industry analytics - indian pharmaceutical industry

8/14/2019 Industry Analytics - Indian Pharmaceutical Industry

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ALLIANCE BUSINESS SCHOOL

Section EGroup 10

PGP 2008-10

A Study onGrowth and Recent Developments in

PHARMACEUTICAL INDUSTRY

Submitted To:Dr. R. Venkatamuni Reddy

Submitted by:Atreyee Nandy - 08PG294Harkirt Kaur - 08PG306Nalini Sharma - 08PG317Sanaa Sadique - 08PG341Santosh Prasad - 08PG342

Vineeth Gangadharan -

08PG355


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ACKNOWLEDGEMENT

We would like to express our heartfelt gratitude and thankfulness towards our Industry

Analytics professors, Dr. R.Venkatamuni Reddy and Dr. Gervasio S.F.L Mendes for

giving us an opportunity to work on this project, which has helped us gain an in depth

understanding of the Indian Pharmaceutical Industry.

The timely advice given by Prof. Reddy and Prof. Mendes went a long way in

ensuring that we do not lose focus while working on the project. The constant

guidance and meaningful suggestions provided by them also helped in making this

project a relevant and a rich source of learning for the students of Industry Analytics.

We hope that this project would enable the readers understand the working of Indian

Pharmaceutical Industry in detail.

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EXECUTIVE SUMMARY

The Indian pharmaceutical industry has come a long way from waiting for imports of

bulk drugs from global players for re-processing to becoming an industry which is

driving the product development and is breaking new grounds in medical research

worldwide.

The Indian pharmaceutical industry has a unique amalgamation of two major critical

factors that make it so attractive and thereby add impetus to its growth. These are:

The process patent regime

Price controls

The implementation of Good Manufacturing Practices has further supplemented the

growth of this industry which is now producing bulk drugs for all the major therapy

segments, which are now most in demand. In addition to this, the competencies that

India has achieved in process re-engineering and organic synthesis have helped derive

the most cost-effective solutions which are also compliant with the quality standards.

The purpose of this report is to provide an extensive outlook on the pharmaceutical

industry. The broad objectives of this report are:

To study the growth and trend of Indian Pharmaceutical Industry and its

contribution to Indian economy.

To study the bottlenecks in patenting and suggest suitable measures in the light

of the problematic issues in patenting with a focus on TRIPS Agreement.

To track the significance of Mergers and Acquisitions in consolidation of

Pharmaceutical Industry.

The report provides a complete synopsis on the Indian pharmaceutical market and its

present demographics. The reports also presents the future prospects of the industry,

which is an indicative of vast potential and growth opportunities, and also the possible

challenges that the Indian pharmaceutical industry may face ahead.

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CONTENTS

Chapter 1: GLOBAL REVIEW 6

Origins and Evolution

Global Scenario

Therapeutic Market Segmentation

Chapter 2: COUNTRY REVIEW 16

Indian Pharmaceutical Industry

Industry Structure

Domestic Growth Drivers Domestic Exports

Critical Success Factors

Pharmaceutical Regulatory Bodies In India

Chapter 3: PATENT- The key facet of the Indian Pharmaceutical Industry 35

Background of Pharmaceutical Industry with respect to patents

Patents Amendment Act (2005)

Scenario Post Trips

Novartis Case

Chapter 4: PRICING OF DRUGS 45

Pricing of Drugs-Principle and Laws

Chapter 5: Merger and Acquisitions in the Indian Pharmaceutical Industry 54

Drivers in Mergers and Acquisitions

Mergers and Acquisition Trends in India

Mergers and Acquisitions-Challenges

Chapter 6: Framework of Analysis 66

Qualitative Analysis

Quantitative Analysis

Chapter 7: Outlook 98

Future Scenario

Issues and Challenges

Vision-2020

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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 there strategies, changing

there business models to fuel there 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

worlds seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will

drive less than half of the industrys 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.

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RECORD

LOW

GROWTH

FOR THE

US

In the US,

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

genericisation 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, slowing

the introduction of new medicines.

A similar level of growth is anticipated in the top five European markets (France,

Germany, UK, Italy and Spain), as the industry faces significant generics exposure

and governments struggle to manage their aging populations and embrace new

treatment innovations (Figure 2). Increasing therapeutic substitution can be expected

in 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

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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 genericisation, expanded use of innovative specialty products,

increasing reliance on value-based medicine and higher levels of uncertainty around

safety issues.

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TOP TEN PHARMACEUTICAL COMPANIES BY WORLDWIDE SALES (2007-08)

Sales (US$ billion)

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 worlds 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.

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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:

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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.

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CHAPTER 2

COUNTRY REVIEW

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INTRODUCTION: INDIAN PHARMACEUTICAL INDUSTRY

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 worlds 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.

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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 genericcompanies 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.

INDUSTRY STRUCTURE

The Pharmaceutical industry in India is fragmented with over 3,000 small/medium

sized generic pharmaceutical manufacturers. It has over 20,000 units out of which 300

units are in the organized sector; while others exist in the small scale/unorganised

sector. The leading 250 pharmaceutical companies control 70% of the market with

market leader holding nearly 7% of the market share. There are also 5 Central Public

Sector Units that manufacture drugs. These companies are:

Indian Drugs & Pharmaceuticals

Hindustan Antibiotics Ltd.

Bengal Chemical and Pharmaceuticals Ltd.

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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 patients 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 humoral theory i.e. the presence of blood, phlegm, yellow

bile and black bile. A persons 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 defense 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

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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

countrys 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 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

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among developing countries. From a mere processing industry, Indian bulk drug

industry has evolved into sophisticated 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 Indias 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 - 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, Cipla, Dr. Reddys 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 worlds fifth largest 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.

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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), Indias DMF filings were around 3.5 times that of China -187 from

India vis--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. Indias 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:

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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 Indias 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 1/7 th of that in

many developed countries and offer an obvious cost advantage.

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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.

Fig: Growth in domestic formulation industry (OPPI, ORGIMS)

(SOURCE: CRISINFAC, YES BANK/ OPPI

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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.

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

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DOMESTIC EXPORTS

Pharmaceutical exports touched a level of Rs. 24942 crores during 2006-07. Exports

constitute a substantial part of the total production of pharmaceuticals in India.

YEAR EXPORT(Rs. in Crores)

1998-1999 6256.06

1999-2000 7230.16

2000-2001 8757.47

2001-2002 9751.20

2002-2003 12826.10

2003-2004 15213.24

2004-2005 17857.80

2005-2006 22578.98

2006-2007 24942.00

(Source:-Directorate General of Commercial Intelligence and Statistics - DGCIS, Kolkata)

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, accountingfor six per cent of the countrys total exports, according to Pharmexcil, the

Pharmaceutical Export Promotional Council.

CRITICAL SUCCESS FACTORS

The rules of pharmaceutical business are changing. Indian pharmaceutical companies

can no longer get away with plundering intellectual properties of multinational

companies. Pharmaceutical business has become a new ballgame altogether after the

introduction of product patents in January 2005.

(a) NEW PRODUCT DEVELOPMENT

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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

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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.

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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.

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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.

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CHAPTER 3

PATENT

THE KEY FACET OF INDIAN


WHAT IS A PATENT?

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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 countrys 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

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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

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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.

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:

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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.

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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.

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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 maintainingprofits.

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.

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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 Indias 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.

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CHAPTER 4

PRICING OF DRUGS

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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 isdefined 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 itthey

face new uncertainties over both supply and demand.

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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;

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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

consumerthere 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 firms are comfortable

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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.

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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,

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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 bureaucraticcomplications and prohibitive cost of transferring a European-style

government health care system to a developing country like India.

VI. AN URGENT NEED FOR A THIRD WAY APPROACH

The "third way" would address the expanding needs of the Indian middle-class for

world-class health care, whilst creating a strong domestic home base for Indian

biopharmaceutical companies to launch their new innovative patented products. And it

would offer a new and creative third-way drug pricing model for developing countries

around the world, which look to India for continued leadership.

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CHAPTER 5

MERGERS AND

ACQUISITIONS IN THE

INDIAN PHARMACEUTICAL

INDUSTRY

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IMPACT OF MERGERS AND ACQUISITIONS ON INDIAN


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 others 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

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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 inthis Industry. With the easy availability of capital and increased global interest in

the pharmaceutical and biotech industry, the sector has become quite a `mergers-

and-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 worlds largestgenerics 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 Croatias Lek,

Canadas Sabex and Denmarks 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.

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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 MNCs have to look to Indian companies.

Indias changing therapeutic requirements and patent laws will provide new

opportunities for big pharmaceutical for launching their patented molecules. While,

Indias 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.

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

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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.

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Arcolab Venezuela America

Mar-05 Uno-Cicle

Hormonal

Brand

Glenmark Establish brand presence in

Brazilian market

4.6 Brazil

Feb-05 Strides

Latina

Strides

Arcolab

Additional 12.5% stake to

establish presence in

Brazilian market

6 Brazil

Feb-05 Mchem

Pharma

Group

Matrix Lab Backward integration, ARV

mfg in China

NA China

Dec-04 Rhodia

Anathetic

Business

Nicholas

Piramal

International Product line 14

Jun-04 Psi

SupplyNV

Jubilant

Organsys

NA NA Belgium

May-04 Trigenesis

Therapeutics

Dr.Reddys

Labs

Niche Technology 11 US

May-04 Espama

Gmbh

Wockhardt Front end line in Germany 11 Germany

Apr-04 Laboratories

Klincer Do

Glenmark Entry in Brazil 5.2 Brazil

Dec-03 RPG Aventis

SA

Ranbaxy Front end in France 84 France

Jul-03 Alpharma

Saa

Cadila

healthcare

Front end in France 6.2 France

Jul-03 CP Pharma Wockhardt Front end and mfg in Europe 17.7 UK

MERGERS AND ACQUISITIONS- CHALLENGE

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

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RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples

of acquisitions proving to be a drain on the companys 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

Wockhardts 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

I. ANALYSIS OF WOCKHARDTS 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 Wockhardts position in the high-potential markets of UK and Germany,

and have expanded the global reach of the organization.

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The growth drivers for Wockhardts 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 companys 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 sales & marketing

infrastructure

The key to Wockhardts successful acquisition management is the managements

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

biogenerics 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?

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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 Sankyos subsidiary but was managed independently.

The main benefit for Daiichi Sankyo from the merger was Ranbaxys low-cost

manufacturing infrastructure and supply chain strengths. Ranbaxy gained access to

Daiichi Sankyos research and development expertise to advance its branded drugs

business. Daiichi Sankyos strength in proprietary medicine complemented Ranbaxys

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, Ranbaxys addition is said to elevate Daiichi

Sankyos 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 Ranbaxys

strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the

potential of the generics business, Ranbaxys 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 Ranbaxys 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

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CHAPTER 6

FRAMEWORK OF

ANALYSIS

(A)QUALITATIVE ANALYSIS

(B)QUANTITATIVE ANALYSIS

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SWOT ANALYSIS OF INDIAN PHARMACEUTICAL INDUSTRY

The SWOT analysis of the industry reveals the position of the Indian pharmaceutical

industry in respect to its internal and external environment.

STRENGTHS-

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 masters

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

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companies. The strength in chemistry skill helps Indian companies to develop

processes, which are cost effective.

WEAKNESS-

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 compet

industry analytics - indian pharmaceutical industry

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