009-
10 from Rs 57.3 billion in 2007-08.
In 2009-10, the 14.7 per cent growth in the anti-infectives segment was slower than
the formulations industry's growth of 17.9 per cent and accounted for about 17.3 per
cent of the total formulations sales.
The key drug classes among antiinfectives were cephalosporins, ampicillin/
amoxycillin and quinolones.
Together, these three accounted for about 77.3 per cent of the anti-infective sales in
India.
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Gastrointestinals
The gastrointestinal segment posted a CAGR of 16.6 per cent during 2007-08 to 2009-
10 and contributed about 11 per cent to total domestic formulation sales in 2009-10.
The largest drug class in this category is anti-peptic ulcerants, which accounted for
about 44 per cent of the segment's total sales.
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Pain/analgesics
The pain / analgesics segment accounts for 8-9 per cent of the total domestic
formulations sales.
It registered a CAGR of about 13 per cent between 2007-08 and 2009-10.
The anti-rheumatic, non-steroid, non-narcotic anti-pyretics, antiosteoporosis, topical
anti-rheumatics and muscle relaxants systemic drug classes accounted for about 94
per cent of the segment's total revenues in 2009-10.
The top five players in this segment were Novartis, Ranbaxy, GlaxoSmithKline,
Piramal Healthcare and Alkem, cumulatively accounting for 42-43 per cent of total
sales.
Pain / analgesics are colloquially termed as painkillers and act in various ways on
the peripheral and central nervous system.
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Pain/analgesics
Examples of such drugs include paracetamol (acetaminophen); non-steroidal anti-
inflammatory drugs (NSAIDs) such as salicylates, narcotic drugs such as morphine;
synthetic drugs with narcotic properties such as tramadol; and various others.
Drug classes such as tricyclic anti-depressants and anti-convulsants, not generally
categorised under analgesics, are also used to treat neuropathic pain syndromes.
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Chronic segments
Cardiovascular system
Therapies for cardiovascular (CVS) ailments rely primarily on control of blood
pressure and cholesterol, especially since high blood pressure increases the risk of
heart disease and strokes.
In 2009-10, this segment continued to be one of the fastest-growing segments in the
domestic formulations market.
It grew by about 20.1 per cent to Rs 47.4 billion in 2009-10 as compared to Rs 39.5
billion in 2008-09.
The segment constituted about 11.4 per cent of total domestic formulation sales.
The leading drug classes in this segment are statins, hypotensive combinations, anti-
coagulants, diuretic combinations, calcium channel blockers and beta blockers.
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Respiratory
Sales in the respiratory segment posted a 2-year CAGR of 14-15 per cent to Rs 37.7
billion in 2009-10.
Cipla continues to lead the segment with a share of about 27-28 per cent.
The top five players - Cipla, Piramal Healthcare, Pfizer, Cadila Healthcare and
GlaxoSmithKline together accounted for 60 per cent of total sales during the year.
The major drug classes include cough preparations, bronchodilator inhalants, anti-
histamines, bronchodilators solids and cold preparations.
Together, these contributed about 91-92 per cent of the total respiratory market sales.
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Neuro/Central Nervous System (CNS)
In 2009-10, the Neuro/CNS segment expanded to Rs 23.3 billion at a 2-year CAGR of
15 per cent.
The major drug classes within this segment include anti-epileptics, anti-depressants,
tranquilisers and anti-psychotics.
These four classes contributed to about 75 per cent of sales in the neuro/CNS
segment.
Sun Pharma is the dominant player in this segment with an 18-19 per cent share.
Other major players include Intas Pharmaceuticals, Torrent Pharma and Abbott
Laboratories; together these four players accounted for 48-49 per cent of the
segment's sales in 2009-10.
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Neuro/Central Nervous System (CNS)
In 2009-10, the Neuro/CNS segment expanded to Rs 23.3 billion at a 2-year CAGR of
15 per cent.
The major drug classes within this segment include anti-epileptics, anti-depressants,
tranquilisers and anti-psychotics.
These four classes contributed to about 75 per cent of sales in the neuro/CNS
segment.
Sun Pharma is the dominant player in this segment with an 18-19 per cent share.
Other major players include Intas Pharmaceuticals, Torrent Pharma and Abbott
Laboratories; together these four players accounted for 48-49 per cent of the
segment's sales in 2009-10.
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Review - Global market
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Declining growth in the global pharmaceutical market continues
Sales in the global pharmaceutical have been declining since 2003, largely driven by a
rise in drugs going offpatent across major therapeutic categories; declining research
and development (R&D) productivity and stricter scrutiny of the value of medicines
and their pricing levels.
In 2009, global pharmaceutical sales grew by 4.5 per cent y-o-y (with a constant US
dollar) to $808 billion (includes audited and un-audited markets).
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Figure 1: Global pharmaceutical sales (2002-2009)
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Table 1: Pharmaceutical sales by region (2009)
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Table 1: Pharmaceutical sales by region (2009)
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Table 1: Pharmaceutical sales by region (2009)
In terms of size, the pharmaceutical industry is dominated by North America (mainly
the US), Europe and Japan.
The North American market remained the single-largest market, with sales of $322.1
billion in 2009 resulting in a 3.3 per cent y-o-y growth, as against a 1.4 per cent growth
in in 2008.
This growth was backed by an improving US economy and lower price deflation in
the generics segment.
Meanwhile, sales in Europe remained flat and the region's contribution to global sales
fell marginally to about 31 per cent in 2009 from about 32 per cent in 2008, mainly as
the euro weakened versus the US dollar.
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Table 1: Pharmaceutical sales by region (2009)
Sales in the Asian and African markets (excluding Japan and including Australia and
New Zealand) grew by 15.9 per cent in 2009 and accounted for 12-13 per cent of total
global pharmaceutical sales.
Sales in China rose by more than 20 per cent for the second year running, while that
in India grew by about 17 per cent.
A strong economy and an increase in penetration of healthcare in these markets,
aided this growth.
Sales in Latin America declined by 1.5 per cent in 2009 to $45.8 billion owing to
exchange rate fluctuations.
However, adjusting for exchange rate changes, these markets grew by over 10 per
cent.
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Table 2: Therapy-wise sales: Oncology leads the pack
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Table 2: Therapy-wise sales: Oncology leads the pack
Among therapeutic categories, sales of respiratory agents, anti-diabetics, angiotensin-
II antagonists and autoimmune agents grew strongly by more than 10 per cent each,
reflecting the increase in the launch of innovative products by large global players.
Sales of autoimmune agents grew the fastest by 18 per cent, thus reporting a nearly 20
per cent growth for the fifth consecutive year.This category includes blockbuster drugs such as Remicade, Enbrel and Humira that
treat a wide variety of immunological diseases.
Oncology remained the top therapeutic category, growing 8.8 per cent to achieve
sales of $52.4 billion in 2009.It also had the largest share (7 per cent) in total global pharmaceutical sales. The
launch of innovative compounds such as Gardasil (the first vaccine to prevent cervical
cancer) and Sutent (for renal cancer) also contributed to this growth.
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Leading drugs by global pharmaceutical sales (2009)
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Pfizer still at the top; Merck surges to second spot
The top ten players strengthened their share in total global sales to 45.1 per cent in
2009 from 42.6 per cent in 2008.
Despite the decline in sales, Pfizer continued to lead the market with a total market
share of 7.6 per cent in 2009.
Pfizer was followed by Merck, which galloped to the second position in 2009 from
the eighth position in 2008 due to added sales from its acquisition of Schering Plough
in 2009.
At the same time, GSK toppled to the fifth position from the second position as its
two major drugs - Valtrex and Avandia - went off-patent.
Sales of Johnson & Johnson declined by over $3 billion in 2009, reflecting the loss of
marketing exclusivity for two of its patented products - Risperdal and Topamax.
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Top corporations by global sales (2009)
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Player profitability
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Changing industry trends
Large players still dominate investments in pharma, earn higher profits
To understand the strategies, dynamics and performance of domestic pharmaceutical
companies (formulations and bulk drugs players) listed on stock exchanges, they have
been segregated into large, medium and small, on the basis of their turnover (as of
2009-10). As per this measure, companies with a turnover of more than Rs 25 billion
can be termed largesized players, those with a turnover between Rs 3 billion and Rs 25
billion would be medium-sized players, while smallsized players would be those with
a turnover of less than Rs 3 billion.
Similarly, in case of bulk drugs players, those with a turnover above Rs 2 billion have
been termed large-sized players.
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On analysing the performance of the above player groups, we observe the following
trends:
Formulation exports to semi-regulated markets decline; pull down overall
sales
Over the past few years, Indian pharmaceutical players have been increasingly
tapping opportunities in global generics markets, especially the US and Europe.
Several medium-sized and small players have targeted the semi-regulated markets of
Africa, Asia and Latin America to enhance their distribution expertise, before
exporting to the regulated markets.
Buoyed by such player actions, formulation exports grew by over 25 per cent
between 2003-04 and 2008-09.
However, in 2009-10, exports were badly hit and grew by just 2.2 per cent y-o-y.
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Formulation exports to semi-regulated markets decline; pull down overall
salesThe decline was mainly due to a fall in exports to semi-regulated markets, on the
back of the EU's seizure of drug shipments, currency fluctuations and a high base in
2008-09.
Traditionally, exports have contributed more than half of the revenues for most largeformulation players.
In recent years, export revenues of medium-sized and small formulation players too
have increased rapidly, with exports contributing about 50 per cent of revenues for
mid-sized players and 20-25 per cent for smaller players.During 2005-06 to 2009-10, exports of large formulation players posted a CAGR of
25.9 per cent, while those of medium and small players recorded a CAGR of 23.6 per
cent and 18.1 er cent, res ectivel .
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High reliance on exports hits revenues of large players, smaller firms fare
better
After rising by 23 per cent y-o-y in 2008-09, revenue growth of large formulation
players moderated to 7.9 per cent in 2009-10, due to lower-than-expected exports.
Further, a high base in 2008-09, on account of one-time sales opportunities enjoyed by
a few large players, too affected exports. Smaller players, however, reported a
relatively robust revenue growth of 15.6 per cent y-o-y.
Sales of medium-sized formulation players grew by 14.6 per cent y-o-y on the back of
positive performance by some top players in the category like Torrent Pharma, Ipca
Labs, Glenmark Pharmaceuticals and Alembic.
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High reliance on exports hits revenues of large players, smaller firms fare
better
In the bulk drugs segment, growth moderated in 2009-10 from the previous years, as
exports slowed, growing by 15 per cent in 2009-10, as global players reduced their
inventory holdings in the wake of the global credit crunch. Between 2004-05 and 2009-
10, revenues of large players bulk drug players registered a CAGR in 20.5 per cent,
while smaller players posted a 23 per cent CAGR.
On a y-o-y basis, revenues of large bulk drugs players grew by 10.8 per cent in 2009-
10, while that of smaller bulk drug rose by more than 30 per cent
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Large players enjoy better profitability, invest more
Typically large players (in both formulations and bulk drugs segments) are more
profitable due to their ability to fetch higher realisations, as they enjoy a wide base in
regulated markets.
The presence of strong brands in the domestic market helps large formulation players
further.
However, a significant exposure to international markets are also makes large players
vulnerable to risks such as currency volatility, overall market performance and
outsourcing plans of key players in the target destinations, etc.
In terms of capital expenditure too, large players score over smaller formulation and
bulk drugs firms, as the latter have a fewer number of US FDA-approved plants,
which significantly reduces their capex requirements.
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Formulation players
Aggregate financial analysis of formulation players
The financials of formulation players are discussed in detail in the following section
(they have been segregated as mentioned earlier). In 2009-10, the aggregate turnover
of large formulation companies grew by about 7.9 per cent to Rs 354 billion in 2009-10.
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Turnover of players, across different sizes, registered sturdy growth
Turnover of formulation players
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Turnover of players, across different sizes, registered sturdy growth
Turnover of formulation players
Turnover of large players (aggregate of 7 companies) registered a CAGR of 21.4 per
cent between 2005-06 and 2009-10 to Rs 354 billion.
However, sales growth moderated to 7.9 per cent y-o-y in 2009-10 due a to high base
in the previous year, as players such as Dr Reddy's Labs and Sun Pharma had one-
time opportunities to sell exclusive drugs in 2008-09.
Revenues of medium-sized players (aggregate of 10 companies) posted a CAGR of
21.3 per cent during 2005-06 to 2009-10 and increased by 14.6 per cent (y-o-y) in 2009-
10, to Rs 110 billion.
Key performers in this category were Glenmark Pharmaceuticals, Ind-Swift Labs,
Torrent Pharmaceuticals and Ipca Labs.
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Turnover of players, across different sizes, registered sturdy growth
Turnover of formulation players
Turnover of small players (aggregate of 10 players) recorded a CAGR of 13.4 per cent
during 2005-06 to 2009-10.
On a y-o-y basis, turnover grew by 15.6 per cent to Rs 20.9 billion in 2009-10, on good
performances by players such as Ajanta Pharma, Group Pharmaceuticals Ltd, Syncom
Formulations, TTK Healthcare and Twilight Litaka.
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Share of export revenues almost stagnant in last 3 years
Contribution of exports to total sales
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Share of export revenues almost stagnant in last 3 years
Contribution of exports to total sales
Large players have greater access to international markets as they have the required
capital, labour and better infrastructure/manufacturing plants which comply with
GMP (good manufacturing practices) requirements.
Large players registered a CAGR of 25.9 per cent in exports during 2005-06 to 2009-
10. However, the share of exports in total sales continued to hover at 66-69 per cent, as
domestic sales also grew at the same pace as exports.
Exports of medium sized formulators grew at a CAGR of 23.6 per cent during 2005-06
to 2009-10, while for small sized players, exports recorded a CAGR of 18.1 per cent.
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Share of export revenues almost stagnant in last 3 years
Contribution of exports to total sales
On a y-o-y basis, in 2009-10, exports of medium-sized players accounted for 51.3 per
cent of total revenues, while for small players the share of exports was 22.8 per cent.
Even though many medium-sized players have ventured into the US by setting up
manufacturing facilities compliant with the regulatory requirements of the US FDA;
semi-regulated markets continue to be their forte. By and large, smaller players export
wholly to semi-regulated markets.
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Formulation exports of large players
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Formulation exports of medium and small sized players
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Higher export realisations makes large players more profitable
Cost structure of large players (2009-10)
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Higher export realisations makes large players more profitable
Cost structure of large players (2009-10)
Typically, for large and medium-sized players, input costs form 35-45 per cent of
sales, while being at 50-60 per cent for smaller players. Large players have an
advantage on input costs as they earn higher realisations, have better brands and a
larger scale of operations.
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Large, medium-sized players report healthy margins, RoCE
Average OPM and RoCEs (2004-05 to 2009-10)
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Large, medium-sized players report healthy margins, RoCE
Average OPM and RoCEs (2004-05 to 2009-10)
The average operating margins of large and medium-sized players have remained at
similar levels over the past 5 years despite differing trends in sales growth.
However, on a y-o-y basis in 2009-10, aggregate operating margins of formulation
players across sizes slightly declined.RoCEs, on the other hand, showed mixed trends. As a result of significant capital
expenditure incurred by large players to enter regulated markets, their average RoCEs
were lower than that of medium-sized players but higher than smaller players.
Returns of medium-sized players were higher owing to the robust growth in their
profits. Returns of smaller players have gradually improved over the past 5 years, in
line with the rise in their profits. Moreover, capital expenditure for these players have
been limited, as they primarily focus on low-cost Asian and African markets.
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Industry has a sound financial profile marked by comfortable gearing
levels
Trends in gearing levels
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Industry has a sound financial profile marked by comfortable gearing
levels
Trends in gearing levels
The gearing levels of Indian formulation players have traditionally remained
comfortable during 2005-06 to 2009- 10 as players generated adequate cash accruals to
fund their capital requirements.Gearing levels of large players has remained constant at about 1 times over the last 2
years. In 2007-08, gearing levels of large players increased to as high as 1.3 times on
account of foreign mergers and acquisitions (partly financed through external funds)
by players such as Ranbaxy, Dr Reddy's and Wockhardt.
However, with a moderation in acquisitions and healthy cash accruals, gearing againimproved to favourable levels since 2008-09.
Gearing levels of medium and small players improved marginally in 2009-10 as
com ared to the revious ear.
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Bulk drug players
Bulk drugs players - Aggregate financial analysis
Among bulk drug manufacturers, large players are those having revenues of above
Rs 2 billion, while the others are categorised as small players.
Large bulk drug players witness healthy growth in turnover
The turnover of large bulk drugs players grew by 10.8 per cent in 2009-10, driven by
strong revenue growth of players such as Aurobindo Pharma, Matrix Labs and Nectar
Lifescience laboratories.
However, the poor performance of Divi's Labs pulled down aggregate turnover
growth. During the last 5 years (2005-06 to 2009-10), large bulk drug players registered
an aggregate CAGR of 20.5 per cent.
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Trends in turnover of large bulk drugs players
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Revenue growth of smaller players outperform larger players
Revenues of small bulk drug players registered a 24.5 per cent CAGR between 2005-
06 and 2009-10. On a y-o-y basis, their revenue growth was better than that of large
players, rising 29 per cent in 2009-10.
The growth was driven by a strong growth in turnover of companies such as
Granules India Limited and Anuh Pharma Limited.
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Turnover trends of small bulk drugs players
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Bulk drug players capitalising on growing export opportunities
Indian bulk drug manufacturers are increasingly resorting to signing contract
manufacturing deals with global players, by providing services such as custom
synthesis and manufacturing bulk drugs for both off-patent and patented drugs.
to the generic players and innovators respectively.
Contract manufacturing deals from global innovators have been increasing in recent
years on account of greater confidence of innovators in on Indian players.
Accordingly, the share of regulated markets in India's total bulk drug exports has
risen to 55-57 per cent in 2009-10 from 38-40 per cent in 2004-05.
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Bulk drugs exports by large players
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Bulk drugs exports by large players
Exports accounted for more than 65 per cent of the total turnover of large players in
2009-10 and registered a CAGR of 19.1 per cent during 2005-06 to 2009-10.
On a y-o-y basis, however, growth in exports moderated to 6.5 per cent in 2009-10,
lower than the 23.9 per cent rise in 2008-09.
The slowdown was due to the poor performance of Divi's Laboratories in the
regulated markets. Similarly, exports of small players increased by 29 per cent y-o-y in
2009-10 mainly due to robust export numbers reported by players such as Granules
India and Anuh Pharma.
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Exports by small bulk drugs players
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Exports by small bulk drugs players
The share of exports in the total revenues of large players grew from 58.6 per cent in
2005-06 to 70.4 per cent in 2008- 09, but subsequently fell to 66.6 per cent in 2009-10, as
several global pharma companies reduced their inventories, which affected bulk drug
exports.
The proportion of exports to total sales for small players stood at 62.7 per cent in
2009-10, marginally down from 63.8 per cent in 2008-09.
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Bulk drug exports (as per cent of sales)
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Exposure to regulated markets helps large players to earn higher returns
Average cost structure (2005-06 to 2009-10)
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Exposure to regulated markets helps large players to earn higher returns
Average cost structure (2005-06 to 2009-10)
The average raw material cost (as a proportion of sales) is lower for large bulk drug
players due to higher realisation earned by them.
Their penetration in the regulated markets, where realisations are typically higher as
compared with the semi-regulated markets, is significantly higher.
Other costs such as labour, selling & distribution, etc do not vary significantly among
players in the bulk drugs segment.
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Average OPM and RoCE (2005-06 to 2009-10)
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Average OPM and RoCE (2005-06 to 2009-10)
A surge in exports to regulated markets and the increasing proportion of exports to
innovators have resulted in better realisations for large players.
As a result, their average operating margins were substantially higher than that of
small players.
However, the average RoCE of large players was comparable to that of smaller
players as larger players have been aggressively investing in manufacturing facilities
that meet the higher regulatory requirements of the regulated markets.
Gearing levels improved for large players; remained stable for small players
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Trends in gearing levels
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Trends in gearing levels
The gearing levels of small bulk drug players remained rangebound between 0.5 and
0.6 times during 2005-06 to 2009-10, while that of large players hovered at 1.1 - 1.3
times in the last 3 years.
Gearing of large players is higher as a portion of their capital expenditure has been
funded by debt.
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Future of Indian pharma
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Indian pharma firms need to diversify, gradually evolve into innovators
Over the last 40 years, since its inception, the Indian pharmaceutical industry hasthrived on the generic model by leveraging on its process chemistry skills and low-
cost manufacturing advantage.
This has enabled players to tap the huge generic opportunity abroad.
However, the R&D productivity of large global pharmaceutical players (innovators)
has considerably slowed down over the past few years which is underscored by the
declining number of new molecules (New Molecular Entities - NMEs) being approved
by the US FDA each year.
Taking this trend forward, the lack of new drug launches between 2010 and 2015
onwards will mean that the generic opportunity set to open up in the next decade
(post 2020) is likely to be significantly lower. (assuming average age of 8-10 years of
patent exclusivity)
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Indian pharma firms need to diversify, gradually evolve into innovators
These changes in the global pharmaceutical landscape could cause a slowdown in thegenerics segment and hence, the Indian pharma industry will be forced to look at
newer avenues for growth.
In the following section, we have provided our opinion on how the global forces of
change will shape the strategy of Indian players.
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Growth in generic market to slow down over the next decade
Revenues of large global pharma companies (innovators) depend on the performance
of their novel, patented molecules.
Hence, the R&D productivity of such players is of critical importance and
accordingly, they invest heavily in R&D (about 20 per cent of revenues excluding
capitalised R&D expenditure).
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Large global players suffering from low R&D productivity
Over the past few years, R&D activities by large global players have resulted in the
innovation of only a handful of new and significant molecules.
Meanwhile drug development costs have escalated. The cost for developing a new
molecular entity (NME) has more than doubled to $1.5 billion over the past 5 years.
During the same period, the number of NMEs approved by the US FDA continued tohover around 15-20 with an occasional rise to over 20 as seen in 2004 and 2008.
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R&D spend vs NME approvals
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R&D spend vs NME approvals
Low R&D productivity is further reflected by the decline in the number of NME
applications with the US FDA. 2010 recorded the lowest number of NME applications
in the past 15 years.
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NME filings hit a 15-year low in 2010
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Higher risks and lower returns: New drugs over the last two years fail to
deliver
In addition to low R&D productivity, innovators' returns from novel molecules have
substantially declined over the last few years.
None of the new drugs approved over the past 2-3 years have been blockbusters
(with sales over $1 billion) or even sales greater than $750 million.
This decline in sales is primarily due to the availability of substitutes (generic as well
as patented) for existing diseases. Rising emphasis on usage of generics has also
steadily reduced the prescription of patented molecules.
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Blockbuster molecules fading away
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Number of Para IV filings has increased substantially
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Number of Para IV filings has increased substantially
Moreover, uncertainty on returns from on-patent molecules has risen substantiallydue to Para-IV filings by global generic companies.
When a generic company certifies that its generic product does not infringe on a
patent listed in the US FDA Orange Book, it applies for an ANDA approval with a
Paragraph IV (Para IV) filing).As competition in the generic space has intensified, more and more generic
manufacturers are looking for Para-IV opportunities to boost sales and profits.
Such a trend has induced caution among innovators in launching new drugs.
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Fewer drugs going off-patent to result in an inevitable slowdown in generic
space
Over the past few years, off-patent drugs have been the key growth drivers in the
generic market.
Between 2005 and 2010, the generic market is estimated to have expanded by a
CAGR of 13 per cent.With $130 billion of new drugs going off-patent during this period, new generic sales
grew by 15 per cent while sales of existing generics grew by 4 per cent.
Research believes that in the next decade (post 2020), growth in the generic market is
likely to slow down to 3-5 per cent.
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Fewer drugs going off-patent to result in an inevitable slowdown in generic
space
Fewer drugs going off-patent coupled with lower prices of the patented drugs (as a
result of the availability of substitutes) will key reasons that will result in a
significantly lower incremental generic opportunity.
Patented drugs launched over the 2 years have not been able to garner sales in excessof $1 billion as seen in the case of Lipitor, Plavix, Nexium, Diovan, which were
launched between 2000 and 2005.
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What to expect: The best and worst
Based on the current trends in the global R&D, three scenarios could
emerge beyond 2010:
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What to expect: The best and worst
Based on the current trends in the global R&D, three scenarios could
emerge beyond 2010:
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What to expect: The best and worst
Based on the current trends in the global R&D, three scenarios could
emerge beyond 2010:
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What to expect: The best and worst
Based on the current trends in the global R&D, three scenarios could
emerge beyond 2010:
Over the last two years, sales of new drugs have averaged at about $200 million per
drug.
Keeping the average sales per new drug constant, we estimate that size of drugs
going off-patent between 2020 and 2025 could range about $60 billion(as against $150
billion between 2010 and 2015).
Further, due to erosion in prices of off-patent drugs, the effective increase in generic
market is slated to be about $12 billion.
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What to expect: The best and worst
Based on the current trends in the global R&D, three scenarios could
emerge beyond 2010:
This is significantly lower than the impending generic opportunity of about $50
billion during 2010 to 2015. (Refer to the formulations exports section for a detailed
analysis).
Further, competition in the global generic market is steadily intensifying. India's cost
arbitrage also has been steadily eroded, as most global generic pharma players have
outsourced manufacturing of bulk drugs/API to rival low-cost destinations such as
China.
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Indian players have to increasingly diversify into other revenue streams
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Indian players have to increasingly diversify into other revenue streams
The three major segments - domestic formulations, formulation exports and bulkdrug exports - have traditionally been the backbone of the Indian pharmaceutical
industry. With the generics market set to become extremely competitive in the long
term (next 10 years), Indian players will look to make the most of the current generic
opportunity and achieve a substantial scale of operations.However, going forward, with more MNCs foraying into India and a shrinking
generic market, Indian pharma players will have to increase their reach in segments
such as contract research, biopharmaceuticals and new drug development (NDD).
Global challenges will force Indian players to offer a whole gamut of products andservices to ensure stable revenues and margins.
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Medium-term strategy: Increasing the scale of their generic operations
In the medium term (next 5-10 years), Indian players will look to expand theirpresence in the global generics market so as to maintain stable revenues in case of a
slowdown in the segment.
In addition to regulated markets, Indian players will also look to expand further in
the semi-regulated markets of Latin America and CIS, in order to stave offcompetition from large global players.
With a strong generic opportunity opening up over the next 5 years and the need to
expand market shares, Indian players will look at options such as contract
manufacturing deals, joint ventures (JVs) and overseas acquisitions.These strategies will be mainly geared towards expanding product portfolios, brand
building and having a well-established distribution network.
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Medium-term strategy: Increasing the scale of their generic operations
Such strategies are already gathering pace as witnessed in the contract manufacturingdeal signed between Pfizer and Aurobindo Pharma for sale of generic drugs in the
emerging markets.
Recently, Merck and Sun Pharma have signed a distribution agreement for the sale of
Sun Pharma's generics in the emerging markets, while Cadila Healthcare and BayerAG have set-up a joint venture for distribution of their drugs in India and abroad.
Additionally, overseas acquisitions will also be hand-picked to target specific
geographies as in the case of Taro's acquisition by Sun Pharma.
(Over 90 per cent of Taro's revenues are derived from the US market and it has a
strong presence in therapeutic segments in which Sun Pharma is not dominant).
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Medium-term strategy: Increasing the scale of their generic operations
Although the acquisition strategy has backfired in the past, the importance of havinga strong presence in the generic market will make the case for more foreign
acquisitions by the larger players.
While increasingly gaining a presence in key geographies (in both regulated and
semi-regulated markets) will help Indian players protect their territory, they will haveto make concerted efforts in research-driven areas to make sizeable profits in the long
term.
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Innovation could shape the future of Indian players in the long-term
Until 2005, the Indian drug regulatory system recognised only process patents.
As a result, Indian pharma players began manufacturing generic copies based on the
same active ingredient using different processes.
This increased their expertise and process chemistry skills in reverse engineering
drugs.
As more and more opportunities emerged in the generic space, Indian players started
largely focusing on R&D for generic drugs (Bio-availability (BA)/Bio-equivalence (BE)
studies) as against developing new drugs.
Accordingly, India's R&D capabilities lie in reverse engineering drugs and in process
chemistry.
Additionally, in the past, Indian players also lacked the financial muscle to launch a
novel drug.
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Innovation could shape the future of Indian players in the long-term
However, going ahead, we believe that a paradigm shift needs to take place in theIndian pharmaceutical industry.
Large Indian players have to enhance their focus on new drug development.
Research believes this to be an area with tremendous potential for Indian players in
the long run.The ability to discover novel drug molecules will enable Indian players to be present
across the value chain (bulk drugs to generic formulations to novel drugs).
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Innovation could shape the future of Indian players in the long-term
However, going ahead, we believe that a paradigm shift needs to take place in theIndian pharmaceutical industry.
Large Indian players have to enhance their focus on new drug development.
Research believes this to be an area with tremendous potential for Indian players in
the long run.
The ability to discover novel drug molecules will enable Indian players to be present
across the value chain (bulk drugs to generic formulations to novel drugs).
Additionally, Indian drugmakers can also provide contract research services to global
innovators.
The size of the Indian contract research industry is about $275 million and it is set to
grow to by about 15-17 per over the next 5 years.
We believe that India has to enhance its presence in contract research that will also
build players' all-round expertise in new drug development.
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Biopharmaceuticals holds immense potential for Indian pharma players
The Indian biopharmaceutical industry is in its emerging stages and is sized atapproximately $1 billion as of 2009-10.
Indian biopharma players largely export recombinant vaccines to semi-regulated
markets and launch biosimilars in the domestic market.
Players are yet to make meaningful inroads into regulated markets in the Europe andResearch believes that the biopharmaceutical segment has ample potential to make
up for the lack of opportunity in the formulation exports.
However, a lot would depend on the regulations on biosimilars in regulated markets
and India's capabilities in supplying a range of such products.
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Manufacturing opportunities
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Manufacturing opportunities for Indian pharmaceutical players
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Manufacturing opportunities for Indian pharmaceutical players
Manufacturing opportunities for Indian pharmaceutical players can broadly be
classified into formulations and bulk drugs.
The formulations segment can be further categorised into domestic and export.
Traditionally, the domestic formulations segment has been accounting for 60 per cent
of the total formulations production.
Although this share will continue to remain stable till 2014-15, the share of
formulations exports is set to rise gradually during the same period.
In the case of bulk drugs, we believe that as only around 20 per cent of the total bulk
drugs manufactured are utilised for domestic consumption, bulk drugs exports
represent a significant manufacturing opportunity for Indian players.
Hence, the Indian pharmaceutical industry is dominated by exports, which is
estimated to have contributed more than 60 er cent to the industr 's sales in 2009-10.
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Manufacturing opportunities for Indian pharmaceutical players
Formulations are exported either through contracts (supply) or directly sold (retail) in
the market.
Currently, contract manufacturing for formulations forms a small portion of total
formulation exports since most Indian players want to have a direct presence in the
concerned target markets.
On the other hand, bulk drugs are either supplied under a contract, in case of
patented drugs, or are outrightly sold in case of off-patent drugs.
Going forward, India is poised to extend its presence into the on-patent regulated
markets, while maintaining a strong foothold in off-patent drugs as well.
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Indian pharmaceutical industry sales by key segments
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Indian pharmaceutical industry sales by key segments
Overall demand for pharmaceuticals is expected to post a strong CAGR of 15-17 per
cent to $43-46 billion by 2014-15 from an estimated $21.5 billion in 2009-10.
Between 2004-05 and 2009-10, formulation exports grew strongly by over 20 per cent.
During this period, exports to regulated markets also registered a robust CAGR of
around 30 per cent owing to the increasing penetration of generics in key markets
such as US and Europe.
Over the next few years, we expect formulation exports to continue to grow by about
15-17 per cent, driven by the growing generic opportunity in regulated markets and a
favourable growth in semi-regulated markets.
With competition intensifying, Indian pharma players are poised to tap the generics
space by shifting focus to mid- and small- sized molecules, in order to sustain
rofitabilit .
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Indian pharmaceutical industry sales by key segments
Domestic players' continuing efforts to bag a substantial share of Abbreviated New
Drug Application (ANDA) approvals are also indicative of India's aggressiveness in
pursuing regulated markets.
Meanwhile, bulk drug exports are expected grow faster (by 18-20 per cent) than
formulations exports.
This is because the growing generics market and rising cost pressures faced by
innovators provide a significant opportunity to Indian bulk drug players.
Additionally, India's key strengths such as low-cost manufacturing, high process
chemistry skills, manufacturing facilities and increasing number of drug master filings
(DMFs) are expected to lead the growth in bulk drug exports.
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Indian pharmaceutical industry sales by key segments
The domestic formulations market also witnessed strong growth of 14-15 per cent
during 2004-05 to 2009-10 driven by drug classes catering to lifestyle diseases.
We expect this trend to continue and the domestic market to expand to over $16
billion in 2014-15 from $8.7 billion in 2009-10 - at a CAGR of about 14 per cent.
A detailed analysis and assessment of the growth opportunities in each of the above
mentioned segments along with their regional distribution are discussed in the
subsequent sections.
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Formulation exports
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Introduction
With a size of $5.2 billion in 2009-10, formulation exports have been key growthdrivers for the pharmaceutical industry.
Indian players export to both regulated markets and semi-regulated markets. With
the opening up of generic opportunity in the regulated market in the last decade, the
share of regulated markets in India's total formulation exports have risen to about 43per cent in 2009-10 from 35 per cent in 2004-05.
Despite the gradual shift in focus, semi-regulated markets remain important target
markets, especially for mid-sized and smaller Indian pharma players.
For large players, presence in semi-regulated markets enables diversification from
the highly competitive regulated market.
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Formulation exports have more than doubled in the past 5 years
Formulation exports have resgistered a CAGR of 20 per cent to $5.2 billion in 2009-10from $2 billion in 2004-05 driven by a robust 24.4 per cent growth in exports to
regulated markets.
A 17.2 per cent growth in exports to the semi-regulated markets also aided the
growth in formulations exports.
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Formulation exports by India (2005-06 to 2009-10)
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Formulation exports by India (2005-06 to 2009-10)
However, growth in formulation exports would have been higher if not for the slumpwitnessed in 2009-10.
Exports grew marginally by 2.2 per cent y-o-y in 2009-10, significantly lower as
compared to the previous years.
With the exception the US, growth in exports to other regions remained muted.
Exports to regulated market grew by around 10 per cent y-o-y in 2009-10, while
exports to semi-regulated markets fell by around 3 per cent y-o-y.
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Among regulated markets, exports to US surge, Europe disappoints
The 10 per cent y-o-y growth in formulation exports to regulated market was drivenby a 31.4 per cent y-o-y growth in exports to the US.
The strong growth in exports to the US was partially due to a low base (exports had
remained flattish y-o-y in 2008-09).
However, exports to Europe fell by more than 12 per cent y-o-y.
The increasing pricing pressure and withdrawal of Indian players from highly
competitive tenders in these markets were key factors that aided the downfall in
exports.
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Exports to semi-regulated markets declined
Although the 5-year growth in exports to semi-regulated markets has been strong,they declined by about 3 per cent in 2009-10 due to a series of drug seizures at
European ports in the middle of 2009.
A majority of these drugs were generics meant for sale in the Latin American and CIS
markets.The drugs were seized on the grounds that these products were still on-patent in
some countries in the European Union and had thus violated intellectual property
rights.
Subsequently, India raised this issue with the World Trade Organization (WTO) and
since then, the European Union has agreed to amend its laws to permit Indian
generics sales to semi-regulated markets.
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Exports to semi-regulated markets declined
While the exact impact of these seizures is difficult to quantify, we believe it had asignificant bearing on the exports to the semi-regulated markets in 2009-10.
In addition, during the year, the US dollar weakened against local currencies in many
semi-regulated markets.
This resulted in lower sales realisations in dollar terms for Indian players.
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Despite flattish y-o-y growth, long-term export prospects intact
Research expects formulation exports to grow strongly at a 15-16 per cent CAGRbetween 2009-10 and 2014- 15.
This growth will be mainly fuelled by exports to regulated markets, while semi-
regulated markets will continue to remain key export destinations for Indian players.
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Outlook on India's formulation exports
O tl k I di ' f l ti t
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Outlook on India's formulation exports
Drugs worth over $150 billion will go off-patent between 2010 and 2014, of which $40
billion worth of drugs will open up to competition in 2011 alone.
Accordingly, we expect the global generics market to grow moderately by 10-11 per
cent.
We expect formulation exports to regulated markets to grow by 17-18 per cent in the
next 5 years as Indian players are well placed to increase their presence in the generics
segment, especially in the US market as evidenced from their rising share in
Abbreviated.
New Drug Application (ANDA) approvals and tentative approvals. Additionally,
mi