FDI IN INDIAN PHARMA SECTOR

ECONOMY OF INDIA
The economy of India is the twelfth largest economy in the world by nominal value and the fourth largest by purchasing power parity (PPP). In the 1990s, following economic reform from the socialist-inspired economy of post-independence India, the country began to experience rapid economic growth, as markets opened for international competition and investment. In the 21st century, India is an emerging economic power with vast human and natural resources, and a huge knowledge base. Economists predict that by 2020, India will be among the leading economies of the world. A revival of economic reforms and better economic policy in 2000s accelerated India's economic growth rate. By 2008, India had established itself as the world's second-fastest growing major economy. However, the year 2009 saw a significant slowdown in India's official GDP growth rate to 6.1% as well as the return of a large projected fiscal deficit of 10.3% of GDP which would be among the highest in the world. India's large service industry accounts for 62.6% of the country's GDP while the industrial and agricultural sector contribute 20% and 17.5% respectively. Agriculture is the predominant occupation in India, accounting for about 52% of employment. The service sector makes up a further 34%, and industrial sector around 14 India's per capita income (nominal) is $1032, ranked 139th in the world, while its per capita (PPP) of US$2,932 is ranked 128th. Previously a closed economy, India's trade has grown fast India currently accounts for 1.5% of World trade as of 2007 according to the WTO. According to the World Trade Statistics of the WTO in 2006, India's total merchandise trade (counting exports and imports) was valued at $294 billion in 2006 and India's services trade inclusive of export and import was $143 billion. Thus, India's global economic engagement in 2006 covering both merchandise and services trade was of the order of $437 billion, up by a record 72% from a level of $253 billion in 2004. India's trade has reached a still relatively moderate share 24% of GDP in 2006, up from 6% in 1985.

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GROWTH RATE OF INDIA. The Gross Domestic Product (GDP) in India expanded at an annual rate of 7.20 percent in the last quarter. India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world economy, according to the World Bank. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points. This page includes: India GDP Growth Rate chart, historical data and news. Interest Country Rate India 3.25% Growth Rate 7.20% Inflation Rate 14.97% Jobless Rate 7.32% Current Account -13 Exchange Rate 46.0850

Year
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Mar

Jun Sep Dec Average

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2010 7.20 7.20 2009 6.70 6.70 2008 9.00 9.00 2007 9.70 9.70 In the third quarter of 2009, India's economy expanded 7.9%. And although it is expected that in the last three months of 2009, the third largest economy in Asia might have recorded growth over 8%, the beginning of 2010 may surprise us on the negative side. Indeed, recent data is indicating that GDP growth in the last quarter of 2009 may beat expectations. For example, since June industrial production has been accelerating, recording 11.7% growth in November, the fastest in two years and exports grew 18% yoy in November. Yet, the stunning performance of the Indian economy has a lot to do with a significant fiscal stimulus and loose monetary policy. In fact, it is estimated that government contributed around 50% of total GDP growth in the year to September. In addition, lower interest rates have supported domestic demand for consumer durables. However, despite some positive data, the rising inflation is a growing concern. Indeed, a weaker monsoon has pushed price of food significantly higher in the last few months. This price pressure combined with strong industrial production may soon lead to interest rate hikes and tighten credit availability. Also, there is another danger by the corner. It is likely that due to extensive spending, Indian government may record huge fiscal deficit in the year to March. And in order to balance the budget the authorities may decide to increase taxes thus crowding our private investments.

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OVERVIEW OF PHARMACEUTICAL SECTOR
The Indian Pharmaceutical industry has been witnessing phenomenal growth in recent years, driven by rising consumption levels in the country and strong demand from export markets.This segment of Industry has shown tremendous progress in terms of infrastructure development, technology base and wide range of products. The industry now produces bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing processes and has also developed excellent GMP (Good Manufacturing Practices) compliant facilities for the production of different dosage forms. The strength of the industry is in developing cost effective technologies in the shortest possible time for drug intermediates and bulk activities without compromising on quality. This is realized through the country's strengths in organic chemicals' synthesis and process engineering. India is today recognized as one of the leading global players in pharmaceuticals. Europe accounts for the highest share of over 23% of Indian Pharma exports followed by North America and Asia. Exports to USA have crossed the land mark figure of US $1 billion during 2006-07. Internationally recognized as amongst the lowest-cost-producers of drugs, India holds fourth position in terms of volume and thirteenth position in terms of value of production in pharmaceuticals. It is estimated that by the year 2010, the Indian pharmaceutical industry has the potential to achieve over Rs.1,00,000 crore production of formulations and bulk drugs. The Domestic Pharma Industry : The domestic Pharma Industry has recently achieved some historic milestones through a leadership position and global presence as a world class cost effective generic drugs' manufacturer of AIDS medicines. Many Indian companies are part of an agreement where major AIDS drugs based on Lamivudine, Stavudine, Zidovudine, Nevirapine will be supplied to Mozambique, Rwanda, South Africa and Tanzania which have about 33% of all people living
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with AIDS in Africa. Yet another US Scheme envisages sourcing Anti Retrovirals from some Indian companies whose products are already US FDA approved. Many Indian companies maintain highest standards in Purity, Stability and International Safety, Health and Environmental (SHE) protection in production and supply of bulk drugs even to some innovator companies. This speaks of the high quality standards maintained by a large number of Indian Pharma companies as these bulk actives are used by the buyer companies in manufacture of dosage forms which are again subjected to stringent assessment by various regulatory authorities in the importing countries. More of Indian companies are now seeking regulatory approvals in USA in specialized segments like Anti-infectives, Cardiovasculars, CNS group. Along with Brazil & PR China, India has carved a niche for itself by being a top generic Pharma player. Increasing number of Indian pharmaceutical companies have been getting international regulatory approvals for their plants from agencies like USFDA (USA), MHRA (UK), TGA (Australia), MCC (South Africa), Health Canada etc. India has the largest number of USFDA approved plants for generic manufacture. Considering that the pharmaceutical industry involves sophisticated technology and stringent "Good Manufacturing Practice (GMP) requirements, major share of Indian Pharma exports going to highly developed western countries bears testimony to not only the excellent quality of Indian pharmaceuticals but also its price competitiveness. More than 50% share of exports is by way of dosage forms. Indian companies are now seeking more Abbreviated New Drug Approvals (ANDAs) in USA in specialized segments like anti-infective, cardio vascular and central nervous system groups. Exports According to the Quick Estimates of Directorate General of Commercial Intelligence and Statistics (DGCIS), Pharmaceuticals exports (valued in US dollar terms) registered an impressive growth rate at 30.7% terms during April-October,2008 compared to the corresponding period of the last year. This growth further increases to 38.5% when valued in rupees terms. Exports on account of Pharmaceuticals have been consistently outstripping the value of corresponding imports during 1996-97 to 2007-08. The trade balance increased from Rs. 2157 crores in 19965| Page

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97 to Rs. 13893 crores in 2007-08. Exports of pharmaceuticals registered a growth at the rate of 16.22% during 2007-08. The share of exports of Pharmaceuticals products to the total national exports have been in excess of 2% during each of last 12 years ending 2007-08. It has exhibited a long-term upward trend from 2.01% in 1996-97 to 2.55% in 2007-08. Investment • According to Ministry of Commerce and Industry, Domestic investment in the Pharmaceuticals sector is estimated at Rs. 31.43 thousand crores, which is equivalent to US $ 7.14 billions. • The Drugs and Pharmaceuticals sector has been able to attract FDI amounting to US $ 1428.96 million in the sector from April 2000 to December 2008. • So far, as domestic industrial proposals between August 1991-March 2008 are concerned, total Industrial Entrepreneur Memorandum (IEMs) filed including Letter Of Intent (LOI) & Direct Industrial Licences (DIL) add upto Rs. 31257 crores in Drugs & Pharmaceutical Sector, according to Ministry of Commerce & Industry. • According to the Ministry of Commerce & Industry, Pharmaceutical sector is estimated to have created 2.20 lakh employment opportunities. • According to Centre For Monitoring Indian Economy (CMIE), the aggregate sectoral income grew by 18.9% during the quarter ending June 2008 while the growth in net profits during 2007-08 was 8.2%. Key Strengths • • • • Strong manufacturing base Cost competitiveness Network of laboratories and R&D infrastructure Highly trained pool of scientists and professionals

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• • • • • • • • • • •

World-class quality products Strong marketing and distribution network Strong process development skills Potential ground for clinical trials Fast growing health care industry Rich biodiversity Growing biotechnology industry Highest Quality approvals from USFDA, EDQM, MHRA etc. Ranks 4th in the world, accounts 8% by volume and 2% by value. Very strong in Indian medicine systems of Ayurvedic, Homoepathy, Unani, Siddha and Herbals medicines An excellent center for clinical trials.

Research and Development In no other Industry segment innovative R&D is as critical as in Pharma industry. Here, the New Drug Discovery Research (NDDR) has to keep pace with the emerging pattern of diseases as well as responses in managing existing diseases where target organisms are becoming resistant to existing drugs. The NDDR is also an expensive activity. It is encouraging to observe that at least 10 Indian companies are into new drug discovery in the areas of infections, metabolic disorders like diabetes, inflammation, respiratory, obesity & cancer. Most of these companies have increased their R&D spending to over 5% of their respective sales turnovers. There is notable success from some Indian companies in out licensing new molecules in the asthma and diabetes segments to foreign companies. Introduction of Product Patent for Pharmaceuticals is an important feature for Indian Pharma R&D scenario. This has boosted the confidence of MNC Pharma companies in India where a number of western Pharma companies have already R&D collaborations with Indian Pharma companies in the field of NDDR. Some Indian companies have also got US-FDA approvals for their new molecules as Innovative New Drugs (lND).
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Western Pharma companies have recognized the attractiveness of India as a R&D outsourcing destination due to low cost scientific manpower, excellent infrastructure, top quality with capability to conduct modern research under GLP, GCP guidelines. Many of them have set up independent R&D centres in India. Clinical Trials to establish safety and efficacy of drugs constitute nearly 70% of R&D costs. Considering the low cost of Research and Development in India, several MNC Pharma companies as well as global Clinical Research Organizations are increasingly making India a clinical research hub. In conclusion new drug discovery in India has made a promising start wherein at least five to six potential candidates in the areas of Malaria, Obesity, Cancer, Diabetes and Infections are likely to reach Phase II clinical trials. Contract Manufacturing Many global pharmaceutical majors are looking to outsource manufacturing from Indian companies, which enjoy much lower costs (both capital and recurring) than their western counterparts. Many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA. Indian companies are proving to be better at developing Active Pharmaceutical Ingredients (APIs) than their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering in to strategic alliances with large generic companies in the world of off-patent molecules or entering in to contract manufacturing agreements with innovator companies for supplying complex under-patent molecules. Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals, Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large Indian companies started undertaking contract manufacturing of APIs as part of their additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending on Indian companies for many of their APIs and intermediates. The Boston Consulting Group

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estimated that the contract manufacturing market for global companies in India would touch $900 million by 2010.

Selected Contract Manufacturing Deals in India Indian company Lupin Laboratories Multinational Fujisawa Apotex Nicholas Piramal Allergan Advanced Optics Wockhardt Ivax Medical Product Cefixime Cefuroxime (Bulk) Bulk and Formulations Eye Products Nizatidine (anti- ulcerant) Axetil, Lisinopril

Dishman Pharmaceuticals Solvay Pharmaceuticals Eprosartan Mesylate IPCA Labs Merck Tillomed Orchid Chemicals and Apotex Eli Lilly Bulk Drugs Atenelol Cephalosporin injectables CVS products, anti-infective and other

Pharmaceuticals Sun Pharma

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drugs and insulin Kopran Cadila Healthcare Synpac Pharmaceuticals Altana Pharma Boehringer Ingelheim Biocon Bristol Myers Squibb Penicillin- G Bulk Drug Intermediates for Pantoprazole Gastrointestinal Products Bulk Drugs and CVS

GROWTH OF INDIAN PHARMACEUTICAL INDUSTRY:
The pharmaceutical industry in India is among the most highly organized sectors. This industry plays an important role in promoting and sustaining development in the field of global medicine. Due to the presence of low cost manufacturing facilities, educated and skilled manpower and cheap labor force among others, the industry is set to scale new heights in the fields of production, development, manufacturing and research. Industry Trends • • • • The pharma industry generally grows at about 1.5-1.6 times the Gross Domestic Product growth Globally, India ranks third in terms of manufacturing pharma products by volume The Indian pharmaceutical industry is expected to grow at a rate of 9.9 % till 2010 and after that 9.5 % till 2015 In 2007-08, India exported drugs worth US$7.2 billion in to the US and Europe followed by Central and Eastern Europe, Africa and Latin America
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The Indian vaccine market which was worth US$665 million in 2007-08 is growing at a rate of more than 20%

In 2008, the domestic pharma market in India was expected to be US$ 10.76 billion and this is likely to increase at a compound annual growth rate of 9.9 per cent until 2010 and subsequently at 9.5 per cent till the year 2015.

• •

The retail pharmaceutical market in India is expected to cross US$ 12-13 billion by 2012 The Indian drug and pharmaceuticals segment received foreign direct investment to the tune of US$ 1.43 billion from April 2000 to December 2008 "The Indian pharmaceutical industry has grown from a humble Rs 1,500 crore turnover in 1980 to approximately Rs 1,00,611 crore in 2009-10," the pre-Budget survey said. The growth of the Indian pharmaceutical industry has been fuelled by exports, which increased 25 per cent in 2008-09.

FDI IN INDIA
FDI in India has increased over the years due to the efforts that have been made by the Indian government. The increased flow of FDI in India has given a major boost to the country's economy and so measures must be taken in order to ensure that the flow of FDI in India continues to grow. Advantages of FDI in India: The Indian government made several reforms in the economic policy of the country in the early 1990s. This helped in the liberalization and deregulation of the Indian economy and also opened the country's markets to foreign direct investment. As a result of this, huge amounts of foreign direct investment came into India through nonresident Indians, international companies, and various other foreign investors. The growth of FDI in India boosted the economic growth of the country. Major advantages of FDI in India have been in terms of 11 | P a g e

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• • • •

Increased capital flow. Improved technology. Management expertise. Access to international markets.

Amount of foreign direct investment in India The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this figure stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the flow of foreign direct investment in India has grown at a very fast pace over the last few years. The various forms of foreign capital flowing into India are NRI deposits, investments in the commercial banks of India, and investments in the country's debt and stock markets. FDI in major sectors in India The major sectors of the Indian economy that have benefited from FDI in India are • • • • • • • • • • Financial sector (banking and non-banking). Insurance Telecommunication Hospitality and tourism Pharmaceuticals Software and Information Technology

Foreign Direct Investment (FDI) is permited as under the following forms of investments. Through financial collaborations. Through joint ventures and technical collaborations. Through capital markets via Euro issues. Through private placements or preferential allotments.

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Forbidden Territories: FDI is not permitted in the following industrial sectors: • • • • • • • • Arms and ammunition. Atomic Energy. Railway Transport. Coal and lignite. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc.

FOREIGN INVESTMENT The Foreign Direct Investment (FDI) equity inflows during 2009-10, in the month of November 2009 were estimated at US$ 1.73 billion. Cumulative amount of FDI inflows from August 1991 to November 2009 was US$ 125.92 billion. The sectors attracting the highest FDI equity inflows during April-November 2009 have been the Services Sector, Computer Software & hardware, Telecommunication, Housing and real estate, Construction activities, Power, Automobile industry, Metallurgical industries, Petroleum & Natural gas and Chemicals. • The top investing countries in terms of FDI equity inflows during April-November 2009 have been Mauritius, Singapore, U.S.A, U.K, Netherlands, Japan, Cyprus, Germany, U.A.E, France.

An Overview of Advantages of FDI
Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments FDI inflow helps the developing countries to develop a transparent, broad, and effective policy environment for investment issues as well as, builds human and institutional capacities to execute the same.
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Some of the biggest advantages of FDI enjoyed by India have been listed as under: Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India. Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India. Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

FOREIGN DIRECT INVESTMENT (FDI) IN PHARMA SECTOR
FDI Inflows to Drugs and Pharmaceuticals industry in India has grown over the last few years due to the several incentives that have been provided by the Indian government. The increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has helped in the growth of the sector

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Drugs and Pharmaceuticals ranks 8th in India’s top 10 FDI-attracting sectors. The government of India has allowed foreign direct investment up to 100% through the automatic route in the drugs and Pharmaceuticals industry of the country, on the condition, that the activity should not fall into the categories that require licensing. Pharmaceutical industry accounts for about 2.91% of total FDI into the country. The FDI in Pharmaceutical sector is estimated to have touched US$ 172 million, thereby showing a compounded annual growth rate of about 62. The Industry has received almost Rs 2141 crore investment from 36 countries through FDI between April 2007 to April 2009 with most of the fund infusion directed to healthcare and biotech ventures. Out of the total investment, almost 82 per cent of the FDI in Pharmaceutical sector was from five countries - Mauritius, Singapore, USA, UAE and Canada. The increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has helped in the expansion, growth, and development of the industry. This in turn has led to the improvement in the quality of the products from the drugs and Pharmaceuticals. Technologically strong and totally self-reliant, the Pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market as a global leader.

The Pharmaceuticals sector has been able to attract FDI amounting to Rs.21409 million during the period from April, 2007 to April, 2009 including Rs. 43.42 million in the first month of the current year. Out of 36 countries which contributed to FDI in India, 5 countries, led by Mauritius (56.36%), Singapore (11.18%), USA (5.81%), UAE(4.73%) and Canada(4.00%), accounted for over 82% of FDI in Drugs & Pharmaceuticals(Table-1).

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There were 208 foreign collaborators during the period April, 2007 to April, 2009 in so far as Drugs & Pharmaceuticals are concerned. Of these, top 10 foreign collaborators contributed 48.70% of FDI. Further, out of top 10 collaborators, 7 were from Mauritius and one each from Singapore, UAE and USA as may be seen from the Table-2.

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INDIAN PHARMA ATTRACTS RS 2141 CR FDI IN 2007-09, MAJORITY FROM MAURITIUS

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S i n g a p o r e h a v e a t t r a c t e d m a n
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y f u n d i n g a g e n c i e s t o o p e n t h
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e i r o f f i c e i n t h e s e c o u n t r i e s
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. T h o u g h m a n y o f t h e m h a v e t h
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e i r o f f i c e s a n d o p e r a t i o n s i n
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o t h e r n a t i o n s , t h e b a s e o f t
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h e f i r m w i l l b e i n t h e s e c o u n
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t r i e s , w h i c h i n t u r n w i l l h e l
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p t h e m t o e n j o y t h e t a x b e n e f
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i t s , s a i d V i k r a m G u p t a , c h i e f
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o p e r a t i n g o f f i c e r , I n d i a V e n t
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u r e A d v i s o r s P v t L t d , t h e v e n
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t u r e c a p i t a l f i r m u n d e r t h e P
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i r a m a l G r o u p .

" W h e n w e l o o k

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a t t h e g l o b a l f u n d i n g s o u r c e s
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, a l m o s t 8 0 p e r c e n t o f t h e m

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h a v e t h e i r b a s e i n M a u r i t i u s

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a n d a n o t h e r 1 0 p e r c e n t a t S i
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n g a p o r e . I n a b i g g e r p i c t u r e ,
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t h e f o r e i g n i n v e s t o r s a r e l o
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o k i n g a t o p p o r t u n i t i e s t o i n v
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e s t i n b i o t e c h v e n t u r e s a n d n
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e w a r e a s l i k e c l i n i c a l r e s e a r
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c h a n d e v e n R & D v e n t u r e s i n I
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n d i a a t p r e s e n t , " h e a d d e d .

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A c c o r d i n g t o t h e r e g u l a t i o n s ,
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F D I u p t o 1 0 0 p e r c e n t i s p e
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r m i t t e d o n t h e a u t o m a t i c r o u t
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e f o r m a n u f a c t u r e o f d r u g s a n
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d p h a r m a c e u t i c a l , p r o v i d e d t h
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e a c t i v i t y d o e s n o t a t t r a c t c
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o m p u l s o r y l i c e n s i n g o r i n v o l v
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e u s e o f r e c o m b i n a n t D N A t e c h
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n o l o g y , a n d s p e c i f i c c e l l o r

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t i s s u e t a r g e t e d f o r m u l a t i o n s .
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F D I p r o p o s a l s f o r t h e m a n u f a
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c t u r e o f l i c e n s a b l e d r u g s a n d
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p h a r m a c e u t i c a l s a n d b u l k d r u
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g s p r o d u c e d b y r e c o m b i n a n t D N
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A t e c h n o l o g y , a n d s p e c i f i c c e
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l l o r t i s s u e t a r g e t e d f o r m u l a
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t i o n s w i l l r e q u i r e p r i o r G o v e
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r n m e n t a p p r o v a l .

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FDI POLICY IN THE DRUGS AND PHARMACEUTICALS INDUSTRY IN INDIA
In India, the Department of Chemicals & Petro-Chemicals, in the Ministry of Chemicals and Fertilizers, is the concerned authority for the drugs and phamaceutical sector. The Department aims at ensuring abundant availability of good quality pharmaceuticals of mass consumption, at reasonable prices within the country. It also formulates and implements policies and programmes for achieving growth and development of chemicals, petro-chemical and pharmaceuticals in the country. In order to attract investment into the sector, the Department has undertaken several initiatives. The major being the Pharmaceutical Policy, with the objective of: Strengthening the indigenous capability for cost effective quality production and exports of pharmaceuticals by reducing barriers to trade in the pharmaceutical sector.  Strengthening the system of quality control over drug and pharmaceutical production and distribution to make quality an essential attribute of the Indian pharmaceutical industry and promoting rational use of pharmaceuticals.  Encouraging R&D in the pharmaceutical sector in a manner compatible with the country’s needs and with particular focus on diseases endemic or relevant to India by creating an environment conducive to channelising a higher level of investment into R&D in pharmaceuticals in India.  Creating an incentive framework for the pharmaceutical industry which promotes new investment into the pharmaceutical industry and encourages the introduction of new technologies and new drugs As per all such initiatives, foreign Direct Investment (FDI) upto 100% is permitted (subject to stipulations laid down from time to time) through the automatic route in the case of all bulk
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drugs cleared by Drug Controller General (India) along with all their intermediates and formulations.

MEASURES TAKEN BY GOVERNMENT TO ATTRACT FDI
Recent Initiatives in Pharma sector Government has taken various policy initiatives for the Pharma sector • • Government has offered fiscal incentives to R&D units in Pharma sector Steps have been taken to streamline procedures covering development of new drug molecules, clinical research etc. • A number of inhouse R&D units holding recognition of DSIR have come up in the Pharma sector. These units are eligible for weighted tax deduction@150% under Section 35 (2AB) of the Income Tax Act 1961 for the R&D expenditure incurred. • Government has also come up with two new schemes specially targeted at drugs & pharmaceutical research.These are: 'The New Millennium Indian Technology Leadership Initiative' (NMITLI) and the 'Drugs and Pharmaceuticals Research Programme' (DPRP). As per Union Budget 2010.

Improving Investment Environment Foreign Direct Investment (FDI) inflows during the year have been steady in spite of the decline in global capital flows. India received FDI equity inflows of US$ 20.9 billion during April-December, 2009 compared to US$ 21.1 billion during the same period last year.  Government has taken a number of steps to simplify the FDI regime to make it easily comprehensible to foreign investors. For the first time, both ownership and control have been recognised as central to the FDI policy, and methodology for calculation of indirect foreign investment in Indian companies has been clearly defined. A consistent policy on downstream investment has also been formulated. Another major initiative has been the
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complete liberalization of pricing and payment of technology transfer fee, trademark, brand name and royalty payments. These payments can now be made under the automatic route.  Government also intends to make the FDI policy user-friendly by consolidating all prior regulations and guidelines into one comprehensive document. This would enhance clarity and predictability of our FDI policy to foreign investors.

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BUDGET 2010 - EXPECTATIONS OF PHARMA INDUSTRY
The last budget being neutral, the Indian pharmaceutical industry has drawn its unfinished agenda with the hope that Budget 2010 would prove to be a remedy for the industry. Industry believes that its wish list has a merit for consideration in this budget as some of these items have not been covered in the aforesaid impending legislations. Research tax credits Drying pipeline of new drugs, increased R&D expenditure and increased pressure in the developed nations to bring the health care costs down has compelled MNCs to offshore R&D further. While India is perceived as an attractive destination to outsource R&D work due to its low cost and high quality capabilities, to put India in a leading position, there is a need to provide impetus to such activities in the form of tax and fiscal benefits. While currently, weighted tax benefit is available for in-house R&D, there are no specific benefits available to units engaged in the business of R&D. In this regard, the Government can play its role by providing benefits to units engaged in the business of R&D by way of deduction from profits linked to investments. Further, benefits in the form of research tax credits, which can be used to offset future tax liability, similar to those given in developed economies can also be considered. Include expenses related to research done outside R & D lab The Indian pharma space has witnessed multiple innovative moves that have strengthened their ability to make it big in the discovery/R&D space. These Indian companies incur huge expenditure on overseas trials, preparations of dossiers, consulting/legal fees for NCE (New Chemicals Entities) and ANDA (Abbreviated New Drug Applications) filings with the US FDA. Also there is a significant amount of legal costs incurred in defending the patents and products. While currently, weighted deduction is available for expenditure on in-house R&D facility, the provisions do not specify that the expenditure incurred outside the R&D units are eligible for weighted deduction. Accordingly, industry bodies have sought the inclusion of expenditure

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incidental to research carried outside R&D facility in India or in any foreign country, within the ambit of weighted deduction. Extend tax holiday to hospitals beyond rural areas The quality and low cost advantage has boosted the medical tourism in India. Industry report suggests that about 150,000 medical tourist visit India every year. Further, medical tourism to India is expected to bring revenue of $2 billion by 2012. In order to capitalise on the opportunity and to strengthen the position of India as a low cost health care tourist destination, there is a greater need to set-up more and more state of the art health care facilities. Even otherwise, there is a clear case of augmenting health care system in India. Given that large part of investment would need to be contributed by private sector, the Government can play its role by providing fiscal benefits and extending the existing tax holiday to hospitals set up beyond the rural areas. Subsidy for rural healthcare infrastructure Specifically with regard to rural and semi-urban areas, several companies have taken the initiative to build the supply chain infrastructure and develop specific products--these steps are not easy and carry huge investments. To promote the development of these areas and have better access to healthcare facilities, the Government, in addition to its own programs, should support the private sector as well--this could be in the form of subsidy, sharing infrastructure with private sector, tax incentives and so on. Rationalise assessment procedure As per the industry practice, Pharma companies reach out to patients through doctors by providing free samples of drugs to doctors and incur other promotional expenditure on seminars and so on for education of doctors. This creates awareness about the drugs and ultimately helps in boosting the sales of the companies. During the course of assessment proceedings, the revenue authorities often challenge the promotional information and ask for voluminous documents which are cumbersome to provide. They also often deny tax deduction on an ad-hoc basis. In this regard, the Government can rationalize the provisions by providing for claim of expenditure on a self certification basis or on the basis of specified documents such as CA certificate and so on.
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Harmonize pricing regulations Transfer pricing is another area needing special attention for pharmaceuticals industry. While transfer pricing regulations expect companies dealing in active pharmaceuticals ingredients (APIs)/finished drug formulations (FDFs) imported from related parties to maintain higher margins, Drugs Prices Control Order (DPCO) places restrictions on the end selling price. Equally customs regulations create a reverse pressure by seeking to check any undervaluation of imported APIs/ FDFs. There is a clear case to being in harmony in transfer pricing, customs and DPCO regulations. Other issues which pharma companies face is comparison of prices of innovator/ research oriented companies with generic companies without taking cognizance of quality and efficacy. This causes significant hardship for innovators companies who spend significant costs on research. There is an immediate need to address these issues as well. Also, while it is proposed that Advance Pricing Agreements (APAs) and safe harbor rules would be introduced, it needs to be expedited. Extend list of life saving drugs On the indirect tax front, the Government can look at extending the list of life saving drugs, which are eligible for customs duty exemptions in India. This will lead to availability of life saving drugs to the patients at reduced prices and bring down the cost of treatment for these ailments. Further, it could also consider reducing the duty on medical devices which would lead to overall reduction in the cost of treatment of patients. Also, Government could consider reducing basic custom duty for formulations to five percent in line with the Chelliah Committee's long-term fiscal policy recommendation. Rationalise duty structure The levy of excise duty on API at eight percent and on output of four percent has led to accumulation of Cenvat credit in the books of manufacturers, especially those who are not engaged in exports and cater only to the domestic market. Further, there are no provisions to recover the accumulated Cenvat credit, which becomes a cost to such pharma manufacturers. The Government could consider rationalising the duty structure by making it at par with duty on
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final output. Another demand has been to increase the abatement limit allowed for computation of excise duty on medicaments, from 35 to 45 percent. Further, industry has sought rationalisation of Value Added Tax (VAT) on medicines across states with specific exemption of life saving drugs and life saving medical devices. In a nutshell, while the global developments have led to exciting opportunities for Indian pharma industry, it is once again in search of support from the Government to tap the same. On the other hand, the Government is making progress in bringing two major tax reforms, ie direct tax code, and goods and services tax; they carry an underlying agenda of bringing tax reforms, simplification of procedures and minimisation of tax incentives. Given that the Government intends to implement these legislations in the near future, it appears that it may not bring in any major changes in this budget.

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IMPACT OF BUDGET ON PHARMA SECTOR
• The Indian Pharmaceutical Industry (IPI), valued at around US$20 bn (Share: Domestic – 59%, Exports – 41%), is ranked 11th in value terms and fourth in volume terms in the world. It manufactures about 400 bulk drugs and almost the entire range of formulations. • The industry, however, constitutes less than 2% of the total global industry turnover due to low prices. • The industry is highly fragmented with around 20,000 players, of which around 250 in the organised sector control over 70% of the total domestic market in value terms. • The industry has been growing at a healthy rate of 11-12% annually over the last few years driven by good growth in both domestic and export markets. While growing share of generics in the developed markets and opportunity from Contract Research and Manufacturing Services (CRAMS) have been the primary drivers for exports, changing demographics and shift in disease profile have been the major factors contributing to the domestic market growth. • The IPI has remained largely immune to the global slowdown. Though the industry achieved good growth in total turnover during FY2008-09, its profitability was negatively affected due to exchange fluctuation losses, high interest burden and volatility in raw material prices. Globally, the impact of economic slowdown has had varied impact across different markets with overall moderation in growth rate vis-à-vis previous year.

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BUDGET PROPOSALS
1. Increase in the weighted deduction on expenditure incurred on in-house Research & Development activities from 150% to 200% also increase in the weighted deduction on payments made to National Laboratories, research associations, colleges, universities and other institutions, for scientific research from 125% to 175%. 2. Increase in peak rate of excise duty from 8% to 10%.

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3.

Increase in rate of Minimum Alternate Tax (MAT) from 15% to 18%.

*Excluding 2% education cess and 1% secondary & higher education cess # On influenza vaccine and nine specified life saving drugs used for the treatment of breast cancer, hepatitis-B, rheumatic arthritis etc and bulk drugs used for the manufacture of such drugs

IMPACT OF BUDGET ON PHARMA SECTOR

1. Increased weighted deduction on in-house R & D expenditure will further encourage spending by pharmaceutical and biotech companies on research for New Chemical

Duty Structure
(%) CUSTOMS DUTY* • Bulk 7.5 7.5 Existing Proposed

Drugs

ions

Formulat

10.0

10.0

• Life Saving Drugs# EXCISE DUTY • Bulk

5.0

5.0

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8.0

10.0

ions

Formulat

4.0

4.0

• Life Saving Drugs#

Nil

Nil

FDI IN INDIAN PHARMA SECTOR

Entities (NCEs), New Drug Delivery Systems (NDDS) etc carried out in-house or outsourced to third parties like National Laboratories and research institutions. Expenditure of capital nature and cost incurred on clinical trials conducted domestically will also be eligible for enhanced rate of weighted deduction. 2. Impact of increase in peak rate of excise duty would increase the cost of bulk drugs & drug intermediates for the formulation companies. However, the impact on bulk drug manufacturers would depend upon their ability to pass-on the increase to domestic clients while their export business would remain unaffected. 3. Increase in MAT rate is expected to result in higher tax outgo for pharmaceutical companies covered under MAT and operating from tax-exempt locations.

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BUDGET IMPACT: COMPANIES
% of Sales Company Applicable Bulk Drugs Ranbaxy Lab. Sun Pharma 25 11 Formulations Proposals Overall Impact

74 89

1,2 and 3 1 and 2

?? ??

Dr. Reddy's Lab. Cipla GlaxoSmithKline Biocon Aurobindo Pharma Lupin Legends: ??

37 12 3 92 56 18

56 84 97 8 44 82

1 and 2 1 and 2 2 1, 2 and 3 2 1, 2 and 3

? ?? ? ?? ?? ??

Highly Positive

?

Marginally Negative Highly Negative

??

Neutral

?

Marginally Positive

??

Ø

No Proposals

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'PHARMA TO BE ONE OF TOP THREE FDI ATTRACTING SECTORS IN INDIA'
Over the past few years, the number of FDI investors has been increasing with keen interest in the pharma Sector Could you explain the sudden FDI interest and activities in the Indian pharma and lifesciences sector? The confidence of the international investors has been growing in the Indian pharma sector post the enactment of product patents in January 2005. Many global pharma companies have/are in the process of setting up their own base in India by increasing stake in their own Indian subsidiaries or collaborating with local pharma companies. Post 2005, about 17 patents have been filed in India for new products. This number is expected to increase over time as more and more companies gain positive experience of doing business in India. The Indian pharma and life sciences sector is expected to grow through the launch of new products from India's own New Chemical Entities (NCE) pipeline, increasing number of in-licensing and out-licensing deals between Indian and foreign companies and consolidation in the sector with Indian companies acquiring assets in India as well as abroad. Another factor is that for the production of drugs and pharmaceuticals, an FDI of 100 percent is allowed, subject to the fact that the venture does not attract compulsory licensing and does not involve use of recombinant DNA technology. Who are the major global players in Private Equity (PE) activities, specifically for pharma? In the developed markets, many PE funds have been created with specific focus on pharma and life sciences sectors. Some of them have been increasing activity in India as well. Well known names that have been operating in the US and European markets are Domain Associates, MPM Capital, Alta Partners, SV Life Sciences Advisers, Burrill & Company, OrbiMed Advisors, Quaker BioVentures and Venrock Associates. On the Indian side, the Ajay Piramal Group sponsored IndiaVenture Fund. This fund is focused on making investments across the entire
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healthcare and life sciences domain including hospitals, pharma and biotech, healthcare IT, retail pharmacies, clinical research, medical devices etc. In the current market situation, how are Venture Capital (VC) and PE companies structuring their investments and returns from pharma companies? While VC and PE firms looking at pharma and life sciences sector are being selective with their money, the economic crisis has not had a substantial negative impact on their activities. Pharma and life sciences investors are in it with intent to capture the opportunity offered by the sector as they are not very susceptible to short-term problems. In fact, the sector's desperation for cash has led to better deal terms for VCs. And companies that do secure funding are using it wisely, since they cannot afford to waste money anymore. In many cases, the best business plans are able to raise funding while less promising ideas fall by the wayside. Mostly PE companies structure their investments in order to protect their returns and to ensure that they are able to exit from their investments within their defined time frames (typically three to five years). The nature of the sector is such that VCs need to look at all the avenues for value creation once they have made the investment. In order to accomplish value creation, the PE companies negotiate for at least one board seat. PE funds also look for opportunities to create value through cross sector synergies across their portfolio of companies. In case of our IndiaVenture Fund, we get benefited by the relationships of Ajay Piramal group that have been created over two decades across the entire healthcare and life sciences domain. What has been the estimated FDI in the pharma/lifesciences industry over the past five years? The total cumulative FDI that has come into India till date is about $110 billion. However, 80 percent of this FDI inflow has happened from April 2000 to March 2009 (nearly $90 billion). In the financial year 2009, the total FDI was $27 billion and in the financial year 2008, the FDI inflow was at $24 billion. So far the Indian drug and pharmaceutical sector has attracted close to $2 billion in FDI in cumulative value. The sector has been able to attract FDI amounting to $1.4 billion from April
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2000 to December 2008. This sector has become one of the top sectors for FDI in India. However, with the recent downfall in the global economies, PE investments declined 34 percent to $303.0 million in 2008, compared to $459.2 million invested during first 10 months of 2007. Average PE deal size in 2008 came down to $16.8 million from $30.6 million in 2007. Till now, which country has shown keen interest in India? Why? Mauritius has contributed the maximum (about 40 to 50 percent of the total FDI), $40 billion from FY 2000 to FY 2009 and about $2.5 billion in FY 2010 so far. The top five countries with highest cumulative FDI into India are--Mauritius (44 percent), Singapore (nine percent), USA (seven percent), UK (six percent) and Netherlands (four percent). Mauritius and Singapore offer significant tax and regulatory advantages to the investors. That is the primary reason majority of the PE funds are housed in Mauritius and a few are based in Singapore. What kind of returns have been observed by FDI investors? There are not many examples in the Indian pharma and life sciences sector where the FDI investors have exited their investments. However, just to give an example, early investors in Biocon have made tremendous returns. ICICI venture paid Rs 18 crore for a 15 percent in March 2000, and sold its holding (it was diluted to 12.5 percent after intra-group mergers) in 2002 for Rs 46 crore to AIG investments and GW capital. That's a 156 percent return in just over two years. In March 2004, Biocon went in for an IPO at a price of Rs 315 per share. AIG investments and GW capital made huge returns on this investment. Not every investment would yield these kinds of returns, but the sector offers unique opportunities for making good returns if invested properly. Why are developed countries investing their funds via other countries, and how does this channel of investment benefit them? Each country has different regulations, taxes and exchange restrictions, as well as limitations on personal freedoms of speech, privacy and petition of grievances—that affects the decisions of investors about where to put their investments. Some countries have become highly specialised in attracting international investors and have created conducive environment for these investors.
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However, countries where the growth investment opportunities exist may not necessarily offer specialised tax or regulatory incentives even though they may have well defined tax treaties with countries offering better tax and regulatory environment. What are the factors affecting the growth of FDI investments? FDI in any country, directly or indirectly impacts the environmental, governance and social issues. Typically, the host country limits the extent of impact that may be made by the FDI to ensure adequate protection for small scale businesses. At times certain foreign policies may not be appreciated by the workers of the recipient country. Some disadvantage of FDI pertain to the fact is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution. India showed initial resistance to FDI because of the above reasons. However, the overall impact of the FDI investments has been positive for the growth of the country. The Government of India has a well-defined and transparent FDI policy. This includes opening of many new sectors to FDI, raising FDI equity caps in sectors already opened and procedural simplification. The FDI policy in India is widely reckoned to be among the most liberal in emerging economies and FDI up to 100 percent is allowed under the automatic route in most sectors and activities. Given the critical role that technological innovation plays in the sector and the role that IPRs play in the ability of the pharma sector to capitalise on that innovation, it is not surprising to find a positive relationship between IPRs and FDI in the sector. The strength of IPR protection appears to be one important factor, among others, influencing trade and investment decisions in the sector. Where do you see FDI investments in the pharma and lifesciences sector in India in the future? The Indian pharma and life sciences sector will continue to internationalise and seek to capitalise on new market opportunities around the world.
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Moreover, as intellectual property standards in India continue to provide increasing comfort to the international community, one could reasonably anticipate geographic diversification in the types of investments in the sector, including R&D. In this context, one can expect growth in the FDI as firms seek to exploit locational advantages of sites around the world and thereby contain costs or position themselves strategically. In the coming years, I expect this sector to be one of the top three sectors attracting FDI in India.

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CONCLUSION
“The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent.” The increase in FDI Inflows to Drugs and Pharmaceuticals industry in India has helped in the expansion, growth, and development of the industry. This in its turn has led to the improvement in the quality of the products from the drugs and pharmaceuticals industry.

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