Asia Business Generator Project (Osaka International Business Promotion Center)

Overview of Indian Pharmaceutical Industry

Submitted by

STRATEGIC MANAGEMENT GROUP

(A division of TATA Industries Ltd)

Nirmal 18th Floor, Nariman Point, Mumbai 400021, India Tel 91-22-6637 6789 / 42 Fax 91-22-6637 6600 URL: www.tsmg.com Email: raman.kalyanakrishnan@tsmg.com

Pharmaceutical Market Overview The global pharmaceutical market was estimated at USD 700 billion in 2007 and is expected to grow at 6% CAGR 1 to reach USD 937 billion in 2012. Generic drugs constituted USD 92 billion of global pharmaceutical sales and is expected to grow at 11% CAGR to reach USD 155 billion in 2012. The Indian pharmaceutical industry is ranked 4th in the world in terms of production volume and 13th in terms of domestic consumption value. The Indian pharmaceutical market is expected to grow from USD 13 billion in FY 20072 to USD 34 billion in FY 2012. The key drivers for this growth are expected to be increased per capita spend on pharmaceuticals, improved medical infrastructure, greater health insurance penetration and shift in disease profiles.

Indian Pharmaceutical Industry (US $Billion) CAGR (FY02-FY07) 5 13 20%

3.7

33%

0.9 4.4

9.4

16%

2001-02

2006-07

API & Intermediates

Formulations (Generics + Patented)

Today the Indian pharmaceutical sector meets 95% of the countrys medical needs. The domestic pharmaceutical industry has evolved from being purely reverse engineering focused to being research driven, export oriented and globally competitive. The Indian pharmaceutical industry consists of both domestic companies and subsidiaries of multinational corporations. Indian companies manufacture a wide range of generic drugs (branded and non-branded), intermediates and bulk drugs/Active Pharmaceutical Ingredients (API). However generic drugs continue to remain the mainstay of the industry. Recently, Indian pharmaceutical companies have been scaling up their presence in other business segments such as drug discovery & development, contract research & manufacturing and are focusing on developing competencies in several areas of the pharmaceutical value chain.

1 2

Compounded Annual Growth Rate FY 2007 - Financial Year, Apr 1st 2006 to Mar 31st 2007

Indian Formulations Industry Formulations are broadly categorized into patented drugs and generic drugs. A patented drug is an innovative formulation that is patented for a period of time (usually 20 years) from the date of its approval. A generic drug is a copy of an expired patented drug that is similar in dosage, safety, strength, method of consumption, performance and intended use. The Indian formulations market was estimated to be USD 9.4 billion in FY 2007 comprising of domestic consumption of USD 6.2 billion and exports of USD 3.2 billion. The formulations market is expected to grow at 17% CAGR to reach USD 21 billion in FY 2012. Nearly 97% of Indias drug market in volume terms consists of second-and-third generation drugs no longer subject to patent protection in the developed world. Over the last 30 years, Indias pharmaceutical industry has evolved from being a marginal global player to becoming a world leader in the production of high quality generic drugs. India exports pharmaceutical products to more than 200 countries, primarily the United States, Russia, China and the United Kingdom. Indias single largest export market continues to be the United States, which is the worlds largest generic drug market.

Exports by Region (2005)

Russia 12% Brazil 7%

Others 29%

UK 9% Nigeria 5% China 8%

USA 30%

Generic drugs are 40-75% lower in costs as compared to patented drugs. Low production costs give India an edge over other generics-producing nations. In recent years, Indian pharmaceutical companies have invested substantial part (about 30%) of their total global investment in generic manufacturing capacity. Indian firms now account for over 35% of Drug Master File (DMF) applications and 25% of all US Abbreviated New Drug Application (ANDA) filings submitted to the FDA. These filings give Indian generic companies an advantage over other generic producing nations. India also has the largest number of US FDA approved manufacturing sites outside the US.

Principal products of Indias leading drug manufacturers

Company Ranbaxy Labs Principal products: API and generic drugs Anti-infectives, cardiovascular, gastrointestinal, central nervous (diazepam, midazolan), ophthalmic & ointments, urologicals, nutritionals, sex hormones, analgesics, anti-asthma, cough & cold, vaccines. Cardiovascular, gastrointestinal, anti-infectives, pain management Antibiotics, anti-asthmatics, anti-AIDs and TB drugs, anabolic steroids, analgesics-antipyretics, antacids, anti-arthritis, anti-inflammatory, anticancer, antidepressant agents, anti-diabetic, anit-epileptic, anti-fungal, anti-malarial. Anti-infectives, pain management, nutraceuticals Percent of sales API: 22%, Generic: 78% API: 40% Generic: 60% API 7%, Generic: 93%

Dr. Reddys Cipla

W ockhardt Pfizer India Sun Pharma

Nutritionals, cough syrup, anti-arthritis, anti-infectives, cardiovascular Neuro-psychiatry, cardiovascular, gastrointestinal, diabetic, gynecological, anti-allergic, antidepressants, cholesterol reducers, anti-asthma, Parkinson, ADD, pain. GSK Anti-infective, anti-inflammatory, analgesic, gastro-enterological, antiallergic, dermatological. Lupin Tuberculosis medication, antibiotics, cardiovascular. Cadila Cardiovascular, gastrointestinal, anti-inflammatory/analgesic, antibiotics/anti-infectives, vaccines/immunomodulators, anti-diabetics; vitamins. Nicholas Piramal Analgesics-anti-inflammatory, antibiotics, antifungal, antihistamines, antiseptics, cardiovascular, central nervous system, diabetic, dermatologic, endocrinologic, gastro-enterological, vitamins, pulmonary-respiratory, trauma-emergency, gastrointestinal, NSAIDs. Aurobindo Antibiotics, anti-retrovirals, cardiovascular, central nervous system, gastroenterological, Pharmaceuticals anti-allergy.

API : 19% Generic: 81% Generic: 100% API: 18% Generic: 82% Generic: 100% Generic: 100% Generic: 100%

Generic: 100%

Generic: 100%

The vast majority of Indias pharmaceutical companies are small by global standards with revenues less than USD 5 million. The formulations industry is highly fragmented with ~400 units in the organized sector and ~15,000 units in the unorganized sector. The industry has a range of over 100,000 drugs spanning various therapeutic segments. Indian companies dominate the formulations market - 7 out of the top 10 players are Indian. The top 5 companies in formulations (Glaxo SmithKline, Ranbaxy, Cipla, Nicholas Piramal and Zydus Cadila) account for over 23% of the domestic formulations market. In geographic terms, manufacturing operations are largely concentrated in West and South India. However, some players have shifted manufacturing base to excise free zones in the North due to shift towards MRP (maximum retail price)-based excise duty levy. In India, approximately 71% of the total formulations sold are for acute illness (short duration) and remaining for chronic illness (prolonged duration). This is true for most developing countries as compared to developed markets where the growth is led by chronic ailments.
Leading Therapeutic segments in India by Sales (Rs. Billion)
FY 2005 FY 2006 FY 2007 CAGR % 36.9 43.7 49.7 16.0 23.1 27.1 30.5 15.0 21.7 25.3 28.2 14.0 19.6 21.4 26.3 15.7 20.2 22.9 25.8 13.1 19.5 21.7 23.8 10.7 11.4 13.2 15.5 16.8 11.9 13.4 15.2 13.1 10.9 13.3 15.0 17.5 9.0 10.6 12.5 17.9 184.1 212.6 242.7 14.8 Top 10 Therapeutic Categories Total Dom es tic Form ulation Dem and 212.7 244.4 279.0 14.5 Therapeutic segments Anti-infectives Gastrointestinal Cardio Vascular Pain/Analgesics Respiratory Vitamins/Nutrients Dermatology Gynaecological Central nervous system Anti-diabetic

The demand for domestic formulations is expected to be driven by chronic therapeutic segments like anti-diabetic, central nervous system, cardiovascular system and lifestyle disease profile segments like gastrointestinal. The changing lifestyle in Indian society is expected to result in a rise in the incidence of chronic ailments. Apart from chronic ailments, Anti-infectives and the Pain/Analgesics segments are expected to grow steadily in the long run due to hygiene issues in semi-regulated markets like India.

Chronic vs. Acute - Sales mix of top 10 Indian players in FY 2006

100 90 80 70 60 50 40 30 20 10 0 Sun Pharma Zydus Cadila Cipla Industry Sanofi Aventis

Nicholas Piramal

Aristro Pharma

Pfizer India

Acute

Chronic

Regulatory System The Indian pharmaceutical industry is mainly regulated on patents, price and quality. Until 2004, the regulatory system in India focused only on process patents. Indian companies thrived during this phase by re-engineering products of global pharmaceutical players and launching them in India. Indian companies gained process chemistry skills, but de-emphasized research & development for new drug discoveries. In January 2005, India complied with WTO to follow the product patent regime. The Act allowed for only two types of generic drugs in the Indian market: off-patent generic drugs and generic versions of drugs patented before 1995. The Amendment grants new patent holders a 20-year monopoly starting on the date the patent was filed and no generic copies can be sold during the duration of the patent. Other regulations like the Drugs and Cosmetic Act regulate the import, manufacture, distribution and sale of drugs in India. The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and formulations. Currently 74 bulk drugs and formulations are under the purview of price control.

Alkem Labs

Ranbaxy

GSK

Government Initiatives The government has introduced several development programmes to improve access and quality of healthcare services in the country. The National Rural Health Mission (NRHM) introduced by the government to provide basic healthcare amenities in rural areas is expected to increase access to essential drugs. The recent budget (2008-09) has announced a slew of measures for the pharmaceutical sector. Chief among them are: Cut in excise duty on all pharmaceutical formulation products, from 16% to 8%. This will benefit Indian arms of MNCs who incur higher excise duty. Increase in outlay for HIV treatment. This will benefit players like Cipla & GSK who are extensively developing anti-HIV formulations. Outlook Globally, the trend towards increased use of generics is on the rise and is expected to open up tremendous opportunities for generics players. Governments in many countries are also encouraging the shift to generics on the back of rising pressure on healthcare budgets. The U.S. generics market is currently experiencing intense competition while semi-regulated and emerging markets are expected to become new growth opportunities. While restructuring and realignment of business models will enable Indian players to survive and grow in the U.S. and European markets, increasing their presence in emerging markets will enhance their market share in the global generics industry.