India Pharmaceutical-Industry as an Export Sector

Sumeet Shekhar Neeraj,

GITAM School Of International Business

Formerly, GIFT Vizag

Registration No. 1226110122

Date: 17-01-2011

Abstract

India has emerged as a preferable manufacturing destination for global pharma majors namely Roche, Eli Lilly, Johnson & Johnson etc, the world leaders who have already planted themselves deep into the Indian market in line with Indian majors like Cipla, Dr. Reddys Labs, Ranbaxy and various others savouring high quality, cost effective production capabilities of India for their exports to the world market. The Indian Pharmaceutical industry has grown from a $333.33m turnover in 1980 to approximately $22.33bn by Sept. 2009 and the country now ranks 3rd in terms of volume of production (10 per cent of global share) and 14th by value. Exports ($12bn) of pharmaceuticals have consistently outstripped imports ($6.5bn). India currently exports drug intermediates, active pharmaceutical ingredients (APIs), finished dosage formulations, bio–pharmaceuticals and clinical services. The sooner India manages to close the infrastructure gap (major central infrastructure projects mainly roads, ports, airports and power plants, 55% delayed, 2009 data), the financial gap (huge costs and time for international approvals and registration processes) the faster the growth will be in Indian pharmaceutical industry (Economic Survey of India 2010). The focus markets of Indian pharmaceutical exports industry needs of R&D spending, financial aids, policy in action, mergers and acquisitions to be improved, reviewed and critically identified, modulated and studied respectively to grab the largest pie of the export market plethora for the future growth.

INTRODUCTION

India's pharmaceutical sector is currently undergoing unprecedented changes and has seen a

remarkable growth in its exports (pharmaceutical exports occupy a share of 4.4% to 5.2% of

India's total exports over the last 5 years [2]) and exports grew at a compounded annual growth

rate of 21.98% during the five year period of 2004-05 to 2008-09.

The industry in the country now ranks 3rd in terms of volume of production (10 per cent of

global share) and 14th by value. Exports ($12bn) of pharmaceuticals have consistently

outstripped imports ($6.5bn) [Economic Survey of India, 2010].

India’s growth story vindicates its potential, it had a $333.33m turnover in 1980 to

approximately $22.33bn by 2009-10 and a number of the country's largest pharmaceutical

companies are attaining global-player status (viz. Cipla, Ranbaxy, Dr. Reddy’s Labs, Lupin,

Sun Pharma, Cadila etc) as existing markets expand (less regulated markets LRMs viz.

Thailand, Cambodia, Malaysia, Pakistan, Vietnam, Ukraine, Belarus and Moldova, with other

importing LRMs in Azerbaijan and Kyrgyzstan), and new ones open up (Iran, Saudi Arabia,

China, Georgia , South Africa etc), for high quality, affordable generic drugs in the highly

lucrative markets.

Approximately $123bn of generic products is at risk (subject to patent renewal approvals by

regulators) of losing patents by 2012. Even at a conservative estimate of 15% opportunity this

translates into $18.4bn opportunity for India [2]. However the figures need to be appropriately

deflated since Indian opportunity will lie in generics equivalent of branded drugs, which

would be cheaper.

Ageing populations of the US (plus the 2010 US Healthcare Reforms in action), China &

European economies leading to the more and more expenditure on medicines and

appreciation in the per capita consumption value of the drug products with cheaper rates,

which is India forte (an astounding e.g.: In India, 100 tablets of Zinetac, a drug used in

common peptic ulcers cost $2 while, in Chile, same costs as much as $ 196).

Generics business: The aforesaid companies have boosted their capacities, as demand

continues to grow for the generics offered in the fields of antiretroviral therapy (Cipla),

oncology (Cipla and Dr. Reddys), antibiotic therapy (Micro Labs, Santha Biotech), insulins

and vaccines (Biocon, Serum Institute of India) and other hormonal drugs; India

manufactures more than 96 generic group drugs offered to the global market.

Regulations: A 100% foreign direct investment, liberalisation of rules related to foreign

technology agreements as well as of the import regime, the introduction of Schedule-M,

Schedule-T and revision of Schedule-Y (to permit conduct of phase II-IV clinical trials in

India) of The Drugs and Cosmetics Act, 1940 had put upon a great impulse to the industry.

PHARMEXCIL: The creation of PHARMEXCIL as well as a National Pharmaceuticals

Policy with the objective of, among other things, has been rendering India as a preferred

global destination for pharmaceutical R&D and manufacturing followed by exporting the

drugs has proved successful [5]. The recent creation of a separate Department of

Pharmaceuticals is only a manifestation of the importance government of India has accorded

to the sector.

Markets & regulations: Currently India exports full basket of pharmaceutical products

comprising intermediates, APIs, Finished Dosage Combinations (FDCs), biopharmaceuticals,

vaccines, clinical services, etc., to various parts of the world. India is among the top 20

pharmaceutical exporters world-wide and with the largest number of US FDA inspected

plants (119 plants), outside the USA. Various other agencies like MHRA (Medicines &

Healthcare Regulatory Agency) UK, MCC (Medicines Control Council) South Africa, TGA

(Therapeutic Goods Administration) Australia, HPB (Health Promotion Board) Canada have

approved scores of plants in India [2]. Notably the global pharmaceutical markets are

estimated at $773.1bn (2008) growing at 4.8% over the previous years.

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Broadly, Asia is the largest importing region from India with a share of 30% of India's

pharmaceutical exports followed by Europe (24%) and North America (21%). During 2008-

09 United States of America had been the top export destination with a share of approx 18%

in India's pharmaceutical exports valued at $1.55bn followed by Russia’s valued at $0.33bn

with a share of 3.84%, Germany ($0.31bn and 3.65%), Austria ($0.31bn and 3.58%) and UK

($0.27bn and 3.12%). In the year 2008-09, 58% of India's pharmaceutical exports comprised

formulations valued at $5.03bn followed by Bulk Drugs (48%) valued at $3.6bn and herbals

exports 3% valued at $251m [2].

Pharma SMEs: According to the CII (Confederation of Indian Industries), there are around

80,000 small-scale units engaged in the areas of pharmaceutical formulations and bulk drugs.

The present decade has opened up newer opportunities for the SMEs (Small- to Medium-

Sized Enterprise) in the field of CRAMS (Contract Research and Manufacturing Services),

Clinical trials etc. A number of them have received approvals from international regulatory

authorities mentioned below for facilities and expertise; they can avail opportunities in

CRAMs (e.g. Macleods Pharmaceuticals, Micro Labs, Alkem Ltd, Hetero Drugs, Ankur

Drugs etc). The product launches may help SMEs to secure manufacturing contracts and

opportunities to supply Active Pharmaceutical Ingredients (APIs) and allied chemicals. The

German Technical Cooperation has entered into a memorandum of understanding (MoU)

with the Drugs & Pharmaceuticals Manufacturers Association (DPMA) of India to help

pharma-SMEs that need interventions to brave the intense competition. India government has

been making every attempt to support SMEs through several incentives. One such effort is

the development of SMEs clusters in various parts of the country (e.g. Indore- SEZ, Baddi-

Export Promotion Industrial Park- EPIP).

Pricing & policy controls: The uncertainty in the pricing policy (governed by the National

Pharmaceutical Pricing Committee and the Drug Price Control Order 1995) of drugs imposed

by the Indian government at various levels of the industry on a number of essential drugs

despite an increase in the price of raw material has taken a toll on the bottom lines of

manufacturing companies, thereby hampering its R&D initiatives.

A significant boost in certain critical areas such as manufacturing regulatory infrastructure

(The Drugs and Cosmetics Act 1940 recent amendments in Schedule M, guiding the Good

Manufacturing Practices have come in line with the standards of USFDA regulations) and

new drug discovery programme (Schedule Y of the act), the improvised Indian

Pharmacopoeial Compendia (in quasi equal standards to the United States Pharmacopoeia

and the British Pharmacopoeia) can place India among the top pharmaceutical industries in

the world.

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Bilaterals and International agreements: Post liberalization, the pharmaceutical export

industry has had to reorganize itself to keep pace with the economic reforms that were taken

on by India, the abolition of industrial licensing as well as the international export

commitments mainly the bilaterals and agreements and/or pacts signed which testify a lot of

decisive work and agreement on pharmaceutical tariff lines curb e.g. India-Ghana, India-

Peru, India-Russia, India-Kenya, India-South Africa, India-Singapore, India-Mongolia, India-

Japan EPA, other comprehensive treaties and joint workings with almost all of the developing

economies of the world for pharmaceuticals trade and businesses, now has begun exploring

the greener pastures of countries like African countries (Nigeria, Kenya and various others

etc), India-Japan EPA (Economic Partnership Agreement, September 2010) would boost the

industry as Japan is one of the global leaders in per capita drug consumption i.e. more than

$412 followed by Germany- $222 and USA- $191). India exported $1.38bn worth drugs &

Pharmaceutical to Asia (approx 19% of India’s total pharma exports) and ASEAN countries

accounted for $497.73m (approx 36%) [6].

Labour Costs: Skilled scientists/technicians/management personnel at affordable costs have

kept India one of leading in the list, as studied by BLS (Bureau of Labour Statistics) Hourly

labour compensation costs in India are among the lowest when compared with the 36

countries which are huge cost advantages (in 2005, India’s average hourly compensation cost

for all employees in manufacturing i.e. $0.91 was approximately 3.1% of the level seen in the

United States i.e. $29.74) for the Western pharmaceutical companies of up to 60-70% aptly

have made the country to be the choicest manufacturing & exporting destinations in the

sector.

Comparison of Cost Advantage in India (%) [2]

Costs in the Western Countries (Taking) 100.0% Production costs 50.0% R&D Costs 12.5% Clinical Trials Cost 10.0% Source: Pharmexcil Research

Manufacturers’ Internal Infrastructure: The Indian skilled workforce and Western-

equivalent research infrastructure owned by the Indian MNCs (Multi National Companies)

viz Lupin, Cipla, Ranbaxy, Dr. Reddys Labs etc with well equipped R&D labs with advanced

imported technologies such as Nuclear magnetic resonance (NMR), advanced

Chromatography (HPLC- High Performance Liquid Chromatography, Gas Chromatography

etc) based equipments, Infra Red (IR) Spectroscopes etc, Clinical Research facilities and tie-

ups with major clinical services providers viz. Clingene (Biocon), Quintiles, and various

other Clinical Research Organizations (CROs) for their outsourced researches and clinical

trials.

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Scientific & Educational Institutions: The quality knowledge dissemination by institutions

like Council of Scientific and Industrial Research (CSIR), National Research Development

Corporation, Central Drug Standard Control Organization (CDSCO), Indian Council of

Medical Research (ICMR), Indian Drug Manufacturers Association (IDMA) and various

others, during the last few years there has been phenomenal growth in the number of

institutions imparting pharmaceutical education and combined admission capacity of the

courses is about 61,000 seats scored through 500 plus colleges (teaching 2 years Diploma, 4

years Graduation, 2 years Post Graduation and 5 Plus years in PhD etc regulated jointly by

Pharmacy Council of India and All India Council of Technical Education).

Expertise from institutions viz. CDRI (Central Drug Research Institute), IISc (Indian Institute

of Science), NIPER (National Institute of Pharmaceutical Education and Research), NRDC

(National Research Development Corporation) and various others, R&D capabilities,

Science-Technology infrastructure and industry during the last five decades have also

selectively developed to extraordinary levels as compared to that in most developing nations

impelling greatly to the exports sector of the industry.

India Pharma Patent Regime: The improved Intellectual Property protection after the

introduction of TRIPS (Trade-Related Aspects of Intellectual Property Rights) and

compulsory licensing (such licenses provide generics companies with restricted access to

intellectual property in order to manufacture generic versions of patented medicines in good

faith of the country’s health)[7], protected patent regime after the TRIPS (commitments taken

by India under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights

(TRIPS) forced a change in The Patents Act regime in 2005, bringing to the fore a major

challenge for the country’s pharmaceutical industry to comply with the TRIPS guidelines, the

Product patent was reintroduced after 35 years again) provided a safe platform on which

pharmaceutical exporters has helped them grow in India and also meet the need for increased

production rather than relying on imports, which was once critical for the infant Indian

national economy [7]. The fact of the matter is that Indian manufacturers are still not able to

encash the opportunity due to the lack of investments and government promotion in the

Pharmaceuticals research (only a handful of government clinical and manufacturing research

promotion and development institutions exist as mentioned above) and Public Private

Partnership in the sector for promoting Orphan Drugs research and other similar projects as

opportunities for the sector.

Government’s Schemes & Initiatives: Reduced pro-manufacturing, CAPEX costs by duty

exemption upto zero percent by EPCG scheme of Foreign Trade Policy) and expenditure to

run cGMP compliance facilities and high quality documentation and process understanding is

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grossly being supported by the Government (DGFT & Deptt. Of Commerce) by the

promotional policies viz. EPCG (Export Promotion Capital Goods), DEPB (Duty Entitlement

Pass Book), MAI (Market Access Initiative, financial assistance is also provided for

contesting litigation(s) in the foreign country concerning restrictions/anti dumping duties etc.

on particular product(s) of Indian origin), MDA (Marketing Development Assistance) DGFT

(Directorate General of Foreign Trade) has been supportive to the exporters by leveraging the

zero duty benefits and schemes of the Foreign Trade Policy 2009-2014, revised 2010.

To promote pharmaceutical exports PHARMEXCIL-Hyderabad (works closely with the

Department of Commerce and the Export Promotion Cell in the Department of Chemicals

and Petrochemicals to undertake activities such as promoting exports, preparing country-

profiles, assessing export potential across the countries and to have greater degree of

interaction internationally), EXIM Bank (indulged in leveraging cheaper loans to the

exporters and also does contract rating of importers), the creation of Pharma Parks, SEZs’

(Special Economic Zones) and EPZs’ (Export Processing Zones) dedicated to pharmaceutical

manufacturers, export dedicated SEZs’ e.g. Indore EPZ, Pune SEZ, Vizag Pharma City

(largest) etc have helped promoting the exports.

Tax Environment: In SEZs for the corporate taxes front, pharma units set up in SEZs enjoy

100% income tax exemption on export profits in the first five years of operation, 50%

exemption for the next five years, and 50% exemption on the reinvested export profits in the

following five years. Companies located in SEZ also benefit from various Indirect Tax

benefits such as exemption from payment of Customs Duty; Excise Duty; Central Sales Tax

and refund and exemption of Service Tax. The bottom line is that India Govt. and EPCs

(Export Promotion Council) offer attractive tax benefits, reimbursements and reductions in

customs duties which also help global manufacturers compete in the price-sensitive LRMs

environment.

Key Challenges:

R&D & Investments: Low investments by Indian drug makers (e.g. Ranbaxy maximum

12.6%) in innovative R&D compared to the Global players investing upto 20% (Eli Lilly

maximum 20%) of their sales revenue continue to be a major weakness of Indian

pharmaceutical exporters lacking capacities for filing more and more ANDA’s and

penetrating into the generic markets globally only and not in the Novel Drug Delivery

Systems.

The diffused nature of the Indian pharmaceutical industry has also been a concern that only

about 20 to 30 companies (viz. Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, Sun

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Pharmaceuticals, Nicholas Piramal, Zydus Cadila, Biocon, Glenmark Pharmaceuticals,

Wockhardt Ltd, Torrent, Biocon, Matrix Labs etc. [2] are large enough to bear the transactions

costs associated with sustained exports to and compliance with entry regulations of the

developed markets which scores to crores.

Non Tariff Measures: The importing countries’ regulations have been one of the bothering

concerns, e.g. insistence on completing long process (e.g. average 3-4 years for a ANDA

Stability Batch, for generics, till the Product’s launch after approval, Novel Drug Delivery

Systems call for average 10-16 years for a drug development till launch after NDA filing and

approvals) for registration to the international (country specific) quality auditing agencies

such as the USFDA (USA), MHRA (EU), TGA (Australia), EMEA (EU), MOH (Ministry of

Health)-Thailand, China SFDA (State Food Drug Administration), GCC (Gulf Cooperation

Council), MCC (South Africa), Canada FDA, MOH-Mexico, etc. and the mandates on

allowing imports of only those drugs which are registered in some developed countries etc.

The multiplicity of drug approval agencies in various countries has raised drug registration

costs and site inspections costs. These regulatory agencies insist on pharmaceutical standards

& quality procedures of their country, which often varies from country to country and ask for

discrete quality audits to be conducted by their agencies independently.

Indian manufacturers are prevented from bidding for government contracts as US permits

bidders only from countries that are signatories to WTO Agreement on Government

Procurement [2]. The have to submit separate state level applications for marketing drugs in

the United States as there is no nation-wide system of application even where FDA approval

has been received

Indian firms have often been accused of making counterfeit drugs by drug makers in the US

and European markets unanimously cited to be allegations used to erect non-tariff measures

for restricting competition from Indian companies who sell their low-cost drugs in the

developed markets. As per a health ministry study, about 0.3% of drugs in with ‘Made in

India’ tag are spurious, while about 5% are counterfeit and not actually ‘Made in India’. The

Supply of spurious drugs, fake drugs with “Made in India” claims e.g. cases of such exports

from China containing Indian Manufactured tags being caught in Nigeria.

Data Exclusivity: In 2006, the USA placed India on the Special 301 Priority Watch List for

not granting monopoly rights for clinical trial data (data exclusivity) that would give the

patent holder five years of marketing exclusivity. Some pharmaceutical companies also

pressured the Indian government. This occurred even though India’s current law is TRIPS

compliant. It allows the Indian drug regulatory authority to use the patent holder’s clinical

data to approve generic medicines rapidly. Implementing data exclusivity would reduce

Pg. 7

generic competition and devastate the ability of poor Indians to access affordable medicines [7].

Monetary Resources: Majority of Indian SMEs lack the ability to compete with MNCs for

New Drug Discovery, research and commercialization of molecules on a worldwide basis due

to lack of monetary resources compared to the risk associated (research costs, patent

litigations post-discovery, registration costs etc).

FUTURE TRENDS

All in all Indian drug sales are expected to rise by an annual 8% to nearly $26.59bn between

2006 and 2015[3]. 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%.

It is likely that many of the Indian small companies will merge or disappear from the market

altogether. The Commerce Ministry is mulling to formulate a policy on mergers and

acquisitions by multinationals in the pharma sector e.g. Ranbaxy by Daichi Sankyo Japan,

Dabur Pharma by Fresenius Kabi AG Germany, Piramal Healthcare by Abbott Labs USA.

In the coming years, opening up of US generics market and antiretroviral therapy of AIDS

market in Africa will boost exports since in the absence of a medical support. [Notably each

day, 6,000 Africans die from AIDS. Each day, an additional 11,000 are infected.]

The Pharma market in Thailand is fastest growing in Asia-Pacific region. It has a strong

pharma Industry producing mostly generics. It depends on imports for patented drugs. The

market is expected to be worth US $1 .82 billion by 2012 [6].

Contributions from unconventional markets in Latin America, Australia and the emerging

markets in the Middle East and African Region and increased Abbreviated New Drug

Applications (ANDAs) approvals in the US would lead the industry to shine in the upcoming

days [4], SMEs will benefit from boosted contract production for western firms as gradually

they would learn to comply the standards of the developed nations e.g. Dishman and GVK-

Biosciences undertake contract research for western companies, Sun pharma manufacturing

for Eli Lilly. Acquisition of foreign companies will lead to a strong increase in foreign

production by Indian manufacturers, which will have a dampening effect on exports.

SUMMARY

The global state of affairs direct us to the fact that tackles the non tariff measures [1] namely

the strict quality regulations to exports of pharma products in various countries and the

lengthy documentation processes demanded by the importing country regulatory authorities

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etc need to be addressed through consistent efforts and greater interaction with the concerned

agencies of the choicest markets for the exporters. The Indian companies are putting their act

together to tap the generic drugs markets in the regulated high margin markets of the

developed countries. The US market remains to be the most lucrative market for the Indian

companies led by its market size and the intensity of blockbuster drugs going off patent [4].

Based on the retrospective data USA, Germany, Russia, UK, China, Brazil, Canada, South

Africa, Nigeria, Netherlands, Spain, Turkey, Ukraine, Viet Nam, Israel, Italy, Mexico, UAE,

Singapore, Iran had been potential importers of Indian Drugs. Countries like South Africa,

Israel, Turkey, Kenya, Singapore, UK, China, Russia, Italy and Vietnam etc have been

identified to be potential prospective markets with high growth rates of imports from India [2&

3]. Africa, Latin America, ASEAN and CIS countries with huge demands deem them to be put

in the category of focus countries as these are the emerging markets and have a huge potential

with day in day out incremental growth rates of per capita drugs consumptions supported by

treaties like SAFTA (with SAARC), treaties with GCC, EU, Japan, Korea etc.

If India is able to take a 10% slice in the emerging market in developed countries it will open

an opportunity of around $50bn at current prices of patented and branded drugs and shall be

able to surpass the major exporters of the world.

REFERENCES

1) Non Tariff Measures: (http://www.commerce.nic.in/trade/international_ntm.asp?id=4&trade=i)

2) Report of the Task Force on Pharmaceuticals 25 February 2009:

(http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17)

3) Mc Kinsey Report on Indian Pharma Industry 2015:

(http://bw.businessworld.in/PDF_upload/Indian_Pharma.pdf)

4) Overview of Indian Pharma Industry:

(http://www.cci.in/pdf/surveys_reports/indias_pharmaceutical_industry.pdf)

5) The introduction of Pharmaceutical patents in India- NBER Working Paper:

(http://www.nber.org/papers/w6366)

6) Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector, July

2009:

(http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf)

7) TRIPS: India - Patent Protection for Pharmaceuticals:

(http://www.pharmainfo.net/reviews/trips-india-patent-protection-pharmaceuticals)

8) Oxfam India Comments on DIPP Paper on Compulsory Licensing- September 30th, 2010:

(www.dipp.nic.in/ipr.../Feedback_OxfamIndia_30September2010.pdf)

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