Best Pharma Industry Report 2011 (India) | Pharmaceutical Drug | Generic Drug

Indian Pharmaceuticals Industry

A comprehensive review report
5, May 2011

Part of Summer Internship Project
Under the Supervision Of Dr. Ch. Venkataiah & Prof. (Dr.) R.Venkateswarlu

By: Sumeet Shekhar Neeraj Mobile: +91 78428 88751
Registration No.: 1226110122 GITAM School of International Business
Visakhapatnam- 530045 INDIA

Indian Pharmaceuticals Industry

ABBREVIATIONS
AIDS API ASEAN ANDA ASSOCHAM ANVISA CAGR CII CIS CRAMS CEPA DCGI DMFs DPCO EPCG EPZ EU EUR FDI FTA GCC GOI GSK cGMP HPB IPR IISc HIV HTS IPR LRM M&A MNC MAI MCC MHRA NCE NDA NPPA OTC R&D ROW SAARC SAFTA SEZ SFDA TRIPs TGA TRIPS USFDA WTO : Acquired Immune Deficiency Syndrome : Active Pharmaceutical Ingredient : Association of Southeast Asian Nations : Abbreviated New Drug Application : Associated Chambers of Commerce and Industry of India : Agência Nacional de Vigilância Sanitária : Compound Annual Growth Rate : Confederation of Indian Industry : Commonwealth of Independent States : Contract Manufacturing and Research Services : Comprehensive Economic Partnership Agreement : Drugs Controller General of India : Drug Master Files : Drug Price Control Order : Export Promotion on Capital Goods : Exports Processing Zone : European Union : Euro : Foreign direct investment : Free Trade Agreement : Gulf Cooperation Council : Government Of India : Glaxo Smith Klein : Current Good Manufacturing Practices : Health Promotion Board : Intellectual Property Rights : Indian Institute of Science : Human Immunodeficiency Virus : Harmonized Tariff Schedule : Intellectual Property Rights : Less Regulated Markets : Mergers & Acquisitions : Multinational Corporation : Market Access Initiative : Medicines Control Council : Medicines & Healthcare Regulatory Agency : New chemical entities (New Patented Drug) : New Drug Applications : National Pharmaceuticals Pricing Committee : Over-The-Counter Drugs (dispensed without prescription) : Research and Development : Rest of the World : South Asian Association for Regional Cooperation : South Asian Free Trade Area : Special Economic Zone : State Food and Drug Administration : Trade-Related Aspects of Intellectual Property Rights : Therapeutic Goods Administration : Trade Related Intellectual Property Rights : United States Food Drug Administration : World Trade Organization

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DEFINITIONS
Pharmaceuticals These are drugs used to prevent, diagnose, treat/mitigate, or cure diseases in humans and animals. OTC Drugs Over-the-counter (OTC) drugs are medicines that may be sold directly to a consumer without a prescription from a healthcare professional, as compared to prescription drugs, which may be sold only to consumers possessing a valid prescription. Drugs There are two types of pharmaceutical drugs used to prevent, diagnose, treat/mitigate, or cure diseases in humans and animals: bulk drugs (intermediates/raw materials) and formulations. Abbreviated New Drug Applications (ANDAs) An application submitted to the U.S. Food & Drug Administration by a generic drug manufacturer challenging a patent held by an innovator company. Once approved, an applicant may manufacture and market the generic drug product of an existing formulation to the American public. New Drug Applications (NDAs) These are the vehicles in the United States through which drug sponsors formally propose that the FDA may approve a new pharmaceutical for sale and marketing. The goals of the NDA are to provide enough information to permit FDA reviewers to establish the following:  Is the drug safe and effective in its proposed use(s) when used as directed, and do the benefits of the drug outweigh the risks?  Is the drug‘s proposed labeling (package insert) appropriate, and what should it contain?  Are the methods used in manufacturing (Good Manufacturing Practice, GMP) the drug and the controls used to maintain the drug‘s quality adequate to preserve the drug‘s identity, strength, quality, and purity? Active Pharmaceutical Ingredient (APIs) The primary, active ingredient(s) of a final pharmaceutical product, produced in the first stage of pharmaceutical production and usually in bulk quantities. Biologicals Medical preparation made from living organisms and their products, such as insulin, erythropoietin, and vaccines. Blockbusters Industry term which refers to drugs with very large sales (generally in excess of $1 bn). Branded generics Generic drugs for which a drug manufacturing company has attached its brand name and may have invested in its marketing to differentiate it from other generic brands. Brand name drugs Innovator drugs patented by MNC pharmaceutical companies to prevent them from being copied or reverse engineered by other companies. Bulk drugs The active chemical substances in powder form, the main ingredient in pharmaceuticals – chemicals having therapeutic value, used for the production of pharmaceutical formulations. Major bulk drugs include antibiotics, sulpha drugs, vitamins, steroids, and analgesics. Formulations Drugs ready for consumption by patients (generic drugs) sold as a brand or generic product as tablets, capsules, injectables, or syrups. Formulations can be subdivided into two categories: generic drugs and branded drugs. Generic drugs Copies of off-patent brand-name drugs that come in the same dosage, safety, strength, and quality and for the same intended use. These drugs are then sold under their chemical names as both over the counter and prescription forms. Also, referred to as unbranded formulations.

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Drug intermediates These drugs are used as raw materials for the production of bulk drugs, which are either sold directly or retained by companies for the production of formulations. Drug Master files (DMFs) Generic registration applications filed with the U.S. FDA in order to allow the active pharmaceutical ingredients (APIs) to appear in marketed drugs. Essential drugs Drugs classified as essential by the Indian government consist of antibiotics, antibacterials, antiTB, penicillin and its salts, anti-parasitic, cardiovascular drugs, erythromycin and its preparations, vitamins and provitamins, vaccines (polio, human and veterinary), preparations containing insulin, caustic and other hormones, and tetracycline and its preparations. Indian companies dominate this class of drugs with a domestic Indian market share of 71 %. These drugs are subject to government price controls. Hatch-Waxman Act (Drug Price Competition and Patent Restoration Act) Passed in 1984, it established the ANDA process that permits the U.S. FDA to approve generic versions of approved innovator drugs without supplying clinical trials or New Drug Application (NDA) performed by the innovator company. It created a regulatory system by specifically authorizing Abbreviated New Drug Application (ANDA) and adopting bioequivalence as the new standard for generic drug approval. Thus a generic drug manufacturer is only required to demonstrate that its product contains the same active ingredient and basic pharmacokinetics as the brand-name drug. The requirement with respect to safety and efficacy would be determined by relying on the pioneers clinical trial data. This step was taken to assist and facilitate FDA review. Innovator drugs These are drugs with patents on their chemical formulation or on their production process. They have been tested and approved by the U.S. FDA after extensive clinical trials. Plain Vanilla Generics Commodity generics that are ―off-patent‖ in the regulated markets. They offer little or no innovative value over the innovator‘s product. Prescription drugs Medicines that mainly encompass two classes, innovator drugs and generic drugs. Proprietary drugs Those drugs that have a trade or brand name and are protected by a patent. West/ Western The countries Viz. United States, Canada, and Western Europe or countries lying in the western part of the globe. Orphan Drugs An orphan drug is a pharmaceutical agent that has been developed specifically to treat a rare medical condition, the condition itself being referred to as an orphan disease. The assignment of orphan status to a disease and to any drugs developed to treat it is a matter of public policy in many countries, and has resulted in medical breakthroughs that may not have otherwise been achieved due to the economics of drug research and development. Biosimilars Also called Biogenerics or Follow-on biologics are terms used to describe officially-approved subsequent versions of innovator biopharmaceutical products made by a different sponsor following patent and exclusivity expiry on the innovator product.

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Contents
Sr. No. 1.0 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.0 5.0 6.0 Particulars Milestones- India Story Growth Drivers Exports & International Markets Indian Domestic Market Product Patent Regime, TRIPS & TRIPS Plus Growing middle class and Indian demographics & epidemiology Government‘s Initiatives Scientific & Educational Institutions Manufacturers‘ Internal Infrastructure CRAMS & Outsourcing Clinical Research Industry Growth Constraints R&D & Investments Non-Tariff Measures Counterfeiting Data Exclusivity Implementation of TRIPS-plus Monetary Resources Pricing & policy controls Notable M&A‘s and Strategic Alliances Distribution Channel Analysis Future Outlook & Conclusion ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Pg No. 5 13 13 15 15 19 22 24 25 26 27 33 33 33 34 34 35 36 36 37 38 42

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1.0 MILESTONES- INDIA STORY
―The Indian pharmaceutical industry is a success story providing employment for mns and ensuring that essential drugs at affordable prices are available to the vast population of this subcontinent.‖ - Richard Gerster ‗Pharmaceuticals‘ has emerged as one of the leading industries in the Indian Inc., with the domestic market showing an unprecedented growth from a mere $0.3 bn turnover in 1980 to about $22 bn by 2009. The country now ranks 3rd in terms of volume of production (10 % of global share) and 14th largest by value (1.5%)1. At the time of independence in 1947, India‘s pharmaceutical market was dominated by Western MNCs that controlled between 80 and 90% of the market primarily through importation. Approximately 99% of all pharmaceutical products under patent in India at the time were held by foreign companies and domestic Indian drug prices were among the highest in the world. The Indian pharmaceutical market remained importdependent through the 1960s until the government initiated policies stressing self-reliance through local production. At that time, 8 of India‘s top 10 pharmaceutical firms, based on sales, were subsidiaries of MNCs. To facilitate an independent supply of pharmaceutical products in the domestic market, the government of India founded 5 state-owned pharmaceutical companies. Today, India is the world‘s 3rd largest producer of bulk drugs. Government policy culminated in various actions including: the abolition of product patents on food, chemicals, and drugs; the institution of process patents; the limitation of multinational equity share in India pharmaceutical companies (initially post de-licensing), and the imposition of price controls2 on certain formulations and bulk drugs. Subsequently, most foreign pharmaceutical manufacturers abandoned the Indian market due to the absence of legal mechanisms to protect their patented products (Product Patents were abolished from the Patents Act, 1970 in 1972 & most striking feature of the new law was that it did not recognize product patent protection in drugs and food). Following the de-licensing of the pharmaceutical industry in the 90‘s, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D
1

One reason for lower value share is the lower cost of drugs in India ranging 5% to 50% less as compared to developed countries. 2 The DPCO-1995 & NPPA

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costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. Accordingly, the share of the domestic Indian market held by foreign drug manufacturers declined to less than 20% in 2005. As the MNCs abandoned the Indian market, local firms rushed in to fill the void, and by 1990, India was self-sufficient in the production of formulations and nearly self-sufficient in the production of bulk drugs. The Patents Act, 1970 was again revised in 2005 under the marquee of WTO‘s TRIPS Agreement which required developing countries to provide product patents on pharmaceuticals. To comply with TRIPS agreement, India decided to enforce a product patent regime since 2005, which banned copying and selling of patented drugs launched after 1995. Indian companies countered the new product patent regime since 2005 by setting up global standard facilities and entering into regulated markets. This gave them confidence to take on global generic companies and went ahead to acquire numerous overseas units to enter newer markets3. The Indian pharmaceutical sector has come a long way, being almost non-existent before to become a prominent provider of healthcare products, meeting almost 95 per cent of the country's pharmaceuticals needs. Currently there are about 250-300 large units that control 70 per cent of the market with market leader holding nearly 7 per cent of the market share and about 8000 Small Scale Units together which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units (adding in numbers every year) produce the complete range of pharmaceutical formulations, i.e. medicines ready for consumption by patients and about 350 bulk drugs, i.e. chemicals having therapeutic value and used for production of pharmaceutical formulations. Post the global economic downturn the industry is back on a growth track after the relatively dull years, when exports from the country had dipped (Net pharma exports from India during 2008-09 was around Rs 30,759 crore compared to Rs 31,130.70 crore in 2007-08 notably the Export of pharmaceutical products from India increased from Rs26,895 crore in 2006-07 to Rs30,760 crore in 2007-08 and to Rs39,538 crore in 2008-09 a CAGR of 21.25%) but now India's net turnover in the pharmaceutical industry including exports is Rs 90,000 crore . The Indian domestic formulation market grew at a CAGR of 14.4% in the past five years to reach $8.7 bn in 2009-10, surpassing the global pharmaceutical growth rate of 7.8 % (and approximately US$12 bn in 2010, and showed a strong growth of 21.3% for

3

Mr. D G Shah, Secretary General of Indian Pharmaceutical Alliance (IPA) and a leading industry advisor in a public meeting.

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the twelve months ending September 20104). The Industry today is in the front rank of India‘s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units with severe price competition and government price control. It has expanded drastically in the last two decades.

Phase V Phase IV Growth Phase
> Rapid expansion of domestic market

Innovation and Research
> New IP law > Discovery Research

Phase II Phase I Early Years
> Market share domination by foreign companies > Relative absence of organized Indian companies

Government Control
> Indian Patent Act –1970 > Drug prices capped > Local companies begin to make an impact

Phase III Development Phase
> Process development > Production infrastructure creation > Export initiatives

> International market > Research & development orientation

1970

1980

1990

2000

2010

4

‗India Pharma Inc.: Capitalising on India‘s Growth Potential‘: Report by PwC, Nov 2010: http://www.pwc.com/en_IN/in/assets/pdfs/publications-2011/PwC_CII_pharma_Summit_Report_22Nov.pdf

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Aforesaid growth story has been fuelled by exports and its products are exported to more than 200 countries with a sizeable share in the advanced regulated markets of US and Western Europe. The industry employs over 42 lakhs directly and indirectly. 40% of the world‘s bulk drug requirement is met by India5. This dramatic growth in the Indian pharmaceutical industry can be attributed to several factors such as growing middle class population globally and in India, ageing populations of the US, 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, plus the 2010 US Healthcare Reforms in action6, generic products at risk of losing patents. Generic is emerging as one of the leading segments to be benefited by many drugs going off-patent in due course of time. According to a new research report ―Booming Pharma Sector in India‖, the Indian pharmaceutical industry is projected to show double-digit growth in near future owing to rise in pharmaceutical outsourcing and consolidation of highly fragmented industry. As exports form major part of the pharmaceutical industry in India, leading players have started expanding their reach towards the West. Thanks to investments in R&D and thriving for more and more ANDA filings, the clinical trials market is expected to grow at blistering pace in coming years. To support this evidence, we have done an extensive research and analysis of various segments of the Indian pharmaceutical market. These segments include: Domestic & Export Market, Branded & Generics Drugs, Formulations (defined as the end products that are administered to patient population, and are ready-to-use forms of APIs or bulk drugs including capsules, tablets, syrups and injections) & Bulk Drugs including APIs. The baseline for optimistic future outlook of the pharmaceutical market is improvement in access to medicines of Indian population. Emerging sectors like biogenerics or biosimilars and pharma packaging will also pave the way for the pharmaceutical market to continue its upward trend over the forecast period (FY 2010- FY 2013)7. Various reviews vindicate that the Indian pharmaceutical industry to reach $20 bn by 2015, making it one of the world's top 10 pharmaceuticals markets growing at a CAGR of 11.7% during 2005–2015 and establish its presence among the world‘s leading 10 markets
5 6

Department of Pharmaceuticals, Third Round Up of Developments in the Pharmaceutical Sector (Jul, 2009) United States Healthcare Reforms 23, March 2010: http://www.healthreform.gov 7 ‗Booming Pharma Sector‘, accessed on 20, April 2011: http://www.pharmaceutical-marketresearch.com/publications/healthcare_market/booming_pharma_sector_india.html

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(ASSOCHAM). IMS estimates the healthcare market in India at $31.59 bn by 20208 whereas the global management consulting major, McKinsey & Co. predicts that the Indian pharmaceutical market is expected to touch $40 by 2015. The industry has given employment to approximately 2.86 mn people and has around 20,053 units. Globally, India is 4th in terms of volume (8% of world's production), 13th in terms of value, and 17th in terms of pharmaceutical export value. The drugs and pharmaceuticals exported are worth over $3.8 bn. India produces bulk drugs related to various therapeutic areas. Indian pharmaceutical industry manufactures over 400 bulk drugs and roughly 60,000 finished medicines used in different formulations. India is emerging as a global leader in the area of outsourced clinical research and contract manufacturing & research. Contract research is increasing at the rate of 25% per year, and is expected to touch US $380 bn by 2010. The highly fragmented Indian pharmaceutical industry has around 30,000 players, out of which 330 are in organized sector. Indian pharmaceutical industry exports its products to more than 200 countries, including highly regulated markets of Europe, Japan, USA and Australia. The cGMPs developed by the industry, regulators and government agencies like USFDA (USA), WHO (Geneva-Global), ANVISA (Brazil), MCC (South Africa), TGA (Australia), SFDA (China), DCGI (India) others like country specific Ministries of Health facilitate the production of different dosage forms at the highest of their global standards. Indian firms (and firms with Indian subsidiaries) have grabbed revenues out of a few major operational segments of industry sub division Viz. from US Market & Non US but International Market formulations, Domestic formulations, and CRAMS and others as shown below in the graphical representation:

8

‗Industry overview‘, accessed on 20, April 2011: http://www.ibef.org/industry/pharmaceuticals.aspx

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Indian Pharmaceuticals Industry

Figure 1: Areas of operation of various Indian companies

Company Ranbaxy Dr Reddy's Lab Cipla Ltd. Lupin Ltd. Sun Pharma

2000-01 1,741.80 984 791.30 650 613

2009-10 7,344 7,003 5,765 4,740 4,103

9 Yrs. CAGR %
17% 24% 25% 25% 24%

Table 1: Rise of top-5 (Purely Indian drug companies) Growth in 10 years (in Rs Crore)

The key players in Indian market (excluding their parent group financials and operations) with their areas of operations in the industry‘s avenues are enumerated below in Table 1. The main areas segmented for the industry are: Domestic Generics, Developed market generics (also called the regulated markets), Emerging market generics (also called the ROW or the LRMs), CRAMS, Biosimilars or Biogenerics, Drug discovery (Novel Drugs), Vaccines and Medical Devices

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Company

M Cap ($m)

Domestic Generics

Developed market generics

Emerging market generics

CRAMS

Biosimilars

Drug discovery

Vaccines

Medical devices

Sun Pharma Cipla Dr Reddy's Lab Ranbaxy GSKPharma Lupin Ltd Cadila Healthcare Piramal Healthcare9 Divi's Lab Glenmark Pharma Biocon Aurobindo Pharma Jubilant Organosys Torrent Pharma Aventis Opto Circuits Ipca Laboratories Pfizer Sterling Biotech AstraZeneca Sun Adv Research Co Novartis Dishman Pharma Unichem Labs Wockhardt Ltd. Solvay Panacea Biotech Strides Arcolab Plethico Pharma Abbott Orchid Chemicals Merck Nectar Lifesciences Elder Pharma Alembic JB Chemicals Indoco Remedies Parenteral Drugs Ankur Drugs Zenotech Labs Natco Pharma Suven Life Sciences Piramal Life Sciences Shasun Chemicals Venus Remedies Ajanta Pharma Marksans Pharma Ind-Swift Labs SMS Pharma Wanbury Ltd

8,045 6,109 4,784 4,408 3,271 3,223 2,494 1,958 1,935 1,504 1,302 1,182 1,130 982 927 898 755 626 597 480 441 402 383 353 342 324 320 309 286 277 248 232 185 151 149 138 105 92 86 86 84 83 77 55 49 48 40 40 36 24 Table 2: Key players in India with their areas of operation

9

Now Abbot India (Taken over) ‗Abbott acquires Piramal's Healthcare Unit‘ Printed 21 st, May 2010

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Table 3: Market size rankings and expected shifts

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2.0 GROWTH DRIVERS
Exports & International Markets: The period between 2000 and 2010 witnessed India‘s top 10 drug companies growing in their sales turnovers, ranging between Rs 500-Rs 800 crore, to professionally-run MNC generics manufacturing companies with turnovers ranging from Rs 3,500 crore to over Rs 7,000 crore. India is among the top 20 pharmaceutical exporters worldwide. Most of these exporting firms earlier depended on bulk drug supplies, small exports to unregulated markets in Africa and Asia and formulation sales in the domestic market, the last 10 years saw them aggressively tapping regulated markets of the US and Europe and penetrating into newer and emerging markets. The Indian industry had filed only 3 marketing applications with the USFDA in 1998, the number swelled to 148 in 2009. 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. 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). As global markets such as North America, Europe and Japan continue to slow down (graphical representation below), pharmaceutical companies are scanning markets for new growth opportunities to boost drug discovery potential, reduce time to market and squeeze costs along the value chain. The Industry is beginning to realize that some of the most promising opportunities will come from emerging markets (Asia/Australia/Africa & Latin America). IMS Health and other sources suggest that emerging markets (China, India, Brazil, Russia, Turkey, Mexico and South Korea) will contribute to over 40% of the incremental growth of the global Pharmaceutical industry over the next decade.

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Figure 2: Slowing down regulated markets

Figure 3: Emerging markets driving industry growth10

India forte has been able to offer11 a full basket of pharmaceutical products comprising intermediates, APIs12, Finished Dosage Combinations (FDCs) including OTC drugs,
10 11

Source: IMS Health, Market Prognosis, October 2009 Indian 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; Indian industry manufactures more than 96 generic group drugs offered to the global market. 12 With a growth rate of 35.0% over the past five years, Indian bulk drug exports have grown to reach U.S.$6.7 billion in 20082009 from U.S.$1.5 billion in 2003-2004 as per CRISIL Research, March 2010.

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biopharmaceuticals, vaccines, clinical services, etc. to various parts of the world by virtue the largest number of US FDA inspected plants (around 150 plants), outside the USA. Various other agencies like MHRA- UK, MCC- South Africa, TGA – Australia, HPB- Canada have approved scores of plants in India. Notably the global pharmaceutical markets are estimated at $773.1bn (2008) growing at average 4.8% over the previous years. Broadly, Asia is the largest importing region from India with a share of 30% of India‘s pharmaceutical exports followed by Europe (24%) and North America (21%). During 2008-09 United States of America had been the top export destination with a share of 15pprox. 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 $251m13. Indian Domestic Market: India‘s domestic Pharma market, which was valued at approximately US$12 bn in 2010, and showed a strong growth of 21.3% for the twelve months ending September 201014. PwC estimates that over the next 10 years, the domestic market will grow to US$49 bn – a compounded annual growth rate (CAGR) of 15%, with the potential to reach US$74 bn a CAGR of 20%, (if aggressive growth drivers kick in Viz. the double digit GDP growth rates, the government policies supporting the R&D investments, insurance sector reforms and growth, the pricing controls leading to the drugs‘ affordability even by the major rural markets15 but as of now the rural markets contribute to only 17% of the sales so there‘s a huge market unleashed and the improvements in the patented drugs sale in the domestic market due to increasing per capita income of India). Product Patent Regime: India enforced process patent, in early 1970, which allowed domestic companies to legally copy and manufacture patented drugs. To comply with TRIPS agreement, India decided to enforce a product patent regime since 2005, which banned copying and selling

13 14

Report of the Task Force on Pharmaceuticals 25 February 2009: http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17 IMS Health. (Moving Annual Total), September 2010 15 Currently, around 67% of India‘s population, or 742 mn people live in rural areas as per Novartis Report: ―Arogya Parivar: Health for the poor‖. April, 2010

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of patented drugs launched after 1995. To face this, the Indian drug companies also increased their spend on research and development. The last decade saw a 20 fold jump in spend on R&D. If the Indian drug industry grew at a compounded annual rate of 9 per cent between 2000 and 2005, the latter five years saw the growth propelling to 13 to 14% every year. ―From a market size of $12.6 bn in 2009, the Indian pharmaceutical market will grow to $55 bn by 2020, with the potential to reach $70 bn in an aggressive growth scenario. In a pessimistic scenario characterized by regulatory controls and economic slowdown, the market will be depressed and is expected to reach $35 bn‖16. The Indian generic pharmaceutical industry is witnessing rapid growth resulting in immense opportunities for firms. Generics worth over USD 40 bn (close to 15% of the total prescription market of the US) are going off patent in the near 2-5 years. This is certainly going to give an impetus to an industry which always seems to have strategies of innovation in place. Approximately $123 bn of generic products is at risk (subject to patent renewal approvals by regulators) of losing patents by 2012 globally. Even at a conservative estimate of 15% opportunity this translates into $18.4bn opportunity for India17. However the figures need to be appropriately deflated since Indian opportunity will lie in generics equivalent of branded drugs, which would be cheaper. Besides, the product patent regime has provided ample support to the industry to sustain its growth pace despite the global economic downturn. 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), 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

16

Mc Kinsey Report: BusinessWeek, By Diana Farrell and Eric Beinhocker, 19, May 2011: http://www.mckinsey.com/mgi/mginews/bigspenders.asp 17 Report of the Task Force on Pharmaceuticals 25, Feb 2009: http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17

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the need for increased production rather than relying on imports, which was once critical for the infant Indian national economy. Although 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. The domestic formulation sales had increased at an CAGR of 17% since 1995/96 for a group of 15 large formulators. Some have improved their market share (for e.g. Cipla saw an increase in its market share from 4.18% in 1995/96 to 5.24% in 2007/08) while others major companies like Cadila Healthcare, Sun Pharma, Dr. Reddy‘s and Glenmark have experienced annual growth of over 20% The market share of MNCs has declined over the years (compared to foreign firms controlled about 70% of the Indian market in 1970‘s and Indian drug prices were among the highest in the world), after the introduction of product patent protection in January 2005- from 23% in December 2004, to 22% in March 2006 and 20% in March 2008. MNCs have started introducing patented drugs to the Indian market which Indian companies can no longer manufacture; 17 of these were introduced in the first four years (2005-2008) of the new patent regime18. More such drugs are expected to be marketed through new chemical Entities (NCEs) patented after 1995 will not immediately be put in the market.19 The exports market growth has been one of the most outstanding features of the Indian pharmaceutical industry. Negligible before the 1970s, exports started picking up after the abolition of product patents in 1972, accelerating in the 1980s and then growing rapidly since the mid-1990s. In recent years, exports have been increasing annually at more than 20%. The proportion of exports in net sales for the studied 120 companies was 44%. The export market was found to be larger than the domestic market not only for large companies, such as Ranbaxy (Now owned by Japanese Daichi Sankyo Corporation) 61.7% of net sales, Dr. Reddy‘s 59.7%, or Cipla 50.1%, but also for smaller companies such as Granules 68.9%, Shilpa Medicare 73.5%,

18 19

Ernst & young report, 2008 p. 8 as quoted in IBEF-Indian Brand Equity Foundation website: www.ibef.org Sudip Chaudhuri (IIM Kolkata), Chan Park and K. M. Gopakumar, ‗Five years into the product patent regime: India‘s response: UNDP Study 2010‘: http://donttradeourlivesaway.files.wordpress.com/2010/11/india-study-final.pdf

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Kopran 60.5%, Transchem 54.6%, and Pure Pharmaceutical 51.9% of their total produce for the year studied i.e. 2007-08 from CMIE Prowess database. Strong patent protection was being argued as being beneficial for India as it will stimulate investment for research for innovation to suit local needs. In the underdeveloped Indian pharmaceutical industry before 1972, the capacity to conduct R&D was limited. Traditionally, the Indian pharmaceutical industry spent very little on R&D. In the early 1990s, its R&D expenditures amounted to only about 1.5% of sales (Grace 2004, p.37). Even larger companies such as Ranbaxy and Dr. Reddy‘s Laboratories spent only 2 to 3 % of their sales on R&D in 1992/93. Since then, however, and particularly since the early 2000s, there has been a substantial increase in research spending in a segment of the industry. *The objectives of R&D conducted by Indian companies were broadly found to be14:    Development of NCEs (New Chemical Entities) Modifications of existing chemical entities to develop new formulations, compositions, combinations (also known as incrementally modified drugs) Development of generics (that is, development of processes for manufacturing active pharmaceutical ingredients i.e. APIs and development of formulations to satisfy quality and regulatory requirements for marketing patent-expired drugs) The development of NCEs is not yet a significant part of the R&D activities of Indian companies constituting less than a quarter of the total R&D expenditure by the major companies. Nor are most of the large R&D spenders involved in NCE development; e.g. Cipla is the third largest spender on R&D was also found to have no NCE portfolio. The Indian pharmaceutical industry is highly export oriented. Significant R&D efforts are directed towards developing processes and products to get regulatory approvals for entry and growth in patent-expired generic markets, Para IV filings (One of the strategies that has been believed to dominate thinking in the pharmaceutical industry is that in order to grow fast, companies have to aggressively pursue investment in both new chemical entities and new products, which could successfully challenge existing patented drugs. This is a high risk-high reward business model. Another strategy that has been found very useful is to file for a patent challenge under Para IV of the Hatch Waxman Act, 1984. Paragraph IV is an important aspect of the Hatch-Waxman Act- USA. Under this system, generic drug firms challenge pioneers drug patents in court. The claim is that that the generic

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version proposed to be launched by the manufacturer/claimant does not infringe the patent holder‘s version. If successful, the prevailing generic firm obtains a ―180-day marketing exclusivity period‖ as the economic reward for its litigation efforts, and consumers benefit from earlier access to low-cost generic alternatives to the brand-name drug) in developed countries. Development of processes for manufacturing APIs and product development of formulations, process validation, bio-equivalence testing and generation of other data required for DMFs and ANDAs for getting international regulatory approvals are specifically highlighted as areas where R&D is undertaken by the companies active in the regulated markets. Also, as noted above, apart from DMFs and ANDAs, patenting is increasingly becoming important for generic companies desiring to move up the value chain. Thus much of R&D by Indian pharmaceutical companies operating domestically have nothing much to do with TRIPS. It is the result of increasing export orientation of Indian pharmaceutical companies and diversification to the regulated markets, particularly to the US. Growing middle class and Indian demographics & epidemiology: By 2025 Indian middle class will have expanded dramatically to 583 mn people—some 41 % of the population. These households will see their incomes balloon to 51.5 trillion rupees ($1.1 bn) – 58 % of total Indian income20, rapid urbanization, and increase in lifestyle-related diseases and acceptance of health insurance. In the next decade, India‘s spend on health care will grow from the current 1 per cent of the GDP and new patented drugs will be available in India much faster. Further, drugs will reach a large segment of rural population21. 20

Demographics & epidemiology with huge upside potential boosting the markets22 Area: 2 973 193 km2 Inhabitants (2010): 1,173,108,018 Population density (2010): 363 inhabitants per km2 Gross Domestic Product (2010) (e): INR 64350 billion = $ 1430 billion General government expenditure on health as a % of total expenditure on health (2009): 17% General government expenditure on health as a % of total government expenditure (2009): 3.9% Public healthcare expenditure (2010): 0.9% Private healthcare expenditure (2010): 4.3% Total healthcare expenditure as a % of GDP (2010): 5.2%

Mc Kinsey Report: BusinessWeek, By Diana Farrell and Eric Beinhocker, 19, May 2011: http://www.mckinsey.com/mgi/mginews/bigspenders.asp 21 ‗The pharma story: A decade of transition‘ accessed on 24, April 2011: http://www.businessstandard.com/india/news/thepharma-storydecadetransition/420227/ 22 CIA Factbook accessed on 30, March 2011: https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

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Demographic profile (Age/years) 0-4 5-54 54 and above

1991 36% 55% 10%

2001 35% 55% 12%

2010 29% 59% 12%

Table 3: Age wise share of Indian population

Structure of the government healthcare service: Primary Care (in rural areas): 22,271 primary healthcare centers and 137,271 sub-centers. Secondary Care (healthcare centers in smaller towns and cities): 1,200 PSU (public sector units) hospitals, 4,400 district hospitals, and 2,935 community healthcare centers. Tertiary Care (hospitals): 117 medical colleges and hospitals. 84% 10% 5% 1% Life expectancy (years) Birth rate (per 1000) Death rate (per 1000) Infant mortality rate (per 1000) Hospitals (numbers) Public Private Hospital beds (numbers) Doctors Nurses Dentists Medical colleges New doctors every year Retail chemist outlets : of private hospitals <30 beds : 30 –100 beds : 100-200 beds : >200 beds : 65.4 : 25.4 : 8.1 : 66 : 15,393 : 4,049 : 11,344 : 875,000 : 592,215 : 737,000 : 80,000 : 170 : 18,000 : 350,000

Size of Hospitals:

Health Indicators:

Healthcare Infrastructure:

[Source: Ministry of Health, Medistat Outlook Espicom report January 2005, ICRA report Indian Healthcare sector February 2005, Confederation of Indian industry] Changing demographic & epidemiological profile: Improving overall health status and socioeconomic pressures have resulted in changes in the demographic profile. With the decline in birth rates, the population aged 0-14 has declined, while on the other hand improvement in life expectancy has led to an increase in the old age population. On average this has led to higher per capita demand for health services. The type of healthcare service requirement has changed due to

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the rise of lifestyle-related diseases such as diabetes, cardiovascular diseases, and diseases of the central nervous system. There are around 700,000 new cases of cancer each year and approximately 2.5 mn cases. It is estimated that there are around 40 mn people in India with diabetes, 5.1 mn HIV/AIDS patients, and 14 mn tuberculosis cases. In the past year, the Indian pharmaceutical industry witnessed a growth of 7%, the cardio-vascular segment recorded a growth of 15 to 17% and the anti-diabetes segment 10-12% growth. Ophthalmology: Annual incidence of cataract, the cause of 80% of blindness, is 3.8 million cases. The total potential for surgical cataract removal is 1.75 million cases per year. Cancer: The total number of cancer cases in India was estimated at 924,790 in 2001. This is projected to increase to 1,229,968 by 2011 and to 1,557,800 by 2021. Cardiovascular diseases: The mortality rate due to cardiac arrest and related causes was estimated at 2.4 million in 1990. With increasing urbanization the problem is on the rise. Malaria: Projected to increase from 2.03 million cases in 2001 to 2.62 million cases in 2021. Hypertension, diabetes and renal diseases: These stress and lifestyle related disorders are on the rise. The diabetic population in India is projected to increase from 40 million of 2001 to 47 million people in 2010. Hypertension is lower in rural areas but on an increase in urban cities. Prevalence rate in Delhi alone is 17.34%. Both hypertension and diabetes further cause renal disorders. Neurological and psychiatric disorders and addictions: The current prevalence rate for neurological disorders is 15 to 20 people per thousand. The most common ailments are epilepsy, migraine, cerebrovascular disorders, Parkinson‘s disease and peripheral neuropathies. It is estimated that 1% of the population is suffering from serious psychiatric illnesses, 10-15% have neuro-disorders, and 2.5% are mentally retarded.23 In view of the growing population and higher incidence of non-communicable diseases, it is estimated that the demand for quality healthcare in India will increase. The role of the private sector is likely to further increase with preference for private care and government‘s constrains of limited resources and eventually the industry growth.

23

ICRA report on Indian Healthcare and TIFAC (Technology Information, Forecasting and Assessment Council), 2010

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Figure 4: Total pharmaceutical spend comparison of the global markets with India

Figure 5: $128 bn of protected/patented sales are set to expire by 2012 offering payers/patients further affordability

Government’s Initiatives: Reduced pro-manufacturing, CAPEX costs by duty exemption upto zero% by EPCG scheme of Foreign Trade Policy) and expenditure to run cGMP compliance facilities and high quality documentation and process understanding is 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, financial assistance is also provided for contesting litigation(s) in the foreign country concerning

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restrictions/anti-dumping duties etc. on particular product(s) of Indian origin), MDA, DGFT (Directorate General of Foreign Trade) has been supportive to the exporters by leveraging the zero duty benefits and schemes of the Foreign Trade Policy 2009-2014, revised 2010. To promote pharmaceutical exports PHARMEXCIL-Hyderabad (works closely with the Department of Commerce and the Export Promotion Cell in the Department of Chemicals and Petrochemicals to undertake activities such as promoting exports, preparing country-profiles, assessing export potential across the countries and to have greater degree of interaction internationally), EXIM Bank (indulged in leveraging cheaper loans to the exporters and also does contract rating of importers), the creation of Pharma Parks, SEZs‘ (Special Economic Zones) and EPZs‘ (Export Processing Zones) dedicated to pharmaceutical manufacturers, export dedicated SEZs‘ e.g. Indore EPZ, Pune SEZ, Vizag Pharma Park (largest) etc. have helped promoting the exports and the industry‘s growth largely. 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. The only issue currently being talked is that the SEZs have been included under MAT which has been raised to 18.5% vs. 18%; this year, the excise duty was increased marginally from 4% to 5%24 and the Research and development tax relief that is available to small, medium and large companies in the industry available on capital and revenue expenditure. The SME R&D relief scheme introduced in the Budget 2011 enables SMEs to claim an enhanced corporation tax deduction of 175% for periods to April 2011, 200% to April 2012 and 225% thereafter of the qualifying expenditure on a research and development project during the accounting periods25. SMEs that are loss-making may surrender the enhanced deduction to HM
24 25

Budget 2011 Budget 2011 Speech, Minister of Finance, 28, Feb 2011

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Revenue and Customs for a cash tax credit equal to 14% of the uplifted amount. Companies operating within the large company scheme may claim an enhanced corporation tax deduction of 130% (125% prior to 1 April 2008) of the qualifying expenditure on a research and development project during the accounting period. Qualifying revenue expenditure includes employee costs, consumable materials and a proportion of utilities used during the process. Companies of all sizes may claim research and development allowances of 100% on qualifying capital expenditure incurred on a project. This has again helped promote additional investment in R&D by small companies. A significant boost in certain critical areas such as manufacturing regulatory infrastructure has been seen (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 comparable standards to the United States Pharmacopoeia and the British Pharmacopoeia) can place India among the top pharmaceutical industries in the world. Bilaterals and International agreements and the abolition of industrial licensing as well as the international export commitments mainly the bilaterals and agreements and/or pacts are being signed which testify a lot of decisive work and agreement on pharmaceutical tariff lines curb e.g. India-Ghana, India-Peru, India-Russia, India-Kenya, India-South Africa, India-Singapore, IndiaMongolia, India-Japan EPA, other comprehensive treaties and joint workings with almost all of the developing economies of the world for pharmaceuticals trade and businesses, now has begun exploring the greener pastures of countries like African countries (Nigeria, Kenya and various others etc), India-Japan EPA have and are expected to 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 (24pprox. 19% of India‘s total pharma exports) and ASEAN countries accounted for $497.73m (24pprox. 36%)26. Scientific & Educational Institutions: The quality knowledge dissemination by institutions like Council of Scientific and Industrial Research (CSIR), National Research Development
26

Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector, July 2009: http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf

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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, ScienceTechnology 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. Manufacturers’ Internal Infrastructure: The Indian skilled workforce and Western-equivalent research infrastructure owned by the Indian MNCs 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 equipment, Infra-Red (IR) Spectroscopes etc., Clinical Research facilities and tie-ups with major clinical services providers viz. Clingene (Biocon), Quintiles, and various other Clinical Research Organizations (CROs) for their outsourced researches and clinical trials. Employment Costs Viz. 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.

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Comparison of Cost Advantage in India (%)27 Costs in the Western Countries (Taking) 100.0% Production costs 50.0% R&D Costs 12.5% Clinical Trials Cost 10.0% Source: Pharmexcil Research

CRAMS & Outsourcing: CRAMS (Contract Research and Manufacturing Services) in India
has been one of the fastest growing segments in the pharmaceutical industry. The current market size for the pharma CRAMS business in India has been estimated to be $1.2 bn, with an prospect that this will increase to more than $5 bn in the next 5 years. Indian CRAM providers like Dr. Reddy, Nicholas Piramal, Akums Drugs, Jubiliant Pharma, Dishman Pharma and various others have proved that they are well positioned for this upsurge as India has considerable infrastructure and quality and offer lower cost structures which are attractive to pharma MNCs. It pertains to outsourcing research services/manufacturing products to low-cost providers with world class standards, in line with international regulatory norms like the USFDA, Australian-TGA, UKMCA, and EMEA. Pharmaceutical multinationals have traditionally been outsourcing manufacture of intermediates, API‘s and formulations. Since late 1990s, CRAMS has gained more importance, as MNCs have been coming under intense pressure to cut costs to maintain their profitability. The global market for pharmaceutical outsourcing was worth US$58 billion in 2009. It is expected to grow at a CAGR of over 14% (2007–2012) to reach US$85 billion by 2012. Out of the total market, contract research was US$21 billion in 2009 and is expected to touch US$32 billion, in 2012, with an annual growth of 15%. The contract manufacturing segment of global pharmaceutical outsourcing market was at US$37 billion in 2009 accounting for the major share (approximately 63.8%) of the total market. India, with large number of US FDA-approved manufacturing facilities, is one of the most preferred locations for outsourcing manufacturing services in India by the multinationals and global pharmaceutical companies. The Indian CRAMS market was valued at US$2.5 billion in 2009 and is expected to reach US$7.6 billion by 2012, growing at a CAGR of 47.2% (20072012). Out of the total CRAMS market, contract research stood at US$0.9 billion in 2009 and is expected to touch US$3.4 billion, reflecting a CAGR of 62.51% (2007–2012). The contract

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manufacturing segment of CRAMS market was at US$1.6 billion in 2009 accounting for the major share (approximately 64%) of the total Indian CRAMS market. The reasons why India has emerged as an inviting destination for outsourcing drug production28:   Over 80 per cent of the 38 big and medium-sized pharma companies across the world rated India higher than China, Eastern Europe, Puerto Rico, Singapore and Ireland. India offers a significant cost-quality proposition in end-to-end research and development, with potential savings of over 60 per cent as compared to the US, coupled with a strong supply of skilled manpower and capital efficiency    The country has close to 100 manufacturing facilities approved by the FDA, the largest after the US Drug production outsourcing industry to grow over 43% annually, thrice the global growth rate Diminishing numbers of new drugs, as against existing drugs going off-patent, high research and development costs, and pressure to reduce healthcare costs are forcing Big Pharma to rope in strategic partners to contain manufacturing and drug development expenses Clinical Research Industry: The clinical trials business expects to reach approximately $1 billion by 2011, further solidifying the subcontinent as one of the world's preferred destinations for clinical trials. This has increased the need to address all aspects of pharmacovigilance to ensure delivering medical advances to patients, quickly and efficiently while protecting public health. Notably the GOI is also involving itself in the Clinical Research sector development; In July 2010, the Ministry of Health and Family Welfare (MOHFW), India, had launched a roadmap for pharmacovigilance in the country under the Pharmacovigilance Programme of India (PvPI). The goal of this programme has been to provide safer medicines for the Indian population. In 2000, it was projected as the next big thing to happen in healthcare, for its potential to replicate the outsourcing success stories in information technology (IT) and business process outsourcing (BPO). Listing various ‗Advantage India‘ factors, experts had predicted the country would bag 15 per cent of the global clinical trial industry by 2011, from less than one per cent at the time.
28

‗Big pharma companies join outsourcing queue‘: Business Standard, Printed 17, August 2009

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McKinsey had earlier projected that by 2011, over 3, 00,000 patients would be enrolled for clinical trials in India and 1,500 to 2,000 studies conducted here each year. Various industry estimates also projected the industry to grow to over Rs 5,000 crore by 2011. As against this, the Indian clinical trial industry did only 240-260 trials from MNCs and another 180-200 trials of domestic companies last year. The exact business is not known, since almost all the 120-plus Clinical Research Organisations (CROs) operating in India are privately held. Industry experts believe the business in 2009 was not more than $250-300 million (Rs 1,100 crore to Rs 1,500 crore). A study by Hyderabad-based Cygnus Business Consulting & Research said the clinical research industry in India had touched $258 mn in 2008, up from $140 mn in 2006, with a growth rate of 85 per cent in those two years. The allied services outsourced market in India was estimated to be $106 million in 2008 and is growing at a rate of 21 per cent. These services comprise bio-statistics, data management, pharmacovigilance and together they account for around 35 per cent of total global clinical research spend. The size is estimated to be around $22 billion globally. The global clinical research industry is currently pegged at $64 billion (According to a recent FICCI- Ernst & Young study). There are more than 40 companies in India which offer one or more allied services. According to Apurva Shah, group managing director, Veeda Clinical Research, "While outsourcing to India started for cost arbitrage in late 1990s, most western sponsors have now realized that Indian CROs can contribute a lot more. Indian CROs have graduated from just doing simple studies to doing more complex and challenging studies. We no longer just execute protocols but contribute in several ways to add value to the sponsor‘s drug development". The likes of Pfizer, Eli Lilly, Astrazeneca, GlaxoSmithKline, Bayer get allied services work done here in India. With the rise of clinical trial sites outside the US and Europe, and tightening of regulatory requirements that require thorough documentation and audit trials, India with its track record of managing IT-ITeS work has emerged as a favored destination for outsourcing allied services work. Also the cost of a data entry operator here is around $10-20 per hour, compared to $30-50 per hour in developed economies, says the report. Similarly, a bio-statistician and medical writing professional charges around $30-70 per hour in India compared to $100-150 in western countries.

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Leading players in India offering clinical services include Clinigene International, Vimta Labs, Lotus labs, Veeda and multinationals like Quintiles Spectral, Pharmanet, Clintec, Quintiles, ICON, GVK Bio, Siro Clinpharm, Parexel, PRA International, PPD, Covance, Omnicare and Kendle, among others. However, the sector of the industry is faced with many challenges (taken the projections by various renowned research agencies) namely:  The sheer number of patients in India is quite sizeable and the issues sometimes conflict between the need to provide access to medicines versus the need to provide safer medicines. The projections have remained largely on paper.  Clinical research is still being circumvented by the Indian small fries due to large investments in the drug innovative researches due to monetary and time constraints. (refer figures 6-9)  Data show the growth rate is dipping. And, many multinational companies (MNCs) prefer other emerging destinations in Southeast Asia such as China, Korea and Singapore. Data from the US government‘s global trials registry, clinicaltrial.gov, show only 246 clinical trials were held in India in 2009. That was 9.6 per cent lower than the number of trials a year before. On the other hand, the number in China (316) and Korea (397) grew 15.3 per cent and 20.7 per cent, respectively, in 2009 as against the previous year.  ―India‘s industry is still evolving and many Indian companies have gained capabilities in Phase-II and Phase-III trials and to some extent in pre-clinical development, at comparatively cheaper costs. But cost is not the criteria; it is quality and speed,‖ said Aaron Schacht, executive director and chief operating officer of global external research and development (R&D) at Lilly Research Laboratories, the R&D division of US-based multinational drug major, Eli Lilly, in a recent interaction with Business Standard.  Recession, regulatory issues, lack of laws, concerns on data protection, research skill sets, lagging infrastructure and delay in approvals are among the many reasons given by sector experts for the decline.  If a trial is approved in the US within a month, it takes six to eight weeks for the apex drug regulator, Drug Controller General of India, to respond. Normally 12-16 weeks are needed to get approval for a trial, public newspapers study vindicate.

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Countries like China, Korea or Singapore have plenty of government-certified and trained trial sites. In India, the government is yet to start certifying trial sites. Quality assurance and training at site are major areas of concern for companies wanting to do trials in India, though we have about 1,500 sites.

Not only the trial sites: quality and infrastructure of CROs are another area of concern. Of the 120-plus CROs, only about 20 comply with the global benchmark ICH- GCP (International Conference on Harmonization/ WHO Good Clinical Practice) standards, said an industry expert.

DCGI had, earlier had come out with a comprehensive clinical trial inspection programme, with specific guidelines and checklists to make trial regulations more stringent and uniform. At present, trials are based on guidelines brought out by the Indian Council of Medical Research and the office of DCGI. India had amended Schedule Y of the Drugs and Cosmetics Act in 2005 to create a conducive environment for doing trials in India, but specific laws are yet to be in place to effectively regulate trials in the country.

MNCs account for almost 70 per cent of the trials in India. Most of them have their own CROs. Indian CROs mainly do the work of domestic companies and small and medium drug companies from the US and Europe.

Now the regulators demand that a drug has to be launched in India if trials of that drug are done in India. It will be difficult for multinational companies to give such a commitment, since international launch of a drug involves various factors, time lines and priorities.

The number of trials happening globally has come down due to the dwindling pipeline of multinationals. Further, India‘s skills in this field are limited to oncology, cardio-vascular and metabolic diseases.

At present, India does not allow Phase-I of clinical trials, in which a drug is first experimented on a human being. This is another reason for lack of growth for the sector, say industry experts. They agree India is yet to have a favorable regulatory environment and infrastructure to allow the risky Phase-1 trials.

For Phase-1, Singapore, Korea and China are the most preferred destinations in Southeast Asia, current trends show.

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Figure 6: Overview of a Clinical trial process for US marketing approval (IND & NDA stages) - For Innovative New Chemical Entities

Figure 7: Average cost of clinical trials per molecule

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FDA Approval

NDA Submitted FDA review (2.5 Years) Extensive Human Clinical Studies (3 Years) Clinical Studies Effectiveness (2 Years) Clinical Studies – Safety (1 Year) IND Submitted Discovery & Preclinical (3-4 Years) Figure 8: Innovator / Branded Development Stages

FDA Approval

ANDA Submitted FDA review ( 1 – 2 Years)

Formulation BA/BE Study (1 Year)

Safety and Efficacy Established by Clinical Trials of Innovator Figure 9: Generic Drugs Development Stages

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3.0 GROWTH CONSTRAINTS
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 companies29 (viz. Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, Sun Pharmaceuticals, Nicholas Piramal, Zydus Cadila, Biocon, Glenmark Pharmaceuticals, Wockhardt Ltd, Torrent, Biocon, Matrix Labs etc. 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. The have to submit separate state level applications for marketing drugs in the
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United States as there is no nation-wide system of application even where FDA approval has been received Counterfeiting: Counterfeit medicines are essentially fake versions of branded or generic medicines. They are made to look like the real thing and are packaged in fake packaging, but they don‘t contain the active ingredients that give medicines their healing effects. The global pharmaceutical industry has an annual turnover of trillions of dollars, so it should come as no surprise that criminals are trying to grab a piece of the action dishonestly. 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 generic competition and devastate the ability of poor Indians to access affordable medicines. Data exclusivity is a backdoor to monopoly protection. It also sweeps away the attempts by India‘s parliamentarians to balance health and profits. It makes a mockery of India‘s patent offices‘ work to apply rigorous standards and ensure only innovative medicines are granted a monopoly. Entering the free trade agreement negotiations, as the European trade agenda becomes the latest mouthpiece for the multinational pharmaceutical companies. Until now, much of the debate on generic production in India has focused on patents. Now, the EU has changed track and is pushing hard for India to sign up to another means of blocking off generic production: data exclusivity. With data exclusivity, India would be agreeing to grant a period of exclusivity over the clinical trial data submitted by a pharmaceutical company. This in turn

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would prevent the Drugs Controller General of India – the body responsible for approving medicines for market – from registering a generic medicine until that time was over. The multinational pharmaceutical industry has asked for that time to be 10 years. Now, a pharmaceutical company would merely have to submit clinical trial data to obtain several years of monopoly, whether the drug was patented or not, whether it was old or new, whether it showed inventive step or not, or gave added therapeutic benefits or not. The effect on access to affordable medicines is clear. India can learn from the countries that have preceded it down this path. Jordan brought in data exclusivity as part of a trade deal with the US. A study by Oxfam found that of 103 medicines registered and launched since 2001 that had no patent protection in Jordan, at least 79% had no competition from a generic equivalent as a consequence of data exclusivity. The study also found that prices of these medicines under data exclusivity were up to 800% higher than in neighbouring Egypt. India should not repeat others‘ mistakes, or the effect would be felt far beyond India‘s borders. The country is the source of the vast majority of drugs used to treat AIDS in developing countries. Affordable medicines produced in India have played a major part in reaching the more than five million people receiving HIV/AIDS treatment across the developing world today. India needs to stand strong and resist European demands. Implementation of TRIPS-plus: TRIPS provides high standards of protection that ensure recognition of pharmaceutical patents for products and processes, and measures to enforce conferred intellectual-property rights. There is no first-sight justification to further increase such protection (often in excess of that applied in developed countries) in countries with weak scientific and technological infrastructures or where a large part of the population is poor. [6] Several other processes can be undertaken or advocated for by the public-health community in this respect. For example, developing countries with substantial markets, such as India, Brazil, and Thailand, could establish precedence by adopting TRIPS flexibilities into national patent laws; south–south partnerships could mitigate resource and capacity constraints; and pharmaceutical companies might recognize that creation and development of these markets is vital to long-term sustainability and growth. The key to these and other measures is the recognition that protection of public health under TRIPS must take precedence over measures subsequently adopted under other trade agreements, as already stressed in many World Health Assembly resolutions since 1996. This recognition will require strong advocacy from all in the public-health community in both developing and developed countries.

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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 postdiscovery, registration costs etc). 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. There were originally 347 price controlled drugs included in 1979, which were then reduced to 143 in 1987 and currently, there are 76 bulk drugs under the DPCO30. Price controlled drugs are essential medicines, such as antibiotics and painkillers, and drugs used for the treatment of diseases such as cancer and asthma. Such medicines contain bulk drugs, or raw materials, whose prices are controlled by the NPPA – manufacturers cannot hike prices on their own. However, 90% of drugs are currently outside of any price controls in India. Consumer organizations maintain their stance of urging the government to continue to expand the umbrella of the DPCO, but the industry believes that there is enough competition for the prices to be modulated by the market itself. They believe that price caps would inhibit the development of R&D in the country as companies would be less inclined to invest in R&D without the possibility of high returns.

30

The First Schedule, List of Price Controlled Drugs, Drug Prices Control Order (1995). 1, November 2010: Accessed on 30, April 2011: http://nppaindia.nic.in/drug_price95/txt9.html

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4.0 NOTABLE M&A’s AND STRATEGIC ALLIANCES
Recent Mergers & Acquisitions and Strategic Alliances  2010 Piramal Healthcare: Abbott Sale of domestic: branded formulations: Abbott acquired Piramal's domestic branded formulations division, along with its 350 brands, Baddi facility and about 5,200-strong sales force for US$3.72 billion      2010 Strides Acrolabs: Pfizer Licensing and supply arrangement:: To supply 40 off patent products, mainly oncology ingestables that would be commercialised by Pfizer 2009 Shantha Biotech Sanofi-Aventis: Acquisition Acquired for about US$820mn and got access to Shantha's vaccines pipeline and access to emerging markets 2009 Aurobindo Pfizer Dossier licensing & supply contract: Formulations and injectables for US,EU and ROW markets on exclusive and co-exclusive basis 2009 Biocon Mylan Development & supply contract: To develop, manufacture, supply and commercialise many high-value generic biologic compounds for the global markets. 2009 Dr. Reddy‘s Labs GSK Pharma: Supply contract To develop and market more than 100 branded products on an exclusive basis across an extensive number of emerging markets, excluding India.  2008 Strides-Aspen: JV: GSK Pharma: Upfront milestone & supply contract: To manufacture and supply branded generics to GSKwhich would be marketed in about 80 emerging markets.  2008 Ranbaxy Daiichi Sankyo: Acquisition Daiichi acquired Ranbaxy and got access to Ranbaxy's: diversified product portfolio and vast geographical presence.

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Indian Pharmaceuticals Industry

5.0 DISTRIBUTION CHANNELS IN INDIA31
Currently, majority (91%) of drug sales is through the retail markets, while institutional sales are very low (9%). PwC forecasts that the increase in institutional sales will be marginal in the next 5 years, and will only show significant impact between 2015 and 2020. Increased institutional sales are expected to be driven by the increase in the penetration of insurance, and the growing number of government and private hospitals.

Figure 10: Institutional sales to retail sales share

Supply Chain Team & Partners Suppliers: They supply to the Production Units based on the detailed Purchase order copies honoring the laid down terms. The orders are based on the following categories of materials: Raw Materials (Excipients & API or Active Pharmaceutical Ingredients) from various international vendors and local vendors, the purchasing is done in in line with their ethical purchasing standard operating procedures. Production Units: The Production Units plan the production schedules, internal purchase requisitions, materials and spares, active pharmaceuticals ingredients and excipients demand based on the Marketing Units forecasts for the month.

31

Author‘s interaction with Industry professionals in Supply Chain Management

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Plant Warehouses: These are used for the stocking and dispensing of the raw materials and the finished goods in the FG Stores. The alcoholic products are stored in the bonded stores under the control of the excise department. Production Planning & Inventory Control Team (PPIC): The PPIC team takes care of all the supply chain needs and standards being maintained as per the laid down procedures. They ensure that the timelines are being met and the supplies etc. are all streamlined. They act as a bridge in between the PU‘s and the MU‘s for the delivery schedule planning, materials requirements, projects planning, launch plans, product life cycle study and in various other strategy making functions etc. Central Warehouse: The central warehouse absorbs all the stocks manufactured at the Production Units based on the space availability and the demand from the Marketing Units. They further disburse (on monthly and as & when required bases) the stocks to the regional CFA‘s (carry & Freight Agents) situated in regions all over India and to the subsidiary warehouses across the world. The central warehouses directly supply to the Hospitals and other medical institutions on bulk orders beyond decided numbers. CFA’s: The Carry & Freight Agents receive the goods for the month according to the region‘s Marketing Unit‘s forecasted demands. Expired stocks are returned back to the central warehouse for disposal and recording. The free samples are also supplied to the destinations from the CFA‘s based on the orders. Generally the same is collected by the marketing representatives (for costly samples) from the CFA‘s directly or else the Physician‘s samples are sent directly to the marketing representatives at their residence on monthly basis (for fast moving samples) Retailers: The retailers give timely orders to the marketing representatives for their stocks replenishments. They maintain a safety stock to avoid the supply exigencies. Consumers/Customers: The customers are generally the patients whom either the doctors have prescribed the drugs. Most of the business for the industry from the retail and institutional orders & sales notwithstanding the larger chunk of orders are for the institutional sales & hospitals and the research centres.

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All procedures are well documented and recorded (in SAP and other ERP systems in use) at every movement of inventory or both RM & FG alongwith the due signatures of respective region/locations supervisors‘ after checking. As a mandate by the regulators all the above procedures & inventory tracking is done upto the CFA level in SAP/ERP beginning from the raw materials procurement department at manufacturing plant (PU) warehouse.

Suppliers

Figure 11: A critical supply chain model for the industry

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Cos. CFAs

Hosp & Clinics

Stockists WHS

Pharmacy Retail

Patient

Doctor

Figure 11: A distribution model of the Indian industry

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6.0 FUTURE OUTLOOK & CONCLUSIONS
All in all Indian drug sales are expected to rise by an annual 8% to nearly $26.59bn between 2006 and 201532. 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 201233. 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 days34, 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. The global state of affairs direct us to the fact that tackles the non-tariff measures 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 etc. need to
32 33

McKinsey Report on Indian Pharma Industry 2015: http://bw.businessworld.in/PDF_upload/Indian_Pharma.pdf Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector, July 2009: http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf 34 Overview of Indian Pharma Industry: http://www.cci.in/pdf/surveys_reports/indias_pharmaceutical_industry.pdf

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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. 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. 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 and be the global leader in the Pharmaceuticals landscape.

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