Original Final Project

Final Project Report
On
“Detail study of Indian pharma companies Vs
European pharma companies”
A report submitted to Ishan Institute of Management &

Technology, Greater Noida, as a partial fulfillment of full time Post
Graduate Diploma in Business Management.
Under the Guidance of
Mr. Shivnath Mishra
SUBMITTED TO, SUBMITTED BY,
Dr. D.K. Garg Sanjeev Kumar
Chairman Enr : 14047

IIMT, Greater Noida Kumar Akhilesh
Enr : 14022
Batch- 14th
BM (Marketing)
ISHAN INSTITUTE OF MANAGEMENT & TECHNOLOGY
1A, KNOWLEDGE PARK-1, GREATER NOIDA
DISTT. G.B. Nagar (U.P)
Website- www.ishanfamily.com
E-mail- ishan_corporate@yahoo.com
PREFACE
As a student of management, apart from theoretical studies we need to get a deeper

insight into the practical aspects of those theories by working on various projects. So
these projects have high importance in management studies to enhance the knowledge
and skills.
Management in India is heading towards a better profession as compared to other

professions. The demand for professional managers is increasing day by day.
Working on this project has been an enriching experience. This project will help me a
lot in the professional growth. It has given us the confidence to prepare for ourselves
as fully fledged international marketing professional in the eminent future. A
comprehensive understanding of the principle will increases the decision-making
ability and sharpens the tools for this purpose. .
The demand for professional managers is increasing day By day. To achieve

profession competence, manager ought to be fully occupied with theory and practical
exposure of management.
A comprehensive Understanding of the principle will increases their Decision making

ability and sharpening their tools for this purpose. The scope of the work under
taken by us includes introduction to basic & major things about the Impact of
pharmaceutical industry on the customer and also their own future aspects.
We would like thank our Respected Chairman Dr. D. K. Garg Sir, who always been
a source of motivation and support to all the students of PGDBM. We pay our
gratitude to Prof. M. K. Verma and all faculty members of the institute without
whose help it would have been impossible to conduct such a study. We must
acknowledge our heartiest thanks to the respondents who spared their precious time to
us.
We have put our maximum effort to gain the information. If any error or mistake is
found in collection data kindly ignore.
CERTIFICATE
This is to certify that the project work done on “Detail study of Indian pharma
companies Vs European pharma companies” submitted to Ishan Institute of
Management and Technology, Greater Noida by Sanjeev Kumar & Kumar Akhilesh
in partial fulfilment of the requirement for the award of degree of Post Graduate
Diploma in Business Management is a bonafide work carried out by them under my
supervision and guidance. This project work is the original one has not been
submitted anywhere else for any other degree/diploma.
Date: 18/06/10
Name of the guide:
Place: Delhi Mr. Shivnath Mishra
(Area Manager)
Apex Lab Pvt. Ltd.
Sidco Garment Complex,
3rd Floor, Chennai-600032
Seal/Stamp of Guide
ACKNOWLEDGEMENT
No research can blossom from single person’s mind without proper guidance,
assistance and inspiration from various quarters. Our project was given its
present shape by assistance of many people whom we are greatly indebted to.
We owe deep intellectual debt to the numerous people who through their rich
and various contributions have greatly improved our understanding of various
concepts of our project.
We express our sincere thanks to hon’ble Mr. Shivnath Mishra(Area Manager,

Apex Lab Pvt. Ltd.) for his stimulate discussion, constructive and valuable
suggestions that helped us in this endeavour. We would like to thank all those
people who graciously helped us by sharing their valuable time, experience &
knowledge for completion of this project.
We take an opportunity to express our sincere thanks to Dr. D.K.Garg

(Chairman, IIMT), Dean Sir Prof. M.K.Verma and all the staff members of the
PGDM department for making available all the facilities in fulfilling the
requirements for this reasonable work.
Finally, we thank our parents for their moral support and financial help.
Sanjeev Kumar
Enr. – 14047
Kumar Akhilesh
Enr. – 14022
DECLARATION
The Final Project project on “Detail study of Indian pharma companies Vs

European pharma companies” is the original work done by me. This is the
property of the institute and use of the report without prior permission of the
institute will be considered illegal and actionable.
Date: 18/06/10
Sanjeev Kumar
Enr. – 14047
Kumar Akhilesh
Enr. – 14022
BM (Marketing)
BATCH – 14th
TABLE OF CONTENTS
S.No. TITLE PAGE NO.
1. INTRODUCTION 13
Overview
Objective of study
Significance of study
Plan of the study
2. Growth of pharmaceutical Industry 29
India’s Pharmaceutical Industry -

Independence to 21st Century
European Pharmaceutical Industry - In
Present Era
Comparison of growth
3. Regulatory Environment of India’s and 72

European Pharmaceutical Industry
The Patent Act
Drug price control
Patent (Amendment) Act
4. Industry Production 124

Indian Pharmaceutical Manufacturers
European Pharmaceutical
Manufacturers
5. Scope of pharmaceutical Industry 133
Contract Research and outsourcing and
Other services
Research and Development
6. Mergers, Acquisition and Other Alliances in last 153

two years
7. SWOT Analysis 198

Indian Pharmaceutical Industry
European Pharmaceutical Industry
8. International business of Pharmaceutical 223

Industry
Import
Export
Role of import/export in U.S. Market
9. Generic drugs in the U.S. Market 247

Role of Indian and European generic
drugs in the U.S. Market
Impact of generic drugs on U.S. Market
10. Conclusion 264

Findings
Suggestions
11 Comparison of five top pharmaceutical 273

companies’ profile-world wide
Executive Summary
The project is concerned with the “Detail study of Indian pharma companies Vs
European pharma companies” Work procedures are dealt in detail along with their
drawbacks and scope of improvements in this sector. All the work instructions are
dealt in detail and suggestions are made wherever there is a scope of improving on the
quality of the product and services provided to the market and consumers.
As Pharmaceutical companies in India are growing at a very fast pace and this has
made the Indian pharmaceutical industry as the second largest growing industry. Also
the pharmaceutical industry in India is the third largest in the world, which will be of
US$20 billion by 2015.
But in starting phase, The Indian pharmaceutical industry traces its roots to the 1903
formation of Bengal Chemical and Pharmaceutical Works in Calcutta by Professor
P.C. Roy. During the first half of the twentieth century, however, and despite modest
efforts on the part of the colonial government to spur local production, India remained
largely dependent on the UK, France, and Germany for medicines. The government
took its first concrete steps toward self-reliance in pharmaceuticals with the
establishment of Hindustan Antibiotics Ltd. (HAL) in 1954 and Indian Drugs and
Pharmaceuticals Ltd. (IDPL) in 1961. IDPL (in spite of its grossly inefficient
character) became instrumental in the development of the industry by serving as the
vehicle for a comprehensive Soviet-sponsored program in which Russians supplied
machinery, personnel, and technical know-how to produce antibiotics.
Prior to the Patent Amendment Bill, not the substance itself but merely the
manufacturing process was protected for a period of seven years. India’s patent
legislation had frequently been the reason for legal disputes with large western drug
firms, especially from the US. In line with international standards, the sector is now
subject to product and process patents valid for a period of 20 years. Indian
companies seeking to copy drugs before the patent expires are forced to pay high
licence fees. This became necessary following the signing by India'
s government of
the TRIPS Agreement (Agreement on Trade-Related Aspects of Intellectual Property
Rights).
India has the advantage of the cost, as the cost of labor, the cost of inventory is much
lower than U.S. The multinational companies, investing in research and development
in India may save upto 30% to 50% of the expenses incurred. The cost of hiring a
research chemist in the US is five times higher than its Indian counterpart and the
manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in US. The cost of performing clinical trials in India is one tenth of the cost
incurred in US as well as the cost of performing research in India is one eighth of the
cost incurred in US.
As the Final Project is the part of the management study. It is plays a very important
role in the management student life. It gives the practical experience of the market
and chance to understand the behaviour of Industry.
In every management training scheme there is a provision for real experience within
the academic time period. The purpose of this training is to apply the theoretical
knowledge which is taken by the students in the class and apply them in the real world
and sees the implementation of this knowledge. It is well said phrase that “nothing is
much practical than a good theory” but on the same hand we cannot deny that
“practical is better than theory”. We can say both the phrases are not opposing each
other but they are complementary to each other. Experiencing both in a good and
dedicated manner really pays a lot in one’s professional career.
Marketing management is creating a revolution in marketing of products and services

providing to the market and consumers of the organization throughout the world. This
is one of the leading Indian media sectors organizations which have grasped quality
mettle and have successfully, ridden business recessions and annihilate the
competition.
Marketing management is a powerful tool for achieving organizational goals and

gaining competitive advantage. Final project goal is to help students become effective
managers in competitive, global environment.
Emphasis is given on discovering the challenge of both managing and understanding
the interrelatedness of activities throughout the industry, and how the marketing
functions fits into the organization
Field exposure is very much necessary for a student of marketing. In this stream of
business the application of theory is very frequent. Marketing is now diversified that
it can be done by cell phone or internet.
With my honest efforts and some great luck I got a chance to complete my Final
project on “Detail study of Indian pharma companies Vs European pharma
companies”. There I had worked hard and my work was to understand the real picture
of pharma industry and compare the Indian and European pharma style and status. I
meet with various professional people and analyze market competition. I also get their
feedbacks about my work.
LITERATURE REVIEW
It has been purely a practical exposure to real business in general and of marketing in
particular. Through the entire tenure of project have learned the practical implication
of business. We must say that, through this practical exposure that is Final Project on
“Detail study of Indian pharma companies Vs European pharma companies”
which enable me to get an in depth sight of the reality show of the business.
Doing project was really an opportunity before me when I could convert my

theoretical knowledge into practical and of real world type. Fortunately, the industry I
got is a true follower of the various principles of management and also one of the
leading segment of the industry. The working environment that I was being provided
was extraordinary and helped me a lot in delivering my work properly and with full
potency of mine.
The graph of sales of these respective product lines is the best in the industry as
compared to other. Here I found all the professionals are very much committed to
their work as well as they were all professionals enough. This helped me a lot in
getting a good deal of exposure. As I had to consult the Channel partners, I felt
myself, in the beginning, in a bit problem. But the cooperation of my superiors at the
work induced confidence in me to deal with my problems whenever they came.
Since I had to complete my project within a limited time frame, this made me
experience the actual stress of the workplace. This I think will work as real booster
when I will go to work after the completion of the PGDBM course at IIMT, Greater
Noida. The way the Guide supported me and his other subordinates was a good
example of co ordination and good manager. This shows that in the corporate world
the superior officer should not only take care of the target fulfilled but also the
behavioral aspect of the subordinates.
Working with the professionals was a great experience as I came to know that how a
person can work as a team in a multifarious industry to achieve the organizational
goal. Many a times, while working, I had to sacrifice my personal feelings and
aspirations just to keep the project interests in my mind by giving it the top most
priority.
Indeed, I always tried to do justice with my duties even at the cost of my personal life
for the time being. But this could be a success, as I got continuous support from my
guide as well as other officers & Colleagues.
So, at last I would like to thank my institution for providing me with the opportunity
to do final project. I’m also grateful to my guide Mr. Shivnath Mishra, Area Manager
for providing me all the assistance in completing my project.
CHAPTER-1
INTRODUCTION
Overview
The pharmaceutical industry-global view

Origins and evolution
The modern pharmaceutical industry is a highly competitive non-assembled global
industry. Its origins can be traced back to the nascent chemical industry of the late
nineteenth century in the Upper Rhine Valley near Basel, Switzerland when dyestuffs
were found to have antiseptic properties. A host of modern pharmaceutical companies
all started out as Rhine-based family dyestuff and chemical companies e.g. Hoffman-
La Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba and Geigy),
Novartis etc. Most are still going strong today. Over time many of these chemical
companies moved into the production of pharmaceuticals and other synthetic
chemicals and they gradually evolved into global players. The introduction and
success of penicillin and other innovative drugs in the early forties institutionalized
research and development (R&D) efforts in the industry. The industry expanded
rapidly in the sixties, benefiting from new discoveries and a lax regulatory
environment. During this period healthcare spending boomed as global economies
prospered. The industry witnessed major developments in the seventies with the
introduction of tighter regulatory controls, especially with the introduction of
regulations governing the manufacture of ‘generics’. The new regulations revoked
permanent patents and established fixed periods on patent protection for branded
products, a result of which the market for ‘branded generics’ emerged.
GLOBAL SCENARIO
The global pharmaceutical market can be classified into two categories: regulated and
unregulated/semi regulated. The regulated markets are governed by government
regulations like intellectual property protection, including product patent recognition.
As a result, they have greater stability in both volumes and prices like the United
States. The unregulated/semi-regulated markets have lower entry barriers in terms of
regulatory requirements and hence, they are highly competitive. The global
pharmaceutical companies till 2010 will be closely regulated by emerging issues like
patent safety, side effects, adverse action reporting, strengthening harmonization and
regulations and stronger clinical evidence. Global pharmaceutical market has
increased its focus on novel drugs, good delivery system, and new chemical entities.
The other factor which is driving the growth of global pharmaceutical market is
speeding up regulation in bio-generic segment. Moreover there will be shift in growth
from top ten markets to emerging economies. The global pharmaceutical market will
change its shape from primary care driven to specialty care driven that is oncology
and biotech. The global pharmaceutical industry will take a shape of virtually
integrated pharmaceutical company. There is a widening gap between mature market
performance and emerging market performance, which will require many
pharmaceutical companies all over the globe to make changes throughout their
operations from shifting their sales and market, revising their strategies, changing
their business models to fuel their growth.
For the global pharmaceutical industry, 2008 will be a year of softening growth and a
widening gap in performance between the increasingly generalized and cost
constrained mature markets, as well as the burgeoning ‘pharmerging’ sectors where
demand is growing and economies and access to healthcare are expanding at record
levels. Marking an important inflection point for the industry, for the first time the
world’s seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will
drive less than half of the industry’s growth in 2008, while the pharmerging markets
will contribute nearly a quarter of growth worldwide (Figure 1). Further divergence
will be apparent between primary care-driven and specialist-driven therapy areas, and
between therapy classes with major unmet needs and innovations, and those
dominated by generics.
Pharmaceutical growth will slow to 4-5% in 2008, marking an all-time low for this
market. This is due in part to a lessening of the volume growth generated by the
Medicare Part D prescription drug benefit. It also reflects the continued high level of
generalisation in this market with approximately $15 billion in branded products
expected to lose patents in the 2008 timeframe. The US will also continue to feel
the impact of heightened safety scrutiny, as the US FDA acquires more power,
RECORD
slowing the introduction of new medicines. A similar level of growth is
LOW
anticipated in the top five European markets (France, Germany, UK, Italy and GROWT
H
Spain), as the industry faces significant generics exposure and governments
FOR THE
struggle to manage their aging populations and embrace new treatment US
innovations (Figure 2). Increasing therapeutic substitution can be expected in
In the US,
these markets, along with an upturn in parallel trade, particularly with specialist
driven products. Cost-saving initiatives are likely to become more aggressive
and will include price cuts, contracting and rebating, as well as the expansion of
reference pricing schemes in Germany, Italy and Spain. Value growth in these
markets will be limited to areas of unmet needs. In Japan, cost-containment drives –
including incentives for prescribing generics – will also impact market performance
as the country embarks on another year of national health insurance price cuts.
Growth of 1- 2% is anticipated, compared with 4-5% in 2007. Notwithstanding this
downturn, Japan remains in economic recovery and access to drugs continues to
improve for its aging population. A rise in the level of new product launches is
expected as the Pharmaceutical and Medical Devices Agency becomes fully staffed
and focuses on accelerating approvals. This will be particularly noticeable in areas of
unmet needs, such as oncology, where approvals have already been granted for
Avastin and Tarceva.
ACCELERATING GROWTH IN EMERGING MARKETS
By contrast, much stronger growth of 12-13% is expected in the seven pharmerging
markets of China, India, Brazil, Russia, Mexico, Turkey and South Korea, driving
sales of $85-90 billion in 2008. Although these markets have their own unique
characteristics, common to each is a rising GDP and expanding access to both generic
and innovative new medicines as primary care improves and extends through rural
areas, and private health insurance becomes more commonly available. China will be
a particularly strong performer in 2008, reflecting the country’s booming economy
and greater government involvement in healthcare policy. This involvement extends
to annual price cuts, enforced generic prescribing and an anticorruption campaign that
targets promotional activity, product approvals and manufacturing.
Overall, the global pharmaceutical market will grow 5-6% to over $735 billion in
2008, down from 6- 7% in 2007 (Figure 3). Key dynamics shaping this growth are the
continued wave of generalisation, expanded use of innovative specialty products,
increasing reliance on value-based medicine and higher levels of uncertainty around
safety issues.
TOP TEN PHARMACEUTICAL COMPANIES BY WORLDWIDE SALES
(2007-08)
Sales (US$ billions)

Source: IMS Health. Intelligence 360 Global Pharmaceutical Perspective
TOP TEN PHARMACEUTICAL COMPANIES WORLDWIDE BY TOTAL
R&D EXPENDITURE
Fourteen pharmaceutical companies featured in the top 50 R&D spenders according
to European Commission research in 2007-08, including 3 in the top ten: Pfizer,
Johnson & Johnson, and GlaxoSmithKline. Other companies to feature were
Sanofiaventis, Roche, Novartis, Merck, AstraZeneca, Amgen, Bayer, Eli Lilly, Wyeth
and Abbott.
• Pharmaceutical companies ranked as the highest sector of R&D investment across
the world’s top 1400 companies, spending over 70 million euros.
• In 2007, Pfizer spent nearly US$7.6 billion on R&D globally, followed by Johnson
& Johnson (US$7.1 billion) and GlaxoSmithKline (US$6.9 billion).
• Of the top ten pharmaceutical companies, Amgen spent the largest proportion on
R&D with expenditure equalling over 24% of total sales.
THERAPEUTIC MARKET SEGMENTATION
Commencing with repackaging and preparation of formulations from imported bulk
drugs, the Indian industry has moved on to become a net foreign exchange earner, and
has been able to underline its presence in the global pharmaceutical arena as one of
the top 35 drug producers worldwide. Currently, there are more than 2,400 registered
pharmaceutical producers in India. There are 24,000 licensed pharmaceutical
companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured
here. India has more drug-manufacturing facilities that have been approved by the
U.S. Food and Drug Administration than any country other than the US. Indian
generics companies supply 84% of the AIDS drugs that Doctors without Borders uses
to treat 60,000 patients in more than 30 countries. However total pharmaceutical
market is as follows:
It is very much evident from above figure that chronic therapy area (Gastro Cardiac,
Respiratory, Neuro Psychiatry and Ant diabetics) is dominating the market in long
run.
Objectives of the Study
The main objectives of the study are:
• To evaluate the performance of a few leading pharmaceutical companies

especially in terms of their ANDA filings and approvals as well as DMF
filings with USFDA in post-TRIPS period.
• To evaluate the R&D expenditure of a few leading pharmaceutical companies
in post-TRIPS period.
• To evaluate the patents granted to a few leading pharmaceutical companies by
USPTO in post-TRIPS period.
• Indian drug firms could no longer simply copy medicines with foreign patents
by using alternative manufacturing processes and offer them on the domestic
market. As a consequence of the major changes to India’s drug patent
legislation, the country’s pharmaceutical industry is undergoing a process of re-
orientation.
• To know Government Initiatives for growth of Indian Pharmaceutical Industry

likes:Tax breaks are offered to pharma industry, New procedure for the
development drugs, Proper clinical procedures, New Millennium Indian
Technology Leadership Initiative and the Drugs and Pharmaceuticals Research
Programme - Two schemes launched by the government.
• Comparison of top pharmaceutical companies’ profile world wide and analyse

their different strategies, working culture, new opportunities and their
competitive edge.
• The US has become its most important sales market. Sales to the US recently
amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to
Europe came to nearly 20%. Overall, approx. 80% of the manufacturer’s total
sales are generated abroad.
• Revenues from domestic market dominated the total pharmaceutical revenues
in current year. Exports contribution is expected to surpass the domestic
turnover by 2010
• The pharma sector would witness an upswing in the revenues from service
segment due to the increase in outsourcing of Contract research &
manufacturing services (CRAMS) to India
• To take the steps to overcome the obstacles for different pharmaceutical

companies and how to explore the opportunities.
• Growth and future prospects of pharmaceutical industry worldwide.
Significance of The Study
The growth of Indian Pharmaceutical industry in terms of a few parameters has been
envisaged in a few studies but a firm level comprehensive work on the growth of
Indian Pharmaceutical industry taking many parameters simultaneously has not been
done so Compared with western industrial nations, energy prices are low but
companies must expect repeated power cuts and offset fluctuations in the electricity
network with the help of emergency power generators. In many areas, the hot and
humid climate makes high demands on climate technology at production plants and
on the refrigeration of finished products. Insufficient energy supply also leads to a
situation where production hours must be handled very flexibly. This shortage can
only be eliminated in the medium term and will require maximum effort. However,
India’s government Besides the positive outlook for India’s drugs industry, there are
also a number of adverse factors. These include, above all, serious shortcomings in
infrastructure.
Compared with western industrial nations, energy prices are low but companies must
expect repeated power cuts and offset fluctuations in the electricity network with the
help of emergency power generators. In many areas, the hot and humid climate makes
high demands on climate technology at production plants and on the refrigeration of
finished products.
Government take so many Initiatives for growth of Indian Pharmaceutical Industry
likes:Tax breaks are offered to pharma industry, New procedure for the development
drugs, Proper clinical procedures, New Millennium Indian Technology Leadership
Initiative and the Drugs and Pharmaceuticals Research Programme - Two schemes
launched by the government.
institutional obstacles to overcome first. More often than not, Indian medicines fail
because doctors and pharmacists in other countries are reluctant to prescribe or hand
out drugs produced in India. There is a tendency to favour locally/nationally produced
drugs. For this reason, drug companies from India are finding it hard to gain a
foothold in western markets.
Besides the positive outlook for India’s drugs industry, there are also a number of
adverse factors. These include, above all, serious shortcomings in infrastructure.
finished products. Insufficient energy supply also leads to a situation where
production hours must be handled very flexibly. This shortage can only be eliminated
in the medium term and will require maximum effort. However, India’s government
besides the positive outlook for India’s drugs industry, there are also a number of
intends to expand power generation capacities to roughly 240 GW by the end of the
11th five-year plan in 2012. This would mean a more than 100 GW, or nearly 90%,
increase on today'
s total.
Recent globalization and the development of the information superhighway have
brought the countries of the world closer. From a business perspective, the world is
one marketplace. The American pharmaceutical industry has played a pioneering role
in the development of the drug industry through in-depth, timely, and useful research
and bulk manufacturing of drug products. Although the US pharmaceutical industry is
enjoying the leadership position, it can no longer be content to focus only on the US,
Japanese, and European markets.
Benchmark of performance against the leading Eastern European pharmaceutical
companies using market share data by company and comprehending their
strategies.Benchmark the top 10 generic companies over the 2004-07 period, and use
detailed company analysis to measure the performances and outlooks of major players
including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-Aventis,
Watson, Bayer and Stada.
Lack of incentives in Europe. Pricing and reimbursement pressures in Europe have
created greater boundaries to innovation, leading to fewer undervalued latestage
products. As a result, traditional specialty companies are likely to face future
difficulties in this region.
Pricing pressure, authorized generics, a lack of patient awareness and distrust among
healthcare prescribers. Increasing incidence of parallel traded products will impact
companies operating in the region resulting in potential loss of sales eventually
affecting cash flows and lowering innovation in drug development.
India has the advantage of the cost, as the cost of labor, the cost of inventory is much
lower than U.S. The multinational companies, investing in research and development
in India may save up to 30% to 50% of the expenses incurred. The cost of hiring a
research chemist in the US is five times higher than its Indian counterpart and the
manufacturing cost of pharmaceutical products in India is nearly half of the cost
incurred in US. The cost of performing clinical trials in India is one tenth of the cost
incurred in US as well as the cost of performing research in India is one eighth of the
cost incurred in US.
Plan of the study
The report is written based on the in-depth investigations and studies of

pharmaceutical outsourcing industries in both Europe and India. It first carefully
selected, among a large pool of companies, top 50 best outsourcing service providers
in each country. It then conducted detailed comparisons among these selected
companies in more than twenty different areas.
The comparison is performed in four different ways:
• Head-to-head comparison of two countries including advantages and
disadvantages of each country in pharmaceutical outsourcing;
• Head-to-head comparison of pharmaceutical outsourcing industries between
the two countries including their development history and pattern, current
market sizes and service capabilities, strengths and shortcomings, and future
growth potentials including the growth drivers and resistors;
• Head-to-head comparison of top outsourcing service providers of each
country;
• Head-to-head comparison of popular outsourcing models in each country.
The objective of the comparison is to provide readers an unbiased depiction of the
pharmaceutical outsourcing industry in each country with the emphases on revealing
each country’s strengths, weakness, advantages and disadvantages in outsourcing.
A comprehensive Understanding of the principle will increases their Decision making
ability and sharpening their tools for this purpose. The scope of the work under
taken by us includes introduction to basic & major things about the Impact of
Pharmaceutical Industry on the customer and also their own future aspects. We
have put our maximum effort to gain the information.
Since I had to complete my project within a limited time frame, this made me
experience the actual stress of the workplace. This I think will work as real booster
when I will go to work after the completion of the PGDBM course at IIMT, Greater
Noida. The way the Guide supported me and his other subordinates was a good
example of co ordination and good manager. This shows that in the corporate world
the superior officer should not only take care of the target fulfilled but also the
behavioral aspect of the subordinates.
Working with the professionals was a great experience as I came to know that how a
person can work as a team in a multifarious industry to achieve the organizational
goal. Many a times, while working, I had to sacrifice my personal feelings and
aspirations just to keep the project interests in my mind by giving it the top most
priority.
We stimulate discussion, constructive and valuable suggestions that helped us in this

endeavour. We would like to thank all those people who graciously helped us by
sharing their valuable time, experience & knowledge for completion of this project.
With my honest efforts and some great luck I got a chance to complete my Final
project on “Detail study of Indian pharma companies Vs European pharma
companies”. There I had worked hard and my work was to understand the real picture
of pharma industry and compare the Indian and European pharma style and status. I
meet with various professional people and analyze market competition. I also get their
feedbacks about my work.
CHAPTER 2
Growth of Pharmaceutical industry
in the medium term and will require maximum effort. However, India’s government.
Competent workforce: India has a pool of personnel with high managerial and
technical competence as also skilled workforce. It has an educated work force and
English is commonly used. Professional services are easily available.
Cost-effective chemical synthesis: Its track record of development, particularly in the

area of improved cost-beneficial chemical synthesis for various drug molecules is
excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk
drugs.
Legal & Financial Framework: India has a 53 year old democracy and hence has a
solid legal framework and strong financial markets. There is already an established
international industry and business community.
Information & Technology: It has a good network of world-class educational
institutions and established strengths in Information Technology.
Globalisation: The country is committed to a free market economy and globalization.

Above all, it has a 70 million middle class market, which is continuously growing.
Consolidation: For the first time in many years, the international pharmaceutical
industry is finding great opportunities in India. The process of consolidation, which
has become a generalized phenomenon in the world pharmaceutical industry, has
started taking place in India.
India'
s US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent
per year. It is one of the largest and most advanced among the developing countries.
Over 20,000 registered pharmaceutical manufacturers exist in the country. The

domestic pharmaceuticals industry output is expected to exceed Rs260 billion in the
financial year 2002, which accounts for merely 1.3% of the global pharmaceutical
sector. Of this, bulk drugs will account for Rs 54 bn (21%) and formulations, the
remaining Rs 210 bn (79%). In financial year 2001, imports were Rs 20 bn while
exports were Rs87 bn.
Indian Pharmaceutical industry independence to 21st century
A Brief History (1900–1999)

The Indian pharmaceutical industry traces its roots to the 1903 formation of Bengal
Chemical and Pharmaceutical Works in Calcutta by Professor P.C. Roy. During the
first half of the twentieth century, however, and despite modest efforts on the part of
the colonial government to spur local production, India remained largely dependent
on the UK, France, and Germany for medicines. The new and independent
government in 1947—which emphasized industrialization to achieve self-reliance—
invested heavily in pharmaceuticals (among other industries) and curbed imports. 2
Yet, in contrast to its policies toward other sectors, the government did not discourage
foreign firms from competing in India. In other sectors, self-reliance was pursuing at
high cost, but pharmaceutical policies emphasized national health. Because there was
no local substitute for MNCs’ technology, the government did not discourage their
presence in the country. In fact, until 1970, the Indian pharmaceutical industry
consisted almost entirely of MNCs, most of which maintained minimal physical
operations in India.
The government took its first concrete steps toward self-reliance in pharmaceuticals
with the establishment of Hindustan Antibiotics Ltd. (HAL) in 1954 and Indian Drugs
and Pharmaceuticals Ltd. (IDPL) in 1961. IDPL (in spite of its grossly inefficient
character) became instrumental in the development of the industry by serving as the
vehicle for a comprehensive Soviet-sponsored program in which Russians supplied
machinery, personnel, and technical know-how to produce antibiotics. The IDPL
development program helped self-reliance in several ways. First, it showed that it was
possible to produce drugs in India at competitive costs. Second, it developed human
and physical capital, some of which moved in due course to other companies. Third, it
spurred the existence of a network of support institutes, pharmacy colleges, and up
and down stream businesses.
The IDPL program alone was insufficient to jumpstart local industry. Local
companies needed a way to compete with more experienced and better endowed
foreign firms; only then would the industry have the critical mass to sustain itself. The
1970 Patent Act made headway toward this end by recognizing patents on processes
but not patents on products, which in turn enabled local firms to legally produce
compounds that were patented elsewhere.
Consequently, scores of Indian pharmaceutical companies evolved to reverse-
engineer and cheaply sell copies of all major drugs. Although many Western
observers criticize the 1970 Patent Act on ethical grounds, it cannot be denied that the
legislation helped to develop India’s pharmaceutical industry. Over the next thirty
years, the industry would grow from a handful of MNC players to today’s 16,000
licensed pharmaceutical companies. From 1970, local Indian firms reverse-engineered
bulk drugs, which they either sold wholesale or processed into simple formulations.
Meanwhile, MNCs—reluctant to expose their IP in such a lawless market—limited
their exposure to India. By 1997, MNCs had come 14 to account for 30 percent of
bulks and 20 percent of locally produced formulations.4 Most MNCs did the bare
minimum needed to stay in the Indian market (such as producing simple formulations
from imported bulks), while awaiting the arrival of stronger patent protection. The
few MNCs that have been bullish toward India over the past thirty years have local
managers to thank for their aggressive posture. Even without strong patent protection,
the Indian pharmaceutical industry matured during the 1980s. In particular, local
companies grew less reliant upon reverse-engineering for revenues. By increasingly
focusing on attributes such as novel delivery systems, Indian firms were on their way
to creating revenues based on their own added value. Companies also started to
produce products better tailored for their markets than typical MNC products. For
example, Lupin Labs introduced its AKT-4 kits, which combined four
antituberculosis (anti-TB) drugs that were generally administered together into a
single package. The AKT-4 kits were well received by TB patients, who no longer
had to worry about the lack of availability of any one drug. (Selective discontinuation
of anti-TB drugs can lead to resistance and even relapse in TB patients.) While
impressive in terms of growth and development, the past thirty years have been
relatively uneventful for the Indian pharmaceutical industry. However, as 2005
approaches, fundamental structural changes are likely, if not inevitable. As of 2005,
India has agreed to enforce product patents on drugs. Consequently, it will no longer
be possible for companies to collect rents on competitors’ IP.
At present, there are many questions surrounding the post-2005 patent regime.
Industry participants wonder about both the will and ability of patent courts to
implement and enforce decisions. They also worry about the potential for price
controls to limit the profitability of first generation drugs (see 3.1.1 and 3.1.2).
However, the proposed (and already enacted) changes to which India agreed by
signing the Agreement on Trade-Relate Aspects of Intellectual Property Rights
(TRIPS) 5 on April 15, 1994, have been sufficient to motivate much change within
the industry. Some companies will continue in their old ways for as long as possible,
but others are in the midst of transitions that will enable them to remain profitable in a
changed industrial environment.
India's pharmaceutical industry in the spotlight

In 2001, India’s pharmaceutical industry became the focus of public debate when
Cipla, the country'
s second-largest pharmaceuticals company, offered an AIDS drug
to African countries for the price of USD 300, while the same preparation cost USD
12,000 in the US.
This was possible because the Indian company produced an all-inone generic pill
which contains all three substances required in the treatment of AIDS. This kind of
production is much more difficult in other countries as the patents are held by three
different companies.
In the final analysis, the price slump was a result of India'
s lax patent legislation. In
2005, patent legislation was tightened, so India’s pharmaceutical sector had to adjust.
1. Development of India’s pharmaceutical industry

Up until the 1970s India’s pharmaceuticals market was mainly supplied by large
international corporations. Only cheap bulk drugs were produced domestically by
state-owned companies founded in the 1950s and 60s with the help of the World
Health Organisation (WHO). These state-run firms provided the foundation for the
sector’s growth since the 1970s. Back then, India’s government aimed to reduce the
country’s strong dependence on pharmaceutical imports by flexible patent legislation
and to create a self-reliant sector. In addition, it introduced high tariffs and limits on
imported medicines and demanded that foreign pharmaceutical companies reduce
their shares in their Indian subsidiaries to two fifths. This made India a less attractive
location for international companies, many of which left the country as a
consequence. Especially India Drugs and Pharmaceutical Ltd. (IDPL) are credited
with speeding up the development of a national pharmaceutical industry. Several
IDPL staff has successfully founded their own firms, which now belong to the top
group among India’s pharmaceutical companies. In the 1980s, however, the decline of
state-run companies began − among other things because of increasing central
government bureaucracy and insufficient corporate governance. Today, there are no
(entirely) state-owned pharmaceutical companies left. By contrast, the weakening of
the patent system and numerous protectionist measures sped up the development of a
major national pharmaceutical industry on a private-sector basis, which made it
possible to provide the population with a large number of drugs.
Current situation
India’s pharmaceutical industry has been in transition for several years now. This is
the result mainly of the changes to drug patent legislation in 2005. Prior to the Patent
Amendment Bill, not the substance itself but merely the manufacturing process was
protected for a period of seven years. India’s patent legislation had frequently been
the reason for legal disputes with large western drug firms, especially from the US. In
line with international standards, the sector is now subject to product and process
patents valid for a period of 20 years. Indian companies seeking to copy drugs before
the patent expires are forced to pay high licence fees.
This became necessary following the signing by India'
s government of the TRIPS
Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights). So
Indian drug firms could no longer simply copy medicines with foreign patents by
using alternative manufacturing processes and offer them on the domestic market. As
a consequence of these major changes to India’s drug patent legislation, the country’s
pharmaceutical industry is undergoing a process of re-orientation. Its new focus is
increasingly on self developed drugs and contract research and/or production for
western drug companies.
Pharmaceutical companies in India are growing at a very fast pace and this has made
the Indian pharmaceutical industry as the second largest growing industry. Also the
pharmaceutical industry in India is the third largest in the world, which will be of
US$20 billion by 2015. Mergers and acquisitions are the part of this growth. The
compounded annual growth rate of pharma in India is 12-15% and the global figures
are 4-7% for the period of 2008-2013. With such a profound growth of
pharmaceutical companies in India numerous pharmaceutical jobs can be seen. This in
turn is helping biotechnology industry and booming the biotechnology jobs in India.
Angel Broking has done a research on the growth of pharmaceutical industry and
found that by 2015 the pharmaceutical industry in India will be in the top 10 markets.
Yet another finding of FICCI-Ernst & Young study reveals that the population of high
income group in India is rising which will give rise to more influx of MNCs and
expensive drugs.
Pharmaceutical companies along with native companies are also competing with the
top MNCs. Such a profound growth is because of the heavy population figures and
with the increasing number of middle class people and their income the access to
drugs and medicines is also increasing. But still the low-priced generics are popular in
Indian pharmaceutical industry.
From India in year 2007-08 total of US$ 8.25 billion were exported and there was
seen 29% rise in this figure in 2009. MR Anand Sharma, Union Minister of
Commerce said that pharmaceutical sector in India has grown and it is the major
contributor to exports from India. In 1990 the amount was meagre as compare to
today'
s massive figures.
Initiatives by Government
1. Tax breaks are offered to pharma industry

2. New procedure for the development drugs
3. Proper clinical procedures
4. New Millennium Indian Technology Leadership Initiative and the Drugs and
Pharmaceuticals Research Programme - Two schemes launched by the
government.
Some Vital Information on Pharmaceutical Companies in India
• In terms of volume - India'

s pharmaceutical industry is the third largest in the
entire world.
• In terms of value - India'
s pharmaceutical industry ranks fourteenth
• By 2015 - It will be in the list of top 10 global pharmaceutical markets and it
will touch US $ 20 billion.
• 2008-2009 - Saw 29% growth in exports of pharmaceutical drugs as compared
to 2007
• 2013 - Indian formulation market is expected to touch US$ 13.7 billion
Pharmaceutical Industry in India is one of the largest and most advanced among the
developing countries. It is ranked 4th in volume terms and 11th in value terms
globally. It provides employment to millions and ensures that essential drugs at
affordable prices are available to the vast population of India. Indian Pharmaceutical
Industry has attained wide ranging capabilities in the complex field of drug
manufacture and technology. From simple pain killers to sophisticated antibiotics and
complex cardiac compounds, almost every type of drug is now made indigenously.
Indian Pharmaceutical Industry is playing a key role in promoting and sustaining
development in the vital field of medicines. Around 70% of the country'
s demand for
bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and vaccines is met by Indian pharmaceutical industry. A number of
Indian pharmaceutical companies adhere to highest quality standards and are
approved by regulatory authorities in USA and UK.
The Indian pharmaceutical industry traditionally relied on “reverse engineering” i.e.
product copying, through which vast profits were made. In recent years, however, the
larger domestic companies have realised the need to undertake original research and /
or penetrate into the regulated generics markets in the USA/EU in order to survive in
the global market. At the same time, the Indian pharmaceutical industry is renowned
for supplying affordable generic versions of patented drugs for illnesses like
HIV/AIDS to some of the world’s poorest countries.
Some of the strategies that have been followed by Indian pharmaceutical companies
for their growth in the global markets have been as follows:
Geographic diversification with few companies focussing on increasing
presence in the regulated markets and others exploring the developing/under-
developed markets of the world.
As a part of diversification strategy, some of the companies have acquired
brands, facilities and businesses overseas. Some companies have even started
their local marketing in foreign markets.
Partnerships for supply of bulk drugs and formulations with the generic
companies as well as innovators.
For regulated markets such as the US, there are companies focussing on value
added generics, niche segments or patent challenges in the US.
Focus on offering research and manufacturing services on a contractual basis
(CMOs and CROs).
Apart from these strategies Indian companies have to devise newer strategies
continuously to survive in the highly competitive global market in an industry that is
characterised by - high capital requirement, high technical requirement, high process
skills, high value addition prospects, high export volumes, high market sophistication.
Indian companies are following the route of mergers and acquisitions to make inroads
in the foreign markets. They need to consolidate further in different parts of the world
to become trans-national players. Indian companies will have to rise above the
statement of Michael Porter (1990), that most multi-national firms are just national
firms with international operations. They shall certainly be at an advantage, as their
strong national identities will give them a competitive advantage in the global
markets.
TYPES OF DRUG SYSTEM IN INDIA

Ancient civilization allowed India to develop various kinds of medical and
pharmaceutical systems. In addition to the allopathic system, which is prevalent in the
United States, Japan and Europe, the following types of medical and pharmaceutical
systems are used by the Indian people:
Ayurveda: Ayurveda translates as the “science of life”. It encompasses fundamentals
and philosophies about the world and life, diseases and medicines. The knowledge of
Ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative
treatment lies in drugs, diet and general mode of life.
Siddha: The Siddha system is one of the oldest Indian systems of medicine. Siddha
means “achievement”. Siddhas were saintly figures who achieved healing through the
practice of yoga. The Siddha system does not look merely at a disease but takes into
account a patient’s age, sex, race, habits, environment, diet , physiological
constitution and so forth. Siddha medicines have been effective in curing some
diseases, and further work is needed to truly understand why this system works.
Unani: The Unani system originated in Greece and progressed to India during the
medieval period. It involves promotion of positive health and prevention of disease.
The system is based on the hum oral theory i.e. the presence of blood, phlegm, yellow
bile and black bile. A person’s temperament is accordingly expressed as sanguine,
phlegmatic, choleric or melancholic. Drugs derived from plant, metal, mineral and
animal origins are used in this system.
Homeopathy: Homoeopathy is a branch of therapeutics that treats the patient on the
principle of “SIMILIA SIMILIBUS CURENTUR” which simply means “Let likes
be cured by likes”. Homeopathy seeks to stimulate the body'
s defence mechanisms
and processes so as to prevent or treat illness. Treatment involves giving very small
doses of substances called remedies that, according to homeopathy, would produce
the same or similar symptoms of illness in healthy people if they were given in larger
doses. Treatment in homeopathy is individualized (tailored to each person).
Homeopathic practitioners select remedies according to a total picture of the patient,
including not only symptoms but lifestyle, emotional and mental states, and other
factors.
Yoga and Naturopathy: Yoga and Naturopathy are ways of life. In naturopathy one
applies simple laws of nature. It advocates proper attention to eating and living habits.
It also involves hydrotherapy, mud packs, baths, massage and so forth. Yoga consists
of eight components: restraint, observance of austerity, physical postures, breathing
exercises, restraining of the sense organs, contemplation, meditation and Samadhi.
Increasing interest exists in revisiting these ancient drug systems.
INDUSTRY SEGMENTATION
Indian pharmaceutical industry can be widely classified into bulk drugs, formulations
and contract research. Bulk drugs are the Indian name for Active Pharmaceuticals
Ingredients (API). Formulations cover both branded products and generics. Indian
pharmaceutical sector is self sufficient in meeting domestic demand and exports
successfully to various markets globally. The existence of process patents in India till
January 2005 fuelled the growth of domestic pharmaceutical companies and
developed them in areas like organic synthesis and process engineering, as a result of
which, Indian pharmaceuticals sector is able to meet almost 95 percent of the
country’s pharmaceutical needs. India is globally recognized as a low cost, high
quality bulk drugs and formulations manufacturer and supplier. Contract Research, a
nascent industry in India has witnessed commendable growth in the last few years. As
per Yes Bank /OPPI report (2007-08), formulation segment (including domestic
formulation and formulation exports) constituted 72%of the total pharmaceutical
industry (in terms of sales) while bulk drugs and contract research constituted 25%
and 3% of pharmaceutical industry respectively.
Fig: Segment-wise
Segment sales
BULK DRUGS
Bulk drug industry is the backbone of the Indian pharmaceutical industry. Growth of
Indian bulk drug industry in the last five decades has been impressive and highest
among developing countries. From a mere processing industry, Indian bulk drug
industry has evolved into sophisticated industry
industry today, meeting global standards in
production, technology and quality control. Today, India stands among the top five
producers of bulk drugs in the world. The market is fragmented with far too many
players. About 300 organised companies are involved in the production of bulk drugs
in India. Over 70 percent of India’s bulk drug production is exported to more than 50
countries and the balance is sold locally to other formulators. Indian bulk drug
industry is mainly concentrated in the following regional belts
belts - Mumbai to
Ankleshwar, Hyderabad to Madras and Chandigarh. Around, 18000 bulk drug
manufacturers exist in India. Some major producers of bulk drugs in Indian
pharmaceutical industry are Ranbaxy Laboratories, Sun Pharma, Cadila, Wockhardt,
Aurobindo Pharma,
harma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals &
Chemicals, Nicholas Piramal, Lupin, Aristo Pharmaceuticals, etc. Most are involved
in bulk as well as formulations while a few are solely into bulk drugs.
India is the world’s fifth largest producer
producer of bulk drugs. The market size is expected
to grow at higher percentages in future years with more and more international
companies depending on India to meet their bulk-drug supply needs. Moreover, India
is way ahead of competitors in the total number of Drug Master File (DMF) filings.Of
the overall DMF filings to US FDA, the portion of filings by Indian players has
jumped from around 14% in 2000 to 46% of total filings in 2008(January-June) This
growth in proportion speaks volumes about the quality standards followed in Indian
manufacturing facilities.
Fig: Increasing share of Indian companies in DMF filings (US FDA)

(SOURCE: CRISINFAC, YES BANK/ OPPI)
The growing number of DMF filings signifies the increase in number of contracts that
Indian players have garnered. While India has recorded 1671 DMF filings, China
shows a tally of 520, the second largest number of DMF filings after India. In 2008
(January-June), India’s DMF filings were around 3.5 times that of China -187 from
India vis-à-vis 51 from China. The bulk drug segment is a low-margin and volume-
driven business. The thrust is on manufacturing. In manufacturing operation,
efficiency through better process skills to reduce both manufacturing time and cost is
critical. Low cost manufacturing is a distinct advantage gained by Indian companies
over a period of time with a steep learning curve. Bulk Drugs exports have grown
significantly in the past on account of growth in generic industry, increasing share of
Indian companies in DMF filings and contract manufacturing opportunity. Bulk drugs
exports grew robustly by 28% CAGR between 2001 02 and 2007-08 to reach an
estimated USD4.2 billion.
Fig. India’s Bulk Drug Export (CRISINFAC, YES BANK/ OPPI)
As already explained, India has carved a niche for itself by being one of the largest
bulk drug suppliers. India offers a number of distinctive advantages in the
pharmaceutical industry, as illustrated in the figure below:
Fig: Advantage India-API

(SOURCE: CRISINFAC, YES BANK/ OPPI)
India has many local manufacturing equipment manufacturers. These equipments are
of high quality and low cost, thus reducing the cost of capital. According to industry
estimates, Indian companies are able to reduce the upfront capital cost of setting up a
project by as much as 25-50%due to locally manufactured equipment and high quality
technology/engineering skills. Competition in the India’s domestic formulation
market has made it inevitable for API suppliers to continuously develop alternative
production methods to improve yield or reduce costs. This ensures that India has a
significant cost advantage due to process engineering.
Apart from availability of a high number of skilled chemists, India also offers
scientists with vast experience and unmatched skills. The scientific staff in India
though equivalent or better qualified are also available at a fraction of the cost. This
makes Indian research firms more competitive than many international firms while
being cost competitive. Labour costs are also low in India, being almost 1/7th of that
in many developed countries and offer an obvious cost advantage.
Outlook for India’s pharmaceutical industry up to 2015

All in all we expect India to see drugs sales rise by an annual 8% to nearly EUR 20 bn
between 2006 and 2015. To be sure, this growth rate is higher than that seen for
Germany (+5% p.a.) and the entire world (+6%). Nonetheless, India’s share in world
pharmaceutical sales will rise only marginally to a good 2%. Growth of India’s
pharmaceutical industry and thus its share in global drugs manufacturing could even
be slightly higher if the infrastructure problems could be remedied quickly. While the
pharmaceutical industries of China and Singapore will likely continue to show much
higher growth, India looks set to even lose market share in Asia. Mainly affected by
this development are smaller Indian companies with sales of up to EUR 10 m which
focus on traditional Indian medicines. It is likely that many of these companies will
merge or disappear from the market altogether. By contrast, large pharmaceutical
companies with sales volumes of over EUR 50 m will be able to increase their sales as
they will be better equipped to adjust their product ranges to the demands of
international markets. These firms will expand their capacities in India – mostly in the
sector’s clusters surrounding Delhi and Mumbai – but will also take over firms in the
industrial countries. Medium-sized businesses will benefit from increasing contract
production for western firms. All in all, the share of pharmaceuticals in the total
chemicals industry in India will come to roughly 17% in 2015 (2006: 18%), compared
with 28% in Germany (from 24% in 2006). For the world as a whole, the ratio will
likely be only slightly lower than the German level (25%). Although India’s
pharmaceutical sector is growing strongly, the population’s demand for drugs cannot
be met by the country’s own production in all segments. At EUR 1.5 bn, India’s total
drugs imports are comparable in size to Norway’s entire pharmaceuticals market.
Imports look set to continue to rise strongly. On a medium-term horizon, one-fifth of
the world’s pharma sales will be accounted for by the emerging markets. China will
then be among the group of the five largest manufacturers, while India will join the
group of the ten largest suppliers.
High sales growth
India is gaining in importance as a manufacturer of pharmaceuticals. Between 1996
and 2006, nominal sales of pharmaceuticals were up 9% per annum and thus
expanded much faster than the global pharmaceutical market as a whole (+7% p.a.).
Demand in India is growing markedly due to rising population figures, the increasing
number of old people and the development of incomes. As a production location, the
country is benefiting from its wage cost advantages over western competitors also
when it comes to producing medicines. Between 1996 and 2006, nominal sales of
pharmaceuticals on the Indian subcontinent were up 9% per annum and thus expanded
much faster than the global pharmaceutical market as a whole (+7% p.a.). Indian
companies strongly expanded their capacities, making the country by and large self-
sufficient. Nonetheless, with total sector sales of roughly EUR 10 bn, India
commands a less than 2% share in the world’s pharmaceutical market (1966: 1.5%).
This puts the country in twelfth place internationally, even behind Korea, Spain and
Ireland and before Brazil, Belgium and Mexico. Among the Asian countries, India’s
pharmaceuticals industry ranks fourth at 8%, but has lost market share to China, as
sales growth there was nearly twice as high and sales volumes nearly four times
higher than in India.
India’s pharmaceutical industry currently comprises about 20,000 licensed companies
employing approx. 500,000 staff. Besides many very small firms these also include
internationally well-known companies such as Ranbaxy, Cipla or Dr. Reddy’s. With
sales of roughly EUR 1 bn, Ranbaxy is currently the world’s seventh largest generics
manufacturer.
Currently the most important segment on the domestic market is anti-invectives; they
account for one-quarter of total turnover. Next in line, and accounting for one-tenth
each, are cardio-vascular preparations, cold remedies and pain-killers. By contrast,
medicines against civilisation diseases (such as diabetes, asthma and obesity) or so-
called lifestyle drugs (anti-depressants, drugs to help smokers to quit and anti-wrinkle
formulations) are of little significance at present.
Indian pharmaceutical companies increasing investment abroad
In the coming years, Indian drug makers will likely continue to look to foreign
countries to expand their operations. An example for the global orientation of Indian
pharmaceutical companies is Ranbaxy. Currently, Ranbaxy exports its products to 125
countries, has subsidiaries in nearly 50 countries and production plants in more than
10 countries. The US has become its most important sales market. Sales to the US
recently amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to
Europe came to nearly 20%. Overall, approx. 80% of the manufacturer’s total sales
are generated abroad.
According to PwC, about half of all larger Indian drug makers are looking to expand
abroad through take-overs, whereas less than 20% of their Chinese competitors pursue
that strategy. Targeted markets are still the US and Europe. In many cases, there are
Over the past few years, for instance, Ranbaxy has bought companies in Romania,
Belgium, Italy and France, and intends to become the world’s fifth largest
manufacturer of generics by 2012. Wockhardt is operating in Germany and the UK, as
is Cadila in France. At the beginning of 2006, Dr. Reddy’s bought Betapharm, a
German generics manufacturer, for almost EUR 500 m. The German market is
particularly attractive for Indian companies as generics prices there are relatively high
by international standards.Compared with the UK, a generic drug costs nearly 50%
more in Germany. So it cannot come as a surprise that Indian producers are loath to
leave the lucrative German market to the large German generics companies such as
Ratiopharm, Hexal and Stada alone.
FORMULATIONS
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.
Formulation Industry can be subdivided into two segments:
Domestic Formulation Industry
Indian Formulation Exports
Domestic Formulation Industry
Between 2002 and 2007, the domestic formulation industry grew at a CAGR of 14%
from around USD4.3 billion in 2002 to USD 8.4 billion in 2007. Demand in India is
growing markedly due to rising population, increasing per capita income, increasing
access to medicine, especially in the rural areas and an increasing population of over
sixty years of age.
Presently, the growth of a domestic pharmaceutical company is critically dependant

on its therapeutic presence. In terms of end-use, the pharmaceutical industry is
subdivided into several therapeutic segments. These segments are broadly defined on
the basis of therapeutic application. Some of these segments are low-volume, high
margin segments, while the others are high-volume with relatively low margins. The
new lifestyle categories like Cardiac, Respiratory and Vitamins are expanding at
double digit growing rates. The long term ailment, chronic therapies is now
accounting 24% of the market. The only growth driver for acute therapies is the new
product introduction under this segment. Today, anti-infective which used to be the
single largest therapeutic segment in Indian pharmaceutical industry is increasing.
Anti infective segment is now 1st in terms of value contribution followed by
Gastrointestinal and Cardiac.
The key therapeutic segments include:
Anti-infective
Cardio vascular
Central nervous system drugs
Anti-infective is currently the largest therapeutic segment in India. It accounts for one
fifth of total market turnover. Next in line, and accounting for one-tenth each, are
cardio-vascular preparations, cold remedies, pain killers and respiratory solutions.
INDIAN FORMULATION EXPORTS

Indian formulation exports grew at a CAGR of 23.2% touching around USD 4 billion
in 2007-08. The growth has been spurred mainly due to the focus on regulated
markets by most Indian companies, thereby increasing revenues.
Fig: Indian Formulation Exports
DOMESTIC GROWTH DRIVERS:

Pharmaceutical sector is one of the most globalized sectors among the Indian
industries. The downside is pharmaceutical sector traditionally has been immune to
business cycles. The upside of Indian pharmaceutical sector, however, is influenced
by a mix of global and local factors. Global factors are important as most Indian
companies ship a major portion of their production to overseas markets. Also,
multinationals operating in the Indian market follows the central research and global
marketing model. Their actions are largely dictated by global trends although local
issues are given due importance. The domestic market is critical for both Indian
companies and multinationals. For Indian companies, the domestic market lends
stability to bottom line and offer means to cope with fluctuations in global demand.
The growth drivers for Indian pharmaceutical market are:
Growing Population and Improving Incomes: Household incomes are rising in
India; the proportion of middleclass in Indian population is also increasing. Statistics
show a clear migration of population towards middle and upper classes. Rise in
income levels is always accompanied by greater demand for medical facilities and
pharmaceutical products. Middle class is already 70 million strong and is expected to
grow even fast, accounting for a higher share of total population. Increase in living
standards will lead to longer life expectance and higher consumption of drugs and
health care services.
Changing lifestyles: Rising incomes and improving literacy rates are leading to
change in lifestyles. While incomes provide the means to access medical facilities and
products, improving literacy boost awareness about diseases and lead to higher
consumption of drugs. Changing lifestyles, however, is leading to a change in disease
profile especially in urban areas. Hectic lifestyles and high cholesterol diets are
resulting growing incidence of diseases such as cardio vascular diseases and cancer.
Research and Development: The R&D efforts of Indian companies have been
largely focussed on chemical synthesis of molecules and their cost effective
production thereof. India has a large pool of technical and scientific personnel with
good English language skills. Indian scientists have developed a high degree of
chemical synthesis skills while engineers have developed competencies in producing
molecules cost effectively. These skills have helped Indian companies tap generic
markets abroad successfully in the past and will continue to do so.
Healthcare Expenditure: Indian healthcare system is largely run by the govt with
private sector playing a small, but important part. The healthcare system in India
comprises government hospitals in cities and towns and a network of health centres in
rural areas. This is supplemented by a string of private hospitals and clinics in largely
urban areas. The public expenditure on health has been growing at a decent rate while
private expenditure has been recording marginal growth.
(a) NEW PRODUCT DEVELOPMENT

Pre 2005: New product development efforts of Indian pharmaceutical companies in
process patents era were limited to reverse engineering molecules discovered by other
companies. Thanks to absence of product patents, Indian companies did not have to
go through long winded drug development process. Nor did Indian companies have to
expend any effort on research focus. Indian companies simply zeroed in on
blockbuster drugs and tried to come up with an alternative process as fast as they
could. The focus of the Indian companies was to launch a copy of a blockbuster drug
ahead of their rivals in India and abroad.
Key areas to focus on R&D for Indian companies:

1. Potential product identification
Complex API
Complex finished product
Commercial potential of products
Out-licensing opportunity to MNCs
2. Novel Drug Delivery System (NDDS)
3. New Drug Development
Post 2005: A large number of drugs are going “off patent” in the next few years.
According to IMH Health, more than $60 billion worth of drugs are going “off
patent” by 2011. Thus, Indian companies will not be short of new products for at least
another two years. In the long run, however Indian companies may find it hard to
make money from drugs coming off patent. Already competition in generic market is
intense and likely to increase further in the future. Hence, new molecules rather than
generics will drive revenues and profits in the product patents area. Indian companies
need to discover new drugs either through their own efforts or research alliances.
Perhaps licensing deals with multinationals could also provide Indian companies
access to new drugs. Focus on basic research will come with its own issues. Indian
companies will have to acquire the skills of identifying research areas that offer
excellent revenue and profit potential. This will entail a closer tracking of disease
profiles and related therapies as well as keeping a close tab on the research
programmes of rivals. Besides, Indian companies will have to pay more attention to
economics of drug development process. A product patent is granted for a period of
20 years.
(b) THERAPEUTIC COVERAGE
Pre-2005: In the absence of product patents, Indian pharmaceutical companies did not
feel the need to focus on specific therapeutic areas. Most Indian pharmaceutical
companies eschewed narrow focus and tried to cover as many therapeutic areas as
possible. Now the product portfolio of many Indian companies has considerable
breadth and depth. Given the price controls in the market, diversification worked to
the advantage of companies in the domestic markets. In the export markets, a wider
product portfolio gave companies the option of picking and choosing from an array of
opportunities.
Post 2005: Opinion is divided over the therapeutic strategy that Indian companies
should pursue in product patent era. Some companies believe that focus on select
therapeutic segment will fetch them greater dividends in terms of new chemical
entities and market share. Other companies believe such a strategy is risky given the
size of Indian companies and that a big setback in research could sink the company.
Instead such companies are pursuing a de-risking strategy of building a wide product
portfolio. In the domestic market, such a strategy will result in economies of scale at
production and marketing stage, putting the company in a better place to weather
competition from multinationals. In the export markets even after the introduction of
product patents, products under patent protection will comprise only 15 percent of the
market. So a vast chunk of the market will be still open for competition although
margins will be wafer thin.
EXPORTS
Pre-2005: Most Indian companies focused on exports. Exports improve the valuation
of companies owing to higher margin in overseas markets. Indian companies built
fortunes by making cheaper versions of blockbuster drugs and selling them in
domestic and export markets. Indian companies built especially strong position in
manufacture of bulk drugs. Out of the total exports, formulations constituted 55
percent and bulk drugs constituted 45 percent. Success in export market allowed some
Indian companies to build a strong position in the domestic market organically and
through acquisitions of brands and companies.
Post 2005: Exports has continued to be a priority for Indian companies. Major
blockbuster drugs will come off patent in the near future, creating a big generic
opportunity for Indian companies. Also, a growing demand for anti-AIDS drugs in
Africa will keep Indian companies busy. Exports have and will continue to provide
Indian companies with the strength to withstand the onslaught of multinationals in the
domestic market.
(d) LOW COST PRODUCTION THROUGH SCALE

Pre-2005: Indian pharmaceutical companies have mastered the science of producing
drugs cheaply. Thanks to benign patents regime, Indian companies have developed a
high level of chemical synthesis skills. The absence of development costs together
with efficient production has enabled Indian companies to establish a solid position in
bulk drug manufacturing. But scale did not receive as much importance as it should
have, because the cost of Indian pharmaceutical companies was already low owing to
aforesaid reasons. Many Indian companies did not find the return on investment of
world class plants compelling enough.
Post 2005: By 2011, drugs worth $60 billion will come off patent, presenting a huge
generic opportunity to Indian companies. But the competition in the generic market
will be brutal, resulting in thin margins. The cost of production will hold the key to
success in the generic market. The production cost in turn depends on scale. Indian
pharmaceutical companies need to build global scale to stand a chance in the generics
market.
PHARMACEUTICAL REGULATORY BODIES IN INDIA

National Pharmaceutical Pricing Authority (NPPA)-
NPPA is an organization of the Government of India which was established, to
fix/ revise the prices of controlled bulk drugs and formulations and to enforce
prices and availability of the medicines in the country, under the Drugs (Prices
Control) Order, 1995.
The organization is also entrusted with the task of recovering amounts
overcharged by manufacturers for the controlled drugs from the consumers.
It also monitors the prices of decontrolled drugs in order to keep them at
reasonable levels.
Central Drugs Standard and Control Organization (CDSCO) -
CDSCO lays down standards and regulatory measures of drugs, cosmetics,
diagnostics and devices in the country. It regulates clinical trials and market
authorization of new drugs. It also publishes the Indian Pharmacopeia. The main
functions of the Central Drug Standard Control Organization (CDSCO) include
control of the quality of drugs imported into the country, co-ordination of the
activities of the State/UT drug control authorities, approval of new drugs proposed to
be imported or manufactured in the country, laying down of regulatory measures and
standards of drugs and acting as the Central Licensing Approving Authority in respect
of whole human blood, blood products, large volume parenterals , sera and vaccines.
The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port offices.
The four Central Drug Laboratories carry out tests of samples of specific classes of
drugs.
Department of Chemicals & Petrochemicals (DCP)
DCP is responsible for the policy, planning, development, and regulation of the
chemical, petrochemical, and pharmaceutical industries in India. This department
aims:
To provide impartial and prompt services to the public in matters relating to
chemical, pharmaceutical and petrochemical industries;
To take steps to speedily redressal of grievances received;
To formulate policies and initiate consultations with Industry associations and
to amend them whenever required.
INDIAN PHARMACEUTICAL SECTOR: FUTURE SCENARIO

The dream of Indian pharmaceutical companies for marking their presence globally
and competing with the pharmaceutical companies from the developed countries like
Europe, Japan, and United States is now coming true. The new patent regime has led
many multinational pharmaceutical companies to look at India as an attractive
destination not only for R&D but also for contract manufacturing, conduct of clinical
trials and generic drug research. With market value of about US$ 45billion in 2005,
the generic sector is expected to grow to US$ 100billion in the next few years.
The Indian companies are using the revenue generated from generic drug sales to
promote drug discovery projects and new delivery technologies. Contract research in
India is also growing at the rate of 20-25% per year and was valued at US$ 10-
120million in 2005. India is holding a major share in world'
s contract research
Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118
million per year in India, is estimated to grow to US$ 380 million by 2010, as MNCs
are entering the market with ambitious plans. By revising its R&D policies the
government is trying to boost R&D in domestic pharmaceutical industry. It is giving
tax exemption for a period of ten years and relieving customs and excise duties of all
the drugs and material imported or exported for clinical trials to promote innovative
R&D.
The future of Indian pharmaceutical sector is very bright because of the following
factors:
• Clinical trials in India cost US$ 25 million each, whereas in US they cost
between US$ 300-350 million each.
• Indian pharmaceutical companies are spending 30-50% less on custom
synthesis services as compared to its global costs.
• In India investigational new drug stage costs around US$ 10-15 million,
which is almost 1/10th of its cost in US (US$ 100-150million).
WHAT IS IN STORE FOR THE FUTURE?

• We can expect a significant level of consolidation- a major portion of small
players are likely to be wiped out.
• Many of the existing players are family owned businesses .No one should be
surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come
through. It is the classic “bird in the hand” principle –if the founders can earn
a few billions without too much effort, why should they spend hundreds of
millions and ten years or more in trying to develop new drugs.
• The present scenario presents an excellent opportunity for multinational
enterprises to establish manufacturing bases in India through the take-over
route. The availability of talented scientists at a relatively low cost makes
India an ideal location for manufacturing quality drugs. A word of caution is
necessary though such enterprises may have to follow a dual pricing policy,
one for the local market and another for the global market.
• The Indian government would do well to take another look at its policies
.There is not much incentive for companies to invest in new drugs. The
corporations engaged in R&D need tax breaks and innovative incentives.
SPECIAL ECONOMIC ZONES - To play an important role in the future of the

pharmaceutical industry
Influx of outsourced work from global pharmaceutical companies has given the
necessary impetus for the creation of pharmaceutical Special Economic Zones
(SEZ),which would be one of the key drivers of outsourced pharmaceutical services
growth in the coming future'
It was in February 2006, when plans matured and finally the Special Economic Zone
Act came into force. The Act brought along many promises of creating an
internationally competitive and hassle free environment for exports. Consequently,
with the setting up of SEZs, India witnessed a revival of interest amongst many
players from the pharmaceutical and biotech sector. SEZs are instrumental in
attracting companies to set up manufacturing facilities and rendering a base for
services in India. SEZs served as a big boon for the Indian pharmaceutical industry,
which has a strong focus on exports, and derives 50 percent of its revenues from
exports, With the Act in place, the confidence of investors was reconfirmed. As a
result, many big pharmaceutical companies and biotech players like Ranbaxy,
Wockhardt, Dr Reddy'
s, Lupin, Jubilant, Biocon, Divi'
s Lab, Zydus and Nicholas
Primal joined the camp. SEZs are instrumental in bringing in fast globalisation by
establishing close global contacts. SEZs, therefore, offer distinct advantages to export
oriented pharmaceutical companies who are present in these zones. These companies,
through their SEZ units, can remain in contact with markets globally and add to the
growth of globalisation. Besides, unlike those outside SEZs, companies which have
located units in an SEZ are able to reflect the advantages they get in terms of tax sops
and better technology in the final selling price of their products.
The Draft National Pharmaceutical Policy, 2006 has recognized the need and benefits
of developing pharmaceutical parks/SEZs in India and proposes a scheme for setting
up separate SEZs for bulk and formulations. "It is proposed to set up 25
pharmaceutical parks over five years in India. This kind of a development will
strengthen India'
s competitiveness, develop world class infrastructure for the industry
and fuel the growth of pharmaceutical exports considerably," opines Gajaria.
Although Indian pharmaceutical companies continue to view SEZs as an opportunity
to further facilitate India'
s integration in the global pharmaceutical industry, it still
remains to be seen if these estimates and perceptions stand the test of time.
ISSUES AND CHALLENGES

1. Attracting and retaining a skilled workforce
The pharmaceutical business is knowledge and experience business and people have
always been one of the most important resources for any pharmaceutical or Biotech
Company. We can talk about brand but the people in a company, in particular in their
behaviour, represent a living brand. We can focus on intellectual property but that is
the creation of the people, and people joining or leaving a company will add to or
reduce the sustainable intellectual property. We can talk about markets, but to access
any market you need people with a good understanding of that market and the culture
and values of customers and suppliers. Increasingly we talk about regulation and
compliance as thought they are some abstract function of a company. In practice we
are describing the collective values and integrity of the individual members of staff,
and the way they are motivated to behave in particular situations. So people are key
but how any organisation ensure that it can attract, recruit, develop, and motivate
those individuals with the competencies that will set that business apart from those of
competitors. The first challenge is that there are increasing signs that the labour
market is moving in favour of the employee rather than the employer. There is
growing demand for skilled people but traditional labour markets are providing fewer
new people with the right qualifications and experience; and companies are still trying
to recruit people with ever-more-specialised knowledge. It is possible to recruit from
new markets, but this is a new competence for many companies.
2. Controlling operating costs

It is accepted knowledge that the pressure to control and reduce costs is one of the
next major challenges to be faced by the pharmaceutical industry. But how is this
done and what is the best approach? Understanding and controlling operating costs is
a critical first step to developing or sustaining competitive advantage. Increasing
generic competition, imminent patent expiries (revenue can decrease by up to 60% at
patent expiry), shorter pipelines and the emergence of China as a low cost
manufacturing base all contribute to constantly eroding margins. To maintain or
increase margins in the future, leading pharmaceutical companies have to start taking
a proactive approach immediately to understanding costs. As the pharmaceutical
industry embraces these new challenges, the companies that emerge at the forefront
will be those who address the issues now and are able to account for all the costs
throughout their organisation. To achieve this advantage, companies have to start
recognising and targeting costs today. Research & Development (R&D) costs are
spiralling as companies race to discover the next blockbuster, but where is the money
to fund this research going to come from? These questions are important as the costs
of operations are concerned.
• How are costs distributed throughout your company?
• Where should you focus your cost reduction efforts for greatest benefit?
• How are you going to use to tackle these costs?
• Have you identified all the hidden costs?
• How do you compare to the best-in-class?
• What is your baseline and what can you achieve?
• Where are you going to start?
Cost is complicated, ranging from back office through manufacturing and quality to
sales. To gain real benefits a structured programme of cost identification and
improvement has to be in place.
3. Infrastructure
increase on today'
s total. Moreover, the country’s lacking transport infrastructure is
increasingly turning into a major obstacle. The pharmaceuticals industry is especially
dependent on road transport. However, the major transport links are chronically
congested and many are in a poor state of repair. Of the total road network covering
just over 3.3 million kilometres, only about 6% are relatively well built National and
State Highways. In many cases, there are no paved surfaces or there is only one lane
for all traffic. But the government has launched an extensive investment programme
entitled the National Highway Development Programme, to be implemented by the
middle of the next decade.
4. Impact of new patent law

Legal changes in India in 2005 made it considerably more difficult to produce “new”
generics. Foreign pharmaceuticals, which enjoy 20 years of patent protection, can no
longer be copied by means of alternative production procedures and sold in the
domestic market. Hence, a reorientation was required in India’s pharmaceutical
industry. It now focuses on drugs developed in-house and contract research or
contract production for western drug makers. Thus this transition phase of
reorientation is a challenge for the industry.
INDIAN PHARMACEUTICAL INDUSTRY: VISION- 2020

The pharmaceutical industry in India is expected to grow from $5.5 billion now to
$25 billion by 2010 and $75 billion USD by the year 2020. By 2020, global
integration of most sectors in the world economy would be much more pronounced,
and the pharmaceutical industry will not be an exception. In fact the Indian
pharmaceutical industry, which currently has strong linkages with the global
pharmaceutical market, will become even more strongly integrated. Globally the
pharmaceutical market is undergoing a transformation led by change in demand
patterns, realignment of supply chains, and global regulatory shifts. In order to predict
the state of the Indian pharmaceutical market in 2020, it is useful to understand the
current global environment of the pharmaceutical market and its key trends and
analyse the implications that these factors will have on the global as well as on the
domestic pharmaceutical market. Key trends of global pharmaceutical industry are
declining R&D productivity, increasing spread of generics and increasing
outsourcing.
India is expected to host 30% of the world'
s contract research within the next 10-15
years, driven by the attractions of low cost and high quality standards, says the India
Brand Equity Foundation, IBEF. The IBEF quotes a McKinsey forecast for the value
of pharmaceutical clinical trial outsourcing in India at $1.23 billion by 2010. This
would represent 7% of the total world market, projected by Biopharm at $18.5 billion
in 2010.
India offers a huge cost advantage in clinical trials compared with Western countries.
A multinational company moving R&D to India could save as much as 30-50%, IBEF
says. Indian companies can conduct clinical trials at less than one-tenth of US costs.
The US National Institutes of Health trial registry (www.clinicaltrials.gov) lists 272
trials actively recruiting patients in the country, of which 60% are Phase III. There are
currently 70 CROs in India, according to Biopharm’s Contract Research Annual
Review 2006 - a number that is projected by to increase in the coming years. Several
western CROs, including Aptuit (US), Synergy Research Group (Russia) and ethical
Clinical Research (Canada) have formed alliances or joint ventures with their Indian
counterparts in recent months. Investment has also flowed in the opposite direction,
with US CROs Radiant Research and Taractec both being acquired by Indian groups
this year.
India is likely to be in the league of top 10 pharmaceutical markets by 2020. As per

the Government of India'
s annual report 06-07 the Indian pharma industry is worth
about $12 billion (over Rs 55,000 crores) as of now which includes $4.5 billion in
exports of drugs, pharma and fine chemicals. The pharma industry needs to focus
more on R&D and better productivity to capitalise on the immense existing
opportunities. India, with its inherent competitive advantages and cost-effective
manufacturing capabilities, has now become one of the most preferred destinations for
Contract Research and Manufacturing Services (CRAMS). As per the KPMG report,
India holds huge potential to tap the $20 billion CRAMS business, which is expected
to reach $ 31 billion by 2010. India with its intrinsic competitive advantages remains
as one of the most preferred outsourcing destinations and is now playing a vital role in
manufacturing as well as drug development value chain of various innovator
companies.
The Indian Pharmaceutical Industry is entering an era where the value chain
components are reassessed and redesigned to realize optimum value. While the cost of
doing business is increasing, the customers are demanding more innovative
pharmaceutical products at more competitive prices. The change in patent regime has
also become heralded a change in the industry dynamics. On one hand, patents on
blockbuster drugs are expiring and on the other hand, there are insufficient drugs in
the pipeline. The changing industry dynamics both at the domestic level as well as the
international level has forced the pharmaceutical players to rethink their traditional
business strategies.
European Pharmaceutical industry-in present era
For the European pharmaceutical industry, the time has come to think again. In the
past, most companies adopted a pure "size sells" strategy. Ever-growing armies of
sales representatives seemed to be the fast track to higher sales. Sales force volume, it
seems, was the only thing that mattered. The outcome is that, today, marketing and
sales expenditures at drug companies can account for over 30% of revenues – far
more than R&D spending. While expansion of some 10% annually over the past five
years has pushed the European pharmaceutical sales force above 100,000, statistical
evidence from the USA suggests that it may after all be possible to buck the trend. In
America, the number of sales visits to doctors fell by 13% in 2005.
In Europe too, size is evidently no longer the all-important issue. Instead, a different
factor is gradually emerging as the new secret of success: sales force effectiveness
(SFE), or sales excellence. Aware of this, more and more pharmaceutical companies
are reviewing their existing sales models in an attempt to answer one central question:
Do we still see the right customers at the right intervals, communicating the right
message and using the right promotional mix? As the industry grapples with dynamic
development, weak product pipelines and pressure on margins, some of the traditional
answers just don'
t seem to fit any more. Our study highlights the challenges and
opportunities that arise from this development. It gives pharmaceutical companies a
platform from which to review their own sales models. The study is based on a survey
conducted by Roland Berger Strategy Consultants at the eye for pharma Sales Force
Effectiveness Europe 2006 conference in Barcelona. More than 200 managers took
part, representing the world'
s leading producers of ethical drugs, generics and OTC
products. These companies were split into two size categories: large companies (with
global revenues upward of USD 15 billion) and midsized companies (USD 1 to 15
billion).
Taking stock: Where the pharmaceutical industry stands
In the quest for sales excellence, it is crucial to understand what drives change in the
pharmaceutical industry. Why has the traditional pharmaceutical sales model come
under such pressure? For the purposes of this study, three main causes can be
identified:
> Growing financial pressure
> Regulatory changes
> Changes in buyer behaviour
Several components contribute to mounting financial pressure. The first is a general
drive to contain healthcare costs across Europe. Due to "enforced" annual price
reductions, pharmaceutical companies are faced with lower margins, which increase
the need for a transparent return on investment. This pressure is being augmented by
steadily growing generic competition across Europe. In addition, weak product
pipelines are insufficient to replace products that are going off-patent. For small to
midsized drug firms, this will increasingly become an existential threat, triggering a
further wave of consolidation across Europe. Yet the pharmaceutical industry also has
to respond to regulatory changes.
On the one hand, such changes can impose constraints on existing sales methods. On
the other, they can also level the playing field and/or open up new opportunities for
first movers in the industry. Some of the changes involve stricter self-regulation
mechanisms, such as the British code of conduct that recently came into force and that
seeks to further limit access to physicians.
The third challenge lies in the way buyer behaviour is changing. General practitioners
(GPs) are experiencing mounting pressure to prescribe lower-cost drugs, for example.
Hospitals are adopting a more professional approach to procurement and must
therefore be served by key account managers. Meanwhile, countries such as Italy or
Spain are effectively breaking up into multiple regional markets as budgets come
under local control.
Different countries, different causes
As usual, there is no one-size-fits-all solution to these challenges. On the contrary,
even a cursory view of the industry'
s five leading European markets shows that the
causes of these changes vary from country to country. Country specific adaptation of
sales and marketing processes is thus becoming an imperative.
In Germany, a strict policy of reference pricing is causing drug prices to drop as low
as generic levels. In addition, GPs are under heavy pressure to stay within annual
prescription budgets. New regulations have introduced Diagnosis Related Groups
(DRG) that will drive the future evolution of hospital demand. The number of
consultations has dropped now that patients have to pay a fee when seeking advice
from a physician. Buyer behaviour in Germany is essentially determined by two
factors. First, patients themselves must pay the often considerable difference ("co-
payments") for drugs that cost more than the reference price. Second, powerful
hospital purchasing groups have begun to negotiate prices across all products.
In France, reference pricing is based on unmet medical needs, identified market
potential and the cost of both research and development and marketing and sales.
Prices for medication are gravitating toward minimum levels, while low-cost generic
alternatives are abundant. Recently introduced marketing regulations aim to limit the
frequency of visits to physicians. Furthermore, the French government wants to
increase taxes on pharmaceutical promotional expenditures. Buyer behaviour is being
influenced by high co-payments and a three-tiered reimbursement system that refunds
100%, 65% or 35% of the price of medication. Private hospitals now handle over 50%
of all operations and are thus gaining in importance.
In the United Kingdom, primary care trusts are offering incentives to cut branded
prescription. Additional financial pressure arises from a price regulation arrangement
that is renegotiated every five years between the Department of Health and the
pharmaceutical industry. In addition, the Association of the British Pharmaceutical
Industry (ABPI) introduced a new code of conduct on January 1, 2006, that includes
further restrictions on access to health professionals. The National Institute of Clinical
Excellence (NICE) is yet another hurdle to product use. To ease the burden on
doctors, nurses have been given greater powers to prescribe drugs. Also, substantial
investment by the National Health Service has raised the number of hospital-based
physicians, whereas the number of GPs is stagnating.
In Italy, financial pressure stems from a singularly opaque process that requires prices
to be negotiated on the basis of a European Union average every six months.
Additionally, reference prices for therapeutic classes are adjusted automatically if the
prices for generics are 20% lower than those for patent-protected new chemical
entities (NCE). A new regulation is planned that would introduce co-payments for
visits to specialists and laboratory tests. At present, Italy is the only top-five country
that does not yet operate an aut-idem substitution model. Since Italy has the highest
density of medical practitioners in Europe, this increases the need for potential-based
targeting. In addition, buyer behaviour has been affected by the fact that Italy has
been decentralized into 21 regions with local budget control.
In Spain, the use of generic drugs will be promoted further following the recent
approval of aut-idem substitution regulation. Reference prices are based on the
average European drug price over the past six months. A new code of conduct
implemented in June 2005 has expanded self regulation mechanisms. A further focus
on price reductions for drugs will follow. Structural reforms have transferred
autonomous control over purchasing budgets to 17 regions. In addition, planned
advances in privatization in the hospital sector could offer job opportunities to 20,000
physicians who are currently unemployed.
The story so far
In the past, the industry reacted to similar developments by focusing on products for
common chronic diseases. These were typically marketed to general practitioners.
Product launches took place globally to maximize sales in as many countries as
possible and as quickly as possible. Another standard response to such challenges was
to increase the size of the sales force. Huge armies of sales representatives were seen
as a competitive advantage. One negative side-effect, however, was that sales and
marketing became the industry'
s biggest expense item at over 30% of revenues, even
ahead of R&D. Today, two new sales and marketing trends are emerging. Pure "size
sells" strategies are being abandoned. Furthermore, drug companies consciously tailor
their sales and marketing strategies to individual stakeholders.
Abandoning pure "size sells" strategies
Apparently, size is no longer the critical issue. Recruiting a never-ending stream of

sales reps is evidently no longer regarded as the best way to increase sales. In the
survey conducted by Roland Berger Strategy Consultants, respondents were asked
how their sales force had evolved over the past two years and how it would develop in
the next two years.
The change of direction is striking. Although 44% of respondents had swelled their
ranks of sales representatives in the past two years, only 9% planned to do so in the
next two years. Indeed, more than 30% expected to see a significant decrease in the
size of their sales force. The unclear and volatile revenue situation in the
pharmaceutical industry obviously necessitates more flexible sales resources. As in
any industry, such headcount reductions must nevertheless be executed with great
circumspection to minimize the negative impact on customer relationships.
Tailoring sales and marketing strategies to individual stakeholders
The second trend concerns the relative importance of individual stakeholders in the
healthcare market. Roland Berger Strategy Consultants asked study participants which
group had been the most influential in the past and whose influence they expected to
increase most in the next two years Specialists are in short supply. All drug
companies want to win their custom. Accordingly, this group has been the most
influential in the past and is expected to remain so in the next two years. Conversely,
the influence of general practitioners is expected to stagnate. 26% of respondents
citedzthem as the most influential group in the past, but only 2% believed their
influence would increase most in the future.
Payors, on the other hand, are emerging as a new group of highly influential
stakeholders. Although they are very sensitive to price, they offer the opportunity to
deliver value across the entire healthcare system. To compete successfully within the
new stakeholder context, pharmaceutical companies must develop tailor-made sales
and marketing strategies that meet the differing demands of these individual
constituents. Exclusive relationships with specialists and the ability to visibly add
value for payors, will become the key sources of competitive advantage in the future.
Sales excellence levers that deliver a competitive edge
Pharmaceutical companies are rethinking their sales strategies and considering what
market approaches will best enable them to deal with fiercer pressure on margins,
increasing stakeholder complexity and a changing healthcare market. This is where
sales excellence comes into play. Sales excellence gives companies a fresh angle on
the pivotal sales question now facing the pharmaceutical industry: Do we still see the
right customers at the right intervals, communicating the right message and using the
right promotional mix? In response to this question, Roland Berger Strategy
Consultants has identified five major areas that are critical in shaping sales
excellence: change, customers, the company, employees and information technology.
Focusing on these five areas, we have developed a holistic model that can be tailored
to the needs of each pharmaceutical company. Each area groups various levers of
sales excellence, each of which is itself underpinned by a clear set of key principles.
Organizing for sales excellence
Consistent implementation of a clearly defined operating model is an essential

prerequisite for sales excellence. This model must combine adequate financial
resources with an organizational set-up that balances broad geographic reach with
local implementation capabilities. Aware of this, we were eager to see how theory
compared with practice on this score.
Budgets for European sales force effectiveness
We asked the participants in our interactive survey how much their companies
planned to spend on SFE in Europe in 2006 and how this budget compared with that
of the previous year. Clearly, budgets are tight, so investments require great prudence.
Although 19% of all budgets are over EUR 5 million, 28% of the midsized companies
involved in the study have SFE budgets of less than EUR 1 million. Notwithstanding,
38% of SFE budgets are expected to increase. It is noticeable that the narrower the
scope of geographic responsibility, the fewer managers knows about their company'
s
SFE budget. More than 40% of participants did not know the budget of their company
– a clear indication that transparency is lacking in this vital area.
Organizational structure
The majority of SFE initiatives are launched on a European or global level. Midsized
companies place primary responsibility in the hands of their European or global
general managers, whereas large companies designate a special European/global SFE
manager. Country management handles implementation.
But what are the major obstacles that prevent people from buying into sales
excellence projects? More than a quarter of all firms point the finger at firstline
managers as the most important impediment to achieving defined SFE targets . These
managers should therefore be involved in SFE programs from an early stage. Ideally,
first-line managers should be integrated right from the outset – when the key levers of
SFE are being identified, say. This practice should ensure that they engage in the
project. And it will also help higher-level SFE managers to identify and leverage
selected first-line managers as change agents. The influence of this class of managers
on the motivation of their sales representatives should not be underestimated. Given
that over a quarter of all participants answered "other/don'
t know", there would also
seem to be more complex situations where further pockets of resistance exist or
multiple stakeholders are blocking change.
Exploring new sales models

At the same time, pharmaceutical companies are increasingly experimenting with
innovative sales models. Not all these ideas will be appropriate for every industry
player. Each company must therefore identify which approach is most suitable in light
of its own strategic context and priorities.
One strategy is to draw significant distinctions within the sales force structure. The
initial step involves hiring sales representatives who have a less sophisticated
educational profile and deploying them to cover general practitioners. Their lower
skill profile will significantly reduce costs. Then, over the next five years, these reps
could possibly be replaced by more costeffective communication media. In a second
(simultaneous) step, companies are also building a small "elite" sales force that will
target specialists – the drug companies'"true partners". Investing in significant skill
development and differentiation beyond a mere knowledge of diseases and products
may prove to be necessary as this model unfolds. In this context, some companies are
going in the opposite direction. They develop their sales reps into true "business reps"
that are measured by their territory results (incl. e.g. return on investment) and make
them fully responsible for all activities in their territories, across all stakeholders.
Another strategy currently being explored is to focus on new, more cost-effective
promotional channels. This involves concentrating the primary sales channel on the
top 10% of physicians while using more cost-effective channels to serve lower
potentials. The latter channels could include interactive e-mails or e-detailing. Direct-
to-consumer (DTC) advertising for indications can be applied if it proves to be
necessary for the patient flow, e.g. to increase symptom/treatment awareness. As we
have seen, the business environment within which pharmaceutical companies operate
is changing rapidly. Accordingly, it is vital to keep a close watch on regulatory
changes and to specifically address and cultivate emerging stakeholders and
influencers, such as nurses (in the United Kingdom) or payers. Some of the
interviewed managers have already started to explore this option by demonstrating,
communicating and delivering greater value to payers. There are many ways in which
this can be done. Companies can improve their regulatory affairs and lobbying work,
for example, or invest in evidence-based medicine trials and pharmacoeconomic
studies. Either way, there is no question that the trend toward greater customer
concentration must be monitored carefully and addressed appropriately. New hospital
(purchasing) groups, for instance, will almost certainly require key account
management. In addition, the interviewed companies are placing more and more
emphasis on catering to the needs of patients and identifying ways to generate value
for them, such as through disease management programs. Increasingly, companies are
systematically measuring their return on investment in order to optimize the
promotional mix. This practice involves focusing on individual campaigns but
including multiple promotional elements. To observe real impact, it may be necessary
to invest heavily in such "measured campaigns". Pilot projects in relevant local
markets could help to identify which tools work best, so that key success factors can
then be adapted for international roll-out. Once the actual impact and corresponding
return on investment have been observed, budgets can be reallocated accordingly.
Another trend is to synchronize the promotional mix across all channels.
Pharmaceutical companies are beginning to explore new channels to complement
their existing sales force. Closer collaboration between Sales and Marketing can be
extremely beneficial, as appropriate CRM platforms help to automate campaign
management. Last but not least, a number of companies have started to make thei
Another case in point is Lupin'
s recent acquisition of Hormosan in Germany and a
substantial stake in Generic Health, one of the leading generic pharma companies of
Australia. Last year they had successfully acquired Kyowa in Japan and thus
positioned themselves amongst the top ten generic companies in that market and
similarly the company'
s acquisition of Rubamin, renamed Novodigm in India has
helped them establish its presence in the CRAMS arena. The pursuit, therefore, is to
move up the value chain either in terms of geography, business or products.
Global Pharma Companies are experiencing an ever changing landscape ripe with
challenges and opportunities. In this challenging environment Ranbaxy is enhancing
its reach leveraging its competitive advantages to become a top global player.
Contract sales organizations (CSOs), for example, can be leveraged especially in

countries with restrictive labor laws, as they can potentially reduce hiring risks.
Moreover, pharmaceutical companies can guarantee the productive use of detailing
resources by in-licensing products if the sales force is underutilized. Similarly,
detailing peaks can be covered by leveraging external partners – through collaboration
with CSOs or co-promotional partners, say. Some companies are also looking to
identify new solutions for latest age products – for example through performance-
based out-licensing – in order to free-up resources for new launches.
Comparison of growth
Capabilities Comparison
Because different companies have different strengths and weaknesses, two companies
may well put forth identical analyses of the post-2005 patent environment, yet react in
completely different ways. This subsection attempts to highlight some of the features
that differentiate companies from one another. Figure 1 presents a qualitative snapshot
of the functional capabilities of the companies that comprise this paper’s sample.
According to the sample, in all four areas of the product cycle, the most prominent
Discovery Clinical Bulk Marketing
Trials Manufacture Formulation &
Distribution
Manufacture
India Globa India Globa India Global India Global India Global
l l
Indian
Firms
A 3 1 2 1 2 2 2 1 3 2
B 2 1 0 0 2 1 1 1 2 1
C 2 1 0 1 2 1 2 1 3 1
D 3 2 3 2 3 3 3 2 3 2
E 1 1 0 0 3 2 2 2 2 2
F 2 1 0 0 3 2 2 1 3 2
G 1 1 0 0 3 2 2 2 3 2
H 1 1 0 0 3 2 2 1 3 1
MNC’
S
I 1 3 0 3 2 3 2 3 1 2
J 1 2 0 3 2 3 2 3 3 2
K 1 3 0 3 3 3 2 3 2 3
L 1 3 2 3 3 3 2 3 2 2
Indian
Averag 1.88 1.13 0.63 0.50 2.63 1.88 2.00 1.38 2.75 1.63
e
MNC’
S 1.00 2.75 0.25 3.00 2.50 3.00 2.00 3.00 2.00 2.25
Averag
e
Size Comparison
Historically, large companies have dominated the global pharmaceutical industry.

This has been the case primarily because certain phases of the product cycle (see
section 2.2), such as clinical trials and (global) marketing, require substantial
investment. In India, three factors have reduced the importance of companies’ size, as
compared with elsewhere in the world.
Local companies did not have to engage in discovery and clinical trials, limited their
operations to India and its neighbors, and finally, were offered substantial protection
under the drug price control order (DPCO). For these reasons, bigger did not
necessarily mean better in India
Total Assets Market Cap Turnover Employees
Indian Firms
Ranbaxy 500,141* 880,283* 333,425# 5,104@
DRL 101,756* 3,756* 82,900#
Wockhardt 260,230* 194,385* 79,113* 2,400@
Lupin 18,564* 17,957* 3,000#
NPIL 185,172* 122,013* 117,150* 1,500#
Dabur 121,875# 176,700#
Sun 6,578# 7,043#
MNCs
Glaxo 8,526,000@ 13,087,000@ 54,000@

Merck 31,853,400@ 26,898,200@ 57,300@
Novartis 34,552,000# 21,134,000# 87,239#
HMR 55,899,000@ 22,346,000@ 97,100@
Legend: All monetary figures in USD ($1,000s). * = 1996 or 96–97 (36 INR/USD); #
= 1997
Or 97–98 (40 INR/USD); @ = 1998 or 98–99 (43 INR/USD).
Growth of Pharmaceutical Industry in India-
• As per the present growth rate, the Indian Pharma Industry is expected to be a
US$ 20 billion industry by the year 2015
• The Indian Pharmaceutical sector is also expected to be among the top ten
Pharma based markets in the world in the next ten years
• The national Pharma market would experience the rise in the sales of the
patent drugs
• The sales of the Indian Pharma Industry would worth US$ 43 billion within
the next decade
• With the increase in the medical infrastructure, the health services would be
transformed and it would help the growth of the Pharma industry further
• With the large concentration of multinational pharmaceutical companies in
India, it becomes easier to attract foreign direct investments
• The Pharma industry in India is one of the major foreign direct investments
encouraging sectors
Role of Pharmaceutical Industry in India GDP-CRAMS
• The Indian Pharmaceutical Industry is one of fastest emerging international

center for contract research and manufacturing services or CRAMS
• The main factors for the growth of the CRAMS is due to the international
standard quality and low cost
• The estimated value of the CRAMS market in 2006 was US$ 895 million
• Indian already has the biggest number of US Food and Drug Administration
(USFDA)
• standardized manufacturing units outside the territory of United States
• Around 50 more new manufacturing units are to be set up in accordance to the
USFDA and UK Medicines and Healthcare Regulatory Agency (MHRA)
standards
• With all these development India is posed to become the biggest producer of
drugs in the world
• Some of the major domestic players in this sector are Paras Pharma, Bal
Pharma, Unijules Life Sciences, Flamingo Pharma, Venus Remedies, Surya
Organics and Chemicals, Centaur Pharma, Kemwell, Coral Labs
• The contract manufacturing market in India pertaining to the multinational
companies is expected to worth US$ 900 million by the year 2010
Comparison with the U.S.
The Indian biotech sector parallels that of the U.S. in many ways. Both are filled with
small start-ups while the majority of the market is controlled by a few powerful
companies. Both are dependent upon government grants and venture capitalists for
funding because neither will be commercially viable for years. Pharmaceutical
companies in both countries have recognized the potential effect that biotechnology
could have on their pipelines and have responded by either investing in existing start-
ups or venturing into the field themselves.[36] In both India and the U.S., as well as in
much of the globe, biotech is seen as a hot field with a lot of growth potential
• India has the advantage of the cost, as the cost of labor, the cost of inventory is
much lower than U.S.
• The multinational companies, investing in research and development in India
may save up to 30% to 50% of the expenses incurred
• The cost of hiring a research chemist in the US is five times higher than its
Indian counterpart
• The manufacturing cost of pharmaceutical products in India is nearly half of
the cost incurred in US
• The cost of performing clinical trials in India is one tenth of the cost incurred
in US
• The cost of performing research in India is one eighth of the cost incurred in
US
Chapter-3-
Regulatory environment of Indian and European
pharmaceutical industry
Regulatory Environment
It is almost impossible to engage in a discussion about pharmaceuticals without
addressing regulation. This is true for two reasons. First, since drugs affect the health
and well being of so many citizens, government has an interest in assuring their
adherence to medical standards and availability. Second, in light of the fact that
patentable research can represent up to ten percent of a given drug company’s cost
structure, IP protection is essential to provide firms with incentives to develop new
drugs.
Approval Process
Unlike other products, drugs must undergo extensive approval procedures before they
may be marketed. India’s domestic approval standards are quite low, but export
products must comply with standards in all destination markets. Approvals are
required for both products and processes. After a new drug is developed, regulatory
authorities oversee clinical trials, which determine efficacy, toxicity, and side effects
(see section 2.2.2). Companies are free to manufacture and formulate all approved
products for which they have production rights (whether newly patented molecules or
off-patent substances) as long as the relevant authorities determine that their
production facilities comply with global GMP standards. GMP standards apply to
equipment, sanitation, and documentation. Indian pharmaceutical companies often
employ foreign consultants to help bring factories into GMP compliance. Because
India’s own regulations are less stringent than those of the FDA in the United States,
or the DHSS in the UK, many Indian firms have opted to limit their operations to
domestic sales and exports to other countries with approval standards similar to
India’s.
Price Controls
Price controls are not nearly as important in today’s pharmaceutical sector as are other
regulatory issues. This is partly because market-clearing prices for controlled drugs
have typically fallen at or below price-controlled levels since the late 1970s. In cases
where price controls did pose problems, companies simply adjusted their product
portfolios accordingly, toward no controlled drugs. But price controls are still worthy
of mention insofar as past price control orders have shaped current pharmaceutical
operations. Furthermore, it is plausible that price controls will assume a role of
increasing importance in the near future. In 1970, the government introduced the Drug
Price Control Order (DPCO) to guarantee public access to “essential” drugs, to
provide a reasonable rate of return to companies, and to ensure quality.9 In response
to the DPCO, many firms concentrated on production of (nonessential) drugs outside
its scope. Some even divested themselves completely of controlled drugs. In this
sense, the DPCO undermined its own objective of providing public access to essential
drugs, which were more difficult to procure after it was introduced. Another
derivative effect of the DPCO was that it exempted smaller firms from price controls,
thereby encouraging them to participate in the pharmaceutical industry. Not
surprisingly, this caused small companies to be represented more prominently than
might otherwise be expected.
To address the aforementioned problems (e.g., the lack of incentive to produce
essential drugs and the overrepresentation of small companies), while still adhering to
its objectives, the government issued a revised DPCO in 1995. The 1995 DPCO
declassified 70 out of 146 drugs, dropped some clauses that favored small companies,
and exempted newly (locally) produced products from price controls. Recent evidence
suggests that, as it enacts new patent legislation, the government may be positioning
itself to backtrack on the progress made in the 1995 DPCO. New price controls would
arguably serve to defend consumers and local companies against the potentially
destabilizing effects of India’s obligations under TRIPS. The EMR amendment, for
example, contains explicit provisions for compulsory licensing and fixing prices of
newly registered drugs. Insofar as the EMR amendment provides insights into New
Delhi’s agenda, it is reasonable to assume that price controls may emerge as a new
menace to producers of patentable drugs in the future.
Intellectual Property Protection
Prior to 1970, India employed Western-style patent legislation, and recognized
product patents in addition to process patents on drugs. Under that environment,
MNCs prospered while local companies lacked the resources to enter the industry.
The 1970 Patent Act, which represented a change in favour of local producers,
consisted of the following key clauses:
1) No pharmaceutical product patents are admissible, only process patents are
acknowledged;
2) The term for a process patent is fourteen years;
3) Three years from filing, patents are deemed to be endorsed as license of right;
4) Patents must be worked within three years of filing;
5) The Indian government may use or authorize others to use the patented
invention.13
By ignoring product patents, the 1970 Patent Act permitted companies to reverse
engineer their (MNC) competitors’ products. In addition to India, such products are
freely sold in Russia, the Commonwealth of Independent States (C.I.S.), Africa,
China, and South America. Furthermore, Indian companies were free to ship reverse-
engineered drugs to patent-recognizing countries on or after the day of expiry (with
no lag time). Such a liberal patent environment benefited Indian firms at the expense
of MNCs, causing some MNCs to opt for minimal presence in India.
In 1995, the government amended the 1970 Patent Act to conform to the TRIPS
accord of the Uruguay round of GATT. The main provisions of the 1995 ordinance
were:
1) The recognition of product patents;
2) Exclusive marketing rights (EMR) for new products from 2000–2005;
3) A mailbox provision for filing product patent applications during the transitional
period from 1995–2005;
4) Twenty-year patent life;
5) Shifting of the burden of proof to the alleged infringer;
6) The extension of protection to include imported materials and products.14
Thus far, the EMR clause and the mailbox provision have been officially incorporated
into India’s patent legislation. Although it is too early to evaluate the effectiveness of
the EMR amendment, U.S. and EU officials were reasonably pleased with the April
19, 1999 legislation, and the U.S. delegation that advised India on EMR felt the
amendment adequately addressed its concerns. The 1995 ordinance caused an
enormous rift in the pharmaceutical industry. Firms immediately aligned themselves
according to their positions on IP. In particular, two major industrial associations in
the Indian pharmaceutical sector—the Indian Drug Manufacturers Association
(IDMA) and the Organization of Pharmaceutical Producers of India (OPPI) — locked
horns. The two associations share similar agendas, except on the subject of IP: the
IDMA opposes to stringent IP protection, while the OPPI favours it. The IDMA was
victorious over the OPPI in 1995 because it was able to hold the ordinance in
suspension, but the dynamics of the current global economy bode well for the OPPI in
the future. First, the Uruguay GATT resolution established a ten-year grace period for
developing countries to implement protection. In light of the grace period clause, it
was inevitable that less developed countries would delay implementation of new
patent laws to allow producers time to reorient themselves. After 2005, however,
delays will no longer be permissible, and India will have to comply with
GATT/TRIPS requirements, or risk a return to isolation. Since the second scenario is
unlikely and undesirable, the industry can probably look forward to product patent
protection in 2005. The precise future of India’s drug patent regime remains hazy, but
stronger protection is presumably on the horizon
Other Regulatory Issues

Aside from approvals, price controls, and patent policies, the Indian government has
used other tactics to regulate the pharmaceutical and other sectors. These are
primarily those of classic protectionism (e.g., tariffs on imports, mandatory licensing,
restrictions banning imports, etc.). Liberalization efforts of 1991–1992 sought to
disassemble projectionist barriers and allow foreign firms to compete on more even
footing with their Indian counterparts. The main components of this 1991–1992
liberalization included:
a) MNCs treated as equal to Indian companies.
b) Automatic approval for 51 percent foreign equity proposals.
c) Automatic approval for foreign technology agreements.
d) Most bulk drugs (and their forms) deli censed.
e) Provision for a higher rate of return for companies undertaking production from
basic stages.
Interviews with firms, as well as supporting literature suggest that, aside from the
important move to GATT/WTO compliance, the pharmaceutical industry was largely
unaffected by liberalization. Several explanations seem relevant. First, because it
valued health more than industrial self-sufficiency, the government had never kept
foreign firms wholly out of the pharmaceutical sector in the first place. Second,
industry-specific regulations are simply far more important than classic projectionist
measures to the pharmaceuticals sector.
Regulatory issues in the Indian pharmaceutical industry. Understanding the regulatory

scenario in this sector is extremely crucial not only due to the rapid and ongoing
changes at the global level, largely with reference to good manufacturing practices
(GMP), good clinical practices (GCP) and good laboratory practices (GLP) but also
due to the onus on the regulatory bodies to ensure a healthy supply of quality drugs at
affordable prices to the Indian masses.
The present section begins with a brief description of the major regulatory bodies
monitoring the Indian pharmaceutical sector. It then undertakes a review of the
prevailing mechanisms for drug regulation and temporal progression of some
predominant policy measures and Acts. The section subsequently provides a
comprehensive account of the status and key guidelines pertaining to the dimensions
of drug pricing, patent related issues, GMP and clinical trials, in addition to a brief
review of standards for medical devices and biotech products. It concludes with an
assessment of the deficiencies of present regulatory regime and some new initiatives
by the State to ensure the production and marketing of safe and efficacious drugs at
affordable prices in the domestic sphere and to sustain current growth prospects in the
global markets.
Major bodies regulating drugs and pharmaceuticals
The principal regulatory bodies entrusted with the responsibility of ensuring the
approval, production and marketing of quality drugs in India at reasonable prices are:
The Central Drug Standards and Control Organization (CDSCO), located under the
aegis of the Ministry of Health and Family Welfare. The CDSCO prescribes standards
and measures for ensuring the safety, efficacy and quality of drugs, cosmetics,
diagnostics and devices in the country; regulates the market authorization of new
drugs and clinical trials standards; supervises drug imports and approves licences to
manufacture the above-mentioned products;
The National Pharmaceutical Pricing Authority (NPPA), which was instituted in 1997
under the Department of Chemicals and Petrochemicals, which fixes or revises the
prices of decontrolled bulk drugs and formulations at judicious intervals; periodically
updates the list under price control through inclusion and exclusion of drugs in
accordance with established guidelines; maintains data on production, exports and
imports and market share of pharmaceutical firms; and enforces and monitors the
availability of medicines in addition to imparting inputs to Parliament in issues
pertaining to drug pricing.
The Department of Chemicals and Petrochemicals also oversees policy, planning,

development and regulatory activities pertaining to the chemicals, petrochemicals and
pharmaceutical sector. The responsibilities assumed by this body are relatively
broader and varied in comparison to the other two bodies. The main aspects of
pharmaceutical regulation are thus divided between the above two ministries. The
Ministry of Health and Family Welfare examines pharmaceutical issues within the
larger context of public health while the focus of the Ministry of Chemicals and
Fertilizers is on industrial policy. However, other ministries also play a role in the
regulation process. These include the Ministry of Environment and Forests, Ministry
of Finance, Ministry of Commerce and Industry and the Ministry of Science and
Technology. The process for drug approval entails the coordination of different
departments, in addition to the DCGI, depending on whether the application in
question is for a biological drug or one based on recombinant DNA technology. Issues
related to industrial policy such as the regulation of patents, drug exports and
government support to the industry are governed by the Department of Industrial
Policy and Promotion and Directorate General of Foreign Trade, both under the aegis
of Ministry of Commerce and Industry and the Ministry of Chemicals and Fertilizers.
With respect to licencing and quality control issues, market authorization is regulated
by the Central Drug Controller, Ministry of Health and Family Welfare, Department
of Biotechnology, Ministry of Science and Technology (DST) and Department of
Environment, Ministry of Environment and Forests. State drug controllers have the
authority to issue licences for the manufacture of approved drugs and monitor quality
control, along with the Central Drug Standards Control Organization (CDSCO).
Prevailing Mechanisms
This sub-section primarily focuses on major regulatory policies and mechanisms in

relation to drug pricing and development of standards for ensuring safety and
efficacy.
In India, drug manufacturing, quality and marketing is regulated in accordance with

the Drugs and Cosmetics Act of 1940 and Rules 1945. This act has witnessed several
amendments over the last few decades. The Drugs Controller General of India
(DCGI), who heads the Central Drugs Standards Control Organization (CDSCO),
assumes responsibility for the amendments to the Acts and Rules. Other major related
Acts and Rules include the Pharmacy Act of 1948, The Drugs and Magic Remedies
Act of 1954 and Drug Prices Control Order (DPCO) 1995 and various other policies
instituted by the Department of Chemicals and Petrochemicals.
Some of the important schedules of the Drugs and Cosmetic Acts include: Schedule
D: dealing with exemption in drug imports, Schedule M: which, deals with Good
Manufacturing Practices involving premises and plants and Schedule Y: which,
specifies guidelines for clinical trials, import and manufacture of new drugs
In accordance with the Act of 1940, there exists a system of dual regulatory control or
control at both Central and State government levels. The central regulatory authority
undertakes approval of new drugs, clinical trials, standards setting, control over
imported drugs and coordination of state bodies’ activities. State authorities assume
responsibility for issuing licenses and monitoring manufacture, distribution and sale
of drugs and other related products.
Source: Adapted from Dun & Bradstreet (D&B) 2007
Temporal Progression of Drug Policies & Acts
The Patents Act of 1970, Drug Price Control Order 1970 and Foreign Exchange
Regulation Act 1973 played a significant role in terms of the building of
indigenous capability with regard to manufacture of drugs. The New Drug
Policy of 1978 provided an added thrust to indigenous self-reliance and
availability of quality drugs at low prices.
DPCO 1987 heralded the increasing liberalization in the industry. One of the
important features of this act was the reduction of the number of drugs under
price control to 143.
The major objective of DPCO 1995 was to decrease monopoly in any given
market segment, further decrease the number of drugs under price control to 74
and the inclusion of products manufactured by small scale producers under
price control list.
In 1997, the National Pharmaceutical Pricing Authority was constituted in order

to administer DPCO and deal with issues related to price revision.
The Pharmaceutical Policy 2002 carried forward earlier governmental

initiatives in terms of ensuring quality drugs at reasonable prices, strengthening
of indigenous capability for cost-effective production, reducing trade barriers
and providing active encouragement to in-house R&D efforts of domestic firms.
In 2003, the Mashelkar Committee undertook a comprehensive examination of

the problem of spurious and sub-standard drugs in the country and
recommended a series of stringent measures at Central and state levels. The
regulatory body came in for censure with the committee noting that there were
only 17 quality-testing laboratories, of which only seven laboratories were fully
functional.
The National Pharmaceuticals Policy 2006, among other initiatives, has
proposed a slew of measures such as increasing the number of bulk drugs under
regulation from 74 to 354, regulating trade margins and instituting a new
framework for drug price negotiations in a move to make drugs more affordable
for the Indian masses.
TRIPS AND PHARMACEUTICAL INDUSTRY: ISSUES AND PROSPECTS

Trade Related Aspects of Intellectual Property Rights (TRIPS) were brought in with
the prospects purpose of universalising the standards of Intellectual Property Rights
and frame the rules of the game of the developing countries on par with the developed
countries. Several factors like the continuous advancement in science, new
breakthroughs in bio-technology, the growing participation of the private sector in the
cost intensive research and development in the knowledge based pharmaceutical
sector and the relative strength demonstrated by the developing nations in adapting
the results of the scientific innovations to the local environment have prompted the
industrialised nations to seek stronger protection for their innovations in all the
countries.
The Paris convention of 1883, one of the oldest treaties governing the protection of
industrial intellectual property was fairly liberal in protecting the Intellectual Property
Rights (IPR). Under this convention, member countries were free to determine the
standards of protection, the subject matter of protection and the period of protection
and thus maximum divergence were observed in the case of protection of innovations
in the pharmaceutical sector. Several countries fearing that the patent protection in
pharmaceuticals will limit the spread of knowledge and thus prevent the scientific
innovations reaching the general and the needy public neither protected the processes
of manufacturing a drug nor the final drug. This is because, once a product is patented
(product patents), the same product cannot be produced by an alternate method or
process during the protection period. However, if the process alone is protected
(process patents), then an alternative process which is mostly ìnvented’ around the
earlier process could be used to produce a similar product, since in pharmaceuticals, a
product can be produced by more than one method. Under the Paris Convention
differences were observed in the term and duration of protection too. For instance,
while some countries granted protection from the date of filing the patent application
yet others did so from the date of the grant of patent. Many developed countries had a
period of protection that ranged from 14 to 16 years.
While many of the industrially developed resource rich countries chose to reward the
innovators and adopted product patents to promote further innovations, some of the
developing countries realised the potential of the process patents in developing the
domestic industry and adopted the same. Thus, the developing countries with process
patent protection were able to take advantage of the innovations made by early
innovators. When a subsequent product is based on an innovation made earlier, the
late entrant enjoys the reduction in the cost of developing the product without of
course sharing the benefits/profits derived by the new product with the early
innovator. But the capacity to exploit the earlier innovations to its advantage depends
on the technological development of the country, capacity of the domestic industry,
the market size and the type of technology that is used in developing the product. Of
the many countries that adopted process patents, developing countries like India,
China, Korea and Brazil have developed expertise to develop new products, which
were mostly around the earlier innovations of the developed countries. It is assessed
that the deficiencies in India’s intellectual property system alone are estimated to cost
US companies around $500 million a year.
As per the minimum standards mentioned in the TRIPS agreement, patent shall be
granted for any inventions, whether products or processes, in all fields of technology
provided they are new, involve an inventive step and are capable of industrial
application without any discrimination to the place of invention or to the fact that
products are locally produced or imported. Accordingly, now patents will have to be
granted in all areas including pharmaceuticals and the effective period of protection is
for twenty years from the date of filing the application. With the implementation of
TRIPS agreement by most of the developing countries by 2005, a stronger patent
regime or product patents will be uniformly applicable on the pharmaceutical
innovations among the member countries1 of the World Trade Organisation.
The implications of TRIPS for the pharmaceutical sector are that: patents will be
granted both for products and processes for all the inventions in all fields of
technology; the patent term will be twenty years from the date of the application
(compared to the seven years under the 1970 Act), which is applicable to all the
member countries and thus rules out all the differences in the protection terms
prevailed in different countries; patents will be granted irrespective of the fact
whether the drugs were produced locally or imported from another country; though
the grant of the patent excludes unauthorized use, sale or manufacture of the patented
item, yet there are clauses which provide manufacturing or other such rights of the
patented item to a person other than the patent holder. In the case of a dispute on
infringement the responsibility (to prove that a process other than the one used in the
patented product has actually been used in the disputed product) lies with the accused
rather than with the patent holder (in the 1970 Act, the responsibility is with the patent
holder). This is the broad framework, which will guide the pharmaceutical industry
of India in the WTO regime.
However, in order to smoothen out the differences in the level of protection and to
make necessary amendments in the national laws to adopt product patents,
Countries with different developmental status have been given a transitional period to
bring in reforms in the desired areas and make the laws comparable with other
countries. Countries with different developmental status have been given a
transitional period to bring in reforms in the desired areas and make the laws
comparable with other countries. Thus developed countries had one year to make the
suitable amendments and for the developing and least developed countries, the time
provided was 10 and 15 years respectively. As per this even US had to amend its
patent law since, the effective term of protection was for a period of 17 years from the
date of grant. India has to enforce the system of stronger patents from January 2005.
During the transitional period of 1995-2005, India has to start accepting applications
for product patents from 1995 and provide exclusive marketing rights (EMR) for the
products that were granted patent protection elsewhere.
Within India, the opinion on stronger patents on the pharmaceutical industry is
divided, some emanating from the country’s prior experience with product patents and
others from countries, which have recently adopted product patents. These evidences
suggest that a country’s level of IPR influences a variety of social and economic
factors which range from common peoples access to medicine to the functioning of
the domestic industry, investment in R&D, technology etc. Developing countries
particularly, India, Argentina and Brazil were the strongest opponents of the TRIPS
agreement and India was more vocal in voicing her views on issues raised by the
developed countries. Now due to pressures from various quarters, all the three
countries have accepted the TRIPS agreement and India currently looks for flexibility
within the TRIPS framework that would have positive impact on the people, industry
and economy.
The universal TRIPS regime is expected to result in free flow of trade, investment and
technical know-how among the member countries by resolving the barriers that exist
in the form of differences in the standards of intellectual property. There is a rich
amount of literature available, which has looked into the various impacts of universal
IPR regime.
In this paper a modest attempt is made to highlight the issues of relevance for India
that emerge from various studies on the probable impact of product patents on the
pharmaceutical industry. It also presents some of the important provisions within the
TRIPS agreement that are favourable for developing countries like India. These are
presented in sections 2 and 3. Section 3 also presents the initiatives taken by the
government of India in adopting the product patents. The last section presents the
future scenario of the pharmaceutical industry.
Product Patents and Prices of Medicines
Much of the debate on the impact of product patents on the pharmaceutical industry in
India has centred on the issues of price of the patented product and their accessibility.
While it is true that a positive association is observed between stronger protection and
prices of drugs, it is also true that prices decline with the expiry of patent. In the US,
Frank and Salkever (1995) report a rapid reduction in the price of drugs after the
expiration of the patent. Though more competition among generic drug producers
results in substantial price reductions for those drugs, yet increased competition from
generics does not result in aggressive response in price behaviour by established
brand name products. Danson and Chao (2000) on the contrary observe that generic
competition has a significant negative effect on price of the branded products in the
US and other countries with relatively free pricing like UK, Germany and Canada,
whereas for the countries with strict price regulation like France, Italy and Japan the
number of generic competitors has either no effect or a positive effect on prices of
branded products.
In India when amoxycilin was first introduced by a multinational the price of the drug
was very high. However, with the local manufacturers stepping in to produce the
indigenous version of the amoxycilin, the price of the same declined rapidly. It should
be admitted that adoption of the process patents along with the domestic regulations
that restricted the role of the multinationals resulted in the growth of the domestic
industry. In the late ‘90s the pharmaceutical industry of India has reached a position
of near self-sufficiency in formulations. After a long time experience of having a
negative balance of trade in pharmaceutical products, India started enjoying positive
balance of trade from the late ‘80s (Table 1). In production volume India accounts for
8 per cent of world’s pharmaceutical production and is the fifth largest country in the
world after the US, Japan, Europe and China. The number of pharmaceutical
manufacturers increased from a mere 200 in 1950-51 to more than 6000 in the ‘80s,
which reached a phenomenal figure of 23,790 in 1998-99. Of this a sizeable
percentage of firms belong to the small-scale sector. It is estimated that out of the 28.6
million workforces in the pharmaceutical industry, about 4.6 million is employed in
the organised units and the rest are engaged in distribution and ancillary industry.
These units produce drugs that are not under patent protection and are analogous to
products that are already there in the market. Hence competition is severe among the
pharmaceutical units in India, which is one of the important reasons for the relatively
lower prices of the medicines in India.
Irrespective of the competition, because of the socio-welfare implication of the

pharmaceutical prices, all over the world other than in the US, the prices of medicines
are subject to government regulations. However, the methods used to regulate prices
differ from country to country. In USA and Canada, the cost is charged in full to
patients. Even in the US, a law allowing the pharmacists to import the drugs from
Canada that would be cheaper by 30-50 per cent was proposed but was not passed due
to pressures mainly from the industry quarters (Sanfransisco Chronicle, January 1,
2001). (Industry observers however note that the high rate of return made possible by
the free pricing policy of the US government is responsible for half of the new drugs
that are invented there). In some nations the government meets part of the bill. Most
of the governments list the drugs, which qualify for reimbursement and the extent to
which they do so. In most OECD member countries, price is fixed according to the
therapeutic value of the drug, its cost of production and the price of similar drugs.
In France and Italy, the manufacturers’ price must be approved for a product to be
reimbursed by the social insurance programme. The UK price system favours
domestic firms that would locate corporate headquarters and R&D in UK. Among
multinationals it favours those that have significant sales to National Health Service.
Further in UK no attempt is made to control the prices of individual drugs. Instead
annual arrangements are made with companies to determine the total sum to be paid
by the National Health Service for its products. This assures the firms a reasonable
rate of return. Germany follows reference pricing of pharmaceuticals. This classifies
drugs into groups with similar therapeutic purpose and sets a common reimbursement
price for all products within a group. The consumer pays the difference between the
reference price and the manufacturers’ price. Hence demand is highly elastic at above
the reference price. In all these countries majority of the people are also covered by
some health security schemes.
In the absence of such health security schemes and with the very low purchasing
power of the people in India, the government of India has brought certain essential
drugs under the price control. The price control along with the amendment of patent
laws in early ‘70s resulted in a declining impact on prices. Three factors have
contributed to the lower costs of production viz :(1) the process development capacity
of the units; (2) severe competition among the firms and (3) relatively lower costs of
production. Based on India’s own experience and on a selective comparison of prices
of a few drugs in countries where product patents is in force, intellectuals forewarn
that the stronger protection would result in increase in the prices of the drugs and thus
medicines will be inaccessible to common people. Their comparison of patented drugs
introduced elsewhere in the world shows that prices of the drugs had increased
manifold after the protection. This fear about the rise in the prices and the probable
exploitation by the multinationals among the developing world grew high when the
vested multinationals tried to prevail on the South African government to stop the
passing of the bill to permit parallel import of the HIV-AIDS drugs which would
ensure the availability of those drugs at a lower rate.
The other side of the argument on prices of the drugs is that, developing countries
may not be affected by the increase in the price of the drug due to low participation of
patented drugs (Watal, 1996; Lanjouw, 1998). This is because so far the dynamic
domestic players in India have managed to introduce substitutes of the patented
product within four or five years after their appearance in the world market. This `lag’
is to observe, the feedback on the product in the international and other markets
(Lanjouw, 1998). Thus, the welfare loss of non-introduction of a patented drug is
minimised by the introduction of such drugs though after a lag, so far made possible
by the weaker regime, will not be possible in the product patents regime. It is also
possible that the monopoly would adopt a discriminatory pricing strategy to fully
exploit the different markets.
One of the major advantages of the universal system is that, it would facilitate access
to new medical products. While the welfare loss due to the possible price increase in
the post WTO regime is highlighted in most of the studies, the welfare loss due to the
non-introduction of new-patented drugs in India due to the weak protection regime is
not discussed adequately. In this context, one of the advantages of the product patents
is that the stronger patents will provide access to the latest inventions in drugs, which
the developed world will not shy away from introducing in India. It is observed that,
though Pakistan also has process patent regime, some of the new drugs that were
introduced in Pakistan by the MNCs were not introduced in India at all even though
these MNCs were present in the country (Basant, 2000). This is because the MNCs
feared about the competition from the counterfeit products in India, whereas in
Pakistan MNCs are stronger than the domestic firms.
It is also possible that higher prices charged by the MNCs may not really affect the
consumers because; the research activities undertaken by the MNCs are totally
different and not pertain to the LDC market. Hence it can be said that the percentage
of population affected by the price rise would be very less. SenGupta (1998) presents
a different picture. His analysis shows that prices of òlder drugs’, which are not
patent protected are much higher in India compared to other countries, while prices of
drugs that are patent protected or recently off patent are cheaper in India compared to
the prices of drugs in the same set of countries. This anomaly he attributes to the price
control mechanisms that are in operation in India. Basant ‘s (2000) comparison of
various medicines from 14 MNCs operating both in India and Pakistan show that
about 70 per cent of the various medicines are cheaper in Pakistan than in India.
A related issue is the wider use of cost effective generic drugs. In US and some parts
of Europe, the pharmacists are authorised to dispense generic drugs in the place of a
prescription drugs, which will cost less than the prescription drug. Thus, the
consumers have the option to choose between the generic and the branded drug.
However, if the doctor writes it as `dispense as written’ then the pharmacist cannot
change the drug. In India, the Òver the Counter’ market is restricted to a few
common medicines and prescriptions bearing the generic name are also uncommon.
Unlike the other consumer items, in the case of drugs, the consumer goes by what has
been prescribed by the physician. Hence, in the post WTO regime, the physicians will
play a crucial role in choosing between a patented drug and a generic drug, in cases
where alternatives are available and help the consumers from being exploited by the
market forces.
The drug prices in India were brought under control based on the recommendations of
the Hathi committee, which observed that since the drugs industry has a social
responsibility, it should operate much above the principles of trade for profit.
However, due to the repeated plea of the industry that the drug production was
becoming unprofitable, in 1986, government reduced the number of drugs under
control from 347 to 166. Yet in spite of the price reductions in India, over a period of
15 years from 1980, there has been a general rising trend in prices especially of
essential life-saving drugs (Rane, 1995). Recently, whereas the finance ministry under
which the Drug Price Control Order (DPCO) is monitored has announced the decision
to reduce the number of drugs under the price control, the report on pharmaceutical
pricing set up by the government, after studying the scenario in different countries
where some form or the other of price control exists, has recommended that drugs
should be under the price control. The Pharmaceutical Policy 2002 indicated a drastic
reduction in the number of drugs under price control. According to the industry
sources, the new DPCO would cover about 34 bulk drugs and their formulations
under control (Lalitha, 2002a).
Despite the price controls, monitoring and enforcing such prices has been very poor in
India (Rane, 1996) where, significant differences persisted between the prices charged
by different manufacturers for the same formulation. Mostly companies with
substantial market power charged higher prices and the impact of DPCO did not
percolate to the consumers at all (Chaudhuri, 1999). While stressing the fact that the
present price controls will be applicable on patented products too and such controls
would definitely benefit the customers, Watal (1996) warns that costs of establishing
and maintaining an effective price control over all patented drugs may be very high.
There is nothing in the GATT treaty, which prevents India from continuing to use
price regulation to protect the consumers against exploitation through high prices. The
drug price control mechanisms prevalent in India are applicable on the patented drugs
too. Under the Drug Policy (1994) of India, a drug is subject to price control if annual
turnover in the audited retail market is more than Rs.40 million. A drug turnover
above this minimum revenue level may be exempted if there are at least 5 bulk
producers and at least 10 formulators, none with more than 40 per cent of the audited
retail market. Any bulk drug with a turnover above Rs.10 million with a single
formulator with 90 per cent or more of the market is also subject to price control.
Given this last criterion, all patented drugs would be subject to price control, unless
they are widely licensed, a highly unlikely scenario (Watal, 1996).
While it is clear from the above arguments that the patented products can be subject to
price controls yet it is not very clear, whether the products that enter the country
through the Èxclusive Marketing Rights’ (EMR) route will also be under these price
controls. As per the TRIPS agreement, during the transitional period, developing
countries like India will also have to provide Èxclusive Marketing Rights’ for
products patented elsewhere (any other member country) till the patent application for
that product is approved or rejected in India. Kumar (2001) points out that while
there is a possibility of getting a product produced locally, if we accept the product
patents, under EMR, the import monopoly is sanctioned before examining whether a
product is worthy of patent or not. Actually in the TRIPS agreement, the scope and
effects of EMRs are not specified2. EMR has no legal precedent anywhere in the
world but for one case in Argentina. Though as of May 1999, 13 WTO members like,
Argentina, Brazil, Cuba, Egypt, India, Pakistan, Turkey, Uruguay, Kuwait, Morocco,
Paraguay, Tunisia and the United Arab Emirates have notified the establishment of a
mailbox, yet only India and Argentina have gone for EMR. In India no EMR so far
has been granted. There is an interesting case of EMR in Argentina. The Argentine
patent office confirmed EMR on a US company, since the said application satisfied all
the stated conditions. However, the patent examination later revealed that the patent
application did not cover a new legal entity but which was already in the public
domain and a patent for this product was granted in Luxembourg where patents are
granted without prior examination (Correa, 2000).
Hence, to avoid abuse of EMRs, developing countries should ensure that EMRs if
granted (a) apply only to new chemical entities, since the rationale of the said article
is clearly to provide protection to such entities and not to a simple new form or
formulation of a known product and (b) require that a patent in any other WTO
Member country that serves as a basis for the EMRs be granted in a country with a
serious examination procedure (Correa, 2000). But India should allow introduction of
products under EMR only after they are certified that the product is suitable to the
Indian environment and the consumers. Hence, one way to reduce the monopoly
powers enjoyed by such drugs could be to improve the speed of processing the EMR
applications and decide on their patent status soon so that domestic controls can be
enforced on such drugs.
Regulatory framework
• The main regulatory body in India is the Central Drug Standard Control
Organization (CDSCO) under the Ministry of Health and Family Welfare.
• CDSCO is presided over by the Drug Controller-General of India (DCGI),

who is in charge of approval of licenses for drugs at both the Central and state
levels.
• India introduced the product patent regime, in accordance with the TRIPS
agreement, in January 2005 with an amendment to the patent act.
• Foreign direct investment (FDI) up to 100 per cent is permitted through the
automatic route in drugs and pharmaceuticals.
• For licensable drugs and pharmaceuticals manufactured by recombinant DNA

technology and specific cell/tissue targeted formulations, FDI needs prior
government approvals.
• The industry is undergoing consolidation due to recent legislation and policy

updates:
–Manufacturing units should adhere to good manufacturing practices (GMP)
outlined in Schedule M of the Drugs and Cosmetics Act
–Manufacturing units are required to comply with the WHO and international
standards of production.
• The National Pharmaceutical Pricing Authority (NPPA) is responsible for
fixing and controlling the prices of 74 bulk drugs and formulations under the
Essential Commodities Act.
Drug regulatory environment in India in transition
Existing drug regulatory system

• India has a bifurcated drug regulatory system —regulatory functions are
divided between the Centre and state authorities.
• Existing infrastructure at the Centre and in states is inadequate to perform the

assigned functions of drug administration with efficiency and speed, though
there is a renewed focus on the same.
Proposed new system
• The Central Cabinet approved the formation of the Central Drug Authority
(CDA) in January 2007.
• The proposed organisational structure of the CDA is to be analogous to the

USFDA.
• It will be a strong, well-equipped, empowered, independent and professionally

managed body.
• It is expected to facilitate up gradation of the national drugs regulator,

uniformity of licensing, and enforcement and improvement in drug
regulations.
• The efficiency and efficacy of drug administration is expected to be much

higher after this transition.
Product Patents and Research and Development
One of the advantages of the universal patent regime is that private venture capital
firms become willing to invest in technology based start up companies; technical
knowledge flows more readily from university laboratories to the market place and
local firms become willing to devote substantial resources to internal research
(Sherwood, 1993). Available evidence shows that patents are important for chemicals
and particularly for pharmaceuticals basically because of the huge R&D costs
incurred by the firms (Nogues, 1990). Also, the purpose of the patent is to provide a
form of protection for the technological advances and thereby reward the innovator
not only for the innovation but also for the development of an invention up to the
point at which it is technologically feasible and marketable.
The higher cost of the R&D proves to be an effective entry barrier for new firms and
hence only firms with large flow of funds become responsible for industrial inventive
activity (Grabowski, 1968). In developing countries, only a few firms have
sophisticated R&D facilities and others benefit mainly from the spillovers of the
resultant R&D. But, in order to move on to the higher echelon, firms need to invest in
R&D. More often small firms shy away from investing in R&D because; R&D is
based on trial and error. Though small firms are also capable of innovations, for
successful commercialisation of the innovation, size of the firm matters. For instance,
cost of developing one new drug in the US increased from $54 million in 1970 to
$231 million in 1990. Recent studies indicate that 1 out of 5000 compounds
synthesized during applied research eventually reaches the market. Other estimates
indicate that of 100 drugs that enter the clinical testing phase 13, about 70 complete
phase 1, 33 complete phase II, and 25-30 clear phase III. Only two-thirds of the drugs
that enter phase III is ultimately marketed. This suggests that attrition rates are
especially severe in earlier research stages. Compounds that overcome clinical trials
of Phase II have a relatively good chance of becoming new drugs. However, as phase
III is the more costly R&D stage, one failure out of three produce may still imply a
considerable loss of resources (Gambardella, 1995). Though global investment in the
R&D has been increasing rapidly, R&D efforts need not necessarily result in new
products and innovations. According to a US FDA report 84 per cent of new drugs
placed on the market by large US firms during the period 1981-88 had little or no
potential therapeutic gain over existing drug therapies. Similarly in a study of 775
New Chemical Entities introduced in to the world during the period 1975-89, only 95
were rated to be truly innovative (Lanjouw, 1998).
Because of these reasons and due to the protected policy regime, the R&D investment
in India has been very low and started picking up only in the early ‘90s as evident
from Table 24. Of the Rs.1, 800 crores spent on R&D in 1998, 35 per cent belongs to
the public and joint sector and that of the private sector is about 65 per cent (IPR,
September 2000). In spite of the growing investment in R&D, R&D as percentage of
sales ratio stagnates around 2 per cent. Further of the 1261 Department of Science
and Technology recognised R&D units, 256 have spent more than Rs. 1 crore every
year. 350 have spent between Rs.25 lakhs and Rs. 1 crore and the remaining below
Rs. 25 lakhs (Report on Currency and Finance, 1998-99). This indicates that most of
the R&D investment was perhaps directed towards process improvements and
adapting the technology to local conditions thus resulting in technology spillovers
rather than in new product developments. For instance, the UK multinational Glaxo
was faced with several local competitors on the first day when its subsidiary marketed
its proprietary drug Ranitidine in India (Lanjouw, 1998), because the competitors
enabled by the weaker patent regime were ready with the indigenous version of
Ranitidine. The more recent case of adapting the technology developed elsewhere to
local conditions enabled by the process patent regime is the case of viagra introduced
by Pfizer. A patent for this drug was granted by the US patent office to Pfizer in 1993.
The company spent about 13 years and several millions of dollars to develop the drug.
Apparently what took Pfizer 13 years and millions of dollars in R&D to perfect, the
Indian firms have managed to do in weeks, for a fraction of costs. Of the 30 raw
materials used in this drug, 26 are available locally. Utilising the information that was
available on the Internet, US patent records and industry literature some of the Indian
firms started their work on the indigenous version of viagra, which was available in
the market within weeks of Pfizer formally launching the product. However such
reverse engineering is not possible with products that have got patents after 1995.
Absence of stronger protection in the chemical and pharmaceutical sector in
developing countries like India is cited as one of the reasons that holds back foreign
investment especially from countries like the US, Japan and Germany (Mansfield,
1995). However, with the change in scenario, domestic companies, which had
invested in biotechnology, were finding the lack of protection as a problem to
commercialise their innovations (Lanjouw, 1998), because in DNA recombinant
technologies, novelty is the product. The process of discovery is complicated, but
once the product is obtained, its propagation can be achieved in many ways (Reddy
and Sigurdson, 1997). Globally now factors favour the internationalisation of R&D as
the multinationals review their core competencies. This is resulting in vertical
disintegration of R&D, product development, and clinical trials, manufacturing and
marketing activities. The severity of the US regulatory bodies has also been one of the
strong factors in encouraging US firms to set up R&D and manufacturing facilities
else where (Kumar 1996). Recent research done in this area also suggests that besides
the level of IPR in a country, factors like the host country’s policy on foreign direct
investment, availability of human resources and physical infrastructure, market size,
play an important role in the decision to locate the R&D activities by a multinational
enterprise (MNE) in other countries (Kumar 1996 and 2001). Contrary to the
perception that stronger IPR is necessary for attracting R&D investment, an
insignificant relationship between patent protection and location of R&D activity
emerges in the analysis of Kumar. On the other hand factors such as availability of
technological resources and infrastructure were found to be more important in
attracting or improving R&D (Mehrotra 1989, Kumar 1996) than the IPR protection.
For instance, problems like non availability of basic tools of DNA recombinant
technology and lack of technology and expertise among the local recipients to develop
diagnostic kits on a mass scale have been faced by units which have set up their R&D
facilities in India (Reddy and Sigurdson, 1997). Even in the weaker patent regime of
India, MNEs such as Ciba, Hoechst, ICI, Uniliver, Cadbury and Astra had set up their
R&D, though they protected their innovations by patenting them in their home
countries. Basically as Kumar (1996) observes, if the overseas R&D is not directed to
new product development but is restricted to local adaptations and providing support
to local production of MNE, then IPR will not have much influence on the decision to
locate R&D by an MNE.
Rising R&D costs imply that only giant corporations with formidable R&D,
marketing and financial capabilities will be able to afford extensive new drug
developments and commercialisations. Since it is difficult for each unit to invest in
R&D, to economise on scarce R&D resources and to avoid the probable duplication,
pooling of R&D resources and mergers of firms have been identified as possible
solutions. Where joint efforts of firms were involved as in the case of Japan, clear
logistics have been worked out. Ìn Japan the locus of ownership of intellectual
property rights flowing from a consortium is determined by the nature and degree of
governmental subsidy. Under the hojokin formula, the government provides 40-60 per
cent financing, using conditional loans whose repayment are tied to profits. Under the
itakusi formula, the government provides full contract financing of research. This
formula was used in the case of ICOT, and under this patent belongs to the Ministry
of International Trade and Industry, which can be licensed to the members of the
consortium and foreign firms’ (Ordover, 1991 P 51). Mergers and amalgamations
are also taking place to pool the resources and R&D advantages, which reduce the
duplication of research and wastage of resources. Hence to avoid such costs and to
take advantage of the resources, several consolidations of firms have occurred in the
US in the 1980’s. In India also several mergers started taking place from 1995
onwards. Some of these mergers were: Crossland Research Laboratories merged with
Ranbaxy Laboratories in 1995; Sandoz (India) was merged with Hindustan Ciba-
Geigy to form Novartis (India) in 1996; Sumitra Pharma was merged with Nicholas
Piramal in April 1995; Cadila Healthcare had acquired the business of Cadila
Laboratories, Cadila Chemicals, Cadila Antibiotics, Cadila Exports and Cadila
Veterinary Private Ltd in June 1995; John Wyeth (India), Wyeth Laboratories and
Wyeth (India) Pvt Ltd were amalgamated with Cyanamid India in April 1996 and
now is known as Wyeth Lederle Ltd. Tamilnadu Dadha Pharma was amalgamated
with Sun Pharmaceuticals Industries in April 1997. Nicholas Piramal, Boehringer
Mannheim, Piramal Health care were merged in April 1996. Roussel India (Erst) was
merged with Hoechst Marion Roussel in April 1997 (CMIE, Industry, Market Size
and Shares, August, 2000).
There has been an apprehension that in the wake of globalisation the focus of research
in the LDCs could change and the major R&D firms may be more involved in drug
discovery that addresses the global diseases and neglect the research that is more
relevant for the LDCs. In this context, the concern is will the developing countries
such as India benefit by the global R&D efforts or the R&D efforts that might get
stimulated within the country? A study done in the context of India observes that of
the firms that are both Indian owned and subsidiaries of multinationals, 46.2 per cent
of the research funds are targeted at LDC markets. However, they are for products
targeted at developing country markets and not for diseases where 99 per cent or more
of the burden is on low and middle-income countries. Also, there are differences in
the diseases pattern prevalent in the developed and developing countries. For instance,
the percentage of mortality in developing countries in infectious and parasitic
diseases, circulatory diseases and cancer is 43, 24.5 and 9.5 per cent respectively. The
corresponding figures for the developed countries are 1.2, 45.6, and 21 per cent
respectively (Report on Pharmaceutical Research and Development Committee,
(PRDC) 1999). Therefore, anticancer research and cardiovascular diseases have been
the main focus of research of the pharmaceutical firms of the West. There were 1,422
anti cancer projects in development by the worldwide pharmaceutical industry in May
1999. In contrast, pneumonia, diarrhoea and tuberculosis that account for 18 per cent
of the global disease burden are subject of less than 0.2 per cent of global medical
research and third world diseases such as malaria, chagas disease, tetanus, and
lymphatic filariasis have so far not attracted the developed countries’ attention.
The patenting activity by the Indian inventors in the US and Europe and other primary
data of study suggest that àny discovery research is and would be on global diseases
and on products for the worldwide market. But Indian firms are allocating a `non-
negligible portion of their R&D budgets to tropical diseases research and LDC
products and that the fraction of this going towards the discovery of new products,
rather than development may well are increasing’ (Lanjouw, 2000, P.20).
The number of patents filed and granted also indicates the level of inventive activity
and the R&D capabilities of a country. The developing countries’ R&D declined to
about 4 per cent in 1990 from nearly 6 per cent in 1980 despite the steady increase of
R&D outlays in Asian countries particularly in South Korea and Taiwan. This
negligible R&D also reflects in the number of patents filed by them. 95 per cent of the
16, 50,800 patents granted in the US between 1977 and 1996 were conferred upon
applications from 10 industrialised countries. The developing countries accounted for
less than 2 per cent of the total number of patents (Correa 2000). Table 4 presents the
number of patents filed by Indians and others in the patent office of India. Invariably
the number of patents filed and granted by others is higher than those of Indians.
Interestingly, there is a huge gap between the number of applications filed by Indians
and the actual number of patents. Implicitly a large number of applications are turned
down because such inventions already exist or the inventions lack non-obviousness or
industrial applicability. It suggests that the companies with inventing ability should
keep themselves updated of the developments taking place elsewhere and try to make
their inventions distinct from others. This suggests the important role that will be
played by information technology in searching for evidence and prior art.
Patent applications by industry during 1995-2000 indicate that pharmaceuticals rank

the highest with 396 applications followed by chemicals (337) and electronics ranks
the least with 23 applications (IPR, Vol.6, No.9, 2000). Table 5 gives the number of
patents filed by some of the Indian pharmaceutical companies with the Indian patent
office. Though many of them could be for the processes developed, yet it indicates
that the impending WTO regime has stimulated the R&D activity and importantly
filing of patent applications also.
In view of the importance of the R&D in a knowledge-based industry like
pharmaceutical sector, there needs to be a close relationship between the industry and
the academic institutes. One of the reasons for the western world’s dominance in
R&D is due to the strong research collaboration that exists between the universities
and the industry where the research lead provided by the university is taken up for
further research by the industry both to explore new areas as well as to work on the
existing knowledge available in the public domain. This is very much essential for a
country like India, which is opening up now, so that further research is done on areas
that are most essential for the welfare of the people. The following example of Merck
will be useful in this context. Merck is a US based pharmaceutical company and has a
very high in-house R&D expertise. `Between 1972 and 1974, two scientists Michael S
Brown and Joseph L Goldstein of the University of Texas identified the key steps in
the production of Cholesterol, work for which they were awarded Nobel Prize in
1985. Their findings motivated Merck’s scientists to launch research on cell culture
assays for cholesterol inhibitors as early as 1975. In 1978, Merck isolated Lovastatin
the Mevacor compound from a microorganism of the soil. Mevacors NDA was
approved for marketing in August 1987. The product reached $260 million sales in
1988, the first full year of marketing and it reached $ 1 billion sales in 1991. As soon
as Brown and Goldstein’s discovery was made, it was publicly available. Yet Merck
was the only company that effectively exploited their findings (Gamberdalla, 1995).
This is a very heuristic illustration. There could be several such findings that may be
effectively explored. In India also such strong association between the academic
institutes and industry needs to be established. Academic institutes can serve the role
of research boutiques where basic research or further research based on knowledge
that is available in the public sources may be undertaken and industry can proceed
with further development or commercialisation of the compound identified by the
university. Since 1995, there has been a steady improvement in the patents filed by
the academic institutions in India, which is presented in Table 6. Until recently, the
culture of protecting the inventive work through patenting was almost non-existent in
the academic institutions as most teachers felt that the knowledge should be shared
freely through publications and seminars. This was no different than the thinking
prevailed in the R&D institutions. After India became a member of the WTO, a new
thinking has started taking routes in universities and academic institutions regarding
patents (Intellectual Property Rights, Vol. 5. No.8, 1999) and these institutions have
started filing patent applications.
Besides patenting the innovations, sound licensing practices are essential to enhance
the utility of research done by universities. For instance, University of California at
Sanfransisco and Stanford University jointly hold a patent that covers the technique
for combining genetic materials. Rights for this patent were not sold exclusively but
were available to any one for a reasonable fee. This patent brought the universities
more than $100 million in licensing revenues over the years and has been widely
credited with the emergence of the biotechnology industry. On the other hand
assigning the rights to one company might have slowed the evolution and
commercialisation of biotechnology (Zilberman et al, 2000). Therefore, a strong
collaboration with research institutes and the industry could reduce the research cost
in the industry like the expenditure in screening and synthesising the chemicals and
the university could provide the research lead. Gamberdalla (1995) observes that
university research had a positive and significant effect on corporate patents and
industry R&D and geographical proximity increases the strength of the effect of
university research on corporate patents. The contribution of university research is
greater if the industry and university scientists can interact more easily.
Patents, Foreign Direct Investment and Technology Transfer
One of the expected outcomes of strengthening the IPR is the increase in foreign
direct investment (FDI) in R&D, direct manufacturing or joint ventures. However, the
impact of stronger patents on FDI remains inconclusive from the available evidence
since IPR is only one of the factors in attracting FDI. FDI flows depend on skills
availability, technology status, R&D capacity, enterprise level competence and
institutional and other supporting technological infrastructure (UNCTAD, 1996;
Correa, 2000). Highlighting the FDI flows to countries with allegedly low levels of
IPR protection, Correa (2000) observes that the perceived inadequacies of intellectual
property protection did not hinder FDI inflows in global terms. Thus FDI increased
substantially in Brazil since 1970 until the debt crisis exploded in 1985, while in
Thailand FDI boomed during the eighties. In contrast developing countries that had
adopted stronger protection have not received significant FDI inflows. He further
observes that FDI in the pharmaceutical industry outpaced FDI in most other sectors
in Brazil after patent protection for medicines was abolished in that country. In Italy
after the introduction of process patent protection in 1978, FDI increased. Hence, it
appears that patent production does not have significant impact on FDI. After the
abolition of protection on pharmaceuticals in Korea, though no new subsidiary was
set up, in the existing companies, foreign capital had increased and the pharmaceutical
industry accounted for 23 per cent of total foreign capital. Foreign investment did
increase because, FDI was not allowed in formulations. So the only way to enter the
country was to collaborate with a local firm (Kirim, 1985). In the case of India after
the adoption of process patents in the pharmaceutical sector, the number of foreign
collaborations increased from 183 in 1970 to 1041 in 1985 (Mehrotra, 1989) perhaps
because of the fact they were catering to a larger market.
Kumar (2001) argues that in developing countries like India, focus of the FDI policy
should be to maximise its contribution to the country’s development rather than on
merely increasing the magnitude of inflows. In other words, attracting FDI in specific
sectors is more important than aiming at increasing the FDI per se and that alone is
not going to improve investments in R&D. Multinational enterprises (MNEs) have so
far come to India primarily for exploiting her large domestic market and their
contribution to India’s exports is negligible. During the stronger patent regime before
the ‘70s, and after that also, the market share of the MNEs in vitamins and other
nutrients was more than 90 per cent while in the case of anti T B drugs it was only 18
per cent (Sen Gupta, 1996). In contrast, MNEs account for nearly 40 per cent of
China’s manufactured exports.
Several studies quoted by Dunning (1992) point out that US affiliates in Canada
consistently spent less on technology creating activities than did their indigenous
counterparts. Other Canadian studies have found that foreign ownership is either not
significantly or is negatively correlated to R&D performance. He also observes that
the R&D intensity of foreign controlled firms in the Canadian pharmaceutical
industry was less than that of their locally controlled counterparts.
In the case of India, total FDI flow has been stagnating, due to various forms of
regulatory framework and the government control over production that was prevalent
for a long time. These regulations have been relaxed as part of the liberalisation
measures and currently 100 per cent foreign equity is allowed in the pharmaceutical
industry. Table 7 provides information on the total FDI and FDI in the pharma
industry. Vast differences are observed between the amount approved and the actual
inflow, which suggests that a large number of proposed investments do not
materialise and perhaps wither away due to the bottlenecks encountered at the time of
implementation. In pharmaceutical industry till 1999 it has been less than 0.50 per
cent. However, with the measures towards adopting stronger patents and increasing
the FDI limit in the pharmaceutical industry from 74 per cent to 100 per cent should
attract more FDI over a period of time. The FDI approved in pharmaceutical sector
accounted for Rs.1614.6 though the actual inflow could be much lower than this.
Patents and Technology Transfer

To qualify for the patent, an invention should be novel, non-obvious and capable of
industrial application. As per this, the applicant reveals the content of the patent in
the patent application, which is in the public domain. However, such disclosure could
undermine the competitive advantage of the invention encouraging the innovator to
protect the invention as a trade secret rather than with a patent. For as detailed earlier
in the case of Viagra, it is possible to get access to patent information from the patent
office of any of the countries and develop a new product based on the information
obtained in the patent application form thanks to the rapid development of
information technology. A sizeable level of technology currently available is due to
`spill overs’ or developing an alternative process that is very close to the existing one.
This is the reason why the actual technology in a patent is often kept as a trade secret
(Correa, 2000; Mehrotra 1989) and which leads to entering in to a separate licensing
agreement with the innovator for the transfer of that technology.
The high cost of development and rapid obsolescence may prevent the transfer of
technology and the patent holder may prefer direct exploitation or import of products
than transferring the technology or know-how. Fear of competition also dissuades the
transfer of technology or demands a high royalty for the transfer, but huge royalties
may have a negative impact on the expenditure on R&D. In the case of India, though
in the pre’70s era, the technology transfer by the big TNCs did not support the
indigenous technological abilities, yet in the post ‘70s, a large number of small and
medium size firms have also been transferring their drug technologies to India, thus
encouraging an atmosphere of competition in technology transfer (Mehrotra, 1989).
But India has encountered difficulties in getting access to technology for a component
known as HFC 134 A, which is considered the best available replacement for certain
chlorofluorocarbons. Patents and trade secrets cover this technology, and the
companies that possess them are unwilling to transfer it without majority control over
the ownership of the Indian company (Correa, 2000).
The presence of multinationals did not lead to large-scale technology transfer.

Between 1965-1982, top 10 multinationals introduced technology for production of
only 9 bulk drugs, while 4 public sector companies introduced technology for 51 bulk
drugs and the top Indian private sector companies for 36 drugs. Even in drugs that
were open for MNCs, they were not particularly keen to introduce technology in
essential drugs (Mehrotra, 1989). In the pharmaceutical industry technological self-
reliance can be obtained if bulk drugs are indigenously produced from their basic
stage. There has been a notable increase in the manufacturing of bulk drugs from the
basic stage onwards which increased from Rs. 240 crores in 1980-81 to Rs. 3148
crores in 1998-99. Besides improvements has also been achieved in new drug
delivery systems, basic research and development.
While the available evidence on product patents impact on R&D is inconclusive, one
of the minimum standards mentioned in the TRIPS agreement is that import of a
patented product in a host country will be treated as equivalent to producing the same
in the host country. Intellectuals strongly oppose this since by allowing such a
provision developing countries will not benefit by way of R&D or technology transfer
and it will also lead to exploitation of the consumers and therefore recommend
working of the patent in the host country. This fear is more valid in countries where
the domestic industry is not strong or where the major part of the consumption is met
by imports alone. In such circumstances the `working requirement’ will not achieve
anything since, unless the patent holder cooperates, transfer of technology will not
take place. In such cases, compulsory license will be a useful instrument, which is
elaborated, in the following pages.
FLEXIBILITY IN THE TRIPS AGREEMENT
In the foregoing session, the probable impact of product patents on some of the
important aspects like prices, R&D, foreign direct investment and technology inflow
was highlighted. Stronger patents because of the exclusive rights effectively rules out
competition and ensures the monopoly power of the patent holder throughout the
period of protection. The scepticism regarding the access by the developing countries
to important breakthroughs in medicine made by the developed countries however
linger on. Hence it is feared that it will have adverse effects on trade and may impede
the transfer of technology and know-how. Article 7 of the Agreement states the
objectives of the IPR as `the protection and enforcement of intellectual property rights
should contribute to the promotion of technological innovation and to the transfer and
dissemination of technology to the mutual advantage of producers and users of
technological knowledge and in a manner conducive to social and economic welfare
and to a balance of rights and obligations’. As per this, flexibility to define the
national laws within the TRIPS framework is available under the clauses of
compulsory licensing, exceptions to exclusive rights and the principle of exhaustion,
which are discussed below.
A compulsory licensing (CL) system is incorporated in the patents, whereby a person

other than the patentee or the government is authorized to produce a patented product.
Even under the Paris convention, the provision for CL was there, where a CL cannot
be granted before the expiration of four years from the date of filing the application or
three years from the date of grant of the patent whichever is longer. But this provision
was hardly utilised by the industry because even before the end of the third year of the
grant, the process was known. The TRIPS agreement does provide certain grounds
(though not limited to them) for a country to exercise the CL option.
The link between IPR and high domestic prices provided the main justifications for
weakening the level of protection for drugs by means of comprehensive compulsory
licensing practices (Brago in Siebeck et al, 1990). Greece and Yugoslavia have also
evolved compulsory licenses. Canada is one of the countries, which frequently
adopted CL to check the price of the patented drugs. In Canada, CL of products to
local firms is encouraged, though the innovating firms view compulsory licensing and
renewable patents as restrictions on their rights.
CL in the US has more often been used to restrict the anti competitive practices and as
a remedy in more than 100 antitrust case settlements. The use of CL5 is allowed
under specific grounds and contains detailed conditions under which a CL can be
granted. Like for instance, the CL could be issued under the grounds for (a) refusal to
deal by the patent holder, (b) emergency and extreme urgency, (c) anticompetitive
practices, (d) non-commercial use, and (e) dependent patents. The TRIPS Agreement
does not limit the members’ right to issue CL only on these grounds. For example, the
German patent law has provided that CL could be issued in the interest of public
while the Brazilian patent law allows for CL in cases of insufficient working (this is
under debate). Though the US is against any country using the CL and the drug cartel
of the US is against the issuance of the compulsory licensing, yet ìronically under the
US law, the US’s own patent legislation is far more liberal than that which it is trying
to impose on developing countries. Under the US law, if the government wants to use
a patent, it can do so without the need for a CL and without negotiating with the
patent holder. The patent holder can ask for compensation but has no other rights. In
addition, the Bayh Dole Act gives the government wide ranging powers to issue CL’
(Scrip’s Year Book, 2000, Vol.1: 165). In fact, in the US, many compulsory licenses
have also been granted in order to remedy anti-competitive practices. In some cases,
the licenses have been granted royalty free. `CL has been used as a remedy in more
than 100 antitrust case settlements, including cases involving Meprobamate, the
antibiotics Tetracycline and Griseofulvin, synthetic steroids and most recently, several
basic biotechnology patents owned by Ciba-Geigy and Sandoz, which merged to form
Novartis. Statistical analysis of the most important compulsory licensing decrees
found that the settlements had no discernible negative effect on the subject
companies’ subsequent research and development expenditures, although they
probably did lead to greater secrecy in lieu of patenting’ (quoted in Correa, 2000:91).
Article 40.2 of the TRIPS agreement spells out that `nothing in this Agreement shall
prevent Members from specifying in their national legislation licensing practices or
conditions that may in particular cases constitute an abuse of intellectual property
rights having an adverse effect on competition in the relevant market. A member may
adopt, consistently with the other provisions of this Agreement appropriate measures
to prevent or control such practices which may include for example exclusive grant
back conditions, conditions preventing challenges to validity and coercive package
licensing in the light of the relevant laws and regulations of that member’ (GATT
Agreements). In China, àny entity which is qualified to exploit the invention or
utility model has made requests for authorisation from the patentee of an invention or
utility model to exploit its or his patent on reasonable terms and such efforts have not
been successful within a reasonable period of time, the patent office may, upon the
application of that entity, grant a compulsory license to exploit the patent for
invention of utility model’ (as quoted in Keayla, 1994b: 196).
Some of the developing countries have argued that working of the patent should not
include importation and thus have put forth the case for compulsory licensing of a
patented product in the event of `non-working’ in the host country. Watal (2001)
however argues that ìt is not clear what developing countries hope to achieve by
using this condition of local manufacture. It clearly helps domestic industry in getting
access to the technology but would this force the pace of transfer of technology? By
itself, `working’ requirements are not likely to encourage the transfer of technology,
as right holders are not likely to cooperate in giving the required know-how. Where
such cooperation is not required, local licenses can be obtained by making `refusal to
deal’ or `public interest’ a ground for compulsory licenses, without confronting the
non-discrimination clause in Article 27.1. Similarly if the problem is lower prices i.e.,
to force the use of local labour and materials, thus enabling the manufacturer to offer
the patented invention at lower prices, it can also be tackled directly by making the
sale of patented inventions on unreasonable terms a ground for compulsory licenses.
If `working’ were the only ground for compulsory licenses, by `working’ the patent
within three years from its grant, and selling the resultant product at unreasonably
high prices for the entire patent term, the right holder saves himself from compulsory
licensing’
Article 30 allows limited exception to patent rights. It states that `members may
provide limited exceptions to the exclusive rights conferred by a patent, provided that
such exceptions do not unreasonably conflict with a normal exploitation of the patent
and do not unreasonably prejudice the legitimate interests of the patent owner, taking
account of the legitimate interests of third parties. Accordingly, the following types
of exceptions may be provided: àcts done privately and on a non-commercial scale or
for a non-commercial purpose; use of the invention for research or teaching purposes;
experimentation on the invention to test or improve on it; preparation of medicines
under individual prescriptions; experiments made for the purpose of seeking
regulatory approval for marketing of a product after the expiration of a patent; use of
the invention by a third party that had used it before the date of application of the
patent and importation of patented product that has been marketed in another country
with the consent of the patent owner’ (Correa, 2000:75). Another exception known as
Bolar exception also permits the pre-market testing of generic products during the
patent term, so that they can be marketed immediately upon expiration of the patent.
The other important aspect that is gaining attention is the parallel trade. Objectively,
the patent owner loses his rights once the product is on the market or when the patent
owner has sold his innovations. This principle is known as the principle of exhaustion
of rights or commonly known as parallel trade. TRIPS leave the decision on rights of
national or international exhaustion to national laws. The US adopts a national
exhaustion principle whereby the patent owner will have no control over the product
once it is placed in the domestic market. But he can exercise his rights outside the US
market regarding the price and quantity of the product. The European Union applies
the regional exhaustion principle whereby the rights are exhausted within the EU
region. International exhaustion gives no right to the patent owner once he has sold
his product. The international exhaustion is consistent with the objective of TRIPS
agreement mentioned in Article 7. The advantage of international exhaustion is that
developing countries such as India can scout for cost advantages of the patented
product. Both national and international exhaustion has its own merits and demerits.
For instance while the international exhaustion disallows the exclusive rights of the
patent owner globally and thus can gain access to the patented product, but an
unscrupulous patent owner/manufacturer can restrict the supply of the product that is
exported. In those cases exercising the compulsory license option can lead to getting
the patented product in required quantity. Besides, using the international exhaustion,
lot of `grey’ goods could also be traded.
All these provisions suggest that patented product can be manufactured, traded and
used for experimental purposes, within the provisions of the TRIPS Agreement. The
national laws will have to clearly define the cases in which such provisions could be
used to benefit the people and the industry.
Steps Initiated by the Government of India
Through the first amendment to the Patent Act made in 1999, the Government of
India (GOI) has facilitated the `Mail Box’ system and the Exclusive Marketing Rights
for products patented elsewhere. The mailbox has initiated the process of accepting
the patent applications from January 1, 1995, which will be processed in 2005. The
EMR has so far not attracted many applications.
The Doha6 declaration has made it clear that each member has the right to grant CL
and the freedom to determine the grounds upon which such licences would be
granted. This is however subject to certain conditions like: authorisation of such use
will have to be considered on its individual merits; the proposed user will have to
make efforts over a reasonable period of time to get a voluntary license on reasonable
commercial terms (except in cases of national emergencies); legal validity of the CL
decision and the remuneration will be subject to judicial or other independent review
and the CL can be terminated if and when the circumstances which led to it cease to
exist and are unlikely to recur.
In the amended Patent Act of India Sections 82 to 94 in Chapter XVI deal with CL.
These sections provide details of: general principles applicable to working of patented
inventions; grounds for grant of CL; matters to be taken into account by the controller
of patents while considering applications for CL; procedures for dealing with CL
applications; general purposes for granting CL and terms and conditions of CL.
Under Section 87, when the controller is satisfied that the application for the grant of
a CL or the revocation of the patent after the grant of CL has a prima facie merit, the
applicant will have to serve copies of the application to the patentee and to advertise
the application in the official gazette. The patentee or any other person may oppose
the grant of the CL within the period specified by the controller, who can also extend
the time. Thereafter the controller will decide on the case after hearing both sides.
Any decision by the controller to grant a patent can be contested. Under Section 117
A, an appeal can be made to the Appellate Board. The applicant will be able to use the
CL only if and after the Appellate Board turns down such appeals. The problem with
the amended provisions is that the entire process is excessively legalistic and provides
the patentees the opportunity to manipulate by litigation. The huge expenses involved
in fighting the large pharmaceutical companies holding the patents may dissuade the
non-patentees from applying for licenses in the first place. Chaudhuri suggests that
there is enough justification to carry out further amendments to simplify the general
provisions of CL in the Act to enlarge its use, such as listing the medicines eligible for
CL in public health crises (inclusion of such drugs can not be a ground for opposition
and appeal). For any drug in the public health list, the controller may immediately
after receiving an application grant the CL, fixing a royalty rate using the royalty
guidelines.
THE PATENT ACT
WHAT IS A PATENT?
Patent is a legal document granted by the government giving an inventor the exclusive
right to make, use and sell an invention for a specified period of time. It is also
available for significant improvements on previously invented articles. The
underlying idea behind granting patents is to encourage innovators to advance the
state of technology. According to the UN definition, a patent is a legally enforceable
right granted by country’s government to its inventor. Patent Law represents one
branch of a larger legal field known as intellectual property rights. Patent Law centres
on the concept of novelty and non-obvious inventions. The invention must me legally
useful. The imitators and all independent devisors are prevented from using the
invention for duration of patent.
BACKGROUND OF PHARMACEUTICAL INDUSTRY WITH RESPECT TO

PATENTS:
Indian Pharmaceutical industry is undergoing fast paced changes. The Indian
Generics market is witnessing rapid growth opening up immense opportunities for
firms. This is further triggered by the fact that generics worth over $40 billion are
going off patent in the coming few years which is close to 15% of the total
prescription market of the US. The Indian pharmaceutical companies have been doing
extremely well in developed markets such as US and Europe. The quality and
affordability of generic drugs have made India a virtual pharmacy to the world.
Nearly 70 percent of generic drugs manufactured in India are exported to other
developing countries. The expansion of AIDS treatment over the past few years has
been driven by the accessibility and affordability of generic ARVs (anti-retro viral
drugs) from India. Pharmaceutical multinationals have maintained a low-key presence
in Indian market due to absence of product patents and rigid price controls. In the
domestic market, the share of Indian companies has steadily increased from around 20
per cent in 1970 to 70 percent now the industry has thrived so far on reverse
engineering skills exploiting the lack of process patent in the country. This has
resulted in the Indian pharmaceutical players offering their products at some of the
lowest prices in the world. The quality of the products is reflected in the fact that
India has the highest number of manufacturing plants approved by US FDA, which is
next only to that in the US. Patents Act 1970 in its original form does not differentiate
between Process and Product patents for medicines, food and chemicals. One of the
important features of the Act was that it did not provide product patents for the three
mentioned industries. These industrial sectors were covered by product patent only. In
addition the Drug Price control Order, 1970 put a cap on the maximum price that
could be charged and ensured that the life saving drugs are available at reasonable
prices. The Act of 1970 safeguards the interests of the inventor and consumer in an
even-handed manner. The Act has been promulgated in keeping with the Socialistic
Principles outlined in the Directive Principles of State Policy. Therefore with a
regulatory system focused only on process patents, helped to establish the foundation
of a strong and highly competitive domestic pharmaceutical industry which in the grip
of a rigid price control framework transformed into a world supplier of bulk drugs and
medicines at affordable prices to common man in India and the developing world.
PATENTING' INDEPENDENCE: 1972

The Indian Patents Act of 1972 granted independence to the Indian pharmaceutical
industry. There was nothing much that Cipla or any other Indian pharmaceutical
company could do before that.
The hands of all the Indian pharmaceutical companies were tied by the then patent
law that put the interest of foreign monopolies before the health of millions of
suffering Indians. April 20, 1972 was a red-letter day for India. It was the day when
the Patents Act (Act 39 of 1970) came into force, replacing the Indian Patents and
Designs Act of 1911. The new Patents Act abolished product patents and allowed
process patents for seven years only.
Come to think of it, the rationale behind the patent amendment of 1972 was not very
different from the rationale behind the Independence movement. Our freedom-fighters
essentially fought for the right to decide what was best for our country rather than be
dictated to by foreign powers.
The Indian Patents Act of 1972 granted the pharmaceutical sector the right to produce
any drugs the country needed. It did away with the shackles imposed by monopoly. It
refused to let multinational corporations (MNCs) wear the noble garb of intellectual
rights.
If IT professionals give a thought to the significance of this old law they can easily
imagine what could have been the plight of the Indian IT industry if Microsoft and
other software giants were to prevent any Indian from doing any developmental work
on their software platforms???
There are no two opinions on the view that the Amendment brought by the Act in
1972, played an important role in avoiding the health care catastrophe.
In 1971, MNCs had an over 70 per cent share of the Indian pharmaceutical industry.
In 2007, in a reversal of roles, Indian companies commanded 83 per cent. In 1971,
Alembic was the only Indian among the top 12 companies in the Indian
pharmaceutical market. In 2007, there are only three MNCs in the top-12 list.
Pharmaceutical business models are changing. The world is now discovering India as
a preferred place for clinical research. In more ways than one, the industry appears set
to keep up its growth and progress, but for the 2005 Act.
Now we shall see in the next section of the report what exactly does the Patent Act
2005 indicate and suggest.
Number of patents filed and granted to Residents and Non-Residents
Applications for patents filed Patents Granted
Year Residents Non- Total Residents Non residents Total

residents
1994 1588 3212 4800 448 1287 1735
1995 1545 5021 6566 415 1198 1613
1996 1660 6632 8292 359 661 1020
1997 10155
Notes: Break ups are not available for the year 1997
Source: World Intellectual Property Organisation, Industrial Statistics, 1997
Patent Applications by Units with R&D
Recognized R&D Units Number of Applications
Panacea Biotec Ltd 95
Ranbaxy Laboratories Ltd 51
Lupin Laboratories Ltd 28
Cipla Ltd 26
Sun Pharmaceutical Industries Ltd 20
Tablets (India) Ltd 18
Hoechst Marion Roussel Ltd 17
Ajanta Pharma Ltd 15
Dr. Reddys Research Laboratories 14

Natural Remedies Private Ltd 13
Natco Pharma Ltd 12
Kopran Ltd 11
Source: Intellectual Property Rights, (IPR) Vol. 6. No.9, September 2000.
PATENTS AMENDMENT ACT (2005)

The Patent Amendment Act 2005 passed by the Parliament in its budget session of
2005 brings the Indian Patent Act in full conformity with the intellectual property
system in all respects. The major amendments introduced in Sections 2 and 3 of the
India patent Act suggest:
An invention in order to be patentable, should:
(i) Involve an inventive step capable of industrial application;
(ii) Involve technical advances as compared to the existing knowledge or having
economic significance or both; and
(iii) Not be obvious to a person skilled in art. Section 3 outlines various situations
where an invention (properly so called) can yet be not patentable.
Section 3(d) of the Patents Act 1970 has been amended under the new Act to
prescribe a class of discovery which cannot be subject matter of patent under the
following clauses:
• Mere discovery of a new form of known substance which does not result in the
enhancement of the known efficacy of that substance
• Mere discovery of any new property or new use for a known substance
• Mere use of a known process, machine or apparatus unless such known
process results in a new product or employs at least one new reactant.
Product Patents have been extended to fields of technology such as drugs, food and
chemicals but granting of patents are subject to restrictions as mentioned above
(Section 3(d)). This section prevents frivolous inventions from being patented. The
amendments introduced in the Patents Act exhibit the essence of patentability in the
pharmaceuticals and chemicals is inventive ingenuity, novelty and existence of
industrial application or economic significance of the new product or process.
SCENARIO POST TRIPS:
The amendment of 2005 extends full TRIPS coverage to food, drugs and medicines.
It requires patents to be provided to products as well. The other implications for the
pharmaceutical sector under the new act are as follows
• The term of a patent protection has been extended to twenty years compared
to the seven years which was provided by the act of 1970.
• If the law of the country provides so, then the use of the subject matter of the
patent shall be permitted without the authorization of the patent holder,
including use by the government or any other third party authorized by the
government. However such use shall be permitted only if prior to such use,
the user has made efforts to obtain the authorization of the patent holder and
such efforts have not been successful within a reasonable period of time. This
requirement can be waived in case of a national emergency after notifying the
patent holder.
• The onus of proving on a legal complaint that the process used by one
enterprise is totally different from that which has been used by another would
lie on the defendant. Prior to the amendment the responsibility was on the
patent holder to establish patent infringement.
WHAT IMPLICATIONS DOES TRIPS HAVE FOR INDIAN

PHARMACEUTICAL INDUSTRY?
If 1972 was motivated by national interest, 2005 was prompted by international
pressure, by an ill-perceived need to "belong" to the international community. The
Patents Act 1972 resurrected a flagging domestic pharmaceutical industry. This Act
had a much wider purpose; to help the Indian who had to fight TB, diabetes and a
multitude of diseases with affordable medicines. Every country has its own specific
need-based patent laws, which are national laws. There is no harmonization in patent
laws of different countries. Each country has to decide for itself its own destiny.
Today we have a population of over 1,100 million. The diseases that used to worry us
the most are still around. There is the additional scourge of HIV/AIDS. Millions of
Indians need medicines. Most of them cannot afford to pay high prices.
Going by global experience, product patents that are now again enforced, can only
lead to monopolies and these, in turn, to high prices. Africa and the AIDS issue of
1990-2000 is a clear example.
India needs to build in enough safeguards even in our current patent law. Perhaps in
our haste to join WTO, we neglected many important issues.
A product patent system will make India dependent on the multinational companies
for technology and for permission to produce the patented drug. Exorbitant prices will
be charged and the Indian pharmaceutical industry will become subservient to the
MNCs. They will lose the position that they had gained in the wake of the Act of
1970.
The immediate and the most drastic effect that TRIPS compliance and introduction of
the new Act of 2005 will have will be with respect to the health sector in India.
The patients are the ultimate beneficiaries of the pharmaceutical research and
development. By denying product patents India will be able to encourage bulk generic
drug production at cheap prices.
However generics are not the only solution to counter the problem of access to
medicines. Generic production of drugs will not necessarily result in the innovation of
new and more effective drugs and by not acknowledging innovation India will run the
risk of not having access to future medicines which will in turn affect public health.
The actual problem lies in the fact that the product patents not only increase the cost
of the drugs and medicines, but that most of them fail to introduce research and
development in the neglected diseases. Hence while on one side the introduction of
product patents will help in development of new and more effective drugs, the
problem still remains that the research and development undertaken by the drug
manufactures evade the neglected diseases and the diseases which are region specific
such as medicines for malaria and tuberculosis which are found prevailing in
developing countries like India.
A DEBATE ON PRODUCT PATENT AMENDMENT- NOVARTIS CASE.

Protestors marched in India against Novartis. WHY?
Nearly a quarter of a million people from 150 countries voiced concerns over the
negative impact of a legal challenge brought by Novartis that could have on access to
medicines in developing countries and had asked Novartis to drop the case. Had the
challenge been won by Novartis it would have been a major blow to production,
domestic use and exports of generics to the world. The drug at issue was a cancer
drug (Glivec) which Novartis sold at US$2500 per patient per month while generic
versions of Glivec in India only cost about US$175 per patient per month. A court
case brought by Swiss drugs giant Novartis in India could define how the industry
distributes discount medicine to the developing world while maintaining profits.
Novartis moved the court on contesting that India'
s patent law could leave millions
without access to affordable drugs. Opponents accused the Basel-based firm of
squeezing the competition.
In 2005, the Indian government introduced patent protection for drugs for the first
time. But the law only protects completely new compounds that were invented after
1995, a deviation of the industry standard.
The Novartis leukaemia drug Gleevec (Glivec in some countries) fell foul of this
ruling as it was deemed to be a new form of an existing treatment that was developed
before the cut-off date.
This opened the door for generic pharmaceutical companies to copy the treatment,
which was earlier distributed free to thousands of patients in India, at a fraction of the
cost.
"We are deeply convinced that patents save lives. If the patent law is undermined the
way it is happening in India, there will be no more investment into the discovery of
lifesaving drugs," said Novartis head of corporate research Paul Herrling.
The company insisted that it will continue to offer Gleevec free to patients in India
who cannot afford it.
Watchdog groups such as Médicins sans Frontières, said generic competition has
dramatically reduced the cost of drugs. They launched a petition against Novartis
while hundreds of activists protested in the streets of the Indian capital, New Delhi.
Lot at stake
The Geneva-based International Federation of Pharmaceutical Manufacturers and
Associations (IFPMA) was "very concerned" about the Indian patent law.
Companies need to have assurances that they can obtain adequate patent protection
that gives a fixed period of legal monopoly in which they can recoup what they have
invested in research so that they can continue their research.
Otherwise they would not have a sustainable industry and that will preclude their
ability to improve treatments.
But the Médicins sans Frontières argued that blocking cheaper generic copies would
keep the cost of treatments such as Gleevec artificially high.
The consequence of a ruling in favour of Novartis would have led to fewer and fewer
drugs in the market. In the long term it would have killed the competition from
generic drugs.
However it was admitted that even the Indian generic drug companies, although
capable of producing Gleevec at a tenth of that charged by Novartis for a monthly
dose, were also looking to make a profit.
Thus it cannot be said that Novartis are the bad guys of the movie and that the
generic.
A POSSIBLE SOLUTION TO THE PRODUCT PATENT ISSUE
The most practicable solution to the problem which at the same time allows for TRIPs
compliance would be granting of dual licenses. This would mean that the patent
would be partly product patent and after a reasonable time being given to the inventor
to make a reasonably large profit it would be converted to a process patent whereby
the patented drug can be manufactured by competing manufacturers using an
alternative process. This would solve the problem of excessive hike in prices and
would render the drugs more accessible to the millions suffering. Collaboration with
the MNCs on various fronts such as research and development, manufacturing and
marketing will help Indian Pharmaceutical companies make profitable breakthroughs.
As far as India’s pharmaceutical industry is concerned, various options are possible in
the WTO regime. But ultimately, the path currently is followed by international
standards for patent protection moves inevitably toward a clash between public health
and intellectual property.
Stringent intellectual property protection for pharmaceuticals would only retard public
health initiatives in the coming years. Given the rapid evolution of the AIDS crisis
throughout the world, with more than 35 million cases alone in India, a twenty year
term of market exclusivity for new treatments is not reasonable if we expect to make
real progress in containing the disease. It might well be appropriate for a governing
body to clearly define a list of essential medicines, such as antiretroviral (ARV)
agents, that would be subject to somewhat more relaxed patent protection compared
to other drugs.
DRUG PRICE CONTROL
PRICING OF DRUGS- PRINCIPLES AND LAWS

The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to
ensure proper market conditions –
• Turnover
• Market monopoly
• Market competition.
Under this, prices of 74 bulk drugs and their formulation are being controlled
representing approximately 20% of the pharmaceutical market. Bulk drugs, with a
turnover of over Rs40 million, are under the purview of the DPCO, excluding those
drugs with sufficient market competition. Sufficient market competition is defined as
the presence of at least five bulk producers and 10 formulations, with no producer'
s
market share exceeding 40 per cent. In case a single producer controls about 90 per
cent of the market for a drug, which has a turnover in the range of Rs.10-40 million,
the drug is considered to be under the purview of the price order (ICRA, 2000).
Industrial licensing has been abolished for all drugs, formulations and drug
intermediates except for the five drugs which are reserved for public sector.
Moreover, price controls have been waived for a period of five years for drugs which
have been developed indigenously there is a price controls under DPCO, still a
majority of drugs in the market are not regulated and the price rise during this period
is still considered to be minimal. In short, while the DPCO has evolved in a step-by-
step ad hoc fashion, it has managed to strike a rough balance between regulating
prices to ensure adequate access to essential medicines for the rural and urban poor,
while allowing the emergence of a globally competitive Indian domestic drug
industry. The new research environment has added important new elements to the risk
environment of pharmaceutical research as a by-product of the dramatic exploration
of entirely new areas of application. Manufacturers that venture into new territory are
less certain of what they will find and less confident of what it will be worth when
they find it—they face new uncertainties over both supply and demand.
I. HOW TO DETERMINE THE PRICE OF DRUGS?
As a developing country, India has much more limited fiscal and economic resources
alongside a much larger population of low-wage urban workers and small farmers. As
a result, establishing a European-style drug reimbursement scheme, even with a
combination of public and private financing, would require a vast expansion of public
subsidies by the Indian Government.
Although reference pricing is the most common international cost-containment tool,
adopting a European drug pricing system and referencing prices to foreign prices also
would have serious disadvantages in an Indian context. Even if Indian prices were
referenced to, the prices of most advanced drugs would still be prohibitively high and
likely well beyond the reach of the common man. While a European-style universal
health insurance system and a comprehensive public drug benefit could be used to
alleviate the burden on the common man through a public subsidy, it would impose a
massive long-term fiscal burden on the Indian Government. According to the OECD,
in 2003 per capita drug expenditures averaged $606 in France, $507 in Canada, $393
in Japan, $353 in Australia, $284 in the Czech Republic, and $225 in Poland. Even if
these costs were partially subsidized by the Indian Government or the states, the cost
would be prohibitive and would likely displace other vital government programmes.
On the other hand, if the prices of advanced drugs were referenced to other
developing countries, or domestic generic drug prices, such controls would keep drug
prices lower, but undermine the global competitiveness of India'
s world-class
pharmaceutical companies, and deter future private sector investments in advanced
biopharmaceutical discovery. In such a situation, research by Indian companies and
patenting activity of scientists would likely shift offshore, probably to the U.S. or to
the U.K.
II. WHY PRICES OF PATENTS AND GENERICS DIFFER?

If a government sets the same price for generic and patented medicines, consumers
naturally tend to choose the more advanced product, since it provides better value or
greater quality assurance. Accordingly, demand for unbranded generics in price
controlled markets tends to be artificially reduced.
It is universally acknowledged that drug discovery is an extremely expensive process;
That for every molecule that finally makes it into a product, there are several that are
abandoned on the road to discovery;
Thus the patenting system provides an opportunity to recover developmental costs
over the patent period. The new research environment has added important new
elements to the risk environment of pharmaceutical research as a by-product of the
dramatic exploration of entirely new areas of application.
Manufacturers that venture into new territory are less certain of what they will find
and less confident of what it will be worth when they face new uncertainties over both
supply and demand.
REASONS FOR THE UNCERTAINTY OVER DEMAND FOR NEW DRUGS
Of the numerous factors that create uncertainty over the demand for new drugs, two
stand out. First, many new drugs address conditions that have not been systematically
treated. Data on the prevalence, health consequences, and social costs are sparse
because conditions that are not treated tend not to be studied. Second, even if one
does know the number of those suffering from a condition and the health
consequences of that condition, we still may have only a vague idea of what people
are willing to pay for the drugs that alleviate those conditions.
• Uncertainty over the health benefits from a new drug is therefore one
problem,
• Uncertainty over what consumers are willing to pay for those benefits is
another
INFEASIBILTY OF PRICE CONTROLS
Price controls on pharmaceutical products produce a variety of negative consequences
for national health systems and reduce social welfare by depressing the number of
new drugs added to the global pharmacopoeia. It can also reduce the availability of
some innovative medicines in foreign countries, with the effect of limiting
competition and requiring national health system to forgo the benefits of those
innovations in reducing health care costs.
The economic models also indicate that benefits of lower prices to consumers were
less than the benefits to society of new drugs foregone.
III. PRICE FIXING AND CONTROLS FOR PRICING – ISSUES AND

SUGGESTIONS
The new pharmaceuticals pricing policy envisaged that all patented drugs that would
be launched in India after 1 January 2005 would be subject to price negotiations
before granting them marketing approval, and that the Drugs and Cosmetics Act 1940
would be suitably amended to provide for this. The Department of Chemicals and
Petrochemicals in consultation with the Department of Health would lay down
necessary guidelines for determining the negotiated prices. Government on 18
January 2007 notified a committee to examine the issue of price negotiations for
patented drugs. The committee was to interact with industry and to propose a system
of reference pricing/price negotiations/differential prices that could be used for price
negotiations of patented drugs and medical devices before their marketing approval in
India. The committee submitted its report by mid April 2007.The considerations
weighed by the committee were-
• An approach was one that would determine the price premium enjoyed by the
drug in the lowest price market abroad compared with the closest therapeutic
equivalent in the same country, and to apply that same premium to the closest
therapeutically equivalent prevailing in the domestic market. That is to say,
the same premium factor prevailing in the domestic market would become
one of the markers.
• Another approach under consideration was the principle of purchase parity
pricing being used in Europe between member countries. Under this
methodology, the price arrived at could be at a substantial discount to the U.S.
prices, even less than 50%.
• There was a push towards looking at prices charged abroad with a view to
determining the lowest of the prices charged overseas.
But every one of these approaches was market distorting, and suffered from several
shortcomings:
The National Pharmaceutical policy therefore suggested that all patented drugs that
would be launched in India after 1 January 2005 would be subject to price
negotiations before granting them marketing approvals, and for this the Drugs and
Cosmetics act was amended and was enacted in 2008.
Given the high number of pharmaceutical firms in the informal/unorganized sector,

domestic and foreign drug companies in India also run a large risk that their patented
drugs will be pirated even with protected product patent system. Price controls benefit
health delivery in countries that have a well regulated public health delivery system.
Public health expenditures in Indian states continue to be low, with a wide disparity in
effectiveness of delivery between states. There is a large private sector and
unorganized access to medicines. In these circumstances, price controls would lead to
market distortions, excessive regulation and the development of grey markets. High
duties and transaction costs impose a heavy burden on the consumer—there are
examples where these distort prices enormously, against imported drugs. A mindset
that creates negativity towards imported drugs needs to be changed.
III. WHY DOES INDIAN DRUG PRICING SYSTEM NEEDS TO BE
DIFFERENT FROM EUROPEAN STYLE AND OTHER DEVELOPING
COUNTRIES” PRICING SYSTEM
The above analysis makes clear that India should develop a new approach that avoids
the costs of European-style drug price controls, while also avoiding the inequities of a
free market style.
The issue of drug availability is to ensure that-
• the latest clinical treatment and drugs must be available
• these should be accessible to the entire population
• there should be incentives for development of new drugs through R&D that
would require adequate compensation for development costs.
India presents a unique situation. Absence of product patents for over three decades, a
large indigenous industry, coupled with political economy requirements of a welfare
state; require a balance between incentives and control. It is important that the latest
drugs and formulations are available, that they can be reached to all, whether in the
public health or the private health systems. It is equally important that there be an
environment for industry and research to grow, and that global firm are comfortable
using the talent pool in India for R&D and drug discovery, assured of reasonable
returns.
Given wide income disparities, a range of public health and private care systems, and
freedom of choice, and the distortions likely to be caused by the price fixing for
patented products, it is important to consider creative solutions that would suit a
developing country like India. A possible alternative that could be adopted in India for
patented drugs is the adoption of a two tier price system.
For example, in some states like Tamil Nadu, drug purchases for public hospitals by
the government are negotiated with the companies. Each tablet carries a distinctive
mark and the strips are separately labelled to indicate that they are not for sale, but
part of the public health care system. The same drugs are available in the open market
at market prices. Such a twin pricing system has the advantage of delivering drugs at
low costs to the public health care system without distorting the market mechanism.
In the case of patented drugs it is conceivable that producers may be willing to accept
prices that are close to marginal costs of production plus fixed returns, if allowed to
access the market for pricing that covers development costs. In this approach, the
Department of Petrochemicals would finalize a list of patented drugs that it intends to
be used in the public health system. Using this approach, the producing companies
would be invited to convey the prices at which these drugs would be made available
to government hospitals and dispensaries. These would be distinctively packaged and
labelled and supplied to the health departments of the states against invoices raised by
them, and accepted terms of payment. Outside this, firms would be free to charge
market prices, and enjoy IP protection in full for their products.
Such an approach might offer a short term solution to drug access concerns, while
longer term structural reforms are explored. In the long-term, any solution to India'
s
drug access problem requires major structural reforms to the health care system. In
formulating such reforms, a balance must be struck between the markets for free sales
and government supplies. The government cannot supply the entire demand for drugs
unless it is prepared to commit to massive public subsidies and drastic price controls.
A fresh approach is needed.
IV. CHALLENGES FACED BY THE GOVERNMENT TO DEVELOP A

NEW APPROACH TO PHARMACEUTICAL PRICING.
• The Government has an overriding responsibility to ensure that the citizens of
India – especially the common man -- have access to affordable medicines for
treating the most common and important disease conditions.
• At the same time, any new policy must maintain a world-class Indian life
sciences capability. India is a world leader in the advanced life sciences. The
Indian pharmaceutical industry dominates global generics markets and has
begun making serious investments in innovative drug discovery. Given
adoption of the Product Patents Act and increasing competition from Chinese
generic companies in the international generics marketplace, the future of the
Indian biopharmaceutical industry rests on its ability to innovate. Thus, any
new policy must balance improved access to key medicines for the common
man with support for India'
s continued capability to discover and develop
advanced medicines, which represents a long-term national asset.
V. KEY FEATURES OF THE NEW PRICING APPROACH

Such a solution requires a two-track approach.
• First, the government should strengthen the public health infrastructure to
ensure that rural and urban poor have universal access to treatments for basic
medical needs. Such a system should be built around government bulk
purchases of low-cost generic medicines. Also, instead of seeking to provide
the latest state-of-the-art treatments for the rural and urban poor, the focus
should be on the low-cost delivery of high-quality, essential care for all.
• While patients in the public health system should be free to purchase more
expensive patented or branded drugs, this could be achieved through a
"balanced-billing" arrangement in which the government would subsidize
only the cost of the basic generic drug, with the remainder being contributed
by the patient. Such an approach would avoid the prohibitive cost of have the
Central or State governments subsidize state-of-the-art foreign medicines,
allowing government funds to be allocated to an expansion of basic care to a
larger number of people.
• A second way is that the government should aim to facilitate the continued
evolution of private health care markets, including private hospitals, private
insurance, and high-cost patented drugs. Creating a separate private market
would ensure that the cost of such advanced care would be borne by middle
income household. This two-track system would avoid the bureaucratic
complications and prohibitive cost of transferring a European-style
government health care system to a developing country like India.
Chapter-4- Industrial production
INDUSTRY PRODUCTION
INDIAN PHARMACEUTICAL MANUFACTURERS
The Indian Pharmaceutical Industry today is in the front rank of India’s science-
based industries with wide ranging capabilities in the complex field of drug
manufacture and technology. A highly organized sector, the Indian Pharma Industry is
estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks
very high in the third world, in terms of technology, quality and range of medicines
manufactured. From simple headache pills to sophisticated antibiotics and complex
cardiac compounds, almost every type of medicine is now made indigenously.
Playing a key role in promoting and sustaining development in the vital field of
medicines, Indian Pharma Industry boasts of quality producers and many units
approved by regulatory authorities in USA and UK. International companies
associated with this sector have stimulated, assisted and spearheaded this dynamic
development in the past 53 years and helped to put India on the pharmaceutical map
of the world.
The Indian Pharmaceutical sector is highly fragmented with more than 20,000
registered units. It has expanded drastically in the last two decades. The leading 250
pharmaceutical companies control 70% of the market with market leader holding
nearly 7% of the market share. It is an extremely fragmented market with severe price
competition and government price control.
The pharmaceutical industry in India meets around 70% of the country'

s demand for
bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and injectibles. There are about 250 large units and about 8000 Small
Scale Units, which form the core of the pharmaceutical industry in India (including 5
Central Public Sector Units). These units produce the complete range of
pharmaceutical formulations, i.e., medicines ready for consumption by patients and
about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production
of pharmaceutical.
Following the de-licensing of the pharmaceutical industry, industrial licensing for
most of the drugs and pharmaceutical products has been done away with.
Manufacturers are free to produce any drug duly approved by the Drug Control
Authority. Technologically strong and totally self-reliant, the pharmaceutical industry
in India has low costs of production, low R&D costs, innovative scientific manpower,
strength of national laboratories and an increasing balance of trade. The
Pharmaceutical Industry, with its rich scientific talents and research capabilities,
supported by Intellectual Property Protection regime is well set to take on the
international market.
Indian bulk drugs market in 2006 was about US$3.29 billion, witnessing a growth of
19% over 2005 at CAGR of 18.81% in the last six years. India ranks 4th in terms of
volume, among the top 15 drug manufacturing countries worldwide. Indian
companies have the distinction of developing cost-effective technologies for
manufacturing bulk drugs and intermediates, conforming to global standards. India
has over 80 US FDA approved plants, the second highest in the world.
Indian bulk drug market is fragmented with top 10 companies contributing 44% of the
market and about 1,323 companies accounting for the balance 56%. Nearly 70% of
the bulk drugs, manufactured are exported to more than 50 countries. Contract
manufacturing in India in 2006 was USD658.6 million, registering a growth of 48%
over previous year. Indian companies have filed 408 DMF'
s during 2006 out of a total
704. By 2010, Indian bulk drugs market is projected to grow to about US$6.54 billion
and contract manufacturing to USD1.5billion. The Pharmaceutical Industry in India is
increasingly being recognised as a reliable source of quality medicines at affordable
prices and is emerging as a global powerhouse. As we enter the Knowledge Economy,
speedy and efficient exchange of reliable information will be a prime requirement for
the efficient management of our intellectual capital. The Indian manufacturers of bulk
drugs have taken the advantage of the prevalent economic conditions and have
accordingly carved their markets. During the times when the import duty was as high
as 115%, the Indian bulk drugs were positioned as import substitutes and when the
duty fell they have become exporters.
The growth which the Indian Pharmaceutical Industry has achieved is mainly due to
the Indian Patents Act, 1970 which was one of the achievements of IDMA in
strengthening the national sector.
The main Industry Associations in India are:
1. Bulk Drug Manufacturers Association (India), A-24, 2nd floor, View Towers,
Lakadi Ka Pul, Hyderabad-500004, Tel : 3322142 /3316328
2. Indian Drug Manufacturers Association (IDMA), 102-B, Poonam Chambers,

Dr.A.B.Road, Worli, Mumbai - 400 018, Tel: 2494 4624 / 2497 4308, Fax: 91-22-
24950723, Email: idma@vsnl.com / idma@idma-assn.org
3 Organization Of Pharmaceutical Producers In India (OPPI): (established in 1965),

Peninsula Chambers, Ground Floor, Ganpatrao Kadam Marg, Lower Parel, Mumbai
400 013., Tel: +91 22 24918123, 24912486, 66627007, Fax: +91 22 24915168, E-
Mail : indiaoppi@vsnl.com
4Unilab Chemical & Pharmaceuticals Pvt Ltd:

Unilab Chemicals & Pharmaceuticals Pvt. Ltd. is a manufacturing company
established in 1978. It is a quality manufacturer of bulk drugs & formulations, APIs
(active pharmaceutical ingredients), API intermediates, quaternary compounds and
fine chemicals . The Company specializes in the manufacture of antiseptics and
disinfectants. Unilab holds all necessary
licences and a Good Manufacturing Practices (GMP) certificate granted by the Food
and Drug Administration, Maharashtra State.
M/s Blue Circle Ltd.:

Blue Circle has three strong manufacturing sites located in the industrial belt of
Thane, having close proximity to Mumbai. Jet Chemicals Pvt. Ltd. (JCPL)
incorporated in 1969 is the oldest unit built over an area of 12000 Sq. Mtrs. Blue
Circle Speciality Chemicals Pvt. Ltd. (BCSCPL) incorporated in 1989, occupies an
area of 3000 Sq. Mtrs. Blue Circle Organics Pvt. Ltd. Came into being in July 2004.
They have a strong presence in the global market with their expertise being
1. Gomberg and related reactions and formations of biaryl compounds
2. Sandmeyer reaction
3. Grignard reaction
4. Hydrogenation with nobel metal catalyst
The company is recognised in four major areas:

1. Pharmaceutical intermediaries/ Fine chemicals
2. X Ray Contrast Media Intermediaries
3. Polymer Modifiers
4. Custom Synthesis and Toll manufacturing
Their production facilities can take up multi-step synthesis. Their facilities are
equipped with glass-lined and stainless steel multi-purpose reactor, safety and control
system installation. All manufacturing operations are carried out as per ICH Q-7A
guideline. Blue Circle also aims at manufacture of products with flexibility and with
the regulations in force concerning the environment, safety & health.
Innovation strategies employed: Unilab Chemicals & Pharmaceuticals Pvt. Ltd.

(UCPL) started with the production of Cetrimide and Chlorhexidine Gluconate. It is
in the transition from the third stage (market penetration) to the fourth stage
(accelerated growth) of the business growth cycle. UCPL & Blue circle have gone for
combination growth strategies. Both the companies are engaged in international
business at the very first rung of direct exports. They went for intensive expansion at
varying levels. Markets were carefully carved in the developing countries like Africa,
Latin America rather than developed countries from Europe & USA. Advantage was
that these countries were initially importing from Europe at a much higher price and
are behind India in terms of technology by approximately 10 years. Also, this is an
industry where profits lie in volumes and these countries will not have market large
enough to even achieve break even if they start manufacturing themselves.
UCPL & Blue circle have resorted to forward integration by also producing the
intermediaries and for some chemicals the packaged product for the end user eg
phenolic cleaners. They are also helping their existing customers to set up
manufacturing units while ensuring life time partial dependence for the generation of
continuous income. Sustainable competitive advantage in the bulk drug industry
where the technology gets copied relatively in advance as compared to other
industries; comes in the form of continuous innovations. This competitive advantage
is derived from the combination of two basic themes viz (i) Competitor Centred & (ii)
Customer Centred
Product related innovations are in general customer centred and process related
innovations are generally competitor centred. As a result of these innovations it is
observed that there is either an increase in the price or decrease in the price along with
increase in the volume. In any of the cases, the result has been an increase in the
return on investment. The process innovations help reduce the cost and hence increase
the margins.
One of the processes to obtain 98% purity of a molecule, it had to undergo reflux
reaction in which Naphtha was used as a solvent, took 125 hours for a batch of 500
cc. They introduced a new wax process by which though the purity was reduced by
three percent to 95%, the reflux would be completed in 8 hours. As a result of this
twelve batches could be produced instead of just one batch in the same period of time.
This amounted to 30% utility cost reduction The factory forward process involves
Business Competency Process, Channel Management, Customer Account and Order
Execution. It is the most complicated & difficult process. As the Indian Bulk Drug
industry relies a lot on direct exports, the complications get compounded. Effective
debtor management becomes vital.
The financial analyses give a clear picture of the problem areas of the firm. E.g. a
high level of debtors indicates that the 4Ps need to be relooked; a high level of raw
material inventory may imply that the supply chain needs to be modified.
Initially, the import duties were 115% of FOB value and the landed price of the raw
material worked out to be almost 2.5 times of the actual price. Market for the bulk
drugs was growing in India and witnessed an increase in the number of manufacturers
and hence the competition. Unilab Chemicals & Pharmaceuticals Pvt. Ltd. And M/s
Blue Circle employed continuous innovations in order to maintain the price level and
remain in the market.
Financial performance of Unilab Chemicals & Pharmaceuticals Pvt. Ltd.
Accounting Year Turnover in Crores

2000-01 5.1
2001-02 7.24
2002-03 9.23
2003-04 11.48
2004-05 12.70
2005-06 12.62
2006-07 14.50
2007-08 15.09
CONTRACT RESEARCH AND MANUFACTURING:

Increasing costs of R&D, coupled with low productivity and poor bottom lines, have
forced major pharmaceutical companies worldwide to outsource part of their research
and manufacturing activities to low-cost countries, thereby saving costs and time in
the process. The global pharmaceutical outsourcing market was worth USD57.2
billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by
2010. Global market for Contract Research and Manufacturing Services (CRAMS) in
2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market,
contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract
manufacturing was USD38.89 billion accounting for the major share (approximately
68%) of the total global pharmaceutical outsourcing market. India, with more than 80
US FDA-approved manufacturing facilities, is one of the most preferred locations for
outsourcing manufacturing services in India by the multinationals and global
pharmaceutical companies. The Indian pharmaceutical outsourcing market was valued
at USD1.27m in 2007 and is expected to reach USD3.33 billion by 2010, growing at a
CAGR of 37.6%. The Indian CRAMS market stood at USD1.21 billion in 2007, and
is estimated to reach USD3.16 billion by 2010.
India holds the lion'

s share of the world'
s contract research business as activity in the
pharmaceutical market continues to explode in this region. Over 15 prominent
contract research organisations (CROs) are now operating in India attracted by her
ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in
the field of new drug discovery and the rest 65 per cent of business is in the clinical
trials arena. India offers a huge cost advantage in the clinical trials domain compared
to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of
hiring a chemist in the West.
EUROPEAN PHARMACEUTICAL MANUFACTURERS
The Evolution of Drug Production in European Countries
The pharmaceutical industry is very important to the economy of every

country. Pharmaceuticals, especially drugs, are so priceless that no nation can
survive without them and every serious-minded government pays great
attention to drugs. Drugs are so important that the World Health Organization
(WHO) recommends a National Drug Policy for every country. Most
progressive countries have formulated and implemented their national drug
policies, thereby ensuring good health for their citizens and great wealth for
their nation. The development of pharmaceuticals in European Countries has
undergone significant evolution from the concoctions infused from a cocktail
of leaves, fruits, barks and roots to small tablets made through chemical
synthesis. Modern science and technology has turned drugs into extremely
valuable products and continues to aim at delivering them in forms with
enhanced efficacy, precision in action, safety and appearance. This poses a
great challenge to the pharmaceutical industry as there is always a need to
improve on previous inventions and develop even better drugs. As a result of
this evolution, many new entrants into the pharmaceutical industry have
emerged globally since the mid-1930s.
This has led to intense competition with its attendant problem—products of

suspect quality infiltrating the markets as players in the industry struggle to
get more of the market shares. The problem is exacerbated by the double
regulatory standards adopted by exporting countries, as well as the lack of
inbuilt security measures that should be included during product development
by drug manufacturers to forestall counterfeiting.
The pharmaceutical industry in European Countries has passed through a

tortuous path, from the rudimentary era of pre-957 to the foundation-laying
era of the 1960s, through the oil boom era of the 1970s, to the harrowing
experience of the 80’s and 90’s and into the potentially bright era of the
2000s. This path traversed by the industry is not peculiar to European
Countries but is the same as in other developing countries. The development
of the European Countriesn pharmaceutical industry has evolved over time in
five phases. Each phase depicts the stages of growth that took place in the
industry.
Phase I (Pre 1957 Era)
The first phase started with the establishment of the first pharmacy in
European Countries by Dr. Zacheus Bailey in Lagos.1 During this time, the
pharmaceutical business involved distribution of imported drugs by
representatives of different multinationals in the country. Some of the
multinationals were Beecham, May and Baker, Pfizer, Glaxo and J. L.
Morrison. This meant that there was no local manufacturing of modern
pharmaceutical products in European Countries before 1957.
Phase II (1957-1980)
This phase covered the era when the multinational companies started
establishing production plants in European Countries. These include Glaxo
(1958), Pfizer (1962), Sterling (1963), Wellcome (1967), PZ (1968), and
Pharchem (1968), SmithKline Beecham (1973), May & Baker (1977), and
Hoechst (1982). This phase was seen as the golden era as many companies
expanded and some of them built modern factories. With the end of the
European Countries-Biafra Civil War in 1970 and the emergence of the oil
boom, this era could not have been better for the companies and the economy
as profits, employment and foreign exchange swelled. However, these
companies were solely owned and operated by foreigners with no European
Countriesn indigenous participation.
Phase III (1980-1982)
The enactment of the Indigenization Policy in 1978 brought about the third
phase in the evolution of drug production in European Countries. The policy
forced most of the multinational companies to sell 60% of their shares to
European Countriesn investors. The period also saw the emergence of
indigenous companies such as Biode, Rajrab and Leady Pharma (1980),
Biomedical Services (1981) and many others. The Federal and the then
Bendel State Governments also set up manufacturing facilities in the country.
Indigenous companies began to combine the formulation of simple dosage
forms with the manufacture of more sophisticated dosage forms. By 1980, the
local production of drugs had increased from less than 5% to 20%.3 This
stage of the evolution was a very positive stage for the country’s
pharmaceutical industry. It engendered prospects for many European
Countriesn investors and improved the chances of expansion with consequent
positive growth impact on the European Countriesn economy.
Phase IV (1983-1986)
Excessive unmanaged dependence on imported finished products resulting

from the oil boom era had a severely damaging effect on the economy. With
the dwindling economy and severe shortages of foreign exchange, goods
became scarce and the scarcity of pharmaceutical products became a new
phenomenon. The government introduced the infamous import license for all
imported goods, including drugs, and with it, the course of the history and
development of the Pharmaceutical Industry was altered. The introduction of
the structural adjustment programme as recommended by the International
Monetary Fund (IMF) further exacerbated the fragile economy.
The European Countriesn government’s implementation of the import license

regime was done mainly on the basis of political patronage. Many people
who had no business with drugs and pharmaceuticals got the licenses and
became importers, while pharmacists, genuine manufacturers and importers
were denied access to foreign exchange or forced to repurchase the import
licenses from those whose plants and offices were located in their briefcases.
With the introduction of this regime, the drug importation and distribution
system in European Countries became chaotic. The country’s markets were
flooded with all sorts of fake/counterfeit and substandard products.
However, two positive results happened during this period. More indigenous
pharmaceutical manufacturers, such as Emzor, Mopson, Barewa,
Geonnasons, Continental, Ashmina, and Afrik came into the scene. In
addition, the proportion of local manufacture grew to 40 percent
Chapter-5-
SCOPE OF PHARMACEUTICAL INDUSTRY
CONTRACT RESEARCH AND MANUFACTURING OUTSOURCING AND

OTHER SERVICES
Increasing costs of R&D, coupled with low productivity and poor bottom lines, have
forced major pharmaceutical companies worldwide to outsource part of their research
and manufacturing activities to low-cost countries, thereby saving costs and time in
the process. The global pharmaceutical outsourcing market was worth USD57.2
billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by
2010. Global market for Contract Research and Manufacturing Services (CRAMS) in
2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market,
contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract
manufacturing was USD38.89 billion accounting for the major share (approximately
68%) of the total global pharmaceutical outsourcing market. India, with more than 80
US FDA-approved manufacturing facilities, is one of the most preferred locations for
outsourcing manufacturing services in India by the multinationals and global
pharmaceutical companies. The Indian pharmaceutical outsourcing market was valued
at USD1.27m in 2007 and is expected to reach USD3.33 billion by 2010, growing at a
CAGR of 37.6%. The Indian CRAMS market stood at USD1.21 billion in 2007, and
is estimated to reach USD3.16 billion by 2010.This report gains significance in view
of the growing prospects of CRAMS and the increasing interest of Indian pharma
companies in exploiting the current opportunities. CRAMS report provides a brief
introduction on CRAMS industry, market overview, India-china emerging players.
CRAMS report updates on industrial applications in Pharma, Biotechnology and data
management industry. It also highlights the growth drivers, issues and challenges in
CRAMS industry. It has profiled 20 companies providing introduction, operational
details excluding financial details of the companies. CRAMS report presents
information about the regulatory issues involved including regulatory systems in India
and the government policies. CRAMS report identifies critical success factors
involved in the manufacturing/production and research. At the end the report presents
future outlook for CRAMS industry.
Drivers for Contract Manufacturing
Manufacturing Strategies
Drug manufacturing represents typically 25-30% of total cost of producing drug and
so achieving the agility in production process has become essential for pharmaceutical
companies, which are expected to align their supply chains with constant shift in
global demand. Pharmaceutical companies are increasingly adopting the “virtual”
model and outsourcing their manufacturing functions to optimize manufacturing cost
and focus more on core activities like research and marketing.
The key objectives and drivers for outsourcing the manufacturing functions are as
follows:
• Improving cost
• Better capacity management with flexibility to handle business needs
• Effectively utilizing internal core expertise and other resources (including
financial) and more opportunity to focus on core competencies
• Quick time-to-market
• Leveraging external expertise (and addressing the challenge of non-
availability of internal resources and capabilities)
• Investing less capital (and leveraging financial resource in other core
activities)
• Leveraging vendor’s innovative, state-of-the-art process and production
technologies to support the rapid technical transfer of products from R&D to
full scale commercial manufacturing.
Contract manufacturing approach is adopted for improving cost, process and
capabilities as Contract Manufacturing Organizations (CMO) can leverage their skills
and competencies to improve process, provide volume discounts on raw material and
deploy units in low cost countries. In case of small companies, the knowledge and
experience of CMO helps to deploy the best practices and leverage experiences in
manufacturing their products.
Also CMO provides a range of services like pre-clinical development, commercial
batch manufacturing, active manufacturing, packaging and other related services.
CMO employs latest manufacturing facilities and techniques and has the capability to
understand and deploy multiple regulatory requirements. CMO brings maturity while
integrating with customer process and system. To provide efficient and integrated
services, CMO integrates with supply chain activities of the pharmaceutical
companies.
Manufacturing Strategies
During the complete development cycle of the drug, the manufacturing’s
requirements come at multiple stages. In addition to manufacturing of drug at the
commercial scale, there is also a need during the pre-clinical supplies as well as
during the clinical trial supplies (but on a smaller scale). So companies adopt the
different manufacturing strategies for manufacturing outsourcing based on the stage
of drug development, as the objective and business needs (such as volume, cost, time)
are different in different stages of drug development. In addition to this, companies
also considers various others factors for outsourcing decision, such as products related
risks, internal competencies & capabilities, cost of operations and others.
Some manufacturing functions are completely outsourced, while some are partly
outsourced. If specific manufacturing function(s) are not outsourced, then for any
additional capacity need, or for any new drug manufacturing need, the company needs
to either expand the existing facilities, or acquire the additional facilities.
The key manufacturing strategies considered by companies are as follows:

• Complete In-house Manufacturing
- Drug is completely manufactured internally. This drug can be for
commercial purpose or a drug manufactured during pre-clinical and clinical
trial stage.
• Complete Contract Manufacturing
- All the manufacturing functions are outsourced to the vendor.
• Part In-house and Part Outsourced (Hybrid Approach)
- A combination of in-house and outsourced manufacturing is used to address
the company’s need.
Most large companies adopt hybrid approach. The approach taken in hybrid
outsourcing is as follows:
• Part of manufacturing steps like early/late stage ingredients, API are
outsourced and later stage steps like final formulation are performed in-house.
• All manufacturing steps are performed internally, expect additional capacity as
it requires outsourced partner.
• For commercial use (large quantity), manufacturing is outsourced and for
clinical trial or pre-clinical trial, products are manufactured in-house (small
quantity).
• API process development and clinical supply manufacturing is performed in-
house and the scale-up to commercial and commercial manufacturing is
outsourced.
Companies as a whole may adopt different strategy for different drugs in their
portfolio, for example Company may outsource the complete manufacturing of old or
generic drug (stable and less risky drug), and may adopt hybrid approach or complete
in-house manufacturing strategy for other drugs.
Contract manufacturing especially sees extensive outsourcing for specialized skills

like biopharmaceutical manufacturing, sterile manufacturing and others. For bio-
manufacturing and API, most outsourcing is done to matured markets like US, Europe
and countries like India and China are used for raw material and intermediates
contract manufacturing.
The global pharmaceutical industry is at the cross roads. With many of the
blockbuster drugs getting off-patented and with increasing R&D costs, it’s hard by the
companies to maintain their bottom-line and remain unaffected. They have found
recourse to outsourcing some of their research and manufacturing activities and
saving cost in the process. This has led to the growth of contract research and
manufacturing services or CRAMS making the companies in India to rejoice.
Business of CRAMS has come as a boon to the mid-cap pharma companies in India,
these companies are merrily embracing CRAMS taking full advantage of the features
enjoyed by India as a country of diverse origin and strong manufacturing base in
pharma for years. India could potentially capture 10% of the global CRAMS market
of almost US$ 168 billion by 2009. Overall the CRAMS segment is expected to have
grown at 40-50 percent in the last few years. This comprehensive report has the
objective of equipping you with the cutting edge analysis across countries and product
segments and keeping you abreast of the latest developments. This report on the
scenario of contract research and manufacturing in India comes at a time when
business is pregnant with greater possibilities, new players are coming up on a regular
basis and overseas companies are taking great interest in outsourcing their clinical
trials or manufacturing of APIs in India.
This report is going to be enlightening and resourceful to all those involved with
CRAMS in India, be it the present players, the players in the offing, the policy makers
or the academicians. Global pharma and biotech companies are taking increasing
interest in India to outsource their activities in bio-pharma, clinical trials, health care
(Telemedicine) and contract manufacturing. Companies in India involved in CRAMS
are mainly involved in clinical trials, research and development and manufacturing.
Over the last decade outsourcing has become an important strategic issue for
pharmaceutical companies due to declining R&D productivity, increased generic
competition, blockbuster drugs going off-patent, rising drug development costs and
fewer new drugs discoveries. Under pressure to protect their margins, innovators are
outsourcing non-core activities like manufacturing of intermediates and APIs to low
cost destinations like India, which is likely to gain momentum over the next Decade.
India currently accounts for a miniscule proportion of the US$ 27 billion global
outsourcing industry and is set to capitalize on the mega opportunity.
Global Outsourcing Scenario
Current market for outsourcing in the Pharmaceutical and Biotechnology Industry is
valued at $100 billion in 2006 growing at around 10.8 percent to reach $168 billion by
2009. API Manufacturing is the largest contributor to outsourcing market with a 55
percent share. Clinical Research with a 35 percent share of the market is the second
largest segment contributing to more than one-fourth of the revenues in this industry
followed closely by Drug discovery and Dosage form Development at 25 percent and
20 percent, respectively.
The more established segments like API manufacture and clinical research have
acquired more than 30 percent share of their potential, which also reflects in their
contribution to the total outsourcing revenue. However, emerging segments like basic
research and developmental activities for drug substance and dosage form are yet to
cross the 20 percent threshold of their total potential.
Contract Research
Some of the known facts in drug discovery are:
• 370 Biotech medicines to treat 200 diseases are in the development pipeline
from 144 companies.
• 178 for cancer, 47 for infectious diseases, 26 for autoimmune diseases, 21 for
HIV/AIDS.
• Of every 5,000 compounds only 5 make it to clinical trials.
• In spite of a sluggish economy R&D spending is on the rise.
• For the first 8 pharma companies there is 6.8 percent increase in the R&D
spending. Approximately $8 billion spent on R&D in 2002.
• Contrary to popular perception FDA approval time has come down from 2.4 to
1.9 years from 1960s to 1999.
All these factors have accounted for Innovator companies trying to reduce cost by
outsourcing components of the Drug Discovery Process.
The global pharma industry has been under pressure to bring out blockbuster drugs to
strengthen its drying pipelines, as well as overcome loss of sales to generics due to
best-selling drugs going off-patent. Managing the drug discovery process and
technologies has become one of the top challenges faced by the global pharma
industry in the recent past; herein lies the opportunity for a spate of companies
focusing on contract research in drug discovery.
Let us consider the threat of generics to blockbuster drugs going off-patent. In the
span of five years from 2001 to 2006, about 40 blockbuster drugs with combined
annual sales of $45 billion will go off-patent in the U.S. These include E. Merck’s
Zocor (off-patent in 2005; for hyperlipidemia; annual sales of $2.8 billion), Takeda-
Abbot’s Prevacid (off-patent in 2005; for peptic ulcers; annual sales of $3.1 billion),
Bayer’s Cipro (off-patent in 2003; for infections; annual sales of $1.3 billion), and
AstraZeneca’s Losec with sales of $4.6 billion (off-patent in 2001). Consider the
R&D cost of drugs; according to a recent study by the Tufts Center for the Study of
Drug Development, it takes $895 million and 10 to 15 years to get a drug to market.
The pharma industry desperately needs strategies to bring down the cost of drug
discovery and outsourcing has become one of the most favored strategies being
adopted globally. The most important benefit of outsourcing is that global majors can
outsource processes related to biology, chemistry, screening, and lead optimization, to
name a few. Many of the processes involved in drug discovery are time-consuming,
laborious, and non-strategic in nature and can be outsourced to save on costs.
While it provides the global majors the much needed cost-benefit, it is a huge
opportunity for smaller companies that do not have a well developed drug discovery
program to get a toehold, making it a win-win strategy. With biotech companies
joining the drug discovery race, the outsourcing of research to keep costs low, as well
as gain other strategic advantages has become a high point in the last five years and is
expected to gain momentum in the next decade. Contract work in basic research has
evolved from low-end research activities to more value-added high-end research. The
numbers of alliances formed for basic research collaboration are growing steadily;
however, most of them are concentrated in the pharma and biotech hubs of U.S. and
Western Europe. Alliance activity in Asia, Eastern Europe, and Latin America is
growing; however, growth lags the U.S. and Western Europe. Growth of outsourcing
continues to be fueled by the need for drug developers to contain costs and speed
products to market, increasing globalization of pharmaceutical and biotech firms, and
technological demands from drug developers. Reputation for research quality and
thoroughness, speed to project completion, and strong client relationships are the key
to success in research partnering. Domain expertise as an entry barrier is restraining
contract research partnering opportunities. Availability of top of the line infrastructure
and manpower is a defining factor for success in drug discovery contract research.
Understanding and respecting sanctity of patents is critical for growth. Outsourcing in
basic drug discovery occurs mainly in the following 10 segments:
O Broad-based screening
O Oncology
O Infectious diseases
O Genomic Targets
O Chemistry
O Central Nervous System disorders
O Cardiovascular System disorders
O Gene Therapy
O Autoimmune/Inflammation
O Metabolic diseases
In the period from 1997 to 2004, these 10 segments accounted for cumulative alliance
payouts of
$8.02 billion. Genomics, Broad-based screening, oncology, and are the three
segments exhibiting higher payouts than the remaining segments. In all the segments,
big pharma is the largest outsourcer, accounting for more than 50 percent of the
payouts on an average. In the cardiovascular disease segment, big pharma dominated
completely with 92.3 percent share. For the period 1997 to 2004, the
autoimmune/inflammation and CNS segments, mid-size pharma was prominent with a
share of 37.4 percent and 24.1 percent, respectively. In the oncology and metabolic
segments, big biotech is prominent with a share of 21.1 percent and 29.1 percent,
respectively. Outsourcing by biotech companies has been minimal in the
autoimmune/inflammation segment for the period 1997 to 2004.
The Global Contract Research Market was worth $18.7 billion with a YOY growth
rate of 14.7 percent. This represents a significant 23 percent of the total Global R&D
expenditure currently being outsourced. The market is expected to grow to $47 billion
at a faster pace in the period 2006 to 2011 (at a CAGR of 16.6 percent) when
compared to the projected global R&D spend. India'
s drug discovery outsourcing
market amounted to just $470 million in 2005. But its expected to grow 30 percent a
year, hitting $800 million by end 2007.
Clinical Research
Clinical Research is the second largest segment, which is being outsourced with
nearly a 35 percent share of the outsourcing activity. The global CRO market was
worth $15.2 billion in 2005 with a YOY growth rate of 23 percent. The market
includes services provided to the pharmaceutical and biotechnology companies in the
clinical development process for innovative molecules (NCEs) as well as generics.
Specifically these services would be clinical, bio analytical, bio statistical, data
management services, biomarkers, regulatory submissions, medical writing, and site
management services for the four phases of clinical development of a NCE and the
bio-analytical / bio-equivalence services for generics.
Phase IIb-III is the single largest segment in the global CRO market accounting for 40
percent of the total market revenue. The segment is also the most established
component of clinical development that has seen earliest outsourcing efforts from
companies primarily to:
O Tap expertise in patient recruitment and monitoring.
O Leverage cost and skill advantages offered by Site Management Organizations
(SMOs) for Multi-site trial management
O Leverage cost and skill advantages in bio analyses
However, the segment exhibiting highest YOY growth is that of biomarkers. The
clinical leverage provided by biomarkers in predicting probable end points and
challenges drives this segment to be a significant contributor in the next decade and is
expected to revolutionize the way early clinical development will be conducted.
Phase I and IV are expected to maintain the pace of growth with the current focus on
ADR monitoring and more rigorous evaluation in early clinical development.
The Bioavailability/ Bioequivalence (BA/BE) outsourced market was worth $1.56

billion with a in 2005 with a YOY growth of 16.8 percent. A robust pipeline of patent
expiries in the forecast period, potential growth in authorized generic efforts and
technology enhanced generics are expected to drive the growth in this market. Most of
the outsourcing in this segment is currently on a project basis and has not evolved
towards a preferred partnership model.
India, with second largest population in the world, and with every sixth patient in the
world being an Indian, is going through an upheaval economically, socially and
scientifically. Increasing globalization has brought about fundamental changes in the
way clinical trials are conducted here. Increased awareness of Good Clinical Practices
(GCP) requirements, stronger desire of international acceptability of research done in
India has brought favourable changes in the attitude of clinicians in India towards
participation in clinical trials. Investigators are eager to take part in GCP clinical trials
and are also willing to adhere to constraints of the protocol. As per Frost & Sullivan
analysis Current outsourced clinical trial activity in India is at around $118 million
and is estimated to go up to $379 million by 2013. Just 800 people are full time
employees, while an additional 1,500 people work as site staff. The total number of
patients undergoing clinical trials is close to 10,000. The clinical trials legislative
requirements are guided by specifications of schedule Y of the Drugs and Cosmetics
Act in India. Recently, the Ministry of Health, along with DCGI and Indian Council
for Medical Research (ICMR) came out with draft guidelines for research in human
subjects. These are essentially based on the Declaration of Helsinki, WHO guidelines
and ICH requirements for GCP. The Department of Science and Technology has
taken the initiative for establishing quality requirements by setting up the National
Board for Accreditation of Testing and Calibration Laboratories for clinical and
diagnostic laboratories.
India has more than 50 Contract / Clinical Research Organizations (CROs) with many
Pharmaceutical companies having their own CROs, conducting trials in close to 80
government and private hospitals. MNCs like Aventis, Pfizer and Novartis are already
outsourcing their global clinical trials to India. Indian companies such as Doctor
Reddy’s Labs and Biocon have made significant investments in R&D infrastructure
and have partnered with MNCs for contract research and licensing of the R&D
pipeline.
CONTRACT MANUFACTURING
Large pharmaceutical companies increasingly turn to contract manufacturing
organizations (CMOs) solely to achieve efficiencies in cost, capacity and time-to-
market, or to obtain a specific expertise not available in-house. Today, these factors
still play a role, but now the most dynamic driver behind the use of CMOs in the
pharmaceutical industry rapidly is becoming the unique, innovative, and state-of-the-
art process and production technology they offer. More and more pharma companies
are leaning towards outsourcing to concentrate on marketing their products, without
spending time in drug discovery and the process of manufacturing. This applies to
those virtual companies that exist by the simple fact they can rely on contract
manufacturers and researchers.
As per Frost & Sullivan research the worldwide revenue for contract manufacturing
and research for the pharmaceutical industry was estimated at $100 billion in 2004
and is expected to increase at a CAGR of 10.8 percent to $168 billion in 2009.
Contract manufacturing of prescription drugs for 2004 was estimated at $26.2 billion,
and is expected to rise to $43.9 billion by end of 2009. Contract manufacturing of
OTC and nutritional products is the largest and fastest growing segment, expected to
rise at a CAGR of 11.3 percent to $102 billion by 2009. The contract research market
is expected to reach $21.9 billion by 2009, rising at a CAGR of 8.6 percent from
$14.5 billion in 2004.
The global pharmaceutical contract manufacturing market for finished dosage
formulation has been traditionally strong in North America and Europe. North
America accounted for 50.5 percent of the global pharmaceutical contract
manufacturing market followed by Europe and Asia. Due to the outsourcing boom in
Asia, contract manufacturing has been witnessing significant growth in finished
dosage formulations, active pharmaceutical ingredients (API’s) and intermediates.
The global pharmaceutical contract manufacturing market is segmented into
injectables, solid and liquid dosage forms spanning across North America, Europe,
and Asia. Injectables are expected to show the highest growth during the next five
years. Solid dosage forms represented 47.0 percent of the global market in 2004.
Liquid dosage forms are projected to grow the slowest during the next five years.
The demand for specialized technologies and services such as sterile products,
biopharmaceuticals, and lyophilization is likely to drive the market to a significant
extent.
Within the contract manufacturing segment, that for the cardiovascular drugs is the
largest among all other application categories with worldwide revenue of about $2.56
billion in 2004, it is rising at a CAGR of 8.7 percent through the next five years.
Analgesics seem to be rising at the highest pace in the contract manufacturing
business with the expected annual average growth rate of 11.9 percent over the period
from 2005 – 2010. Many CMOs have gone far above and beyond the immediate
needs of their customers to create innovative home grown processes and to implement
the latest, technologically advanced equipment-technology that frequently surpasses
that available at Big Pharma'
s own facilities. The total cost of pharmaceutical
production includes not only the cost of building new plants. It includes the cost to
maintain them, stay up-to-date on equipment advances, and to maintain a workforce
of highly-skilled operators with more than just the knowledge to run them, but with
the expertise and experience necessary to continually update and improve them.
The CRAMS advantage to India
The advantages offered by India to support the growth of the CRAMs model are
briefly summarized below:
1. Cost Advantage
• India has always been looked forward (to) for its cost advantage for
outsourcing opportunities. Along with the cost benefits, India offers much
more that makes it an attractive destination for outsourcing.
• Clinical Trials in India can cost less than 50 percent of those conducted in
western countries.
• Capital efficiency: Indian companies are able to reduce the upfront capital
cost of setting up a project by 25-50 percent due to access to locally
fabricated equipment and high quality local technology/engineering skills.
This benefit can be passed on to customers.
• Labor cost in India is typically in the range of 10-15 percent of similar costs
in the US.
2. Efficiency and Infrastructure
• India has 3-4 million English speaking scientists, the second largest
concentration in the world following the US.
O A huge patient population, genetically distinct groups, specialty hospitals with
state-of the-art facilities, nearly 700,000 hospital beds and 221 medical colleges, and
skilled, English speaking investigators are some of the advantages.
• Indian manufacturers are skilled in rapid reverse engineering, complex
molecule synthesis and process development. Central laboratories that are
certified by international organizations are available. They cannot only
service studies conducted in India, but also, in due course of time act as
central laboratory for all countries in Asia where global clinical trials are
conducted.
• India has more than 75 FDA approved plants and 200 manufacturing facilities
certified as having good manufacturing practices.
• The manufacturing plants have state-of-the-art technologies with cost
competitiveness ensured during plant development, maintenance and
operation including labor, raw materials sourcing and equipment costs.
3. Regulatory
• Compliance with International regulatory standards: India today has a rich
resource pool of GCP compliant ethics committees and GCP compliant
investigators; moreover the effort towards greater harmonization is ongoing.
Nearly 100 ICH GCP compliant clinical trials have already been conducted in
India.
• The introduction of the new patent regime in India from January 2005 has
boosted the confidence of multinational companies looking to outsource the
manufacturing of branded drugs with the protection of intellectual property
rights (IPRs).
• Amendment to Schedule Y to allow parallel phase clinical trails to be
conducted in India and also the reduction in custom duties for clinical trial
samples being imported will boost clinical research outsourcing to India.
• The Indian Biotechnology Policy announced in 2005 will furnish easier
procedures for regulatory clearance (Single window clearance) as well as
exemptions from Import duties and service taxes encouraging foreign
investment in India.
Indian companies have shifted focus on R&D in the pharmaceutical sector in the
recent times. Many companies now spend 8 percent or more of revenues on research.
Many pharma companies are concentrating on international companies for contract
research and manufacturing (CRAM) deals. Medicinal chemistry, custom synthesis,
and clinical studies are some areas in which Indian firms are attracting new business.
Ranbaxy has two ongoing collaborative research programs. An anti-malarial
molecule, Rbx 11160, is being developed in collaboration with the Medicines for
Malaria Venture (MMV), Geneva and a collaborative research program with
GlaxoSmithKline plc (GSK). Nicholas Piramal India Ltd. (NPIL) runs a clinical
research unit and does contract synthesis as well. This involves lead optimization of
compounds prepared in very minute amounts. Other large companies like Zydus
Cadila and Dr Reddy'
s all have either active programs or intentions of entering the
area of CRAMs. CRAMs are an important area for some medium-sized pharma
companies. For example, Shasun Chemicals and Drugs positions itself as an
"integrated research and manufacturing solutions provider". Divi'
s Laboratories, a
similar sized pharmaceutical company, has been associated with innovative
multinational companies for contract research and custom synthesis.
Besides these pharma companies there are also specialized contract research
organizations (CROs) in the pharma sector, which do just outsourced research. Some
are international CROs, like Quintiles, which came to India in 1997. It has facilities in
Mumbai, Ahmedabad and Bangalore, with close to 900 people.
Biotech companies also show a lot of prominence in terms of opportunities available
to them. Most biotech companies are built on a contract or collaborative research
model. Syngene, which is a subsidiary of Biocon, carries out contract research for
drug discovery. Syngene has a threeyear agreement to carry out research projects to
support new drug discovery and development, primarily in the early stages and
involving small molecules in the areas of oncology and cardiovascular disease with
Novartis. Avesthagen has established itself as an RPO - a research process
outsourcing company. It works on a collaborative model with partners in development
and shares the Intellectual Property rights. Avesthagen is into agricultural research
and medical research of plants and spanning across genomics, proteomics,
sequencing, and metabolics. Reliance Life Sciences does contract clinical research
and chemistry and biology research.
Conclusion
India has strong chemistry and regulatory skills, which have helped it emerge as a top
destination for Research and Development. India’s cost of manufacturing is 30-40
percent lower as compared to western countries and its labor cost is 1/7th of that of
the USA. India has the highest number of US FDA approved plants outside the USA
and has 6 times the number of trained chemists as the US, available at 1/10th of cost.
Already MNCs like AstraZeneca, Merck, GSK, Solvay, Eli Lilly and others have
started sourcing products from India. MNCs are likely to scale up operations
gradually as they get more experienced with Indian partners. Although India scores
over China on most fronts, the Chinese companies pose a significant threat to India.
Over the years, Chinese companies have been aggressive in filing DMFs. Chinese
companies have filed over 60 DMFs in 2005 as compared to 40 in 2004. Over the
next 2-3 years, Chinese companies are likely to move up the value chain by venturing
into high-end intermediates and formulations. Leveraging on its low cost advantage
and strong Government, backing China poses a significant threat of making major
inroads into the US market as well as commanding a better share of the CRAMS
industry. Other Asian countries like Taiwan and Korea could also pose a threat to
Indian companies. India is likely to account for 3-4 percent of the global contract
outsourcing industry. From the above estimates, it is evident that the Indian CRAMS
story has just scaled the ‘tip of the iceberg’ and ‘sky is the limit’ for the companies
that have ventured into this space.
Research and Development
Recent concerns about escalating drug prices and rising health care spending have
sparked considerable interest in how new drugs are discovered, tested, and sold—and
in how well those processes serve the interestsof U.S. consumers. Public dialogue on
those issues, how-ever, suggests that the complex economic forces that gov-ern the
drug-discovery process are not widely understood.Even some of the basic economic
facts about the pharma-ceutical industry have been subject to debate. This
studydescribes the current state of pharmaceutical research anddevelopment (R&D),
analyzes the forces that influence it, and considers how well markets are working to
deliver new drugs.
Much of the public interest in pharmaceutical R&D concerns the relationship between
drug prices, drug firms’ costs, and the pace and direction of innovation. Average
prices of new drug products have been rising much faster than the rate of inflation,
and annual R&D spending has grown faster still. Nevertheless, introductions of
innovative new drugs have slowed. At the same time, drug companies have been able
to charge high retail prices for new drugs that are only incrementally different from
older drugs whose prices have fallen. With consumers paying more for new drugs in
the United States than almost any where else in the world, and with the perception
that the drug industry has become less innovative, many observershave wondered
whether some kind of policy interventionis warranted.
Pharmaceutical markets, however, are extremely complex in many respects. Large
public-sector investments in basic biomedical R&D influence private companies’
choices about what to work on and how intensively to invest in research and
development. The returns on private-sector R&D are attractive, on average, but they
vary considerably from one drug to the next. Consumer demand for prescription drugs
is often indirect, mediated by doctors and health insurers. New drugs must undergo
costly and time-consuming testing before they can be sold. Moreover, it may cost
hundreds of millions of dollars to develop an innovative new drug that then will cost
only a few cents per dose to manufacture and the price of the drug will have no
obvious connection to either cost. Comparative information about drug quality from
unbiased, head-to-head clinical trials of competing drugs is seldom published,
although it would help drug purchasers make the best choices—and in turn improve
the market signals that guide private companies’ decisions about research and
development. An understanding of how such factors interact with the industry’s R&D
process is necessary to recognize the underlying causes of anyfailure of the market to
encourage a socially optimal levelof drug R&D.
This study presents basic facts about the pharmaceutical industry’s spending on
research and development and about the types and numbers of new drugs that result
from it. The study also analyzes several major issues related to pharmaceutical R&D:
• What explains the cost of developing new drugs?
• Does federal investment in R&D stimulate or displace private investment?
• Has the drug industry’s innovative performance declined?
• How profitable are drug firms, and how do profits affect the amount and type
of R&D that companies conduct
The Role of Federal Research and Development

The federal government spent more than $25 billion on health-related R&D in 2005.
Only some of that spend ing is explicitly related to the development of new pha
maceuticals. However, much of it is devoted to basic research on the mechanisms of
disease, which underpins the pharmaceutical industry’s search for new drugs.
The primary rationale for the government to play a role in basic research is that
private companies perform too little such research themselves (relative to what is best
for society). In general, the information generated by basic research can be readily
replicated at low cost. Thus, many of the benefits of that research accrue not to the
company that performs it but to the public and to other firms. With pharmaceuticals,
those spillover benefits can be significant because the development of new drugs
depends on scientific advances. Federal funding of basic research directly stimulates
the drug industry’s spending on applied research and development by making
scientific discoveries that expand the industry’s opportunities for R&D.
Government-funded basic research can also stimulate private-sector R&D indirectly.
By supporting graduate students and postdoctoral researchers in academic labs
where basic research is conducted, federal grants help totrain many of the researchers
who are hired by drug companies. That training enhances the productivity and
profitability of the companies’ R&D investments, while also allowing researchers to
command higher salaries.
Given the extent of federal funding for life-sciences research, however, there is a risk
that some of that funding could crowd out private-sector investment in R&D.
In general, the government tends to focus on basic research, whereas private firms
focus much more on applied research and development. That difference diminishes
the risk of direct crowding out. But the distinction between basic and applied research
is not well defined, and the division of labor between the two has become less
pronounced as the potential commercial value of basic life-sciences research has
become more widely recognized. Government and private R&D efforts have
sometimes overlapped (as in the race to finish ma ping the human genome); thus, the
government may have funded some research that the private sector otherwise would
have financed. Identifying specific cases where direct crowding out has occurred is
difficult, but it is probably most likely to happen when the government funds research
whose potential commercial applications are obvious and valuable. Federal R&D
spending can also crowd out private spending indirectly by causing labor costs to rise.
Although students and postdoctoral researchers form part of the workforce for
federally funded research, the government and the drug industry both draw on the
same supply of trained professional researchers. That supply is relatively fixed in the
short run, and higher R&D spending in either sector can cause salaries to rise by
increasing the demand for researchers. That is more likely to occur when R&D
spending is growing rapidly. In recent years, both real (inflation-adjusted) salaries for
biomedical researchers and total employment in biomedical research have increased
along with real R&D spending. When R&D spending is growing more slowly,
however, there is probably little such effect on labor costs for professional
researchers. Assessing the Drug Industry’s R&D Performance Total spending on
health-related research and development by the drug industry and the federal
government has tripled since 1990 in real terms. However, the number of innovative
new drugs approved by the Food and Drug Administration each year has not shown a
comparable upward trend. NME approvals shot up for a few years in the mid-1990s
and then fell again; on the whole, such approvals have consistently ranged between
about 20 and 30 per year. Measured by the number of drugs approved per dollar of
R&D, the innovative performance of the drug industry appears to have declined.
However, if new drugs were of higher quality than older drugs, on average, that
improvement would partly or fully make up for a decline in the raw number of drugs
per R&D dollar. Drug quality is multidimensional and difficult to measure, however.
As a result, no careful and comprehensive estimate exists to show how changes
in quality have affected the industry’s actual R&D performance.
Other factors have contributed to the impression that the pharmaceutical industry’s
innovative performance has declined. Over the past decade, a growing share of the
industry’s R&D output has consisted of incremental improvements to existing drugs
rather than new molecular entities. Performance measures that consider only
entirely new drugs such as the number of NME approvals per year miss that shift and
undervalue the industry’s R&D output. Moreover, comparing output per R&D dollar
over long spans of time can be misleading because of shifts in the types of drugs
being developed. Notwithstanding concerns about innovative performance and how to
measure it, the range of illnesses for which drug therapies exist has never been
broader, and technological advances have yielded new drug treatments of
increasing sophistication, convenience, and effectiveness. Even so, it is difficult to
determine whether the returns to society from the money spent on drug R&D have
declined or not. There are several possible reasons why the industry’s R&D
performance could have slipped. Companies may not yet have fully mastered the
complex new research technologies with which they work; the pool of relatively
inexpensive research discoveries may be temporarily depleted, pending further
advances in basic science; and strong consumer demand for new drugs may have
encouraged firms to invest in R&D beyond the point of diminishing returns.
Furthermore, the frequency with which leading drug companies have merged with
one another over the past decade which may have resulted partly from a decline in the
number of new drugs in development—has sparked concerns about the indus-
try’s R&D productivity. According to some observers, large firms tend to be less
innovative than smaller firms. Those mergers have had little initial effect on the
combined firms’ total R&D spending, although the ultimate impact on the
introduction of innovative new drugs remains uncertain.
If the industry’s R&D performance has slipped, recent advances in basic sciences
(such as molecular and cellular biology and biochemistry) could eventually reverse
that trend by stimulating the development of more new drugs.
In addition, new-drug approvals could increase simply because of the rising number
of potential new products that have entered the development pipeline in recent years,
according to drug companies. The greater commercialization of basic R&D and the
increased specialization that has occurred in the drug industry may also enhance
productivity. At the same time, though, the greater role of the private sector in basic
R&D may have made the pace and direction of progress in drug development more
dependent on financial factors in the industry
The Drug Industry’s Profits and R&D Investment By standard accounting measures,
the pharmaceutical industry consistently ranks as one of the most profitable industries
in the United States. Those measures, however, treat most R&D outlays as
expenditures rather than as investments that add to the value of a firm. Thus, they
omit from a firm’s asset base the value of its accumulated stock of knowledge. For
R&D-intensive industries, such as pharmaceuticals, that omission can significantly
overstate profitability. Adjusted for the value of its R&D assets, the drug industry’s
actual profitability still appears to be somewhat higher than the average for all U.S.
industries, but not two to three times higher, as standard measures of profitability
indicate.
The notion that pharmaceutical companies enjoy extra ordinary profits is reinforced
by the relationship between prices and costs in the drug industry. The industry’s high
R&D spending and relatively low manufacturing costs create a cost structure similar
to that of, for example, the software industry. Both industries have high fixed costs
(for research and development) and low variable costs (to put a software application
onto a CD-ROM or to produce a bottle of prescription medication). Consequently,
prices in those industries are usually much higher than the cost of providing an
additional unit of the product, because revenue from sales of the product must ulti-
mately cover those fixed costs.2 Even though conventional accounting measures
overstate the profitability of the drug industry, strong growth in the industry’s R&D
spending over many years suggests that the returns on pharmaceutical R&D have
been attractive.
Ultimately, how adequately prices and profits indicate the kinds of drugs that
consumers want to buy determines the extent to which the pace and direction of drug
innovation are themselves adequate. High prices on new drugs encourage continued
innovation. But because health insurance (private plans as well as Medicaid and
Medicare) keeps consumers from bearing the full weight of those prices, the demand
for new drugs is higher than it otherwise would be at any given price. That effect is
magnified because employment-based health insurance benefits are not subject to
income or payroll taxes, which reduces their cost to consumers. As a result, more
people have health insurance, and many have higher levels of coverage, than would
be the case otherwise.
The effect of health insurance on drug companies’ revenues combined with strong
patent protection that helps firms maintain higher prices—may sometimes create
incentives to invest too much in R&D (from the stand point of the amount of
investment that is optimal for society). The role of health insurance can be tempered
in several ways, however. Insurers and other large buyers of drugs may be able to
exercise more power to negotiate lower prices, and insurers can give patients and
doctors stronger incentives to consider price differences between drugs. The more
accurately a drug’s price reflects its value to consumers, the more effective the market
system will be at directing R&D investment toward socially valuable new drugs.
However, prices can only serve that directing role to the extent that good information
exists about the comparative qualities of different drugs and that consumers and
health care providers use that information.
Chapter-6-
Major Mergers, Acquisition and Other Alliances in the last
two years
A merger, acquisition, or Alliances deal between pharmaceutical companies may

occur as a result of complementary capabilities between them. A small biotechnology
company might have a new drug but no sales or marketing capability. Conversely, a
large pharmaceutical company might have unused capacity in a large sales force due
to a gap in the company pipeline of new products. It may be in both companies'
interest to enter into a deal to capitalize on the synergy between the companies.
Merger, the combining of two or more companies into a single corporation. In

business, a merger is achieved when a company purchases the property of other firms,
thus absorbing them into one corporate structure that retains its original identity. This
differs from a consolidation, in which several concerns are dissolved in order to form
a completely new company. In a merger the purchaser may make an outright payment
in cash or in company stock, or may decide on some other arrangement such as the
exchange of bonds. The purchaser then acquires the assets and liabilities of the other
firms.
Mergers are often accomplished to revive failing businesses, to reduce competition, or

to diversify production. In the U.S., however, fairly stringent antitrust laws are
enforced to be sure that mergers do not result in monopolies.
IMPACT OF MERGERS AND ACQUISITIONS ON INDIAN

PHARMACEUTICAL INDUSTRY
The healthcare sector in India has experienced a paradigm a shift due emerging trends
in globalization, developing markets, industry dynamics and increasing regulatory and
competitive pressures.
Companies across the world are reaching out to their counterparts to take mutual
advantage of the other’s core competencies in R&D, Manufacturing, Marketing and
the niche opportunities offered by the changing global pharmaceutical environment.
The pharmaceutical sector offers an array of growth opportunities. This sector has
always been dynamic in nature and the pace of change has never been as rapid as it is
now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology
companies have evolved distinctive business models to take advantage of their
inherent strengths and the "Borderless" nature of this sector. These differentiated
business models provide the pharmaceutical and biotechnology companies’ the
necessary competitive edge for consolidation and growth.
DRIVERS IN MERGERS AND ACQUISITIONS
Today, there is a global trend towards consolidation and going forward, as pressures
on the pharmaceutical industry increase, this trend will continue. The driving factors
for mergers and acquisitions in the global pharmaceutical industry are:-
• The lack of research and development (R&D) productivity
• expiring patents
• generic competition
• high profile product recalls
This sector is unique in the sense that it traverses across geographies, as health has no
boundaries, and this very boundary-less nature supports consolidation in this Industry.
With the easy availability of capital and increased global interest in the
pharmaceutical and biotech industry, the sector has become quite a `mergersand-
acquisitions'favourite.
Apart from the patented pharmaceutical and biotech companies scouting for newer
geographies to launch their patented molecules, the global generics market also has
undergone an unprecedented consolidation wave in the past three years. In 2007, Teva
acquired US generics major IVAX for $7.4 bn, to become the world’s largest generics
company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz is the
generics arm of the Swiss pharmaceutical group. Novartis, has been buying small
generics companies to grow in size. Sandoz bought Hexal and Eon Laboratories in
Germany, as well as Croatia’s Lek, Canada’s Sabex and Denmark’s Durascan in 2004
and 2005. Deflation in the generic industry would lead to displacement of weaker
players leading to consolidation. The trend has gathered momentum with the $1.9bn
buyout of Andrx by Watson to create the 3rd largest specialty pharma company.
There are three levels of integration that are currently being sought in the generics
industry
• Back-end manufacturing capability (API/formulation)
• Product integration (ANDA pipeline)
• Front-end (marketing and distribution) in the developed world
The US and European generics companies are scouting for alliances/buyouts at the
back end of the chain, which would allow them to offset any manufacturing cost
advantage held by companies in the developing markets. The Indian companies are
looking at the front-end integration as building a front-end distribution set-up from
scratch could take significant time. The product side integration is common to both
sides, with weaker US/European generics companies looking at anyone that could
offer a basket of products. This is because the US/European pipeline is weak while
Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly,
and are looking for geographic expansion.
MERGERS AND ACQUISITIONS TREND IN INDIA

Mergers and Acquisitions (M&A) interest in India is currently very high in the
pharmaceutical industry. Size and end-to-end connectivity are major detriments in the
global markets. To achieve them, Western MNC’s have to look to Indian companies.
India’s changing therapeutic requirements and patent laws will provide new
opportunities for big pharmaceutical for launching their patented molecules. While,
India’s strong manufacturing base will stand global generic companies in good stead
as a low-cost development and manufacturing destination.
Besides consolidation in the domestic industry and investments by the US and
European firms, the spate of mergers and acquisitions by Indian companies has
ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning
curve through partnerships and alliances with international pharmaceutical firms,
Indian pharmaceutical companies have now moved up a step in the value chain and
are looking at inorganic route to growth through acquisitions. Many top and mid tier
Indian companies have gone on a global "shopping spree" to build up critical mass in
International markets. Also, given the easy access to global finance the Indian
companies are finding it easier to fund their acquisitions.
Internationally, Indian pharma companies are on a prowl. And this can be seen by the
fact that in 2007, the Indian pharma industry witnessed 25 mergers and acquisitions
(M&As), with 15 cross border transactions. According to data compiled by
international consultancy Grant Thornton, India Inc recorded M&A deals worth $940
million in November 2007, taking the total for first 11 months of 2007 to $50.79
billion. M&As were an important trend of 2007 for India Inc, with the total deal value
crossing $50 billion mark.
The need to consolidate
Consolidation is restricted not only to India but global pharma market has also been
witnessing the same. India, particularly in the past few years, has seen a lot of activity
in this arena. Indian companies have stepped up their acquisition activity in different
parts of the world. "In terms of business, national boundaries have become permeable
and going forward you will see Indian firms getting more aggressive in this arena,"
feels Dr D B Gupta, Chairman, Lupin. The increase in worldwide M&A activity in
the pharma sector can be attributed to the drying New Chemical Entities (NCE)
pipeline which is putting pressure on the innovator companies. Secondly, as over $65
billion worth medicines are expected to go off patent during next five to seven years,
the generic opportunity seems to be looking better for Indian companies.
To take advantage of this, companies across the world are reaching out to their
counterparts to take mutual advantage of the other'
s core competencies in R&D,
manufacturing, marketing and the niche opportunities offered by the changing global
pharmaceutical environment.
Over the past few years, several Indian companies have targeted the developed
markets in their pursuit of growth, especially via the inorganic route. Companies such
as Ranbaxy, Dr Reddy'
s Laboratories, Wockhardt, Cadila, Matrix, Torrent Pharma
and Jubilant have made one or more European acquisitions.
Besides gaining a faster entry into the target market, one of the basic strategies behind
the acquisitions remains that of leveraging India'
s low cost advantage by shifting the
manufacturing base to India. At the same time, the acquired companies also serve as
an effective front end for Indian companies in these markets.
Trends pre and post 2005
The M&A strategy for Indian pharma companies has not changed with change in the
patent regime. Comparing the situation pre-2005, immediately after 2005 and today,
there has been a strategic rationale driving acquisitions and alliances made by Indian
pharma companies worldwide. A particular trend has been observed in the deals. Most
outbound deals done by Indian companies can be categorised in two major themes—
CRAMs oriented or geographical market entry. And this may remain the same over a
period of time, feels Navroz Mahudawala, Associate Director, Healthsciences
Practice, Ernst & Young. He remarks, "Most large Indian companies have seen their
valuations drop in the last few months. Also, few Indian pharma companies have
Foreign Currency Convertible Bond (FCCB) overhang; which makes it difficult for
them to attempt any aggressive move for outbound M&A at this point in time. Indian
companies would continue to pursue strategic entry opportunities in order to enter or
consolidate presence in Europe or Latin America. Australia and South Africa are
other geographies of interest."
As Indian companies continue cross boundaries for various strategic tie ups, lack of
research and development (R&D) productivity, expiring patents, generic competition
and high profile product recalls will drive the M&A growth.
Moreover, as the US and European generics companies look for alliances/buyouts at

the back end of the chain, this will enable Indian companies to gain an entry in these
markets. Secondly, today there is a global trend towards consolidation and going
forward, as pressures on the pharma industry increase, this trend will continue.
Historically, many of the generic players have only been regional contenders. A prime
attribute of several major deals in the generic sector is that they extend the acquirer'
s
international coverage. Many top and mid tier Indian companies have gone on a
global '
shopping spree'to build up critical mass in international markets. The business
model and size of the company determines the acquisition rationale. Indian companies
are either looking for brand acquisitions, marketing of brands or acquiring assets.
They are doing so to ensure and build critical mass in terms of marketing,
manufacturing and research infrastructure, to establish front end presence,
diversification into new areas--tap other geographies/therapeutic.
Segments/customers/business models (e.g services), enhance product, technology and
intellectual property portfolio and catapult market share.
Big ticket acquisitions to smaller ones
The major pharma M&As in 2007 were Wockhardt'

s acquisition of the French
company Negma Laboratories for $265 million (Rs 1,045 crore) and the US-based
Morton Grove Pharma'
s for $38 million (Rs 150 crore), Jubilant Organosys'
acquisition of Hollister-Stier Laboratories of the US for $122.5 million (about Rs 500
crore), Alembic'
s buyout of the entire domestic non-oncology formulation business of
Dabur Pharma for Rs 159 crore.
Looking at these deals overall, Indian majors were not so active on the M&A front in
2008, as compared to smaller and mid-sized firms, although these deals were
comparatively small. For example in July, Elder Pharma acquired 20 percent stake in
Neutra Health of UK for $11.55 million and 51 percent stake in Biomeda Group of
Bulgaria in an all-cash deal worth Euro 5 million, Plethico Pharma acquired US-based
Natrol for about $81 million, Strides Arcolab'
s acquired Italian firm Diaspa'
s
fermentation assets.
The Indian pharma segment has shown great maturity in inking deals at an
international level. Instead of aiming for high-maintenance targets, they have
restricted their focus to small, manageable deals with a focused market strategy. For
instance, Piramal Healthcare does not stick to the conventional approach followed by
its counterparts. Instead, it focuses exclusively on development in the custom
manufacturing segment for overseas buyers. Besides, it has also targeted the German
supply chain of blood plasma products. Then there are companies like Glenmark that
have built their presence in particular countries like Poland. In recent months,
Glenmark has acquired seven Polish brands. The largest products in the new portfolio
are Cital (citalopram), the leading anti-depressant brand in Poland, and Lamotrix
(lamotrigine), treatment for the management of epilepsy.
Another important development observed is that Indian firms are acquiring many
foreign pharma firms or brands outside India since the latter half of the 90'
s.
According to estimates there are 31 such cases noticed between 1997 and March
2005, which shows how competitive the Indian firms are. The main reason for this
increasing number of foreign acquisitions is part of the market expansion strategies of
the Indian companies. For example, Ranbaxy, acquired Ohm Laboratories in the US
and Rima Laboratories in the Ireland in 1996. With these acquisitions, Ranbaxy aimed
at strengthening its overseas infrastructure, as it expanded globally and also to
facilitate a quick entry into overseas market, by enabling the company to cope with
the much more stringent regulatory framework. This also gave Ranbaxy the capacity
and manufacturing facility needed to compete in the overseas markets. Ranbaxy'
s deal
with Ohm helped them to get rid of the '
made-in-India'image for their very discerning
US customer. And the acquisition of Rima Laboratories helped them to have access to
the product licenses for the UK market and cut short registration services.
Another case in point is Lupin'

s recent acquisition of Hormosan in Germany and a
substantial stake in Generic Health, one of the leading generic pharma companies of
Australia. Last year they had successfully acquired Kyowa in Japan and thus
positioned themselves amongst the top ten generic companies in that market and
similarly the company'
s acquisition of Rubamin, renamed Novodigm in India has
helped them establish its presence in the CRAMS arena. The pursuit, therefore, is to
move up the value chain either in terms of geography, business or products.
On the flip side
Big Pharma is at a stage where it needs to re-invent itself. The current situation
prevailing in Big Pharma is unsustainble, as these companies are spending
increasingly more on R&D, while at the same time, getting fewer results. Difficult
conditions have meant major drug producers have undergone massive mergers to find
cost savings and critical mass in R&D and marketing. More emphasis has also been
placed on internal discovery and development of new products.
However, more recently, mergers have slowed down and strategic alliances between
pharma and biotech are becoming more prominent. Consequently, the acquisition
mode of market consolidation is not being considered effective. Consolidation among
the main pharma participants has meant that big pharma companies need to explore
other partnering options and new ways to integrate with other companies. Many
pharma companies are working on the basis of a network model as the need for more
pipeline products increases.
This means as the number of projects increase, the risk reduces, thereby, making
many partnering options an optimal choice. There are many factors in the pharma
industry that are driving the need for collaboration. Some key issues are the high cost
of drug development, threats to intellectual property, pricing pressure, product
liability issues and the potential of personalised medicine.
Till date, most pharma collaborations within sales and marketing have been directed
to improve market access and reach. For example, the collaboration between
Wockhardt and Ranbaxy or JBchem and Arrow to get access to the untapped global
markets or the use of telemedicine to access the rural population. The allied industries
like diagnostics liasoning with the pharma companies to support their efforts on
access and reach. For example—the deal between Roche Diagnostics and Mankind
where Mankind has exclusive marketing and distribution rights for the Accuchek
Go—blood glucometer device of Roche. Yet another example is DxTech and Piramal.
The alliance includes a license and development agreement relating to DxTech'
s
proprietary technology, a distribution agreement and an agreement to establish a joint
venture between the companies for the marketing and sales of the commercial
product.
But all these alliances have been directed to gain access and reach as they work on the
assumption that access equates reach which in future would no longer remain true
with the evolved consumers, customers and channels. The transformation observed in
many industries have been triggered by an external player encashing on the need of
the consumer need gap.
Indians go on shopping spree
Indian companies are looking strongly at US and Europe, as the rationale for
acquisitions in Europe is to establish front end marketing and distribution
infrastructure in these lucrative generic markets. The case in point is of Reliance Life
Sciences'acquisition of UK-based GeneMedix--the first-ever overseas acquisition of a
listed biopharmaceutical company by an Indian company. For Reliance, the life
sciences arm of India'
s largest conglomerate, the acquisition provides an opportunity
to enter the European market, expand its growing portfolio of therapeutic proteins
under development with a complementary portfolio from GeneMedix, and leverage
the UK company'
s manufacturing facilities, whereas India'
s acquisition in lesser
regulated markets serve as an entry strategy for these markets, apart from building
product portfolio, backward integration and diversification/growth in emerging
opportunities such as CRAMS and biotech.
Future trends
Indian companies would continue to pursue strategic entry opportunities in order to

enter or consolidate presence in Europe or Latin America. Australia and South Africa
being other geographies of interest. Europe is clearly geography of comfort as Indian
companies have traditionally done business with European companies. Further,
Europe was the first regulated market foray for various Indian companies.
"There can be a slowdown in outbound M&A. However, we expect activity to

substantially pickup on the domestic front (domestic M&A and inbound) in the next
12-24 months. We also expect substantial consolidation in the Indian Active
Pharmaceutical Ingredients (API) industry," feels Madhuwala.
Indian companies are likely to take ever larger steps globally, particularly in the US
and Europe, while the scale of domestic Indian companies will continue to attract both
strategic and private equity interests, the latter fuelled by the growing funds raised
from Western investors seeking high returns. Growth through inorganic route has
become an integral part of companies'strategy and there is a clear drive to gain in
scale and size.
Therefore, Indian pharma companies will be compelled to actively consider cross

border acquisitions to maintain their growth momentum, take on global competition
and to acquire global visibility and international brands.
Incentives for Mergers and Acquisitions by Indian companies

• Build critical mass in terms of marketing, manufacturing and research
infrastructure
• Establish front end presence
• Diversification into new areas: Tap other geographies / therapeutic segments
/customers to enhance product life cycle and build synergies for new products
• Enhance product, technology and intellectual property portfolio
• Catapulting market share
The Indian companies excel as far as the back end of the pharmaceutical value chain
is concerned i.e. manufacturing APIs and formulations. Over the past few years the
Indian pharmaceutical companies have also stepped up their efforts in product
development for the global generic market and this is visible with the DMF filings at
the US FDA. About 30% of the new DMF filings at the US FDA are being filed by
Indian companies. What the Indian companies are short of is the front-end distribution
and marketing infrastructure in the developed world. The current stress is on bridging
this gap through any / or all of the following strategies. The type of tactic employed
would depend on the companies’ existing capabilities, available resources, nature and
scale of expansion planned and on the targeted geographical market. The following is
a table of major mergers and acquisitions involving Indian companies.
Acquisitions are the quickest way to front end access. What is interesting is the fact
that apart from market access – i.e. marketing and distribution infrastructure, the
acquiring company also gets an established customer base as well as some amount of
product integration (the acquired entities generally have a basket of products) without
the accompanying regulatory hurdles.
There are also entry barriers for companies from the developing countries and
acquisitions make it easy for these organizations to find a foothold in the developed
markets. Over the last two years, several Indian companies have targeted the
developed markets in their pursuit of growth, especially via the inorganic route.
Companies such as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one
or more European acquisitions, while others such as Torrent are also scouting for
potential targets.
Mergers In Pharma Sector - Cynosure Of The New-Age Takeovers
The past two decades have effectuated a wave of change in India- liberalization,
technological advancements, globalization, and sustainable development to name a
few. This includes a major corporate development called Mergers and Acquisitions
(M&A). Takeovers, as it is commonly known, are an ever-green field in the corporate
sector. Although the 1956 Companies Act did envisage the concept of amalgamation,
in the present day, mergers and acquisitions connote a much wider meaning than a
few mere provisions. Albeit the concept remains the same.
Merger, in common parlance, is a combination of two or more commercial

organizations into one. It is a tool for expanding activities of a company or to augment
their future profits. The terms Mergers and Acquisitions are used inter-changeably.
However there is a difference between the two- a friendly takeover is addressed as a
merger whereas a hostile takeover is termed as an Acquisition.
Takeovers used to be mainly concentrated on stable and profitable industries like

steel, automobiles, banks etc. But the past few years have seen the trend digressing
towards newer and more competitive sectors. The onset of the 21st century initiated a
drift toward unexplored territories like the pharmaceutical sector.
Global Takeovers
In the last year of the decade, the world saw the biggest merger of this industry i.e. the
Pfizer buyout of Wyeth for a staggering $68bn. The combined company will create
one of the most diversified companies in the global health care industry. Operating
through patient-centric businesses that match the speed and agility of small, focused
enterprises with the benefits of a global organization’s scale and resources, the
company will respond more quickly and effectively to meet changing health care
needs. The combined company will have product offerings in numerous growing
therapeutic areas, a strong product pipeline, leading scientific and manufacturing
capabilities and a premier global footprint in health care.
Further the takeover of Solvay pharmaceuticals by US drug maker Abbot

Laboratories and the proposed merger of Novartis AG and Alcon Inc.2 has sent the
share markets on a high tide. The reason behind such bullish response is mainly the
excitement among investors that the imminent merger of these companies will create
a multi-national drug maker in India3. Other major global takeovers in the
pharmaceutical sector are shown in the following table:
Sr. No Company (Acquirer) Company (Target) For Amount Segment Involved

R&D, Cancer
1. Roche (Swiss) Genentech (USA) $46.8bn
Drugs
2. Daiichi Sankyo (Japan) Ranbaxy (India) $4.2bn Generic Drugs
3. Fresenius Kabi (German) Dabur Pharma (India) Rs.1000 Cr. Oncology
4. Abbot (USA) Wockhardt (India) $22.5mn Nutrition
Schering Plough Cardiovascular
5. Merck (USA) $41.1bn
(USA) Meds
Though global mergers have positive ramifications on markets, profitability and

consumer base, it has its flipside also. Takeovers may ensue in stifling of competition
and thereby creating monopoly in the market. The Patented drugs become available to
the acquirer company and the R&D of those drugs may also suffer in the process.
Indian Scenario
The Indian Pharmaceutical industry is a favourite one when it comes to cross border
M&A. This is hugely due to the fact that such takeovers are beneficial in-house quick
growth strategies. The desire to gain foothold in the market of another country is
another major reason behind such mergers. Such transactions help the company save
itself from the pain-staking procedure of establishing a noveau entity in an alien
country. Entry into a domestic market is a key driver of cross-border mergers. It helps
companies save significant time that may be needed to build the green-field
businesses of similar scale.4 At times M&A also cater as ego enhancers of MNCs.
Other factors associated to such transactions include lack of research and
development, productivity, expiring patents and generic competition.
The Indian pharmaceutical industry is known for its generics, cost effectiveness and
competitiveness5. The nature of diseases in India is varied and the market is ever
expanding. Large global pharmaceutical companies aim towards establishing a low-
cost base out of the country. A number of Indian companies have made acquisitions in
the global market. With domestic drug sales of almost $5bn, Indian companies have
also developed a considerable service industry for the global pharmaceutical market.
Approximately 32 cross border transactions worth $2000mn have been executed by
domestic pharmaceutical companies.6 There are likely to be more acquisitions in
regulated markets in the US and Europe.7 A few examples of outbound M&A are
illustrated in the following table:
Sr. No. Company (Acquirer) Company (Target) For Amount Segment Involved
1. Biocon Axicorp (German) $ 30 million Biosimilars
2. Dr. Reddy’s Labs Trigenesis Therapeutics (USA) $ 11 million Speciality Drugs
3. Wockhardt Esparma (German) $ 11million Branded Generics
4- Wockhardt C. P. Pharmaceuticals (UK) Rs. 83 crore Healthcare Products
5. Wockhardt Negma Laboratories (France) $ 265 million R&D
6. Wockhardt Morton Grove Pharma (USA) $38 million Liquid Generics
7. Zydus Cadilla Alpharma (France) 5.5 million Euros Formulation Business
8. Ranbaxy RPG Aventis (France) $ 70 million Generic Drugs
9. Nicholas Piramal Biosyntech (Canada) $4.85mn Regenerative-Heel Pain
Nevertheless, in the last two years, there has been a slow down in the out-bound
M&A and more MNCs are being seen acquiring Indian Pharmaceutical Companies.
This is mainly done to gain access to the generic drug market. Earlier the lack of
patent protection made the Indian market undesirable to the multi-national companies
that had dominated the pharmaceutical market. Since the multinational companies
streamed out of the Indian Market, the Indian domestic companies started to take their
place and carved a niche in both the Indian and world markets with their expertise in
reverse-engineering new processes for manufacturing drugs at low costs. Now the
Indian companies face a threat of takeover under the new IPR regime8 which makes
product patents finally available for the Indian Pharmaceutical industry. The advent of
pharmaceutical product patent recognition in January 2005 changed the ground rules
for Indian companies. In the run up to the new post-patent era and since, the Indian
industry has been evolving. R&D departments are moving away from reverse-
engineering in favour of developing novel drug delivery systems and discovery
research.* This has resulted in the need of new investments and R&D. It also provides
for compulsory licensing which allows countries to import cheaper generic versions
of patented drugs in the interest of public health. This reduces the profitability of the
Indian drug companies. A few more takeovers in the generic industry will lead to
neutralization of the India’s generic revolution which in itself is a stumbling block for
the Indian economy. The reason for such interest of foreign companies in the generic
market is the strategy for the innovators to retain the innovation potential while
acquiring huge generic potential.9
The year 2009 saw the biggest merger in the generic market when Japan’s 3rd largest
drug maker Daiichi Sankyo took over India’s Ranbaxy Laboratories. Daiichi
purchased 63.9% of the stake at Ranbaxy’s for $4.2 billion. This was done by way of
tender offer, private placement of new share and purchase of outstanding shares from
the founding family.10 The Japanese firm bought Ranbaxy seeking to secure revenue
over a long run amongst intensifying competition and price pressure in the branded
drug market globally.
“This deal is speculated to be a win-win for Ranbaxy and Daiichi Sankyo. Daiichi
Sankyo will be able to leverage the low cost advantage offered by India
complimented by world class infrastructure while Ranbaxy will benefit from product
pipeline of Daiichi.” said Sarabjit Kaur Nangra- VP Research, Angel Broking.
According to Frost and Sullivan’s, “Daiichi Sankyo will be amongst the largest
generic manufacturers globally after the merger. The company would be a strong
contender in both the generic as well as innovator space.”
However the Daiichi-Ranbaxy merger has sent out alarms in the pharmaceutical
industry. In a letter to the department of pharmaceuticals, Indian Pharmaceutical
Alliance has said “lack of available funding is the main reason for the recent spurt in
the sale of stakes in domestic companies”. This has urged the Government to fund
R&D activities of the pharmaceutical companies in order to safeguard their
businesses from takeovers.
Indian companies need to attain the right product-mix for sustained future growth.
Core competencies will play an important role in determining the future of many
Indian pharmaceutical companies in the post product-patent regime after 2005. Indian
companies, in an effort to consolidate their position, will have to increasingly look at
merger and acquisition options of either companies or products. This would help them
to offset loss of new product options, improve their R&D efforts and improve
distribution to penetrate markets.
Research and development has always taken the back seat amongst Indian
pharmaceutical companies. In order to stay competitive in the future, Indian
companies will have to refocus and invest heavily in R&D.
The Indian pharmaceutical industry also needs to take advantage of the recent
advances in biotechnology and information technology. The future of the industry will
be determined by how well it markets its products to several regions and distributes
risks, its forward and backward integration capabilities, its R&D, its consolidation
through mergers and acquisitions, co-marketing and licensing agreements
Table: Merger and Acquisition in Recent Years

Announ Target Acquirer Reason Deal Target
ce data Value Country
Feb-06 Betapharm Dr.Reddy’s Front end 570 Germany
Labs line in
Germany
Dec-05 Bouwer Glenmark Front end NA South Africa
Barlett line in SA
Dec-05 Able Labs Sun Mfg facility 23 US
Pharma in US,
Turnaround
potential
Nov-05 Nihon Ranbaxy Increasing NA Japan
Pharma stake to 50%
to
take
advantage of
Japanese
Generic
Oppurtunity
Nov-05 Roche’s API Dr.Reddy’s Increasing 58.97 Mexico
Facility Labs presence in
Contract
Mfg
Oct-05 Avecia Nicholas Increasing 17.1 UK,Canada
Piramal presence in
Contract
Mfg
Oct-05 Servycal SA Glenmark NA NA South Africa
Oct-05 Target Jubilant Capitalizing 33.5 NA
Research Organosys on CRO
oppurtunity
Sep-05 Explora Matrix Explora’s NA Switzerland
Labs Labs expertise in
SA biocatalyst
would help
in dev of
high
potency
API’s
Sep-05 Valeant Mfg Sun Controlled NA US
Pharma substance
mfg
facility
Jul-05 Trinity Labs Jubilant US FDA 12.3 US
Inc Organsys Facility
inUS,
pipeline of
ANDA’s
Jun-05 Heumann Torrent Entry in NA Germany
Pharma German
Gmbh & Co market
Jun-05 Doc Pharma Matrix Lab Front-end in 263 Belgium
NV Europe
Jun-05 Generic Ranbaxy Spanish NA Spain
Prod Generic
Portfolio Market-18
products
Jun-05 Biopharma Strides Entry into 1 Latin
Arcolab new market America
Venezuela
Mar-05 Uno-Cicle Glenmark Establish 4.6 Brazil
Hormonal brand
Brand presence in
Brazilian
market
Feb-05 Strides Strides Additional 6 Brazil
Latina Arcolab 12.5% stake
to
establish
presence in
Brazilian
market
Feb-05 Mchem Matrix Lab Backward NA China
Pharma integration,
Group ARV
mfg in
China
Dec-04 Rhodia Nicholas International 14
Anathetic Piramal Product line
Business
Jun-04 Psi Jubilant NA NA Belgium
SupplyNV Organsys
May-04 Trigenesis Dr.Reddy’s Niche 11 US
Therapeutics Labs Technology
May-04 Espama Wockhardt Front end 11 Germany
Gmbh line in
Germany
Apr-04 Laboratories Glenmark Entry in 5.2 Brazil
Klincer Do Brazil
Dec-03 RPG Ranbaxy Front end in 84 France
Aventis France
SA
Jul-03 Alpharma Cadila Front end in 6.2 France
Saa healthcare France
Jul-03 CP Pharma Wockhardt Front end 17.7 UK
and mfg in
Europe
Mergers & Acquisitions Review 2005-2010 Pharma Biotech
A review of the recent acquisitions and mergers of the industry indicate the following
trends:
Consolidation in medical device, generic and consumer health segment of the
healthcare industry. Mergers and acquisitions were successful if driven by a
blockbuster marketed products like Lipitor (Pfizer- Werner Lambert), Cialis (Lilly-
ICOS) and Erbitux (Lilly-ImClone). If a company was acquired for its R&D pipeline
and development projects or platform technology, in majority of cases, the acquiring
company failed to derive full benefits and most of the projects were later discontinued
or terminated. Diversified companies like Roche, J&J, Abbott and Novartis with
devices, generics and diagnostic performed better as compared to pure pharmaceutical
R&D driven company like Pfizer and Merck. With the $68 billion bid by Pfizer for
Wyeth, $41billion for Schering Plough by Merck and $47 billion bid by Roche for
Genentech has given a great start to 2009 M&A activity. Sepracor was acquired for
$2.6 billion by Dainippon Sumitomo of Japan. Novartis has started the year 2010 by
acquiring 77% of Alcon the eye care unit of Nestle and has paid a total of $50 billion (
$ 10 billion in 2009 + $28 billion in 2010 ). Merck KGA $6 billion OPA for Millipore
and Astellas $ 4 Bn bid for OSI pharma bring the focus back to biotechnology. Teva
buyout of German generic Ratiopharm for $ 5 billion once again shows the
importance of generics.
Drew raised concerns about the low R&D productivity gap in spite of the mergers in
the early and late nineties. These mergers in fact resulted in reduced R&D
productivity to produce new approvals and blockbusters. Glaxo Smith Kline was
formed from Glaxo; Burroughs Wellcome, Smith Kline French, Beecham, Beckman,
Affymatrix, Sterling and a host of other smaller companies. Similarly Sanofi-Aventis
was a merger of the following component companies Hoechst, Rhone Poulenc,
Marion Merell Dow, Roussel Uclaf, Roger Bellon, Dakota, Rorer, Fisons, Winthrop,
Sanofi, Connaught Labs, Merieux and Synthelabo. Johnson & Johnson is composed
of over 250 companies like Alza, Centocor, Cilag, Cordis, Depuy, Ethicon, Janssen,
Life Scan, McNeil, Mitek, Neutrogena, Ortho, Scios, Therakos and Tibotec Pfizer
acquired Pharmacia, Monsanto, Werner Lambert, Parke Davis, Searle, Kabi,
Farmitalia, Sugen, Upjohn and a host of other smaller companies. Bristol Myers
Squibb was formed from Bristol Myers, Squibb and Du Pont Pharmaceutical. Abbott-
Knoll, This applies to most of the top pharmaceutical companies and even Merck has
joined in. Mergers have started within the biotechnology industry like Amgen taking
over of Abgenix, Immunex and Tularik, Biogen-Idec and pharma companies like
Roche taking over Chugai, and Genentech, Novartis-Chiron. Astellas was formed
from the merger of Fujisawa and Yamanouchi and Daichi and Sankyo merged in
2005. Wyeth is American Home Products, Ayerst, Cynamide, AH Robins. Bayer-
Schering merged in 2006 and the German Merck bought Serono.
As several competitive pharma R&D units were merged, several projects were
terminated or given low priority and funds, R&D staff reduced or shifted resulting in
high turnover and low morale. The bigger company centralized R&D units became
more risk averse. Several once promising areas of research like combinatorial
chemistry produced huge chemical libraries with minor structural variations, High
Throughput Screening (HTS), gene therapy, proteomics, antisense, vaccines for
AIDS, Sepsis, RSV and Malaria, Alzheimer’s disease, Parkinson’s disease have
increased our knowledge and understanding and the number of targets. However no
breakthrough blockbuster medicine has emerged out of these new high speed and
costly technologies. Demain attributes such failure to the elimination of natural
products and extracts from the HTS screening and recommends including natural
products in HTS screens. The partnership between different companies to for R&D
and marketing alliances/joint ventures to develop products have a higher probability
of blockbuster success.
Analysis of Recent M&A
A review of the recent acquisitions and mergers indicates acceleration of the

following trends:
Consolidation in medical device, generic and consumer health segment of the
healthcare industry and consolidation in the European and Japanese pharmaceutical
industry. FDA new drug approvals in 2008 were 21 in comparison to 18 in 2007.
With low R&D productivity and patent expiry of several blockbuster drugs, big
pharmaceutical companies were diversifying into medical devices (J&J, Roche),
generics (J&J, Novartis, Sanofi Aventis, and Daiichi Sankyo) and diagnosis (Roche).
Biotechnology companies were acquired for monoclonal antibodies, RNAi and stem
cells technology platform and R&D pipeline of oncology projects.
Genentech rejected a $44 billion offer from its majority shareholder Roche for the
remaining shares in 2008 but Roche has not given up and offered only $47 billion due
to uncertain market conditions in early 2009. Pfizer bid of $68 billion for Wyeth and
Merck 41 billion bid for Schering Plough show the push of traditional pharma into
biologics. These bids have revived the M&A market. Companies like Amgen, BMS
and Lilly need to act fast to grow, to acquire, merge or become a target. Mergers and
acquisitions were successful if driven by a blockbuster marketed products like Lipitor
(Pfizer- Werner Lambert), Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS). New
product derived mergers based on potential blockbuster marketed cancer drugs like
Erbitux (Lilly-ImClone), Velcade (Takeda-Millenium) and Aloxi, Salagen; Hexalen
(Eisai-MGI Pharma) will be successful. Roche potential takeover of Genentech will
be a success. Pfizer takeover of Wyeth and Merck of Schering Plough will not
resolve the low productivity of combined R&D to produce blockbuster drugs to
replace Lipitor, Zocor and Fosamax. Analysts have termed it more a cost cutting
effort and a shock absorber to patent expiry of Lipitor in 2011 as merger will dilute
the affect of patent expiry . Wyeth only brings the best selling vaccine Prevnar and
marketing rights to the best selling biotechnology(biologic) Enbrel to the combined
company and has a week R&D pipeline and facing patent expiry of its blockbuster
brands like Pfizer. I think that several of the combined R&D projects will be
terminated. Why Pfizer did not go for Amgen, Genzyme or Biogen Idec?
J&J is one of the most successful acquiring company and with a Warren Buffett like
approach of leaving the company management in place and benefiting from
innovation. Its acquisition of Centocor and monoclonal antibody provided it with
Remicade, the second top selling biologics and best selling monoclonal antibody in
2008. If a company was acquired for its R&D pipeline and development projects or
platform technology, in majority of cases, the acquiring company failed to derive full
benefits and most of the projects were later discontinued or terminated. Diversified
companies like Roche, J&J, Abbott and Novartis with devices, generics and
diagnostic performed better as compared to pure pharmaceutical R&D driven
company in 2008.
Teva has grown by smart acquisitions in the generic drug business and is now the top
Generic drug company.It started with minor acquisition of Copley pharma in 1999
followed a year later of Canadian Novopharm. In a major move Teva bought for
$3.4 Sicor which was strong in injectable generics and biogenerics and IVAX in 2006
for $7.4 billion. The biggest M&A in generics was Teva offer of $7.5 billion for Barr
and Pliva. These acqusitions have made Teva a strong generic company in Europe and
USA. It has now shifted its focus in the emerging markets as well.
As biologic drugs move into multibillion dollar annual sales, are priced higher with
respect to synthetic products and patent expiry had little effect on sales, and biosimilar
or follow on biologic, unlike generics, need more time to gain market share.
Pharmaceutical companies’ outright acquisition of biotechnology companies and
licensing of technology/late stage projects in development has increased significantly
despite market downturn and significant loss of market value of many biotechnology
companies. This was evident by Merck acquiring Serono, Astra Zeneca absorbing
MedImmune, Takeda taking over Millenium and Roche making a failed offer of 44
billion for the remaining shares of Genentech.
There was a strong emphasis on biologics in R&D pipeline of big pharma companies
and partnership and deals with biotechnology companies. Merck announced its entry
into biosimilar biologics and the entry of 6 biosimilar erythropoietin in Europe and
black box warnings and restrictions in dosage and clinical use resulted in loss of sales
of all blockbuster EPO brands. The market and sales data in 2008 provides once again
strong support for the R&D paradigm shift to biologic and within biologic towards
human monoclonal antibodies, vaccines, erythropoietin, insulin’s and interferon.
Major Historical Mergers
Company Target company Year Deal $ Billion
Novartis (Ciba Sandoz 1996 26

Geigy)
Astra Zeneca 1999 35
Pfizer Werner Lambert 2000 90 Lipitor
GSK Smith Kline French 2000 55
(Glaxo Wellcome)
Pfizer Pharmacia 2003 57 Celebrex
Sanofi Aventis Aventis 2004 62

(Sanofi)
Major Acquisitions in 2005-2010 Medical Devices/Diagnosis
Company Target company $ billion Technology/product

Novartis Alcon 39 in 2009 Eye care
28 in 2010
Boston Scientific Guidant 27.5 Medical Devices
GE Healthcare Abbott diagnostic 8.1 Diagnostic
Life Sci Technol Applied Biosyst 6.7 DNA sequencing

Merck KGA Millipore 6.0 Equipment
Fresenius Renal Care 4 Dialysis

Fresenius APP Pharm 3.7 Abraxane (Nanotech)
Roche Ventana 3.4 Diagnosis
Blackstone Cardinal health 3.3 Healthcare
Abbott Advanced Medical 2.8 Eye Care, Lasik
Kinetics Concepts LifeCell 1.7
Quagen Digene 1.6 Diagnostic

Charles River WuXi Pharma 1.6 Drug testing
J&J Mentor 1.03
Vital Signs 0.86

GE Health
Whatman 0.71
Table 4. Major Acquisitions in 2005-2010 Generics/OTC/Consumer Health
J&J Pfizer OTC 16.6 Consumer health
Teva Barr-Pliva 7.5 Generics
Teva Ivax 7.4 Generics
Novartis Eon 6.8 Generics
Mylan Merck KGA generic 6.7 Generics
Novartis Hexal 5.3 Generics
Teva Ratiopharm 5.0 Generics
Daiichi Sankyo Ranbaxy 4.0 Generics
Teva Sicor 3.4 Biosimilars
Sanofi Aventis Zantiva 2.6 Generics
Barr Pliva 2.5 Generics

Reckitt Benckiser Adams respiratory 2.3 Generics
Watson Andrx 1.9 Generics
Watson Arrow 1.75 Generic Lipitor
King Alpharma 1.6 Generics
Richter Gedeon Polypharma 1.3 Generics
Novartis Ebewe 1.3 Generics
Table 5. Major Acquisitions in 2005-2010 Pharmaceuticals

Pfizer Wyeth 68 Prevnar, Enbrel
Pharmaceuticals
Merck Schering Plough 41 Pharmaceuticals
Bayer Schering 19.7 Pharmaceuticals

Schering Plough Organon 14.5 Pharmaceuticals
Sankyo Daiichi 7.7 Pharmaceuticals
Tricor, Trilipix,
Abbott Solvay 7
vaccines
Nycomed Atlanta 6 Protonix

UCB Schwartz 5.8 Pharmaceuticals
Abbott Kos 3.7 Humira, Niaspan
Abbott Piramal 3.7 Generics
GSK Steifel 3.6 Dermatology

Shire New River Pharma 2.6 Pharmaceuticals
Dainippon
Sepracor 2.6 Lunesta, Xopenex
Sumitomo
Lilly Icos 2.3 Cialis
Dainippon Sumitomo 2.1 Pharmaceuticals
Toyama Fujifilm, Taisho 1.4 Pharmaceuticals
GSK Reliant Pharma 1.65 Pharmaceuticals
Solvay Fournier 1.4 Pharmaceuticals
Shionogi Sciele 1.1 Pharmaceuticals
J&J Cougar 1.0 Cancer drugs
Table 6. Major Acquisitions in 2005-2010 Biotechnology
Roche Genentech 47 Rituxan, Avastin,

Herceptin, MoAbs,
Oncology
AstraZeneca MedImmune 15.6 Monoclonal

Antibodies
Merck Serono 13.5 Biologics
Takeda Millennium 8.8 Velcade, Oncology
Lilly ImClone 6.0 Erbitux, Oncology
Novartis Chiron 5.8 Vaccines
Abraxis American 4.2 Oncology

BioScience
Astellas OSI Pharma 4.0 Tarceva, oncology
Eisai MGI Pharma 3.9 Aloxi, Salagen,

Hexalen, Oncology
Celgene Pharmion 2.9 Oncology
Gilead Myogen 2.5 Biotechnology
Monoclonal
BMS Medarex 2.4
antibodies
Monoclonal
Amgen Abgenix 2.2
antibodies
Gilead CV Terapeutics 1.4 Cardiovascular
Genzyme Osiris 1.4 Prochymal, Stem cells
GSK ID Biomed 1.3 Biologics
AstraZeneca Cambridge 1.3 Monoclonal

Antibody Antibodies
Technology
Merck Sirna 1.1 RNAi
* Espicom, 5th May 2009- ‘The Indian Pharmaceutical Industry 2009-

Diversification, Expansion& Ambitions’
1.Pfizer.com, 26th January 2009.
2. Wall Street Journal, 30th September 2009- ‘Abbot Solvay Rise On Takeover’;
Aurora Sentinel, 04th Jan 2010- ‘Novartis Looks To Buyout Alcon for $38.5 billion’.
3. Wall Street Journal, 30th September 2009- ‘Abbot Solvay Rise On Takeover’.
4. ExpressPharmaOnline.com, 1-15 October 2008- ‘The Making of a Merger’
5. Express Healthcare Management, 1st-15th September 2005- ‘Mergers and
Acquisitions in Pharma’.
6. ExpressPharmaOnline.com, 1-15 October 2008- ‘The Making of a Merger’
8.Financial Express, 5th May 2009
9. Financial Express, 5th May 2009- ‘Indian Drug Firms Face Takeover Threats’
10.Financial Express, 7th Nov 2008
11. The Hindu Business Line, 17 October 2006.
MERGERS AND ACQUISITIONS- CHALLENGE
The challenges faced by companies in executing a merger can be broadly categorized

under the following applicable laws:
1. The Companies Act, 1956
2. Securities and Exchange Board of India (SEBI) Takeover Code
3. Foreign Exchange Management Act, 1999.
4. Competition Act, 2000
While the Indian Companies Act, 1956, usually governs mergers in India,
international deals involve additional compliances with rules laid down under the
FEMA (Foreign Exchange Management Act, 1999) and associated law.11 Further,
listed companies are also subject to the rules and regulations laid down by the SEBI
(Securities and Exchange Board of India). Compliances under the Companies Act
require the Acquirer Company to prepare a scheme of amalgamation under section
393 of Companies Act, 1956. The draft scheme has to be agreed to by Target
Company and submitted to the High Court. Both company’s Board of Directors
should approve the scheme and authorize the directors to make an application to the
High Court under section 391 of Companies Act, 1956. The copy of order is to be
filed with the Registrar of companies within 30 days of passing of orders by the court.
The compliances under SEBI involve the following steps:

1. Acquirer must make a public announcement of- the offer price, the number of
shares to be acquired from the public, identity of acquirer, purpose of acquisition,
plans of acquirer, change and control over the target company and period within
which the formalities would be completed.
2. The acquirer must make a public announcement through a merchant banker within
4 working days of entering into an agreement of acquiring shares or voting rights of
the target company.
3. Relevant documents should be filed with the SEBI which include a copy of the
public announcement in the newspaper, the draft, letter of offer and a due diligence
certificate.
4. Correct and adequate information must be disclosed and comments should be
incorporated by SEBI.
5. Letter of offers to shareholders of the target company must be sent within 45 days
of the public announcement. The offer remains open for 30 days for acceptance by the
shareholders.
6. The acquirer should determine the offer price after considering the relevant
parameters.
Once an offer is made an acquirer cannot withdraw it except unless the statutory
approvals have been refused, the sole acquirer has died or if the SEBI merits the
withdrawal of the offer.
In case of cross-border mergers, the Foreign Exchange Management (Transfer or

Issue of Security by a person Resident outside India) Regulations 2001 will be
applicable.
Although the compliance of these rules and regulations seems easy, a lot of
difficulties are faced during the actual application of those rules n procedures, and a
lot more when the merger is a cross-border one. “There are often occasions when
interplay between SEBI regulations and those of FEMA can make it difficult for deals
to be structured.” said Mr. Diljeet Titus, Titus and Titus Co., Delhi.
There are numerous challenges faced by companies during cross-border mergers. A
major obstacle is the legal disparity between the two merging entities, since these
companies follow statutes of different countries. Hence even if the merger is a
friendly one, the legal disparity creates a major road-block in structuring and
finalizing the deal. Another issue is that of the complex legal set up especially in the
financial sectors of any of the merged entities, thereby causing a problem in decision
making processes.
Misuse of supervisory powers by the shareholder of the merged entity may also put
the new business model at risk. There are other barriers like lack of funds, economical
imbalance at the time of execution, political interference, shareholder’s reluctance,
labour issues etc. Apart from this, there are extra costs incurred like the off-costs and
on-going costs during any cross border merger which are absent in domestic mergers.
Consumer protection rules, differences in employee legislations, different accounting
systems, data protection directives, cross-border business policies employed in
different countries could cause obstructions to cross border M&A and can further
escalate the cost. Exchange of share mechanism also proves to be more expensive in
case the 2 merged entities are listed in different stock exchanges.
These fundamental intricacies of the cross border M&A make it a Byzantine deal.
Cross-border mergers place Indian companies on the global map. Being a significant
part of the global pharmaceutical sector will help the Indian companies to take further
steps in maintaining the global pharmaceutical standards which would be beneficial
for them in all segments including exports, increased profitability, increase in the
R&D laboratories, funding received by the companies, increased number of patented
products, expansion of their market share etc. This in turn will be beneficial to the
global pharmaceuticals as well since the cost effective techniques used by Indian
companies and the huge market India provides to this sector can help enhance the
research and creation of newer and improved drugs.
Although there always remains the risk of losing individual identity of such
companies or exposing the industry to a threat of rampant takeovers, on the whole
Mergers elevates the economic graph of the country.
The technicalities involved in an M&A transaction are humongous and often falls
apart midway. If the SEBI and the RBI (Reserve Bank of India) each establishes an
effective legal cell to respond to questions raised by the parties to a merger on a
timely basis, it can help make the M&A a lesser painful process. Regarding the Indian
Pharmaceutical industry cross-border mergers are healthy only so long as it does not
take away its innovation revolution.
While growth via acquisitions is a sound idea in principle, there are challenges as
well, which relate mainly to the stretched valuations of acquisition targets and the
ability to turn them around within a reasonable period of time. The acquisitions of
RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of
acquisitions proving to be a drain on the company’s profitability and return ratios for
several years post acquisition. In several other cases acquisitions by Indian generic
companies are small and have been primarily to expand geographical reach while at
the same time, shifting production from the acquired units to their cost effective
Indian plants. A few have been to develop a bouquet of products. Other than
Wockhardt’s acquisition of CP Pharma and Esparma, it has taken at least three years
for the other global acquisitions to see break-even.
Most of the acquiring companies have to pay greater attention to post merger
integration as this is a key for success of an acquisition and Indian companies have to
wake up to this fact. Also, with the increasing spate of acquisitions, target valuations
have substantially increased making it harder for Indian companies to fund the
acquisition
The Role of Pharmaceutical Alliances
Alliances in business have a long history, but over the past couple of decades they
have become an important feature of business organisation to such an extent that
Dunning, a prominent researcher of multinational enterprises since the 1950’s, has
described this new trend which gives increased emphasis to cooperation as well as
competition between firms as ‘alliance’ capitalism. In his view this has been brought
about by globalisation and a series of landmark technological advances (Dunning
1995).
The pharmaceutical industry provides a good example of these developments. It has

been
subject to rapid technological change and significant restructuring. Pharmaceutical
companies have been a prominent agent of globalisation, partly through international
mergers but just as importantly in establishing global sales programs for their
products. In addition the pharmaceutical industry, in which R&D is a core activity,
has experienced breakthrough technological advances in biotechnology. Dunning
outlines five reasons for the growth of alliances arising from the impact of
technological advances, several are particularly relevant to the pharmaceutical
industry.
These are to:
• enhance the significance of core technologies;
• increase the interdependence between distinctive technologies for joint supply
of a particular product;
• truncate the product life cycle; and
• upgrade core competencies as a means of improving global competitive
Advantages:
Breakthrough advances in biotechnology has had a significant impact on core
pharmaceutical technologies. Bioinformatics has resulted from the convergence of the
distinctive technologies of biotechnology and IT. The impact of the shortening of the
market exclusivity period has been to effectively truncate the product life of many
new drugs. These both increased the pressure for additional drugs from
pharmaceutical company product pipelines and intensified the search for new
compounds from the biotechnology companies. The alliance framework seems an
obvious structure to satisfy the objectives of the research rich but cash poor biotech’s
and the better resourced but discovery hungry pharmaceutical companies.
Accordingly academic consideration of pharmaceutical alliances has focused on
strategic technology partnering (see for instance Narula and Hagedoorn 1999)
between the funder of R&D typically a large pharmaceutical company and the biotech
or university suppliers of technology.
In the view of Arora and Gamberdella (1990) technology alliances arise as a the result
of:
‘The increasing complexity and multi disciplinarity of resources required for
innovation, and of the stock of knowledge itself [which] tend to make technological
innovations the outcome of interactions and cooperation among fundamentally
autonomous organisations commanding complementary resources.’
Alliances had become such a feature of technology driven industries that in a more
recent paper (Arora et al. 2000) remarked on the rise of ‘markets for technology’ in
which smaller high tech firms supply specialised technologies to larger established
companies using various forms of alliance structures.
The framework of incomplete contracts has been used to examine technology
alliances (see Aghion and Tirole 1994) in which the relationship between a research
unit and a customer for the research is analysed. In such a framework, a ‘research
unit’ is characterised as performing the creative task while the ‘customer’ who
expects to benefit from the innovation, provides the financing. The framework is used
to predict thatresearch activities are more likely to be conducted in a research unit
independent of the customer when the intellectual inputs are substantial relative to the
capital inputs and the customer is in a weak position because of a scarcity of research
capability – a position increasingly found in the pharmaceutical industry.
Lerner and Merges (1997) have used this framework to undertake an analysis of a
small number of biotech alliances to determine the balance of control of the alliance
between the biotech (research unit) and established pharmaceutical company
(customer). Their main finding, in keeping with the Aghion and Tirole framework, is
that the biotechs ceded the greatest proportion of the control rights when their
financial position is weakest. The study also examined which party was likely to
control particular aspects of the alliances. This indicated that the pharmaceutical
company was most likely to control the marketing and manufacturing aspects as well
as the power to terminate the alliance. The biotech was more likely to retain control
over the patents and related litigation.
While this work undoubtedly offers important insights into the nature of
pharmaceutical alliances, there are some possible difficulties with this analytical
approach. The first is that alliances are formed for many reasons, not just to transfer
technology.
Reflecting this OECD has defined alliances in the following terms:
‘Strategic alliances take a variety of forms, ranging from arm’s-length contract to
joint venture. The core of a strategic alliance is an inter-firm co-operative relationship
that enhances the effectiveness of the competitive strategies of the participating firms
through the trading of mutually beneficial resources such as technologies, skills, etc.
Strategic alliances encompass a wide range of inter-firm linkages, including joint
ventures, minority equity investments, equity swaps, joint R&D, joint manufacturing,
joint marketing, long-term sourcing agreements, shared distribution/services and
standards setting.’ (OECD 2001)
Two surveys of alliances published in the early 1990’s reported that while sales and
marketing alliances were 41% and 38% of all alliances respectively, R&D alliances
accounted for only 11% and 13%. (Narula and Hagedoorn 1998). Indeed it might be
expected that R&D activities would be too cloaked in secrecy, the IP considered too
valuable, to trust to collaborative arrangements have grown rapidly since the 1980s
indicates that some of these inhibitions have been overcome. Moreover alliances are
occurring within a broader context – one in which global firms have been shedding
‘non core’ activities along and between their value chains as they concentrate on their
‘core’ competencies. Large multinational companies, which for decades have pursued
various types of integration strategies, have found defining the boundary between core
and non-core functions a difficult process. It has required careful consideration of the
advantages and disadvantages of outsourcing each function. Large global
pharmaceutical companies have been as involved in this evaluation process as any of
the large corporations. It has led some observers to suggest that the core competitive
advantage possessed by global pharmaceutical companies is their organisational and
resource management capabilities to develop and distribute new pharmaceutical
products and that, not only research, but other functions such as sales and marketing
should be outsourced using alliance and other structures (Kay 2001).
For all these reasons this study adopts a broad definition of alliances. It is important in
considering Australia’s future role in the global pharmaceutical industry that while
technology development and transfer is an important part of the industry’s
development path there may be other potential roles for European capabilities
potentially facilitated through alliance structures. The second ‘complication’ with the
alliance model between large pharma and small biotech is that as will be shown in this
paper the most rapid growth in alliance numbers has been between biotech companies
rather than between pharmaceutical and biotech companies. This paper will examine
the different features of these two types of alliances.
This has particular relevance to the European situation. Despite lacking global scale
pharmaceutical companies, indigenous concerns such as CSL, Faulding etc have taken
on increasingly international roles through alliances and other arrangements. At the
same time a number of indigenous bioteches, some listed on the Australia Stock
Exchange, have emerged owning the patent to a new compound of potential interest to
the global pharmaceutical industry. To transform the patented discovery to a
marketable drug requires a daunting amount of money and expertise (Di Masi 2001)
which is likely to be beyond the capabilities of the European firms and capital
markets. Accordingly alliances with global players represent the prime development
path for Australia’s fledgling biotech’s and research institutes.
Geographically the European industry is far removed from the centres of
pharmaceutical and biotech research activity, namely the United States and Europe.
Are alliances with international companies realistic given this remoteness? A study of
research collaboration in the Swedish biotechnology / pharmaceutical sector
(McKelvey, Alm, Riccaboni 2002) is encouraging. Although Sweden has a more
significant and longstanding pharmaceutical industry than Australia – two of its
pharmaceutical companies have only recently participated in international mergers to
form Astra Zeneca and Pharmacia, study shows that research collaborations on a firm-
to-firm basis tend to be international while the links between firms and universities
tends to be more strongly local.
The purpose of this paper is to provide a broad overview of the extent and nature of
alliances. It seeks to answer some basic questions about alliances. Are alliances as
extensive as the discussions and anecdotal evidence suggests? How have their number
and character changed over time? Who are the participants? Are the most common
alliances between big pharma and little biotech? How are they structured and how
much money is involved? Is licensing the main game or are there other aspects of
structuring alliances that are important? Are alliances concentrated in particular kinds
of technologies or therapeutic groups? How do European alliances compare with the
patterns in the rest of the world? Does it seem realistic to expect European companies
to develop their operations through alliance formation?
Number of alliances
While pharmaceutical alliances have been under discussion and academic study for
more than a decade it is only in the last few years that their number has increased to a
significant level. The number of alliances has increased almost fourfold since 1997.
The largest increase, 59.4% has occurred in 2001 to about 1000. For the large
pharmaceutical companies this means entering into one new alliance about every
month, although one company, Glaxo was on average announcing two new alliances
every month in 2001.
For every one new alliance announced involving a drug company, there were in 2001
more than twice that number involving biotech companies. By far the largest single
category of alliance and the fastest growing was between biotech companies. Until
1997 this had been an insignificant category. The majority of allianceswere with
universities or between pharmaceutical companies. From 1997, alliances involving
biotech companies grew rapidly to dominate in numerical terms. Alliances by contrast
between pharmaceutical companies declined. Even those involving universities
showed little growth, perhaps suggesting that increasingly biotech companies are
taking on the role of commercialising university research.
Trends in alliances in Australia
The trends in the number of alliances and the parties involved appear to be
remarkably similar to ‘global’ trends reported above. The ReCap database does not
provide details of the nationality of the alliance parties. To gain a picture of the
position for Australia a list of potential parties was compiled based on the
biomedoz.com.au database of European owned biotech’s and research institutes
supplemented by any missing listed biotech’s taken from the Deloittes Biotech Index.
This was tested for completeness against a number of other directories. The total list
was 205 companies, institutes, universities and major hospitals. Each name was
searched on the Recap database. As a result, 143 alliances were identified. This
includes pre-1993 alliances but excludes several concerned with veterinary
applications.
The same qualifications apply to this European list as for the ‘global’ one. It includes
only announced alliances. While doubtless many alliances remain secret there is
nonetheless the same pressure to report progress and for listed biotechs to release
price sensitive information under the ‘continuous disclosure provisions’ in Australia
as in the US and other countries. As discussed above the database may have a US bias
because SEC filings are a major source of alliance information. Nonetheless the
Recap sourced list seems to be remarkably complete when checked against European
biotech company web sites for alliance information. A search through archival press
releases on these sites failed to turn up any significant missing alliances. A couple
with universities had been not been included.3
As for the total alliance chart above the number of alliances involving European
parties grew rapidly in 2001. The 40 alliances recorded in the 2001 is many times the
level of the early 1990’s. As for the total number of alliances, the last two years and
the late 90’s were very active in terms of alliance formation.
Compared with the total database of almost 1000 alliances in 2001, 40 is a modest
total. Nonetheless it is higher than that based on our share of world GDP and
demonstrates encouraging activity levels in the biotech sector.
In parallel with overseas trends, European alliances were predominately driven by
biotechs. Given the limited number of local pharmaceutical firms – it is not surprising
that few alliances have been between pharmaceutical companies. However as in the
United States alliances between pharmaceutical companies and biotech’s have
remained at relatively low levels. Alliances with universities (including research
institutes) have also remained at modest levels.
Although over 200 European organisations were surveyed on the Recap database only
a small number had a significant number of alliances recorded. Those with the largest
number are set out below.
Organisation Alliances listed on ReCap
Faulding (incl. Soltec) 29
Amrad (incl. Cerylid) 24
Proteome Systems 16
Biota 12
CSL 10
Several companies not included above have been very active in the last year or two.
These include BresaGen (6), Axon Instruments (7) and Agen Biomedical (9, 4 in two
years).
The Nature of Alliances

The Recap database categorises the characteristics of each alliance announced
according to about 30 attributes. These include licensing, research, development,
distribution, marketing, merger, asset purchase and acquisition. Each alliance may be
categorised as having a number of these attributes. The more complex alliances for
instance may involve some combination of licensing, distribution and an equity
injection. By far the dominant attribute as shown below is licensing. About two thirds
of alliances contain some form of licensing. Research, development and collaboration
are also important.
Many of the licensing arrangements concern new compounds. For instance Xenova
and Millennium announced in December 2001 a licence agreement to develop
Xenova’s molecules for cancer treatment that had entered Phase 1. Millennium would
acquire development and marketing rights in the US in return for a payment of
US$11.5m. Others involve licensing arrangements for new technologies and
information. For instance, Proteome Systems entered into an agreement with Johnson
& Johnson to provide access to its newest databases for human genome research.
Alliance structures reflect the objectives of their partners. Although licensing is the
dominant aspect of alliances, this varies between the parties. For instance alliances
between pharmaceutical companies and biotech have a greater tendency to contain
licensing arrangements (72%) than those between one pharmaceutical company and
another (55%) or between bio techs (60%). Drug development has a greater tendency
to drive alliances with pharmaceutical companies than between bioteches.
European alliance attributes

Perhaps reflecting the stage of maturity of the biotech sector in Australia, licences
while prominent, featured in a significantly lower proportion of alliances than for the
total database with only 51% of European alliances in 2001 involving licences
compared with 65% for the total database. A check of earlier years indicated that this
difference has been the case for some time. There were other signs of the relative
immaturity of European alliances. The proportion involving early stage research and
collaboration was higher in Australia and no alliances involved manufacturing. One
other difference was the higher proportion involving asset purchases and acquisitions.
There were an abnormally high number of asset purchases and acquisitions in 2001.
Faulding was involved in several of them, both buying and selling various product
lines and part businesses in deals totalling over $1billion although one these did not
proceed. CSL purchased the antibody collection and testing lab business from NABI
and Biota purchased NuMAX Pharmaceuticals.
Otherwise there were strong similarities. The proportion undertaking research,
development and distribution was about the same as the total database. This indicates
that European companies and research institutes are participating in the global
technology market place with a similar purpose as their peers in other parts of the
world. The under representation of alliances with licensing is the greatest cause for
concern.
Alliance Payouts
The database provides information, where details are released, about the dollar value
of the alliance. This may be a payment upfront for a licensing, marketing, or
distribution arrangement or a payment for equity or outright acquisition. These
payments are described by Recap as alliance ‘payouts’. Not surprisingly payments
made as part of acquisitions form the largest single component of alliance payouts Up
until and including 2000 the overwhelming majority of dollars spent on acquisitions
was between pharmaceutical companies, the largest being the Pfizer
merger/acquisition of Warner Lambert in 2000 totalling $US90b. However the
character of acquisitions changed dramatically in 2001. More than half of the value of
acquisitions involved biotech firms – between themselves or with pharmaceutical
companies
The largest biotech transaction is the announced acquisition of Immunex by Amgen
totalling $16b, but there are many transactions exceeding $1b such as the $3.3b deal
involving Medtronic and MiniMed and the takeover of Block Drug by Glaxo for
$1.2b. Whether the 2001 experience represents a watershed or a one-off aberration
only time will reveal, but the mixed fortunes of biotech companies and their need for
partnerships provides a fertile ground for M&A activity.
The payouts for acquisitions however conceal the trend evident in the discussion
above about the number of alliances and in particular the rapid growth in payouts
involving biotech companies since 1997. By excluding the dollar value of acquisitions
the increasing importance of alliances with biotech companies is revealed. As the
chart below shows the size of alliance payouts involving biotechs has grown
substantially over the last five years with those in 2001 particularly high. In other
words the value of payouts give financial substance to the growth in the number of
alliances announced. While the alliance payouts involving biotechs cover a broad
range of types of collaboration – research, development, distribution etc, the payouts
between the pharmaceutical companies, other than acquisitions, are for asset
purchases – typically the purchase of a particular product line.
The number of European alliances with reported payouts was fairly small and
therefore there is a need for caution in drawing conclusions. After excluding alliances
involving acquisitions about 20 alliances reported alliance payouts totalling about
$280m, generally in the form of licence fees and estimates of milestone payments
made at the time of the alliance announcement. About 45% of this amount was for
alliances between biotechs, with the proportion moving closer to 50% in 2001.
Alliance Technologies
It was suggested in the Introduction to this paper that one of the motivations for
alliances is to gain access to new drug discovery and development technologies. The
human genome project in particular has created firms with specialist sources of
databases of information that can provide this on a commercial basis to other biotech
and pharmaceutical firms. There are other technologies that can facilitate drug design
or improving targeting. Others are supporting technologies. For instance gaining
information (bioinformatics) is one of the fastest growing and most significant
technology related reasons for entering into an alliance.
ReCap categorises alliances according to about 50 technologies. The database
identifies the technologies involved in each alliance. As with other alliance attributes
multiple technologies are possible for a single alliance. The main drug technologies
involved in alliances for 2001 are shown in the table below. In addition to
bioinformatics already mentioned gene expression and sequencing are both
prominent. Various technologies relating to drug design are also important such as
monoclonal.
To gain an overall perspective of the recent growth in these principal drug related
technologies, those above were grouped into four categories:
Drug target related Drug design Drug testing Supporting

and other
TECHNOLOGIES
Proteomics Monoclonals Combinatorial
Pharmcogenomics
Gene expression Oligonucleotide Microarrays
Drug delivery
Gene sequencing Recombinant DNA Screening
Device
Synthetics
Bioinformatics
As can be seen the four categories are indicative rather than prescriptive with a
number of the technologies having applications in more than one category. Alliances
involving drug targeting and various supporting technologies have shown the most
rapid growth over the last few years (see chart below). Supporting technologies
include bioinformatics which has shown the most rapid growth. About 20% of
alliances in 2001 involved bioinformatics. The category also includes alliances invo
lving devices, some of which pertain to the drug discovery and development process,
but in other cases involve less relevant diagnostic and other devices. The largest
number of alliances involving drug targeting technologies is related to gene
expression and sequencing – with about 20% of alliances in 2001 involving gene
expression. In this category, alliances involving proteomics increased from about 10
in 1999 to over 90 in 2001. Overall the number of alliances involving drug testing
remained fairly even through the period although alliances involving screening
showed significant growth in 2001.
In 2001 about 1000 alliances were announced and recorded on the Recap database
compared with just over 600 in 2000 and the 200-300 recorded for much of the 1990s.
This growth has been largely the result of the increase in the number of alliances
entered into with biotech firms. The largest component of this growth was in alliances
between biotech companies.
In terms of alliance attributes in 2001, 65% involved licensing arrangements, although
it would appear that their purposes vary widely. Over 20% involve research,
collaboration, or development, while 10% involve distribution. Only a small
proportion involves equity or other payments.
The data suggests that alliances between pharmaceutical companies and biotech are
more serious business arrangements than those between biotech. They are more likely
than others to involve licensing and a higher proportion involve drug development,
equity injections, distribution and marketing.
In this sense they are closer in form to those contemplated in the theoretical
framework developed by Aghion and Tirole and tested by Lerner and Merges referred
to in the introduction. However the framework appears to be less relevant to
explaining the motivation and behaviour of the parties in the rapidly growing alliances
between biotechs which appear not to involve large amounts of money, but where
there are technological collaborations supporting advances in platform technologies.
European alliances, particularly given the small number recorded on the Recap
database, follow a remarkably similar pattern. There is some evidence however that
they are at an earlier stage of development to the average for the rest of the world. For
instance a significantly lower proportion involves licensing (51% vs. 65%). An
analysis of alliance payouts confirms the increasing importance of alliances with bio
techs which was evident from the number of alliances. For much of the 1990s payouts
(excluding those for acquisitions) were dominated by transactions between
pharmaceutical companies. In contrast in 2001 payouts involving alliances with bio
techs reached over $7billion exceeding payouts involving pharma/pharma alliances.
In terms of technologies involved in the alliances, those involving drug targeting and
various supporting technologies particularly bioinformatics have shown the fastest
growth. Of those involving drug targeting gene expression and sequencing is the most
important. In the field of bioinformatics Australia is reasonably placed. Proteome
Systems are prominent with 16 alliances recorded on Recap. The results presented in
this paper indicate that the market place for pharmaceutical discoveries and
technology through alliances is a significant part of the industry’s development
process and that its importance has grown remarkably in the last few years. Those
European alliances listed on Recap demonstrate a tentative participation in this
marketplace by a small number of European bio techs and research institutes.
I. ANALYSIS OF WOCKHARDT’S ACQUISITION

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by
leveraging two powerful trends in the world healthcare market - globalization and
biotechnology.
Acquisition Management
The company has a strong track record in acquisition management, with three
successful acquisitions in the European market and two in the domestic space.
The acquisitions in Europe and the subsequent integration of their operations have
strengthened Wockhardt’s position in the high-potential markets of UK and Germany,
and have expanded the global reach of the organization.
The growth drivers for Wockhardt’s European business include exports, new product
launches, penetration in the European Union through mutual recognition, and strategic
acquisitions.
• Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10
largest generics companies in UK and the second largest hospital generics
supplier.
• The Company has a comprehensive, FDA-approved manufacturing facility
for injectables that plays a strategic role in driving the company’s growth
through partnerships in contract manufacturing
• Wockhardt UK has built up a critical mass in the segments of Retail Generics,
Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care
(denture cleaning tablets, powders and fixative creams)
• The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic
entry point into Germany, the largest generics market in Europe
• Esparma has a strong presence in the high-potential segments of urology,
neurology and diabetology, assisted by a dedicated sale & marketing
Infrastructure.
The key to Wockhardt’s successful acquisition management is the management’s
ability to turnaround the acquired company in record time and thus create value out of
the acquisition. The company believes in value buys that would have a tactical fit with
its core competencies and key strategic objectives. The acquisitions are mainly driven
by market access since Wockhardt has an extensive pipeline of generics and bio
generics and needs a strategic front-end for the same. The company has plans for
further acquisitions in the developed markets of Europe and US to further consolidate
and strengthen their positions in these geographies.
II. IMPLICATIONS OF THE MERGER OF RANBAXY AND DAIICHI
We will study the implications of the merger between Ranbaxy and Daiichi Sankyo,
from an intellectual property as well as a market point of view.
Why did Ranbaxy go in for a merger with Daichii?
Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy
Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to
operate as Daiichi Sankyo’s subsidiary but was managed independently. The main
benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing
infrastructure and supply chain strengths. Ranbaxy gained access to Daiichi Sankyo’s
research and development expertise to advance its branded drugs business. Daiichi
Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the
generics segment and both companies acquired a broader product base, therapeutic
focus areas and well distributed risks. Ranbaxy is now functioning as a low-cost
manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a smoother
access to and a strong foothold in the Japanese drug market. The immediate benefit
for Ranbaxy was that the deal freed up its debt and imparted more flexibility to its
growth plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi
Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical
market.
Synergies
The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their
respective presence in the developed and emerging markets. While Ranbaxy’s
strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the
potential of the generics business, Ranbaxy’s branded drug development initiatives
for the developed markets will be significantly boosted through the relationship.
To a large extent, Daiichi Sankyo will be able to reduce its reliance on only branded
drugs and margin risks in mature markets and benefit from Ranbaxy’s strengths in
generics to introduce generic versions of patent expired drugs, particularly in the
Japanese market.
Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and
have profound strength in striking lucrative alliances with other pharmaceutical
companies. Despite these strengths, the companies have a set of pain points that can
pose a hindrance to the merger being successful or the desired synergies being
realized.
With R&D perhaps playing the most important role in the success of these two
players, it is imperative to explore the intellectual property portfolio and the gaps that
exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by
both companies in the period 1998-2007. While Daiichi Sankyo’s patenting activity
has been rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in
its patenting activity until 2005. In fact, during 2007, the company’s patenting activity
plunged by almost 60% as against 2006.
Post-acquisition Objectives
In light of the above analysis, we see that Daiichi Sankyo’s focus is to develop new
drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. In a global
pharmaceutical industry making a shift towards generics and emerging market
opportunities, Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of
its global counterparts Novartis and local competitors Astellas Pharma, Eesei and
Takeda Pharmaceutical.
Post acquisition challenges included:-
• Managing the different working and business cultures of the two
organizations
• Undertaking minimal and essential integration
• Retaining the management independence of Ranbaxy without hampering
synergies.
BENEFITS TO RANBAXY AND DAIICHI FROM THE MERGER
• Daiichi Sankyo’s move to acquire Ranbaxy has enabled the company to gain
the best of both worlds without investing heavily into the generic business.
• Furthermore, Daiichi Sankyo’s portfolio has broadened to include steroids
and other technologies such as sieving methods, and a host of therapeutic
segments such as anti-asthmatics, anti-retroviral, and impotency and anti-
malarial drugs.
• Daiichi Sankyo now has access to Ranbaxy'
s entire range of 153 therapeutic
drugs across 17 diverse therapeutic indications.
• Through the deal, Ranbaxy has become part of a Japanese corporate
framework, which is extremely reputed in the corporate world. As a generics
player, Ranbaxy is very well placed in both India and abroad.
• Given Ranbaxy’s intention to become the largest generics company in Japan,
the acquisition provides the company with a strong platform to consolidate its
Japanese generics business. From one of India'
s leading drug manufacturers,
Ranbaxy can leverage the vast research and development resources of Daiichi
Sankyo to become a strong force to contend with in the global pharmaceutical
sector. A smooth entry into the Japanese market and access to widespread
technologies including, plant, horticulture, veterinary treatment and cosmetic
products are some things Ranbaxy can look forward as main benefits from the
deal.
• Through the deal, Ranbaxy has become part of Japanese corporate
framework, which is extremely reputed in the corporate world. As a generics
player, Ranbaxy is very well placed in both India and abroad.
• Given Ranbaxy’s intention to become the largest generics company in Japan,
the acquisition provides the company with a strong platform to consolidate its
Japanese generics business. From one of India'
s leading drug manufacturers,
Ranbaxy can leverage the vast research and development resources of Daiichi
Sankyo to become a strong force to contend with in the global pharmaceutical
sector. A smooth entry into the Japanese market and access to widespread
technologies including, plant, horticulture, veterinary treatment and cosmetic
products are some things Ranbaxy can look forward as main benefits from the
deal.
CHAPTER-7
SWOT ANALYSIS
Indian Pharmaceutical Industry
A scan of the internal and external environment is an important part of the strategic
planning process. Environmental factors internal to the firm usually can be classified
as strengths (S) or weaknesses (W), and those external to the firm can be classified as
opportunities (O) or threats (T). Such an analysis of the strategic environment is
referred to as a SWOT analysis. The SWOT analysis provides information that is
helpful in matching the firm'
s resources and capabilities to the competitive
environment in which it operates. As such, it is instrumental in strategy formulation
and selection. The following diagram shows how a SWOT analysis fits into an
environmental scan:
SWOT Analysis Framework
Environmental Scan
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
SWOT Matrix
Figure 17
Strengths
A firm'
s strengths are its resources and capabilities that can be used as a basis for
developing a competitive advantage. Examples of such strengths include:
• patents
• strong brand names
• good reputation among customers
• cost advantages from proprietary know-how
• exclusive access to high grade natural resources
• favourable access to distribution networks
Weaknesses
The absence of certain strengths may be viewed as a weakness. For example, each of
the following may be considered weaknesses:
• lack of patent protection

• a weak brand name
• poor reputation among customers
• high cost structure
• lack of access to the best natural resources
• lack of access to key distribution channels
In some cases, a weakness may be the flip side of a strength. Take the case in which a
firm has a large amount of manufacturing capacity. While this capacity may be
considered a strength that competitors do not share, it also may be a considered a
weakness if the large investment in manufacturing capacity prevents the firm from
reacting quickly to changes in the strategic environment.
Opportunities
The external environmental analysis may reveal certain new opportunities for profit
and growth. Some examples of such opportunities include:
• an unfulfilled customer need

• arrival of new technologies
• loosening of regulations
• removal of international trade barriers
Threats
Changes in the external environmental also may present threats to the firm. Some
examples of such threats include:
• shifts in consumer tastes away from the firm'

s products
• emergence of substitute products
• new regulations
• increased trade barriers
The SWOT Matrix
A firm should not necessarily pursue the more lucrative opportunities. Rather, it may
have a better chance at developing a competitive advantage by identifying a fit
between the firm'
s strengths and upcoming opportunities. In some cases, the firm can
overcome a weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these
factors can be constructed. The SWOT matrix (also known as a TOWS Matrix) is
shown below:
SWOT / TOWS Matrix
Strengths Weaknesses
S-O strategies W-O strategies

Opportunities
S-T strategies W-T strategies

Threats
Figure 18
S-O strategies pursue opportunities that are a good fit to the company'
s
strengths.
• W-O strategies overcome weaknesses to pursue opportunities.

• S-T strategies identify ways that the firm can use its strengths to reduce its
vulnerability to external threats.
• W-T strategies establish a defensive plan to prevent the firm'
s weaknesses
from making it highly susceptible to external threats.
SWOT Analysis of Indian Pharmaceutical Industry
Recent liberalization, globalization and development of software information have

brought the countries of the world closer. It is a global market place all-about.
The American Pharmaceutical industry has placed a pioneer role in the development
of the drug industry through in depth, timely and useful research and bulk
manufacturing of the drug, although the US Pharmaceutical industry is enjoying the
leadership position in the world pharmaceutical market.
This article analyzes the current information available about the Indian
pharmaceutical industry with special emphasis on Swot Analysis & what strategy
Indian Pharmaceutical Co. should take to complete with MNC Co.
For the empirical study of SWOT in pharmaceutical industry of India, we have

considered the following hypothesis: -
1. R&D expenditure of Indian Pharmaceutical Organization is low.

2. Export of generic product in US and Europe will be a strategically important
step for Indian Pharmaceutical Company.
3. The cost of manufacturing, conducting clinical trial, and research are lower in
India than US.
4. Clear sense of strategic vision is required.
5. Human assets are abundantly available in India.
6. Indian Pharmaceutical Company has to consider licensing, joint venture,
contact research etc.
The pharmaceuticals industry'
s activities span a wide spectrum ranging from R&D to
production to marketing. Companies with limited resources in finance, manpower and
facilities need to prioritise and make decisions as to what can be done in-house
against what needs to be outsourced. In that context, there is much hesitancy on the
part of most R&D based pharmaceutical companies to outsource drug discovery
research from third parties for several reasons. First, it has been reported that in spite
of declining pipeline of new products, the returns on R&D calculated over a seven
year period has been shown to be still much higher than returns on capital employed
for manufacture or marketing . Secondly, for reasons of confidentiality and the tricky
issues of sharing IPRs with the outsourcing partner, companies are generally averse to
outsourcing drug discovery from third parties. This, however does not apply to
developmental or clinical research since, by the time the candidate molecule reaches
these milestones, patent applications would have been in place and confidentiality
issues would no longer be of concern. It is for this reason hat the MNCs restrict
outsourcing to developmental R&D, custom synthesis, formulation development and
clinical research from third parties who have necessary skills, infrastructure, resources
and capabilities to maintain quality standards required by Regulatory Agencies.
It is often said that the pharma sector has no cyclical factor attached to it. Irrespective
of whether the economy is in a downturn or in an upturn, the general belief is that
demand for drugs is likely to grow steadily over the long-term. True in some sense.
But are there risks? This article gives a perspective of the Indian pharma industry by
carrying out a SWOT analysis (Strength, Weakness, Opportunity, Threat).
Before we start the analysis let’s look a little back in the industry’s last six years
performance. The Industry is a largely fragmented and highly competitive with a large
number of players having interest in it. The following chart shows the breakup of the
growth (YoY) of Indian pharmaceutical industry in last six years.
*Volume growth of existing products
The SWOT analysis of the industry reveals the position of the Indian pharma industry
in respect to its internal and external environment.
STRENGTHS-
India today is the 4th largest producer of bulk drugs and formulations in the World
with domestic market of Rs 22,000 crore and an export market of Rs 12000 crore.
Exports are over five times imports and have been growing at > 20% annually over
the last several years. India has the largest number of FDA approved plants outside
the U.S. and 20% of all ANDAs filed in the U.S. are from Indian companies. These
companies dominated in DMF filings with U.S. FDA as well, with 74 of the 198
filings during the 1st quarter of 2005 being from India. The phenomenal growth of the
Indian sector of the industry has been primarily due to the Indian Patents Act 1970
which prohibited the filing of product patents in pharmaceuticals. That the Indian
sector benefited is obvious from the fact that while in 1970 two thirds of the market
share was held by the MNCs in 2004 the order has been reversed. Similarly while in
12970, there were only 3 Companies in the top ten which were solely Indian
Companies today there are only three MNCs in the top ten in India. As a sequel to
India signing the GATT and WTO and with the ushering in of the New Patent Act in
March 2005 introducing a product patent regime, Indian companies are moving into
the area of new drug discovery research. During the last five years between the top ten
companies investments in new drug research has reached Rs 1200 crores in 2004.
With over a 100 patent applications filed in India and abroad and over a dozen
candidate molecules reaching an IND stage and various phases of clinical trials the
cost effectiveness of Indian new drug research is no less than in any other Country.
Over half a dozen candidate molecules have been the subject of licencing for
development by international companies.
1. India with a population of over a billion is a largely untapped market. In fact the
penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the same
for countries like Brazil is US$ 453 and Malaysia US$189.
2. The growth of middle class in the country has resulted in fast changing lifestyles in
urban and to some extent rural centres. This opens a huge market for lifestyle drugs,
which has a very low contribution in the Indian markets.
3. Indian manufacturers are one of the lowest cost producers of drugs in the world.
With a scalable labour force, Indian manufactures can produce drugs at 40% to 50%
of the cost to the rest of the world. In some cases, this cost is as low as 90%.
4. The fact that despite the low level of unit labour costs India boasts a highly skilled
workforce has enabled the country'
s pharmaceutical industry at a relatively early stage
to offer quality products at competitive prices. Each year, roughly 115,000 chemists
graduate from Indian universities with a master’s degree and roughly 12,000 with a
PhD.4 The corresponding figures for Germany just fewer than 3,000 and 1,500,
respectively – are considerably lower. After many chemists from India migrated to
foreign countries over the last few years, they now consider their chances of
employment in India to have improved. As a result, a smaller number is expected to
go abroad in the coming years; some may even return.
5. Indian pharmaceutical industry possesses excellent chemistry and process
reengineering skills. This adds to the competitive advantage of the Indian companies.
The strength in chemistry skill helps Indian companies to develop processes, which
are cost effective.
6. Efficient technologies for large number of Generics.
7. Large pool of skilled technical manpower.
8, Increasing liberalization of government policies
WEAKNESS-
While considering the weaknesses of the Indian industry as destinations for
outsourcing, there are perceptions and realities. The major areas of concern are, lack
of adequate skills and infrastructure in many areas of R&D, imprecise documentation
systems, low track record of performance in the relevant fields, ambiguities in the
interpretation and implementation of global regulatory and Intellectual protection
standards, issues on maintenance of confidentiality, protection of data submitted for
regulatory clearances (data exclusivity), non-adherence to time schedules and secrecy
modalities. While some of these fall under the category of perceptions, most of the
real ones are not insurmountable considering the intellectual and entrepreneurial
capabilities of the Indian companies.
1. The Indian pharmaceutical companies are marred by the price regulation. Over a
period of time, this regulation has reduced the pricing ability of companies. The
NPPA (National Pharmaceutical Pricing Authority), which is the authority to decide
the various pricing parameters, sets prices of different drugs, which leads to lower
profitability for the companies. The companies, which are lowest cost producers, are
at advantage while those who cannot produce have either to stop production or bear
losses.
2. Indian pharmaceutical sector has been marred by lack of product patent, which
prevents global pharmaceutical companies to introduce new drugs in the country and
discourages innovation and drug discovery. But this has provided an upper hand to the
Indian pharma companies.
3. Indian pharma market is one of the least penetrated in the world. However, growth
has been slow to come by. As a result, Indian majors are relying on exports for
growth. To put things in to perspective, India accounts for almost 16% of the world
population while the total size of industry is just 1% of the global pharma industry.
4. Due to very low barriers to entry, Indian pharma industry is highly fragmented with
about 300 large manufacturing units and about 18,000 small units spread across the
country. This makes Indian pharma market increasingly competitive. The industry
witnesses price competition, which reduces the growth of the industry in value term.
To put things in perspective, in the year 2003, the industry actually grew by 10.4%
but due to price competition, the growth in value terms was 8.2% (prices actually
declined by 2.2%).
5. Low technology level of Capital Goods of this section.
6. Non-availability of major intermediaries for bulk drugs.
7. Lack of experience to exploit efficiently the new patent regime.
8. Very low key R&D and Low share of India in World Pharmaceutical Production
(1.2% of world production but having 16.1% of world'
'
s population).
9. Very low level of Biotechnology in India and also for New Drug Discovery
Systems.
10. Lack of experience in International Trade.
11. Low level of strategic planning for future and also for technology forecasting.
OPPORTUNITIES –
Indian pharmaceutical companies have three major opportunities in the global scene.
They are:
1) As a major supplier of Generic Bulk Drugs and Formulations to the Regulated and
Less Regulated Global markets.
2) As a destination for contract research, custom synthesis, contract production and

clinical research.
3) New drug research including discovery of candidate drugs, protecting them through
the patent system and licensing on commercial terms for development by third parties.
Of these the one which is relatively a new activity for Indian companies and therefore
requires serious consideration is the potential for India to be a major destination for
global pharmaceutical industry'
s outsourcing activities. Large pharmaceutical
companies are increasingly looking for off-shore outsourcing to increase their
competitiveness by reducing costs as well as '
time to market'in addition to utilizing
expertise of the partner in areas where in-house capabilities are inadequate. At the
same time outsourcing also enables them to utilise their resources to capitalise their
own internal strengths.
What can Indian industry offer? India has unique strengths in areas of chemical
technology to develop innovative processes, custom production of synthetic drugs
involving highly sophisticated technologies and clinical research. In all these areas
Indian companies can indeed develop strategies for entry into long term contractual
arrangements with leading R&D based pharmaceutical companies and develop
synergistic collaboration ventures. Since all these activities happen after exclusivity is
guaranteed though the patent system, confidentiality issues are not important.
India presents major opportunities for multinational pharmaceutical companies in

clinical trials, contract research and manufacturing. The licensing opportunities for
big pharmaceutical companies as well as the collaborative business model including
services give access to low cost smart intelligent base, indigenous technology and
most importantly the large domestic market. The most important advantage India
presents is low cost that includes the low development costs, low fixed asset costs,
low clinical trial costs and low cost workers.
Several improvements have been seen in India in contrast to the image it presented to
world until recently. Infrastructure in India is improving and there are investments in
huge projects such as the golden quadrilateral road project. The significant growth
and capability is demonstrated by Indian IT industry. The Indian biotechnology sector
is developing with government initiatives and private sector participation with
tremendous opportunities to be explored and paving ways to more fruitful
partnerships with biotechnology companies and world class research institutes.
Ministry of Health and Family Welfare in India have initiated several measures to
ensure the quality of drugs available in India. Steps have been taken against
counterfeit drugs which accounts for 15-30 per cent products in the market.
New health insurance initiatives in India have increased the affordability of the
middle class population. There are about half a million people who can afford good
quality healthcare expenditure. However, the problem remains as urban areas are the
important private sector investment centres and the rural areas still do not have access
to good healthcare system. Due to India’s vast rural population, only one third of the
country’s inhabitants have access to medical care. Although the government is
investing in healthcare for the underprivileged, around 65 per cent of hospitals and 85
per cent of hospital beds are in urban areas. This situation is expected to improve in
future with access to better medical facility.
The OTC segment is expected to grow with the increasing collaborative

pharmaceutical industry and government initiatives along with proper regulatory
framework, which will enhance the business. The new DPCO and National Health
policy post patent reform 2005 is expected to encourage investment for drug R&D in
India. The growth opportunities can be seen in the chronic segments such as diabetes,
cardiovascular, central nervous system disorders, cancer and other maladies. As
second largest population base India presents significant clinical trial opportunities
because of the low cost and large diverse pool of untreated patients.
Major pharmaceutical companies such as Aventis, Novartis, GlaxoSmithKline, Eli

Lilly, Pfizer and Novo nordisk have started clinical trials across India especially in
Andhra Pradesh and Gujarat States. What is required in India is strategic
identification of market viability. The estimation of opportunities and forecasting the
market is an important step towards assessing the commercial viability for drug
development and clinical trials. Segmentation is important as for clinical trial
opportunities, segmenting the clinical trial service providers will help in estimating
the market. Large and small hospitals and contract clinical trial providers could be a
plausible segmentation for clinical trial service providers in India.
An area Indian companies including dedicated ones have great potential to be

involved in is clinical research. While several estimates are available, it is fair to
assume that 30-35% of total drug discovery and development costs are today
deployed for clinical research. Such costs could be reduced to half when clinical
research activities are outsourced from low cost economies such as India. There are at
any point in time over 500 molecules undergoing clinical trials in various phases in a
large number of centres around the World in addition to many more for new
indications of marketed drugs and post marketing surveillance for safety and efficacy.
Indian advantages apart from lower costs rest with availability of large and diverse
patient populations, skilled clinicians, ability to meet global ICH guidelines etc. The
recent changes in Schedule Y of the Drugs & Cosmetics Act also permits on the merit
of each case the conduct of trials in a concurrent phase with those carried out in
centres abroad... English being the language of Science and Medicine in India,
excellent communication facilities and adequate documentation and analytical
systems are the other advantages that India provides. During the last ten years , over a
dozen Clinical Research Organisations have been set up in the Country and many
trials have been carried out meeting FDA standards.
1. The migration into a product patent based regime is likely to transform industry
fortunes in the long term. The new patent product regime will bring with it new
innovative drugs. This will increase the profitability of MNC pharma companies and
will force domestic pharma companies to focus more on R&D. This migration could
result in consolidation as well. Very small players may not be able to cope up with the
challenging environment and may succumb to giants.
2. Large number of drugs going off-patent in Europe and in the US between 2005 to
2009 offers a big opportunity for the Indian companies to capture this market. Since
generic drugs are commodities by nature, Indian producers have the competitive
advantage, as they are the lowest cost producers of drugs in the world.
3. Opening up of health insurance sector and the expected growth in per capita
income are key growth drivers from a long-term perspective. This leads to the
expansion of healthcare industry of which pharma industry is an integral part.
4. Being the lowest cost producer combined with FDA approved plants; Indian
companies can become a global outsourcing hub for pharmaceutical products.
5. Growing incomes and growing attention for health.
6. New diagnoses and new social diseases and Spreading prophylactic approaches.
7. New therapy approaches and new delivery systems.
8. Spreading attitude for soft medication (OTC drugs) and Spreading use of Generic
Drugs
9. Globalization, New markets are opening and easier international trading.
THREATS-
The real threats for the Indian companies come from within the country as well as
from outside. Proliferation of CROs with short term goals and little understanding of
the intricacies of global regulatory requirements leads to erosion of standards,
unhealthy competition, price wars and consequently credibility loss among the
international partners. Wherever Chinese industrial units are able to offer products
and services, they have invariably undercut India on the price front. Lower costs of
utilities including power, lower costs of finance, large Government subsidies for
exports, dual exchange rates are all responsible for lower costs of Goods and Services
in China. While in the area of chemical technology, India has a lead over China or
even all other Countries, the same is not the case in fermentation related
(biotechnology products) areas. Wherever Raw Materials are to be imported,
fluctuations in their prices adversely affect costs of production. When outsourcing is
seen as a threat to domestic industry and employment opportunities, countries may
opt to bring in legislations to control them as has been done in some states in the US.
Non-tariff barriers including imposition of phyto and phyto-sanitary measures and
standards on labour and environment could stand in the way of growth of the
outsourcing opportunities in India.
Overall balance is in favour of India attaining a dominant position as an outsourcing
destination for international pharmaceuticals companies. Apart from becoming a
global player for contract research, custom production of intermediates and
development of candidate drugs for pre-clinical and clinical testing and clinical
research are areas where major strides are possible. After all, of the $ 170 Billion
estimated as the global outsourcing market by 2010, if India can get even a 10%
market share, it will still be, in value terms, double the current turnover of the entire
Indian Pharmaceutical industry. And that indeed is an achievable target.
1. There are certain concerns over the patent regime regarding its current structure. It
might be possible that the new government may change certain provisions of the
patent act formulated by the preceding government.
2. Threats from other low cost countries like China and Israel exist. However, on the
quality front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane.
3. The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the short-
term, the implications over the long-term are positive for the industry.
4. Containment of rising health-care cost and High Cost of discovering new products
and fewer discoveries.
5. Stricter registration procedures and Competition, particularly from generic
products.
6. High entry cost in newer markets and High cost of sales and marketing.
7. More potential new drugs and more efficient therapies.
8. Switching over form process patent to product patent.
PORTER’S FIVE FORCES MODEL
(a) INDUSTRY COMPETITION

Pharmaceutical industry is one of the most competitive industries in the country with
as many as 10,000 different players fighting for the same pie. The rivalry in the
industry can be gauged from the fact that the top player in the country has only 6 %
(2006) market share, and the top 5 players together have about 18 % (2006) market
share.
Thus, the concentration ratio for this industry is very low. High growth prospects
make it attractive for new players to enter in the industry. Another major factor that
adds to the industry rivalry is the fact that the entry barriers to pharmaceutical
industry are very low. The fixed cost requirement is low but the need for working
capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells
us that in bigger companies this ratio is in the range of 3.5-4 times. For smaller
companies, it would be even higher.
Many small players that are focussed on a particular region have a better hang of the
distribution channel, making it easier to succeed, albeit in a limited way.
An important fact is that, pharmaceutical is a stable market and its growth rate
generally tracks the economic growth of the country with some multiple (1.2 times
average in India). Though volume growth has been consistent over a period of time
value growth has not followed in tandem.
The product differentiation is one key factor which gives competitive advantage to the
firms in any industry. However, in pharmaceutical industry product differentiation is
not possible since India has followed process patents till date, with loss favouring
imitators. Consequently product differentiation is not a driver, cost competitiveness is.
However, companies like Pfizer and Glaxo have created big brands over the years
which act as product differentiation tools.
Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical

products discovered by MNCs at a lower cost and make good profit. But today the
scene is different with the arrival of the patent regime which has forced Indian
companies to rethink its strategies and to invest more on R&D. Also contract research
has assumed more importance now.
(b) BARGAINING POWER OF BUYERS

The unique feature of pharmaceutical industry is that the end user of the product is
different from the influencer (read doctor). The consumer has no choice but to buy
what doctor says. However, when we look at the buyer’s power, we look at the
influence they have on the prices of the product. In pharmaceutical industry, the
buyers are scattered and they as such do not wield much power in the pricing of the
products. However, govt with its policies plays an important role in regulating pricing
through the NPPA (national pharmaceutical pricing authority).
(c) BARGAINING POWER OF SUPPLIERS

The pharmaceutical industry depends upon several organic chemicals. The chemical
industry is again very competitive and fragmented. The chemicals used in the
pharmaceutical industry are largely a commodity. The suppliers have very low
bargaining power and the companies in the pharmaceutical industry can switch from
their suppliers without incurring a very high cost. However, what can happen is that
the supplier can go for forward integration to become a pharmaceutical company.
Companies like Orchid Chemicals and Sashun Chemicals were basically chemical
companies who turned themselves into pharmaceutical companies.
(d) BARRIERS TO ENTRY
Pharmaceutical industry is one of the most easily accessible industries for an
entrepreneur in India. The capital requirement for the industry is very low; creating a
regional distribution network is easy, since the point of sales is restricted in this
industry in India. However, creating brand awareness and franchisee among doctors is
the key for long term survival. Also, quality regulations by the government may put
some hindrance for establishing new manufacturing operations. The new patent
regime has raised the barriers to entry. But it is unlikely to discourage new entrants, as
market for generics will be as huge.
(e)THREAT OF SUBSTITUTES
This is one of the great advantages of the pharmaceutical industry. Whatever happens,
demand for pharmaceutical products continues and the industry thrives. One of the
key reasons for high competitiveness in the industry is that as an ongoing concern,
pharmaceutical industry seems to have an infinite future. However, in recent times the
advances made in the field of biotechnology, can prove to be a threat to the synthetic
pharmaceutical industry.
CONCLUSION
This model gives a fair idea about the industry in which a company operates and the
various external forces that influence it. However, it must be noted that any industry is
not static in nature. It’s dynamic and over a period of time the model, which have
used to analyse the pharmaceutical industry may itself evolve.
Going forward, we foresee increasing competition in the industry but the form of
competition will be different. It will be between large players (with economies of
scale) and it may be possible that some kind of oligopoly or cartels come into play.
This is owing to the fact that the industry will move towards consolidation. The larger
players in the industry will survive with their proprietary products and strong
franchisee.
In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key
players. Smaller fringe players, who have no differentiating strengths, are likely to
either be acquired or cease to exist.
The barriers to entry will increase going forward. The change in the patent regime has
made sure that new proprietary products come up making imitation difficult. The
players with huge capacity will be able to influence substantial power on the fringe
players by their aggressive pricing thereby creating hindrance for the smaller players.
Economies of scale will play an important part too. Besides government will have a
bigger role to play.
SWOT Analysis of European Pharmaceutical Industry
The Pharmaceutical industry has a lot of yet untapped potential and it will be
interesting to see how the industry matures over the long term. Undoubtedly, the long
history and global expertise of firms like Pfizer, GSK and Merck will stand them in
good stated to create and benefit from emerging global opportunities.
Notwithstanding it’s strengths, complacency must be guarded against because
smaller, agile and innovative firms are on the prowl and all it takes for the small
upstarts is a super drug that can change the entire face of the industry. We’ve seen it
in happen in the Information & Communications industry, for all we know
pharmaceuticals may just be next.
Strength of European pharma companies
1. R&D innovation with a broad therapeutic coverage

2. Marketing strength in major geographical and therapeutic areas
3. Existing Patent protection for a number of years on key products
4. Opens a huge market for lifestyle drugs
5. High level of Biotechnology in India and also for New Drug Discovery
Systems.
6. Good experience in International Trade.
7. High level of strategic planning for future and also for technology forecasting.
8. The Eastern European market registered sales growth of 19.9% from 2007 to
2008 and witnessed a CAGR of 19.6% during the period 2004–08.
9. Benchmark your performance against the leading Eastern European
pharmaceutical companies using market share data by company and
comprehending their strategies.
10. Benchmark the top 10 generic companies over the 2004-07 period, and use
detailed company analysis to measure the performances and outlooks of major
players including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-
Aventis, Watson, Bayer and Stada.
Weakness of European pharma companies
1. High cost of production.

2. Not Efficient technologies for large number of Generics.
3. Less pool of skilled technical manpower.
4. Increasing liberalization of government policies
5. Discontinuation of products in the latter stages of development
6. Co-marketing agreements can limit European pharma companies global
presence
7. Increased size and operational complexity make European pharma
companies less agile companies
8. pricing pressure, authorized generics, a lack of patient awareness and distrust
among healthcare prescribers.
9. Increasing incidence of parallel traded products will impact companies
operating in the region resulting in potential loss of sales eventually affecting
cash flows and lowering innovation in drug development.
10. Complex drug pricing, reimbursement and purchasing policies will affect the
development of new drugs thus affecting the growth of Eastern European
pharmaceutical market.
Opportunities of European pharma companies
1. Decreasing development time through favourable R&D collaborations and

internal efforts
2. Emergence of integrated global markets and globalisation for new products
3. Co-marketing agreements with companies wishing to capitalize on European
pharma companies marketing strengths, providing Companies with strong
products and therefore revenue growth
4. The new patent product regime will bring with it new innovative drugs. This
will increase the profitability of MNC pharma companies and will force
domestic pharma companies to focus more on R&D. This migration could
result in consolidation as well. Very small players may not be able to cope up
with the challenging environment and may succumb to giants.
5. Opening up of health insurance sector and the expected growth in per capita
income are key growth drivers from a long-term perspective. This leads to the
expansion of healthcare industry of which pharma industry is an integral part.
6. Aging of the world population.

7. Growing attention for health.
8. New diagnoses and new social diseases.
9. Spreading prophylactic approaches.
10. New therapy approaches and new delivery systems.
11. Spreading attitude for soft medication (OTC drugs).
12. Spreading use of Generic Drugs,
13. Globalization
14. Easier international trading.
15. Opening of new markets
Threats of European pharma companies
1. Increased competition for core products like Viagra as its high cost
encourages use of cheaper alternative treatments. An increase in the
number of safety issues surrounding Viagra
2. There are certain concerns over the patent regime regarding its current
structure. It might be possible that the new government may change certain
provisions of the patent act formulated by the preceding government.
3. Threats from other low cost countries like China and Israel exist.
However, on the quality front. So, differentiation in the contract
manufacturing side may wane.
5. Containment of rising health-care cost.
6. High Cost of discovering new products and fewer discoveries.

7. Stricter registration procedures.
8. High entry cost in newer markets.
9. High cost of sales and marketing.
10. Switching over form process patent to product patent.
11. Increasing due diligence and compliance with standards leads to cost
overruns and delays in new product launches
Environmental Analysis (PEST)
Technological advancements, tighter regulatory-compliance overheads, rafts of patent

expiries and volatile investor confidence have made the modern pharmaceutical
industry an increasingly tough and competitive environment. Below is an analysis of
the structure of the pharmaceutical industry using the PEST (political, economic,
social and technological) model?
Increasing Political Attention:
Over the years, the industry has witnessed increased political attention due to the
increased recognition of the economic importance of healthcare as a component of
social welfare. Political interest has also been generated because of the increasing
social and financial burden of healthcare. Examples are the UK’s National Health
Service debate and Medicare in the US..
Economic Value Added:
In the decade to 2003 the pharmaceutical industry witnessed high value mergers and
acquisitions7. With a projected stock value growth rate of 10.5% (2003-2010) and
Health Care growth rate of 12.5% (2003-2010), the audited value of the global
pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004. Only
information technology has a higher expected growth rate of 12.6%. Majority of
pharmaceutical sales originate in the US, EU and Japanese markets. Nine geographic
markets account for over 80% of global pharmaceutical sales these are, US, Japan,
France, Germany, UK, Italy, Canada, Brazil and Spain. Of these markets, the US is
the fastest growing market and since 1995 it has accounted for close to 60% of global
sales. In 2000 alone the US market grew by 16% to $133 billion dollars making it a
key strategic market for pharmaceuticals.
The Social Dimension:
Good health is an important personal and social requirement and the unique role
pharmaceutical firms’ play in meeting society’s need for popular wellbeing cannot be
underestimated. In recent times, the impact of various global epidemics e.g. SARS,
AIDS etc has also attracted popular and media attention to the industry. The effect of
the intense media and political attention has resulted in increasing industry efforts to
create and maintain good government-industry-society communications.
Technological Advances:
Modern scientific and technological advances in science are forcing industry players
to adapt ever faster to the evolving environments in which they participate. Scientific
advancements have also increased the need for increased spending on research and
development in order to encourage innovation.
Legal Environment:
The pharmaceutical industry is a highly regulated and compliance enforcing industry.

As a result there are immense legal, regulatory and compliance overheads which the
industry has to absorb. This tends to restrict it’s dynamism but in recent years,
government have begun to request industry proposals on regulatory overheads to so as
not to discourage innovation in the face of mounting global challenges from external
markets.
3. Structural Industry Analysis (Porter’s Five Forces)
This section provides a summary positional analysis of the pharmaceutical industry

using
Porter’s Five Forces model (see diagram below)

Figure: Porter’s Five Forces Model for Industry Analysis8
Barrier to entry: High (Pharmaceuticals). Cost of R&D and patent limitations

Industry Competition: High. Advantages gained by first mover advantage
(patents)
Suppliers: supplier power is low
Buyers: buyer power is low
Substitutes: low (with patents) medium (after patent expiry)
Overall, the pharmaceutical industry shows an upward trend in its core markets. The
industry remains highly valued has a favourable market position with strong financial
make-up and strong earnings growth. Its future potential demand trend is positive and
despite increased competition the industry still shows a continuing upward growth
momentum. Datamonitor’s9 forecast of the leading 16 pharmaceutical companies for
2001 to 2007 suggests that combined sales will grow at a minimum rate of 5.2 percent
based on the potential of their product pipeline.
4. Strategic Issues Facing The Industry
The strategic issues shaping the modern pharmaceutical industry are:
Industry Consolidation:
Merger activity has been intense within the industry in the last decade. Analysts
believe that three firms; GlaxoSmithKline, Bristol-Myers Squibb and Merck are likely
candidates to be directly involved in the next round of industry consolidation. Eli
Lilly and AstraZeneca would make the best partners for GlaxoSmithKline, combining
the latter'
s commercialization strengths with a partner'
s valuable portfolio and
pipeline. A merger with Merck and Johnson may provide a complementary portfolio
and a short-term revenue boost, but the long term consequences of such a deal would
be a cause of concern if pursued due to the monopolistic consequences such a merger
could have.
Science and Innovation:
Over the last decade the knowledgebase of the pharmaceutical sciences has changed
dramatically and continues to change at a fairly high rate. As new technologies and
bodies of scientific knowledge emerge, whole new sets of opportunities and threats
are being introduced.
Breakthroughs in science, innovation and technology continue to create novel

opportunities for new products and processes. This has increased the pace of the
industry and major players must keep up with changes else become vulnerable. Over
the last decade, we have seen this happen as companies that were not very effective in
research and new product development were acquired.
Increased Competition:
A major issue facing the industry is the intense competition and the changing face the
pharmaceutical market. The industry has seen a legion of new market entrants,
increased competition among key players and industry consolidation. A host of large-
scale mergers and acquisitions have taken place over the last two decades.
Competitive advantage within the industry is being constantly redefined and to
maintain their presence, key industry players are
being forced to revamp their organisational structure, overcome huge barriers in

R&D, clinical trials simply to ensure continuity and maintain profitability.
Changing Consumer Profile:
The profile of the pharmaceutical consumer has changed. Consumers are now better
informed
and there are expectations on the industry to show that their products deliver better
health and
greater economic value. Also, in previous decades governments were either the sole
or major purchasers of pharmaceutical products but the current trend shows that
healthcare costs are being constantly being shifted away from the government, which
acted as the traditional social purchaser, over to health insurance companies and
common individuals. The increasing price sensitivity of the common consumer and
financial muscle of healthcare agencies and health insurance companies is forcing
firms in the industry to cut product prices thereby reducing margins. In the future, as
government shifts more healthcare costs to the end consumer, consumers will
increasingly pay more for access to healthcare and medicines and this will further
increase their price sensitivity.
Ageing Populations:
Due to ageing global populations there is external pressure on the industry to reduce
the price
and long-term dependence on pharmaceuticals. This, in addition to the market

requirement for the industry to improve current new medicines and lower product
costs is increases the pressure on industry to aggressively reduce it’s cost base without
compromising gross spend on research and development which most firms require to
maintain competitiveness.
Changing Geo-political Environment:
The political environment worldwide has become a major force. Due to the socio-
political consequences of healthcare and medicines, the pharmaceutical industry is
facing increasing political pressure to reduce prices and control costs. In certain geo-
political areas, particularly in developing economies, government are increasing
pressure on pharmaceutical firms to act in the social interest and this is likely to
intensify in the future. Examples are issues around AIDS in Africa. African
government'
s policies are becoming increasingly stringent with regards to the conduct
of pharmaceutical firms.
Decreasing Consumer Influence:
A unique feature of the pharmaceutical market is that the final consumer has little or
no say in the choice of medicines and treatments. Medical doctors, general
practitioners and pharmacists usually act as agents of the final consumer and they are
largely responsible for the consumer’s purchasing decisions. As a result of this
pharmaceutical companies’ direct a sizeable proportion of their marketing efforts at
these agents. With the advent of the internet, consumer enlightenment has the capacity
to erode the influence of the medical agents as consumers have easier access to
medical information and treatments.
CHAPTER-8-
INTERNATIONAL BUSINESS OF PHARMACEUTICAL
INDUSTRY
The impact of IPR will largely depend on the developmental status of the economy
such as the availability of technical manpower and infrastructure, capacity of the
domestic industry, and so on. A country with a strong domestic industry such as India
is in a relatively advantageous position than a country where domestic industry does
not have much presence and depends on multinationals. It is true that the impending
WTO regime has stimulated the R&D investment in India. Some of the big units have
started strengthening their R&D and have also filed number of applications for
patents. There is some evidence available regarding the mergers and amalgamations
to pool the human and financial resources (CMIE, 2000) to strengthen the R&D in
new product development. These firms will definitely benefit by the stronger
protection. Some of the R&D and manufacturing facilities set up in these firms meet
the international standards, and they have already been approached by multinationals
for conducting research and undertaking manufacturing on their behalf. Besides the
R&D investment in traditional chemical based screening, some of the R&D firms are
looking for breakthroughs in biotechnology research. With TRIPS allowing the
patenting of the living organisms, research in biotechnology is the latest buzzword in
the Western pharmaceutical industry. Significant breakthroughs have already been
made in the area of stem cells and cloning which have potential cure for some of the
dreaded diseases like cancer, Parkinson disease, Alzheimer’s and nervous disorders.
Cloned animals have been patented and are being used for research purposes. The
human genome project or the sequencing of DNA, which has already spent about $3
billion, will be highly beneficial for the pharmaceutical companies to identify the
toxicity of the new drugs on different population or in knowing the reasons for
prevalence of certain diseases in specific regions or communities.
In contrast to this, in India biotech research is concentrated in the areas of vaccines,

diagnostics, molecular and cellular biology, cell culture, fermentation and hybridoma
technology. Lalitha (2001) observes that some of the research based pharmaceutical
firms have ventured into biotech research since the late ‘90s. Recombinant vaccines
(for typhoid, rabies and hepatitis B), HIV 1&2 diagnostic test kit and gene probe test
for TB are some of the important areas where research is being currently carried out.
It is also observed that though simple diagnostic kits, were the first to arrive in the
biotech market elsewhere, in India only a handful of companies are engaged in the
production of TB diagnostic kit. Nevertheless, a few companies have developed
technology in enzyme immobilization used for conversion in the synthesis of semi-
synthetic penicillin like ampicilin and amoxcyline. In the case of DNA or r-DNA
research, research is at a basic level, for two reasons. India does not recognize
patenting living organisms and because of the moral and ethical issues concerning the
human stem cells and embryonic research, R&D firms tread cautiously in this area.
As part of trade liberalization though most of the drugs were delicensed yet, bulk
drugs produced by the use of re-combinant DNA technology and bulk drugs requiring
in vivo use of nucleic acid as the active principles and formulations based on use of
specific cell or tissue targeted formulations shall continue to remain under
compulsory licensing (Government of India, 2000). Also a committee set up under the
Department of Biotechnology scrutinizes each research application concerning
embryos and only embryos discarded in the fertility clinics can be utilized for
research purposes. This area being highly research and resource intensive currently
very few firms are engaged in this research.
The Indian Pharmaceutical Industry in 2009

Turnover: $6.02 billion, up 6.4 percent year over year
Exports: $3.72 billion
Imports: $985.3 million
Bulk drug production: $2.10 billion, with over 400 bulk drugs produced. Over 60,000
formulations produced, in 60 therapeutic categories
Capital investment: up 14.8 percent to $1.16 billion
Employment: 5 million direct, 24 million indirect
Pharmaceutical outsourcing is increasing world over and it is expected that contract

research and manufacturing would reach $6.4 and 22.5 billion respectively in 2001
(Scrip’s Year Book, 2000). These figures could increase still more with the vertical
disintegration of activities by the multinationals as they review their core
competencies. Henceforth, R&D could take place in one country, manufacturing in
another and marketing rights could be given to a totally different country. Domestic
units with state of art facilities, infrastructure and manpower that matches the product
profile of the multinationals would derive the maximum benefits. These units could
flag off the foreign direct investment in manufacturing and R&D. This segment that
has been able to export its products to both developed and developing countries
(Table 3) can widen the market further in the universal patent regime provided the
manufacturing practices and the quality standards match the standards at the export
destination. While the medium and big units can adopt any of the or combination of
strategies that were mentioned above, at present the future of the thousands of small
units is not very clear. Under normal circumstances, units that are producing the
generic drugs should not get affected because these drugs are not patent protected.
But it is likely that, they may face competition from large producers who may
compete on larger volume and lower cost of production. Evidence from Jordan
indicate that the local industry had to suffer in terms of investment and production and
a number of small local firms had to close their operations (Correa, 2000).
In order to increase the global prospects of the pharmaceutical industry in the post
2005 period, the Central Government has fixed the deadline of December 2003, to
comply with the Good Manufacturing Practices set by World Health Organisation.
Since this is mandatory for all the units, it means incurring expenditures that could
range from Rs. 15 lakhs to 1 crore per unit. In some cases, it would involve shifting to
new premises altogether. A few units might exit from business because of this. As
contract manufacturers it is essential that both the parent unit and the loan licensee
meet these requirements in cases where the production is meant for exports. While
these standards improve the quality on par with international standards, it will also act
as potential entry barriers for new firms to enter (Lalitha, 2002b).
The strength of the Indian pharmaceutical industry is in reverse engineering. Such

units by utilising the provisions under compulsory licensing, exceptions to exclusive
rights and the Bolar exception should aim at producing the generic version of the
patented product and those that are nearing patent expiry. Such firms should also be
engaged in research leading to new drug delivery mechanisms and in identifying new
uses of existing drugs. In this context, it is also essential to protect the innovations
that have been introduced by the technology spillovers. Evenson (in Siebeck et.al
1990) and Watal (1997) suggest that in order to develop domestic innovations,
developing countries require utility models or petty patents. These petty patents can
be available for a shorter period of time for process innovations made over an existing
product. The TRIPS agreement leaves members to introduce such legislation, as there
are no specific rules on this subject. Such patents will encourage the small firms.
One of the concerns regarding product patents is the access to patented products.
Some of the provisions within the TRIPS agreement mentioned in the above
paragraphs, clearly indicates that price controls could be imposed on the patented
products. However, exemptions from price controls has been suggested by the
government for the products that are produced domestically using the domestic R&D
and resources and are patented in India. Such exemptions will keep the prices high
and make access to the drugs difficult. It appears that `who patents the product’
matters more for the government than what is patented. In the recently concluded
Doha meeting, a separate declaration on the TRIPS agreement has clarified that
members have the right to grant compulsory licence in the area of pharmaceuticals
and that they have the freedom to determine the ground upon which such licenses are
granted (Economic Times, 21 November, 2001) which can have a considerable
impact on the availability as well as on their prices. However, the amendments made
by the Government of India, make the procedures very cumbersome which needs to
be revised in the third amendment to the Patents Act. While parallel trade in
pharmaceutical may facilitate access to medicine, yet compulsory licence will be the
only course of option to facilitate flow of technology and R&D. Scherer and Watal
(2001) suggest that tax concessions should be provided to the pharmaceutical
manufacturers to encourage them to donate the high technology drugs to the less
developed and developing countries which is a viable option.
A majority of the population does not have access to the essential medicines (most of
which are off patent) either in the government or private health care systems because
they are not within their capacity to reach. Now that the percentage of drugs under
price control has been reduced drastically it is essential to keep the prices of the
essential drugs under check, especially those concerning the common diseases.
Currently only a handful of pharmaceutical firms in India invest in R&D which needs
to be improved. The Pharmaceutical Research and Development Committee (1999)
has suggested that a mandatory collection and contribution of 1 per cent of MRP of all
formulations sold within the country to a fund called pharmaceutical R&D support
fund for attracting R&D towards high cost-low-return areas and be administered by
the Drug Development Promotion Foundation. The domestic universities and other
academic institutions can play the role of research boutiques or contract research
organisations (CRO), which can supply the technical know-how and manpower. Units
that already have such facilities can also function as a CRO for other firms.
In the post TRIPS era, the government will have to probe in to factors that contribute
to the widening gap between the proposed FDI and the actual FDI and rectify these
bottlenecks. Similarly the difference between the number of patents filed and the
patents granted calls for a detailed analysis to figure out where the Indian firms are
lacking.
Governments at various levels should take active part in disseminating knowledge

about the IPRs and the possible strategies that can be adopted by the industry. This
will remove some of the impediments. Lessons should be drawn from the Chinese
experiences where systematic efforts were taken to educate the bureaucrats, policy
makers and the industry about the WTO and product patents in the pharmaceutical
industry. India will have to strengthen the patent examination process and speed up
the processing procedures. This will help in checking the products that may enter the
country utilising the import monopoly route provided by the EMR. Besides a strong
institutional and judicial framework will have to be set up for monitoring the prices,
to prevent infringement and trade dress cases of patented products respectively.
As far as India’s pharmaceutical industry is concerned, various options are possible in

the WTO regime. These are to: (a) manufacture off patented generic drugs, (b)
produce patented drugs under compulsory licensing or cross licensing, (c) invest in
R&D to engage in new product development, (d) produce patented and other drugs on
contract basis, (e) explore the possibilities of new drug delivery mechanisms and
alternative use of existing drugs, and (f) collaborate with multinationals to engage in
R&D, clinical trials, product development or marketing the patented product on a
contract basis and so on. Besides these strategies, India’s strength lies in process
development skills. This expertise utilised within the WTO framework with emphasis
on quality standards will provide India a competitive advantage over other Asian
countries.
Balance of Trade in Pharmaceutical Sector

(Rs. Crores)
Year Exports of Imports of Drugs Balance of Trade

Drugs
1960-61 1.55 17.60 -16.05
1965-66 3.80 13.80 -10.00
1970-71 8.46 24.27 -15.81
1973-74 37.33 34.16 3.17
1980-81 76.18 112.81 -36.63
1987-88 289.99 349.44 -59.75
1988-89 467.6 446.91 20.69
1989-90 856.8 652.12 204.68
1990-91 1254.6 604.0 650.6
1991-92 1489.5 807.38 682.12
1992-93 1541.5 1137.4 404.1
1993-94 1991.7 1440.0 551.7
1994-95 2465.3 1537.0 928.3
1995-96 3443.2 1867.0 1576.0

1996-97 4340.0 1039.2 3300.8
1997-98 5353.0 1447.1 3906.0
1998-99 6153.0 1446.8 4706.2
1999-00 6631.0 1502.0 5129.0
Sources: Pillai and Shah, 1988, Chaudhury, 1999, and 39th IDMA Annual
Publication 2001.
Foreign Direct Investment in India

(Rs. Crores)
Year Amount Actual Inflow FDI Approved % of Pharma

Approved in Pharma FDI to total
approvals
1991 534 351
1992 3888 675
1993 8859 1787 29.9 0.34
1994 14187 3289 163.0 1.15
1995 32072 6820 185.8 0.58
1996 30147 10389 118.2 0.33
1997 54891 16425 182.9 0.33
1998 30814 13340 91.1 0.30
1999 28367 16868 79.8 0.28
2000 37043 12763 1614.6 4.36

Total 246802 82707 2465.3 1.00
Source: Handbook of Industrial Policy and Statistics, 2000, Foreign Trade and
Balance of Payments, CMIE, July 2001
Export
Exports constitute a substantial part of the total production of Pharmaceutical in India.

The formulations contribute nearly 55% of the total exports and the rest 45% comes
from bulk drugs. Pharmaceutical exports clocked $7.2 billion in 2007-08, accounting
for six per cent of the country’s total exports. Indian companies export drugs to over
200 countries, but the top 25 markets, which includes the US, Germany, Russia,
China and few European and African countries, account for about half of the total.
Indian drug makers exported medicines worth Rs 31,608 crore during April 2008-
January 2009 and exports shot up 30.7% as compared to last year due to a weak
Indian currency and increased demand for low-cost generic medicines. US is the
largest importer of drugs followed by Russia and Germany.
Indian pharma industry is set to defy recession by registering a 25% growth in exports
during the current fiscal. As per projections made by Centre for Monitoring Indian
Economy (CMIE) pharma exports from India is expected to touch the figure of
Rs36,471 crore in 2008-09 against the exports of Rs29,140 crore in the previous year.
Depreciation in Indian rupee and cost advantage will help the industry to post such an
exponential growth in overseas sales. The forecast seems quite optimistic, as the
industry posted just 8% growth in export in 2007-08 compared to Rs26,895 crore
recorded in 2006-07. However, depreciation in Indian currency is going to help them
in a big way to achieve the growth. In the first half of the current fiscal, rupee
depreciated by whopping 6.6% against the dollar and the trend is likely to continue till
the end of the fiscal. India'
s export of drugs and pharmaceuticals accounts for almost
40% of the sectors'aggregate sales.
Global recession is not expected to impact Indian pharma sector due to its low cost
manufacturing advantage. Indian companies are mostly into the manufacturing of
generic drugs and offers drugs at a price much lower than the patent holder company.
In fact, slowdown will prove to be a boon for Indian pharma companies, as foreign
customers will look for cheaper products. However, growth of exports may slowdown
in last two quarters.
The first two quarters have been good for pharma sector and no significant impact of
slowdown was visible. However, last two quarters may not be same and the sector
may see some slowdown in export.
Those companies are feeling the pinch of slowdown that has exposure to the Latin
American market. Majority of Indian pharma export goes to Europe. Of the total
export in 2007-08, 25% went to European countries, 19% to Asia, 18.3% to North
America, 13.5% to African countries, 8% to CIS countries and rest to other regions.
India exported drugs and pharmaceuticals worth Rs1,872 crore to the US and Rs564
crore to Germany in 2007-08. This distribution is also likely to be same in current
fiscal. Country wise US gets largest exports from India followed by Netherlands, UK
and Germany.
Bucking the trend Pharma exports are expected to be around Rs36,471 crore this
fiscal against Rs29,140 crore in the previous year. Export accounts for almost 40% of
the aggregate sales of the industry. Indian pharma market is contributing 8% globally
in terms of production, 2% in terms of value by producing drugs worth $18 billion.
Pharmaceutical Exports in India till 2006-07
Source: E&Y Study

According to the E&Y Report India’s exports should continue to show strong growth
through 2010 as $60 billion worth of patented drugs lose their patent protection in the
United States and Western Europe. As seen from the graph, the exports have shown a
steady growth through 2001-2007 and will continue to do so. Exports have grown to
constitute a major revenue source for India’s major pharmaceutical companies
including Ranbaxy, Cipla, and Dr. Reddy’s. Collectively, regulated markets
accounted for more than 50 percent of their total annual revenues. In 2005-06,
Ranbaxy derived nearly 80 percent of its sales revenues from exports, while exports
and international acquisitions accounted for 66 percent of Dr. Reddy’s sales and 50
percent of Cipla’s. The successful penetration of the U.S. and EU markets has
encouraged a growing number of Indian “copycat” companies to enter these markets.
India’s exports to the regulated Western markets are expected to remain strong in the
midterm, even though Indian companies will be challenged by declining prices in the
U.S. market, declining profit margins, growing competition from other low-cost
countries, parallel launches of authorized generics by Western innovator companies,
and the increasing power of large distributors in the U.S. and European markets.
About $60 billion in blockbuster drugs will open to generic competition between 2002
and 2010 and Indian companies are expected to vie for a significant percentage of that
business.
Our leading exporters include Dr. Reddy’s, Wockhardt, Sun Pharma, and Lupin Labs.
The vast majority of India’s exports, by value, are destined for the developed
economies of the West, particularly the United States, Germany, the United Kingdom,
and France. Exports to these countries consist primarily of bulk drugs that account for
nearly 60 percent of India’s pharmaceutical exports. The remainder, mostly
formulations, is exported to the countries of the former Soviet Union (CIS) and
developing countries (Southeast Asia, Africa, and Latin America). India continues to
be a leading supplier of less expensive antibiotics, cancer therapy, and AIDs drugs to
the developing world.
According to the Quick Estimates of Directorate General of Commercial Intelligence
and Statistics (DGCIS), Pharmaceuticals exports (valued in US dollar terms)
registered an impressive growth rate at 30.7% terms during April-October,2008
compared to the corresponding period of the last year. This growth further increases
to 38.5% when valued in rupees terms. Exports on account of Pharmaceuticals have
been consistently outstripping the value of corresponding imports during 1996-97 to
2007-08. The trade balance increased from Rs. 2157 crores in 1996-97 to Rs. 13893
crores in 2007-08. Exports of pharmaceuticals registered a growth at the rate of
16.22% during 2007-08. The share of exports of Pharmaceuticals products to the total
national exports have been in excess of 2% during each of last 12 years ending 2007-
08. It has exhibited a long-term upward trend from 2.01% in 1996-97 to 2.55% in
2007-08.
After nearly 30 years of focusing inward, India’s pharmaceutical industry has
emerged as a global player satisfying a significant portion of the world’s generic drug
needs. Attracted by high drug prices in the West, India’s pharmaceutical exports grew
from $1.9 million in 1999 to $5.2 billion in 2005. In the last 5 years, India’s exports
more than doubled and account for approximately 40 percent of total industry
production and nearly 30 percent of its revenues. India also enjoyed a trade surplus
that increased from $3.1 billion in 2004 to $3.8 billion in 2005, or by 23 percent.
India’s exports should continue to show strong growth through 2010 as $60 billion
worth of patented drugs lose their patent protection in the United States and Western
Europe. Assocham predicts that Indian companies will capture at least 30 percent of
the replacement market of generic drugs.
According to Assocham, the importance of exports has grown dramatically over the
last 5 years due to declining profit margins and the extremely price-competitive nature
of the domestic Indian pharmaceutical market. Exports have grown to constitute a
major revenue source for India’s major pharmaceutical companies including Ranbaxy,
Cipla, and Dr. Reddy’s.
Collectively, regulated markets accounted for more than 50 percent of their total
annual revenues. In 2005-06, Ranbaxy derived nearly 80 percent of its sales revenues
from exports, while exports and international acquisitions accounted for 66 percent of
Dr. Reddy’sales and 50 percent of Cipla’s. The successful penetration of the U.S. and
EU markets has encouraged a growing number of Indian “copycat” companies to
enter these markets. India’s exports to the regulated Western markets are expected to
remain strong in the mid-term, event though Indian companies will be challenged by
declining prices in the U.S. market, declining profit margins, growing competition
from other low-cost countries, parallel launches of authorized generics by Western
innovator companies, and the increasing power of large distributors in the U.S. and
European markets. About $60 billion in blockbuster drugs will open to generic
competition between 2002 and 2010 and Indian companies are expected to vie for a
significant percentage of that business. India exports pharmaceuticals to more than
200 countries and on a country-wise basis, India’s five largest export markets are the
United States (28 percent), Russia (11 percent), Germany (10 percent), the United
Kingdom (8 percent), and China (7 percent). All of India’s major pharmaceutical
companies are looking at the global market to accelerate their growth. They are
looking at all markets with potential including the regulated markets of the United
States, Japan, and Europe; the semi regulated markets of BRIC countries; and less
regulated markets of Africa, Middle East, and Southeast Asia. India has also become a
very important source of generic drugs for the developing world and is the leading
supplier of AIDs drugs to the world. Indian companies like Cipla and Ranbaxy have
driven the down the annual cost of anti-retroviral treatment from $15,000 per patient
in 1995 to $200 in 2005.57.
Other leading exporters include Dr. Reddy’s, Wockhardt, Sun Pharma, and Lupin
Labs. The vast majority of India’s exports, by value, are destined for the developed
economies of the West, particularly the United States, Germany, the United Kingdom,
and France. Exports to these countries consist primarily of bulk drugs that account for
nearly 60 percent of India’s pharmaceutical exports. The remainder, mostly
formulations, are exported to the countries of the former Soviet Union (CIS) and
developing countries (Southeast Asia, Africa, and Latin America). India continues to
be a leading supplier of less expensive antibiotics, cancer therapy, and AIDs drugs to
the developing world. In 2005, more than 90 percent of India’s exports are of drugs
that are no longer protected by patents. India’s largest single export market continues
to be the United States, which is the world’s largest generic drug market. Exports to
the United States grew from $429 million in 2003 to $589 million in 2005, or by 37
percent. The percentage of total exports represented by the United States declined
slightly from 12 percent in 2003 to 11 percent in 2005. This decline can be attributed
to the introduction of authorized generic drugs by domestic U.S. pharmaceutical
giants, lagging profits and declining generic drug prices, and growing competition
from other low-cost countries, particularly Israel, China, Korea, and those from East
Europe. To offset revenue losses from total sales in the United States during 2005- 58
06, India’s leading exporters have been aggressively shifting their attention to Europe
and Africa. Europe, the world’s third largest pharmaceutical market, behind the
United States and Japan, had generic sales of approximately $100 billion primarily in
the UK, Germany, and France. As previously stated, Indian pharmaceutical
companies have made a number of acquisitions in Europe to gain a foothold in its
markets. European generics markets considered to be under served include Spain,
Italy, and France, and are expected to be important and growing markets for Indian
exporters in the next 5 years.
High export growth of Indian drugs makers
In the course of increasing contract production and low-cost manufacture of
proprietary medicines, exports are expected to receive a major boost in future.
However, Germany'
s very high export ratio of currently 55% will hardly be achieved
by 2015, as this would imply more than a trebling of total exports. In this context, it
should be considered that take-overs of foreign companies will lead to a strong
increase in foreign production by Indian manufacturers, which will have a dampening
effect on exports. A positive impact on exports is expected from foreign investment in
India, though. Competition between Indian firms and western drug makers will
probably be much fiercer as the companies from Asia are increasingly seeking to tap
the global markets. The generics market will grow in both the developed countries
and in the emerging markets. Most vital medicines are already exempt from patent
protection today. The manufacture of generic drugs in that segment is growing
strongly. In addition, patents for high-turnover drugs with a volume of EUR 100 bn
will expire in the next few years. Of these drugs, roughly one-third will likely be
produced by Indian companies.
Exports of Pharmaceutical Products from India*
Country 2004-05 2007-08

Total Exports 34432 66310
USA 4238 6718
Russia 3036 4932
Hong Kong 1919 3562
Germany 3418 3252
Nigeria 1199 2577
UK 1142 2568
Singapore 868 2452
Netherlands 1436 2192
Iran 634 1796
Brazil 170 1627
Italy 721 1514
Vietnam 885 1413
China 361 1371
Spain 765 1287
Srilanka 825 1242
* Total Exports to top 15 countries 21617 38503
Source: IDMA Annual Publication,
Value of exports,
India is the second largest country in the world, with a population of approximately 1
billion. The population is expected to grow to about 1.5 billion by 2050. Life
expectancy at birth for males and females is 62.4 and 63.4 years, respectively, which
is much lower than that of the United States. The total admission capacities for
medical and pharmacy institutions of higher
learning are 17,000 and 5610, respectively. India has approximately 14,000 hospitals.
The number of registered doctors and nurses is about 490,000 and 600,000,
respectively.
India’s pharmaceutical market may not be impressive by international standards, but

considering the total Indian economy, it is one of the major economic sectors in India.
According to the Indian Drug Manufacturers’Association (IDMA) annual publication,
the estimated value of production of bulk drugs and formulations in India during
2000–2001 was approximately Rs 22,187 crores (~$4.5 billion) out of which Rs. 4344
crores is for bulk drugs and Rs. 17,843 crores for the formulations (currency
conversion rate used is Rs 49 _ US $1.00 or Rs. 1 crores _ $0.204082 millions)
Table summarizes the value of production of bulk drugs and formulations during the
past decade. The bulk drug production increased by nearly 20% every year,whereas
the value of formulations increased at an average rate of 15% per year.Table clearly
indicates the rapid growth of the pharmaceutical sector in the Indian market. Table III
shows the total import and export values of drugs and pharmaceuticals during the past
decade. The value of imports and exports increased two-fold and four-fold,
respectively, during 1998 and 2007. For the years 2006 and 2007, the value of imports
and exports was $306.5 million and $1353.3 million, respectively. Table IV shows the
export values in terms of formulations and basic and crude drugs between 1998 and
2005. During the year 2005–06, the value of exports of formulations, basic, and crude
drugs was $632.9 million, $585.8 million, and $37.0 million, respectively. The export
of bulk drug underwent dramatic growth in the past decade, coming in at nearly 40%
each year. A comparison of values shown in Tables shows that _80% of the
formulations produced are consumed indigenously, whereas the majority of the bulk
drugs manufactured are exported. Lists the top 10 countries to which India exports
drugs and pharmaceuticals. The ranking is based on the export figures of 2006–2007.
Russia and the United States are the top two importers of bulk drugs and
pharmaceuticals from India ($100.7 million and $137.9 million, respectively).
However, countries such as Brazil, Singapore, and Iran experienced a tremendous
growth in the import of pharmaceuticals from India in recent years.
Total value of export of drugs and pharmaceuticals from 1998–1999 to 2007–

2008.
Rupees % Growth over

Year in Crores $ Million Previous Year
1998–99 1489.5 304.0 —

1999–00 1541.5 314.6 3
2000–01 1991.7 406.5 29
2001–02 2465.3 503.1 24
2002–03 3443.2 702.7 40
2003–04 4340.0 885.7 24
2004–05 5353.0 1092.5 23
2005–06 6153.0 1255.7 15
2006–2007 6631.0 1353.3 8
2007- 2008 6928.7 1465.2 9
Currency exchange rate: Rs 49 _ US $1.00 or Rs 1 crore _ $0.204082 million.
Indian pharmaceuticals exports
• For 2007–08, export revenues are estimated to be around US$ 8.9 billion.
• Formulation exports are estimated to constitute 46 per cent of total revenue,

while bulk drugs are estimated to account for 54 per cent.
• Revenues from formulation exports are expected to surpass those from bulk
drugs by 2010–2011.
• By 2012, exports are expected to top US$ 23.5 billion, with most of the value
generated by generics and active pharmaceutical ingredients (API).
• Exports to regulated markets are expected to surge at a compound annual

growth rate (CAGR) of 25.4 per cent between 2007-08 and 2012-13. In
comparison, exports to semi-regulated markets clocked a CAGR of 14.6 per
cent from 2000 to 2005.
• Formulation exports to regulated markets are expected to grow at a high

CAGR of over 25.4 per cent to reach US$ 5.4 billion by 2012-13.
• Demand from semi-regulated regions is estimated to grow at a modest CAGR

of around 14.6 per cent and reach US$ 4.8 billion in the same period.
Generics to drive growth of exports from India
• By 2011-12, the share of Indian players in the US generic market is expected

to cross 6 per cent from 2.1 per cent in 2006-07.
• Formulation exports to the US are expected to grow at a CAGR of 38 per cent

and reach around US$ 3.03 billion in 2011-12.
• Exports of generic drugs to Europe are likely to grow at a healthy CAGR of 20

per cent to reach US$ 1.8 billion by 2012-13.
• India is the world‘s fifth-largest producer of bulk drugs.
• Demand for bulk drugs has grown at a CAGR of 31 per cent since 2000–01 to
reach US$ 4.8 billion in 2007–08.
• The share of Indian companies in the total drug master files (DMF) filed with
the USFDA* increased from 14.5 per cent in 2000 to 48 per cent in 2008.
• Semi-regulated markets account for a majority of bulk drugs'exports with a 50

per cent share
The Export Promotion Cell in the Pharmaceutical Division acts as a nodal agency in
the matters related to export of pharmaceuticals. In order to give adequate attention to
day-to-day problems faced by the exporters, the Cell interacts with various
Ministries/Departments and our Missions abroad. The Cell also collects statistical
data on export and import of pharmaceuticals in the country and provides
commercially useful information on developing and increasing drugs and
pharmaceutical exports. The Cell has also been entrusted with organisation of
seminars and workshops on standards, quality control requirements etc. Of important
countries so as to prepare domestic companies for exporting their products.
The Cell communicates with 131 Missions abroad to collect information related to
pharmaceutical industry in these countries such as, status of the pharmaceutical
industry, details of documentation, guidelines for licensing of pharmaceutical
companies as well as registration for medicines, details of pharmaceutical market with
information on local production, demographic data, details of health care system,
health indicators and prevalent disease pattern, details of imports of pharmaceuticals
of these countries, details of joint venture units for pharmaceuticals operating in these
countries etc. The Cell has started providing commercially useful information to the
industry/exporters for boosting pharmaceutical exports.
Pharmaceutical Export Promotion Council (Pharmaexcil)
• Objectives The objectives of the Council (Pharmexcil) are to extend all

assistance to the pharmaceutical industry in India to explore their
opportunities.
• Services Extended include:

a. Trade Enquiries received from foreign Embassies /Buyers
b. Market Development assistance as provided by Ministry of Commerce for
business tours to foreign countries.
c. Arrange one to one Buyer/Seller Meets in India/Abroad.
d. Arrange Exhibitions in India and Abroad for market promotion.
e. Assist in Regulatory matters with domestic and Foreign Government
agencies.
f. Provide financial assistance for Product Registration charges, Research and
Development, Product showcasing etc. as per rules.
g. Arrange Conferences/Seminars in domestic and foreign countries - for market
and technical up-gradation of information.
IMPORT
India’s consumption of imported pharmaceuticals accounts for only a minimal portion

of the world’s production. Its imports consist of mainly life-saving drugs and new
generations of formulations that are under patent by innovator companies. These
include anti-cancer, cardiovascular, and anti-hypertension drugs imported primarily
by major global pharmaceutical companies for sale in the Indian market. Within these
categories, leading imports consisted of penicillin (13 percent), antibiotics for
combating stomach infections (9 percent), and other medicines for retail sales in
dosage form (19 percent). Life saving drugs can be imported into India duty free,
whereas all other pharmaceutical imports faced a base duty rate of 30 percent and an
effective duty rate of 56.8 percent in 2002, compared with “zero” duty in the United
States. India’s imports of finished pharmaceutical drugs, intermediates, and APIs
nearly tripled in value from $516.1 million in 1999 to more than $1.3 billion in 2005.
India’s top 7 import source countries accounted for approximately 32 percent of the
total during 2005, down from 37 percent in 2004. India’s leading import suppliers
included Switzerland (8 percent), Germany (6 percent), the United States (7 percent),
and France (3 percent). Although India’s pharmaceutical market is relatively small, at
least 45 MNC pharmaceutical companies are serving the market through subsidiaries,
other tie-ins, and imports. India’s imports from Switzerland, the United States, and
Germany consisted primarily of other medicaments in dosage form for retail sales.
India’s consumption of imported pharmaceuticals accounts for only a tiny portion of
the world’s production. Its imports consist almost entirely of life-saving drugs and
new generations of formulations that are under patent by innovator companies. These
include anti-cancer, cardiovascular, and anti-hypertension drugs imported primarily
by major global pharmaceutical companies for sale in the Indian market. Within these
categories, leading imports consisted of penicillin (13 percent), antibiotics for
combating stomach infections (9 percent), and other medicines for retail sales in
dosage form (19 percent). Life saving drugs can be imported into India duty free,
whereas all other pharmaceutical imports faced a base duty rate of 30 percent and an
effective duty rate of 56.8 percent in 2002, compared with “zero” duty in the United
States. India’s imports of finished pharmaceutical drugs, intermediates, 55 and APIs
nearly tripled in value from $516.1 million in 1999 to more than $1.3 billion in 2005
India’s top 7 import source countries accounted for approximately 32 percent of the
total during 2005, down from 37 percent in 2004 (table 13). India’s leading import
suppliers included Switzerland (8 percent), Germany (6 percent), the United States (7
percent), and France (3percent). Although India’s pharmaceutical market is relatively
small, at least 45 MNC pharmaceutical companies are serving the market through
subsidiaries, other tie-ins, and imports. India’s imports from Switzerland, the United
States, and Germany consisted primarily of other medicaments in dosage form for
retail sales.
INDIA’S LEADING IMPORT SUPPLIERS
• SWITZERLAND
• GERMANY
• US
• FRANCE
IMPORT DATA FROM 1999 TO 2005
Total value of import of drugs and pharmaceuticals from 1998–1999 to 2007–

2008 .
Rupees % Growth over

Year in Crores $ Million Previous Year
1998–99 807.4 164.8 —
1999–00 1137.4 232.1 41
2000–01 1440.0 293.9 27
2001–02 1527.0 311.6 6
2002–03 1867.0 381.0 22
2003–04 1039.2 212.0 44
2004–05 1447.1 295.3 39
2005–06 1446.8 295.3 0.02
2006–07 1502.0 306.5 4
2007- 08 1587.4 387.0 6
Currency exchange rate: Rs 49 _ US $1.00 or Rs 1 crore _ $0.204082 million.
GOVERNMENT INITIATIVES
GENERAL PROVISIONS
• Exports and Imports shall be free, except where regulated by FTP; free unless
regulated or any other law in force.
• All imported goods shall also be subject to domestic Laws, Rules, Orders,
Regulations, technical specifications, environmental and safety norms as
applicable to domestically produced goods
• Any goods, export or import of which is restricted under ITC(HS) may be
exported or imported only in accordance with an Authorization or in terms of
a public notice issued in this regard.
PROMOTIONAL MEASURES
• Central Government aims to encourage manufacturers and exporters and
Quality to attain internationally accepted standards of quality for their
products.
• Central Government will assist in modernization an up gradation of test
houses and laboratories to bring them at par with international standards.
• Exporters are eligible for STATUS CATEGORY
A Status Holder shall be eligible for following facilities:
i. Authorization and Customs clearances for both imports and exports on self
declaration basis
ii. Fixation of Input-Output norms on priority within 60 days
iii. 100% retention of foreign exchange in EEFC account
iv. Enhancement in normal repatriation period from 180 days to 360 days;
EPCG SCHEME
• Under this scheme the exporter is allowed to import capital goods use during
Pre – production, Production and Post – production stage against payment of
5% customs duty subject to fulfilment of export obligation
• The export obligation is 8 times the duty saved
• The export obligation is 6 times in case of SSIs and agro units engaged in
exports.
• The period for fulfilment of export obligation is 8 years
• The period for fulfilment of export obligation is 12 years when:
• EPCG authorization > 100 crores
• Located in Agri export zone
• Unit under revival plan of BIFR
• Unit is a cottage or tiny sector unit
DUTY EXEMPTION SCHEME

• The export enterprise is allowed to make duty free import of inputs which are
directly used in the export product at the pre-shipment stage
• The details of the inputs are given in the Handbook of Procedures in the form
of Standard Input-Output norms (SION)
DUTY REMISSION SCHEME (DEPB)

• This scheme offers the facility for duty free import of inputs at the post
shipment stage under Duty Entitlement Passbook Scheme
• It is valid for 24 months from the date of issuance
• This facility is provided by way of grant of import duty credit against the
export product
• DEPB has been extended till 31st December of 2009
OTHER PROVISIONS
• Import of Bonafide Trade Samples is allowed without limit except in case of
vegetable seeds, bees and new drugs
• Export of Bonafide trade and technical samples of freely exportable item is
allowed without any limit
• The exporter is allowed to replace damaged or defective good free of charge
• Exporter is allowed to import damaged goods for repair and later export them
back without any license based clearance
• The exporter is allowed to trade goods from another country to a third country
without license (if item is non restricted)
• Private bonded Warehouses for Export and Import
Role of import/export in U.S. Market
Next year, drug sales in China will outpace those of France and of Germany, while
Brazil will be buying more medications than Britain. The report was issued by IMS
Health, a research company based in Norwalk, Conn., that tracks prescriptions and
other data on drug sales.
Unless the world’s current leaders in brand-name drugs move more nimbly to expand
into those emerging markets, they will miss the big growth opportunities and cede
those markets to local players, the report said.
Annual growth of pharmaceutical sales in mature markets like the United States and
Western Europe has slowed to the low single digits in the last eight years. The
slowdown is a result of the worldwide economic crisis, but also of patent expirations
on a variety of name-brand drugs, growing use of generic drugs, reduced investments
in biotechnology and tighter government restrictions on the pharmaceutical market,
the report said.
The United States drug market had sales last year of about $300 billion, with an
annual growth rate of 5 percent, IMS said. And even if Congress passes health care
legislation, which, according to a recent Credit Suisse report, could increase drug
sales by $10.7 billion, the impact on the growth rate would be minimal.
By contrast, IMS said, 17 emerging markets are poised for significant growth. The
report grouped the countries, which IMS has called the “pharmerging markets,” into
three tiers in descending order of market value growth. China alone occupies the top
tier. The second tier comprises Brazil, Russia and India, while the third tier includes
Venezuela, Poland, Argentina, Turkey and Mexico.
Last year, those countries accounted for $123 billion — about 16 percent — of more
than $770 billion in global drug sales, IMS said. The emerging market sales
represented 37 percent of industry growth.
By 2013, those same countries are estimated to bring in an additional $90 billion in
sales accounting for 48 percent of industry growth, the report said. Over all, emerging
markets will represent about 21 percent of total drug sales in 2013, IMS executives
said in an interview.
It estimated that China, the leader of the pack in emerging markets, would account for
$40 billion in additional sales by 2013. “These traditionally peripheral economies are
gearing up to turn the tables on the established pharmaceutical world order,” the
report said.
Certainly, developed markets like the United States and Japan still represent a vast
majority of pharmaceutical sales. Even so, the report urged leading drug makers to
move faster to capitalize on high-growth emerging markets, where they already face
competition from entrenched domestic producers with well-established brands.
A few European drug makers, including Novartis, Sanofi-Aventis and

GlaxoSmithKline, have been forging ahead by acquiring local companies or
increasing their local partnerships in those countries or by making major investments
in research and development in developing markets.
But, overall, the leading drug makers are underperforming in emerging markets. The
top 15 pharmaceutical companies, including Pfizer, Merck and Eli Lilly, together
derive less than 10 percent of their sales from emerging markets, IMS said.
To build profitable businesses in these countries, drug makers must tailor their
approaches to the specific dynamics and challenges of each market, Murray Aitken, a
senior vice president at IMS, said in an interview Tuesday. Some emerging markets
for pharmaceuticals have been particularly hard hit by the worldwide economic crisis.
CAPTER-9.
GENERIC DRUGS IN THE U.S. MARKET
Although the pharmaceutical industry has always been an important part of the total
health care system in the U.S., the industry is becoming increasingly important in the
recent years due to the attention it has received from the government and the private
sector. Prescription drug spending and utilization in the U.S. has increased rapidly in
recent years. According to the Kaiser Family Foundation’s report on prescription
drug trends, U.S. spending for prescription drugs was $140.6 billion in 2001, which
represents more than a three-fold increase since 1990.7 The National Institute for
Health Care Management Foundation (NIHCM) reported that overall spending on
prescription drugs in the U.S. increased 17.1% from 2000 to 2001. Spending on
prescription drugs now represents 10-11% of health care expenditures in the U.S.
There are three main factors driving the increases in prescription spending as
mentioned in the NIHCM study:
1) The increasing number of prescriptions (utilization)
2) Changes in the types of drugs used
3) Manufacturer price increases for existing drugs
In addition, according to GAO, part of the increase is attributed to growth in the

number of patients diagnosed with conditions that can be treated with
pharmaceuticals, and the development of innovative drugs for some conditions.
According to a recent Bank of America report, pharmaceuticals are the fastest-

growing component of health care costs. The U.S. currently spends approximately
$150 billion on prescription drugs and some industry sources project this number will
reach $300 billion by 2010, equivalent to annual growth of approximately 9%. Due to
this increase in cost, managed care and other insurance providers are seeking to
control pharmaceutical expenses through generic substitution. With continued
pressure on cost, the aging demographics of the U.S. and the continuing rise in co-pay
hurdles, the generic drug industry is expected to grow in coming years.
Definition of a Generic Drug
A generic drug is a prescription drug which is not manufactured by the originator of

the product; the molecule is off patent and available from multiple sources, and the
product is known by the chemical name, not a trade name.8 A generic drug should
possess the same active ingredients in the same dosage form and strength as the
original brand drug. For generic drugs to be marketed and sold, it needs to
demonstrate similar bioequivalence which means that there is a similar absorption rate
as the original brand drug. The generic drug also needs to produce the same
therapeutic effect and safety profile as the initial or innovator’s brand name product.
Equal standards apply for brand name and generic drugs in regards to drug safety,
efficacy, purity, stability, manufacturing, and labelling, which are set and enforced by
the Food and Drug Administration (“FDA”). Thus far, 7,000 generic drugs have been
approved by the FDA.
Developing and Marketing Generic Drugs
In developing generic drugs, the manufacturer only needs to demonstrate the

bioequivalence of its drug to the branded product, and that the manufacturing process
produces acceptable purity and consistency. The development does not involve
lengthy and costly clinical trials because generic manufacturers only need to prove
bioequivalence. On average, the development of generic drugs takes only three years,
in contrast to the six to seven years of development time spent on branded products.9
Benefits of Generic Drugs
The main benefit of generic drugs is the cost savings. According to Janney
Montgomery research, U.S. retail sales of generic prescription drugs totaled $11.1
billion in 2001 versus brand name prescription drug sales of $121 billion. However,
the generic drugs were dispensed in 47% of all prescriptions. These figures indicate
that generic drugs represented 47% of prescriptions but only 8.4% of the cost.10
Major Trends in Generic Drugs Industry
• Favourable Economics: There has been upward pressure on health care costs in
recent years. With the ever-increasing cost, generic drugs are in a favorable
environment to grow in upcoming years.
• Healthy Growth: According to IMS health, relative to a branded market which
showed 0% growth in the U.S. last year, the generic drug group grew new
prescriptions by 8% and sales by approximately 16%. IMS predicts this growth
will continue, estimating that the generic drug industry will show approximately
15% compounded annual growth through 2005.
• Patent Expiration: A huge pipeline of patents will expire between 2003 and
2006 for some of the major drug companies. Enormous opportunity exists for the
generic drug companies to capture the increasing demand originally filled by
branded drugs.
• Competitive Environment: There is an increase of competition in the generic
drug market due to the appearance and growth of Indian, Chinese, and Eastern
European players. The long term sustainability for current pricing is in question.
• Acceleration in Industry Consolidation and Partnering: Industry analysts
predict that there will be increased consolidation in the near future and that the top
5 generic players will control more of the industry. They suspect that acquisitions
and partnering will focus more on increasing strategic cost advantages, production
capacity, and scale by adding local market presence and gaining pipeline products.
The generics pharmaceutical market is an attractive market for many
pharmaceutical companies, especially for the Indian pharmaceutical companies
who have two main competitive advantages; highly talented pool of chemists and
low costs. However, with fierce competition already in place, the Indian
pharmaceutical companies have to carefully select their market position within the
industry and further define their specialties. With some of the larger Indian
pharmaceutical companies already successful in the marketplace, the smaller
company should also take advantage of their competitive advantage and enter the
market. With disciplined approach to the market, and ability to plan longer term,
many smaller Indian pharmaceutical can find their niche to succeed in this
lucrative market.
• Role of Indian and European generic drugs in the U.S. Market
As there was no efficient patent protection between 1970 and 2005, many Indian
drug producers copied expensive original preparations by foreign firms and
produced these generics by means of alternative production procedures. This
proved more cost-efficient than the expensive development of original
preparations as no funds were required for research, which contained the financial
risks. This spending block may come to as much as EUR 600 m for only one
drug. This kind of money could previously only be raised by large corporations in
the industrial countries. The competitiveness of generics producers is based on
cost-efficient production.
In this field, Indian companies are currently in top position. At one-fifth, India’s
share in the global market for generic drugs is considerably higher than its share
in the overall pharmaceuticals market (approx. 2%). At the same time, India’s
pharmaceutical companies gained know-how in the manufacture of generic drugs.
Hence the name “pharmacy of the poor” which is frequently applied to India.
This is of significance not least for the domestic market as disposable income is
as little as EUR 1,900 per year for roughly 140 million of the total of 192 million
Indian households1, which means the majority of Indians cannot afford expensive
western preparations.
Generic And Global Industry Dynamics

The modern generic pharmaceutical industry came into existence through the 1984
US Drug Price Competition and Patent Restoration (Hatch-Waxman) Act, which
provided for facilitated market entry for generic versions of all post-1962 approved
products in exchange for an extension of the patent period for the original drug. As
more generics became available, US health maintenance organisations and pharmacy
benefit management companies encouraged or mandated measures such as generic
prescribing, brand substitution by pharmacists, and reimbursement on the basis of
cheapest brand. In 2005, more than 60% of prescriptions in the US were filled with a
generic. Their established role in the US effectively debunks the disparagement of
generics that is still occasionally forthcoming from brand industry sources such as the
Pharmaceutical Research and Manufacturers of America (PhRMA) . Other countries
with highly developed generics markets include the UK, Germany, the Netherlands,
Canada, and the Nordic countries, and generics markets are expanding rapidly, from a
lower base, in France, Spain, Italy, Russia, Latin America, Australia, and elsewhere .
As patents expire on many big-selling products, '
about $100 billion worth of brand-
name drugs will lose patent exclusivity [in the US] during the next five years,
including products going off patent in 2006 that will generate about $21 billion in
combined sales'
. Recent examples include Pfizer'
s antidepressant Zoloft (sertraline)
and Merck'
s anti cholesterol drug Zocor (simvastatin), which both lost US patent
protection in June 2006. The world'
s largest generics company, Teva, headquartered
in Israel, and the Indian firm Ranbaxy (tenth in global generics rankings) obtained
180 days US exclusivity for generic simvastatin of various strengths. The availability
of generic simvastatin has flow-on implications across the anti-cholesterol market,
which in 2004 had a global value of about US$25 billion. In Australia, generic brands
of simvastatin were first listed on the PBS on 1 August 2005. It was envisaged
initially that the reference pricing system would trigger a price reduction for all
brands in the statin group of drugs, but the PBAC accepted a submission from Pfizer
for Lipitor to be excluded from the price cut on the grounds of being 'more effective
than simvastatin in lowering cholesterol'
.
Plavix, one of the world'
s highest selling drugs at about US$4 billion in 2005,
marketed in the US by Bristol-Myers Squibb (BMS) for Sanofi-Aventis, is another
recent example of a major product going off patent. In August 2006, the Canadian
company Apotex after complex legal wranglings launched a generic version of Plavix.
Within days, close to 80% of new prescriptions in the US were filled with the Apotex
generic, and BMS and Sanofi-Aventis lost around US10 billion in market value.
The next big generics development is the introduction of regulatory pathways for
biogenerics. These are generic versions of biotechnology-based drugs
(biopharmaceuticals or biologics) such as insulin and human growth hormone, that is,
large-protein molecules derived from living cells. Bio generics involve a substantial
innovative input, and are therefore not strictly generic medicines in the traditional
regulatory sense, and are sometimes referred to as biosimilars or follow-on protein
products. But they are sufficiently similar to a product already approved to make
substitution possible. The cost of the original biologics is typically well in excess of
US$10,000 per patient per year, and this market is growing much faster than sales of
traditional drugs. In 2005 the value of biopharmaceuticals in the US was around
US$30 billion. Australia'
s Therapeutic Goods Administration (TGA) was the first
regulatory agency, in 2004, to approve a biogeneric, namely Omnitrope for treatment
of growth disorders, supplied by Sandoz. Omnitrope has since been approved also in
the European Union and the US.
The complexity of bio generics manufacturing, and regulatory uncertainties, have so
far protected originator products from competition even when patents have expired.
Regulatory processes for bio generics are not yet streamlined but the case of Omni
trope is a sign of things to come. Several companies including Indian firms stand
ready to launch bio generics. Technical barriers to entry make this market, if anything,
more appealing to generics players with requisite technological capabilities. Major
originator products are expected to give rise to only one or two bio generics, likely to
be priced 25 to 40% below the original. This translates into profit margins much
higher than in generic small-molecule markets where price falls tend to be much
steeper.
To counteract the threat of generic competition, '
big pharma'applies a range of
sophisticated '
life cycle management'techniques, notably the '
ever greening'of patent
protection through the embedding of brands in intricate clusters of patents which
make challenges complex and expensive. Other techniques include the packaging of
two existing drugs, about to go off patent, into a single new patented drug. For
example, Pfizer'
s Caduet, containing both Lipitor and Norvasc, is expected to retain
patent protection in the US until 2018, long after competition has eroded the value of
its basic chemical ingredients . The patenting of a marginally modified version of the
original chemical substance, coupled with massive marketing campaigns to switch
patients to the newly patented product, has also proven commercially effective. The
industry standard in this type of strategy was set by AstraZeneca which successfully
launched Nexium when Losec/Prolosec was about to lose patent protection. Nexium
'
has been found to be pretty much identical to Prilosec and about ten times more
expensive'. Other ways of managing the '
life cycle'of drugs include new delivery
technologies (such as once-a-day formulations), new indications which may bring
additional periods of exclusivity, switch to over-the-counter (OCT) status, and so-
called '
exclusion payments'made '
when a branded company shares a portion of its
future profits with a potential generic entrant in exchange for the generic'
s agreement
not to market its product’.
Blurring 0f Originator And Generic Categories
This complex environment leaves little scope for '
traditional'generics companies
competing solely on price. Indeed, mergers and acquisitions have brought forth a
small number of multinational generics majors, with technological, legal, and
marketing capabilities approximating those of '
big pharma'
. Firms in this group
include Teva, Mylan Laboratories, Actavis, Barr (which in 2006 acquired Pliva, the
largest drug company in Eastern and Central Europe), Watson (recently merged with
Andrx, another generics major), and the Indian companies Ranbaxy and DRL. These
are companies dealing also in proprietary products such a new drug delivery
technologies, and in some cases they engage in the development of new innovative
drugs. Merck KGaA, the parent company of Alphapharm in Australia, is a long-
standing member of this group, but has declared a full-scale shift into the innovator
category (following the acquisition of Serono, a large biotech company) and its
generics division has been off-loaded the US-based generics major Mylan
Laboratories. The blurring between the brand-name (originator, innovative) and
generics sectors is demonstrated most starkly by Sandoz, which ranks globally as the
second largest of the generics suppliers (after Teva). Sandoz was established by
Novartis (the world'
s fourth largest pharma company) in 2002 from a collection of
previously existing subsidiaries. Similarly, Sanofi-Aventis has created Winthrop
Pharmaceuticals '
to position the Group ... as a major actor on the generics market'It
makes good sense for Novartis and Sanofi-Aventis to supplement the core business of
patented products with a strong presence also in the generics market. In the US and
elsewhere, a capacity to supply an extensive range of products, including off-patent
drugs, can be a competitive advantage.
The phenomenon of authorised generics, also known as pseudo-generics or fighting-
brands, represents an intriguing form of life cycle management. This refers to brand-
name products given a generic label; the '
brand-name manufacturer either sell [s] the
authorized generic itself through a subsidiary or licens [es] a generic firm to sell the
authorized generic'. This practice is the subject of heated debate in the US and is
viewed by the Federal Trade Commission as potentially illegal anti-competitive
conduct. Pseudo-generics can be harmful to consumers '
because an expectation of
competition from authorized generics will significantly decrease the incentives of
generic manufacturers to pursue entry prior to patent expiration [through patent
challenges], especially for "non-blockbuster" drugs'
. Authorised generics would seem
to have become common also in Australia but a detailed analysis of their impact on
local market dynamics is yet to be undertaken [but see.
Patent expiries and the growth of the generics sector is only one of the factors which
explain the changing dynamics of the global biopharma industry. A major trend is the
expansion of outsourcing by the major companies across a range of functional areas,
including manufacturing, and R&D and clinical trials. It is striking that Asian and in
particular Indian firms are now highly competitive providers of outsourcing services
including supply of APIs.
Impact of generic drugs on U.S. Market
The global generics market grew at a faster pace than the global pharma market in
2007, with a CAGR of 16.4% during 2004–2007. Regular patent expirations of
blockbuster drugs are the primary growth driver of the industry.
Rising healthcare expenditure has also contributed to industry expansion, with

governments coming under growing pressure to provide low cost alternatives to
branded drugs. However, the generics market is changing due to the threat from
authorized generics, competition from players in emerging countries and increasing
consolidation. Teva’s acquisition of Barr Pharmaceuticals is the latest example of
companies attempting to improve their market strength and geographical reach via
divestments and acquisitions.
‘The Top 10 Generic Pharmaceutical Companies’ is a new report published by

Business Insights that analyzes the size, structure and competitive landscape of the
global generics market. The top 10 generics companies are assessed based on their
market shares, product performances, therapeutic focus and future outlook, and the
key issues and challenges facing these companies are examined. The latest industrial
trends and developments are assessed across the generics markets of the UK, France,
Germany, Italy, Spain and the US. This report also evaluates the strengths and
weaknesses of the leading players and provides insights into the opportunities and
threats that face them. Assess the structure, competitive landscape and latest
developments in the global generics market, compare the performances and portfolios
of leading companies and benchmark their strategies with this new report...Compare
the performances and growth strategies of leading generics companies and discover
the business models that hold the key to future growth with this new report...
• Assess the market dynamics, sales volumes, growth drivers within major generics
markets with this report’s analysis of countries including France, Germany, Italy,
Spain, the UK and the US.
• Benchmark the top 10 generic companies over the 2004-07 period, and use detailed
company analysis to measure the performances and outlooks of major players
including Novartis, Teva, Mylan, Apotex, Ratiopharm, Pfizer, Sanofi-Aventis,
Watson, Bayer and Stada.
• Evaluate the strategies of leading generics companies by using this report to measure
the success of their currently marketed products and identifying their geographic
expansion, product innovation tactics, major acquisitions and divestments and new
product launches in U.S. market.
• Identify the therapeutic focus of the top 10 generics companies, understand how
company product portfolios are evolving and examine future growth opportunities
within key therapeutic areas.
• Measure the industrial impact of the latest trends and issues including the
implications of patent expirations and the future potential of emerging generics
markets such as Brazil, Russia, India and China.
Some key findings...
• The US attained generics sales worth $25.4m in 2007, accounting for 26.3% of
global market. However, the generics markets of EU countries have a higher growth
rate than the US, and accounted for 14.2% of the global sales in 2007.
• The global generics market reached $90.7m in 2007, representing a three-year

CAGR of 12.1%. Sales of generic drugs are expected to increase by 14–15% in 2008,
as compared with branded pharmaceutical growth of 6–7%. Much of this growth will
be driven by the introduction of pro-generic reforms to major markets.
• The top 10 generics companies accounted for 28.5% of the global market in 2007.
Many leading players are actively updating their product portfolios, seeking growth
opportunities in emerging markets, pursuing cost optimization and investing in R&D
capabilities.
• Generics companies are currently facing a number of major challenges including

continued pricing pressure, authorized generics, a lack of patient awareness and
distrust among healthcare prescribers.
• The nervous system (NS) and cardiovascular system (CVS) were the largest
generics therapy areas among the top 10 companies in this report, with a 2007 market
share of 31% and 28% respectively.
Key issues examined...
• Growing presence of branded companies. Branded Pharma companies are

increasingly involved in generics production to win back revenues that would
otherwise be lost due to patent expiry. After launching their own authorized generics,
branded companies are able to delay and inhibit the entry of pure generic players by
undercutting price and market share during the exclusivity period.
• Rising pressure on pricing. The long term sustainability of generic pharmaceutical

companies is coming under threat after government initiatives to promote low cost
generics have contributed to product devaluation and reduced profit margins.
• Increased consolidation. Generic manufacturers are consolidating in order to

compete with rising numbers of specialty pharma companies who possess greater
scale and R&D capabilities. The regulatory framework for authorized generics also
provides easy market access for specialty developers, forcing pure generic players to
consolidate in order to achieve greater vertical integration, scale and R&D skills.
• Genericization of specialty products. Specialty pharma products with orphan drug

status become vulnerable to genericization once this status has expired.
Biogenerics are increasing as a result of favourable EU legislation.
• Lack of incentives in Europe. Pricing and reimbursement pressures in Europe have
created greater boundaries to innovation, leading to fewer undervalued latestage
products. As a result, traditional specialty companies are likely to face future
difficulties in this region.
Prescription drugs worth $40 billion in the U.S. and $25 billion in Europe are due to
lose patent protection by 2007-08. Indian firms will likely take around 30 percent of
the increasing global generics market, the Associated Chambers of Commerce and
Industry of India (Assocham) forecast. Currently, the Indian industry is estimated to
account for 22 percent of the generics world market. Low production costs give India
an edge over other generics-producing nations, especially China and Israel, says
Assocham'
s president Mahendra Sanghi. He suggests that it will be easier for Indian
firms to win larger generics market shares overseas than at home, particularly in the
U.S. and Europe.13 Indian drug manufacturers currently export their products to more
than 65 countries worldwide.14 Their largest customer is the U.S., the world'
s biggest
pharmaceutical market.
The use of generic drugs is growing quickly in the U.S. due to cost pressure by payers
and the introduction on January 1 this year of the Medicare Part D prescription
benefit, giving seniors and people with disabilities prescription drug coverage for the
first time. With 74 facilities, India has the largest number of U.S. Food and Drug
Administration (FDA)- approved drug manufacturing facilities outside the U.S. Indian
firms now account for 35 percent of Drug Master File applications and one in four of
all U.S. Abbreviated New Drug Application (ANDA) filings submitted to the FDA.15
Analysts at Credit Lyonnais Securities Asia say they expect the number of generic
drug launches by Indian companies in the U.S. to increase from 93 in 2003 to over
250 by 2008.16
In January 2006, the Indian exporters'representative body, the Pharma Export
Promotion Council (Pharmexcil) said it planned to raise a number of concerns with
the U.S. government over what it sees as barriers to trade with them. One is a U.S.
regulation that disqualifies Indian firms from bidding for government contracts, and
another is the requirement Indian drug manufacturers submit separate applications for
each U.S. state (there is no U.S.-wide regulatory requirement), even when the firms
have FDA-approved products and facilities However, India'
s traditional lucrative
export markets may be becoming a little less secure, for a number of reasons. For
example, generic prices have not been rising in the U.S.; the seniors'advocacy group
AARP (formerly the American Association of Retired Persons) says that, of the 75
generic drugs widely used by older people that it monitors on a quarterly basis, none
had had a change in manufacturer list price during third quarter 2005 and only three
had had increases in list price at any time during January to September 2005.18 Also,
new competitive threats have arrived, such as authorized generics produced by major
drug producers, new mid-sized players, Chinese and Eastern Europe manufacturers,
and fully integrated generics firms, which are less reliant on Indian “back-end”
businesses.
Giants like Sanofi-Aventis and GlaxoSmithKline are not looking to enter the
commodity generics market in the United States, where chain pharmacies often
determine which generics they offer based on the lowest available price — and where
consumers often view generic makers as interchangeable.
Instead, the big drug makers are pursuing a growing consumer base in emerging
markets like Eastern Europe, Asia and Latin America where many people pay out of
pocket for their medicines but often cannot afford expensive brand-name drugs.
And, in some emerging markets, where the fear of counterfeit drugs or low-quality
medicines runs high, consumers who can afford it are willing to pay a premium for
generics from well-known makers, industry analysts said. These products are known
as company-branded generics, or branded generics. They carry the name of a trusted
local or foreign drug maker stamped on the package, seen as a sign of authenticity and
quality control.
“We are able to create different tiers of products at prices they haven’t previously
seen with our stamp of approval,” said Andrew P. Witty, the chief executive of
GlaxoSmithKline.
Last year, Glaxo bought a stake in Aspen, a generic maker in South Africa, and signed
agreements with Dr. Reddy’s, an Indian generic firm, to sell their products in
emerging markets.
Under the distribution agreement, the Dr. Reddy’s products are subject to Glaxo
quality control checks and, eventually, will carry a Glaxo logo, a company
spokeswoman said.
Until recently, many brand-name drug makers invested the bulk of their research and
marketing dollars in the development of blockbuster drugs, only to cede their
intellectual property and market share to lower-priced generic competitors once
patents expired. But now, with an estimated $89 billion in brand-name drug sales in
the United States at risk to generic competition over the next five years, according to
IMS Health, some drug makers are selling generics to offset revenue declines — as
well as wring some post-patent profits from the innovative drugs they developed.
It is a topic sure to be discussed at the Generic Pharmaceutical Association’s annual

meeting, which begins Tuesday in Naples, Fla.
“It definitely represents a change in thinking,” said David Simmons, the president of
Pfizer’s established products business unit.
That recently started division sells off-patent brand-name Pfizer products like the
antidepressant Zoloft. It also markets generic versions of those off-patent drugs under
its own Greenstone label, and distributes a number of generic drugs licensed from a
few other producers.
In the last year, Pfizer signed licensing deals with three India-based generic makers to
sell those companies’ pills and injectable drugs in the United States and other
markets, adding more than 200 products to the company’s generic portfolio. Pfizer
said its Greenstone generic subsidiary had become the world’s seventh-largest
purveyor of generic medicines, as measured by number of prescriptions dispensed.
While drug sales in developed markets like North America have low single-digit
annual growth, emerging markets, including India, China, Russia and Brazil, have
growth in the midteens, said Doug Long, vice president for industry relations at IMS
Health, a health information firm.
As a result, some drug makers are pursuing a two-tiered strategy in developing

markets: selling their own lines of more expensive name-brand products to the more
affluent, as well as offering midpriced branded generic lines that include prescription
and over-the-counter medicines for the broader market.
Branded generics can give prominent drug makers a way to capitalize on those
markets without having to compete with no-name generic producers whose selling
point is rock-bottom pricing. Company-branded generics can charge more for the
promise of quality.
“It’s an economic opportunity for Watson and Pfizer and Sanofi and Teva,” said Paul
M. Bisaro, the chief executive of Watson Pharmaceuticals, a leading generic maker.
“They have a reputation that says, ‘You can count on us.’ ”
Watson itself had primarily been focused on the United States market, but last year
the company spent $1.75 billion in cash and stock to acquire Arrow, a generic maker
that operates in 20 countries, Mr. Bisaro said.
And in markets that may need antibiotics and antifungal drugs more than quality-of-
life drugs like sleep aids or erectile dysfunction pills, there is a logic to branded drug
makers’ acquiring local generic makers or licensing generic products to tailor their
product portfolios to the local market.
Last year, for example, Sanofi-Aventis spent more than 1.5 billion euros to buy
Zentiva, a leading Czech generic maker; Medley, the leading producer of generics in
Brazil; and Laboratorios Kendrick, a generic producer in Mexico. Sanofi is now the
world’s 11th-biggest generics player in terms of sales, the company said.
“For me, the interest in Medley, Kendrick and Zentiva is to acquire a portfolio of
affordable medicines, recognizing that outside of the United States and Europe people
are really paying for medicines out of their own pocket,” said Christopher A.
Viehbacher, the chief executive of Sanofi-Aventis. “Therefore you have to have
medicines that fit the pocketbook and, to me, generics really fit the bill.”
Medley even has its own generic brand identity, Mr. Viehbacher said, which includes
mint-green packaging that is a visible logo on pharmacy shelves.
The Swiss drug maker Novartis, which unified its generic business in 2003 under the
name Sandoz, recognized the consumer interest and business opportunity in generic
drugs early on.
“In the beginning, of course, especially other pharmaceutical companies were very
skeptical about it,” said Dr. Daniel Vasella, the chairman of the board and former
chief executive of Novartis. “Some competitors said that this was not right to enter a
field that was competing with our own.”
Now, with organic growth and the acquisition of branded generics like the German
maker Hexal, Sandoz is the world’s second-largest purveyor of generic drugs, after
Teva.
Branded generics may appeal to leading drug makers because they represent a hybrid
of the generic and name-brand models — allowing drug makers to use their existing
commercial distribution system and marketing skills to sell premium-priced generics
as if they were brand-name drugs, said Ronny Gal, an analyst at Sanford C. Bernstein
& Company.
Under this approach, manufacturers or distributors advertise branded generics.

Company sales representatives visit doctors and pharmacists to market them. And, in
emerging markets where government health coverage and private insurance are less
common, consumers who pay out of pocket for their own medicines would rather
spend on names they can trust, Mr. Gal said in an interview last month.
“Patients prefer brands,” he wrote in a note to investors last year, “and as long as they
are the main payers, they will continue to use branded generics.”
Still, branded generics may not be a diversification strategy for the long term.
Some companies are moving into branded generics as a short-term tactic to make up
for revenue shortfalls and capture near-term growth in emerging markets, Mr. Gal
said.
But as government health care programs and health insurers in emerging markets
develop further, consumers could be encouraged or required to switch from midpriced
branded generics to low-cost no-name generics, he said. He estimated that it would
take at least a decade for that to happen.
As drug multinationals from the United States demand a stronger intellectual property
(IP) regime that gives exclusive marketing rights for their patented medicines in India,
their own government has said the IP system is partly responsible for the
extraordinary increase in prices for some medicines in the US.
A recent study conducted by the United States’ Government Accountability Office

(GAO) has highlighted the importance of low-cost generic equivalents and said lack
of therapeutically equivalent drugs and limited competition have contributed to the
extraordinary rise in drug prices in the US during the past decade.
The other reasons cited for the increase in prices include transfer of drug marketing
rights to larger companies and mergers and acquisitions among drug companies.
The study is significant for the Indian pharmaceutical industry, as domestic drug
exporters are the leading suppliers of low-cost, therapeutically equivalent medicines
in the US.
The study could also be an eye-opener for National Pharmaceutical Pricing Authority,
industry experts say.
Released on December 22, the GAO study said 416 branded drug products had
extraordinary price increases during 2000–2008.
The number of extraordinary price increases each year more than doubled from 2000
to 2008 and most such rises ranged from 100 percent to 499 percent, the report said.
More than half the branded drug products that had extraordinary price increases were
in just three therapeutic classes—central nervous system, anti-infective, and
cardiovascular.
The report said limited availability of therapeutically equivalent drugs could be a

result of patent protection and market exclusivity. Two of six case-study drugs that
had extraordinary price increases were patented at the time of the extraordinary price
increase, it said.
“Recently, drug companies have increasingly focused on speciality drugs that target
niche markets, or a smaller population of people with a narrow indication or medical
condition. According to experts and industry representatives, the pace of
consolidation among drug companies through mergers and acquisitions and transfers
of drug ownership rights has increased. Fewer companies producing and marketing
drugs can lead to greater market domination among certain companies and less
competition,” the report said.
While prescription drug pricing in the private sector is not subject to federal
regulation, drug companies are subject to anti-trust enforcement in the US.
The Federal Trade Commission (FTC), the enforcer of anti-trust laws in that country,
had recently come out with a study that revealed “pay-to-delay” settlements among
pharmaceutical companies to delay the entry of low-cost generic alternatives in that
market.
FTC has filed cases challenging “pay-to-delay” settlements, in which a brand-name
manufacturer shares a portion of its future profits with a potential generic competitor
in exchange for an agreement to delay marketing the generic prescription drug.
CHAPTER-10-
CONCLUSION
As Pharmaceutical companies in India are growing at a very fast pace and this has
made the Indian pharmaceutical industry as the second largest growing industry. Also
the pharmaceutical industry in India is the third largest in the world, which will be of
US$20 billion by 2015. India'
s US$ 3.1 billion pharmaceutical industry is growing at
the rate of 14 percent per year. It is one of the largest and most advanced among the
developing countries.
The compounded annual growth rate of pharma in India is 12-15% and the global
figures are 4-7% for the period of 2008-2013.
Over the next thirty years, the industry would grow from a handful of MNC players to
today’s 16,000 licensed pharmaceutical companies Legal & Financial Framework:
India has a 53 year old democracyand hence has a solid legal framework and strong
financial markets.
Angel Broking has done a research on the growth of pharmaceutical industry and
found that by 2015 the pharmaceutical industry in India will be in the top 10 markets.
From India in year 2007-08 total of US$ 8.25 billion were exported and there was
seen 29% rise in this figure in 2009
Indian drug firms could no longer simply copy medicines with foreign patents by
using alternative manufacturing processes and offer them on the domestic market. As
a consequence of the major changes to India’s drug patent legislation, the country’s
pharmaceutical industry is undergoing a process of re-orientation. Its new focus is
increasingly on self developed drugs and contract research and/or production for
western drug companies.
Government take so many Initiatives for growth of Indian Pharmaceutical Industry

likes:Tax breaks are offered to pharma industry, New procedure for the development
drugs, Proper clinical procedures, New Millennium Indian Technology Leadership
Initiative and the Drugs and Pharmaceuticals Research Programme - Two schemes
launched by the government.
Indian bulk drug market is fragmented with top 10 companies contributing 44% of the
market and about 1,323 companies accounting for the balance 56%. Nearly 70% of
the bulk drugs, manufactured are exported to more than 50 countries. Contract
manufacturing in India in 2009 was USD658.6 million, registering a growth of 48%
over previous year. By 2010, Indian bulk drugs market is projected to grow to about
US$6.54 billion and contract manufacturing to USD1.5billion.
All in all, the share of pharmaceuticals in the total chemicals industry in India will
come to roughly 17% in 2015 (2006: 18%), compared with 28% in Germany (from
24% in 2006). For the world as a whole, the ratio will likely be only slightly lower
than the German level (25%).
At EUR 1.5 bn, India’s total drugs imports are comparable in size to Norway’s entire
pharmaceuticals market. Imports look set to continue to rise strongly. On a medium-
term horizon, one-fifth of the world’s pharma sales will be accounted for by the
emerging markets. China will then be among the group of the five largest
manufacturers, while India will join the group of the ten largest suppliers. India
commands a less than 2% share in the world’s pharmaceutical market (1966: 1.5%).
This puts the country in twelfth place internationally, even behind Korea, Spain and
Ireland and before Brazil, Belgium and Mexico. Among the Asian countries, India’s
pharmaceuticals industry ranks fourth at 8%, but has lost market share to China, as
sales growth there was nearly twice as high and sales volumes nearly four times
higher than in India.
India’s pharmaceutical industry currently comprises about 20,000 licensed companies
employing approx. 500,000 staff. Besides many very small firms these also include
internationally well-known companies such as Ranbaxy, Cipla or Dr. Reddy’s.
In the coming years, Indian drug makers will likely continue to look to foreign
countries to expand their operations.
According to PwC, about half of all larger Indian drug makers are looking to expand
abroad through take-overs, whereas less than 20% of their Chinese competitors pursue
that strategy. Targeted markets are still the US and Europe. In many cases, there are
The German market is particularly attractive for Indian companies as generics prices
there are relatively high by international standards. Compared with the UK, a generic
drug costs nearly 50% more in Germany.
The US has become its most important sales market. Sales to the US recently
amounted to just fewer than 30% of Ranbaxy’s total sales, while sales to Europe came
to nearly 20%. Overall, approx. 80% of the manufacturer’s total sales are generated
abroad.
increase on today'
s total.
Moreover, the country’s lacking transport infrastructure is increasingly turning into a
major obstacle. The pharmaceuticals industry is especially dependent on road
transport. However, the major transport links are chronically congested and many are
in a poor state of repair. Of the total road network covering just over 3.3 million
kilometres, only about 6% are relatively well built National and State Highways. In
many cases, there are no paved surfaces or there is only one lane for all traffic. But
the government has launched an extensive investment programme entitled the
National Highway Development Programme, to be implemented by the middle of the
next decade.
Recent globalization and the development of the information superhighway have
brought the countries of the world closer. From a business perspective, the world is
one marketplace. The American pharmaceutical industry has played a pioneering role
in the development of the drug industry through in-depth, timely, and useful research
and bulk manufacturing of drug products. Although the US pharmaceutical industry is
enjoying the leadership position, it can no longer be content to focus only on the US,
Japanese, and European markets.
FINDINGS
• As per the present growth rate, the Indian Pharma Industry is expected to be a
US$ 20 billion industry by the year 2015 and this sector is also expected to be
among the top ten Pharma based markets in the world in the next ten years.
• The national Pharma market would experience the rise in the sales of the
patent drugs and the sales of the Indian Pharma Industry would worth US$ 43
billion within the next decade.
• India today is the 4th largest producer of bulk drugs and formulations in the
World with domestic market of Rs 22,000 crore and an export market of Rs
12000 crore. Exports are over five times imports and have been growing at >
20% annually over the last several years.
• With the increase in the medical infrastructure, the health services would be
transformed and it would help the growth of the Pharma industry further with
the large concentration of multinational pharmaceutical companies in India, it
becomes easier to attract foreign direct investments and the Pharma industry in
India is one of the major foreign direct investments encouraging sectors.
• Indian pharmaceutical industry posses’ excellent chemistry and process
reengineering skills. This adds to the competitive advantage of the Indian
companies. The strength in chemistry skill helps Indian companies to develop
processes, which are cost effective.
• The Indian Pharmaceutical Industry is one of fastest emerging international
centre for contract research and manufacturing services or CRAMS. The
estimated value of the CRAMS market in 2006 was US$ 895 million and the
contract manufacturing market in India pertaining to the multinational
companies is expected to worth US$ 900 million by the year 2010.
• In many cases, besides the positive outlook for India’s drugs industry, there
are also a number of adverse factors. These include serious shortcomings in
infrastructure. There are institutional obstacles to overcome first. More often
than not, Indian medicines fail because doctors and pharmacists in other
countries are reluctant to prescribe or hand out drugs produced in India. There
is a tendency to favour locally/nationally produced drugs. For this reason, drug
companies from India are finding it hard to gain a foothold in western markets.
• Indian with a population of over a billion is a largely untapped market. In fact
the penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the
same for countries like Brazil is US$ 453 and Malaysia US$189.
• Problems related to frequent power cuts and lack of proper transport

infrastructure will slowdown the growth of the industry.Limited funding from
FIs, venture capitalists and the government may slowdown the development of
biotechnology industry in India.
• Low share of India in World Pharmaceutical Production (1.2% of world

production but having 16.1% of world'
'
s population).Very low level of
Biotechnology in India and also Low level of for New Drug Discovery
Systems and Lack of experience in International Trade.
• According to the Kaiser Family Foundation’s report on prescription drug

trends, U.S. spending for prescription drugs was $140.6 billion in 2006, which
represents more than a three-fold increase since 1990. The National Institute
for Health Care Management Foundation (NIHCM) reported that overall
spending on prescription drugs in the U.S. increased 17.1% from 2005 to
2006. Spending on prescription drugs now represents 10-11% of health care
expenditures in the U.S.
• According to a recent Bank of America report, pharmaceuticals are the fastest-

growing component of health care costs. The Europe currently spends
approximately $150 billion on prescription drugs and some industry sources
project this number will reach $300 billion by 2010, equivalent to annual
growth of approximately 9%.
• According to Janney Montgomery research, U.S. retail sales of generic

prescription drugs totaled $11.1 billion in 2009 versus brand name
prescription drug sales of $121 billion. However, the generic drugs were
dispensed in 47% of all prescriptions.
• Evaluate the strategies of leading generics companies by using this report to

measure the success of their currently marketed products and identifying their
geographic expansion, product innovation tactics, major acquisitions and
divestments and new product launches in European market.
• The Europe attained generics sales worth $25.4m in 2009, accounting for
26.3% of global market. However, the generics markets of EU countries have
a higher growth rate than the US, and accounted for 14.2% of the global sales
in 2009.
• The Eastern European market registered sales growth of 19.9% from 2007 to
2008 and witnessed a CAGR of 19.6% during the period 2004–08.
• Benchmark of performance against the leading Eastern European

pharmaceutical companies using market share data by company and
comprehending their strategies.Benchmark the top 10 generic companies over
the 2004-07 period, and use detailed company analysis to measure the
performances and outlooks of major players including Novartis, Teva, Mylan,
Apotex, Ratiopharm, Pfizer, Sanofi-Aventis, Watson, Bayer and Stada.
• Lack of incentives in Europe. Pricing and reimbursement pressures in Europe

have created greater boundaries to innovation, leading to fewer undervalued
latest age products. As a result, traditional specialty companies are likely to
face future difficulties in this region.
• Pricing pressure, authorized generics, a lack of patient awareness and distrust
among healthcare prescribers. Increasing incidence of parallel traded products
will impact companies operating in the region resulting in potential loss of
sales eventually affecting cash flows and lowering innovation in drug
development.
• India has the advantage of the cost, as the cost of labor, the cost of inventory is
much lower than U.S. The multinational companies, investing in research and
development in India may save upto 30% to 50% of the expenses incurred.
• The cost of hiring a research chemist in the US is five times higher than its
Indian counterpart and the manufacturing cost of pharmaceutical products in
India is nearly half of the cost incurred in US. The cost of performing clinical
trials in India is one tenth of the cost incurred in US as well as the cost of
performing research in India is one eighth of the cost incurred in US.
SUGGESTIONS
• Government should take major steps to encourage pharmaceutical sector and

take the Initiatives for growth of Indian Pharmaceutical Industry likes:Tax
breaks are offered to pharma industry, New procedure for the development
drugs, Proper clinical procedures, New Millennium Indian Technology
Leadership Initiative and the Drugs and Pharmaceuticals Research
Programme.
• Consider the Problems related to frequent power cuts and lack of proper
transport infrastructure which slowdown the growth of the industry. Limited
funding from FIs, venture capitalists and the government may slowdown the
development of biotechnology industry in India and take the proper steps to
overcome these problems.
• Make aware Indians about serious diseases encourage to spend on their health
related issues because Indian with a population of over a billion is a largely
untapped market. In fact the penetration of modern medicine is less than 30%
in India.
• Indian Pharma companies should to measure the success of their currently
marketed products and identifying their geographic expansion, product
innovation tactics, major acquisitions and divestments and new product
launches in European market.
• Increase the level of Biotechnology in India and also for New Drug Discovery
Systems and get/provide the good experience in International Trade and
Increase the share of India in World Pharmaceutical Production by using
better R&D and spend more on prescription drugs.
• Select Benchmark of performance and use it against the leading Eastern
European pharmaceutical companies using market share data by company and
comprehending their strategies.
• European pharma companies should outsource the skill labors from
developing countries like India, China etc. to overcome Pricing and
reimbursement pressures in Europe which created greater boundaries to
innovation, leading to fewer undervalued latest age products.
• Cost of hiring a research chemist in the US is very higher than its Indian
counterpart and the manufacturing cost of pharmaceutical products in India is
nearly half of the cost incurred in US. The cost of performing clinical trials in
India is one tenth of the cost incurred in US as well as the cost of performing
research in India is one eighth of the cost incurred in US. So it must tie up or
business alliances with Indian companies.
Chapter-11-
Comparison of five top pharmaceutical companies’ profile-
world wide
TOP FIVE COMPANIES

We have analyzed the top five companies in the Indian pharmaceutical industry for
the purpose of doing the quantitative analysis. Our rationale behind selecting the top
five companies has been the –SALES AND PROFIT.
We studied the sales and profit figures of the companies operating in this industry and
zeroed in on the following companies:
CIPLA
RANBAXY
SUN PHARMA
PIRAMAL HEALTHCARE
Dr. REDDY’S LABORATORIES
BOTTOM THREE COMPANIES

On a similar basis, we chose the bottom three companies in the Indian Pharmaceutical
industry. These are:
MOREPEN LABS
SIRIS Ltd.
KERBS BIOCHEM
We have analyzed the financial position of these companies using the RATIO
ANALYSIS. The first step was to identify the key ratios and study the performance of
the companies using these ratios as the base. After this, we made inter- firm
comparison of the companies, followed by detailed ratio analysis for the last five
years.
In the following pages, we will be studying the detailed analysis of all the above
mentioned companies.
INTERPRETATION OF KEY FINANCIAL RATIOS
OF TOP 5 COMPANIES
YRC Aggregate Cipla Dr Piramal Sun Ranbaxy
Reddy's Health Pharma. Labs.
Labs
200803 200803 200803 200803 200712
Key
Ratios
Debt- 0.98 0.1 0.09 0.43 0.18 1.37
Equity
Ratio
Long 0.69 0.1 0 0.28 0.18 0.92
Term
Debt-
Equity
Ratio
Current 1.58 2.66 2.37 1.54 3.04 0.98
Ratio
Turnover
Ratios
Fixed 1.78 2.05 2.27 1.74 3.62 2.04
Assets
Inventory 5.02 3.9 6.11 8.34 8.88 4.64
Debtors 4.53 3.38 3.53 7.5 3.96 4.72
Interest 5.82 47.45 40.76 5.61 208.94 9.29
Cover
Ratio
INTER-FIRM COMPARISON
ANALYSIS OF THE DEBT EQUITY RATIO
Debt equity ratio is an important indicator of the solvency of a firm. This ratio
indicates the relationship between the external equities or the outsider’s funds and the
internal equities or the shareholder’s funds. A wise mix of debt and equity increases
the return on equity because:
Debt is generally cheaper than equity
Interest payments tax deductible expenses, where as dividend are paid from
taxed profits.
A high debt to equity ratio indicates aggressive use of leverage and a high
leveraged company is more risky for creditors.
A low ratio on the other hand indicates that the company is making little use
of leverage and is too conservative.
If we compare the debt equity ratio, then Ranbaxy Lab, with its debt equity ratio of
1.37, establishes itself as the most risk taking company. The ratio is greater than the
satisfactory ratio of 1:1 and this indicates that the claims of the outsiders are greater
than those of the owners. Dr Reddy’s labs and Cipla with the ratio of 0.09 and 0.1
respectively indicates low debt financing and a higher margin of safety to the
creditors at the time of liquidation of the firm. But too low a ratio of these companies
also does indicate that they have not been able to use low cost outsiders’ funds to
magnify their earnings.
ANALYSIS OF LONG TERM DEBT EQUITY RATIO

From the long term creditors point of view, a low ratio is considered favourable,
which is why , Dr Reddy’s labs with a ratio of zero holds an edge overall others as a
high proportion of owner’s funds provide a larger margin of safety for them. Ranbaxy
with a ratio of almost equal to 0.92, which is almost equal to 1, may not be able to get
credit without paying very high interest and without accepting undue pressures and
conditions of the creditors.
ANALYSIS OF THE CURRENT RATIO AND INVENTORY TURNOVER

RATIO
Current ratio evaluates the liquidity of the business. It is a ratio of current assets to
current liabilities and is an indicator of a company’s abilities to pay its debts in the
short term. Current ratio is expected to be atleast2:1. And if we have a look at the
figures, we see that this criterion is met by Sun Pharma, Cipla and Dr.Reddy’s lab. On
the other hand the rest of the companies lag behind in their current ratio with Ranbaxy
having lowest current ratio of 0.98.
But the most important aspect that cannot be ignored is that current ratio is
independently, can hardly convey any useful information. Even a high current ratio
may not be good news if the proportion of liquid assets in the total assets is far less
than the proportion of the stuck inventories. We shall therefore analyze the Quick
ratio and Inventory turnover ratio together.
The inventory turnover ratio indicates the no. of times the inventory of the company is
turned into sales. A high inventory turnover ratio means fast moving inventory and
thus a low risk of obsolescence.
From the Inventory turnover ratio, we have calculated the operating cycle or the
average time in which the inventory gets converted into sales for each company. This
is tabulated below:
RANBAXY CIPLA DR.REDDY’S PIRAMAL SUN

LAB PHARMA
77.5 92.3 58.9 43.16 40.5
Piramal has a current ratio of 1.54 which is almost half the current ratio Sun Pharma
with an average operating cycle of 43.16 days. Ranbaxy has a still lower current ratio
of 0.98 with an average operating cycle of inventory of 77.5 days Thus it shows that
Ranbaxy has less current assets and those current assets take more time to get
converted to sales which indicates less liquid assets’ proportion.
Cipla with a current ratio of 2.66, which is almost comparable to Dr Reddy’ s labs
ratio of 2.37, portrays a different picture, when it comes to inventory operating cycle.
Dr.Reddy’s Lab takes approximately 33 days less than Cipla to convert its inventory
to sales. Thus with almost the same amount of fixed assets , Dr Reddy’s labs shows
faster moving inventories as compared to Cipla. It shows that Cipla though has a good
amount of current assets yet the proportion of liquid assets is less as current assets
spend more time as inventory.
Sun Pharma tops the chart of current assets with a figure of 3.04 and also has the
highest inventory turnover ratio of 8.88. This shows that Sun Pharma has more
current assets than any other company, but is still managing its inventory so well that
its average operating cycle is the least i.e. 40.5 days.
ANALYSIS OF THE FIXED ASSET TUROVER RATIO
Fixed asset turnover ratio measures the efficiency of the firm in utilizing its assets. A
fixed asset turnover ratio indicates that the company ids tuning over its fixed assets
such that it generates greater sales. A low fixed assets turnover ratio indicates that the
company has more fixed assets than it actually needs for its operations. Sun Pharma
has the highest fixed asset turnover ratio of 3.62 which indicates that it generates
highest sales than any other company. It may also mean that Sun Pharma has fewer
amounts of fixed assets than Cipla which has more of fixed assets but falls short on
fixed asset management.
ANALYSES OF THE DEBTOR TURN OVER RATIO:

It is measures the ability of a company to collect credit from its customers in a prompt
manner and enhance its liquidity. This ratio measures how efficient is firm’s credit
and collection policy and also says about the quality of firm’s debtors. If we look at
the figures, we see that Piramal has the highest debtor turnover ratio of 7.50 followed
by Ranbaxy and Sun Pharma. Cipla is the poorest performer in this category with a
debtor turnover ratio of 3.38. We have calculated the average debt collection period of
all these companies, as illustrated below:
RANBAXY CIPLA DR.REDDY’S PIRAMAL SUN

LAB PHARMA
76.20 76.20 101.98 48 90.90
The above mentioned figures clearly indicate that Cipla’s portfolio of debtors is
comparatively poor with Dr Reddy’s lab also following Cipla’s footsteps. These
companies have a debt collection period of more than 3 months and therefore run a
risk of debts becoming bad debts. A note must be taken care of that the average debt
collection period of a company is in sync with the company’s credit period. If the
former lags than the latter, it is an alarming sign. Piramal with an average debt
collection period of 48 days shows that debtors have a good credibility. Though
Piramal is far behind than any of the companies in management of fixed assets and
also does not put up a good show as far as the amount of current assets is concerned,
yet its management of its limited resources to the maximum speaks volumes about the
company. Thus, no questions that Piramal’s growth, though slow, will be steady and
sustainable in the long run. A good portfolio of debtors is essential as granting of
credit to customers without taking a note of their credibility was the sole reason which
triggered the crash of banks in US.
ANALYSIS OF INTEREST COVER RATIO

The Sun pharma’s interest cover ratio is approximately four times more than that of
Cipla. This is an interesting fact as the debt equity ratio of Sun pharma is more than
that of Cipla. It means that inspite of more outside funds than Cipla it has low interest
cover ratio. It can happen only when the profits earned by Sun pharma are more than
those of Cipla. Thus, even though Sun pharma is a higher risk taker than Cipla it has
better margins of safety to cover up its interest expenses.
Ranbaxy’s figure of 9.29 is very low as it also has high debt equity ratio of 1.37. This
indicates that inspite of having a larger proportion of outside funds (debts) its profits
are not sufficient enough to cover the interest expenses.
Following is a comparison of the debt equity ratio & interest cover of Ranbaxy
Debt-Equity ratio = 1.37
Interest cover ratio = 9.29
The debt equity ratio is approximately 0.14 times more than the interest cover ratio.
In case of Sun pharma,
Debt equity ratio = 0.18
Interest cover ratio = 208.94
It is seen that the interest cover ratio is approximately 1160 times more than the debt
equity ratio. Thus we can infer that higher the interest cover ratio of a company in
comparison to debt equity ratio the more safe is the company to continue its
operations in conditions of decreased earnings.
INTERPRETATION OF KEY FINANCIAL RATIOS OF BOTTOM
3 COMPANIES
Ratios Krebs Siris Morpen
DEBT EQUITY 0.99 0.3 0
RATIO
LONG TERM 0.59 0.3 0
DEBT EQUITY
RATIO
CURRENT RATIO 1.41 3.56 4.84
FIXED ASSET 0.35 0 0
TURNOVER
RATIO
INVENTORY 1.17 0 0
TURNOVER
RATIO
DEBTOR 1.98 0 0
TURNOVER
RATIO
INTEREST -0.14 -88.55 0
COVERAGE
RATIO
INTER FIRM COMPARISON OF THE BOTTOM THREE COMPANIES:

ANALYSIS OF THE DEBT EQUITY RATIO:
Debt equity ratio of Kerbs, Siris and Morepen is very less, not even equal to 1 which
suggests that these companies are very conservative in their approach i.e. depend only
upon their shareholder’s funds.
Morepen’s debt equity ratio as well as long term debt equity ratio is zero, signifying
that the entire capital is contributed by the shareholders only. In spite of less outside
funds, Kerbs fares a bit well than the other two. Ratio for their low debt equity ratio
may be that creditors are unsure of getting back their amount and interests on the due
dates, which is why they are apprehensive of investing in these companies.
ANALYSIS OF CURRENT RATIO:
Current ratio of Morepen and Siris exceeds the normally required 2:1 ratio. Only
Kerbs fall short of this specification. Current ratio does not portray a healthy and
sound position of the companies .We can also see that the debtor turnover ratio is zero
for Siris and Morepen which indicates that though the company has debtors( current
assets) but those debtors are not turning up with payments on due dates. Thus, the
current assets (debtors) are high but it is of no use because of their no chance of
getting recovered.
ANALYSIS OF FIXED ASSET TURNOVER RATIO:

The figures of the zero in case of Siris and Morepen suggest that the return from fixed
assets is nil. Also in case of Kerbs, it is minimal. This suggests that these companies
have though invested in fixed assets, yet are not gaining anything from those capital
expenditure. In short those fixed assets are not operational.
ANALYSIS OF INVENTORY TURNOVER RATIO:

Siris and Morepen figures suggest that the inventory is not at all getting converted in
to sales. This is an indication of permanently stuck inventory- a loss to the company.
Though Kerbs does have an inventory ratio figure of 1.17, it is no good as it indicates
that the operating cycle for inventory is a around 340 days, which is only slightly than
a year. Thus in a year, inventory gets converted into sales only once.
ANALYSIS OF DEBTORS TURNOVER RATIO:

For Kerbs, the debtor turnover ratio is approximately 2 , which means that the average
debt a collection period is somewhere around 180 days. In case of Siris and Morepen ,
this ratio is zero. This means that the debtors are not at all turning up or we can say
that the debts have become bad debts in this year.
ANALYSIS OF THE INTEREST COVER RATIO:

Morepen has interest cover ratio of 0, which shows that there are no profits at all and
it cannot cover up for its interest expenses. There is no margin of safety in case the
company has low earnings. In case of the other two companies the negative Interest
cover ratio indicates that the company is making losses. Thus we can say that in case
of these companies the interest expenses are not covered. In addition the companies
are not even able to cover up their operating expenses.
Key Statistics about Ranbaxy
Top Locations
• New Delhi Area, India (362)

• Greater New York City Area (78)
Ranbaxy Headquarters Address
Plot No. 90 Sector 32

Gurgaon, Haryana 122001
India
Phone: +91-124-418-5000
Fax: 91 11 2646 5748
Headquarters Delhi Area, India
Industry Pharmaceuticals
Type Public Company
Status Operating Subsidiary
Company Size 12,000 employees
2006 Revenue 61,377 mil [INR] (16%)
Founded 1961
Website http://www.ranbaxy.com
Mission & Vision
Ranbaxy'
s mission is to become a Research-based International Pharmaceutical
Company. The Company is driven by its vision to achieve significant business in
proprietary prescription products by 2012 with a strong presence in developed
markets.
Financials
Ranbaxy was incorporated in 1961 and went public in 1973. For the year 2009, the
Company recorded Global Sales of US $ 1519 Mn. The Company has a balanced mix
of revenues from emerging and developed markets that contribute 54% and 39%
respectively. In 2009, North America, the Company'
s largest market contributed sales
of US $ 397 Mn, followed by Europe garnering US $ 269 Mn and Asia clocking sales
of around US $ 441 Mn.
Strategy
Ranbaxy is focused on increasing the momentum in the generics business in its key
markets through organic and inorganic growth routes. Growth is well spread across
geographies with focus on emerging markets. The Company continues to evaluate
acquisition opportunities in India, emerging and developed markets to strengthen its
business and competitiveness. Ranbaxy has forayed into high growth potential
segments like Biologics, Oncology and Injectables. These new growth areas will add
significant depth to the existing product pipeline.
R&D
Ranbaxy views its R&D capabilities as a vital component of its business strategy that
will provide a sustainable, long-term competitive advantage. The Company has a pool
of over 1,200 scientists engaged in path-breaking research.
Ranbaxy is among the few Indian pharmaceutical companies in India to have started
its research program in the late 70'
s, in support of its global ambitions. A first-of-its-
kind world class R&D centre was commissioned in 1994. Today, the Company'
s four
multi-disciplinary R&D centers at Gurgaon, in India, house dedicated facilities for
generics research and innovative research. The robust R&D environment for both
drug discovery and development reflects the Company'
s commitment to be a leader in
the generics space offering value added formulations based on its Novel Drug
Delivery System (NDDS) and New Chemical Entity (NCE) research capabilities.
The new drug research areas at Ranbaxy include anti-infective, inflammatory /

respiratory, metabolic diseases, oncology, urology and anti-malaria therapies.
Presently, the Company has 8-10 programs including one Anti-malaria molecule for
which Phase-III clinical trials have commenced in India, Bangladesh and Thailand.
The Company has signed collaborative research programs with GSK and Merck.
NDDS focus is mainly on the development of NDA/ANDAs of oral controlled-

release products for the regulated markets. Ranbaxy’s first significant international
success using the NDDS technology platform came in September 1999, when the
Company out-licensed its first once-a-day formulation to a multinational company
Worldwide Operations of Ranbaxy
Global Pharma Companies are experiencing an ever changing landscape ripe with
challenges and opportunities. In this challenging environment Ranbaxy is enhancing
its reach leveraging its competitive advantages to become a top global player.
Driven by innovation and speed to market we focus on delivering world-class

generics at an affordable price. Our unwavering determination to achieve excellence
leads us to new global benchmarks. Our people have consistently risen above all
challenges maximized opportunities and positioned Ranbaxy as a leader in the global
generics space.
Ranbaxy’s global footprint extends to 46 countries embracing different locales and

cultures to form a family of 50 nationalities with an intellectual pool of some of the
best minds in the world.
• The Company has pushed the frontiers of possibility, both horizontally and
vertically,
• Growth through scientific breakthroughs and strategic initiatives has been
achieved. This is more evident after the merger of RANBAXY with DAIICHI.
• The clear aspiration is to achieve global sales of US $ 5 Bn by 2012 and
position itself among the top 5 global generic companies.
ACHIEVEMENTS OF RANBAXY
• Ranbaxy achieved Global Sales of US $ 1,619 Mn, a growth of 21%.
Emerging markets strengthened their presence in the Company'
s overall sales
mix, and comprised 54% of the total sales (49% in 2006).
• Went into merger with Daiichi in June 2008.
KEY FINANCIAL RATIOS OF RANBAXY

DETAILED RATIO ANALYSIS OF RANBAXY:
2004 2005 2006 2007 2008
DEBT 0.04 0.24 0.89 1.37 1.37
EQUITY
RATIO
LONG TERM 0 0.03 0.5 0.92 0.92
DEBT
EQUITY
RATIO
CURRENT 1.63 1.21 1.06 0.98 0.98
RATIO
FIXED 2.95 2.29 2.09 2.04 2.04
ASSET
TURNOVER
RATIO
INVENTORY 4.72 4.1 4.44 4.64 4.64
TURNOVER
RATIO
DEBTOR 5.97 4.6 4.51 4.72 4.72
TURNOVER
RATIO
INTEREST 58.23 6.66 8.58 9.29 9.29
COVERAGE
RATIO
• Debt equity ratio and the long term debt equity ratio of the company have
increased from 2004 to 2008, indicating the aggressive strategy adopted by the
company to depend more on debt than on equity. The heavy dependence of
Ranbaxy on the debt took its toll as the company ran into losses on account of
non-payment of required interests and principal disbursements on time.
Because of this Ranbaxy was taken over by Daiichi – a Japanese
pharmaceutical company, which offered Ranbaxy, monetary assistance to
overcome deep debts. Hence it is clear that playing too much risk without
foresight may force liquidation of the company or may result into a forced
acquisition or merger!
• Current ratio has decreased between 2004 -2007, indicating that the
company went into a current asset deficit. The current asset from 2005 went
even below the mean of the total current assets over 5 years. This current asset
ratio figure falls way short of the satisfactory ratio of 2:1.
• A continuous decline in the fixed asset turnover ratio over the 4 years
indicates acquisition of fixed assets. This acquisition of fixed assets does not
go in favour of the company as increase in fixed asset will also result in cost of
maintenance and for that the company is not showing an increase in the cash
in hand.
• Inventory turnover ratio, though reduced by around 13 % in 2005over 2004,
but showed an improvement in the operating cycle of inventory in the
successive years. This period was also marked by the amendments in the
Patent Act. Amendments in the act must have come as a respite as it checked
the inflow of generic drugs in the market.
• Debtor turnover ratio of Ranbaxy has increased over the years. Though the
company has bettered its average debt collection period by 4.65%in 2007 over
2006, yet its average debt collection at the end of 2007 showed an increase of
26.48% over the year 2004. (Being 76 days in 2007 and 60 days in 2004).
• Interest coverage ratio decreased considerably in 2005 by about 88.56% thus
reducing the safety margin to cover the interest requirements. It was when
Ranbaxy was taken over by Daiichi that Cipla made it to the top position in
2008.
In 2008–09, Dr.Reddy’s lab will complete 25 years of being in business.

It is a significant milestone.
Between 1999–2000 and 2007–08, the Company has increased its revenues at an
exponential trend rate of growth (i.e. trend CAGR) of 27 per cent per year, measured
in US dollars.
During 2007–08, the Company successfully launched RedituxTM in India; a
monoclonal antibody used in the treatment of cancer and thus demonstrated its
technological prowess in manufacturing a product in the biologics space
Financial Highlights Consolidated Revenues

• Consolidated revenues decreased by 23% to Rs. 50,006 million or U.S. $. 1.25
billion in 2007– 08 from Rs. 65,095 million in 2006–07.
• Operating Income decreased by 70% to Rs. 3,358 million in 2007–08 from Rs.
11,331million in 2006–07.
• Profit before tax and minority interest decreased by 67% to Rs. 3,438 million
in 2007–08 from Rs. 10,500 million in 2006–07.
• Profit after tax decreased by 50% to Rs. 4,678 million in 2007–08 from Rs.
9,327 million in 2006–07.
• Fully diluted earnings per share decreased to Rs. 27.73 in 2007–08 from Rs.
58.56 in 2006–07.
The company launched 10 new products in the US generics market in 2007–08,
including two over-the- counter (OTC) products. The company had filed 122
cumulative Abbreviated New Drug Applications (ANDAs) in 2007-08.
Key Financial Ratios

2004 2005 2006 2007 2008
DEBT 0.02 0.08 0.28 0.19 0.09
EQUITY
RATIO
LONG TERM 0.01 0.01 0.04 0.02 0
DEBT
EQUITY
RATIO
CURRENT 3.73 2.49 1.85 2.21 2.37
RATIO
FIXED 2.33 1.79 2.05 3.45 2.27
ASSET
TURNOVER
RATIO
INVENTORY 6.99 5.79 5.64 8.69 6.11
TURNOVER
RATIO
DEBTOR 3.97 3.78 4.21 4.94 3.53
TURNOVER
RATIO
INTEREST 72.71 3.82 10.39 27.29 40.76
COVERAGE
RATIO
DETAILED RATIO ANAYSIS OF Dr REDDY’S LAB:

• The debt equity ratio shows fluctuation with an increase in 2005, followed by
a decrease, again by an increase and then finally by a decrease. In spite of
these fluctuations, the range of debt equity ratio is from 0.02 to 0.19. This
range shows that the debt equity proportion of the company remained almost
constant. Long term debt equity ratio trends also hardly show any fluctuation
as the minimum of it is 0.00 and a maximum of 0.04. This signifies that the
company did not rely too much on either the debts or the equity, rather
maintained a balance between the two.
• Current ratio also shows fluctuations with first an increasing trend till 2006
followed by a decrease and finally an increasing trend in the next two
successive years. We can infer that when the economy was hit in 2008 by
financial crisis then the company wisely decreased its debts and increased its
current assets, thus aiming to minimize the liquidity crunch.
• Fixed assets turnover ratio over the five years show a dip in 2008 over the
2007 figures revealing the fact that the company could not generate better
revenues from fixed assets in 2008 than in 2007. It can be attributed to a
decline in consumer demand in 2008 which led to a decrease in the efficient
utilization of the fixed assets.
• Inventory turnover ratio increased in 2007 over 2006 by 54% followed by a
sharp decline of approx 30%in 2008. Thus, in 2008 the inventory took longer
time to convert to sales than in 2007.
• Debtor’s turnover ratio increased consistently till 2007 showing a good trend
in average debt collection period but fell to 3.53 in 2008 showing that debtors
failed to turn up quickly as compared to previous years.
• Interest cover ratio though increased in 2008 over the last three years is a
positive sign in spite of the earnings of the company showing a dip. Hence the
company managed to keep a wide safety margin to cover up its interest
charges.
CIPLA PHARMACEUTICALS LTD.

CIPLA IS BORN
Dr. K Hameed set up in 1935 The Chemical, Industrial & Pharmaceutical
Laboratories, which came to be popularly known as Cipla. On August 17, 1935, Cipla
was registered as a public limited company with an authorised capital of Rs 6 lakhs.
Cipla was officially opened on September 22, 1937 when the first products were
ready for the market.
ACHIEVEMENTS OF CIPLA
• Topped pharma rankings with 5.42% market share, a head of Ranbaxy and
GSK.
• Cipla Laboratories continues to be the largest pharmaceutical company in the
domestic market.
• According to an article published in Business Standard on Jan1, 2008 Cipla
topped the ORG-IMS rankings for with a market share of 5.42 per cent and
sales of Rs 146.32 crore, edging out Ranbaxy which stood at second position
with 5.09 per cent market share and Rs 137.49 crore sales.
• Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the
largest pharmaceutical company in the domestic market for the first time in
May 2008.
TEN YEAR TREND IN SALES IN CIPLA
Key Financial Ratio
2004 2005 2006 2007 2008

DEBT 0.13 0.14 0.19 0.11 0.1
EQUITY
RATIO
LONG TERM 0.11 0.12 0.16 0.1 0.1
DEBT
EQUITY
RATIO
CURRENT 1.87 1.89 2.06 2.42 2.66
RATIO
FIXED 3.19 2.73 2.59 2.24 2.05
ASSET
TURNOVER
RATIO
INVENTORY 3.14 3.54 3.55 3.65 3.9
TURNOVER
RATIO
DEBTOR 4.63 4.29 4.13 3.71 3.38
TURNOVER
RATIO
INTEREST 30.28 39.73 45.17 73.4 47.45
COVERAGE
RATIO
DETAILED RATIO ANALYSIS OF CIPLA:

• The debt equity ratio over the five years is indicative of the fact that there has
not been any significant change in figures. Though this ratio first changed
from 2004 to 2006 with marginal increase, it again dropped back in 2007,
even below the 2004 figures. The 2008 figures are still lower. It shows that
from 2004 to 2006, the company relied more on debts from outside sources
than on equity from shareholders. The reason may be that the company
decided to restrain from dividend payment as these are taxed profits. In the
two successive years, the company’s less reliance on outside funds and more
on shareholder’s funds indicates a shift from aggressive to conservative
strategy. This move seems a sensible one in the wake of economic slowdown.
With drawl from risk debt financing, may though affect the returns on
investment, but is a better choice in the present scenario , where the companies
are finding it difficult to make interest payments on due days. Hopefully, for a
year or so, the companies will continue to rely more on equity.
• Long term debt equity ratio also follows the same trend; first an increase till
2006 and then a decrease till 2008, showing less dependency on long term
debts. This can be again attributed to 2 reasons
• Cipla is apprehensive of whether it’ll meet the interest payment deadlines.
• No creditor is interested or rather resource sufficient to lend to the companies
because of the liquidity crunch in the market.
• An incessant and a significant increase in the current ratio indicates the
company is going strong each year in discharging its current liabilities or short
term obligations.
• On the other hand fixed asset turnover ratio has shown a consistent fall over
these years indicating that the returns from fixed assets have decreased or the
company has gone into more acquisition of fixed assets. It can be inferred that
the company has gone for expansion.
• Inventory turnover ratio’s consistent increase shows the improvement of Cipla
in the inventory management. A decrease of 13 % in the average operating
inventory cycle within 4 years is a testimony of the inventory getting
converted into sales more rapidly.
• The continuous decrease in the debtor turnover ratio is one area which needs
immediate attention as the average debt collection period has gone up from
2004 to 2008. A rise in this ratio must be checked else the company may fall
short of liquidity.
• Interest coverage ratio shows that the company performed well in keeping and
also increasing the margin of safety that it provides to its creditors. But a sharp
decline in the 2008 shows that the company’s profits have considerably
reduced. This sharp decline cannot be attributed to increased interest expense
because the debt equity ratio indicates the decline in the debts of the company
in the same year. It can be hence referred that profits are not sufficient to cover
the interest requirements, and this can be detrimental for the company, in case
the earnings of the company also drop. It is important the management thinks
twice before going for massive acquisition of fixed assets.
SUN PHARMACEUTICALS INDUSTRIES LIMITED
AN OVERVIEW OF THE COMPANY

• Net sales for the year ending 31 March 2008, up 57%.
• International markets are at 55% sales, further strengthening its presence as an
international pharma generic company.
• India formulations continue to be a large part of our turnover, accounting for
43% of its business.
Ex- US branded generics grew 10% in value terms.
Sales of 76% subsidiary in the US, Caraco Pharma
• A total of 215 patents have been have been filed so far, of which 59 were
granted.
KEY FINANCIAL RATIOS OF SUN PHARMA
2004 2005 2006 2007 2008

DEBT 0.21 1.08 1.39 0.72 0.18
EQUITY
RATIO
LONG TERM 0.16 1.03 1.37 0.72 0.18
DEBT
EQUITY
RATIO
CURRENT 1.92 3.34 5.46 4.62 3.04
RATIO
FIXED 2.35 2.23 2.57 2.91 3.62
ASSET
TURNOVER
RATIO
INVENTORY 6.3 7.2 7.74 7.72 8.88
TURNOVER
RATIO
DEBTOR 6.13 6.9 7.09 5.61 3.96
TURNOVER
RATIO
INTEREST 82.22 29.2 44.52 73.79 208.94
COVERAGE
RATIO
DETAILED RATIO ANALYSIS OF SUN PHARMA:

Both debt equity ratio and long term debt equity ratio show the similar trend
of first increasing from 2004 to 2006 and hen decreasing till 2008. The mean
of these two ratios is 0.716 and 0.692 respectively. The figures of the last 2
years show that Sun Pharma has reduced on its debt and increased its equity.
Thus the company is playing safe by following a conservative approach.
Current ratio also shows an increasing trend till 2006 before showing decline
till 2008. In spite of this decline, the current ratio has shown a net increase of
58.33% in 2008 over the figures in 2004.
Fixed asset turnover ratio has consistently increased from 2004 till 2006, thus
showing an increase in revenue from fixed asset over these years. It shows
that the capital investment strategy of the company is quite sound because the
long term investments made, are generating returns for Sun Pharma.
The continuous increase in the Inventory turnover ratio shows improvement
in the inventory management. The inventory operating cycle for 2008 is
approx 41 days which is 16 days less than which the company used to take to
convert its inventory to sales in 2004.
Debtor turnover ratio shows a significant drop in 2008. The figure at 3.96 is
approximately 33% less than the mean debtor turnover ratio (5.94). Thus a
decrease in both current ratio and debtor turnover ratio indicates towards a
decline in cash in hand.
Interest cover ratio has increased manifold from 2004 to 2008, with a net
increase of about 2.5 times. It is indicative of an increase in the safety margin
for payment of interests from profits. One reason for this increase is the
decrease in the debts of the company, which has led to the decrease in the
interest payment liability.
PIRAMAL HEALTHCARE
The VISION of Piramal is to become the most admired Indian pharmaceutical
company with leadership in market share, research and profits by-
Building distinctive sales & marketing capabilities
Evolving from licensing to globally launching our patented products
Inculcating a high performance culture
Being the partner of choice for global pharmaceutical companies
MILESTONES ACHIEVED
• 2008 marked the 20th year of Piramal group’s foray into the healthcare space.
Since their acquisition of Nicholas labs in 1988, the company has come a long
way to stand tall as one the largest healthcare companies in our country.
• Revenues for the year grew 16.2% to Rs. 28.7 billion.
• Operating Profit grew 41.3% to Rs. 5.4 billion.
• Operating Margin increased from 15.5% to 18.9%.
• Net Profit grew 53.1% to Rs. 3.3 billion.
In Healthcare Solutions:
(i) Thirty new products & line extensions launched, new products (launched during
the last 24 months) form 4.9% of sales.
(ii) Top-10 brands grew by 8.5% for financial year 2008.
In Allied Businesses:
(i) Piramal Diagnostic Services (Pathlabs & Radiology) business grew by 71.8% to
Rs.1.2 billion.
(ii) Piramal Diagnostic Services acquired 16 new Laboratories during the year.
(iii)New joint-venture formed with ARKRAY Inc. for marketing Diagnostic Products
in India.
Key Financial Ratio
2004 2005 2006 2007 2008

DEBT 0.75 0.7 0.36 0.29 0.43
EQUITY
RATIO
LONG TERM 0.65 0.49 0.18 0.17 0.28
DEBT
EQUITY
RATIO
CURRENT 1.59 1.2 1.14 1.39 1.54
RATIO
FIXED 2.78 1.9 1.83 1.67 1.74
ASSET
TURNOVER
RATIO
INVENTORY 7.84 5.58 6.25 7.78 8.34
TURNOVER
RATIO
DEBTOR 8.34 8.27 9.53 8.42 7.5
TURNOVER
RATIO
INTEREST 6.35 5.77 8.02 6.58 5.61
COVERAGE
RATIO
DETAILED RATIO ANALYSIS OF PIRAMAL FOR THE PAST FIVE
YEARS:
• Both debt equity ratio and long term debt equity ratio have decreased over the
years except for a slight increase in 2008, indicating that Piramal has not
changed the mix of debt and equity significantly.
• Current ratio of Piramal decreased from 2004 to 2006 followed by an increase
till 2008. The trend of increase and decrease is such that whatever drop is seen
in current ratio till 2006 is recovered till 2008. Thus the current ratio at the end
of the year 2008 was restored to 1.54, almost equal to 1.59 in 2004.
• Fixed asset turnover ratio shows a decreasing trend till 2007 after which,
improvement is registered in 2008, thereby indicating greater revenue
generation from the amount invested in fixed assets.
• Inventory turnover ratio, apart from a decrease in 2005, shows a continuous
increase over the 5 years with a net decrease of 50% in the inventory operating
cycle of 2008 over 2004. From 2004 onwards the inventory operating cycle is
45days, 64 days, 57 days, 46 days, and 43 days respectively for each
successive year till 2008.
• Debtor turnover ratio decreased by a mere 0.83% in 2005 followed by an
increase of 15.23% in 2006. In 2007, again the debt turnover ratio decreased
by 13.18% followed by a further decrease of 11%in 2008. Thus we see the
average debt collection period varies from approximately 38 days to 48 days,
with a mean period of 43days.
• Interest coverage ratio also shows the fluctuating trend followed by alternate
increase and decrease. It shows that the company needs to manage its interest
expenses by keeping a sustained cover that is, margin of safety. This can be
achieved by one or all of the following:
• Decrease in debts
• Increase in profits
• Taking debt at low interest rate.
Bibliography
· http://www.przoom.com/news/22383/
·http://www.business-standard.com/india/news/domestic-drug-makers-immune
toslowdown/351685/
· http://www.expresspharmaonline.com/20090331/market01.shtml
· www.companiesandmarkets.com
·http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000000
224095.pdf
·http://www.pharmafocusasia.com/knowledge_bank/articles/when_borders_break_do
wn.htm
http://biotechpharmaceuticals.suite101.com/article.cfm/preparing_for_the_spring_alle
rgy_season
· Amelia Gentleman (August 7, 2007) Setback for Novartis in India Over Drug
Patent
Ref:http://www.dbresearch.com/PROD/DBR_INTERNET_ENPROD/PROD0000000
000224095.pdf
· Uwe Perlitz( April 9,2009) India'
s Pharmaceutical Industry course for
globalization
· Jacob Heller and Gabriel Rocklin (2008) Promoting Pharmaceutical Research
under National Health Care Reform
· Manjeet Kripalani (March 25, 2008) Indian Pharma: Hooked on the Hard Sell
published in Business week, March issue, Volume 9 4th issue
· Uni Blake (8th March, 2009) Are Pro-biotics the Answer to Keeping Allergies at
Bay
· George Yeh When Borders Break Down
· http://www.ibef.org/artdisplay.aspx?cat_id=152&art_id=22103&arc=show
· http://www.pharmaceutical-drug-manufacturers.com/pharma-industry-statistics/
· http://blogs.wsj.com/health/2009/03/12/pharmas-150-billion-ma-trifecta/
142 |
· http://timesofindia.indiatimes.com/Business/Pharma-MA-wave-set-to-reach-
India/articleshow/4268808.cms
WORD OF THANKS
We take the opportunity to pay hearty regards to Dr. D. K. Garg (chairman sir), Mr.
M. K. Verma (dean sir) and academic director for providing me their kind support for
completion of my project.
We am grateful to all those who directly or indirectly supported us in completion of

this project whether it was moral support, financial or providing appropriate support
during different phases of THE PROJECT. As a result we could accomplish my
project successfully.
At last but not the least we are thankful to Mr. Shivnath Mishra (Guide) , Area
Manager of “Apex Lab Pvt Ltd.” There guidance was a milestone in completion of
my project.

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Final Project Report

“Detail study of Indian pharma companies Vs

European pharma companies”

A report submitted to Ishan Institute of Management &

Under the Guidance of

Mr. Shivnath Mishra

SUBMITTED TO, SUBMITTED BY,

Dr. D.K. Garg Sanjeev Kumar

Chairman Enr : 14047

ISHAN INSTITUTE OF MANAGEMENT & TECHNOLOGY

1A, KNOWLEDGE PARK-1, GREATER NOIDA

DISTT. G.B. Nagar (U.P)

As a student of management, apart from theoretical studies we need to get a deeper

Management in India is heading towards a better profession as compared to other

The demand for professional managers is increasing day By day. To achieve

A comprehensive Understanding of the principle will increases their Decision making

Name of the guide:

Place: Delhi Mr. Shivnath Mishra

Apex Lab Pvt. Ltd.

Sidco Garment Complex,

3rd Floor, Chennai-600032

We express our sincere thanks to hon’ble Mr. Shivnath Mishra(Area Manager,

We take an opportunity to express our sincere thanks to Dr. D.K.Garg

The Final Project project on “Detail study of Indian pharma companies Vs

S.No. TITLE PAGE NO.

Plan of the study

2. Growth of pharmaceutical Industry 29

India’s Pharmaceutical Industry -

3. Regulatory Environment of India’s and 72

4. Industry Production 124

6. Mergers, Acquisition and Other Alliances in last 153

7. SWOT Analysis 198

8. International business of Pharmaceutical 223

9. Generic drugs in the U.S. Market 247

10. Conclusion 264

11 Comparison of five top pharmaceutical 273

Marketing management is creating a revolution in marketing of products and services

Marketing management is a powerful tool for achieving organizational goals and

Doing project was really an opportunity before me when I could convert my

The pharmaceutical industry-global view

Sales (US$ billions)

The main objectives of the study are:

• To evaluate the performance of a few leading pharmaceutical companies

• To know Government Initiatives for growth of Indian Pharmaceutical Industry

• Comparison of top pharmaceutical companies’ profile world wide and analyse

• To take the steps to overcome the obstacles for different pharmaceutical

• Growth and future prospects of pharmaceutical industry worldwide.

Significance of The Study

The report is written based on the in-depth investigations and studies of

We stimulate discussion, constructive and valuable suggestions that helped us in this

Cost-effective chemical synthesis: Its track record of development, particularly in the

Globalisation: The country is committed to a free market economy and globalization.

Over 20,000 registered pharmaceutical manufacturers exist in the country. The

A Brief History (1900–1999)

India's pharmaceutical industry in the spotlight

1. Development of India’s pharmaceutical industry

1. Tax breaks are offered to pharma industry

Some Vital Information on Pharmaceutical Companies in India

• In terms of volume - India'

TYPES OF DRUG SYSTEM IN INDIA

Fig: Increasing share of Indian companies in DMF filings (US FDA)

Fig: Advantage India-API

Outlook for India’s pharmaceutical industry up to 2015