India Pharmaceutical-Industry as an Export Sector

Sumeet Shekhar Neeraj GITAM School Of International Business Registration No. 1226110122 Date: 17-01-2011 Abstract India has emerged as a preferable manufacturing destination for global pharma majors namely Roche, Eli Lilly, Johnson & Johnson etc, the world leaders who have already planted themselves deep into the Indian market in line with Indian majors like Cipla, Dr. Reddys Labs, Ranbaxy and various others savouring high quality, cost effective production capabilities of India for their exports to the world market. The Indian Pharmaceutical industry has grown from a $333.33m turnover in 1980 to approximately $22.33bn by Sept. 2009 and the country now ranks 3rd in terms of volume of production (10 per cent of global share) and 14th by value. Exports ($12bn) of pharmaceuticals have consistently outstripped imports ($6.5bn). India currently exports drug intermediates, active pharmaceutical ingredients (APIs), finished dosage formulations, bio–pharmaceuticals and clinical services. The sooner India manages to close the infrastructure gap (major central infrastructure projects mainly roads, ports, airports and power plants, 55% delayed, 2009 data), the financial gap (huge costs and time for international approvals and registration processes) the faster the growth will be in Indian pharmaceutical industry (Economic Survey of India 2010). The focus markets of Indian pharmaceutical exports industry needs of R&D spending, financial aids, policy in action, mergers and acquisitions to be improved, reviewed and critically identified, modulated and studied respectively to grab the largest pie of the export market plethora for the future growth. INTRODUCTION India's pharmaceutical sector is currently undergoing unprecedented changes and has seen a remarkable growth in its exports (pharmaceutical exports occupy a share of 4.4% to 5.2% of India's total exports over the last 5 years [2]) and exports grew at a compounded annual growth rate of 21.98% during the five year period of 2004-05 to 2008-09. The industry in the country now ranks 3rd in terms of volume of production (10 per cent of global share) and 14th by value. Exports ($12bn) of pharmaceuticals have consistently outstripped imports ($6.5bn) [Economic Survey of India, 2010]. India‟s growth story vindicates its potential, it had a $333.33m turnover in 1980 to approximately $22.33bn by 2009-10 and a number of the country's largest pharmaceutical companies are attaining global-player status (viz. Cipla, Ranbaxy, Dr. Reddy‟s Labs, Lupin, Sun Pharma, Cadila etc) as existing markets expand (less regulated markets LRMs viz. Thailand, Cambodia, Malaysia, Pakistan, Vietnam, Ukraine, Belarus and Moldova, with other importing LRMs in Azerbaijan and Kyrgyzstan), and new ones open up (Iran, Saudi Arabia, China, Georgia , South Africa etc), for high quality, affordable generic drugs in the highly lucrative markets.

Approximately $123bn of generic products is at risk (subject to patent renewal approvals by regulators) of losing patents by 2012. Even at a conservative estimate of 15% opportunity this translates into $18.4bn opportunity for India [2]. However the figures need to be appropriately deflated since Indian opportunity will lie in generics equivalent of branded drugs, which would be cheaper. Ageing populations of the US (plus the 2010 US Healthcare Reforms in action), China & European economies leading to the more and more expenditure on medicines and appreciation in the per capita consumption value of the drug products with cheaper rates, which is India forte (an astounding e.g.: In India, 100 tablets of Zinetac, a drug used in common peptic ulcers cost $2 while, in Chile, same costs as much as $ 196). Generics business: The aforesaid companies have boosted their capacities, as demand continues to grow for the generics offered in the fields of antiretroviral therapy (Cipla), oncology (Cipla and Dr. Reddys), antibiotic therapy (Micro Labs, Santha Biotech), insulins and vaccines (Biocon, Serum Institute of India) and other hormonal drugs; India manufactures more than 96 generic group drugs offered to the global market. Regulations: A 100% foreign direct investment, liberalisation of rules related to foreign technology agreements as well as of the import regime, the introduction of Schedule-M, Schedule-T and revision of Schedule-Y (to permit conduct of phase II-IV clinical trials in India) of The Drugs and Cosmetics Act, 1940 had put upon a great impulse to the industry. PHARMEXCIL: The creation of PHARMEXCIL as well as a National Pharmaceuticals Policy with the objective of, among other things, has been rendering India as a preferred global destination for pharmaceutical R&D and manufacturing followed by exporting the drugs has proved successful
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. The recent creation of a separate Department of

Pharmaceuticals is only a manifestation of the importance government of India has accorded to the sector. Markets & regulations: Currently India exports full basket of pharmaceutical products comprising intermediates, APIs, Finished Dosage Combinations (FDCs), biopharmaceuticals, vaccines, clinical services, etc., to various parts of the world. India is among the top 20 pharmaceutical exporters world-wide and with the largest number of US FDA inspected plants (119 plants), outside the USA. Various other agencies like MHRA (Medicines & Healthcare Regulatory Agency) UK, MCC (Medicines Control Council) South Africa, TGA (Therapeutic Goods Administration) Australia, HPB (Health Promotion Board) Canada have approved scores of plants in India
[2]

. Notably the global pharmaceutical markets are

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

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Broadly, Asia is the largest importing region from India with a share of 30% of India's pharmaceutical exports followed by Europe (24%) and North America (21%). During 200809 United States of America had been the top export destination with a share of approx 18% in India's pharmaceutical exports valued at $1.55bn followed by Russia‟s valued at $0.33bn with a share of 3.84%, Germany ($0.31bn and 3.65%), Austria ($0.31bn and 3.58%) and UK ($0.27bn and 3.12%). In the year 2008-09, 58% of India's pharmaceutical exports comprised formulations valued at $5.03bn followed by Bulk Drugs (48%) valued at $3.6bn and herbals exports 3% valued at $251m [2]. Pharma SMEs: According to the CII (Confederation of Indian Industries), there are around 80,000 small-scale units engaged in the areas of pharmaceutical formulations and bulk drugs. The present decade has opened up newer opportunities for the SMEs (Small- to MediumSized Enterprise) in the field of CRAMS (Contract Research and Manufacturing Services), Clinical trials etc. A number of them have received approvals from international regulatory authorities mentioned below for facilities and expertise; they can avail opportunities in CRAMs (e.g. Macleods Pharmaceuticals, Micro Labs, Alkem Ltd, Hetero Drugs, Ankur Drugs etc). The product launches may help SMEs to secure manufacturing contracts and opportunities to supply Active Pharmaceutical Ingredients (APIs) and allied chemicals. The German Technical Cooperation has entered into a memorandum of understanding (MoU) with the Drugs & Pharmaceuticals Manufacturers Association (DPMA) of India to help pharma-SMEs that need interventions to brave the intense competition. India government has been making every attempt to support SMEs through several incentives. One such effort is the development of SMEs clusters in various parts of the country (e.g. Indore- SEZ, BaddiExport Promotion Industrial Park- EPIP). Pricing & policy controls: The uncertainty in the pricing policy (governed by the National Pharmaceutical Pricing Committee and the Drug Price Control Order 1995) of drugs imposed by the Indian government at various levels of the industry on a number of essential drugs despite an increase in the price of raw material has taken a toll on the bottom lines of manufacturing companies, thereby hampering its R&D initiatives. A significant boost in certain critical areas such as manufacturing regulatory infrastructure (The Drugs and Cosmetics Act 1940 recent amendments in Schedule M, guiding the Good Manufacturing Practices have come in line with the standards of USFDA regulations) and new drug discovery programme (Schedule Y of the act), the improvised Indian Pharmacopoeial Compendia (in quasi equal standards to the United States Pharmacopoeia and the British Pharmacopoeia) can place India among the top pharmaceutical industries in the world.

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Bilaterals and International agreements: Post liberalization, the pharmaceutical export industry has had to reorganize itself to keep pace with the economic reforms that were taken on by India, the abolition of industrial licensing as well as the international export commitments mainly the bilaterals and agreements and/or pacts signed which testify a lot of decisive work and agreement on pharmaceutical tariff lines curb e.g. India-Ghana, IndiaPeru, India-Russia, India-Kenya, India-South Africa, India-Singapore, India-Mongolia, IndiaJapan EPA, other comprehensive treaties and joint workings with almost all of the developing economies of the world for pharmaceuticals trade and businesses, now has begun exploring the greener pastures of countries like African countries (Nigeria, Kenya and various others etc), India-Japan EPA (Economic Partnership Agreement, September 2010) would boost the industry as Japan is one of the global leaders in per capita drug consumption i.e. more than $412 followed by Germany- $222 and USA- $191). India exported $1.38bn worth drugs & Pharmaceutical to Asia (approx 19% of India‟s total pharma exports) and ASEAN countries accounted for $497.73m (approx 36%) [6]. Labour Costs: Skilled scientists/technicians/management personnel at affordable costs have kept India one of leading in the list, as studied by BLS (Bureau of Labour Statistics) Hourly labour compensation costs in India are among the lowest when compared with the 36 countries which are huge cost advantages (in 2005, India‟s average hourly compensation cost for all employees in manufacturing i.e. $0.91 was approximately 3.1% of the level seen in the United States i.e. $29.74) for the Western pharmaceutical companies of up to 60-70% aptly have made the country to be the choicest manufacturing & exporting destinations in the sector.
Comparison of Cost Advantage in India (%) Costs in the Western Countries (Taking) Production costs R&D Costs Clinical Trials Cost Source: Pharmexcil Research
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100.0% 50.0% 12.5% 10.0%

Manufacturers’ Internal Infrastructure: The Indian skilled workforce and Westernequivalent research infrastructure owned by the Indian MNCs (Multi National Companies) viz Lupin, Cipla, Ranbaxy, Dr. Reddys Labs etc with well equipped R&D labs with advanced imported technologies such as Nuclear magnetic resonance (NMR), advanced

Chromatography (HPLC- High Performance Liquid Chromatography, Gas Chromatography etc) based equipments, Infra Red (IR) Spectroscopes etc, Clinical Research facilities and tieups with major clinical services providers viz. Clingene (Biocon), Quintiles, and various other Clinical Research Organizations (CROs) for their outsourced researches and clinical trials.

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Scientific & Educational Institutions: The quality knowledge dissemination by institutions like Council of Scientific and Industrial Research (CSIR), National Research Development Corporation, Central Drug Standard Control Organization (CDSCO), Indian Council of Medical Research (ICMR), Indian Drug Manufacturers Association (IDMA) and various others, during the last few years there has been phenomenal growth in the number of institutions imparting pharmaceutical education and combined admission capacity of the courses is about 61,000 seats scored through 500 plus colleges (teaching 2 years Diploma, 4 years Graduation, 2 years Post Graduation and 5 Plus years in PhD etc regulated jointly by Pharmacy Council of India and All India Council of Technical Education). Expertise from institutions viz. CDRI (Central Drug Research Institute), IISc (Indian Institute of Science), NIPER (National Institute of Pharmaceutical Education and Research), NRDC (National Research Development Corporation) and various others, R&D capabilities, Science-Technology infrastructure and industry during the last five decades have also selectively developed to extraordinary levels as compared to that in most developing nations impelling greatly to the exports sector of the industry. India Pharma Patent Regime: The improved Intellectual Property protection after the introduction of TRIPS (Trade-Related Aspects of Intellectual Property Rights) and compulsory licensing (such licenses provide generics companies with restricted access to intellectual property in order to manufacture generic versions of patented medicines in good faith of the country‟s health)[7], protected patent regime after the TRIPS (commitments taken by India under the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) forced a change in The Patents Act regime in 2005, bringing to the fore a major challenge for the country‟s pharmaceutical industry to comply with the TRIPS guidelines, the Product patent was reintroduced after 35 years again) provided a safe platform on which pharmaceutical exporters has helped them grow in India and also meet the need for increased production rather than relying on imports, which was once critical for the infant Indian national economy
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. The fact of the matter is that Indian manufacturers are still not able to

encash the opportunity due to the lack of investments and government promotion in the Pharmaceuticals research (only a handful of government clinical and manufacturing research promotion and development institutions exist as mentioned above) and Public Private Partnership in the sector for promoting Orphan Drugs research and other similar projects as opportunities for the sector. Government’s Schemes & Initiatives: Reduced pro-manufacturing, CAPEX costs by duty exemption upto zero percent by EPCG scheme of Foreign Trade Policy) and expenditure to run cGMP compliance facilities and high quality documentation and process understanding is

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grossly being supported by the Government (DGFT & Deptt. Of Commerce) by the promotional policies viz. EPCG (Export Promotion Capital Goods), DEPB (Duty Entitlement Pass Book), MAI (Market Access Initiative, financial assistance is also provided for contesting litigation(s) in the foreign country concerning restrictions/anti dumping duties etc. on particular product(s) of Indian origin), MDA (Marketing Development Assistance) DGFT (Directorate General of Foreign Trade) has been supportive to the exporters by leveraging the zero duty benefits and schemes of the Foreign Trade Policy 2009-2014, revised 2010. To promote pharmaceutical exports PHARMEXCIL-Hyderabad (works closely with the Department of Commerce and the Export Promotion Cell in the Department of Chemicals and Petrochemicals to undertake activities such as promoting exports, preparing countryprofiles, assessing export potential across the countries and to have greater degree of interaction internationally), EXIM Bank (indulged in leveraging cheaper loans to the exporters and also does contract rating of importers), the creation of Pharma Parks, SEZs‟ (Special Economic Zones) and EPZs‟ (Export Processing Zones) dedicated to pharmaceutical manufacturers, export dedicated SEZs‟ e.g. Indore EPZ, Pune SEZ, Vizag Pharma City (largest) etc have helped promoting the exports. Tax Environment: In SEZs for the corporate taxes front, pharma units set up in SEZs enjoy 100% income tax exemption on export profits in the first five years of operation, 50% exemption for the next five years, and 50% exemption on the reinvested export profits in the following five years. Companies located in SEZ also benefit from various Indirect Tax benefits such as exemption from payment of Customs Duty; Excise Duty; Central Sales Tax and refund and exemption of Service Tax. The bottom line is that India Govt. and EPCs (Export Promotion Council) offer attractive tax benefits, reimbursements and reductions in customs duties which also help global manufacturers compete in the price-sensitive LRMs environment. Key Challenges: R&D & Investments: Low investments by Indian drug makers (e.g. Ranbaxy maximum 12.6%) in innovative R&D compared to the Global players investing upto 20% (Eli Lilly maximum 20%) of their sales revenue continue to be a major weakness of Indian pharmaceutical exporters lacking capacities for filing more and more ANDA‟s and penetrating into the generic markets globally only and not in the Novel Drug Delivery Systems. The diffused nature of the Indian pharmaceutical industry has also been a concern that only about 20 to 30 companies (viz. Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, Sun

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Pharmaceuticals, Nicholas Piramal, Zydus Cadila, Biocon, Glenmark Pharmaceuticals, Wockhardt Ltd, Torrent, Biocon, Matrix Labs etc. [2] are large enough to bear the transactions costs associated with sustained exports to and compliance with entry regulations of the developed markets which scores to crores. Non Tariff Measures: The importing countries‟ regulations have been one of the bothering concerns, e.g. insistence on completing long process (e.g. average 3-4 years for a ANDA Stability Batch, for generics, till the Product‟s launch after approval, Novel Drug Delivery Systems call for average 10-16 years for a drug development till launch after NDA filing and approvals) for registration to the international (country specific) quality auditing agencies such as the USFDA (USA), MHRA (EU), TGA (Australia), EMEA (EU), MOH (Ministry of Health)-Thailand, China SFDA (State Food Drug Administration), GCC (Gulf Cooperation Council), MCC (South Africa), Canada FDA, MOH-Mexico, etc. and the mandates on allowing imports of only those drugs which are registered in some developed countries etc. The multiplicity of drug approval agencies in various countries has raised drug registration costs and site inspections costs. These regulatory agencies insist on pharmaceutical standards & quality procedures of their country, which often varies from country to country and ask for discrete quality audits to be conducted by their agencies independently. Indian manufacturers are prevented from bidding for government contracts as US permits bidders only from countries that are signatories to WTO Agreement on Government Procurement [2]. The have to submit separate state level applications for marketing drugs in the United States as there is no nation-wide system of application even where FDA approval has been received Indian firms have often been accused of making counterfeit drugs by drug makers in the US and European markets unanimously cited to be allegations used to erect non-tariff measures for restricting competition from Indian companies who sell their low-cost drugs in the developed markets. As per a health ministry study, about 0.3% of drugs in with „Made in India‟ tag are spurious, while about 5% are counterfeit and not actually „Made in India‟. The Supply of spurious drugs, fake drugs with “Made in India” claims e.g. cases of such exports from China containing Indian Manufactured tags being caught in Nigeria. Data Exclusivity: In 2006, the USA placed India on the Special 301 Priority Watch List for not granting monopoly rights for clinical trial data (data exclusivity) that would give the patent holder five years of marketing exclusivity. Some pharmaceutical companies also pressured the Indian government. This occurred even though India‟s current law is TRIPS compliant. It allows the Indian drug regulatory authority to use the patent holder‟s clinical data to approve generic medicines rapidly. Implementing data exclusivity would reduce

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

Monetary Resources: Majority of Indian SMEs lack the ability to compete with MNCs for New Drug Discovery, research and commercialization of molecules on a worldwide basis due to lack of monetary resources compared to the risk associated (research costs, patent litigations post-discovery, registration costs etc). FUTURE TRENDS All in all Indian drug sales are expected to rise by an annual 8% to nearly $26.59bn between 2006 and 2015[3]. To be sure, this growth rate is higher than that seen for Germany (+5% p.a.) and the entire world (+6%). Nonetheless, India‟s share in world pharmaceutical sales will rise only marginally to a good 2%. It is likely that many of the Indian small companies will merge or disappear from the market altogether. The Commerce Ministry is mulling to formulate a policy on mergers and acquisitions by multinationals in the pharma sector e.g. Ranbaxy by Daichi Sankyo Japan, Dabur Pharma by Fresenius Kabi AG Germany, Piramal Healthcare by Abbott Labs USA. In the coming years, opening up of US generics market and antiretroviral therapy of AIDS market in Africa will boost exports since in the absence of a medical support. [Notably each day, 6,000 Africans die from AIDS. Each day, an additional 11,000 are infected.] The Pharma market in Thailand is fastest growing in Asia-Pacific region. It has a strong pharma Industry producing mostly generics. It depends on imports for patented drugs. The market is expected to be worth US $1 .82 billion by 2012 [6]. Contributions from unconventional markets in Latin America, Australia and the emerging markets in the Middle East and African Region and increased Abbreviated New Drug Applications (ANDAs) approvals in the US would lead the industry to shine in the upcoming days
[4]

, SMEs will benefit from boosted contract production for western firms as gradually

they would learn to comply the standards of the developed nations e.g. Dishman and GVKBiosciences undertake contract research for western companies, Sun pharma manufacturing for Eli Lilly. Acquisition of foreign companies will lead to a strong increase in foreign production by Indian manufacturers, which will have a dampening effect on exports. SUMMARY The global state of affairs direct us to the fact that tackles the non tariff measures [1] namely the strict quality regulations to exports of pharma products in various countries and the lengthy documentation processes demanded by the importing country regulatory authorities

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etc need to be addressed through consistent efforts and greater interaction with the concerned agencies of the choicest markets for the exporters. The Indian companies are putting their act together to tap the generic drugs markets in the regulated high margin markets of the developed countries. The US market remains to be the most lucrative market for the Indian companies led by its market size and the intensity of blockbuster drugs going off patent
[4]

.

Based on the retrospective data USA, Germany, Russia, UK, China, Brazil, Canada, South Africa, Nigeria, Netherlands, Spain, Turkey, Ukraine, Viet Nam, Israel, Italy, Mexico, UAE, Singapore, Iran had been potential importers of Indian Drugs. Countries like South Africa, Israel, Turkey, Kenya, Singapore, UK, China, Russia, Italy and Vietnam etc have been identified to be potential prospective markets with high growth rates of imports from India [2&
3]

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

in the category of focus countries as these are the emerging markets and have a huge potential with day in day out incremental growth rates of per capita drugs consumptions supported by treaties like SAFTA (with SAARC), treaties with GCC, EU, Japan, Korea etc. If India is able to take a 10% slice in the emerging market in developed countries it will open an opportunity of around $50bn at current prices of patented and branded drugs and shall be able to surpass the major exporters of the world.
REFERENCES 1) 2) Non Tariff Measures: (http://www.commerce.nic.in/trade/international_ntm.asp?id=4&trade=i) Report of the Task Force on Pharmaceuticals 25 February 2009: (http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17) 3) Mc Kinsey Report on Indian Pharma Industry 2015: (http://bw.businessworld.in/PDF_upload/Indian_Pharma.pdf) 4) Overview of Indian Pharma Industry: (http://www.cci.in/pdf/surveys_reports/indias_pharmaceutical_industry.pdf) 5) The introduction of Pharmaceutical patents in India- NBER Working Paper: (http://www.nber.org/papers/w6366) 6) Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector, July 2009: (http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf) 7) TRIPS: India - Patent Protection for Pharmaceuticals: (http://www.pharmainfo.net/reviews/trips-india-patent-protection-pharmaceuticals) 8) Oxfam India Comments on DIPP Paper on Compulsory Licensing- September 30th, 2010: (www.dipp.nic.in/ipr.../Feedback_OxfamIndia_30September2010.pdf)

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