A project report on

THE PHARMACEUTICAL INDUSTRY

Submitted byNavin Karnani Roll No: 30367 Executive MBA (WP) Dissertation Presented in partial fulfilment of Executive MBA programme

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DECLARATION

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ACKNOWLEDGEMENT

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.................................16 1..................................................................................... 4 B.................20 1............. ..............................................................................37 3......3 Growth rate................................................................ LITERATURE SURVEY...............................5 Industry Segmentation by Distribution....9 E....................7 C........81 Page | 4 ........................................................................43 Competitiveness of the Indian pharmaceutical industry ..........................23 1..7 Current Environment..............................................................................................................................0 GLOBAL PHARMACEUTICAL INDUSTRY............................18 1............................4 Industry Segmentation by Products....9 Research and Development.. 21 1.... RESEARCH METHODOLOGY.......................75 Post 2005 scenario.................................2 Top ten brands by global pharmaceutical sales............................1 Industry Segmentation by Size and Distribution......................................................................................37 3......... SCOPE AND IMPORTANCE OF THE PROJECT......................................28 1..................................14 1......8 D.............2 Evolution of Indian Pharmaceutical Industry.........21 ............................................Contents Contents.......0 THE INDIAN PHARMACEUTICAL INDUSTRY............................................................................1 Introduction.......... MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED RESEARCH....5 Enviornmental analysis (PEST)....................18 The growth rate for pharmaceutical industry was the highest in manufacturing sector.............................................................10 Pricing and investment in a global market..................75 SWOT analysis of the Indian pharmaceutical Industry..............................................................18 1.....................................................34 3.....10 F.......................................22 1................. EXECUTIVE SUMMARY.............................................12 Industry Living Space..................11 Relationship Pharmaceuticals – Healthcare...............................33 1..........................................................................................................................................6 Industry Concentration.............................21 1.....19 1..8 The lifecycle of a drug.....34 2...79 3.. pharmaceutical industry is expected to maintain aboveaverage earnings growth through the end of the decade......21 The U..........S.............

...........................................5 The history of the TRIPs negotiations............................................................112 4...............1 Historical Background ..........133 5.........................................154 Page | 5 ..8 Technical issues.......97 4........................91 4...............................................................................106 4........9 Standards for patentability..5 Facts on the Three Cases of Megamergers..........131 5........114 4......................144 5...85 3.......................................................................12 Exceptions to the exclusive rights.................................2 Background.........148 6..............11 Parallel import....7 Steps involved in Mergers and Acquisitions (M&A): .....................130 5.....3 Winners and Losers in Pharmaceutical M&A.......6 Stakeholders' views.........8 The future of Indian Pharmaceutical industry.....11 Impact of Mergers and Acquisitions on Performance......................................................................................................4 WHO's perspective on globalization and access to drugs....................................................3 The importance of intellectual property rights for national development......14 IPR in the Indian context......................................................8 Reasons for mergers and acquisitions .........115 4..........0 SUGGESTIONS......................................................................................................................94 4.....................2 Mega-Deals Back on Pharma M&A Horizon................10 Compulsory License...........151 7.............................91 4.....0 OBSERVATIONS.......0 THE TRIPS AGREEMENT.....................................9 Mergers.............................114 4......................................132 5........................................6 Recent M&A......7 Drug patents in India..........................................................................................124 4......136 5..........................93 4..15 A possible solution to the product patent issue...13 Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition..........................................141 5......................10 Indian Pharmaceutical: Ripe For Consolidation ............................................................................143 5...................131 5...............................108 4........................................4 Surviving the Scramble........................................146 5.............................................................7 Country experiences..........3.........................................12 The challenge........141 5.....................87 4.................................. Acquisitions and Alliances: Why they can Fail..........................0 MERGERS AND ACQUISITIONS (M & A).......................................................133 5...............133 5..............................92 4......110 4.................................1 Introduction........95 4...............................................................

. A..0 CONCLUSION........1 To study the development of the modern pharmaceutical industry and analyze the current situation.........4 To track the significance of Mergers and Acquisitions in consolidation of pharmaceutical industry........ A........................................... OBJECTIVE OF THE PROJECT The objective of this project is to provide a complete synopsis of the pharmaceutical market and to present the future prospects and also possible challenges that the industry may face in the times to come...........0 PRELIMINARY REFERENCES.... major challenges and the prospects of the industry.2 To study the growth and trend of Indian Pharmaceutical Industry.........155 9......... A.......3 To study the bottlenecks in patenting and suggest suitable measures in the light of the problematic issues in patenting with a focus on TRIPS Agreement.... Page | 6 ..8......157 A........... The broad objectives of this report are: A............................

The interests of pharmaceutical companies and those of the public. and that we should be supporting. Page | 7 .” The reader can use this report to: B. patients and the government often overlap but they are not identical. seven pharmaceutical companies were included.B. We need an industry which is led by the values of its scientists not those of its marketing force. Few other industries can claim to have done as much for the well being of mankind.3 Support internal planning and decision-making with an external perspective founded on detailed analysis. During the 20th century. SCOPE AND IMPORTANCE OF THE PROJECT Medicines contribute enormously to the health of a nation.2 Identify key areas of pharmaceutical market growth and key opportunities for growth.made it on to the list. An effective regulatory regime to ensure that the industry works in the public interest is essential.Johnson & Johnson . its major companies and products. B. This crisis in public trust must be faced. A significant part of this improvement can be attributed to pharmaceutical innovation. I think there have to be some big changes. The comments of Sir Richard Sykes would be a guiding light to find medicines for healing the industry “Today the industry has got a very bad name. That is very unfortunate for an industry that we should look up to and believe in. the present regulatory system is failing to provide this. only one of them .1 Quickly gain an overview into the pharmaceutical industry. When the Financial Times (FT) listed the 50 largest businesses by market capitalisation in 31 March 2009. Unfortunately. the average life expectancy in developed countries increased by over 20 years. When it listed the 50 most admired businesses in 2009. B. It is not in the long term interests of the industry for prescribers and the public to lose faith in it.

I will look for the current status of the global and Indian pharmaceutical industry. websites of various organizations like the WHO. Additionally. and publications like Pharmabiz and Chemical weekly. WTO etc.C. In the process of the comprehensive literature review and analysis. Business Standard and other local newspapers will be reviewed. USFDA. challenges and opportunities. various journals. particularly literature in pharmaceutical journals and other publications providing insights about the industry. Kellog School of Management. Pricewaterhouse Coopers. Goldman Sachs. Stanford University. RESEARCH METHODOLOGY The methodology will include a comprehensive review and critical analysis of literature. will be analyzed. Among sources of the literature will be such publications as the Business Intelligence reports. books. various mergers and acquisitions and the real reason behind this. newspaper articles from such respected sources as the Wall Street Journal. and pharmaceutical companies’ financial data. Page | 8 . the effect of the patent regime and how it is being abused rather than used. Deusche Bank. such as year-end income and expense amounts. research reports of Ernst & Young.

D. MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED RESEARCH Page | 9 .

LITERATURE SURVEY Summary of some of the articles referred. Lastly. the article advocates that low-cost manufacturing locations will play a pivotal role since pricing pressures would intensify as lowcost versions of blockbuster generics take centre stage in the pharmaceutical market. The report provides extensive information concerning the industry. this article provides a brief overview of the impact of patent expiries in the U. the policy-setting mechanism.2 Patent Expiry of Blockbuster Drugs and Push for Lower Healthcare Costs Drive Generic Pharmaceuticals Market.S.4 per cent in January.8 per cent in November 2008. Statistical information such as the present and estimated market size of the generic pharmaceuticals in the U. key trends. information regarding companies' ranks based on total market share as estimated by ORG-IMS forms a part of the article. rising population. Nicholas Piramal. increasing rural penetration. E.Market and Opportunities 2007 Ernst & Young Indian Brand Equity Foundation reveals that India Brand Equity Foundation (IBEF) is a public-private partnership between the Ministry of Commerce & Industry. Further. appears below E. manufacture of branded generics. Lastly.S.S.2 per cent in December and to 14.E. and a brief overview of the performance of key players such as Ranbaxy. the growth of the domestic drug sector. It aims to effectively present the India business perspective and leverage business partnerships in a globalising market-place. gynaecology. the author cites growth data provided by pharmaceutical industry researcher ORG-IMS.4 Old is not gold? 2009 in Express Pharma Suja Nair says that among the most ignored segments of the pharmaceutical industry is the medicine for the elderly i. Exploring several reasons for the ignorance of this segment by Page | 10 . generic pharmaceuticals market.e. The numerous reasons for the buoyancy of the pharmaceutical industry in recent times find mention in the article along with the sources of this information. in the month of January in 2009. vitamins and minerals. According to the article. Estimations of the growth rate of the industry by few institutions (KPMG. and so on. E. Yes Bank) are cited by the author. Besides numerical evidence. drivers.3 Domestic drug makers immune to slowdown. and opportunities. (such as demand for lower healthcare costs) are furnished by the author. Growth has been witnessed in a number of segments of the industry such as anti-infectives. and respiratory drugs. E. and backward vertical integration.S. August 15. improved to 13. which was just 6. Generic Pharmaceuticals Market Outlook.1 Pharmaceuticals . The article also discusses the measures pharmaceutical companies are taking to counter the problem such as consolidation. 2007 is based on a research report by Frost & Sullivan namely U. support statements made by the author. The reasons attributed to the industry's growth are better health insurance coverage. Business Standard (March 13. and Cipla. geriatric medicines. qualitative reasons for the growing significance of generics in U. It includes a market overview.' Testifying to this. 2009) PB Jayakumar in his article views the pharmaceutical industry as one of the few industries that is 'recession proof. Government of India and the Confederation of Indian Industry.

However. making research in these areas less remunerative.000 crore. the author provides an insight into the geriatrics market and the important place it will occupy in the future as today's young population grows old. E. CARE Research believes that the growth of the Indian pharmaceutical companies in the domestic market get restricted with the MNCs introducing newer patented drugs in the country. The author says that geriatric medicines need to be given more attention and this is possible through a strong pro-active government that starts and strengthens collaborations between the healthcare industry. . The IPI is now exposed to a host of new opportunities and risks.5 Government plans to make India. annually till 2020. Under this Page | 11 . This has led the domestic pharmaceutical companies to pursue various strategies on the business and R&D front with the aim of achieving long-term sustainable growth under the new regulatory regime. geriatric medicines remain untouched to a large extent due to lack of clarity regarding the geriatrics market. the government is also working on framing regulations in such a way that it would promote R&D in the country. Publication Date: 15-MAR-09. This proposal has already been sent to Prime Minister Manmohan Singh and are awaiting his approval.the industry. the issues with respect to drug pricing and the Union Pharmaceutical policy will shape the regulatory environment for the industry in future. Rich multinational drug maker are not willing to participate in this because this drugs fetch less profits. or Rs 10. they will launch the programme within six months.Care Research Report says that the playing field for the domestic pharmaceutical companies changed completely with the advent of product patent regime from January 2005. According to them Africa. Besides changes in the patent laws. Besides this. along with creating lakh jobs. Publication: PTI. The entire amount would be spent on developing more effective medicines to cure diseases such as malaria and tuberculosis that hits millions every in India and other developing countries. By DEEPAK SHARMA in his article says that India is aiming to become one of the top five pharmaceutical innovation hubs globally. The author states that there are a few companies such as Mumbai-based Elder Pharmaceuticals which cater to the medicinal needs of the elderly. one of the top five pharmaceutical innovations hubs by 2020. Once they get the approval of the Cabinet.6 The Indian Pharmaceutical Industry – Prescription for growth published in 2008 . insurance agencies and pharma companies. The government has contributed to improving the situation by. formulating a national policy for aged under the Ministry of Social Justice and Empowerment. among other things. South Asia and Latin America are also huge markets for companies which would develop medicines for diseases such as malaria and tuberculosis. According to them the proposal has the potential to add $20 billion to the GDP by 2020. The government would invest in building infrastructure for R&D in the country and a significant amount from the proposed investment would be spent on upgrading human resources also. the government plans to invest up to 2 billion dollars. COPYRIGHT 2009 Asia Pulse Pty Ltd. will mobilize investment of two billion annually. E. The spread of diseases is more in countries with lower income levels. Taking this into consideration department of pharmaceuticals proposed to offer incentives to domestic as well as multinational drug makers to encourage new drug discovery in the country. It also believes that the growth of the Indian pharmaceutical companies in the domestic market get restricted with the MNCs introducing newer patented drugs in the country.

Continued research into medical technologies is essential for improving the quality of life of Americans and eradicating diseases. India's drug price regulator decided to lower prices of 46 brands and to include 254 new medicine brands in the list of price-controlled drugs. India is fast-growing population representing one of the main drivers of pharmaceutical growth in the coming years. Jacob Heller says the pharmaceutical industry is suffering a productivity crisis. measured by Quality-Adjusted Life Years (QALYs). Growth of India's pharmaceutical export sector is down by more than half. Upcoming health care reforms in the US will curtail the remaining incentives for pharmaceutical research. Other Indian companies facing similar problems in the past include Ranbaxy Laboratories. The investment in R&D is also on the rise as it has become important for Indian companies to start innovating new drugs in order to ensure long term sustainable growth and remain competitive at the global level. the Fund marshals private sector efficiencies. the growth for the formulation companies is likely to come from the generics opportunity in the regulated markets and geographic expansion in the semi/non regulated markets. and Engineering Policy White Paper Competition 2008.) · excessive amount of red tape · underdeveloped infrastructure and · The deficient legal framework (although the government is striving to improve the regulatory environment). brought on by soaring R&D costs and competition with generic manufacturers. Key reasons being increased competition in the highly regulated markets of the US and Europe and the steady appreciation of the rupee.a unit of Cadila Healthcare . both locally and abroad. Lupin recently became the third drug maker to be accused of sub-standard manufacturing by the US Food and Drug Administration (FDA). expertise.purchased Italy-based Etna Biotech from Dutch biotechnology firm Crucell. but also provide us an opportunity for rebuilding a more efficient set of research incentives. The Fund will compensate innovators based on market success and medical efficacy. Even victory of Barack Obama and the Democratic Party in the US general election in November 2008 will increase generic substitution in the world's largest Page | 12 . E. as well as Wockhardt and Granules India. On the other hand. By setting proper incentives. remaining regarded as a moderately attractive proposition.8 Indian Pharmaceuticals and HealthCare Reports Q1 2009 article says that India holds an unchanged eighth position in BMI's Q109 regional Business Environment Rankings for Asia Pacific. Pharmaceutical products have tremendous returns in increased lifespan and quality of life. To maintain robust incentives for medical research and to cure defects of the patent system. while Sun Pharma acquired 100% of the US-based narcotic producer and importer Chattem Chemicals. National Pharmaceutical Innovation Fund was introduced.7 Promoting Pharmaceutical Research under National Health Care Reform by Science. and resources to innovating improvements in medical treatments.scenario. and has historically proven exceptionally cost effective. making continued support an important national priority. Caraco Pharmaceutical Laboratories. In December 2008. Zydus Cadila . which will attract greater scrutiny on the sector as a result. E. Sun's' US-based subsidiary. Meanwhile generics industry continues to expand. there are many barriers too like: · low per capita consumption · emphasis on generics (hampering the level of market development. Technology.

its key growth drivers. Indian companies investments abroad and so on. exports. the segments within the industry." that calls for maintaining strict ethical standards when conducting promotional activities. Some pharma companies tend to engage themselves in aggressive marketing tactics which include showering physicians. the change caused by the new patent regime since 2005. Page | 13 . Since the paper includes valuable information about the pharmaceutical industry. the paper mentions the changes needed to be made for the pharmaceutical industry to rise and flourish. generics are on winning position when domestic front is considered.10 Jacob Heller and Gabriel Rocklin (2008) in the article Promoting Pharmace-utical Research under National Health Care Reform brings to light the current problems and scope of improvement of the Drug and Pharmaceutical sector of United States of America. Especially during these troubled times. Here the author emphasizes the need of a regulatory body to in India to take care of the patient’s well being.11 Manjeet Kripalani (March 25. E. In return doctors may prescribe drugs based on company incentives rather than the needs of patients. it would be of great aid in making the report. Detailed research has been carried out which is apparent throughout the report. while the 2011 patent cliff provides yet the greatest opportunity for Indian generics exports. And soon this code would be converted into law. It puts forth the ‘patent system’ which hinders the future growth of this sector.2009) in her research paper India's Pharmaceutical Industry course for globalization provides readers an insight into the Indian pharmaceutical industry. The future is positive for research and to make Medicare be preventive rather than just be used for curing. Hence it is clearly evident that though the Indian pharma industry has been growing enormously in the past few years and has been coming up with new high quality. The information conveyed through the report is supported by substantial evidence which have been gathered from DB Research itself and a few external sources.9 Uwe Perlitz( April 9. 2008) in her article Indian Pharma: Hooked on the Hard Sell talks about the unethical marketing practices being carried out by pharma companies in India. generic drugs. and wholesale distributors with expensive gifts. Complacency can be the reason for the doom of this sector. The report outlines India's position in the world pharmaceutical market as well as its standing among Asian countries. including topics such as its history. but this success story is not as glamorous as its seem to be.pharmaceutical market. pharmacists. Nevertheless. E. E. Thus innovative steps should be taken in time as an impetus to this sector. competitively priced. There is a need to start focusing on preventive measures which could be only attained by channeling funds towards research and development in drugs and pharmaceutical sector. Summarily. To look after this concern the Organization of Pharmaceuticals Producers of India has published a voluntary "Code of Pharmaceutical Marketing Practices.

Previously. In addition. only process patents were granted. but also comprehensive marketing and distribution networks operating throughout India's vast territories. more and more governments worldwide are seeking to curb their soaring prescription drug costs through greater use of generics. a number of uncertainties. Soaring costs of R&D and administration are persuading drug manufacturers to move more and more of their discovery research and clinical trials activities to the subcontinent or to establish administrative centers there. middle class and wealthy-live fast-paced. Asia.F. Both multinational and local drug manufacturers could eventually benefit from the market potential of India's population of over one billion. lifestyle-related illnesses. which recently have returned to India in large numbers (many had left when the regime allowing process patents only was introduced in the early 1970s). affordable generics. the domestic industry is still Page | 14 . New government initiatives seek to enable the majority of the population to access the life-saving drugs they need. These opportunities are presenting themselves not only in India's traditional wealthy client markets such as the U. This untapped domestic market is also highly attractive to the pharmaceutical MNCs. Now. and can afford. a situation that led to India's current role as a world leader in the production of high quality. MNCs and domestic companies are starting to work together. EXECUTIVE SUMMARY India's pharmaceutical industry has been growing at record levels in recent years but now has unprecedented opportunities to expand in a number of fields. while for others it could represent unprecedented opportunities. 2005. for which they want. an area in which the country is currently woefully underdeveloped. while even greater opportunities may be presented by the rise of the new Indian consumer. Western-style lives and. This group-urban. There are. and Eastern and Central Europe. capitalizing on India's high levels of scientific expertise as well as low wages. innovative drug treatments. which was introduced on January 1. as a result. particularly the effects of India's new product patent system.S. India's long-established position as a preferred manufacturing location for multinational drug manufacturers is quickly spreading into other areas of outsourcing activities. A large market will likely open up as the result of a projected boom in health insurance. this includes not only the Indian companies' research and manufacturing capabilities and their much lower operational cost levels. and European Union nations but also in emerging economies with vast populations such as Africa. however. For the foreign firms. South America. The domestic industry's long-established position as a world leader in the production of high-quality generic medicines is set to reap significant new benefits as the patents on a number of blockbuster drugs are scheduled to expire over the next few years. they are beginning to suffer from Western. utilizing each other's strengths for their mutual benefit. The new regime may spell the end for the domestic sector's smaller players. In addition. Nevertheless.

This is particularly urgent in the face of the strong competition from China. the industry still has some catching up to do in terms of quality assurance while. Action is required soon. There is a need for regulatory reform in India to encourage leading global players to continue and accelerate the outsourcing of their R&D activities-beginning with discovery research-to the subcontinent. On the international front. if India wants to be a significant player in the global pharmaceutical arena. Page | 15 . where the government has been particularly proactive in encouraging foreign investments in pharmaceuticals and biotechnology. on the local market. which must change quickly if it is even to begin to address these new opportunities and challenges. pricing remains a problem.spending far too little on R&D.

Some of the big global pharmaceutical companies are Johnson & Johnson (U. The industry expanded rapidly in the sixties./Sweden). The new regulations revoked permanent patents and established fixed periods on patent protection for branded products. Novartis (Switzerland).0 INTRODUCTION The modern pharmaceutical industry is a highly competitive non-assembled global industry. a result of which the market for ‘branded generics’ emerged. Sandoz. Sanofi-Aventis (France).K. AstraZeneca (U.K. Total global sales in 200809 was about $750 billion. Switzerland where companies like Hoffman-La Roche. started. Bayer (Germany). 1.).). Hoffmann La-Roche (Switzerland).). (U. Merck & Co. Figure 1: India’s pharmaceutical industry on course of expansion Page | 16 . Novartis etc. Abbott laboratories (U.S. Its origins can be traced back to the nascent chemical industry of the late nineteenth century in the Upper Rhine Valley near Basel.1 Industry Segmentation by Size and Distribution The industry has been growing at a steady pace. Pfizer (U.S.S. The industry witnessed major developments in the seventies with the introduction of tighter regulatory controls.S. GlaxoSmithKline (U. especially with the introduction of regulations governing the manufacture of ‘generics’. benefiting from new discoveries and a lax regulatory environment.1. Ciba-Geigy (the product of a merger between Ciba and Geigy).).).

Geographically. the world pharmaceutical market is divided as shown in the figure. Figure 2: Share of global market Page | 17 .

3 Growth rate The growth rate for pharmaceutical industry was the highest in manufacturing sector. stomach ulcers. medicines for the treatment of high cholesterol. Table 1: Top ten brands *COPD – Chronic Obstructive Pulmonary Disease 1. high blood pressure and schizophrenia were amongst the top ten brands worldwide. Figure 3: Manufacturing trade average annual growth (%) 1994-2003 Page | 18 .1.2 Top ten brands by global pharmaceutical sales In 2005.

1 Ethical (prescribed) drugs.4 Industry Segmentation by Products Pharmaceutical sales include: 1. which can't he dispensed without a physicians prescription.4. Page | 19 .Table 2: Rank of the 10 Causes of Death by Age Group (in United States. 2005) 1.

About 70% of prescribed drugs are distributed through wholesalers to hospitals.4. and may be produced and sold once the original drug's patent protection expires. The ethical sector can be further segmented into: 1.1 1.1.1.5 Industry Segmentation by Distribution Three-quarters of industry sales consist of pharmaceuticals used in outpatient settings. which are readily available on drugstore shelves. with the balance administered in hospitals. nursing homes. The Page | 20 . health maintenance organizations (HMOs). and retail pharmacies. with OTC products representing the balance.1.4. Generic products. Figure 4: Generic market shares in Europe 2006 1.2 Brand-name products.4. Generics are less-expensive equivalents of brand-name prescribed drugs.2 Over-the-counter (OTC) medications. and other inpatient facilities. Ethical drugs account for about 60% of total industry sales.

retailers.1.2 increasing life expectancies. is fairly fragmented.1 1.1. Figure 5: Top ten companies worldwide by pharmaceutical sales 1. pharmaceutical industry is expected to maintain above-average earnings growth through the end of the decade. 1.7.2Key global push factors of growth are presented by: 1.3 large untreated patient populations.1.7.7. 1. Key global pull factors fuelling this growth include: rapid expansion in the older segments of the population. Page | 21 .7 Current Environment The U. Generic drug industry. 1. in contrast. 1.1 1.2.remaining 30% is sold directly by manufacturers to physicians.S. hospitals.7.6 Industry Concentration The industry is somewhat concentrated.1 regulatory environment.7. especially in developing nations (like Russia and China) 1.7.4 Large markets overseas. and others.1.7. WHO forecasts the global over-65 population to rise from 380 million in 1997 to more than 690 million by the year 2025. The 10 1argest players account for about onethird of worldwide sales of ethical drugs.

R&D is an 'international' activity in this sense of the term. and once a drug has been developed the R&D cost does not need to be incurred again to make the drug available in other Page | 22 . As the diagram moves from left to right and becomes lighter. they do not have to be incurred again in order to make the product available in other countries.1. 1.2 Influence of the managed health care. so the activities become increasingly 'national' in scope.8 The lifecycle of a drug The diagram below shows the typical length of time that it takes for a new drug to go through the various stages of its life cycle (from patent to patient). More formally.7. Figure 6: The drug lifecycle It is possible in the diagram to distinguish between components of the production process that can be considered 'international' (namely can be located anywhere in the world for supply to any given country) and those that are 'national' (that is need to be located in the country in question). the term 'international' is used to denote those stages of a drug's lifecycle for which: • the activity can be located anywhere in the world where a suitable environment exists • once the costs of that activity have been incurred somewhere in the world. as it can be located wherever a suitable research environment exists.2.

generic manufacturers are able to enter the market and sell generic copies of the drug after a drug's patent (and any supplementary protection certificate) has expired. Over the past years. These seek to identify any adverse drug reactions and continue throughout the lifetime of the drug. Within the EU.9 Research and Development The drug industry is a research-oriented sector. Marketing authorisation must then be obtained before drugs can be launched onto the market. There are very high attrition rates at this stage of development: less than one per cent of compounds successfully make the transition from pre-clinical trials to clinical studies in humans. Page | 23 . Phase IV pharmacovigilance trials begin. Even before patent application. and • Phase III: trials on larger groups of patients (typically 1. some of the costs of global manufacturing facilities may also represent an 'international' cost element. A comparison of R & D expenditures in different industries appears below.000–3. and involve rigorous testing of selected NCEs in laboratories and animals. but can then expect rapid authorisation in other Member States in the absence of any specific objections. Three stages are carried out before drugs receive marketing authorisation. A third of INDs make it through both Phase I and II. Around 25 per cent of INDs progress through all three phases to a regulatory review.000). namely: • Phase I: trials in 20-100 healthy adults to test the drug's safety. both in value terms and as a percentage of total sales. there are two main routes for obtaining marketing approval: • a centralised procedure run by the European Medicines Agency (EMEA): new drugs may be granted a single marketing authorisation valid throughout the EU. 70 per cent of investigational new drugs (INDs) proceed successfully through Phase I • Phase II: trials in 100-300 patient volunteers to determine the safety and efficacy of the drug. Pre-clinical trials precede any testing on humans. After the drug reaches the market. although much basic research is carried out in universities and publicly-funded institutes. The different stages shown in the chart above normally follow the patent application and are described in the next few paragraphs. Clinical trials are carried out in humans. In addition.countries. to gain further data on safety and efficacy. 1. • a mutual recognition procedure: firms first seek marketing authorisation in one Member State. the industry's R&D expenditures have risen sharply. a considerable amount of time and money may have been spent on basic research to identify suitable entities for investigation. As discussed earlier.

000 compounds discovered ever reaches the pharmacist's shelf. only one in 10.Figure 7: R&D Expenditures as a Percent of Sales for US Industrial Sectors Figure 8: R & D expenditures of the top ten pharmaceutical companies worldwide Drug manufacturing is also a high-risk business. Figure 9: The economics of R & D Page | 24 .

Let us explore available data relating to this assertion.R&D costs per approved drug It is often reported that the costs of R&D per approved drug have risen considerably over the past 30 years. R&D is not only a lengthy process but also a costly one. DiMasi et al (2003) calculated R&D costs for a sample of 68 drugs first tested on humans between 1983 and 1994. The results are shown in the table and figure below: Table 3: Cost of Research and Development at different stages Figure 10: Breakdown of R & D spend Page | 25 .

the originator brand of simvastatin) accounted for nine per cent of the present value of cash flows and the top ten per cent of drugs accounted for 52 per cent of present value of cash flows.4 per cent between the 1970s and the 1980s. DiMasi et al (2003)'s estimates suggest about 42 per cent of total capitalised expenditure on R&D is incurred in the preclinical phase but only about 21. and about 7.0 per cent was used. even for those drugs successfully marketed.5 per cent of drugs making it through the preclinical phase are successfully marketed. In calculating capitalised costs. This illustrates the importance of unsuccessful R&D expenditure.4 per cent between the 1980s and the 1990s. Not only is a high proportion of R&D unsuccessful (in the sense that it is spent on drugs that are not ultimately approved for marketing) but. Grabowski et al (2002) analysed global cash flows (sales value less production. a real cost of capital of 11. distribution and marketing costs) through the life cycle for 118 new drugs entering the market between 1990 and 1994. Figure 11: Trends in capitalised spend per approved drug (US $ Mn) Page | 26 . Comparison with earlier similar work suggests that R&D costs per approved drug are increasing rapidly (see Figure below). DiMasi et al (2003) estimate a compound annual growth rate of about 9. They found that the single best selling drug (Zocor. a high proportion of revenue and cash flow is accounted for by a small number of 'blockbuster' drugs. Adding in the cost of capital between the time of R&D expenditure and the time of marketing approval increases this substantially—the capitalised value of R&D expenditure averages $802 million per approved new drug. On the basis set out above (capitalised R&D costs per successful drug including unsuccessful R&D and the cost of capital).Total 'out of pocket' expenditure on R&D (including the cost of R&D on drugs that did not successfully make it to marketing approval) averaged $403 million per approved new drug.

Figure 12: The Pharma Productivity Gap Fewer than a third of marketed drugs actually achieving enough commercial success to cover their R&D investment. the number of NCEs receiving approval has not been increasing and indeed has shown a steady decrease in recent years. First. This reflects two trends.$1.200 $802 $318 $138 1975 1987 2001 2006 Source: PhMRA Pharmaceuticals Industry Profiles 2007 The rapid increase in R&D spend per successful new drug shows that the productivity of expenditure has been falling. the absolute amount of R&D expenditure by the pharmaceutical industry has been rising rapidly over time. Second. Figure 13: Returns on Research and Development Page | 27 .

10 Pricing and investment in a global market Price-setting within an individual country is the outcome of bargaining between: • global pharmaceuticals companies (which may have market power in particular therapeutic areas).10. and • major health purchasers – typically national governments 1. Typically. pharmaceutical companies are typically able to acquire a patent. firms with market power will engage in price discrimination if they can segment their market into buyers with different degrees of Page | 28 . In this case they will wish to maximise revenues. pricing is constrained further through competition from generic manufacturers.1. it will be useful to identify pricing strategies that pharmaceutical companies are likely to adopt in different national markets so as to maximise profits. In the absence of other structural or regulatory distortions. For newly launched drugs. subject to a two types of constraints: • the range of demand side measures in place within the country concerned. For drugs whose patents have expired. including pricing and reimbursement policies adopted by the public buyer (which are likely to bite to a greater extent if therapeutic substitutes are available • international linkages. Pricing incentives Given that they have market power. in particular the extent to which parallel trading and international reference pricing constrains the discretion the company has in setting prices in any individual country.1 Firm's objectives A reasonable assumption is that pharmaceutical firms will seek to set prices in order to maximise profits. granting them temporary rights to be the sole producer of that drug. free competition between off-patent drugs should lead to significant drops in price. We take this as our starting point in this analysis.

or under. which is applicable where there are common fixed costs associated with sales to different segments of a market. depending on the price sensitivity of the national buyer or buyers. then price discrimination by firms will tend to have the effect that rich countries contribute more to the cost of R&D than poor ones.recovered on individual drugs. an efficient way to recover these fixed costs is to set prices for each customer group such that the mark-up above marginal cost varies inversely with the elasticity of demand). The pricing and reimbursement systems employed by major purchasers are a key tool in sending these signals. if income per capita is the key driver of differences in price sensitivity between buyers in different countries.price sensitivity. In order to understand why this might be the case. therefore. whilst not losing sales from buyers with a lower willingness to pay. setting differential prices based on the price sensitivity of national buyers allows firms to recover R&D costs in a way which minimises any effect on the take-up of drugs. what pattern of mark-ups across countries represents the fairest and most efficient way of allowing firms to recover R&D costs. dynamic efficiency requires that investment. (This is often described as 'Ramsey pricing'. the prices of drugs must reflect the value they bring to patients ( In formal terms. because some drugs will be commercial successes and others will be failures). as well as being in the commercial interest of firms. they must have an expectation that they will be able to recover the cost of R&D. this could mean charging different prices in different countries. we might expect that countries with a lower national income per capita might be more price sensitive. In this instance. and • on equity grounds. The relevant question is. by charging mark-ups above marginal cost in inverse proportion to the price-sensitivity of buyers. In this way. In the context of the pharmaceutical sector. is made up to the point where the present value of the total benefits to all patients (for whom the benefit exceeds the marginal cost) is greater than the present value of total costs). In such circumstances. Some have argued that this form of price discrimination may represent the best solution: • on efficiency grounds. we would expect pharmaceutical companies to vary prices in relation to income per capita in each country. mark-ups over marginal cost must be limited on average across all drugs to what is necessary to recover R&D costs (R&D costs might still be over. More importantly. Page | 29 . This means that they have to be able to charge prices (somewhere in the world) which are above the marginal cost of manufacturing and marketing drugs. companies can extract as much rent as possible from buyers who are willing to pay higher prices. however. at least on average across all drugs. the starting point is to remember that R&D is a globally common cost and forms a substantial proportion of the lifetime cost of a drug. In order for firms to have an incentive to engage in R&D. For this outcome to be efficient. that is. Generally. It is worth noting at this point that such pricing behaviour may be beneficial for Society overall (considered from a global rather than a national perspective). including R&D.

An alternative would be to view national governments as wishing to minimise healthcare Page | 30 .6% in Canada and 1. after suitable repackaging or re-labelling).8% of GDP in the United States. with potential implications for their willingness to market drugs in low price countries and their incentive to innovate. In response to this. undermining incentives to invest. Moreover. Figure 14: Public and private expenditure on pharmaceuticals (percentage of GDP) In their role as healthcare providers. 1. there is an incentive for parallel trade (that is for third parties to engage in arbitrage by buying drugs in low-price countries and reselling them in high-price countries. so as to prevent them becoming a source country for parallel trade.5% in Japan.3% of GDP.2 Government's objectives In 2002. In comparison. total pharmaceutical expenditure was equivalent to 1. Parallel trading thus imposes a constraint on pharmaceutical companies' ability to Price discriminate. 1.Parallel trade Pharmaceutical companies may be constrained from price discriminating effectively by parallel trading. total pharmaceutical expenditure in Australia equalled 1. The existence of parallel trade will tend to weaken the ability of pharmaceutical companies to charge different prices. we would expect national governments to be interested in maximising health outcomes for their citizens within the constraints of their health budget (This assumes that the healthcare budget is fixed. parallel trade may reduce returns to the innovating companies. since average prices may be lower and parallel traders incur costs and earn profits from their activities. Where significant price differentials exist between countries.10. because if they seek to do so they risk losing revenue from sales in high price countries to parallel imports. pharmaceutical firms may have an incentive to delay launch or avoid launching altogether in low price countries.

governments will wish to see new drugs being developed which will be of benefit to their citizens in the future. both now and in the future. it is able to take into account the effect that the quantity it buys has on the price of the product it is buying. Since national governments are the principal purchasers of pharmaceuticals in most countries. Governments have to offer pharmaceutical companies a price which is sufficiently high that they are willing to continue to supply the drug in that country. where many suppliers compete on price. At a minimum. In practice. this will release some of the healthcare budget for spending on higher drug volumes or on other healthcare treatments • ensuring that drugs are made available in their country. there is a constraint on price-minimising. governments' overall objective could be restated as maximising health outcomes for their citizens. Clearly. We now consider how a government could use its buyer power to achieve the policy objectives outlined above. the existence of close therapeutic substitutes may mean that there are in fact several sellers of differentiated products: Page | 31 . they are almost certain to have buyer power in the market for pharmaceuticals—that is. use of buyer power would lead to a loss of overall welfare if the costs of supply increase with total output (that is. However. Reasonable prices Typically. In particular. there may be other non-healthcare objectives of importance to some governments in negotiating pharmaceutical prices. If a single buyer is buying in a competitive market. the starting point (or counterfactual) should in this case be taken as a monopoly. any pricing approach will involve a trade off between these objectives. they will be able to influence the prices at which they buy drugs. the price would need to cover the 'national' element of drug costs. a saving in pharmaceutical expenditure could be used partly to increase other health spending and partly to reduce the overall health budget.) There are three principal objectives that governments might have in bargaining on pharmaceutical prices: • achieving reasonable pharmaceutical prices. they may wish to use high drug prices to attract footloose pharmaceuticals' R&D and production to locate in their country. In order to analyse the government's best use of its buyer power. The buyer will therefore buy a lower quantity at a lower price than would be the case in the absence of buyer power. such as industrial policy objectives. In a longer-term context.expenditure for a given level of health outcomes. given the international nature of R&D costs. For example. In addition. and • ensuring that there are adequate incentives for R&D on valuable new drugs. if a firm has buyer power. there is a rising supply curve). (In the case of the market for a drug. If governments can purchase existing volumes of drugs at lower prices. within the constraints of current and future health budgets. of course. the market from which the government buys is unlikely to be competitive. it would be possible for the government to steer a middle course between these two approaches. In negotiating drug prices. In this case. In practice. given that patents grant pharmaceutical firms temporary rights to be the sole producer of a particular drug. such a policy is unlikely to provide incentives for firms to locate R&D in a specific country. there should therefore be consideration of the implications for the incentives for pharmaceutical companies to invest in R&D. however. Within this longer-term framework.

In the context of pharmaceutical pricing. reallocating profits from the seller to the buyer. there are a range of possible outcomes consistent with either side using their market power. taking into account the effect that these prices will have on incentives for R&D into new drugs. the quantity produced will be the same as in the outcome where there is only one monopolist. sales in that country will have little effect on companies' global return Page | 32 . the long term objective of maximising health outcomes for people into the future implies that governments will wish there to be adequate incentives for R&D into new drugs. one might expect them to agree on a quantity that maximises joint profits (Including both the monetary profits of the seller. but the buyer may be able to negotiate a lower price. concerned with its citizens health. If a country accounts for a small proportion of Global sales. it may be possible in this way for national governments to use buyer power to negotiate lower drug prices (although. If there is a single seller and a single buyer operating in one market.the case of a monopoly is presented for simplicity) where a single firm is able to exert its seller power by taking into account the effect the quantity it sells has on the price. Market outcomes (prices and quantities) may be determined as a result of negotiation between the two parties. as discussed further below. governments are constrained in the extent to which they can push down prices by the threat that companies have not to supply the drug in question if a price cannot be agreed. Governments in turn can threaten to withhold reimbursement status. and • the threat of pharmaceutical companies withdrawing the supply of a drug to a particular country Incentives to invest in valuable drugs The use of buyer power can also have effects on incentives to invest. As long as demand is not completely price inelastic. Ensuring that there are adequate incentives for R&D therefore forms a constraint on governments using their buyer power to negotiate as low drug prices as possible. In principle. with prices being agreed in the context of: • the threat of withholding reimbursement from government. Where two firms. However. and the 'surplus' (non-pecuniary excess benefits) of the buyer) and then negotiate on a price. Hence the price bargaining process is best analysed strategically. both with monopolies. leading to a loss of overall welfare. In this case. one might also expect a government. the global nature of R&D costs means that the effect of prices in any one country (particularly a small one) on investment is less clear. The optimal set of drug prices from a government's perspective will therefore be the one that maximises all health outcomes (now and in the future). are involved. to try to induce the monopoly to supply a higher quantity than that which maximises profits). in practice. a monopolist will sell a lower quantity at a higher price than in a competitive market. Globally common costs and 'free riding' R&D is a globally common cost. Ensuring that drugs are made available Of course.

however.11. healthcare system. companies may respond by delaying launch of a drug in that country. or even not launching at all. Furthermore. 1. But the program doesn't provide Page | 33 . although free riding may be rational for an individual country. Therefore. be dampened by the practice of international reference pricing. prices in such countries are likely to have little direct effect on the level of R&D and hence on the pace of pharmaceutical innovation. which has the effect of linking prices in different countries. In the light of this. In particular.2 Medicare and Medicaid: Managed care is also moving aggressively into Medicare and Medicaid markers. concerns to retain national sovereignty over drug pricing mean that such an approach is not likely to be implemented in the near or medium term. seek to negotiate prices that reflect a drug's cost effectiveness. an individual country may have a greater effect on global returns to R&D than the size of that country's pharmaceutical market might initially suggest. Managed care's share of the retail pharmaceutical market. governments may face an incentive to 'free ride' on global R&D by paying prices which do not contribute to this cost element. The objectives of the PPRS specifically refer to promoting an industry 'capable of such sustained R&D as should lead to the future availability of new and improved medicines' while our international survey of pharmaceutical pricing and reimbursement schemes suggests a number of countries do not just seek to set as low a price as possible but. Where governments seek to free ride in this way. As a consequence. if many governments successfully adopt this approach then there would be significant aggregate effects on global returns to R&D and hence on companies' incentive to develop new drugs. If prices are linked. Medicare is the principal healthcare financing program for Americans 65 years of age and older. The latter becomes more and more popular because of its ability to provide medical products and services in a cost-effective manner.S. which was less than 30% at the start of this decade. governments may recognise their common interest in allowing higher prices that incentivise the development of new drugs. The managed care providers discount purchases of pharmaceuticals and medical products.11.from R&D. In principle. for innovative drugs. insisting on the use of low-cost generic drugs whenever possible. leaving the globally common costs to be paid for by other countries. the solution to this problem would be to coordinate price setting between countries.1 Managed Care Growth: The shape of the pharmaceutical marketplace transforms rapidly due to growth of managed care in the U. In order to ensure the national supply of a drug. This could affect the incentives governments have in exercising buyer power. ensuring that each paid its 'fair share' (possibly according to some measure of ability to pay). as well as physician and hospital services. a government may seek to negotiate prices that cover only national costs and avoidable international costs. these countries will have a greater incentive to take account of long-run effects on innovation when exercising their buyer power. 1. is expected to reach 90% by the end of it.11 Relationship Pharmaceuticals – Healthcare 1. In practice. The incentive to free-ride may.

Medicare/managed care enrollment has more than doubled over the past four years. 1.12. 1.12. Medicaid managed care plans are also poised for ongoing growth.4 Bringing the drug to market: Before a drug can be brought to market.3 Discovery: New drugs are discovered in scientific laboratories. After the average 10. development. 1.6 Going OTC: Companies sometimes switch a patent-expired product from prescription-only status to over-the-counter (OTC) status to broaden its market and extend its economic life. and FDA review. Margins on products switched to OTC status are lower than those on the prescription products they replace.to 15-year period of discovery.5 Going generic: Generic competition usually appears immediately after patent expiry. but popular consumer medications can have almost infinite shelf lives. Drug pricing is also relatively inelastic. testing.12 Industry Living Space 1. Competition in the market of OTC products is more straightforward. 1. Enrolling into managed care plans.1 Demand: The demand for medicine is tied to the health of the populace. the pharmaceutical industry still represents Page | 34 .reimbursement for outpatient prescribed drugs.12. medicare beneficiaries are typically given free or low-cost prescription coverage.S. 1. it must undergo years of testing and receive government approval from the FDA. It takes several years of sales buildup in major markets in the U. which is relatively constant over the years. Growth of medicare/managed care population increases drug utilization.12.12.2 Life cycle of products: The product cycle of nearly all prescribed drugs is fairly stable. a branded ethical drug has about 10 years of commercial life. new competition of drugs similar in action may enter the market. due to the absence of alternate therapies for the most prescribed drugs. Branded prescription drugs effectively have about 10 years before generic competition erodes their profitability. 2. with the vast majority of attempts unsuccessful.0 GLOBAL PHARMACEUTICAL INDUSTRY Historically. The process is long and laborious. Even at current revenues. At that point.12. the pharmaceutical industry was characterized as a high growth and high margin business with significant return on investment from new drug discovery and development. and prices begin to fall. 1. etc before a drug reaches its full commercial potential.

only about 8% of total healthcare expenditures. However, given the fact that drugs are often an out-of-pocket expenditure, the pricing of drugs has come under a lot of scrutiny. Over the past two decades, the industry has also dealt with the emergence of a generic segment as products brought to market largely since the sixties went off patent and firms emerged to produce knock-offs that sold at much lower prices (today at about 15-20% of initial price at product launch). The industry has also found challenges in:
• • • • • • • •

The rising cost of new drug discovery and development through final FDA approval; estimated variously at $400 m to $800 m for each new product, A declining product pipeline and the withdrawal of several blockbuster drugs from the market due to dangerous side effects impacting a tiny percentage of users, The emergence of a biotechnology based pharma industry that is both a threat and an opportunity for traditional synthetic drug developers, Legislative scrutiny on drug pricing and spending on marketing and sales, particularly in the US, while prices in many regions are far less, Increasing emphasis on FDA enforcement of cGMP as a result of some recent problems as well as Canadian re-importation trends, Drug safety issues resulting from the recent Vioxx and Celebrex market withdrawal, Increasing complexity of drug molecules as the industry selectively targets specific diseases, with the result being declining potential patient populations, Conducting clinical trials globally while ensuring uniform standards and genetic diversity controls.

Despite these issues and recent declines in earnings, the industry is forecast to grow at 8.2% per annum to 2011 to a total of $967 billion dollars. One final thought is that there has been rapid growth of the pharma industry in both India and China and they are steadily improving in quality while maintaining low cost and increasing innovation. It is projected that by 2010, China will become the fifth largest global pharmaceutical market. The value of pharma fine chemicals is first assessed at the active pharma ingredient (API) level, about 10% of total industry revenues or some $52 billion. The industry also supplies advanced intermediates for an additional value of some $20-25 billion and basic building blocks for an additional $10-12 billion. Thus the industry is valued in total at some $85 billion. Of this, an estimated 40% is sourced on the merchant market and the balance is produced by the captive operations of pharmaceutical companies. The key issue for API production is the ability of the supplier to produce in compliance with cGMP requirements set by the FDA in the US. To source or supply APIs and advanced intermediates in other regions, the FDA must still certify the plant site. Today, Europe lags the US in site inspections and the European pharma fine chemical industry sees this as a serious competitive risk. Specifically, large quantities
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of Asian APIs of questionable quality are entering the EU and undercutting the pricing of regional players. If this is not corrected, the industry believes both the safety of the public and the competitiveness of local manufacturers will be at risk. Historically, fine chemical producers were largely captive operations of integrated chemical and life science firms. A few large independents, Eastman Fine Chemical, EMS Dottikon and Lonza did emerge as early third party producers surrounded by hundreds of small ($5MM to $30MM) players. In pharmaceuticals, most production of fine chemicals was conducted by their internal manufacturing operations for security and regulatory risk management. As financial pressure to improve both the income statement and the balance sheet at big pharma companies increased during the 1990s, pharma companies moved to cut costs and extract value to support R&D and marketing by adopting chemical outsourcing strategies. In response, a merchant pharma fine chemical market emerged and has seen constant change through regulatory skill development, roll-up acquisitions, technology start-ups, consolidation, restructuring of both integrated chemical firms and pharma companies with a subsequent spin out of assets, and big acquisitions to secure step-change positions. Today, suppliers to the pharma (and general fine chemical) industry tend to operate in one of following modes from a manufacturing and technology perspective. First, is a full service provider that has both a broad range of production technologies and assets, including some which are either complex, hazardous or leading edge. Competitive position is achieved by being able to carry out multiple synthesis steps within a single supply chain and also contribute what may be a key technology practiced by only a few firms. Second, are the specialist players who differentiates and seeks to operate under the umbrella of the broad based supplier by focusing on a particular synthesis step (phosgenation for example) that may be hazardous or require unique equipment. These firms seek to outsource their specialty even from the large supplier. And a Third group have entered the pharma fine chemicals industry as start-ups driven by a new, unique skill (chiral separations or early stage process development and kilo scale production) or a unique position (chiral building blocks, peptide synthesis, or mammalian cell culture). A Fourth category of participants have emerged largely from India and China, that being low cost producers of the “me-too” products using a range of basic multi-step organic synthesis skills. These firms tend not to practice any unique chemistry and historically competed in their home markets while exporting opportunistically to the “west” purely on a cost basis. Early on, the quality from these largely Asian producers was highly suspect, but first in India and now China these quality gaps are being closed. The NA and European firms still have a lead on unique and emerging technologies and are the centre of innovation for the pharma industry, but their capital equipment and manpower cost positions are well above the Asian players, and the skill and education gap probably no longer exists. In fact, Indian pharma firms and NA and WE firms have begun to establish significant R&D operations in the region that may well lead to a true globalization of the industry. The early pharma fine chemical industry was considered highly attractive from a margin perspective as high prices could be charged for custom manufacturing services
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when compared with the internal cost of inefficient captive manufacturing. In fact, two of the early drivers of outsourcing were per kilo cost reduction and capital investment reduction that improved the ROCE of innovator drug companies. During the 1990s a generic pharma actives industry grew as patents on older drugs expired. This generics market fostered the growth of entrepreneurial players initially in Italy and Spain and later in India. As these firms grew in capabilities, they began to target a broader range of merchant business. The Indian industry, faced with limited brand equity chose to compete on price and drove the trend to competitive pricing and margin erosion in merchant pharma fine chemicals during the latter half of the 1990s. Another aspect of this competition was the shift from high initial margins on advanced intermediates and actives, with slow erosion of pricing during the early years of commercial production, to aggressive pricing and rapid erosion of per kilo prices and margins even on late stage clinical trial quantities. Rather than begin production of a new molecule with a price of say $1000/kilo and then manage its decline to maybe $600/kilo over time, competitive firms began actively bidding down prices even below the $600/kilo level in order to capture the long term supply commitment. In the early 2000s, as the pharma pipeline failed to deliver a growing number of new molecules and thus outsourcing opportunities, prices and margins took a further hit as too many players and too much capacity chased too few opportunities. With high capital costs due to inflated acquisition prices, excess often high cost capacity demanding rationalization, increasing competition from both Indian and Chinese suppliers, and reduced outsourcing by big pharma, firms such as Clariant, DSM, Rhodia, and Degussa have struggled to achieve desired growth and profitability. The pharma fine chemicals industry may be in a better position now to benefit from a recovery, if the product pipeline and pharma sourcing strategies move in positive directions. However, the industry is in serious need of restructuring because there are both too many players and too much capacity chasing too few opportunities, leading to continued pressure on prices and margins.

3.0 THE INDIAN PHARMACEUTICAL INDUSTRY 3.1 Introduction The Indian Pharmaceuticals sector has come a long way, being almost non-existing during 1970, to a prominent provider of health care products, meeting almost 95% of country’s pharmaceutical needs. The domestic pharmaceutical output has increased at a compound growth rate (CAGR) of 13.7% per annum. Currently the Indian pharma
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while others exist in the small scale sector. Figure 16: Trends in the production of bulk drugs and formulations in India since the 1970s Page | 38 . particularly since 1985. India’s thousand-plus companies have built up a formidable industrial strength. particularly from China. Globally. Around 260 constitute the organized sector.000 units. although many source intermediates domestically or from abroad. The smaller drug companies source bulk actives from the many smaller fine chemical operations set up to produce fine chemicals for the domestic and overseas markets. and drug prices are very low compared to the ‘West’. Mumbai (Bombay). the Indian industry ranks 4th in terms of volume and 13th in terms of value.0 billion. Ahmedabad and Bangalore. India has large number of pharmaceutical companies that produce even very new inventions without license from the innovators.industry is valued at approximately $ 8. The bigger pharmaceutical companies are back-integrated in the manufacture of bulk actives. Indian pharmaceuticals industry has over 20. Figure 15: Location of pharmaceutical hubs in India Mainly based in the five major fine chemical and pharmaceutical manufacturing regions around Delhi. Hyderabad. Antibiotics and nutritional supplements are important sector.

in both the 1970s and 1990s. both bulk drugs and formulations is estimated at Rs 35. The output of formulations has seen a phenomenal increase during the period under consideration but is less than 4% as against bulk drugs. Investment in the industry has steadily grown over the years from a mere Rs 23.The pharmaceutical industry has witnessed tremendous transformation since the 1950s.64 crore in 1950 to a moderate Rs 500 crore in 1980 and went up considerably to reach around Rs 4000 crore in 2003. The 1980s is the only period in which formulation growth had outperformed the growth of bulk drugs by a marginal 1%. the production of pharmaceuticals has registered a tremendous increase over the years. which is just over 1% of the global market (ICRA 1999). This is against the value of the production of pharmaceuticals of a mere Rs 10 crore in 1950. The massive growth of the pharmaceutical industry could be attributed to a few domestic and international developments that took place particularly since the 1950s. Propelled by the booming demand. At the global level. Table 4: Growth rate of bulk drugs and formulations production in India since the 1970s The growth rate of bulk drugs recorded in the 1970s and 1990s is almost doublearound 20%-that of the production registered for the 1980s is evident from the above table. the Page | 39 .471 crore in 2003-04 (IDMA 2004). The size of the Indian pharmaceutical industry.

The protection given to the pharmaceutical industry through patents and brand names saw many top companies switch over to the production of specialty medicines. Even a brief survey of the situation. or about $85 Billion in 2005) was the expected increase in outsourcing starting in the mid-1990s. Reddy’s Laboratories. Looking back to the early 1990s.g. approximately 40% of the value of this production is outsourced). a handful of modest sized Indian companies. skilled technical labor that can now support not only fine chemical process development and production but also clinical development and contract research. an increasing number of older drugs would go through patent expiry and expand opportunities for generic suppliers. and some discovery based drug companies based on manufacturing and skilled labor cost advantages and limited protection for intellectual property. quickly and at acceptable cost. marketing and research. become a reputable source of building blocks. including firms such as Ranbaxy. At the same time.industry in general was then experiencing a major overhaul by vertically integrating operations such as production. based on the anticipation of very productive discovery and generic drug pipelines (today. Rhodia. reveals an Indian industry that has: • • • • • many moderate to large players with a varied range of participation. Clariant and DSM) made significant acquisitions to establish themselves as leading fine chemical and active ingredient suppliers to the Page | 40 . both technology start-ups and divisions of large chemical companies – jumped in to take advantage of the growing outsourcing opportunity. and in the late 1990s several large chemical companies (e. At the time there were questions about consistent quality. management and financial resources to pursue acquisitions in other countries. advanced intermediates and active ingredients to the growing global generics market an improving track record with the FDA and other regulatory agencies. These Indian ‘upstarts’ looked to be an emerging threat to Western European fine chemical players. Degussa. A key driver for significant growth in the global pharma fine chemicals segment (APIs. As a result. But today we can say that the Indian pharmaceutical fine chemicals industry has learned its lessons well. advanced intermediates and basic building blocks are normally about 17-18% of the total pharma industry value. New cGMP capacity was built by suppliers of all sizes. even some with international operations. lack of FDA certification and even environmental practices that slowed their progress in international markets. first appeared on the RADAR scope of industry participants in the United States and Western Europe. Indian pharmaceutical fine chemical players have served their apprenticeship and are now embarking on their own voyage of conquest in this globalizing industry. particularly Italian and Spanish firms. Cheminor and Dr. Industry analysts expected the human genome project to lead to the introduction of new drugs of increasing complexity and these drugs would require competent outsourcing partners with real know-how to effectively bring this growing portfolio of life saving products to market..

leaving the majority of the Indian population without realistic access to modern therapies. thus allowing the local companies to produce new drugs at a fraction of the price being asked by the multinationals. often via acquisitions or alliances and are poised to take a larger role in this globalizing industry.” India’s pharmaceutical industry and thus its fine chemicals industry has also had to adapt to new realities. and the net result has been a wholesale consolidation of both fine chemicals and pharmaceutical industry participants. Rhodia. However. Common belief is that while Indian Pharma fine chemicals companies can continue to position themselves as low cost commodity suppliers. consolidation with continued in-sourcing by Western pharma companies. Margin pressure was further exacerbated by low productivity of the pharma drug pipeline. in which Page | 41 . For many years the pipeline was regularly filled with new “me-too” products copied from global pharmaceutical majors. This active capacity building. and mid-size European and North American based companies are putting themselves on the block). including: industry overcapacity (about 70-75% capacity utilization industry-wide). such as Italy). Several Indian-owned (‘indigenous’) companies had been set up even before independence and they eventually (in 1971) persuaded the government of Indira Gandhi to repeal the country’s product patent laws. as well as some European countries. Today. India’s passage of a new Patent Law has raised the IP (intellectual property) hurdle so that Indian firms cannot produce patented active ingredients and dosage form pharmaceuticals in advance of patent expiry! This points to a near term slow down in growth in the domestic pharmaceutical market which will impact both pharma companies and the fine chemical supply network. While this industry evolution has been playing out largely in “the west. The patent regime and the law was identical to that in Great Britain and so no copy products could be produced at low cost (as was then practiced by all other Asian countries. India was an imperial colony at the end of the last world war (just) and so the emerging pharmaceutical companies (particularly British companies such as Beecham. coupled with the improving quality of Indian and Chinese manufacturers created strong price competition and severe margin pressure on the fine chemicals industry. and increased emphasis on quality – the “survival of the fittest” points to a significant new opportunity! And that is the ability to significantly extend its reach into foreign markets to offset slower growth in domestic markets. the opportunity is open – through innovation and strategic thinking – to move up the value chain in multiple ways. Today. Drugs were priced at international levels. larger players in the Indian pharma fine chemical industry have simultaneously been building their export businesses and that will provide for better growth prospects. At the same time.pharmaceutical industry. DSM and Clariant. some Indian players have established foreign operating positions. declining Chinese prices. Indian fine chemical companies can enter foreign markets both organically (playing on their cost advantage and adding further sophistication) and inorganically (several of the high-cost acquisitions of the past 10 years are being written down by firms such as Degussa. ICI’s propanolol and Beecham’s ampicillin were both specifically named in her speech in Geneva. Glaxo and later ICI) developed their business in India as part of their international operations. Unlike China. While the Indian pharma fine chemicals segment has not been immune to the drivers of margin pressure.

Most other Asian countries have not developed their own industries and have. cheaper drugs that are often inadequate). The Indian pharmaceutical industry. It produces life‐saving drugs belonging to all major therapeutic groups at a fraction of prices existing in the world market and thus.she defied the West with the statement that no government should be able to ‘legislate against life’. having accepted the reintroduction of product patents. An interesting parallel now exists in South Africa. which had little technological capabilities to manufacture modern drugs locally in the 1950s. Figure 17: US DMF filings – Global vs India Page | 42 . the industry has reached a watershed. as a result of this action. The Annual Report of the Department of Chemicals and Petrochemicals. has emerged technologically as the most dynamic manufacturing segment in the Indian economy in the 1990s. Today. where the new government is threatening to repeal product patents in order to gain access to low cost treatment for AIDS (the African pandemic of AIDS is threatening to undermine the future welfare of many countries in the region). it generates rising trade surpluses in pharmaceutical products by exporting to over 65 countries. One third of its people still have no access to modern drugs. as a result. however. Besides. describes it as one of the largest and most advanced among developing countries. Italy. Both finished drugs and bulk actives are exported. It is the judgement of the government and its advisers that India has more to gain than to lose by acceding to the West’s demands. significantly competing with developed countries for global market share. Government of India. but from an Indian point of view. has been seen as ensuring health security of the poorer countries. become dependent on multinational companies (that sell at high prices that many of the people cannot afford) or WHO (which can only supply older. therefore. Many multinationals (particularly the US-based ones) eventually withdrew from the Indian market. and have been able to build up an impressive infrastructure to supply both the majority of its own needs and those of an increasing proportion of the Asian. The Indians have ‘called this multinational bluff’. the country’s strategy has largely paid off. which is higher than that filed by Spain. The industry today posseses the largest number of US Food & Drug Administration (FDA) approved manufacturing facilities outside the US and has filed 110 Drug Master Files (DMFs) with the US FDA for drug exports to the US. China and Israel taken together. South American and African export markets.

3. However. The Pharmaceutical Policy 2002 echoes the same sentiment and has shifted the focus of the policy from self‐reliance in drugs manufacturing to the objective of enhancing global competitiveness. the issue of global competitiveness of the industry is still not rigorously addressed. however. The pharmaceutical industry has been identified as one of the most important knowledge based industries in which India has a comparative advantage. strategic alliances and investment. antihistamine. involves a comparative analysis of the Indian pharmaceutical industry in a cross‐ country setting and exploring its growth. foreign investment. exports. These challenges require a change in emphasis in the current pharmaceutical policy and the need for new initiatives beyond those enumerated in the Drug Policy 1986. so that policy inputs are directed more towards promoting accelerated growth of the pharmaceutical industry and towards making it more internationally competitive. vitamin. Chennai (in Tamil Nadu). The nascent industry. let us make an attempt to put the performance of the sector in a global setting. Most of the recent studies on Indian pharma industry deal with the impact of economic liberalization and new global intellectual property rights (IPR) regime on industry performance like R&D and patenting. etc. Kasauli (in Himachal Pradesh).” Against the above backdrop of increasing attention of the policy makers on global competitiveness of the Indian pharmaceutical sector. in turn. The need for radically improving the policy framework for knowledge‐based industry has also been acknowledged by the Government. etc. as modified in 1994. Central Drug Research Institute. Coonoor (in Tamil Nadu). the globalization of the world economy and on account of new obligations undertaken by India under the WTO Agreements.The phenomenal progress made by the industry over the last three decades has instilled a strong belief in the government and the pharmaceutical companies in India that the country has a competitive strength and it should be enhanced by suitable policy measures and firm‐specific actions with regard to export. How does Indian pharma industry perform in a global setting? This issue. hormones. antibiotics. through British initiatives. productivity. This culminated in the discontinuation of local production based on indigenous materials Page | 43 . tranquilizers. Pastures Institute. technology and trade performance vis‐à‐vis global peers in the sector and an analysis of new competitive strategies that Indian firms are adopting to compete in the global market. The introduction of the Policy says: “The basic objectives of Government’s Policy relating to the drugs and pharmaceutical sector were enumerated in the Drug Policy of 1986. psycho pharmacological substances. The Prime Minister’s Advisory Council on Trade and Industry has made important recommendations regarding knowledge‐based industry. innovation. the drug and pharmaceutical industry in the country today faces new challenges on account of liberalization of the Indian economy. received setbacks in the post World War II period as a result of new therapeutic developments in the Western countries that triggered natural elimination of the older drugs from the market usage by newer drugs like sulpha. However.2 Evolution of Indian Pharmaceutical Industry The pharmaceutical production in India began in 1910s when private initiatives established Bengal Chemical and Pharmaceutical Works in Calcutta and Alembic Chemicals in Baroda and setting up of pharmaceutical research institutes for tropical diseases like King Institute of Preventive Medicine. and drugs prices and public health. These basic objectives still remain largely valid.

The enactment of the Indian Patent Act (IPA) 1970 and the New Drug Policy (NDP) 1978 during this stage are important milestones in the history of the pharmaceutical industry in India. were averse to local production and mostly opted for imports from home country as working of the patent. the government decided to intervene through starting public sector enterprises. (IDPL) plants at Rishikesh and Hyderabad in 1961 and the Hindustan Antibiotics at Pimpri. This led to the establishment of the Indian Drugs and Pharmaceuticals Ltd. in 1954 to manufacture penicillin. enjoying a strong patent protection under the Patent and Design Act 1911. The IPA 1970 brought in a number of radical changes in the patent regime by reducing the scope of patenting to only processes and not pharmaceutical products and also for a short period of seven years from the earlier period of 16 years.2. The second growth stage of the industry took place in the 1970s. It also recognizes Page | 44 .1 The Stages of Growth Figure 18: Stages of Growth of the Indian Pharmaceutical Industry In the post‐independence period.and forced the industry to import bulk drugs meant for processing them into formulations and for selling in the domestic market. Indian pharmaceutical industry exhibited four stages of growth. Pune. In the first stage during 1950s–60s. 3. Given the inadequate capabilities of the domestic sector to start local production of bulk drugs and hesitation of foreign firms to do so. The starting of the public sector enterprises has been an important feature in the evolution of the pharmaceutical industry as it assumed initiative roles in producing bulk drugs indigenously and led to significant knowledge spillovers on the private domestic sector. the industry was largely dominated by foreign enterprises and it continued to rely on imported bulk drugs notwithstanding its inclusion in the list of ‘basic industries’ for plan targeting and monitoring. Foreign firms.

Otherwise were required to reduce their foreign ownership holding to 40 per cent. New foreign investments were to be permitted only when the production involves high technology bulk drugs and formulations thereon. The enactment of the process patent contributed significantly to the local technological development via adaptation. orals and injectibles and so on. The production of bulk drugs and formulations have grown at very high rates and the share of bulk drugs in total production has gone up to 19 per cent in 1999–2000 from a low of 11 per cent in 1965–66. liquids. The third and the final one. This stage has also witnessed dramatic changes in the policy regime governing the pharmaceutical industry. 100 per cent foreign investment is permitted under automatic route. capsules. In the third stage of its evolution.compulsory licensing after three years of the patent. In 1991. started a new chapter in the history of Indian pharmaceutical sector where free imports. domestic companies innovated cost–effective processes and flooded the domestic market with cheap but quality drugs. Foreign ownership up to 74 per cent under the Foreign Exchange Regulation Act (FERA) 1973 was permitted to only those firms producing high technology drugs. India has carried out three Amendments in March 1999. thus. The Indian pharmaceutical industry is looking at this era of globalization as both an opportunity and a challenge. 2005 came into force on 4th April 2005 and introduced product patents in drugs. The trade deficits of the seventies have been replaced by trade surpluses during 1980s (See Table). The NDP 1978 has increased the pressure on foreign firms to manufacture bulk drugs locally and from the basic stage possible. known as the Patents (Amendment) Act. 1998). June 2002 and April 2005 on the Patent Act 1970 to bring Indian patent regime in harmony with the WTO agreement on Trade Related Intellectual Property Rights (TRIPs). Page | 45 . domestic firms have emerged as the main players in the market with about 70 and 80 per cent market shares in the case of bulk drugs and formulations respectively (Lanjouw. The term of patenting has been increased to a 20 year period. This led to the steady rise of the domestic firms in the market place. These had a lasting impact on the competitive position of the domestic firms in the national and international markets. The outcomes of the strategic government interventions in the form of a soft patent policy and a regime of discrimination against foreign firms affected the industry with a time lag and provided strong growth impetus to the domestic sector during 1980s. The industry turns out to be one of the most export‐oriented sectors in Indian manufacturing with more than 30 per cent of its production being exported to foreign markets. The growth momentum unleashed by the strategic policy initiatives continued in the fourth stage of the evolution of the industry during 1990s. domestic enterprises based on large‐scale reverse engineering and process innovation achieved near self‐sufficiency in the technology and production of bulk drugs belonging to several major therapeutic groups and have developed modern manufacturing facilities for all dosage forms like tablets. reverse engineering and new process development. The licensing requirement for drugs has been abolished. and the scope of price control has been significantly reduced. foreign investment and technological superiority would determine the trade patterns and industrial performance. food and chemicals sectors. As there exits several ways to produce a drug. These changes in the policy regime in the 1990s. Foreign firms that are simply producing formulations based on imported bulk drugs were required to start local production from the basic stage within a two year period.

Table 5: India’s Trade in Pharmaceutical Products. 1970–71 to 1999–2000 Page | 46 .

An industry doing very well in the international market suggests that it is scaling up its supplier position vis‐à‐vis other competitors and in fact possesses a strong comparative advantage in the product. a comparison of the level of innovation can also. The export market share and import coverage of the export (i. Hence. This is especially true in the case of knowledge‐based industries like pharmaceuticals. The relevance of government policy continues to be critical even in an era of liberalization and this holds for knowledge‐ based industries in developing countries. 3. A stronger growth performance exhibited by a particular industry in cross country comparisons indicates rising level and strength of production. The present section looks into the trends in above mentioned indicators to examine the global competitive strength of the Indian pharmaceutical industry. In order to achieve a relatively higher growth performance among countries.3 Growth and Relative Size The Table below provides a picture of growth performance among eighteen selected countries in the pharmaceutical sector since late 1970s. the government promotion of local technological activities through fiscal or other incentives is always needed when free market forces are not capable of scaling up the developing country’s capabilities in high technology intensive industries. This view is known as the strategic trade theory in international economics. The growth rate of global pharmaceutical value‐added has consecutively slowed down and has fallen from an estimated rate of 25 per cent in 1980–85 to 18.74 per cent in 1990–95 and further to 15. One simple way is to compare the relative size and growth performance in value‐added. an assessment of the competitiveness of Indian pharmaceutical industry is presented. In what follows. one country in the particular sector is required to produce relatively more output per input combination over time and among competing countries.2 Comparative Analysis of the Competitive Strength of the Indian Pharmaceutical Industry With the arrival of global patent regime and widespread liberalization measures at the individual country. the issue of competitiveness is critical for understanding the strengths and weaknesses of a country in the global market place. bilateral.2.e.3. Most of the studies on cross– country and industry level comparisons of competitiveness also emphasized on the productivity level. Innovation is an important source of cross–country differences in the productivity performance. Once it is known where a country lacked in competitiveness vis‐à‐vis others. regional and multi‐lateral levels.8 per cent in 1995–2000. The strategic government policies can have a long‐ term impact on the growth and structure of an industry. to a certain extent. then the concerned government can take facilitating policy measures to address the inadequacy. Page | 47 . measure the competitive strength of the sector. For example. which may drive the sector to emerge as a global player. import to export ratio) are also important indicators of competitive strength. The competitive strength of an industry in the global market can be seen in several ways.2.

standing as the third largest growing pharmaceutical industry amongst the selected countries. Dr Reddy and Cipla to market their own formulations after obtaining US‐FDA approval. As a result of the consistently higher growth performance in the last two decades. 1975–2000. from 3. there are ten countries surpassing India’s growth performance.79 per cent to become Page | 48 . PPP $ Source: Central Statistical Organization Given the absence of blockbuster innovations in the last two decades. It has grown at a phenomenal rate of 41 and 28 per cent per year during 1990–95 and 1995–00 respectively. Indian pharmaceutical sector turns out to be one of the fastest growing industries in the global market place. In 1980–85. The rapid rise of India in the late 1980s can be partly attributed to the suitable policy measures including a soft patent regime that the Indian government adopted during 1970s and partly to the growth of generic segment in world pharmaceutical market following the off‐ patenting of a number of drugs in the late 1990s. it is logical to expect a downward trend in the growth performance of the technology‐driven pharmaceutical sector. India’s share of value‐added nearly doubled between 1980 and 2000. Contrary to the slow‐down of the global trends. the size of Indian pharmaceutical industry has increased impressively with significant gains in the share of world pharmaceutical value‐added. The off‐patenting phenomenon helped many Indian firms enter the generic‐space of international market with their own cost‐effective processes and the rise of a few Indian companies like Ranbaxy. which has fallen to only three countries in 1985–90 and just two in 1990–2000.Table 6: Growth of Pharm Industry in India vis-à-vis in other countries.

11 per cent. Finland. Indian pharmaceutical industry has achieved a high level of growth performance and a scale that is comparable to the global peers. 36 times the size of Norway and 10 times the size of Australia! It is even larger than the combined size of Austria. In the year 2000. The size of Indian pharmaceutical industry is estimated to be about PPP $ 11508 million in 2000. which is about 43 times the size of Austria. Canada. Denmark. The Indian pharmaceutical sector has experienced high rates of productivity growth in 1990s as compared to its performance in 1980s. How did the Indian pharmaceutical sector perform as compared to others in terms of productivity? Page | 49 . the industry generated about PPP $49242 of value‐added per unit of labour. Netherlands and Norway! The size of the Indian pharmaceutical industry would have been even much larger since the unorganized segment of the industry has not been taken into account in the study.2. Those countries that produce increased value‐added per unit of inputs overtime vis‐à‐vis other countries are sure to perform better in the international market. which is more than four‐times the value added generation in the year 1980 (PPP $10660). Belgium. Therefore.7. Productivity is a key determinant of competitiveness. Figure 19: Size of Indian Pharma Industry and its share in global pharmaceutical value added Source: Based on Table 6 3.4 Productivity The relatively rapid growth of output may not be sufficient to ensure competitiveness of a country in the long run unless there is sustained increase in the efficiency with which resources are employed in value‐added activity. especially in a technology‐intensive industry like pharmaceuticals.

Page | 50 . The relative productivity of India in relation to the US has fallen to PPP $19 in 1985 and remained stagnant between 1990 and 1995. It should be mentioned that low labour productivity of India as compared to the US does not necessarily reflect that India is sliding on the path of global competition since higher value addition in the US reflect higher compensation to labour and capital in the form of higher wages to skilled labour and charging higher profit margins and taxes on capital. In India. The series on relative labour productivity presented in Table 7 suggests that for each PPP $100 of the value‐added that USA generated per person employed in 1980. The fragmented nature of Indian pharmaceutical sector characterized by the operation of a very large number of players. India could generate only about PPP $26. This low productivity performance of India in comparison to global peers suggests that the country has to improve the quality of innovation. domestic companies are known to have lower profit margin because of charging lower prices for drugs and Indian skilled manpower works at much lower wages than what their counterparts get in the US. may be a reason for low level of productivity. which tends to rely more on process than product development. Table 7: Labour Productivity in Pharmaceutical Industry.It appears that relative productivity of Indian pharmaceutical sector is one of the lowest in the world and continued to be so between 1980 and 2000. The other important factor for low productivity can be due to the nature of technological activities in the sector. PPP $ Source: Central Statistical Organization. This shows that India’s impressive growth in value‐added as observed in the previous sub‐section is not accompanied by a commensurate rise in the level of relative productivity in terms of the cross–country analysis. Addressing these factors is very important for enhancing India’s global competitiveness. ahead of an improvement to reach PPP $23 in 2000. Further. estimated to be about 10.000 units of which just 300 units are medium and large‐sized. it may be that Indian companies are focusing at the low end of value‐chains in the pharmaceuticals like producing generics than opting for branded products or supply bulk drugs to global players than market formulations of their own. scale and focus on high value added segment of pharmaceutical production. Annual Surveys of Industries.

the research activities in the sector are quite limited and inadequately focused on development of new drugs. They have shown that technological development measured by patent and R&D expenditures have significant impact on the trade performance of the countries. expanding global position would be difficult. the extent and nature of innovation is crucial for countries to prolong their productivity growth and competitiveness in the long run. The pharmaceutical industry being one of the most technology‐ intensive industries. The relative R&D spending of India in terms of the US spending has gone up to PPP $4 and 80 cents in 2000. The Indian pharmaceutical R&D has grown by 17 per cent during the period 1987–91. India turned out to be second highest R&D growing pharmaceutical sector among the selected countries. the percentage of the value‐added devoted for the R&D activities. production process. However. India’s R&D relative to the US is also observed to be increasing. Indian pharmaceutical sector had incurred just PPP $2 and 40 cents. there is a vast gap in the amount of pharmaceutical R&D expenses undertaken by the US and India. its R&D spending is not even one per cent of the value‐added and is the lowest in the cross‐ country comparison. For each PPP $100 worth of R&D expenditure incurred by the US pharmaceutical sector in 1990. First. Page | 51 . self‐reliance in producing quality raw materials and production led by quality management. Indian pharmaceutical industry as compared to global peers incurs a very small fraction of its value‐added for research and innovative activities. Table 8 presents the growth rates of pharmaceutical R&D in selected countries. discovery in novel drugs delivery system.1 per cent firms undertake R&D. which is even less than 1 per cent of their sales in the year 1999–2000. A recent study found that in a sample of 223 firms.2. both medium and small‐sized. Using R&D as an indicator of technological activities.3 per cent of firms are not engaged in innovative activities and another 21. these technological strengths are confined to a few large Indian pharmaceutical companies.5 Innovation Several studies on the economics of technological change and technology gap approach to international trade have brought out that growth performance and competitive advantages of countries go together with their activities of technological innovation and imitation. Two important points can be deduced from it. Moreover. Although. In broad terms the process of technological change can occur through improvements in the products. for a group of countries is furnished in Table 9. Unless the sector sets aside an increasing proportion of its value‐added for the R&D activities over time and across countries. raw material and intermediate inputs. In 1990. the relative gap in R&D spending is falling modestly over the years. Indian domestic pharmaceutical companies are known for their innovative cost‐effective processes. As the Indian industry is dominated by a large number of companies. It can be seen that India had consistently pushed up its pharmaceutical R&D expenses since 1987. In the period 1997– 2001. and through enhancements in the efficiency of the management system. Majority of the Indian companies suffered from limitation of financial. This high growth rate of India in pharmaceutical R&D seems to be due to the low base of pharmaceutical R&D in the base years. technical and skill resources to undertake any kind of R&D activities.3. about 62. The growth rate has gone up to 26 and 83 per cent over the periods 1992–96 and 1997– 2001 respectively. The growing trends of R&D expenses may be a good sign but not a sufficient condition to ensure a rising competitiveness for Indian pharmaceutical sector. The R&D intensities.

Italy and matches that of Spain. Between 1990 and 2000. Indian pharmaceutical industry has significantly improved its R&D intensity in the 1990s. In 2000. STAN Database 2004 Page | 52 . 1987–2000.Second. 1987-2001 Table 9: Pharmaceutical R&D Intensity (%). its R&D intensity has increased by more than nine times from 0. the R&D intensity of India is higher than that of Korea. PPP $ Source: OECD R & D Expenditure in Industry database.7 per cent.91 per cent to 8. Table 8: Growth of Pharmaceutical R&D. PPP $ Source: OECD.

Figure 20: India’s Performance in Pharmaceutical Exports. which have consistently enjoyed favourable trade balance in pharmaceuticals. China. of Korea. irrespective of its impressive export growth rates. Malaysia. Sweden. Argentina. India’s 44 per cent growth rate is higher than that of the US. In fact. Brazil. Thailand. India’s recent export growth rate has not yet translated into gains in export share as India’s growth performance is much lower when compared to the 60 per cent growth rate of world pharmaceutical exports during 2000–2004 and also its contribution to the global sum is minimal.2. nearly five times the figure pertaining to 1990. during 1990–2004 (Table 10). Portugal. However. in $ mn and per cent Although. South Africa. Italy. Mexico. The exports have consecutively achieved higher growth rates.2 billion. it is hovering around 1 per cent of market share. Rep. i. Indonesia. Germany. India’s trade surplus in the pharmaceutical product has increased by eight‐times between 1990 and 2004 from a low of US $195 million to $1616 million. India is far from significantly increasing its global export share. Singapore and Hong Kong. India’s share in the global pharmaceutical exports has not shown any improvement. 23 per cent in 1995–99 and 44 per cent in 2000–04.75 in 1990 to 3. Denmark. 1995–99 and 2000–04.6 Trade Performance Table 10 and figure 20 show the pharmaceutical exports of India and its growth rates over the periods 1990–94. It can be observed that India has increased its pharmaceutical exports at a rapid pace in the 1990s. France.e.4 in 2004. UK. The total pharmaceutical exports in 2004 stood at US $2. These countries are Switzerland. As a consequence of rising trade balance.3. In relation to a group of selected twenty‐nine countries. 14 per cent in 1990–94. Japan. the export to import ratio has increased from 1. Page | 53 . India is much ahead of fifteen countries in terms of growth performance in pharmaceutical exports during 2000–04. India and China. exporting more than the amount being imported. it belongs to the selected group of eight countries.

After identifying strategic markets across the globe.Table 10: Trade Balance in Pharmaceuticals Source: Based on the UN COMTRADE Database. 2006. Their business decisions are increasingly driven by global market orientation for their products. For example. research and marketing can also be beneficial for Indian companies to expand their global operations. acquiring overseas business enterprises with new product portfolios.7 New Global Strategies of the Indian Pharmaceutical Enterprises Competitive advantages of the Indian pharmaceutical industry also critically hinges upon the types of global strategies adopted by its firms. In the last decade. the business strategies of Indian pharmaceutical companies with respect to the overseas market have undergone significant changes. 3. Internationalization in the form of strategic collaborations with global pharmaceutical companies from developed countries for contract manufacturing.2. business location and sourcing of raw materials and intermediates inputs. as large number of Indian pharmaceutical firms lack technological capabilities for product development. they adopted a variety of global strategies for enhancing their market Page | 54 . Internationalization strategy that tends to complement and upgrade the technological strength of Indian pharmaceutical companies can be very crucial for sustaining and enhancing their competitive position in the world market. technology and skills can allow them to emerge as global players.

position like undertaking direct investment for Greenfield projects and overseas acquisitions, tapping foreign securities and capital markets, entering into contract manufacturing with global players, strategic alliances, apart from the traditional method of exporting. Various segments of value‐added activities of Indian pharmaceutical firms like manufacturing, distribution and marketing, R&D, are now being coordinated and formulated according to considerations of global geographical advantages and worldwide business environment. In this section we look at these global strategies that the Indian pharmaceutical companies have adopted to expand their operations globally. 3.2.7.1 Outward Greenfield Foreign Direct Investment A growing number of Indian pharmaceutical firms are undertaking outward FDI to diversify their business overseas. The number of joint and wholly‐owned ventures undertaken by Indian pharmaceutical companies has consistently increased from just 1 in 1990 to a peak of 31 in 1997 (Table 11). Between 1990 and 2000 their total numbers stood at 165 joint and wholly‐owned overseas ventures involving about $243 million. The number of outward investing firms has increased from 1 in 1990 to 11 in 1995 to 14 in 2000. A total of 52 pharmaceutical firms are observed to have been engaged in overseas green field investment activities during 1990–2000. It is interesting to note that outward FDI activity of Indian pharmaceutical industry is not entirely confined to the large‐sized firms alone. Rather a number of medium‐sized firms like Parenteral Drugs, Ace Laboratories, Max India, Claries Life Sciences, Gufic Ltd., etc., are also active in such overseas investment activity. However, the top fifteen largest outward investors from Indian pharmaceutical industry are large‐sized pharmaceutical companies. Geographically, developing countries are the major host of outward investments accounting for 55.2 per cent of the total number of outward FDI projects during the period 1990–2000. Developed countries claimed about 37.6 per cent and Central and Eastern Europe countries a share of 7.3 per cent.
Table 11: Wholly‐owned and Joint‐ventures by Indian pharma companies abroad, 1990-2000

Note: * Total number of firms that have undertaken O‐FDI at least once between 1990 and March 2001.

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Source: i. Indian Investment Centre (1998) Indian Joint Ventures & Wholly owned Subsidiaries Abroad Approved during the year 1996, New Delhi; ii. Indian Investment Centre (1998) Indian Joint Ventures & Wholly owned Subsidiaries Abroad Approved up‐to December 1995, New Delhi; iii. Unpublished firm level outward investment data collected from the Ministry of Finance through Research and Information System (2002), New Delhi.

3.2.7.1.1 WOCKHARDT LIMITED It turns out to be one of the aggressive outward investors among the Indian pharmaceutical firms. It has identified generics and bio‐generics as important future growth strategies and has adopted outward investment in greenfield and brownfield forms to achieve them. The company, at the end of 2004, made its presence felt in the leading and emerging markets of the world via its seven subsidiaries (Table 12). In 2004, more than 50 per cent of the consolidated sales of the company came from overseas markets, namely the USA and Western European markets. The consolidated sales from these markets have increased by more than 55 per cent to Rs. 6239 million in the year 2004 from Rs. 1426 million in the year 20038. The European operation of the company is undertaken by Wockhardt UK Ltd. in the UK and esparma GmbH in Germany—both are wholly‐owned subsidiaries. Wockhardt UK Ltd is the integrated and synergized entity of the two UK‐based companies, Wallis Laboratory and CP Pharmaceuticals, which were acquired by Wockhardt in 1998 and 2003 respectively. It is amongst the 10 largest generics companies in the UK and has US FDA‐approved manufacturing facilities for injectables such as cartridges, vials and ampoules (including lyophilized products). Wockhardt has adopted the same inorganic route to enter into Germany, the second largest generics market in Europe after the UK. It had acquired esparma GmbH in the year 2004 and gained a strategic and strong presence in the high potential therapeutic segments of urology, diabetology and neurology. The establishment of Wockardt USA Inc. is helping the company to strengthen its marketing networks in the US, apart from support for ANDA filings with a full fledged regulatory team.
Table 12: List of Subsidiaries of Wockhardt Limited

Source: Wockardt Annual Report 2004.

3.2.7.1.2 SUN PHARMACEUTICALS It is one of the top 5 pharmaceutical companies in India with strong manufacturing focus on speciality bulk actives of over 90 bulk drugs including ornidazole, iopamidol and iohexol and formulations. Its manufacturing facilities at four plants have US and European approvals for compliance with international good manufacturing practices, safety and quality. Like many other Indian pharmaceutical firms, overseas investment has been a key strategy for Sun Pharmaceuticalʹs drive for internationalization. Apart
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from exporting, the company has gone for overseas acquisition, greenfield investment and joint ventures to serve the international market. It has eight subsidiaries catering to the different regions of the international market (Table 13). Caraco Pharmaceutical Laboratories provided a presence of the company in high value generic markets in the US. Subsidiaries in Brazil and Mexico have recently been started to strengthen the company’s presence in the Latin American markets, besides commissioning a manufacturing facility in Bangladesh. Since 1996, the company has used overseas acquisitions to gain access to markets and manufacturing capabilities. It had acquired about 30 per cent equity in Detroit‐based Caraco Pharm Labs in 1997 and Hungarybased Valeant Pharmaʹs manufacturing operation in 2005, apart from several brand acquisitions. International sales account for about 28 per cent of the company’s total sales in 2005 (Table 15). Between 2004 and 2005, the international sales of the company have grown twice the growth rate of the domestic sales, suggesting increasing internationalization of the company. In this process of internationalization, overseas subsidiaries have played an important role. For example, the US sales of the company are increasingly driven by its subsidiary, Caraco Pharmaceutical Labs: “Increasing US sales at our subsidiary, Caraco, building on the advantage of backward integration, have helped it compete more aggressively in the competitive US generic market.” (Sun Pharmaceutical Annual Report, 2004–05, pp 2)
Table 13: List of Subsidiaries of Sun Pharmaceutical Industries Ltd.

Table14: Consolidated sales of Sun Pharma and Subsidiaries, Rs million

Source: Sun Pharmaceutical Annual Report, 2004–2005, pp. 2.

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It is supplying products to more than 70 countries. Tajikistan. located near Yangon. ointments and powders. tablets and penicillin capsules in Myanmar and Malaysia. injections.2. the production of intravenous (IV) fluid reached the one billion mark and the company had attributed this achievement to its international operations. The Myanmar plant is build for Government of Myanmar at the cost of $5 million. capsules. has planned an aggressive entry into international markets. In 1999.2.1. This has helped the company to access the international markets extensively and presently it exports to over 50 countries around Page | 58 . 3.1. other overseas ventures such as Ajanta Pharma (Tashkent). the company has set up a joint venture with Uzpharmprom in Uzbekistan for manufacturing IV fluids and tablets. the company could not improve its economic performance.7. Uzbekistan and Kyrgyz Republic. Tajik Ajanta Pharma. Subsidiaries in two countries such as Mauritius and Turkmenistan have world‐class manufacturing facilities with state‐of‐the‐art infrastructure to manufacture various dosage forms like tablets. In 2002.3 CORE HEALTHCARE LIMITED (CHL) Gujarat‐based Core Healthcare Limited (CHL). The financial strength of the company was severely hurt due to delayed and high‐cost of financing since 1996 and internal resources were not enough for meeting the high growth plan adopted by the company and also partly due to management concerns. The company has about 600 outlets across the country and has a 40 per cent market share in IV business. However. distribution network and quality of products. The company realized that outward FDI meant for producing in the foreign markets may not always be a profitable option of market serving. the company with its assets and liabilities was acquired by another company named Nirma Ltd.V. the company established two manufacturing plants for IV fluids. Rather outward FDI in the form of opening own marketing offices and trade supporting networks that ensure prompt delivery and follow‐up programs is helpful for exporting from the home country. The company with a view to expand overseas business operations has established an extensive marketing network in foreign markets. Surkhan Ajanta Pharma and Kyrgyz Ajanta Pharma have turned out to be non‐performing ventures and the company is in the process of exiting from all of them.4 AJANTA PHARMACEUTICAL Ajanta Pharmaceutical is another Indian company that has adopted outward investment as a strategy to improve its position in international markets. However. These are two subsidiaries that are performing well with profits and are expected to improve their performance substantially. majority of these outward ventures are directed at the CIS (Commonwealth of Independent States) markets such as Kazakhstan. leading manufacturers of intravenous (IV) fluids. Kazakh Ajanta Pharma. In December 2004.3. As a result. It is the first Indian pharmaceutical company to receive the ISO certification. Maintaining highest levels of quality and resorting to joint ventures with overseas strategic partners has been crucial for higher export performance.7. despite maintaining growth and emphasizing on internationalization. In 1997. the company emerged as one of the biggest bank defaulters companies and has been referred to the Board of Industrial and Financial Reconstruction (BIFR) in March 2000 to be declared as a sick unit. exporting more than 35 per cent of the total production. It has some eight transborder subsidiaries and joint ventures (Table 15). It provides the most modern healthcare facilities like high quality I. fluids and other pharmaceutical products in Myanmar. Geographically.

Since its beginning in 1990 as a small pharmaceutical company engaged in formulations. 3. It is one of the top five softgel capsule manufacturers in the world with twelve internationally approved manufacturing plants in USA. The company has established strong marketing capabilities overseas with marketing presence in 49 countries. 500 crore company and among top 15 pharmaceutical companies in India. a substantial part of its revenue is contributed by exports. the company has strongly gone for direct production overseas. As a result of the trade‐ supporting type of FDI that the company has undertaken in the past.5 STRIDES ARCOLAB LIMITED This company provides an example of a very young pharmaceutical company successfully expanding business in international market. During 2004–05. Table 15: Subsidiaries and Joint Ventures of Ajanta Pharmaceutical Source: Ajanta Pharma Annual Report 2003–04. Page | 59 . Strides Arcolab has grown to be a Rs.7. Brazil and India. Its manufacturing activities now cover a spectrum of ethical pharmaceutical products.the world with exports accounting a substantial part of the total revenues. It has about twelve overseas subsidiaries across the world (Table 17) and about 95 per cent of its global revenues is contributed by foreign markets (Table 16). In 2004–05 exports constituted about 80 % of the sales as compared to 72 per cent in 2003–04. This indicates that Strides is largely a multinational firm with business strategies and planning is more focused on global markets.2. OTC products and nutraceuticals. Mexico. exports accounted for about 92 per cent of sales of the company. Apart from undertaking exports and marketing activities.1.

pp 1. Table 17: Subsidiaries and Joint Ventures of Strides Arcolab Source: Strides Arcolab Annual Report 2003–04 Page | 60 . 2002–03 to 2003–04 Source: Based on Strides Arcolab Annual Report 2003–04.Table 16: Geography of Strides Arcolab’ Revenues.8.

Most of these acquisitions. Natco Pharma. This shows that overseas acquisition activities of Indian pharma companies are largely developed market oriented and apart from being as market entry strategy. The number of investments for overseas acquisitions increased significantly from just 1 in 1995 to 21 in 2005 (Table 18).2. As growing number of firms are undertaking this route of globalization. Between 1997 and 2005.9 million. Developing countries accounted for just about 18 per cent and Central and Eastern Europe about 5. are directed at developed markets like Europe and North America. such activities are motivated to acquire foreign research capabilities. Table 18: Overseas Acquisitions by Indian Pharmaceutical Companies. Dr. nearly 76 per cent of the overseas acquisition cases.5 million to reach $532.2 Brownfield Overseas Investment Last ten years or so have seen Indian pharmaceutical firms progressively adopting brownfield investment as an alternative strategy for trans‐border growth through acquisitions of business enterprises abroad. brands and R&D laboratories. this indicates that Indian pharmaceutical companies are more global now than ever before. Reddy. the amount of consideration involved in overseas acquisitions has increased by 71 times from just $7.6 per cent. Indian pharmaceutical companies have undertaken $1663 million worth of investments in acquiring overseas pharmaceutical companies.7. 3. and others who have pursued the strategy of greenfield outward investment to expand business globally.There are several other Indian pharmaceutical firms such as Dabur. At the end of March 2006. 1995 to March 2006 Note: In calculating amount of consideration only those acquisition deals are included for whom information on consideration is available. Page | 61 . skills and intellectual properties.

1995 to March 2006 Page | 62 .Table 19: Overseas Acquisitions by Indian Pharmaceutical Companies.

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besides generics in the Japanese market. The second acquisition in the year 2002 is liquid manufacturing facility from the New York‐based Signature Pharmaceuticals Inc. This brand acquisition is to further strengthen Ranbaxy’s presence in the German market by augmenting Basics’ cardiovascular product portfolio. the company acquired Basics GmbH. With the dual purpose of securing presence and augmenting existing product portfolio in Spain. the parent company of Nihon Pharmaceutical. Ranbaxy has acquired a generic product portfolio covering eighteen products from the Spanish pharmaceutical company Efarmes. a move by the company to expand its European position through France. the generics business of Bayer in Germany for a consideration of $4 million. entered into a strategic alliance to launch Ranbaxyʹs ethical and drug delivery system based products. Ranbaxy acquired France’s fifth largest generic player. OPIH SARL. This acquisition. As a part of this acquisition. This is an important strategy since the company entered the US market in 1994. This acquisition has helped the company to significantly improve its ability to provide a wide range of quality generics belonging to the cardio vascular system (CVS). the company acquired Ohm Laboratories based in New Brunswick.1 RANBAXY LABORATORIES Ranbaxy emerged as the largest overseas acquirer with 11 acquisitions during 1995– 2006 (Table 19). Ranbaxy and Nippon Chemiphar Limited (NC). In March 2006. In September 1995. The second one concerns with the company’s entry strategy into the Italian generic market. The third acquisition in the year 2002 is that of acquiring 10 per cent equity stake in a generic company named Nihon Pharmaceutical Ltd in Japan. the deal has expanded its product portfolio by another twenty products hitherto marketed under Basics.7. trademarks and equipment used for the self‐administration of medicines from the US company Senetek. Apart from Ranbaxy’s entry into the third largest generics market of the globe. has placed it amongst the top generic companies in the French market. It has acquired Veratide. RPG Aventis and its subsidiary. The first overseas acquisition is a strategy of acquiring firm‐specific intangible assets for autoinjector business. research and quality assurance capabilities is a strategic fit for Ranbaxy’s business in the US for the production of certain liquid‐based dosage forms. It also added to Ranbaxy’s product portfolio by another 52 molecules of which 18 are among the 20 best selling molecules in the French market. In December 2003. Ranbaxy announced four overseas acquisitions.3. branded and generic products and helped in developing its presence in the US OTC market. In April 2000. Ranbaxy acquired patents. The Page | 65 . The year 2002 saw three overseas acquisitions by Ranbaxy. This manufacturing facility with its latest testing. for $86 million20. This acquisition provided Ranbaxy’s access to advanced manufacturing capabilities and processes to manufacture quality OTC (over-the‐counter) drugs. New Jersey. namely patents for autoinjector device of Senetek.2. an antihypertensive brand from Procter & Gamble Pharmaceuticals in Germany. unbranded generic business of Allen SpA. Terapia and Ethimed NV.2. SA. central nervous system (CNS) and pain management segments.

Ranbaxy’s product portfolio has been expanded by Terapia’s product basket of 157 marketing authorisations with a strong focus on the fast growing CVS. besides one manufacturing facility. its products are registered in 12 other countries in South America. this acquisition would provide Glenmark an existing presence in branded generics and over‐the‐counter (OTC) drugs segment of the Brazilian market.7. would provide a strong manufacturing and marketing base for Ranbaxy to expand business operations in the Benelux countries. which would allow Ranbaxy to leverage its new found production base in the Romanian pharmaceutical market to strengthen its presence in the European Union and the CIS markets.6 million in March 2005. it has acquired about 30 per cent equity stakes in Detroit‐based Caraco Pharm Labs in 1997. The acquired company is engaged in manufacturing and marketing of generic‐drugs. a South African sales and marketing company. Subsequently additional stakes were obtained in 2002 and 2004. In August 2004. Initially. Of the five acquisitions done by Glenmark Pharmaceuticals.acquisition of unbranded generic business of Allen SpA.2.7. ensures Ranbaxy’s access to the Italian market. 3. Laboratorios Klinger. The acquired company has a strong retail and hospital presence in Argentina and apart from Argentina. and the hormonal brand.2. for $5. With 21 approved product registrations in Brazil. which is one of the largest and fastest growing pharmaceutical markets in Africa. a division of GlaxoSmithKline.3 million as compared to $2. To enter the lucrative US generic markets. The fourth acquisition is in continuation of the company’s strategy to strengthen its global position in the generic market. for gaining entry into the South African market. In April 2004. The acquired entity has manpower of 176 employees and 91 sales representatives. its loss was $9. The third acquisition involved the two low cost manufacturing capacities of Terapia. With a plan to expand business in the Argentine pharmaceutical market.14 per cent. Glenmark acquired a Brazilian firm. two are brand acquisitions and other three involve acquisition of manufacturing/marketing companies. The acquired entity currently has a basket of 22 products mostly covering the dermatology segment and this acquisition would help the long‐term strategy of Glenmark to emerge as a company having its own marketing channels for drugs. to increase the total holding to about 63. Uno‐Ciclo. In 1999. among top ten Belgium generics companies. The development expenses incurred by Caraco to get Sunʹs generic drugs into the US market constitute a substantial part of this loss. Glenmark acquired Bouwer Bartlett. one of the fastest growing markets in Europe. Page | 66 . 3. Glenmark has acquired a marketing company Servycal SA engaged in cancer‐related products. CNS & musculoskeletal therapeutic segments. As a part of this deal.2.89 million sales. In December 2005. from Instituto Biochimico Indústria Farmacêutica Ltda for $4.2. The company acquired two FDA approved products from Clonmel Healthcare Ltd.3 SUN PHARMACEUTICAL Sun Pharmaceutical has undertaken five overseas acquisitions between 1997 and 2006 (Table 19). this US strategy seems to have been costly for Sun Pharmaceutical as Caraco generated large losses as compared to revenues. The acquisition of Ethimed.2 million.2 GLENMARK PHARMACEUTICALS Glenmark Pharmaceuticals emerged as the second aggressive overseas acquirers from Indian pharmaceutical industry with five overseas acquisitions each.

The Pharma companies are going for compliance with International regulatory agencies like USFDA.4 million. the industry for clinical trials in India was $ 70 million. the company bought Valeant Pharma’s Hungarian manufacturing facilities in August 2005. This constitutes a total potential of $14. According to experts.5 billion by 2010. brands and production capabilities abroad.2.8bn for the Indian pharma companies. twenty‐four months later. Malladi Drugs. Ohio. This suggests that Indian pharmaceutical firms are aggressively pursuing mergers and acquisitions route to become global players by acquiring new technology. The deal also includes intellectual property for 40 product portfolio being marketed by Able. of which the non-clinical segment accounts for $21bn and the clinical segment accounts for $39bn. for their manufacturing facilities. Caraco’s sales grew by 24 per cent. This market is growing at a rate of 20% per annum. In November 2005. Jubilant Organosys and Stides Arcolab with four acquisitions each (Table 19).3. it has also bought a dosage form plant at Bryan. move into new areas and boost its global operation.2. Aurobindo Pharma. The global R&D spend is to the tune of $60 billion. have emerged as other important overseas acquirers. from US‐based Womenʹs First Healthcare for about $5. with three acquisitions. this US story was a bigger success. which enjoy much lower costs (both capital and recurring) than their western counterparts. it will be an industry worth anywhere between $500 million to $1. Natco Pharma. This is impressive since the market is witnessing severe price erosion and the sales of other Indian players in the US like Ranbaxy and Dr Reddy’s has fallen sharply. Dishman Pharmaceuticals and Matrix Laboratories have undertaken two overseas acquisitions while other firms like Kemwell. Page | 67 . Sun Pharmaceutical purchased three brands belonging to synthetic anti‐bacterial Bactrim.3 Contract Manufacturing and Strategic Alliances 3.7.7. owing to Sun’s products during the first half of 2005–06. These acquisition strategies of manufacturing plants. Sun Pharma acquired the dosage form manufacturing operations of the US‐based Able Laboratories for $23.1 Contract Research In 2002. MCC etc. 3. In September 2004. In the same month.4 OTHERS The next group of aggressive overseas acquirers includes three Indian Pharmaceutical firms. Suven pharmaceuticals.3.8 bn (at 1/5th of US/EU costs) repectively. Torrent Pharmaceuticals.15 million. Many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA. Nicholas Piramal India and Wockhardt. brands and intellectual properties have helped the company to quickly establish its presence in the new market.2. Marksans Pharma. As a part of its strategy to enter the European generic market. double the growth rate of the US generics market.However. this translates into $7bn (at 1/3rd of US/EU costs) and $7. gynaecological Ortho‐Est and the anti‐migraine preparation Midrin. 3.2 Contract manufacturing Many global pharmaceutical majors are looking to outsource manufacturing from Indian companies.2.7. In terms of Indian prices. 3. namely Dr Reddyʹs Laboratories.7.2. Unichem and Zydus Cadila have one overases acquisition each.

Ranbaxy Laboratories announced a strategic marketing alliance with Mallinckrodt Baker Inc (MBI). expertise in process research and easy availability of qualified workforce in India are better placed globally to get real boost from this global trend of outsourcing. Malaysia.2. Shasun Chemicals and Jubilant Organosys. The agreement also provides for joint development of other controlled release products. marketing and distributing Ranbaxyʹs New Chemical Entity RBx‐2258 for the treatment of Benign Prostate Hyperplasia in USA. Schwarz Pharma AG of Germany announced a licensing deal with Ranbaxy to acquire the exclusive rights of developing. The process of outsourcing brings substantial economic gains to large global firms as they contract the production of their products to those who can work cost effectively and qualitatively and thus relieve them to focus on their core competencies and high value‐added operations like research and marketing. but also access to new technologies. licensing and collaborative research to strengthen its competitive strength in India and overseas markets. in India. In June 2002. to market MBI JT Baker and Mallinckrodtʹs range of scientific laboratory products in the Indian market. Philippines. Lupin Labs. Diviʹs Laboratories. Thailand. Dishman Pharmaceutical. In 2002 Ranbaxy entered into two overseas agreements for reverse outsourcing. USA. As per the agreement Ranbaxy would manufacture and supply finished formulations of the product to Schwarz Pharma. A few names can be mentioned like Ranbaxy Laboratories. Nicholas Piramal. marketing networks and best business practices abroad. South Africa. Page | 68 . Indian pharmaceutical companies with their low cost manufacturing capabilities meeting international regulatory standards. Another collaborative research agreement with GlaxoSmithKline of UK for new drug discovery and development of new chemical entities for selected therapeutic groups using GSKʹs portfolio of patented molecules was reached in October 2003. data management and laboratory services to global pharmaceutical companies. 3. Matrix Laboratories. clinical trials. A collaborative research agreement was reached between Ranbaxy and ‘Medicines for Malaria Venture’ (MMV) of Geneva to develop anti‐malarial drugs in May 2003.1 Ranbaxy Laboratories was one of the first Indian companies to adopt the strategy of contract manufacturing. and Sri Lanka and non‐exclusive rights in Mexico. besides offering contract services like marketing. research.Very recently contract manufacturing emerged as a new growth strategy for many Indian pharmaceutical companies. outsourcing and strategic alliances not only provide additional sources of revenues.7. In February 2002. It entered into a joint venture with Eli Lilly of USA in 1992 to market selected Lilly products in India and in 1993 Eli Lilly started sourcing Cefaclor intermediates from Ranbaxy. A large number of Indian companies diversified into the business of contract manufacturing in the 1990s. Ranbaxy Laboratories concluded an agreement with Penwest Pharmaceuticals of USA to get exclusive marketing rights of Nifedipine XL in selected markets such as China. Singapore. In June 2004 Ranbaxy obtained an exclusive licensing agreement from Atrix Laboratories to develop and commercialize the latter’s product.3. Adcock Ingram formed a joint venture with Ranbaxy to obtain exclusive selling and distributing rights of Ranbaxyʹs range of anti‐retroviral products in South Africa. Eligard® (leuprolide acetate for injectable suspension). For Indian firms. Japan and Europe. In July 2003.2.

whereby the latter will exclusively distribute Lupin’s generic version of ceftriaxone sterile vials for injection in the USA market. Lupin Laboratories is also an early player into the business of contract manufacturing and alliances. signed a development and know‐how agreement with Nicholas Piramal. Lupin entered into a joint venture agreement with Aspen Pharmacare Holdings of South Africa for the development. Jordan. Under this agreement.3. Syria. These cases show that Indian pharmaceutical firms like Lupin with their extensive sales networks and sales force in the overseas markets are entering into marketing agreements with global firms to market the latter’s products. In another agreement in the same year with Allergan Inc of the US. In November 2005. As per the deal.3 Page | 69 . Sweden. Nicholas Piramal will develop processes for Pfizer. anti‐ glaucoma active pharmaceutical ingredients. Lupin will promote Atopiclair™ Nonsteroidal Cream to paediatricians in the US. The year 2004 has seen Nicholas Piramal entering into strategic alliance with Pierre Fabre of France to exclusively sell the latterʹs dermatology‐related or skincare products in India and getting two new custom manufacturing agreements from two US drug companies.2. 3.3. Nicholas Piramal got a five‐year outsourcing deal from Advanced Medical Optics Inc. In December 2003. In December 2005. Sudan. Kenya. of the US. active ingredients or bulk drugs for supply to AstraZeneca.7.7. In March 2006. Ukraine. Nicholas Piramal is chosen as a partner in development of processes for the manufacture of intermediates. Nicholas Piramal India is among the leaders in the contract‐research and manufacturing providers from the Indian pharmaceutical industry. Enflurane and Sevoflurane in Russia. In February 2004. One contract deal is from Allergan Inc of the US to whom Nicholas Piramal would supply two eye‐related. The company’s strategies of not infringing upon the intellectual property rights of its customers and competitors and of not entering into the lucrative overseas generic markets.3. This joint venture is motivated to derive synergies from Lupin’s strengths in Anti‐TB formulations and Active Pharmaceutical Ingredients and Aspen’s a range of MDR‐TB products.2 Starting with the experience of contract supplying a key intermediate for the tuberculostatic ethambutol for American Cyanamid. Eygpt and Bangladesh. Europe and Japan. a long‐term contract manufacturing agreement between Pfizer International LLC and Nicholas Piramal was signed for animal health products. South Africa & India) of selected Anti‐TB products. namely Levobunolol and Brimonidine. which are expected to add $30 million revenues per annum.2. Lupin entered into an agreement with Baxter Healthcare Corporation of the USA. In February 2006. namely Isoflurane. in a marketing agreement with Chester Valley Pharmaceuticals. Nigeria. Nicholas Piramal will supply the opthalmic products to the American company for developed markets like the US. Nicholas Piramal through its distributors and marketing agents would market three products. Iran. AstraZeneca AB. manufacture and global marketing (except US. Lupin will promote ZymarTM (gatifloxacin ophthalmic solution) in the US pediatric specialty segment.2. led to its emergence as a strong outsourcing partner for the global innovating firms based in the developed markets. provide scale‐up batches for Phase trials and contract manufacture after the product is launched. Additional annual revenue in the range of around $ 15–25 million is expected from this contract manufacturing arrangement. As per this agreement. In the same year the company entered into an agreement with the US‐based Minrad for exclusive distribution and marketing of a new generation of inhalation anesthetic products.2.

A pure contract‐manufacturing player, Dishman Pharmaceuticals, signed its first contract manufacturing agreement with Solvay Pharmaceuticals of Netherlands in 2001 for production and supply of an active ingredient of an anti‐ hypertension drug, Teveten, still under patent. This was the first case of a patented molecule to be manufactured in India on a contract basis. The contract is for eight years with an estimated value of more than $10 million. Since then it is providing contract services to a growing number of global pharmaceutical firms including AstraZeneca, GlaxoSmithKline and Merck. In July 2005, Dishman entered into an agreement with NU SCAAN of the UK to develop and manufacture bulk actives for nutraceutical products of NU Scaan.
3.2.7.3.2.4

3.2.7.3.2.5 Shasun Chemicals and Drugs is another aggressive contract manufacturer from the industry. In the third quarter that ended on December 2005, contract research and manufacturing business contributed about 12 per cent of the turnover of the company. The company, which had experience of contract manufacturing for Indian companies such as Ranbaxy Laboratories and Glenmark has expanded its focus to foreign pharmaceutical companies since 1999. It has entered into a joint venture with the US based company, Austin Chemical, in December 1999. The primary focus of the venture is on joint process development and custom manufacturing to serve multinational pharmaceutical companies operating in the regulated American market. In June 2004, it had entered into a strategic partnership with another US firm, Eastman Chemical, to collaborate on the development and manufacture of performance chemicals for the pharmaceutical industry. In May 2005, US firm Codexis and Shasun entered into a manufacturing and supply agreement under which Shashun will manufacture the intermediate for a generic drug and Codexis will market the products worldwide to the generic pharmaceutical industry. The company has other strategic partnerships for supplying ranitidine (anti‐ulcer drug) and ibuprofen (anti‐inflammatory pain reducer) to the US‐based Apotex and for anti TB drugs with Eli Lilly. The above discussed cases demonstrate that Indian pharmaceutical companies have adopted contract manufacturing as a means of expanding overseas business links and very recently this has taken the form of contract research services to big multinationals companies. This technological partnership with global players has been seen across the firms, irrespective of size differences. The most recent example of strategic technological agreement is the case of Jubilant Organosys entering into a five‐year R&D contract with Eli Lilly in January 2006. Under this agreement, Jubilant would provide a range of collaborative drug discovery services to Eli Lilly, the US‐based pharmaceuticals company. These growing numbers of R&D contracts not only acknowledge the research capabilities of Indian companies, but also provide them with technological learning to emerge as global players albeit in cooperative relationship with global companies from developed countries. To summarize, Indian companies are proving to be better at developing APIs than their competitors from target markets and that too with non-infringing processes. Indian drugs are either entering in to strategic alliances with large generic companies

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in the world of off-patent molecules or entering in to contract manufacturing agreements with innovator companies for supplying complex under-patent molecules. Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals, Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large Indian companies started undertaking contract manufacturing of APIs as part of their additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis, Novartis, Teva etc. are largely depending on Indian companies for many of their APIs and intermediates. The Boston Consulting Group estimated that the contract manufacturing market for global companies in India would touch $900 million by 2010. Industry estimates suggest that the Indian companies bagged manufacturing contracts worth $75 million in 2004.
Figure 21: Contract Manufacturing Service Providers Across the Service Chain

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Table 20: Select Contract Manufacturing Deals in India

3.2.7.4 Raising Resources Abroad In 1990s, Indian pharmaceutical firms have increasingly drawn on the global avenues of financing for their growth. As increasing number of Indian firms are setting up subsidiaries abroad or going for inorganic growth through overseas acquisitions, they need to raise resources for these purposes. In true sense of internationalization, their finance‐raising activities have spilled over the national boundary. A large number of firms have raised resources abroad by issuing Foreign Currency Convertible Bonds (FCCBs) and from foreign capital markets like Luxembourg, New York, London, and Singapore by sponsoring GDRs (Global Depository Receipts) and/or ADRs (American Depository Receipts). Since Indian pharmaceutical firms already have good business record and brand image in the regulated markets, tapping the global financial markets becomes easier for them. A good number of firms including Ranbaxy Laboratories, Dr Reddyʹs Laboratories, Matrix Laboratories, Sun Pharmaceuticals, Nicholas Piramal India, Cipla, Jubilant Organosys, Strides Arcolab, Lupin, Glenmark Pharmaceuticals, Cadila Healthcare, Wockhardt Ltd, Biocon, Dishman Pharmaceuticals and Torrent Pharma have been observed to have raised resources abroad in recent years.
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9 Market Segmentation Due to high level of fragmentation none of the players had a market share of more than 6 % (even the top players Cipla & Ranbaxy commands only 5. Figure 22: Market share of top players Page | 73 . Sun Pharmaceutical Industries Ltd and Lupin Laboratories. Pharmaceuticals and fine chemicals Table 22: Growth of pharmaceutical exports Source: DGCIS 3. of which formulations contribute nearly 55% and the rest 45% comes from bulk drugs.2. The export revenue now contributes almost half of the total revenue for the top 3 pharma majors: Dr Reddy’s.8 Exports The exports constitute almost 40% of the total production of pharmaceuticals in India.24 & 5. Table 21: Exports of Drugs. The formulations and exports are largely to developing nations in CIS. South East Asia.5 bn currently.2. Ranbaxy and Cipla.09 per cent market share on the basis of retail sales respectively). Africa. and Latin America. In the last 3 years generic exports to developed countries have picked up.3. India’s pharmaceutical exports are to the tune of $3. The other major exporters are Wockhardt Limited.

which are readily and cheaply available to the industry for productive purposes. regional. Later. This technological growth has also been contributed partly by the progress that India achieved in building its scientific. productivity and R&D intensity of the Indian pharmaceutical industry is lowest among countries.2. The starting of public sector pharmaceutical companies for indigenous production of drugs has been the initial form of government intervention.3. which led the domestic sector on a new technological trajectory and as a result. but it has also created its own limitations in pushing forward its productivity and technological activities. These national policies. managerial. The government of India has employed a variety of policy tools to develop the domestic pharmaceutical sector and to protect it from large multinational firms operating in and dominating the industry. India has consistently enjoyed a favourable trade balance in pharmaceutical products. a soft patent regime was adopted since 1970. and general skills. a technologically vibrant domestic sector with remarkable technological capabilities to develop new cost‐effective processes and new drug delivery systems has emerged. thus. bilateral levels and across individual countries has opened up new competitive challenges for the Indian Page | 74 . have contributed to the rise of the Indian pharmaceutical industry and to make it competitive in the world markets as among the cheapest producers of drugs internationally. While the Indian policy regime has succeeded in bringing out its pharmaceutical sector as among the fastest growing in the world. The policy liberalization of the past decade or so like liberalization of foreign investment. The fragmented nature of policy that had encouraged a large number of small‐ and medium‐sized pharmaceutical firms appears to have placed a constraint on the scale of production and capabilities to further upgrade the technological strength. Although.10 Conclusions and Policy Options It has been a long journey for the Indian pharmaceutical industry from being merely an import dependent to emerge as a self‐reliant producer and later as an innovation‐ driven developing country competitor in the global market. its export share is still hovering around just one per cent. Due to these factors. trade and industrial policy and shift towards a strong patent regime postulated by the TRIPs at the global.

Indian pharmaceutical firms have been increasingly entering into global securities and finance markets.pharmaceutical sector. the culmination of a 10-year process. Incentives and facilitation policies for encouraging global pharmaceutical companies to outsource their production and R&D works to Indian firms shall be put in place. 2005. Competitiveness of the Indian pharmaceutical industry Post 2005 scenario By issuing the patent ordinance. policy measures are needed to encourage mergers and acquisitions among domestic firms to offset the scale disadvantage and to overcome the trap of low R&D intensity. Many Indian pharmaceutical firms are adopting new internationalization strategies for meeting such challenges and achieve their goal for global growth. R&D and marketing for pharmaceutical companies from developed countries are also being employed by Indian pharmaceutical companies. the industry is exploring business models. etc can be useful policies. The provision of low cost finance for research with subsidy facilities for indigenous research activities continues to be a key to competitive strategy. Hence. brands and research facilities. they are also aggressively acquiring overseas business enterprises. The Indian government can take several policy measures for enhancing the nation’s competitiveness in the pharmaceutical sectors. Apart from undertaking green‐field investments. different from the existing traditional ones. For financing their global expansion. To adapt to this new patent regime. the Indian pharmaceutical manufacturers won’t be able to manufacture patented drugs. Strategic alliances with and contract manufacturing. may result in improving India’s competitive advantages in the pharmaceutical sector. investment and tax allowances for the outsourced production and R&D works. Increases in average firm size through M&As until the concentration index of the Indian pharmaceutical industry rises significantly. In this new scenario. They are strengthening their geographical presence by starting their own subsidiaries and affiliates in different strategic overseas markets. New Business Models include: • Contract research (drug discovery and clinical trials) • Contract manufacturing • Co-marketing alliances Figure 23: Emerging models to capture the outsourcing opportunity Page | 75 . Data protection. India met a WTO commitment to recognize foreign product patents from January 1. technology and market access can also be important for strengthening firms’ technological capabilities. Government policies that encourage overseas acquisitions by the Indian companies for brands. A fragmented domestic market marked by a lower degree of domestic competition is not conducive for global competitiveness.

Page | 76 .The focus of the Indian pharma companies is also shifting from process improvisation to drug discovery and R&D. The Indian companies are setting up their own R&D setups and are also collaborating with the research laboratories like CDRI. IICT etc.

Industry Collaborations Page | 77 .Table 23: Government Run Research Organizations .

The reasons for Chinese competitive advantage are: 3. whereas India is stronger on the finished product / formulation side.6 The companies are also allowed duty free import of capital equipment.4.1 The electricity costs are lower in China as compared to India. wheras exports to US grew at 9 %.2 Threat from China China is becoming a major competitor to India.0 per KWH.2.1.3.3.7 Lower turnaround time for ships at Chinese ports make it conducive as a base for exports. especially in exports of active pharmaceutical ingredients (APIs).5 to 6.4 China has established a large number of profit oriented research and development institutions. 3.3.2. China’s pharmaceutical industry ranks no.2.2.2. If China and India can collaborate.3. CHINDIA can lead the world pharma market!!! Page | 78 . 3.2 Labour charges are 40% lower in China than India.3.2.3. The power costs range from Rs.3 More favourable labour policies like policy of hire and fire 3. China is an important source of chemical and APIs. 3. A comparison of competencies of the two countries is presented below Table 24: Competencies of India and China India is the second largest export destination for bulk drugs / APIs for China (after US) and exports to India grew at 42 % in 2006. which are today independent of government funding in contrast to institutions in India.50 to 2.50 per KWH as against Indian cost of Rs. 3. 3.3.7 in the world and is expected to become the world’s 5th largest by 2010.2. which are mostly dependant on government funding. China’s domestic drug sales have been estimated at about US$8 billion in 2003 and the exports are growing at the rate of about 20% per annum.3.3.5 The Chinese government provides an income tax holiday of 100 per cent for the first two winning years (profit making years) and 50 per cent for the next 3 years.

1.4. 3.2 Indian pharma sector has been marred by lack of product patent.1. However.2 The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. are at advantage while those who cannot produce have either to stop production or bear losses. In fact the penetration of modern medicine is less than 30% in India. which leads to lower profitability for the companies. 3.4. As a result. Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. 3. Weakness.1 Strengths: 3. which has a very low contribution in the Indian markets. per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189. Indian majors are relying on exports for Page | 79 . But are there risks? The succeeding paras gives a perspective of the Indian pharma industry by carrying out a SWOT analysis (Strength.1 India with a population of over a billion is a largely untapped market. But this has provided an upper hand to the Indian pharma companies. The SWOT analysis of the industry reveals the position of the Indian pharma industry in respect to its internal and external environment. Indian manufacturers are one of the lowest cost producers of drugs in the world. Over a period of time.4.4 3. Threat). This opens a huge market for lifestyle drugs. The NPPA (National Pharma Pricing Authority).1 The Indian pharma companies are marred by the price regulation.4. This adds to the competitive advantage of the Indian companies. which are cost effective.4. the general belief is that demand for drugs is likely to grow steadily over the long-term. sets prices of different drugs.4. 3.2 Weakness: 3.1.2.2. growth has been slow to come by.4.2.SWOT analysis of the Indian pharmaceutical Industry It is often said that the pharma sector has no cyclical factor attached to it. To put things in perspective. which is the authority to decide the various pricing parameters. The strength in chemistry skill help Indian companies to develop processes.3 3. 3. With a scalable labor force.3 Indian pharma market is one of the least penetrated in the world. True in some sense.1.4. Irrespective of whether the economy is in a downturn or in an upturn. Opportunity. which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. this regulation has reduced the pricing ability of companies. The companies. which are lowest cost producers.4. Indian pharmaceutical industry posses excellent chemistry and process reengineering skills.

3.2 Large number of drugs going off-patent in Europe and in the US between 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. on the quality front.4.4.000 small units spread across the country. India is better placed relative to China. This leads to the expansion of healthcare industry of which pharma industry is an integral part.3 Opportunities 3.4.1 There are certain concerns over the patent regime regarding its current structure. the growth in value terms was 8. 3. Though this is likely to have a Page | 80 .4% but due to price competition. Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18.4. Indian companies can become a global outsourcing hub for pharmaceutical products. This migration could result in consolidation as well. the industry actually grew by 10. India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry. Very small players may not be able to cope up with the challenging environment and may succumb to giants. as they are the lowest cost producers of drugs in the world. 3.4.3.growth. 3.4.3.4.4. This makes Indian pharma market increasingly competitive.4. differentiation in the contract manufacturing side may wane. To put things in to perspective.4 Due to very low barriers to entry. Indian producers have the competitive advantage.2%) 3. 3.2% (prices actually declined by 2.4.3 The short-term threat for the pharma industry is the uncertainty regarding the implementation of VAT. It might be possible that the new government may change certain provisions of the patent act formulated by the preceding government.4.3. which reduces the growth of the industry in value term. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D.4 Threats: 3. However. To put things in perspective.4 Being the lowest cost producer combined with FDA approved plants. The industry witnesses price competition. 3. The new patent product regime will bring with it new innovative drugs. Since generic drugs are commodities by nature.4. in the year 2003. 3.2.1 The migration into a product patent based regime is likely to transform industry fortunes in the long term. So.3 Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective.2 Threats from other low cost countries like China and Israel exist.3.4.

5% (2003-2010) and Health Care growth rate of 12.5 Summary of the SWOT Analysis 3. the industry has witnessed increased political attention due to the increased recognition of the economic importance of healthcare as a component of social welfare.6%. France.5. social and technological) model. Canada. rafts of patent expiries and volatile investor confidence have made the modern pharmaceutical industry an increasingly tough and competitive environment. With a projected stock value growth rate of 10. Page | 81 . 3. Nine geographic markets account for over 80% of global pharmaceutical sales these are. Italy. economic. US. Political interest has also been generated because of the increasing social and financial burden of healthcare. tighter regulatory-compliance. the audited value of the global pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004.1 Increasing Political Attention: Over the years. Below is an analysis of the structure of the pharmaceutical industry using the PEST (political. 3. Glaxo-Wellcome\SmithKline-Beecham and Novartis (a merger between Sandoz and Ciba Geigy)) and acquisitions.2 Economic Value Added: In the decade to 2003 the pharmaceutical industry witnessed high value mergers (like Pfizer\Pharmacia.5 Enviornmental analysis (PEST) Technological advancements.5% (20032010). EU and Japanese markets. Japan. Majority of pharmaceutical sales originate in the US. overheads.negative impact in the short-term. 3. the implications over the long-term are positive for the industry.4.5. Only information technology has a higher expected growth rate of 12. Germany. UK.

5 Legal Environment: The pharmaceutical industry is a highly regulated and compliance bound industry. The 5 forces approach can be used in initial diagnosis and as an aid to strategy development. SARS. In 2000 alone the US market grew by 16% to $133 billion dollars making it a key strategic market for pharmaceuticals. the US is the fastest growing market and since 1995 it has accounted for close to 60% of global sales.Brazil and Spain. AIDS etc.4 Technological Advances: Modern Scientific and Technological advances are forcing industrial players to adapt even faster to the evolving environments in which they are participating. 3. the impact of various global epidemics e.5. Its main value is as a thought provoking aid to help arrive at a shared understanding of the threats and opportunities facing the firm. 3. 3.g. 3.5. Of these markets. But in recent years. the government have begun to request industry proposals on regulatory overheads so as not to discourage innovation in the face of mounting global challenges from external market. there are immense amount of regulatory and legal compliance overheads which the industry needs to absorb. Figure 24: Porter’s Five Forces Model for Industry Analysis Page | 82 . Scientific advancements have also highlighted the need for increased spending on Research and Development in order to encourage innovation.3 The Social Dimension: Good health is an important personal and social requirement and the unique role played by pharmaceutical companies in meeting the society’s need for popular wellbeing cannot be underestimated. As a result. have also attracted popular and media attention to the industry. The effect of the intense media and political attention has resulted in increasing industry efforts to create and maintain good government-industry-society communications.6 Structural industry analysis (Porter’s Five Forces) A summary of the pharmaceutical industry using Porter’s Five Forces model (see diagram below). This tends to restrict its dynamism. In recent times.5.

which is one of the gauges of fixed cost requirements.2 times average in India). tells us that in bigger companies this ratio is in the range of 3. The product differentiation is one key factor which gives competitive advantage to the firms in any industry. For smaller companies. companies like Pfizer and Glaxo have created big brands over the years which act as product differentiation tools. High growth prospects make it attractive for new players to enter in the industry. The fixed cost requirement is low but the need for working capital is high. The fixed asset turnover. But today the scene is different with the arrival of the patent regime which has forced Indian companies to rethink its strategies and to invest more on R&D.2 Bargaining power of buyers Page | 83 . and the top 5 players together have about 18 %(2006) market share. However. Thus. Though volume growth has been consistent over a period of time value growth has not followed in tandem. cost competitiveness is. the concentration ratio for this industry is very low. An important fact is that. with loss favouring imitators. Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical products discovered by MNCs at a lower cost and make good profit. Consequently product differentiation is not a driver. However. 3.000 different players fighting for the same pie. Also contract research has assumed more importance now. it would be even higher.6.3. pharmaceutical is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.5-4 times. in pharmaceutical industry product differentiation is not possible since India has followed process patents till date. making it easier to succeed. Many small players that are focussed on a particular region have a better hang of the distribution channel. Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharmaceutical industry are very low. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6 % (2006) market share.6. albeit in a limited way.1 Industry competition Pharmaceutical industry is one of the most competitive industries in the country with as many as 10.

Also. quality regulations by the government may put some hindrance for establishing new manufacturing operations. The chemicals used in the pharmaceutical industry are largely a commodity.6. The suppliers have very low bargaining power and the companies in the pharmaceutical industry can switch from their suppliers without incurring a very high cost. are likely to either be acquired or cease to exist. In pharmaceutical industry. can prove to be a threat to the synthetic pharmaceutical industry. The capital requirement for the industry is very low. One of the key reasons for high competitiveness in the industry is that as an ongoing concern. pharmaceutical industry seems to have an infinite future. 3.The unique feature of pharmaceutical industry is that the end user of the product is different from the influencer (read doctor). However. The barriers to entry will increase going forward. The change in the patent regime has made sure that new proprietary products Page | 84 . Smaller fringe players. Whatever happens. Going forward. It’s dynamic and over a period of time the model. plays an important role in regulating pricing through the NPPA (national pharmaceutical pricing authority). The larger players in the industry will survive with their proprietary products and strong franchisee. In the Indian context.6. in recent times the advances made in the field of biotechnology. demand for pharmaceutical products continues and the industry thrives. The consumer has no choice but to buy what doctor says. creating a regional distribution network is easy. The new patent regime has raised the barriers to entry. what can happen is that the supplier can go for forward integration to become a pharmaceutical company. However.4 Barriers to entry Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur in India. It will be between large players (with economies of scale) and it may be possible that some kind of oligopoly or cartels come into play.6. as market for generics will be as huge. However. But it is unlikely to discourage new entrants. since the point of sales is restricted in this industry in India. 3. it must be noted that any industry is not static in nature.6 Conclusion This model gives a fair idea about the industry in which a company operates and the various external forces that influence it. govt with its policies. However. we look at the influence they have on the prices of the product. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies who turned themselves into pharmaceutical companies. The chemical industry is again very competitive and fragmented. creating brand awareness and franchisee among doctors is the key for long term survival. the buyers are scattered and they as such do not wield much power in the pricing of the products. who have no differentiating strengths. However. which have used to analyse the pharmaceutical industry may itself evolve. companies like Cipla. when we look at the buyer’s power. However. we foresee increasing competition in the industry but the form of competition will be different.6.3 Bargaining power of suppliers The pharmaceutical industry depends upon several organic chemicals. Ranbaxy and Glaxo are likely to be key players.5 Threat of substitutes This is one of the great advantages of the pharmaceutical industry. This is owing to the fact that the industry will move towards consolidation. 3. 3.

1970 added a few provisions. (i) Under the license rights. WTO) sought to radically transform the patent Act in many countries. the Indian Patents Act. 3. and it granted product patents for non-chemical substances.come up making imitation difficult. The specific article dealing with patents-Trade-Related Intellectual Property Rights (TRIPS) . 3. 1995 The erstwhile GATT (since 1995. The duration of process patents was fixed at seven years from the date of filling of the patent. but is currently under threat with the conclusion of the last Uruguay Round of General Agreement on Tariffs and Trade (GATT) negotiations in 1993 and the establishment of World Trade Organization (WTO) on 1 January 1995. 1970 and the change-over envisaged under TRIPS is given in table below Table 25: A synoptic comparison of Indian Patents Act.7 Drug patents in India The Indian Patents Act. In fact. Considering the importance of sectors such as pharmaceuticals.requires that the signatories to GATT must necessarily Page | 85 . which sought to significantly restrict the scope of protection.1 Patent Protection under WTO. (iii) Import of patent protected products is not considered to be ‘working of patent’ and therefore the patentee must necessarily produce the same in the country within three years from the date of sealing of a patent. 1970 has been instrumental in encouraging and developing the indigenous drug industry and indirectly containing medicine prices. extension of pharmaceutical product patents to all member countries was the key and controversial issue and also the last issue to be hammered out prior to tabling of the Draft Agreement at the end of 1991. 1995 The Patents Act. 1970 (effective since 1972) sought to provide only process patents for chemical substances including pharmaceuticals. agrochemicals and food products. whichever is earlier. (ii) The Government retained the right to issue compulsory licenses (after 3 years from the date of sealing of a patent) if the product under question was above ‘reasonable’ prices or if it did not satisfy public interests. a process patent owner is obliged to sell the license to any third party fetching a maximum royalty of 4% in turn. Economies of scale will play an important part too. A gist of the patents system. The players with huge capacity will be able to influence substantial power on the fringe players by their aggressive pricing thereby creating hindrance for the smaller players. or five years from the sealing of the patent. 1970 and TRIPS.7. Besides government will have a bigger role to play.

the price of patented products is bound to be high. The period of patent rights is to be changed in the Indian case from seven to twenty years. he and a few others argue that given the current market conditions.amend their Constitution in accordance with this Article. These issues include price rise. It is natural that many recent findings on this matter focused on likely price trends in India in the event of amending the present patents Act. Compulsory licensing is another tool to counter the adverse implications of conferring patent protection. Interestingly. and hence there is no need to focus on negative trends on the drug price front. India was at the forefront in raising this issue backed by strong evidence. The other retrograde step in the direction of TRIPS is the restrictions imposed on the free use of compulssory licensing provisions. as far as the impact on various therapeutic categories is concerned. Until then. The provision of compulsory licensing (under the new dispensation) can be harnessed only when there is a clear case of national disaster or calamity. market structure. The study by Fink (2000) suggest a surge in pharmaceutical prices in the range of 9%-76% if product patent rights are introduced. 3. which were hitherto available in the present India Patents Act of 1970. They further assert that when normal profits are granted the potential disincentive to invest would wither away resulting in recouping of R&D investment. For developing countries. Lanjouw (1998) found drug prices in India. particularly in the post-patent 1970 period. Price ceilings. 1 January 2000 was fixed as the deadline for amending the Constitution. Developing countries like India have. the composition of patented products in the total pharmaceutical market would undergo a drastic change in favour of the former. drug prices in India are expected to considerably escalate to a high level. clearly show the extent of price increase that would be likely in the near future with a changeover from the present system to a patent monopoly era. would reduce or eliminate an inventor’s patent-induced market power. Recent studies. the upsurge in price would depend on the demand for new patented products or on the available alternative treatments. been granted a five-year transition period till 2005. a provision allowed in the TRIPS agreement. technology transfer. royalty and hence foreign exchange outflow. Simultaneously. It needs to be noted that once patented products start proliferating in the market. by allowing firms to charge normal profits in addition to production costs. foreign investment inflows. A sensitive and a highly controversial issue with regard to TRIPS is the concern about the high price of medicines. among the lowest in world. food and agricultural sectors as well. chemical. Even the Paris Convention specifically nails non-working or import of patentprotected products as an abuse of exclusive rights. whichever dominates the market. In any case. This would have a far-reaching influence on price. if put into effective practice. Page | 86 .2 TRIPS and its likely impact Several issues need attention in the wake of a change from process to product patent. Fink suggests that rapid acceleration in drug prices could be countered by various price control measures available with the local government. etc. import dependence. The Article on TRIPS requires member countries to change their Act in such a way that they grant product patent to the pharmaceutical. Domestic production of the patent-protected products is not mandatory wherein import is to be considered as a working of the patent. However. however. As a sequel to a transition to the product patents regime. exclusive marketing rights (EMRs) would have to be granted to those companies introducing newly invented products. A proper amendment needs to be made to the Constitution of respective member countries amending the present rules.7. however. it is estimated that only 10%-20% of the pharmaceutical products are under patent.

Many more of these are likely to witness lifting of controls in the immediate future. conduct of clinical trials and generic drug research. a point worth noting in this context is that one must actually analyse the entire gamut of issues related to the pharmaceutical market and one cannot merely take such provision as given. • Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs. Japan. An appreciation of the overall structural adjustment in economies such as India show that over the years. 3. By revising its R&D policies the government is trying to boost R&D in domestic pharmaceutical industry. (iii) any effort to locally produce the patented medicine is nothing but monopoly production and consequently monopoly pricing. The new patent regime has led many multinational pharmaceutical companies to look at India as an attractive destination not only for R&D but also for contract manufacturing. will then value around US$ 2 billion contributing 10% of the IPM. and United States is now coming true. in return. whereas in US they cost between US$ 300-350 million each.This could be because of several reasons: (i) formulation activity would be costly as multinationals would normally set high prices for the bulk drugs imported in view of global reference pricing. as forecasted by McKinsey. Products Patented in India. The Indian companies are using the revenue generated from generic drug sales to promote drug discovery projects and new delivery technologies.1 What is in store for the future? Page | 87 .8. as made evident in the intentions of government policy pronouncements (GOI 2001). (ii) issuing compulsory licensing to any company in India would amount to enormous royalty fees. by 2015 Indian Pharmaceutical Industry will be of US$ 20 billion. India is holding a major share in world's contract research Clinical Research Outsourcing (CRO). which is almost 1/10th of its cost in US (US$ 100-150million). as MNCs are entering the market with ambitious plans. a budding industry valued over US$ 118 million per year in India. According to a McKinsey Report. It is giving tax exemption for a period of ten years and relieving customs and excise duties of all the drugs and material imported or exported for clinical trials to promote innovative R&D. 3. The future of Indian pharmaceutical sector is very bright because of the following factors: • Clinical trials in India cost US$ 25 million each. This would naturally be reflected in the base price of the patented products.8 The future of Indian Pharmaceutical industry The dream of Indian pharmaceutical companies for marking their presence globally and competing with the pharmaceutical companies from the developed countries like Europe. which will always be higher than the competitive price. particularly since the early 1990s. is estimated to grow to US$ 380 million by 2010. • In India investigational new drug stage costs around US$ 10-15 million. However. catapulting it within top 10 Pharmaceutical Markets of the world. Contract research in India is also growing at the rate of 20-25% per year and was valued at US$ 10-120 million in 2005. pharmaceutical prices have been decontrolled to a substantial degree and in fact presently only a few drugs (75 essential drugs in 1998) are actually controlled.

a major portion of small players are likely to be wiped out. SEZs will play an important role in the future of the pharmaceutical industry. Figure 25: Expected market share of Indian Players in the US Generics Market By 2010-11.S. Reddy's are making way for others. Moreover. share of Indian companies in the U. market by increasing attention to the European market for generics. and leading companies like Ranbaxy.2 Issues and challenges Page | 88 . Many of the existing players are family owned businesses. companies are not risking concentration by focusing only on the U. which would be one of the key drivers of outsourced pharmaceutical services growth in the coming future. It is the classic “bird in the hand” principle – if the founders can earn a few billions without too much effort. Influx of outsourced work from global pharmaceutical companies has given the necessary impetus for the creation of pharmaceutical Special Economic Zones (SEZ). The present scenario presents an excellent opportunity for multinational enterprises to establish manufacturing bases in India through the take-over route.8. why should they spend hundreds of millions and ten years or more in trying to develop new drugs. No one should be surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come through. There is not much incentive for companies to invest in new drugs. The opportunity for Indian pharma companies is sizeable as generic drugs manufactured in India are now being accepted worldwide.• • • • • • We can expect a significant level of consolidation. The availability of talented scientists at a relatively low cost makes India an ideal location for manufacturing quality drugs. The corporations engaged in R&D need tax breaks and innovative incentives. Cipla and Dr. A word of caution is necessary though such enterprises may have to follow a dual pricing policy.S. market is expected to be more than 10 percent. one for the local market and another for the global market. 3. The Indian government would do well to take another look at its policies.

8. Indian pharma sector witnessed 25 Mergers & acquisition deals. as the generics business is weighed down by stiff competition and declining R&D productivity. alliances and partnerships is the need of the hour for the pharmaceutical industry rather than the preference. with 15 cross border transaction worth US$ 600-700 mn. To maintain or increase margins in the future. In practice we are describing the collective values and integrity of the individual members of staff.3. and motivates employees with competencies that set their business apart from those of the competitors. As the pharmaceutical industry embraces these new challenges. and companies are still trying to recruit people with ever-more-specialised knowledge. all contribute to constantly eroding margins. 3. the domestic pharma sector executed more than 40 deals with 32 cross border transaction worth US$ 2000 mn and it includes deals like Dr Reddy’s acquisition of Betapharm of Germany for Euro 480 mn (Rs 2550 cr) and Ranbaxy Terapia buy in Romania for US$ 324 mn (Rs 1250 cr approx). represent a living brand. In recent times.1 Mergers and Acquisitions Currently. Increasing generic competition. Thus.2. In 2006. Increasingly we talk about regulation and compliance as though they are some abstract function of a company. but this is a new competency for many companies. mergers and acquisitions has proved to be an important tool to seize growth opportunities and is widely resorted to by players by either moving up the value chain or by integrating downstream production. and the way they are motivated to behave in particular situations. recruits.2. We can talk about brand but the people in a company. There is growing demand for skilled people but traditional labour markets are providing fewer new people with the right qualifications and experience.8. develops. But how is this done and what is the best approach? Understanding and controlling operating costs is a critical first step to developing or sustaining competitive advantage. We can focus on intellectual property but that is the creation of the people. The key is how an organisation attracts. pharmaceutical companies need to start taking a proactive approach towards understanding costs. most of the leading players have inked M&A deals across the globe. We can talk about markets. It is possible to recruit from new markets.8. The first challenge is that there are increasing signs of the labour market moving in favour of the employee rather than the employer. and people joining or leaving a company will add to or reduce the sustainable intellectual property. shorter pipelines and the emergence of China as a low cost manufacturing base. in particular in their behaviour.2.3 Controlling operating costs It is accepted knowledge that the pressure to control and reduce costs is one of the next major challenges to be faced by the pharmaceutical industry. imminent patent expiries (revenue can decrease by up to 60% at patent expiry). In 2007.2 Attracting and retaining a skilled workforce The pharmaceutical business is knowledge and experience business and people have always been one of the most important resources for any pharmaceutical or biotech company. 3. More mergers & acquisitions and consolidation activity in near future is expected which is driven in the medium term by implementation of the new patent regime and generic companies looking to establish a low-cost base out of the country. but to access any market you need people with a good understanding of that market and the culture and values of customers and suppliers. the companies that emerge at the forefront will be those who address the issues now and are able to account for all the costs Page | 89 .

this transition phase of reorientation is a challenge for the industry. 3. increase on today's total. Thus.throughout their organisation. Moreover. there are no paved surfaces or there is only one lane for all traffic. 3. the country’s lacking transport infrastructure is increasingly turning into a major obstacle. However. To achieve this advantage. But the government has launched an extensive investment programme entitled the National Highway Development Programme.2. In many cases. or nearly 90%. a reorientation was required in India’s pharmaceutical industry.8. Of the total road network covering just over 3. This would mean a more than 100 GW. which enjoy 20 years of patent protection. Page | 90 . the hot and humid climate makes high demands on climate technology at production plants and on the refrigeration of finished products.3 million kilometres. It now focuses on drugs developed in-house and contract research or contract production for western drug makers.4 Infrastructure Compared with western industrial nations. In many areas. the major transport links are chronically congested and many are in a poor state of repair. can no longer be copied by means of alternative production procedures and sold in the domestic market. Insufficient energy supply also leads to a situation where production hours must be handled very flexibly. Hence.5 Impact of new patent law Legal changes in India in 2005 made it considerably more difficult to produce “new” generics. energy prices are low but companies must expect repeated power cuts and offset fluctuations in the electricity network with the help of emergency power generators.2. the Indian government intends to expand power generation capacities to roughly 240 GW by the end of the 11th five-year plan in 2012. companies have to start recognising and targeting costs today. only about 6% are relatively well built National and State Highways.8. Foreign pharmaceuticals. to be implemented by the middle of the next decade. However. This shortage can only be eliminated in the medium term and will require maximum effort. The pharmaceuticals industry is especially dependent on road transport.

but a framework that sets (minimum) standards and conditions for the protection of intellectual property. this means they are committed to follow the rules laid down in its Agreements. The TRIPs Agreement makes the granting of patents for pharmaceuticals obligatory. As such. yet numerous public health experts. these safeguards can only be used if they have been incorporated in the national Legislation Safeguards such as provisions for compulsory licensing are an essential element of IPR legislation. These are made operational via the national intellectual property rights (IPR) legislation. as well as consumer groups. Within the TRIPs framework. One of these WTO Agreements is the Agreement on Trade Related aspects of Intellectual Property Rights (TRIPs). Moreover. there is some room for manoeuvre. they reduce the risk of misuse of the monopoly rights conferred Page | 91 . have expressed concern about the impact of the TRIPS Agreement on the availability and prices of drugs. since they signal to the patent holder that. The TRIPS Agreement is not a uniform law. or intend to make these commitments in future. in the case of abuse of rights and/or non-availability of the product. A global process of rethinking is starting. and allows for exceptions which may facilitate the marketing of generic drugs. Proponents believe this will lead to an increase in investment and in R&D. worldwide. TRIPS provides for a number of safeguards which may be used to protect public health and promote competition. such as compulsory licensing. In fact.1 Introduction Most developed and developing countries are either members or observers of the World Trade Organization (WTO). this represents a significant change in the pharmaceutical sector. Since previously many developing countries allowed only for limited patent protection in this area. These safeguards can be used to mitigate potential negative impacts of increased IPR protection in the pharmaceutical sector on access to drugs. a third party could be allowed to use the invention. However. which can be used to design legislation which is in the best interest of the country.4. there is growing concern about the impact of the intellectual property rights system on innovation and on investment.0 THE TRIPS AGREEMENT 4. Measures to protect the public interest ought to be included in the national legislation. and should encompass public health aspects. in which developing countries should actively participate.

who can then further improve them. are met. Even if such secondary patents are relatively weak. A patent however does not in itself guarantee profits. inventive step and industrial applicability. inventiveness and industrial applicability or utility. if eventually a patent is found to be invalid or an enforcement rule to be unjustified. Therefore. In other words. either through direct exploitation. In the pharmaceutical sector. If countries have strong provisional measures under their enforcement system. a patent was perceived to be an inexpensive way for society to encourage innovation and reward the inventor. if society finds the Page | 92 . applying these criteria in a flexible way will facilitate the granting of ‘secondary’ patents. TRIPS requires that patents are granted when the typical standards for patentability. Similarly. they can be used aggressively to (threaten to) litigate. In the absence of competition. WTO member countries may decide how to apply these criteria. there is a presumption of validity. in exchange for a temporary monopoly on its use. a patented invention will only return profits if it is successfully commercialized . in order to make them available to others. However. and how many people have in the meantime been denied access to essential medicines. the inventor will be able to earn a profit in case of commercialization of the invention. patents on polymorphs etc. novelty. once a patent has been granted. it has to meet three criteria: novelty. defining the scope of patentability at the national level is an important issue. or through royalties in case a third party is given a license to use the invention. since. it is important to carefully state the grounds and conditions for their use in the national legislation. Because of this (temporary) monopoly. in exchange for making his/her idea known to society. this will nurture scientific progress or artistic inspiration. they are only valid when issued and in the country where they are issued. monopolistic pricing may reduce people’s access. However. to ensure that such safeguards can be used effectively. The solution adopted was to give the inventor or creator a temporary monopoly. these can be used to prevent competition for instance while a lawsuit is pending (which can be several years). The intellectual property rights system has been developed in order to try to achieve two contradictory aims: • to promote the publication of ideas.2 Background The philosophy of Intellectual Property Rights Intellectual property rights (IPR) deal with the creations of the human mind. In the pharmaceutical sector. A patent requires the inventor to disclose his invention. and approved by. inventions and creations. • to provide an economic incentive for people to invent or to engage in creative efforts. apart from being new. patents are the most important form of IPR protection. For an invention to be patentable. an invention should not be obvious to people skilled in the art or field of technology and it should have a potential for industrial application in order to be patentable. Patents are more difficult to obtain than other forms of IPR (an application has to be filed at. enforcement rules can have significant implications. in order to stop competition. such as formulation patents. by ensuring that the originator can reap financial rewards from his/her efforts. But the Agreement does not specify how these criteria should be defined.by a patent. from a societal point of view it is important to consider who will reimburse the consumers.that is. 4. So historically. that is. the patent office).

in terms of social development.1The costs of pharmaceutical R&D are high. On the other hand. patents are very important. Moreover. Therefore.3. Furthermore. e. which showed that profits in the pharmaceutical industry are considerably higher than in other industries and that the rate of return is much higher than what is needed to cover the costs. Obviously. Page | 93 . and. the US Office of Technology Assessment has published a study. When contemplating the importance of patents for national development.2 There is a disclosure requirement. A process patent on the other hand confers rights over the process and over the products directly produced by that process. There are several reasons for the importance of patents for the pharmaceutical industry: 4. policymakers should make a profile of their country. however. A product patent confers monopoly rights over the product. evaluate the importance of patents. the latter are the most important.3Usually. at registration. two aspects of development can be distinguished: economic aspects and social or human aspects. taking into account the level of development. the limited room for manoeuvre built into the TRIPs Agreement should be used. the costs of patent application. litigation in case of infringement by an unauthorized party) are to be borne by the patentee (patent holder). the company can charge a higher price and earn more than would have been possible in case of free competition. 4. With regard to impact on development. Because patents are private rights. Production of the same product via a different production method however does not infringe a process patent and is allowed. regardless of the production method.g. Ultimately. While the actual amount is being disputed. which in turn insisted that this issue should be on the agenda of the Uruguay Round negotiations. 4.3. the very existence of the TRIPs Agreement is due to the pressure from the big pharmaceutical companies on the US government. in case the patentee misuses the monopoly rights.3 The importance of intellectual property rights for national development In the pharmaceutical sector. patents may have positive 'dynamic effects' so far as they foster the development of new products that benefit society. R&D costs have to be recovered. In fact. as well as of its protection (e. however. so intellectual property rights should be looked at from this angle.3. based on that.g. imitation is relatively easy. when designing patent laws. which will reduce access. most legal systems contain provisions for government intervention. it is in any case significant. the impact of pharmaceutical patents is negative.4It allows the company to make extra profits. Patents can be granted for a product or for a (production) process. 4. Pharmaceutical patents are a clear example: the inherent effect of patents is to increase the price.3. in order to make sure that the national patent law works in the interest of the country’s social as well as economic development. 4. from these profits.invention useful. Because of the monopoly rights the patent confers. when the availability of the patented product falls seriously short of demand. therefore the patent is important to protect the invention.

Previously. 10.1 Public spending for healthcare in general and for drugs in particular is insufficient.4 WHO's perspective on globalization and access to drugs 4. essential drugs.4. these new standards represent a considerable increase in the protection granted for pharmaceuticals. grant patents for pharmaceutical products.4. sufficient and sustainable financing for drugs and a reliable health care and drug supply system. such as rational selection of the drugs allowed on the market. Today.2 Health insurance is non-existent or has very limited coverage. For most developing countries. Ensuring access to essential drugs depends on several factors. most people.6 million of these deaths could have been prevented if those at risk would have had access to essential drugs. and decreasing.1.4. One of the most effective strategies for promoting affordable prices is to increase competition (see figure 26). it is an important factor. for a minimum period of 20 years.4 Supply systems are often unreliable and poorly managed. Figure 26: Effect of competition on HIV/AIDS drug prices Page | 94 . and a further reduction in their population's already limited access. too many people still lack access to essential drugs. many developing countries did not.4. in order to encourage (generic) competition. however. and include the following factors: 4. especially in developing countries. WHO estimates that more than one third of world's population lacks regular access to the medicines they need. 4.3 New essential drugs are costly.1. They fear therefore an increase in prices of medicines.1. Price is only one of the factors in ensuring access to essential medicines. have to pay for drugs out-of-pocket.3 million children under five years of age died last year. especially for countries and populations with limited resources.1. affordable prices.4. more than half the population lacks regular access to basic. In developing countries.1 Global pharmaceutical challenges At the beginning of the 21st century. in 32 countries. 4. The TRIPs Agreement makes the granting of patents for pharmaceutical products and process inventions obligatory. 8. or only to a limited extent. leading to wastage and shortages. 4. The reasons for this are multiple and complex.4.

reducing duties. B.2.2. about 50 countries did not grant patent protection for pharmaceutical products.5 The history of the TRIPs negotiations In order to increase the understanding about the TRIPs Agreement.4. such as providing comparative price information. 4. it is useful to briefly consider the history of its negotiation. such as compulsory licensing and exceptions which facilitate the marketing of generic drugs ("Bolar exception"). WHO recommends that: 4. Samb. taxes and mark-ups. countries have to incorporate them in their national legislation.2 WHO policy perspective: In the context of globalization and access to medicines.Adapted from: UNAIDS. but also notices that research priorities tend to respond to (economic) demand.2 Public investment is needed to ensure development of new drugs. promoting generic policies. equity pricing of newer essential drugs and making use of the TRIPs safeguards. Therefore.4. Before the Uruguay Round. WHO insists that access to essential drugs is a human right and that medicines are not simple commodities. protecting the interest of the patent holder as well as safeguarding public health. which may be used to protect public health and promote competition.4.2.4. in order to use these safeguards.3 Support should be given to any measures which will improve access to all essential drugs. the TRIPs Agreement contains a number of safeguards. 4. including mechanisms to promote competition. 4. These safeguards can be used to mitigate the potential negative impact of the TRIPs Agreement on access to drugs. 2000 However. allowing parallel imports.1 Patents on pharmaceuticals should be managed in an impartial way. WHO recognizes that patents on pharmaceuticals will stimulate R&D of new drugs. this included a Page | 95 . rather than to medical need. However. 4.

The views of Japan and the EU during the negotiations are interesting too. For instance. They realized that pharmaceutical production was highly concentrated in developed countries. the experience even of developed countries. for most developing countries it seems there have been less benefits than expected. therefore meant a significant change for the pharmaceutical industry. For developing countries. developing countries refused to negotiate an agreement on intellectual property. Unfortunately. unilateral action by the US -on the basis of "Special" section 301 of their Trade Act. This is perhaps the most dramatic asymmetry in contemporary North-South relations.would cease. since all WTO member states were obliged to grant it. since rights on intangible property may be properly used but also can be abused. Industrialized countries argued that patent protection in all fields of technology. in all areas of science and technology. the US has continued to use section 301. • patent protection would promote local R&D. which have led to the granting of a number of compulsory licenses. Second. Japan was concerned about potential abuses of the system. developing countries could obtain benefits. suddenly patenting of pharmaceutical products was made almost universal. as well as many developing countries. The US applies the 301 or super 301 section in order to threaten or retaliate with trade sanctions against countries on the basis of what they consider to be 'non-compliance with adequate standards of intellectual property'.number of developed countries. Developing countries were reluctant to extend patent protection to pharmaceuticals. for instance Brazil. even before the adoption of TRIPs. while an Agreement should establish a certain level of protection. there were two potential benefits in negotiating the TRIPs. by having such a system. In addition. under the agreement there is a multilateral system for dispute settlement. Page | 96 . India. a number of economic studies showed that patent protection for pharmaceuticals in developing countries would lead to an increase in prices for medicines. the expectation was that. raised further doubt whether there would be any benefits. Moreover. as stated now in TRIPs Article 27. the possibility that in other areas of the Uruguay Round negotiations. innovation -the development of NCEs. For almost 3 years. such as Portugal and Spain. At that time. Mexico and Egypt. the TRIPs position on parallel import -countries are free to decide whether or not they allow this. would have three main effects in developing countries: • there would be more foreign direct investment (FDI). for instance access to markets for textiles and agricultural products. which states that patents should be granted in all fields of technology without exclusion. Unfortunately this expectation has not been fulfilled either. politically. to avoid the discussion and the drafting of the Agreement started. from 1986 until May 1989.should be looked at from this perspective. in developing countries. • it would promote the transfer of technology. First. in fact the US has quite a long tradition of anti-trust cases related to the abuse of IPR. it should not amount to a restriction to trade. TRIPs Article 27. such as Italy. which had recently adopted patents for pharmaceutical products. Their main interest was that. Finally. But finally it was not possible. More importantly. the trade-offs.was almost exclusively undertaken in industrialized countries. since it relates to the ability to create and apply new scientific and technologic knowledge. 96% of worldwide R&D expenditures took place in developed countries and only 4%. to an increase in royalty and profit payments abroad and to a greater market penetration by foreign firms.

6." Abraham Lincoln. but this is expensive and risky.1. and thereby added the fuel of interest to the fire of genius in the discovery and production of new and useful things.1 The international innovative pharmaceutical industry's perspective 4. Along with a well-functioning regulatory structure and marketing system.6.6 Stakeholders' views Three important stakeholders are the innovative pharmaceutical industry. are dependent on strong patent and other intellectual property protection.1 The importance of intellectual property rights for pharmaceutical R&D New medicines and access to these new medicines. 4. the national pharmaceutical industry and the consumers. for a limited time. The commercial sector discovers and develops nearly all new drugs and vaccines. secured to the inventor. the exclusive use of his invention. which will be vital in the fight against communicable and non-communicable diseases. it allows the private pharmaceutical industry to operate and contribute to a socially driven public health sector by providing it with cost-effective new technologies. 1859 The patent system represents a compromise between competing short-term and longterm economic and social interests. the patent system provides the incentive necessary to investigate thousands of new compounds and to invest an average of several hundred Table 26: Importance of patent protection for development of innovative products in various industries Page | 97 . "The patent system ….4.

fewer research funds will be allocated to that country or disease. The dependence of pharmaceutical and vaccine discovery and development on adequate and enforceable intellectual property rights is the highest among various sectors. drug R&D has been rising. The exposure of poorer countries to the discovery/development gap is particularly acute because of mitigating circumstances of poverty. HIV/AIDS) is subject to CL policies. Compulsory licensing of a patent to a competitor.g. two major gaps can be identified: • a "discovery/development" gap between the morbidity/mortality and available remedies. due to the relatively large gap in regulatory capability and training between developed and developing countries as well as the differences in enforceability and penalties for counterfeiting activities. Table 26 shows that the first rank is held by the pharmaceutical industry. which have adopted stronger patent protection in recent years. leading to cheaper drugs. is normally limited in application to extraordinary circumstances. also under TRIPs. • The R&D Imbalance: While the relative incidence of infectious diseases is Page | 98 . governments tend to use CL measures for industrial policy. and • an "access imbalance" between consumption of medicines in the developing and the developed world. However. "compulsory licensing" has been touted as a magic policy to improve access to medicines in developing countries. the protection of trademarks. Problems of access to drugs With regard to inadequate access to drugs. poor infrastructure and urbanization.million dollars in R&D. provided for in some way in most countries. They ignore many of the problems with this approach: • it assumes that there is a licensee that can duplicate the originator's skills in manufacturing an equally safe and effective product. if a country adopts CL measures or if a disease area (e. which promises to improve the supply of effective new drugs and vaccines and to improve access to medicines for patients worldwide. However. recently. In some developing countries. the quality of the drug supply is improved. • it assumes that governments will use this "tool" as a pro-consumer tool. Finally. In addition. The effect on public health is that through the reduction of trade in unregulated counterfeit products. • most damaging. This is a fundamental change. such as Korea. there are other pharmaceuticals-related gaps that contrast the health situation in the "North-South" context: • The Quality/Counterfeit Medicines Gap: Patients in developing countries are more frequently exposed to substandard products and counterfeits. often related to technology issues in industry mergers. helps to clean up counterfeit products from the marketplace. Proponents of an activist compulsory licensing (CL) system see the issue in terms of consumer price benefits arising from effectively abrogating the patent's marketing exclusivity.

many developing countries have choices of products from just a few sources. according to the innovative pharmaceutical industry. These are just a few examples to illustrate existing barriers. may actually inadvertently hinder access to vaccines… by discouraging legal vaccine technology transfer and by failing to encourage domestic vaccine research and development". this is a global phenomenon. • Patents do not. measurement techniques etc. inflation. • Generic production is not an automatic answer to access. have an influence on access to those drugs which most of the population in developing countries actually consumes. in fact. which are primarily offpatent drugs. Page | 99 . with post-patent conditions making the product a generic 'commodity' subject to even greater competitive pricing pressures. large populations within India should have easy access to these generic versions of AZT and other medications. For instance.higher in developing countries. China. price controls. • The Drug Production Imbalance: With over 3/4 of the world's population. Thus. A 1995 study showed that countries with intellectual property protection did not have higher prices than countries without such protection. 2/3 of the latter production is concentrated in a few developing countries. India already produces generic copies of patented AIDS drugs. such as India. Innovation makes a therapeutic option available. Cost and Price Issues There is no price at which a 'non-invented' drug can be purchased. If patents were indeed the problem. further. Further. Improving access conditions means focusing on a wide number of factors restricting access to health care and medicines. The Children's Vaccine Initiative noted that while patents and royalties do not raise the price of vaccines 'dramatically'. Egypt. developing countries produce less than 1/10 of drug output. the 'price' of a treatment or cure is infinite. people working in the informal sector cannot enter the social security health care system. generic producers in developing countries may charge lower prices than the original innovator. • Patented products also face competition from off-patent products for the same conditions as well as from other therapeutic alternatives. Republic of Korea. In fact. but it bears most heavily on poorer populations in developing countries. but prices are still above levels which most people in developing countries can pay. Access is poor in some countries regardless of the status of patents. the time between the introduction of an innovative drug and of therapeutically similar products has lessened dramatically over time. Brazil. "… countries which do not recognize IP…. in developing countries. and. the linkage is weak or non-existent since price levels are determined by many factors: distribution conditions and markups. therapeutic competition among alternative drugs drives market prices lower. Indeed. the following issues should be considered: • Regarding the impact of patents on price. • Countries without effective patent protection could produce their own versions of patented products. but this is demonstrably not the case. Usually. Moreover. until now little pharmaceutical research and development has taken place in these countries. funding is often insufficient to provide even the most basic healthcare services and products. In the absence of a new drug. taxes. • The Urban/Rural Gap: The minority of the population living in towns receives three-quarters or more of medical services and products.

• Stimulate the supply of affordable quality generics in developing countries by Page | 100 . a trend which has been observed in Europe as well as in Japan. compared to permitting competitive pricing in the post patent period. which are important in the fight against priority diseases. either directly or indirectly.to long run. they can lead to higher prices in the medium. • Develop a global "orphan-type" incentive plan. Price controls are a very short-sighted policy: while they may make current medicines cheaper. as price controls often go from being "price ceilings" to "price floors". Price controls tend to reduce the supply of newer innovative therapies and can have a distinctly dampening effect on innovation in pharmaceuticals. Bale Recommendations The following global actions are suggested to improve access and innovation in the areas of medicines and vaccines for the benefit of developing countries: • Encourage public-private partnerships for the development and distribution of medicines and vaccines where existing therapies are lacking or not getting adequately distributed. Furthermore. using market exclusivity and tax incentives to encourage companies both in the North and South to perform research and develop drugs for currently neglected diseases. E. local companies must shift their activities from copying drugs to developing new drugs. • Foster local industry investment in R&D and transfer of know-how into developing countries by accelerating the adoption of TRIPs standards for intellectual property rights. in the long run they will make developing new drugs more difficult. • Encourage local innovation by avoiding price controls. • Foster public-private vaccine partnerships to stimulate the development of new drugs and vaccines and/or to increase international financing for their distribution.Figure 27: Estimated Drug Life Cycle Source: Dr H. such as the Medicines for Malaria Venture or the Global Alliance for Vaccines and Immunization.

Parallel trade is product diversion. • Ensure the supply of needed drugs by working to prevent parallel trade. The European Union's experience shows that the benefits of parallel trade accrue mainly to the parallel traders. parallel traders would be buying up supplies of essential drugs in a low-price country for resale in higher-priced markets. cancer and depression over the next decade or so. TB. creating increased health and safety risks for consumers. parallel trade increases opportunities for counterfeit and substandard products to enter the market. Another vital aspect of effective access to medicines relates to information about these medicines and their proper use. to build on basic research to bring new compounds to patients. and that there is no diversion of key products via parallel exporters. not consumers. • Join with judicial authorities. However. then someone else abroad must be paying more through this diversion. the alleged benefits of parallel trade tend to be less than expected. HIV/AIDS. However. even for importing countries. specifically in Europe. Negative approaches. When parallel trade is discussed. Thus the answer is to focus on quality. but rather because consumers lack confidence in their quality. is the International Conference on Harmonization (ICH). to increase the capacity for research in diseases of regional interest. • Adopt global drug review standards to speed up the approval of new drugs. Patients and consumers around the world are increasingly seeking more information about medicines to empower themselves in their own medical care. • Consider creating publicly financed research centres in the region to foster medical research. such as the National Institute of Health (NIH). should be avoided. Perhaps through such a mechanism ASEAN countries and local and international industry together could develop effective treatments for malaria. Japan and the USA. and trademark owners must therefore stand behind the quality of the product. In the area of globalization of Page | 101 . its mission is to improve the efficiency of the registration process for new pharmaceutical products. Severe penalties should be imposed. if it is assumed that parallel imports can make a significant difference in lowering the price domestically. If consumers avoid unbranded generics it is not because of trademarks. thus diverting them from the population who needs them. it is always assumed by proponents that there are only parallel imports. • Empower consumers to choose well. it also has worked with public agencies. as well as increasing the burden on inadequately resourced regulatory staff in developing countries. Furthermore. Improved access to medications can be helped through reducing unnecessary tasks and duplication in the review of drugs internationally. One major effort. To deny trademarks rights would be to soften the pressure on generic drug producers to produce high standard medicines. The Internet. conducted in partnership between the public and private sectors. but the use of the Internet to distribute medicines can also pose dangers.working to inculcate the importance of quality manufacturing procedures locally. While industry does its own drug discovery and drug development research. such as attempting to withdraw trademarks for medicines. Trademarks are a sign of the origin of a medicine. as a truly global medium. In addition. has the potential to be a positive resource. which may seem seductive if a country's officials believe that they will be receiving relatively low-priced imports. pooling the scientific expertise and resources of several countries. because the former capture most of the "rents" arising from the differences in ex-manufacturer prices across countries. the police and industry professionals to implement anti-counterfeiting legislation.

Table 27: Introduction of patents Source: World Bank Noting the above and other concerns. rather than on widespread. such as those listed above. serious tropical diseases. National pharmaceutical industries in developing countries are concerned about trends to focus R&D efforts exclusively on problems for which lucrative markets exists. The national pharmaceutical industries therefore believe that Governments should introduce appropriate policies to alleviate possible negative implications. the implications of TRIPs Agreement on the national pharmaceutical industry might be: • When markets are small. Intellectual property rights can disadvantage developing countries in two ways. It is also worth noting that most industrialized countries.information and trade.6. industrial countries. encourage foreign direct investment. such as impotence. obesity. while having a patent system in place since a long time. due to the weak bargaining power of developing countries in negotiating prices with monopoly suppliers.2 The national pharmaceutical industry's perspective Intellectual property rights are a compromise between the incentive to create knowledge and the desirability of disseminating knowledge at little or no cost. introduced product patents for drugs only relatively recently (see Table 27). most of whom reside in developed. after their pharmaceutical companies had attained a very high degree of development. • This may create an impression of denying people the right to new drugs. Effects on distribution might be particularly strong with respect to the effects of patents on the price of medicines. • The gap between local and multinational companies will widen. namely by increasing the knowledge gap and by shifting the bargaining power towards the producers of knowledge. 4. governments and international institutions need to consider appropriate policies regarding this new health care medium. • New medicines will be more expensive. jet-lag and baldness. there is no systematic empirical evidence for either concerns that intellectual property rights would slow innovation or for their alleged positive impact on research and development. development and innovation and ensure early introduction ofnew products. • The introduction of new products by national industries will be delayed. strengthen research. there will be no interest to invest in technology transfer. • There will be a shift in market share from generics to branded/originator products. Page | 102 . that is. While the debate deals with positive and negative implications. of the introduction of TRIPs standards. • Several case studies indicate that there is little evidence that the introduction of TRIPs compliant standards of IPR would stimulate transfer of technology.

that the TRIPs Agreement should be implemented in ways which would prevent compulsory licensing and parallel imports.4. only three were able to retain their ranking within the top ten after five years. over two billion people do not have regular access to life-saving drugs. The multinational companies (MNCs). Generic manufacturers can copy them only after the patents expire. will prevent access of the life-saving drugs to over two billion people. this. Of the top ten US prescription drugs in 1983. None of them was in the top 100 in 1997. they will be waiting in vain. 1381. distribution and sales of the patented drugs. therefore. consumer organizations believe. Modern drugs have a short lifespan.3 A consumer's perspective (Consumers International) Access to essential drugs and affordable medical services are major consumer concerns. p. Table 28 gives the US ten top prescription drugs in 1983 and traces their ranking during the following 14 years. The top sellers of today will be almost extinct in about 10-15 years. (2) 1997 Ranking: Annual Report 500 Drugs: 500 Prescription Drugs by worldwide sales. Table 28: Top prescription drugs in 1983 and their ranking in 1988 (US) and 1997 (world) Source: (1) 1983 & 1988 US ranking. and 4 drugs were not even in the list of the 500 top selling drugs that year. If developing countries have to wait for 20 years to manufacture new lifesaving drugs. Consumers reject this position because no drug at the end of 20 years will be worth manufacturing. Jan 27. Table 29: Retail prices in USD of 100 tablets Zantac in 11 Asian countries Page | 103 . The prices fixed indiscriminately by the MNCs. the patent holder will have an exclusive monopoly for the manufacture. Currently. 17. SCRIP No. During this period. Pharma Business. 1989. The consumer organizations. reject the position taken up by MNCs. have been advocating that developing countries need to provide strong patent protection for pharmaceuticals (20 years) in their national legislation. particularly the American industry. July/August 1998. is a crisis situation.6.

This seems to be a justifiable argument. • The special problems of the least developed countries (LDCs) should receive Page | 104 . technological and financial resources. Subsequent reforms should incorporate as a central objective the promotion of sustained development in the Third World. Therefore. which. at present.Source: Retail Drug Prices: The Law of the Jungle. • There should be a major review of the WTO multilateral trade agreements. The United Nations Industrial Development Organization (UNIDO) has classified 190 countries into 5 groups based on the degree of development of pharmaceutical technology and industrial production. 100. are available in only 10 advanced industrial countries. how much it costs to develop a new chemical entity and the amounts MNCs really spend on R&D. April 1998. A major argument put forward by multinational drug companies for strong patent protection is to have exclusive rights for a period of time so that they can earn adequate profits to cover their costs of R & D and to continue further R&D. we would need to know how much profits MNCs make. Unfortunately. Table 30: A typology of world’s pharmaceutical industries *) Each country in this group discovered and marketed at least one NCE Consumers have expressed the following concerns: • The TRIPs Agreement represents an unprecedented transfer of power over economic functioning from the heads of nation states to MNCs. HAI News No. Comprehensive research and development to discover and develop new chemical entities require human. independent data on the cost of R&D are scarce.

The TRIPs Agreement will enable multinationals to dominate the global market even more easily. • Trade policy should be a powerful instrument for economic development. • Despite the risks of genetic engineering. there were 28 LDCs. the best of the new technologies are priced for those who can pay. blocking developing countries from the dynamic knowledge sectors. WTO. institutions and practices that have been formulated by a selected few. • From new drugs to better seeds. racing to lay claim to intellectual property under the rules set out in the TRIPs Agreement. the rush and push of commercial interests are putting profits before people. determining how they are used. The people’s response has been loud and clear during the violent events in Geneva. The result: a silent theft of centuries of knowledge from some of the poorest communities in developing countries. privatisation and tighter intellectual property rights are shaping the path for the new technologies. Why have people reacted so violently? People see that power is controlled by market forces operating under faulty global governance supported by rules. Seattle. biosafety and access to healthcare. In 1978. and this aspect must not be lost sight of by narrowly focussing on liberalisation. These laws ignore cultural diversity in the way innovations are created and shared – and diversity in views on what can and should be owned. institutions and practices that will ensure global responsibility. consumers believe it is critical to examine the TRIPs Agreement and explore the best options in interpreting and incorporating relevant provisions into national legislation. The rapid decline into poverty is due to rapid liberalisation. • Tighter property rights raise the price of technology transfer. Cosmetic drugs and slow ripening tomatoes come higher on the priority list than drought-resistant crops or a vaccine against malaria. the UNDP's Human Development Report 1999 has listed the following concerns: • Liberalisation. money talks. To conclude. • There is a need for a comprehensive review of the WTO Agreements to redress their perverse effects. undermining food security. • In defining research agendas. Corporations define research agendas and tightly control the findings with patents. In 1998 there were 48. indigenous knowledge. Based on analysis of empirical data on the impact of the TRIPs Agreement on access to drugs and health services in developing countries. Davos and other places. not need. • New patent laws pay scant attention to the knowledge of indigenous people.particular attention. according to the United Nations. People want a restructuring of the present global governance with a new set of rules. which ultimately will ensure regular Page | 105 . recently. For poor people. so that the benefits of globalisation will be shared equally by all the people of the world and not exclusively by the 20 per cent of the people living in the richest countries. The better options will be those that will strengthen the technological. economic and commercial development of the pharmaceutical sector in developing countries. People ask that they be given a participatory role in decision making to ensure that people will be put at the centre of development and that the highest priority be given to goals of enhancing social development and ensuring human well-being for all throughout the world. from plant varieties to human life. But the privatisation and concentration of technology are going too far. • Poor people and poor countries risk being pushed to the margin in this proprietary regime controlling the world’s knowledge. imposed by WB/IMF structural adjustment programmes and. they remain far out of reach.

with a mandate extending to global competition policy with antitrust provisions and a code of conduct for multinational corporations. As mentioned.1 Experiences with the introduction of patents for pharmaceuticals In most developing countries. With regard to FDI. a large number of formulation plants have been closed down. But the experience of countries which have adopted pharmaceutical patents in the past decade is relevant in this context. there was no increase in FDI and the trade deficit in this area has increased substantially due to the substitution of local production by direct import. So after the introduction of the patents.7. FDI in the pharmaceutical sector has not increased.1. 4. Finally. there is no sign of any increase in pharmaceutical R&D in these countries. the situation is not better. nor are there any clear prospects that R&D for diseases relevant to developing countries will increase in industrialized countries. What happened to foreign direct investment (FDI). It was revised in 1992. and excluded pharmaceuticals. long term solutions would include a World Trade Organization that ensures both free and fair international trade. and Italy began to be a net importer of pharmaceutical products. With regard to the transfer of technology. but to import. many local companies have been acquired by foreign companies.1 Latin America Several Latin American countries. License agreements usually mean that the patent holder provides the active ingredient. 4.2 Italy Italy has introduced patent protection for pharmaceuticals in 1978.1. Moreover. At that time. unfortunately.7 Country experiences 4.7. the experience of countries such as Chili.3 Thailand The first patent law in Thailand was enacted in 1979. and has not increased. prices for medicines in Italy had increased significantly. the essence of the revision was the inclusion of pharmaceutical product and process patents. such as Chili and the Andean countries changed their patent legislation in 1990/1991. A further revision. But there has been no new investment. in the area of pharmaceuticals. TRIPs standards became enforceable only a few months ago. pharmaceuticals became patentable. almost 200 %. and the licensee is usually just formulating. transfer of technology and (local) R&D? What happened to drug prices? 4. Colombia and other Andean countries is that after the adoption of patent protection for drugs. many foreign companies have decided not to produce (or formulate) locally any more. there is little real transfer of technology. there is no clear increase in transfer of technology to local companies. safe and effective drugs. going from a trade surplus in pharmaceuticals to a very severe trade deficit in this area. A number of years after the introduction of these patents. good quality.7. Therefore it can be concluded that transfer of technology in this area was never very substantial. As a result. not the technology for the production of the active ingredient. Italy was a reasonably large producer of pharmaceutical products and an exporter with a trade surplus. In general.1. therefore time is too short to have evidence about its implications.access to affordable. except through the acquisition of local companies by foreign companies.7. introducing petty patents and Page | 106 . 4. In addition.

since the enforcement rules included in TRIPs may require the revision of national laws in respect of civil. • Implementation will reach beyond the intellectual property offices. • A final important observation relates to post-TRIPs era: the legal structure of TRIPs emerged from and belongs to the legal and historical traditions of developed countries. This flexibility is built into the TRIPs Agreement. IP does not have to be contradictory to the policy objectives of developing countries. In fact TRIPs has been described as reflecting the legal culture. criminal and administrative procedures as well as a revision of the role of police and customs authorities. no increase in technology transfer was seen after the enactment of the 1992 patent law. a number of observations can be made based on countries' preparations for becoming "TRIPs compliant": • As mentioned earlier. which provides that members are free “to determine the appropriate method of implementing the provisions of this agreement within their own legal system and practice”. some believe that increased protection of intellectual property rights may enhance the achievement of those objectives. TRIPs enforcement should be part of a wider approach which comprehensively strengthens the legal and law enforcement infrastructures. Thus. since part 3 of the TRIPs Agreement provides minimum standards for the enforcement of IPR protection. in 1992. Developing countries therefore should implement the TRIPs while truly taking into account Article 1. the study did not reveal any price change. in fact. A study to assess the impact of the introduction. TRIPs leaves substantial room for an implementation in a way which takes specific national policies and priorities into account. indicating that foreign companies benefited more from change in patent law than local companies. paradigms and interests of industrialized nations. • Efforts related to the implementation of the TRIPs Agreement will not end by the end of the transitional periods. The development IP rights which are of interest to developing countries. related to enforcement.addressing the issue of parallel import. Page | 107 .1 of the Agreement. The workload and pressure on the legal system of developing countries.2 Development of TRIPs-compliant legislation in developing countries While experience with the actual implementation of TRIPs in developing countries is limited. • there has not been much foreign direct investment in the pharmaceutical sector since 1992. however. there has been an increased tendency to import drugs (compared to local production). • technology that could lead to R&D of new pharmaceutical products in Thailand is not likely to be transferred. on average by 4% per year. the share of originator products as percentage of the total pharmaceutical market increased. the question of the impact on drug prices is in fact not answered by the study. • for products already on the market. However often IP has been equated with TRIPs and it is important to make a distinction. will only begin after the end of the transitional periods.7. of patent protection for pharmaceuticals concluded that: • technology transfer in the pharmaceutical sector has been minimal and has been limited to formulating techniques. was enacted in March 1999. • since the enactment of the 1992 patent act. due to the selection of products (all selected drugs had competitors in the Thai market) and a variety of interfering factors. 4.

although the issue of patent term extension to compensate for regulatory delays in the marketing of new pharmaceutical products was raised in the Uruguay Round negotiations. and it ensures that. Disclosure is crucial. • Diagnostic. The WTO Panel in "Canada . inventive step and industrial applicability. provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner. therapeutic and surgical methods for the treatment of humans or animals. Under the TRIPs Agreement. countries are required to make the grant of a patent dependent on adequate disclosure of the invention and they may require information on the best mode for carrying it out.8 Technical issues 4. Three types of exception to the above rule on patentable subject-matter are allowed. a lot of interest has been expressed on the part of developing countries for standards providing for the protection of traditional medicine and know-how and biodiversity. these exceptions may be of interest from a public health perspective: • Inventions the revention of whose commercial exploitation is necessary to protect ordre public or morality.3 Limitations/exceptions to these rights Under the TRIPs Agreement. patent rights are not absolute but can be subject to the following limitations or exceptions: • Countries may make limited exceptions. 4. Specifically. Thus. protection must last for at least 20 years from the date of filing of the patent application. It should be noted that. In addition. after the expiry of the patent term. or importing8 the patented product or a product obtained directly by the patented process. in all fields of technology. taking into account the legitimate interests of third parties. novelty. using. offering for sale.8.2 The rights conferred and the term of protection According to TRIPs.1 Patentability of pharmaceutical inventions The main rule relating to patentability is that patents shall be available for any invention.8. the minimum rights that must be conferred by a patent follow closely those that were found in most patent laws.8. 4. including to protect animal or plant life or health.covering their knowledge base and information resources. 4. whether a product or a process. the invention truly falls into the public domain.Term of Patent Protection" recently found that this rule applied not only to new patents but also to patents in force at the end of a Member country's transition period.namely. the TRIPs Agreement does not contain an obligation to introduce such extension. many countries Page | 108 . for example. and • Certain plant and animal inventions. namely the right of the patent owner to prevent unauthorized persons from using the patented process and making. may make IP a more positive discipline for these countries and can present an important aspect of sustaining the effectiveness and acceptance of IP systems worldwide. since it makes important technical information publicly available so that others may use it for advancing technology in the area. even during the patent term. provided the invention meets the standard criteria for patentability .

With regard to the protection of pharmaceutical inventions.4 Other policy instruments It should be remembered that governments may use public policy measures outside the field of intellectual property to address issues of access to and prices of drugs. the grounds on which this can be done are not limited by the Agreement. against anti-competitive practices. they have to provide a system where applications for pharmaceutical product patents can be filed (often referred to as a "mailbox" system). there are two situations. If found to be patentable by reference to their filing (or priority) date. For example. in formulating or amending their rules and regulations. the two conditions specifically referred to above (regarding voluntary license and remuneration) may be relaxed. an exclusive marketing right of up to five years will have to be granted provided that certain conditions are met. st Page | 109 . In the event that a pharmaceutical product that is the subject of a "mailbox" application obtains marketing approval prior to the decision on the grant of a patent. 4. consistent with TRIPs provisions. adopt measures necessary to protect public health and nutrition. have until 1st January 2005 to introduce such protection. In these countries. 3. Transition provisions The TRIPs Agreement lays down some rather complicated transition provisions which give countries periods of time to adapt their legislation and practices to their TRIPs obligations. The Bolar provision (see par. • Countries may authorize the use by third parties (compulsory licenses) or for public non-commercial purposes (government use) without the authorization of the patent owner. The basic rule is that developing countries have until the 1st January 2000 and least developed countries until 1 January 2006 to meet their obligations. A small number of developing countries. However. although a certain amount of adjustment in legislation. but the Agreement contains a number of conditions that have to be met in order to safeguard the legitimate interests of the patent owner (see Article 31).allow third parties to use a patented invention for research purposes where the aim is to understand more fully the invention as a basis for advancing science and technology. to be anti-competitive. which did not grant patent protection for pharmaceutical products. the TRIPs Agreement will therefore not lead to fundamental changes. Two of the main conditions are that. a patent would have to be granted for the remainder of the patent term counted from the date of filing.5) is another example of an exception. These applications do not have to be granted until after 1st January 2005. The Agreement also provides for consultation and cooperation between Member Countries in taking actions against anti-competitive practices. an effort must first have been made to obtain a voluntary license on reasonable commercial terms and that adequate remuneration shall be paid to the right holders. Unlike what was sought by some countries in the negotiations. many countries use price or reimbursement controls. For example. from 1 January 1995. provided that such measures are consistent with the provisions of the Agreement. these periods differ according to the type of obligation and the stage of development of the country concerned. as a general rule. the conditions for issuing compulsory licenses are more flexible. The TRIPs Agreement makes it clear that WTO Members may. • Countries have the right to take measures. When a practice has been determined after due process of law.8. TRIPs in context Most developing and least developed countries already grant patent protection for pharmaceutical products.

are met. These are the typical ways in which disclosure can destroy novelty. Usually. it is also true that other countries attached great importance to other areas. This has drawn a lot of attention lately. novelty. Figure 28: Animal hat patent Page | 110 . The TRIPs Agreement pays considerable attention to the need to find an appropriate balance between the interest of rights holders and users.9 Standards for patentability TRIPs requires that patents are granted when the typical standards for patentability. This is not only reflected in the basic underlying balance related to disclosure and providing an incentive for R&D. But outside the US. in a strict way or in a very flexible way. and therefore can destroy patentability. While it is true that some countries put particular emphasis on TRIPs matters in the Uruguay Round negotiations. this was an important theme in the negotiations. The protection of pharmaceutical inventions is one aspect of much wider negotiations. This is the universal standard of novelty. patents have been granted. based on only one click. This has been patented and as a result no other company can use a system for ordering a product via the internet. including Brazil and Argentina. but also in the limitations and exceptions to rights that are permitted and in the transition provisions. Similarly. that is. With respect to the fairly limited number of countries that did not provide patent protection for pharmaceutical products at the time of entry into force of the WTO Agreement. in the US. covering not only the protection of intellectual property in general in a coherent and non-discriminatory way but also further liberalization and strengthening of the multilateral trading system as a whole. Whether this balance has always been found in the right place is a question for discussion among WTO Members.for example in respect of patent term and compulsory licensing. Some countries apply these criteria in a very flexible way and. will generate the resources required to tackle health problems. for instance the “one-click” method for buying books by ecommerce. Under US law. Disclosure can take place through publication or through use (if an invention is used. the Indian Neem tree is one of the well known cases. inventive step and industrial applicability. A strong and vibrant multilateral trading system is believed to be essential for creating conditions for economic growth and development worldwide. An example is the novelty requirement. some. on traditional or indigenous knowledge. have decided to provide such protection more quickly than is required under the TRIPs Agreement. Novelty is not destroyed if disclosure was done through use of an invention outside the US. for example textiles and agriculture. paradoxically perhaps. because of a number of patents granted on so called business systems. and this has created a lot of concern in developing countries. in turn. it means the public knows it). 4. novelty will only be destroyed if the disclosure took place via publication. novelty is destroyed if an invention has been disclosed through publication or through use in the US. is very loose. plants and genetic materials used for centuries in developing countries. This is the reason why. the way in which the inventive step requirement is applied. But the Agreement does not specify how these criteria should be defined and applied. But the US has standards for novelty which are lower. This. the novelty requirement means that a patent will not be granted if the invention has been disclosed anywhere in the world. a good example is the US. So there is room for WTO members to decide how to apply these criteria. may be necessary.

and this has created considerable controversy. But the same loose criteria are applied in other sectors. a decision was taken in favor of Amgen.Figure shows an example of a patent granted in the US in 1990. In fact. A process patent puts the burden of proof on the defendant. Page | 111 . Each year.969. such as pharmaceuticals. Genetics Institute (GI) also sequenced the gene and each claimed to be the inventor. it could be argued that the inventor was nature and that the companies just discovered it. Yet thousands of pharmaceutical patents are being granted. but in the meantime the defending company may already have gone out of business. GI then applied for a number of process patents. The patent in this example is not very significant. an important biotechnology based product. The first to sequence the gene that codifies for this protein was a US company. since around most NCEs. it can be used aggressively to stop competition since there is an assumption of validity. But with 2-3 months time lag. and as a result GI was unable to commercialize this product in the US. not in the US. where it had lost.317 Animal Hat Apparatus and Method. So in Chili. implicitly one thinks about new drugs. once the patent has been granted. another company. on the basis of which it has tried to stop any production and commercialization of ertythropoietin. Mexico and some other countries. Maybe the defendant can prove after 2-3 years (this is how long it usually takes) that he has the right to produce ertythropoietin. dosage forms. Argentina. GI owns process patents related to ertythropoietin. However. When thinking about patents for pharmaceuticals. only a limited number (less than 100) of NCEs are being developed. because the patent was invalid or because a different process is being used. about new chemical entities (NCEs). there is a large number of patents which relate to processes. in the US. but in several developing countries in Latin America. formulations etc. Amgen. This creates a very difficult situation for companies which are interested in producing a generic version. There are many other examples of trivial inventions for which patents have been granted. since it has little economic importance. Some concrete examples: • Processes: Ertythropoietin is a human protein. therefore. which is still in force: patent number 4.

So while there is a role for the patent system to protect real inventions. big companies can use them aggressively against small. public non-commercial use.10 Compulsory License A compulsory license is an authorization which is granted by the government without the permission of the patent holder. a growing number of patents are granted. it is the same thing. countries have the right to issue such licenses. Finally. this may lead to an extension of the patent protection. with which the patent protection would effectively have been extended for 4 to 5 years. SK-F obtained a patent for cimetidine and 4 or 5 years later applied for and obtained a patent on a polymorph. is a very crucial issue. it is entirely up to the national law to decide which are the grounds. Most countries have provisions for compulsory licenses. even if they are weak. There was no real novelty. So chemically. epidemics.• • Uses: Some countries are also issuing patents for new uses of a known product. so there is a lot of flexibility. the originator company asks for a new patent for a different polymorph. through anti-trust legislation. Due to such flexible application of patentability criteria. Under US law. Therefore.g. Other grounds are for instance emergency situations. the second patent was challenged and eventually invalidated. Conditions Page | 112 . to remedy anti-competitive practices or to protect the environment. compulsory licenses can be issued to remedy anti-competitive practices and for use by the Federal Government. It is important for countries to consider whether they will grant patent protection for such new uses. which limit the scope for generic introduction and competition. a broad description that can be used in many situations. While the Agreement does not limit the grounds -or reasons. formulations. the second indication for pharmaceuticals. Grounds Countries have specified many different grounds for issuing compulsory licenses. including patentability of secondary inventions. 4. Sometimes. The development of appropriate national legislation is therefore crucial. the system should not be misused by granting patents for polymorphs. simply states that compulsory licensing is allowed ‘for reasons of public interest’. The German law. TRIPs further states that the conditions under which a compulsory license is granted should be regulated in accordance with the TRIPs Agreement (Article 31). either under their patent law or. local or generic companies and stop competition. these can include public health reasons. dosage forms. for example. An example is AZT. it is important to realize that it is not relevant whether the secondary patents are strong. In this particular example. as in the US. Under the TRIPs Agreement. defining the scope of patentability. AZT was a known product but a new patent was granted for use in case of HIV infection. e. countries can only use those grounds which are allowed by their national legislation. but this creates situations in which companies are forced to litigate. both these grounds are used extensively for issuing such licenses. because litigations are cumbersome and costly. so it is under a fiction of novelty that such patents are granted. processes etc. A well-known case is cimetidine. Polymorphs: Polymorphs are different crystals of the same molecule. which leads to over-protection..for granting compulsory licenses.

UK. While it is true that in some countries. Under US national law. "predominantly" is not exclusively. In fact. provisions for compulsory licensing are needed. This is practiced in the US. the restriction on export no longer applies. Public interest groups advocate that export to a market where a CL has been issued. few compulsory licenses have been issued. It seems advisable for developing countries to provide for an administrative review only. • If a CL is issued to remedy anticompetitive practices. this is important for the US.g. In case of a CL to provide drugs to a population who would otherwise not be able to afford those drugs. Again. so some export is still possible. countries with small markets. TRIPs therefore specifies the conditions that need to be applied when countries want to grant a compulsory license. therefore it is a Page | 113 . should be allowed. the same applies to contractors acting on behalf of the US Government.A compulsory license limits the rights of the patent holder. • In case of public non-commercial use or government use. this prevents malpractice and misuse of the monopoly rights. many of the conditions do not apply. would not be able to use CL provisions effectively. the royalty rate can be lower. TRIPs only requires that the review is independent. otherwise. to prevent patent holders from blocking the use of a CL by initiating time-consuming court procedures. such as the requirement to first try to obtain a voluntary license. but this does not have to be a judicial review. So if the contribution of a patent is minor. the fact that few such licenses have been granted is used as an argument against the compulsory license system. efforts should first be made to obtain a license from the patent holder (a so-called voluntary license). Under US law. A CL therefore would hardly interfere with practices of differential or tiered pricing. only for payment of compensation. e. which is less burdensome and much faster. Also. a third party could be allowed to use the invention. have granted a large number of compulsory licenses. because they will encourage the patent owner to behave correctly. the US Government cannot be sued for infringement of a patent. it could be argued that the patent holder lost nothing. where local production is not viable. • A compulsory license shall be predominantly for the supply of the domestic market. and it is important to select carefully the wording when translating TRIPs into national legislation: • Remuneration for the patent holder shall take into account (not "be equal to" or "be based on") the economic value of the authorization. in general. Also. Main function At times. this is important for the actual implementation of a CL for public use. TRIPs does not require countries to provide for the right of injunction. such as the US. as for instance in case of a formulation patent. The conditions mentioned in TRIPs merit careful reading. compensation is based on what the patent holder has lost. An important condition is that each case shall be considered individually. • A decision to issue a CL must be subject to review. They give a sign to the patent owner that in the case of abuse of rights and/or non-availability of the product. But regardless of whether or not they are used frequently. one of the most important aspects of a compulsory license system is its impact on the actual behavior of the patent owner. it can only be sued about the amount of compensation paid. but does not take those rights away. other countries. which frequently issues compulsory licenses to remedy such practices. on reasonable terms. What is considered ‘reasonable’ depends on national (case) law. so countries may opt for an administrative review. However.

12 Exceptions to the exclusive rights TRIPs Article 30 allows for limited exceptions to the rights conferred to the patent holder. for instance. At times it is being argued that allowing parallel import in developing countries will result in an increase in counterfeit and/or substandard products in the market and will therefore have a negative impact on consumers. into a country of a product from a third country. However.11 Parallel import Parallel importation refers to the importation. currently there is considerable support in the US for allowing parallel import of drugs from Canada). TRIPs explicitly states that it does not address the issue of parallel import. A market where price discrimination is common. instead of putting pressure on developing countries in this respect. These exceptions however can be challenged and subsequently reviewed by the WTO. thereby leaving countries free to determine their own policy in this respect. this will reduce the delay for generic products to enter the market after the patent has expired. without authorization of the patent holder. however. 4. If this were to happen (in fact. in the US. This is speculation. revenues would come under pressure if ‘high-price markets’ such as the US would start parallel importation of cheaper drugs from. this could be true. 4. such as the pharmaceutical market where prices for the same product can vary considerably between countries.necessary element in any IPR law. It is worth noting that the US legislation on IPR allows parallel importation. companies would be tempted to react by harmonizing their prices across borders. To the extend that developing countries do indeed benefit from preferential prices. these should include its use for reasons related to public health. the most common exception to the exclusive rights of the patent holder is often referred to as the 'Bolar provision'. Canada. in fact. to ensure the system can be used effectively. where this product has been marketed by the patent holder or in another legitimate manner. The text of the TRIPs Agreement does not specifically address this issue. and thereby enhance competition. The multinational pharmaceutical industry argues that parallel import will prevent preferential prices for developing countries. Parallel import is allowed under the TRIPs Agreement. However. a WTO Panel ruled that a provision in Canadian law. In the context of pharmaceuticals. it is important to carefully state the grounds and conditions for its use in the national legislation. A Bolar provision allows interested (generic) manufacturers to start producing test batches of a product before the patent expires. parallel import of medicines is forbidden by regulations related to Food and Drug Control. It is mainly used when the price in the third country is considerably lower than the price the patent holder charges in the country concerned. The solution however seems to be to prevent parallel importation in industrialized countries. which permits the use of patented products by generic producers for the purposes Page | 114 . The drug companies’ worries are understandable since. obviously. However the benefits are quite clear and there is a strong economic rationale for developing countries to adopt parallel import. in order to collect the necessary data for submission to the registration authorities. in a recent WTO dispute. will fundamentally change if parallel import is allowed.

4. Augmentin. Lupron.13. It then addresses how the pharmaceutical market is different from other types of markets and how the rules for dominant firm conduct should be adapted to those industry-specific factors. Generic drugs are as safe and efficacious as branded drugs.13 Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition 4. Generic drugs typically sell for approximately 70% less than their branded alternatives. For each of these drugs the branded company – a dominant firm – attempted to extend its patent monopoly through some form of alleged exclusionary conduct. the Panel also decided that manufacturing and stockpiling of patented medicines by generic producers during the six months prior to the expiry of the patent term (which was also permitted under Canadian law) is not allowed. Coumadin. citizen petitions. and Platinol. Generic drugs not only result in cost savings. ¶ Why is antitrust enforcement important to the emergence of generic drugs? Today consumers can purchase low-cost generic forms of Remeron. The promise of generic drugs. It closes with four suggestions for antitrust enforcement in order to assure that the competitive market for generics is protected from exclusionary conduct by dominant pharmaceutical companies.2 The importance of generic competition It seems indisputable that competition from generic pharmaceutical manufacturers benefits every consumer. consumers in the U. Relafen. However. but also enable more consumers to purchase safe essential drugs needed for their health and well being at the lowest price.13. . This section begins with a discussion of the importance of generic pharmaceuticals and preventing anticompetitive conduct that hampers generic entry.1 Introduction This Antitrust law and antitrust enforcement play a crucial role in assuring that consumers receive the benefits of a competitive marketplace. is threatened by exclusionary conduct by dominant brand name firms.of seeking regulatory approval from the authorities for the marketing of their generic version soon after the patent expires.S. Buspar. provided certain conditions are met. In some cases the firms used Page | 115 . saved $8-10 billion annually because of generic drugs. Generic pharmaceuticals are instrumental to health care in the United States and offer low cost and high quality to millions of consumers. and authorized generics. Paxil. however. 4. the Panel effectively has decided that a 'Bolar type' provision is ‘TRIPs compliant'. According to a CBO study in 1994 (when the rate of generic substitution was far lower). This section describes various types of exclusionary conduct and explains that without effective use of antitrust law to restrain exclusionary conduct by dominant firms the promise of generic competition may be diminished or forestalled. Taxol. In some respects generic pharmaceuticals are the model of a competitive market: there are numerous competitors and relatively limited barriers to entry. Generic drugs account for over 56% of all prescriptions but only account for 13% of pharmaceutical expenditures. is allowed under TRIPs. With this decision. That is particularly true in generic pharmaceutical markets. The article then addresses three types of ongoing anticompetitive conduct by dominant brand name firms: product line extensions.

4. these drugs accounted for sales of over $10 billion a year before this anticompetitive conduct ceased. the insurance company. This regulation has a significant impact on entry and in turn. the pharmaceutical industry offers many opportunities for dominant firms to manipulate a highly complex regulatory system to secure monopoly profits. • Buyer Identity: Who is the buyer? Antitrust seeks to protect the interests of buyers and consumers. the Pharmacy Benefit Manager. In still other cases they found different ways to delay generic entry. Perhaps one sign of the importance of these cases is that the rate of generic substitution has increased from 44% to 56% in the past decade. Policing exclusionary conduct by dominant firms in the pharmaceutical industry could not be a greater priority. Consumers save billions of dollars annually because of these enforcement efforts. but by finding loopholes to delay competition.13. the courts and enforcers must be increasingly skeptical of claims that such efforts were based on the merits. Is the ultimate buyer the consumer. competition. In other cases they engaged in inequitable conduct before the Patent and Trademark Office. No system of regulation is perfect. • Costs: Pharmaceuticals typically have high fixed costs and very low incremental costs. • Cost-Based Testing: The cost relationship means that cost-based tests for predatory conduct may often be misleading. Unfortunately.3 Why pharmaceuticals are different • Regulation: Pharmaceuticals are heavily regulated. the physician who describes the drug or a combination of some or all of these? Determining the buyer is important in identifying competitive alternatives and defining the relevant market. Not all distribution mechanisms are equally important and exclusion from some preferred mechanisms may pose especially significant concerns. What do these special factors suggest about the standards for single firm conduct in the pharmaceutical industry? The following factors counsel for a more careful antitrust analysis in three areas: • Deceptive Conduct: The regulatory setting suggests that antitrust enforcers and courts must be particularly attentive to the opportunities of dominant firms to engage in deceptive or sham conduct. • Distribution: Forms of distribution are complex Pharmaceuticals are distributed through numerous intermediaries. In a setting where serial litigation or regulatory filings may be a particularly fruitful tactic to delay competition. Thanks to the efforts of the Federal Trade Commission. and private antitrust attorneys representing buyers of these drugs. not through superior foresight. In other cases they engaged in sham litigation. In total. but assessing the identity of the buyer is quite complex in the pharmaceutical context. It also may be important in determining which parties have standing to bring antitrust claims. state attorneys general.questionable filings in the FDA orange book. and regulation almost always offers the opportunity for competitive mischief. industry and innovation. The costs of manufacturing and marketing drugs are modest compared to the cost of development. antitrust litigation played a significant role in ending this anticompetitive conduct. using a cost-based test may not be instructive in attempting to identify exclusionary conduct. Page | 116 . In a situation where variable costs are small.

brand name drug manufacturers increasingly have turned to underhanded means to delay competition. advances can often improve the mechanism of delivery. Patent laws and the HatchWaxman Act provide a period of exclusivity for brand name drugs during which there can be no competition. not all forms of distribution are equally important. often in exclusive dealing cases the courts will focus on the significance of a specific form of distribution in the entire market.Safe Harbors: The complexity of distribution suggests that antitrust courts and enforcers should be extremely careful about using safe harbors in pharmaceutical distribution cases. 4. many forms of exclusionary conduct by dominant branded pharmaceutical manufacturers have been stopped.4 New forms of anticompetitive conduct by dominants Thanks to the effective enforcement of antitrust laws. depriving consumers of the full benefits of generic competition. the patent-holding firm faces the loss of a significant revenue stream. In order to avoid these potential anticompetitive Page | 117 • . This period of exclusivity provides an important incentive for brand name firms to invent new drugs or improvements to existing drugs. Product line extensions are common in almost every industry. or a generic firm has developed a non-infringing version of the drug (or the patent is declared invalid). It is necessary to understand the incentives created by the pharmaceutical regulatory system to understand the nature of these practices. The merger raised competitive concerns in part because of the FTC’s belief that if the merger was consummated the Cephalon drug. Cima was developing a similar drug.13. generic entry will occur. however. would be removed from the market. 4. This section focuses on three varieties of conduct by dominant firms that may raise competitive concerns: product line extensions. whose patent was about to expire. and authorized generics. and the method of interaction. But new forms are arising. “Cephalon’s ownership of both products will allow it to undermine generic entry by shifting patients [to the Cima product] prior to generic launch. As described below. generic entry would be deterred. dosage forms. As the FTC observed. Toward the end of a patent's life.4.” On the other hand. Facing the inevitable decrease in market share (and consequent decline in sales revenue) that follows the loss of patent protection and introduction of generics. as we can tell from the numerous products advertised as “new and improved. there are several types of exclusionary conduct that the patent-holding firm may engage in to delay or dampen the effect of generic entry.1 Product line extensions Innovation is the lifeblood of the pharmaceutical industry and advances in drug technology mean that a growing number of medical conditions can be treated more effectively and safely. In that case. sometimes a product line extension has anticompetitive effects. For example. Moreover. The FTC recognized this potential for anticompetitive conduct in its investigation of the merger of Cima and Cephalon. The expectation is that once a patent has elapsed.” Without the Cephalon drug in the market. When dominant firms face the threat of new entry they often turn to strategic conduct to hold rivals at bay. questionable citizen petitions. Cephalon manufactured a drug to help alleviate pain after cancer treatments.13. especially when it is coupled with additional conduct to create barriers to generic entry. However.

The court began by observing the difficult task of analyzing a product innovation claim: Because. Impax. the court stated that the rule of reason balancing approach of the D. Then Abbott changed the product from a capsule to a tablet version. persuades me that the rule of reason approach should be applied here as well. and certain buyers of the drugs brought an antitrust suit challenging Abbott’s conduct. and again Impax and Teva prevailed. Tricor is a drug used to lower cholesterol with sales nearing one billion dollars. is justified.effects. a court faces a difficult task when trying to distinguish harm that results from anticompetitive conduct from harm that results from innovative competition. The removal of the product from the NDDF and the withdrawal of the product Page | 118 . as described in Plaintiffs' allegations. Instead. and ‘antitrust should not intervene when an invention pleases customers. involving antitrust claims by Teva. Hence. Teva. ‘The error costs of punishing technological change are rather high and courts should not condemn a product change. they prevailed on all their patent claims and were poised to enter the market in 2003. the FTC required Cephalon to enter into a licensing agreement to facilitate generic entry. unless they are relatively confident that the conduct in question is anticompetitive. challenging Abbott’s patents over the capsule version of Tricor. according to Plaintiffs. The defendants filed a motion to dismiss that was rejected. consumers were not presented with a choice between fenofibrate formulations. Defendants allegedly prevented such a choice by removing the old formulations from the market while introducing new formulations.C. therefore. If consumers are free to choose among products. After the FDA approved the tablet formulation. an inquiry into the effect of Defendants' formulation changes. and several groups of buyers alleging that Abbott’s changes to the drug Tricor violated Section 1 and 2 of the Sherman Act. then the success of a new product in the marketplace reflects consumer choice. Abbott changed the code for Tricor capsules in the National Drug Data File (“NDDF”) to “obsolete. v. suggesting that the tablet version did not have to be taken with food. speaking generally. among other improvements. Abbott stopped selling Tricor capsules and also bought back all the existing supplies of those capsules from pharmacies. Rather than adopting the rule of per se legality suggested by the defendants. The per se standard proposed by Defendants presupposes an open market where the merits of any new product can be tested by unfettered consumer choice. Impax. Circuit in US v. According to their allegations. rejected the claim. preventing pharmacies from filling Tricor prescriptions with a generic capsule formulation. Abbott did not just change their product. Microsoft was appropriate: The nature of the pharmaceutical drug market. The court. however.” The defendants fundamentally claimed that any product improvement would be per se legal.” Changing the code to “obsolete” removed the Tricor capsule drug formulation from the NDDF. Teva and Impax battled for several years. innovation inflicts a natural and lawful harm on competitors. But here. and that the only purpose of the innovation was to eliminate the complementary product of a rival. In addition. Teva. Further patent litigation ensued. following the rule of reason approach. Here the critical element was the conduct Abbott engaged in that limited consumer choice. Perhaps the most prominent case in this area is Abbott Labs.' The defendants argued that in order to prevail the plaintiff would have to demonstrate that “the innovator knew before introducing the improvement into the market that it was absolutely no better than the prior version.

it stopped promoting about the drug’s effectiveness. it assured the FDA that it would not say that Nexium was better.” Anticompetitive conduct through regulatory abuse can be especially pernicious. but did not incorporate this new technology into any of its products. AstraZeneca was fined 60 million Euro for similar conduct. causing managed care organizations to not cover the cost of its generic. that decision is on appeal to the Court of First Instance. Defendants allegedly suppressed competition by blocking the introduction of Generic fenofibrate. Apotex. unnecessary and fraudulent conversion was undertaken solely in order to thwart and impede generic competition and thereby maintain defendants’ dominant position.13. AstraZeneca challenged its entry because Apotex failed to secure approval on the two new patents. In reality. sought to produce the drug on which the patent had expired. The specific alleged anticompetitive conduct included the following: • Up to 18 months before AstraZeneca was going to lose exclusivity for Prilosec. In the EU. AstraZeneca applied for two new patents with respect to the product. By removing the old products from the market and changing the NDDF code. When a firm acquires a dominant position through competition in the marketplace. No natural Page | 119 . It also withdrew the additional product from the market. it was essentially the same product. The cost to the party engaging in such abuse typically is minimal. In Canada. In some respects the Tricor case is similar to the Losec case pursued by the European Union and Canada against AstraZeneca for making patent filings after patent expiration to delay generic competition.” The suit claimed that AstraZeneca’s conversion of the market from Prilosec to Nexium forced drug purchasers to pay more than $2 billion in increased drug costs since December 2002. 4. The court disagreed: a monopolist is not free to take certain actions that a company in a competitive (or even oligopolistic) market may take. A more recent case in the United States was filed by several groups of drug buyers against AstraZeneca for anticompetitive conduct involving the conversion of the drug Prilosec to Nexium just as Prilosec was losing its patent protection. When the generic manufacturer in Canada. because there is no market constraint on a monopolist's behavior…. Plaintiffs allege harm to competition rather than simply harm to Teva and Impax. Late last year AstraZeneca was found to have violated the Canadian Competition Act. we can expect other competitors to arise and possibly displace them. • AstraZeneca marketed Nexium by saying it was superior to Prilosec.4. One of the most effective ways for parties to acquire or maintain market power is through the abuse of government processes.were critical. The defendants argued that this conduct was not an antitrust violation because a monopolist does not have any duty to assist its competitors.2 Citizen petitions The court system and the regulatory process can be used as tools to delay the entry or expansion of rivals to dominant firms. Contrary to Defendants' assertion. the company also effectively withdrew Prilosec from the market. • While creating and marketing Nexium. since these actions prevented generic substitution. when the patent for Losec expired. while the anticompetitive effects resulting from such abuse often are significant and durable. The suit alleged that the “expensive. but to obtain FDA approval.

Often these public challenges are genuine and legitimate.1990s. These petitions are often based on information available well before the petitions are submitted. Almost 30 years ago. state legislators and state regulatory bodies and engaging in an alleged misleading advertising campaign.” No statement could be more on point for anticompetitive conduct in the pharmaceutical industry and the practice of socalled “citizen petitions. Pharmacopeia Convention. The brand is not required to submit petitions with merit. Not surprisingly. thereby extending its monopoly on the market. some of the most prominent government enforcement actions against dominant firms have involved all abuse of the regulatory process. which is when the brand company’s patent expires. allows the public to petition the agency using ‘citizen petitions. like other regulatory agencies. Judge Robert H.” The FDA. which is used by millions of Americans for blood-clotting disorders.” Citizen petitions can provide an opportunity for individuals to express their concerns about safety. Inc. such as the FTC cases involving Buspar and Tiazac and the State Attorney General case involving Remeron. pharmaceutical companies have been exploiting the citizen petition process by filing baseless and redundant petitions in an effort to delay FDA approval of generic drugs. including administrative and judicial processes. scientific. There are no requirements for proof of the accusations made in a petition. As one generic drug executive has observed in Senate testimony: Frequently. This despite the fact that the FDA may have already granted a tentative approval. it could take several months for the FDA to respond to a petition. The purpose of these efforts was to delay generic entry.S. faced with the anticipated threat of generic entry. These cases. In order to slow the approval process. during which time approval of the generic drug is held in limbo. That is especially the case in the pharmaceutical industry. These practices ceased after antitrust litigation brought by the generic manufacturer and groups of buyers. a brand company will file a frivolous petition on the eve of FDA approval of a generic equivalent. Consumers suffer as lower cost alternatives are kept off the market. The brand strategy is that it will take several months for the FDA to decide the petition. have saved consumers hundreds of millions of dollars. Increasingly. can displace dominance acquired through abuse of the regulatory process. or legal issues regarding a product anytime before its market entry. None of the petitions succeeded. The FDA citizen petition process provides significant opportunities for deception. citizen petitions are often submitted on the eve of the completion of the FDA review. What the brand company can do is block competition for several months beyond the life of the 20-year patent. penalties for Page | 120 . where litigation and regulatory approval are necessary for market entry. and similar cases brought by private plaintiffs. the U. One example involves the drug Coumadin. (“USP”). presents an increasingly dangerous threat to competition. The qualified generic is held in administrative limbo. petitioning the FDA. In the mid. Bork observed that “predation by abuse of governmental procedures. Despite tentative approval of the generic drug. however. Coumadin's manufacturer engaged on a multifaceted course of conduct to raise questions about the safety and bioequivalence of the generic drug. meaning that FDA already determined the generic product is safe and effective. The citizen petition approval process is time-consuming.competitive force. no requirements for certifications to the accuracy of the information. One example of this regulatory abuse is sham orange book filings.

Defenders of the citizen petition process would suggest that these petitions are immune (or per se legal) under the Noerr.inaccurate or improper filings. the Director of the Division of Bioequivalence at the FDA Office of Generic Drugs. Although the doctrine protects a wide variety of legitimate petitioning.” Perhaps the most critical factor in evaluating this practice is the impact of the petitions. in an effort to extend the review process as long as possible. Since the Medicare Modernization Act of 2003. As of July 2006.4. In one case. In some cases the innovator firm has entered with its own version of a quasi-generic. Both courts and antitrust enforcers should recognize the pernicious effects of petitioning on generic entry. The FDA Center for Drug Evaluation and Research (CDER) recorded an almost a 50% increase in the number of citizen petitions it received from 2003 to 2004. there were about 170 citizen petitions pending compared to 90 in 1999. 4. FDA Chief Counsel Sheldon Bradshaw has acknowledged that he had seen “several examples” of citizen petitions seemingly designed to delay approval of generic drugs. claims that most petitions are rejected because they are baseless: “Most of the time their motivation is simply to make it harder for the competition to come to market. of which they denied 20. or erroneous information. we do not see Apple coming up with lower cost knock offs of an iPod. None of these last minute petitions were approved. After all. the brand company gained an estimated $7 million.” in which a branded company introduces a generic version of its own patented drug a short time before patent expiration. The FTC’s recent report on the Noerr-Pennington doctrine properly identifies limits to that immunity. The reality is that a trivial portion of the petitions are accepted by the FDA and found to require further action. for each day that the petition delayed generic drug entry. Dale Conner. Multiple citizen petitions can be filed during the review process of a single generic drug. Obviously this is an attractive mechanism to delay generic entry.3 Authorized generics Another practice that may raise competitive concerns is the creation of so-called “authorized generics. How is it in the economic interest of the branded firm to genericize a market? It Page | 121 . irrelevant.13. The “authorized” or “branded” generic undercuts the inevitable market penetration and profitability of the other would-be generic competitors by capturing a large part of the generic market prior to the entry of traditional generics. The Office of Generic Drugs denies a high percentage of the petitions that it receives and few have ever altered FDA policies towards generic drugs. there has been a substantial increase in citizen petitions. Eleven of the 21 petitions were “last minute petitions” filed within four months of the generic drug’s scheduled entry into the market. certain types of sham petitioning are not immune. One must wonder why any branded firm enters with a generic version of a high value product. the FDA has ruled on 21. Not surprisingly. The FDA has cited incidents in which citizen petitions have been used for improper purposes.Pennington doctrine. and there are no limits on how many petitions can be filed. Of these 45 petitions. Some petitions contain little or no evidence and rely on obsolete. or 95%. Filers even submit the same petitions again after they have already been denied. but on average they caused delays of an average of 10 months. In other cases it has entered into arrangements with traditional generic firms to enter with a quasi-generic version of the drug. it is rare that petitions present new issues that the FDA has not already considered. According to the FDA. Often petitions are filed over an extended period of time. brand companies have filed 45 separate citizen petitions requesting that the FDA delay the approval of a generic drug.

the cigarette manufacturers eliminated black label cigarettes and significantly increased branded prices. ¶ The purpose of this strategy may be to diminish the incentive for generic entry. Is the reduction of these generic incentives sufficiently significant to have an anticompetitive effect? Perhaps so. But for the potential reward of six months of exclusivity which represents the vast majority of potential profits from generic entry. There is a battle between the apparent short-term benefits of having a new product come to market sooner and the potential long term harm of reducing the incentive and perhaps the ability of generic firms to effectively challenge patents and enter the market. time-consuming and costly. many firms might forego their efforts to challenge patents. In turn. Could such a strategy be successful? There is an interesting historical example. During that 180-day period of exclusivity. numerous other generic firms enter and quickly force prices down to marginal cost. as such.can only make sense if the branded firm sees some long term benefit. generic firms might just decide not to enter these markets. They priced these black label cigarettes in a predatory fashion and eventually drove the independent private label manufacturers out of the market. the branded manufacturers came out with their own black label cigarettes. the pot of gold will still be large enough so that some generics will fight to be the first to file and the first to market. One of the key aspects of the HatchWaxman Act is a 180-day period of market exclusivity which is granted to the first firm to successfully challenge a patent on an innovator drug. Elimination or the reduction of the rewards from the 180-day exclusivity period. Just as patent law created a system of rewards to provide incentives to innovate. ¶ One can see the potential effect of an authorized generic strategy. the generic firms may decide not to challenge certain patents if the opportunity for success and the potential rewards do not seem sufficiently significant. “For some blockbuster drugs. As the value of the exclusivity decreases. the branded firms are not interested in aggressive competition that may threaten to cannibalize their sales. After World War II. In response to the emergence of these black label cigarettes. Another Page | 122 . the issue poses a difficult and challenging antitrust issue. ¶Understandably. generic companies will lose part of their incentives to enter markets by challenging invalid patents or developing non-infringing versions of the drug. Once these manufacturers were driven out. Ultimately this was challenged by the Justice Department in a successful antitrust case against the cigarette industry. such as diminished generic competition. the successful challenger is the sole generic firm. consumers are deprived of the benefits of that generic competition. it reaps substantial profits. the HatchWaxman Act created a system to reward generics for creating non-infringing versions of a drug or successfully challenging patents. Once the exclusivity period expires. As FTC Commissioner Jon Leibowitz has observed. This exclusivity is essential to the balance of the Hatch-Waxman Act. cigarette manufacturers faced the increasing threat of black label or generic cigarettes. With the authorized generic coming to market prior to the entry of the generic firm that has marketing exclusivity. Inventing noninfringing drugs is risky. In other cases. But we could very well see fewer generic applications for smaller drugs—the ones that warrant several hundred million dollars a year in revenue—and this could lead to fewer generic products on the market which would be bad for consumers. the value of that exclusivity may decrease substantially.” What are the potential antitrust concerns raised via an authorized generic strategy? Obviously. The regulatory system effectively requires patent litigation in order to enter the market and this litigation is a multi-million dollar proposition.

If the authorized generic captures half the sales in the generic market. the FTC is uniquely suited to handle the issues surrounding the allegations involving sham petitioning.4. but rather be the first to enter into an alliance with the patent holder. by diminishing the incentives for generic firms to challenge their patents. but there is more to do. the threat of a patent holder entering into an authorized generic agreement may compel generic challengers to drop their patent challenges and enter into settlements. Competition is critically important. then generic companies will respond by investing less in those areas. The ultimate losers from such delays.potential competitive concern is that a manufacturer may develop a reputation for introducing authorized generics when entry by “true” generic competitors seems likely. but it may well diminish competition in the long term by signaling to generic manufacturers not to attempt to enter the market. The generic challenger knows that even if it is successful. I suggest the following as an enforcement agenda: • The FTC should investigate a product line extension case. This means that there will inevitably be fewer challenges even to patents which appear to be relatively weak. state attorneys general. Finally. The Commission’s recent enforcement action against Unocal for sham and deceptive conduct before state regulators has saved consumers over $500 million annually. the reward to the generic company that successfully challenged the patents or discovered a noninfringing product will be reduced by much more than half. This could easily result in delays of several months or even longer in the arrival of generic competition. The FTC. The incentive to aggressively litigate against a potentially invalid patent or invent around the patent will be dampened severely. Thus. the patent holder actually controls the conditions of entry. of course. The goal no longer will be to be the first to successfully challenge a patent. who will end up paying monopoly prices longer than necessary. The FTC may be more capable of addressing issues of product improvement because of the administrative litigation setting and the expertise of the Commission in pharmaceuticals. this statutory incentive for generic companies to challenge patents and to develop non-infringing products is severely compromised. are consumers. The Commission demonstrated this ability to grapple with complex technical issues in its recent Rambus decision. • The FTC should investigate a citizen petition case. 4. brand-name manufacturers could effectively raise the barriers to entry. however. Many of the factors identified earlier. The competitive issues raised by product line extensions are addressed above. may forestall competition. and private antitrust lawyers have played an important role in protecting pharmaceutical markets from artificial barriers to competition.13. ¶As a recent economic study sponsored by the Generic Pharmaceutical Association found: When authorized generics enter during the exclusivity period. Citizen petitions may be a particularly pernicious form of regulatory abuse.4 Conclusion Antitrust plays a vital role in maintaining rivalry as the lodestar of the marketplace. If the incentive to challenge patents and develop non-infringing products is severely reduced. Because of the Commission’s expertise in the Noerr-Pennington doctrine from both the FTC study and its enforcement action against Unocal. One of the most difficult issues in a product extension case is whether the new product is truly an improvement over the current product or merely an attempt to extend an expiring patent. The Commission should use that litigation expertise to Page | 123 . This type of strategic conduct will not immediately foreclose competition.

With the introduction of the Patent Act 1970. and placed the burden of proof on the plaintiff in case of infringement. In fact the decade of 1970s witnessed the passage of several government directives directly shaping the growth path of this sector. 1970 Patent Act. the Patent Act 1970. The decade of the 1970s has been of great importance to the IPR. there are numerous economic factors affecting the pharmaceutical industry which would make such broad standards harmful to effective antitrust enforcement. which witnessed a “process revolution” through concerted effort at acquisition of technological capability fostered by a favourable policy environment. including the Drug Price Control Orders (DPCO) 1970 and 1979. But right from its origin through the decades of the 1950s and 1960s. As suggested above. Finally. Through the decades of 1970s and 1980s. excluded all imported substances from the domain of patent protection (i. especially a weak patent regime. by contrast granted only process patent for chemical substances including pharmaceuticals. however. reduced the duration of patents to 7 years from the date of filing or 5 years from the date of sealing whichever is lower. trying to cope with the challenges of globalisation and reforms. there was a concerted effort at generating indigenous technological capability (in production as well as in research) in the pharmaceutical sector with the goal of increasing access to drugs at affordable costs. 4. Process revolution in Indian pharmaceuticals post 1970 1970 marked the beginning of a new era for the pharmaceutical industry in India. Foreign Exchange Regulation Act (FERA) of 1973. the industry remained largely dominated by foreign firms and drug prices were among the highest in the world. It is going through a turbulent phase of adjustment driven by the emerging international economic order of the WTO. DPCO 1970 was the first concerted and rational effort to check the ever rising drug prices in India. the FTC and the Antitrust Division should be extremely cautious about articulating broad pronouncements in amicus filings in monopolization cases on the standards for exclusionary conduct. DPCO 1979 expanded the coverage of drug price Page | 124 . New Drug Policy 1978 and of course. The FTC should participate as amici curiae in pharmaceutical antitrust cases in the district courts to clarify key legal principles.14 IPR in the Indian context The origins of the pharmaceutical industry in India can be traced back to the colonial (pre-independence) era. the industry is again at a watershed. the IPR reached new heights of process capabilities to “knock off” any new drug with a noninfringing process and market them at low prices. only new substances manufactured in India were entitled to patent protection). A brief discussion of these policies may be in order. The Patent Act 1970 was a radical departure from the earlier Patent Law which accorded product as well as process patent protection up to a period of 10 years (extendable by another 6 years) and acted as a major deterrent to the creation of indigenous technological capability especially through reverse engineering. At the present juncture. Perhaps one of the most important actions as amici was the FTC brief in the Bristol Myers case that clarified for the court that sham orange book filings were not protected by the Noerr doctrine because they were merely “ministerial” filings.e.• • address sham and deceptive petitioning in the pharmaceutical industry where there may be similar competitive harm. especially the TRIPS agreement establishing a new IPR environment.

Indeed. self sufficiency in drug production and easy and cheap availability of drugs. which essentially implies decoding an original process for producing a bulk drug. The spirit of this policy regime of the 1970s was reinforced by Drug Policy 1978 with its three-fold objective of self reliance in pharmaceutical technology. Against the backdrop of this policy environment. the use of such processes infringes upon the intellectual property rights of the innovator of the original process. In case of the former. stirring methods. The impetus largely came from the massive expansion of Page | 125 . where up to 74% foreign equity was allowed to high technology bulk and formulation producers provided their 50% of the bulk is supplied to non-associated formulators and the share of own bulk in their formulation should not exceed 1/5. solvent conditions. In fact many of the firms began with such simple technological activities (perhaps on off-patent drugs) to acquire more complex capabilities at a later stage. The price fixing rules were made more rigid and stringent. during the decades of 1970s and 1980s respectively. simple product development in conventional dosage forms which had already started in the post independence era. This involves a detailed understanding of the chemical properties of the active molecule.. temperature. Hence the scope of such activities is limited to off-patent drugs only. respectively during the same periods. This is not to suggest that infringing process development (simple imitation) did not take place. The second category of reverse engineering activities is somewhat more complex as it results in the development of non-infringing processes whereby the same bulk drug may be produced through a different route.a. e. which may be free from product patents but continue to enjoy process patent protection. Along with process revolution.g. It is possible to decode all of these parametric specifications of a process through reverse engineering. all of which have to be simultaneously optimised in order to arrive at the optimum process specification. time. With the introduction of the Patent Act of 1970.control. continued in the post 1970s. Non-infringing processes are relevant only in case of patented drugs. both infringing processes for off-patented molecules and noninfringing processes for patented molecules. needless to mention. the bulk drug industry grew at a phenomenally high rate of 21 and 11% p. the industry acquired substantial technological capability of process development through reverse engineering.a. a reverse engineered process exactly matches the specifications and design of the original process and therefore. As a result.. with the exception of “Core” sectors (including pharmaceuticals). the formulation industry also registered impressive growth rates of 13 and 10% p. One can make a distinction between two types of reverse engineering activities: infringing and non-infringing processes. This in a sense summarises the policy framework adopted in the 1970s with a clear emphasis on import substitution and self-reliance in the production of bulk as well as formulations and on creating indigenous technological capability of process development (bulk). use of various chemical and physical substances with different levels of purity etc. bringing about 80% of the Indian pharmaceutical industry (in value terms) under price regulation. FERA 1973 was introduced to restrict and regulate the operations of foreign (multinational) companies in India to protect and develop indigenous industrial and technological capability. there has been widespread reverse engineering for non-infringing processes. the excipients used and the chemical process of conversion from the active molecular compound to the final bulk drug. the pharmaceutical industry in India embarked on a new trajectory of technological learning based on reverse engineering. A 40% ceiling was imposed on foreign equity share. This phenomenon has been often been referred to as the process revolution in the Indian pharmaceutical sector. As a result. A chemical process incorporates a complex set of parameters.

India’s reform process began with trade reforms which sought to reduce. one also finds provisions for bilateral negotiations and unilateral actions built into the WTO framework. The idea is to pave the way for liberalised and market driven international flows of goods. WTO has been the prime architect of the broad framework of this new global order. quantitative restrictions and other non-tariff barriers. capital and technology in a multilateral framework. Ironically. perhaps with a time lag marginally exceeding the demand lag. Indeed there has been a noticeable difference in the parameters of acceptable drug quality in India compared to that of the developed world. The new world order post-1990: India’s reforms process In tune with a newly emerging international economic order. As an outcome of the policy framework. But that did not deprive the Indian patients from the latest drug discoveries without much delay in launching. and technical know-how was deregulated. antidumping and other safeguard measures are examples of WTO provisions which can be misused (mainly by the developed nations) to counter the spirit of multilateral trade liberalisation propagated by the WTO and the proponents of this new world order. MNCs became reluctant to launch their new drugs in India. The policy environment facilitated free entry of a large number of producers of both bulk and formulation. the norm itself was often kept at a low level by the regulatory authority to encourage small producers who may not be able to afford sophisticated equipments for various tests/ assays. Indeed there was a marked increase in R&D expenditure of the industry during this period: it stood at Rs 500 million in 1986 accounting for nearly 2% of the industry’s sales turnover compared to less than 1% prior to 1970. Problems of spurious drugs and irrational combinations have been a natural outcome of this phenomenon. the quality variations notwithstanding. but RBI retained the monitoring authority of the dividend payment. especially when it serves the interest of developed countries. This implied a wide variation in the quality and price of a drug in the market and multiplicity of formulations. India’s economic reforms process began in the late 1980s/1990. The monitoring of payments for imported raw material. export import licenses. The resultant market structure was characterised by a limited number of large organised sector units enjoying the lion’s share of the market on one hand and a very large number (thousands) of small producers each producing a microscopic fraction of the total industry sales. But most drugs were now available in India at affordable prices. Product regulations and standards. rationalise and eventually eliminate all forms of trade restrictions. Examples are numerous: Ranitidine (Glaxo) and Amlodipine (Pfizer) are two of the glaring examples of this phenomenon. services.bulk drugs due to the process revolution and the policies to deter captive consumption of bulk. lack of adequate quality regulations and control mechanisms often resulted in the supply of sub-optimal and ineffective drugs. Apart from deviations from the quality norms. primarily geared towards free trade and removal of “policy distortions” in all dimensions of a country’s economic activity. Reduction and removal of subsidies have accompanied trade reforms in India. however. most of them in the small scale and unorganised sector. While the policy environment favoured small producers. Policies towards foreign investment and foreign technologies have been relaxed. FEMA allows the pharmaceutical MNCs to Page | 126 . tariffs. Indian firms introduced these new drugs in the market using noninfringing processes. FERA 1973 was modified to Foreign Exchange Management Act (FEMA) 1999.

food products and agrochemical from the date of application. The salient features of the forthcoming patent regime are summarised below.hike their stakes in India up to 74%. 1994 and 2003. Among the specific policy initiatives towards the pharmaceutical sector. downsizing of employment and closure of production facilities of many units including that of multinationals. • Product patents are allowed in all fields of technology with a uniform duration of 20 years in pharmaceuticals. The earlier policy to deter captive consumption of bulk is reversed. Major thrust is placed on drug quality. Automatic approval can be granted for foreign technology agreements in high priority industries up to a lump sum payment of Rs. the IPR is going through a turbulent phase of adjustments. • For process patents. the burden of proof will rest with the party that infringes. For other non-high priority industries automatic permission will be given according to the same guidelines if no free foreign exchange is required for any payments. • Compulsory licenses will be given by the government only on the merit of each case. the DPCO 1995 clearly states that the objective is to prevent monopoly in any market segment.10 m. As opposed to the earlier objective of making drugs available at affordable prices. or if the royalty is less than 5% of domestic sales or 8% of exports. divestment of public sector units and de-reservation and reduction of benefits of the small-scale sector. the policy framework encouraging process development through reverse engineering activities disappears. • There will be no discrimination between imported and domestic goods in so far as intellectual property protection is concerned as per the national treatment clause in WTO. Other elements of the structural adjustments programme followed by India include industrial reforms leading to abolition of industrial licensing. This is in contrast with the requirement of the earlier patent regime. However. Only 40% of the total finished dosage forms remain under price control in 2001 compared to 8590% in 1979. the patent holder will be given a hearing and an opportunity to present his case for intellectual protection. It is interesting to note the clear policy shift in the stated principle for controlling drug prices. DPCO 1987 followed by DPCO 1995 appeared as major landmarks reinforcing the policy move towards liberalisation. and would be granted in case of national emergency. acknowledging the need to monitor and regulate quality and promote rational use of drugs. The overall philosophy of the new policy regime is well echoed in the Drug Policy Statements of 1986. Licensing requirements for all bulk drugs and formulations are abolished with a few noted exceptions. virtual elimination of MRTP regulations. Although the IPR has continued to expand both in terms of production and trade during the decade of the 1990s. we attempt to trace this adjustment process for the organised segment of the industry. Restrictions on import of bulk are largely removed. In the following section. In Patent Act of 1970 burden of proof was on the original innovator. With the enactment of this law. Challenges and adjustments post 1990: quality and R&D as the Twin Pillars The challenges Page | 127 . subject to a maximum ceiling. It stresses the need to implement Good Manufacturing Practices (GMP) for all manufacturing units. the new policy environment has posed major challenges to the sector which is evident from rising drug prices. Both of these policies aimed at progressive decontrol of drug prices. But the strong product regime is “supposed” to encourage basic and frontier research in the industry. As a result. The Patent Act of 2005 has been direct fallout of the WTO agreements.

Reverse engineering on patented drugs will come to complete halt. Even with trade liberalisation. based on noninfringing process development for patented molecules to introduce the latest drugs in the Indian market. This is being fully exploited by the developed countries to protect their large pharmaceutical markets from low cost imports from the developing world. bio-availability acts as an important parameter of drug quality. This in turn implies a high rate of obsolescence in the generic pharmaceutical market. drug quality will act as a principal parameter of success even for Indian firms in years to come. • Limits to growth through process development. Not only keeping minimum impurity is important. raising a big question mark as to how far the Indian pharmaceutical can exploit its process development capabilities acquired through conscious R&D effort during the last quarter of the century. The first relates to the response of the Indian industry to a new paradigm of drug quality. will no longer be a viable option. The global pharmaceutical market is becoming increasingly competitive both with respect to price as well as quality. Therefore new norms of drug quality are being introduced worldwide which will further limit the scope of access to the world generic market. In this regard. especially those in the organised sector can be synthesised as follows.• The major challenges posed by the new policy regime of globalisation and reforms to the Indian pharmaceutical industry. Limits to the generic market . With a move towards quality harmonisation. A high quality drug must be effective and should not produce any toxicity or side effects. A second and most commonly stated parameter of quality pertains to the impurity profile and stability of chemical ingredients. the conventional corporate growth strategy. adopted by the IPR till now. Reverse engineering on off-patent drugs can. Let us analyse and capture some of these. the WTO allows for imposition of product regulations and standards to create barriers to free flow of trade. we believe that the generic market will become extremely crowded both in India and the world since all non-innovating firms will have to rely on the generic market. of course. A further limit on the scope of business development based on the generic market may be posed by the high rate of new drug discovery in the 1990s. the Indian industry (organised sector) is going through a major phase of restructuring and adjustments. In fact a market of about US$50b of pharmaceutical products will come off-patent in the next few years. First and foremost. quality implies therapeutic efficacy and safety. The adjustments To cope with these serious challenges. We restrict our analysis to two of the major dimensions of the adjustment process. Since most these new drugs are not “new” in the sense of having a pioneering therapeutic use. but also consistency in the specified impurity profile over all batches of production must be adhered to. A new paradigm of drug quality Drug quality is a complex multi-dimensional concept. new drug discovery might reduce the life span of existing drugs. Detailed documentation of all the production stages along with the quality control operations constitutes an added Page | 128 .With the introduction of the new patent regime. The second looks at the changing role of R&D and technology in this new era of globalisation and reforms. continue to give them an edge in the generic market. but are merely replacing existing drugs with better therapeutic efficacy and lower side effects.Given that new drugs will now become the exclusive monopoly of the innovating firm. A related quality parameter affecting product purity is contamination during the production process.

characterised by a strict IPR regime. • Finally. which have been incorporated in the global quality standards like USP and European Pharmacopoeia (EP). Entry into this highly competitive market calls for stringent quality requirements. But in the new era of globalisation. • Detailed documentation is becoming an important facet of production and quality control. a fast moving technology frontier and a move towards international harmonisation of quality standards. not only US but the entire global market may be subjected to stricter quality norms. Prior to the 1990s. This has resulted in divergence of the technical requirements for quality specification and control in different countries. This is not to suggest that there were no high quality producers even during this period. the governments of the three largest pharmaceutical markets (United States. Some Indian firms have already succeeded in developing superior methods. • For formulations. The relative importance of each of these diverse parameters in the final quality specification would vary from country to country depending on the composition of their pharmacopoeial committee and socio-economic priorities of the government. which was hitherto largely ignored and adopt the following operational and organisational changes: • Quality control must be much more rigorous with stricter parameters and sophisticated instrumentation. compelling the globalised industry to replicate many test procedures including clinical trials in order to market new products in different countries. The third set of quality parameters stipulates that the production process should be environment friendly and should not create any health hazards within and outside the production unit. the United States market in particular. the quality of active pharmaceutical ingredients (API or bulk) becomes all important. and Japan) have jointly initiated a move towards harmonisation of drug quality through the International Conference on Harmonisation (ICH) from the late 1980s. Indian players have thus contributed to outward shifts in the global frontiers of drug quality. • The environmental dimensions of quality necessitate increased attention towards effluent treatment and proper waste management using modern methods and equipment. To overcome this problem. In a sense. But quality parameters did not receive much attention by the industry and the regulatory authorities in general. Page | 129 . • High quality standards as per the multidimensional definition given above demand up-gradation of production and quality control technology. firms will have to explore the growing international market for generic drugs. Indeed with the threat of ICH.dimension of quality specification as it creates institutional memory and makes the entire production process transparent to all concerned parties. Europe. quality has added a new dimension to their R&D thrust. Firms are now trying to develop new improved analytical methods for quality specification and control. drug quality in India was loosely defined and remained far below international standards. the Indian manufacturers have to pay intensive attention to the concept of drug quality. In this new era. The intermediates and excipients of the production process must also be non-hazardous and environment-friendly. The US Pharmacopoeia (USP) has dominated this harmonisation movement with an in-built bias towards increasingly stringent norms for impurity profile through sophisticated instrumentation and analytical methods.

NDDS2 respectively) and analytical methods for quality • New drug discovery research (NDDR) 4. with more than 35 million cases alone in India. it requires complete overhauling of the plant setup to install sophisticated (often imported) machinery and equipment for production and quality control. novel drug delivery systems (NDDS) of first and second generations (NDDS1. In many cases. a twenty year term of market exclusivity for new treatments is not reasonable if we expect to make real progress in containing the disease. This would mean that the patent would be partly product patent and after a reasonable time being given to the inventor to make a reasonably large profit it would be converted to a process patent whereby the patented drug can be manufactured by competing manufacturers using an alternative process. various options are possible in the WTO regime. This would solve the problem of excessive hike in prices and would render the drugs more accessible to the millions suffering. It might well be appropriate for a governing body to clearly define a list of essential medicines. Stringent intellectual property protection for pharmaceuticals would only retard public health initiatives in the coming years. From “Business driven R&D” to “R&D driven Business” Technological capability of the Indian pharmaceutical industry can be classified into three broad groups: • Process development capabilities (bulk drug) • infringing and non-infringing • Product development capabilities (formulations) • conventional dosage forms (CDF). that would be subject to somewhat more relaxed patent protection compared to other drugs. such as antiretroviral (ARV) agents. Collaboration with the MNCs on various fronts such as research and development. Given the rapid evolution of the AIDS crisis throughout the world. As far as India’s pharmaceutical industry is concerned.Most of these elements of higher drug quality entail increased automation of the production process. But ultimately.15 A possible solution to the product patent issue The most practicable solution to the problem which at the same time allows for TRIPs compliance would be granting of dual licenses. Page | 130 . manufacturing and marketing will help Indian Pharmaceutical companies make profitable breakthroughs. the path currently is followed by international standards for patent protection moves inevitably toward a clash between public health and intellectual property.

Mergers and acquisitions. Eastman Kodak. It is often thought of as a rather new phenomenon. and rest of Europe in the late 1980s and early 1990s. all created through enormous mergers with the aim to lead research and development in every field of the pharmaceutical industry into the future. The first mergers started in the later half of the 19th century. cable television and satellite communication.S. After the initial merger between the two large companies a row of mergers followed during the 90s and continued into the 21st century. Focus lied towards expanding in areas where the firm had greater competitive advantage and downsizing in areas where they had not. it is not a new phenomenon. The value of M&A’s was almost five times larger than the previous peak in 1989.K. a so called horizontal consolidation which created large corporate giants. At this time the M&A phenomenon also entered the U. in small proportion and started a trend that later would explode in the U. United States and Europe. sometimes as a method to expand market share almost into having a monopolistic market power. Many U. often referred to as M&A’s. Contrast with earlier waves was that the market experienced an active market in corporate assets. The first wave that occurred in the United States from 1890 to 1905 was. and an almost monopolistic market. often to share costs. This has been known as the first wave of takeovers in the United States. the big consolidations of huge companies creating world leading multinational corporations. and DuPont. such as General Electric. The common merger at that time was within the same industry between several producers. a merger for monopoly. A plausible explanation for the last wave is the introduction if new technologies like the internet. companies engaged in simultaneous expansions and downsizing of their businesses in the 1980’s. The fifth wave came in the 1990’s and is said to be the mother of all waves when it comes to the financial size of the mergers. It was also a huge transatlantic merger which combined the two world-leading pharmaceutical powers. Page | 131 . AstraZeneca and Novartis. Nevertheless. is also a tool for expanding ones business or get around different laws or regulations such as tax laws or monopoly regulations. It was not near as big of an impact as the first wave. increase efficiency or gain market power. It has been spoken of a fourth and a fifth wave as well. There are various factors that influence different industries through varying periods in time. It is not definitely known why these mergers come in wave patterns and it is common that the mergers occur within different industry clusters. Many renowned corporations in today’s society has been formed in the last 15 years and has become a multi billion dollar industry with giant corporations such as Pfizer.K.1 Historical Background A merger or acquisition happens when two or more companies join together.9 billion that set a trend for future massive mergers in the industry.0 MERGERS AND ACQUISITIONS (M & A) 5. but it helped companies to merge and create strong corporations after the war and earlier market crash in the early 1900s. The first large M&A according to deal value that took place in the pharmaceutical industry was the consolidation in July 1989 when Philadelphia-based SmithKline Beckman was acquired by British Beecham Group to form SmithKline Beecham. but also as the start of mergers around the world. This was a merger with a total deal value of $8. After World War II. to unite in the search for generic drugs that could help us fight the diseases around the world. the third wave of mergers came in the 1960s and was all about increasing market share by growth. The second wave came as a build-up phase after World War I in the 1920s.5.

that we will see yet another round of consolidation and a fourth wave of pharma M&A? Merger statistics for the first half of 2002 show that the healthcare industry is at the forefront of the current M&A frenzy. The third wave. the majority of these deals are almost insignificant when compared to the mega-mergers of the past M&A waves these deals represent millions rather than billions of dollars. a closer look at the data shows that while M&A activity continues unabated. in current market conditions with the huge pressure on the industry to match historic performance. It dominates other industries in both the size and pace of deal activity with dollar transactions of $72 billion. and Pharmacia & Upjohn/Monsanto with big deal activity falling sharply at the end of 2000. And yet. produced three largescale. Speculation that mega-deals are back on the pharmaceutical M&A horizon is rife. is there any doubt.2 Mega-Deals Back on Pharma M&A Horizon From the circumstantial evidence of mediocre returns to the investment required to finance a major deal. it is clear that mergers and acquisitions should not be undertaken lightly. between 1998 and 2000. three times higher than any other sector. Then came the announcement mid-2002 of the Pfizer/Pharmacia merger and the willthey/won’t-they rumors of a tie-up between GlaxoSmithKline and the beleaguered Bristol-Myers Squibb. high-dollar mergers: Pfizer/Warner-Lambert. the majority of recent deals focused on portfolio rationalization and strategic repositioning rather than megamerger. However. Despite an active rumor mill. Table 31: Big Pharma M & As Page | 132 .Figure 29: The Three Waves Cumulative M&A Spend 5. GlaxoWellcome/SmithKline Beecham.

within the next two to three years.4 Surviving the Scramble While we can only speculate what the new landscape will look like as evolving market pressures begin to bite and the short term rush to merge gives way to longer term acquisition strategies. Page | 133 . increased their portfolios. This level of consolidation gives it a position almost 5% ahead of its closest competitor.3 Winners and Losers in Pharmaceutical M&A So are the mega-mergers of the 1990s back again for another round? The answer is almost certainly yes. 5. despite the potential pitfalls and expense. They were all started for different reasons and in different periods over time and they all operate all over the world. the Pfizer/Pharmacia deal will give the new entity an unprecedented pro forma market share of 11. In the following text we discuss the three M&A’s chosen. and many of them have become large corporations through mergers or acquisitions. increased their technological advancement. The companies have often merged or acquired other firms more than once. no CEO can afford to be left out of the market share race. GlaxoSmithKline. and thanks to these consolidations they have increased in size.9%. who the original companies were. Figure 30: 2001 Global Market Share 5. two things seem certain mergers and acquisitions will continue and these transactions will never be straightforward.5 Facts on the Three Cases of Megamergers There are numerous pharmaceutical companies in the world. who acquired whom or if they merged. we focus on three strategies to endure the impending scramble for survival. At this rate. This following text handles three different major M&A’s within the pharmaceutical industry. These are some of the biggest companies in the industry. and become the great corporations of today. To realize the strategic benefits and shareholder value these mergers set out to achieve. because. and why the consolidations occurred.5. In an industry characterized by fragmentation. the Top Five could become more powerful than the existing Top Ten.

Warner-Lambert’s history goes back to the middle of the 19th century when William R. Pfizer expanded to South America and Europe. Warner starts up his drug store in Philadelphia. withholding only one single building containing research. and was established all over USA with a larger product portfolio and large manufacturing plants. It was not until the 21st century that Pfizer decided to grow substantially by merging or acquiring already large corporations. Through constant concentration on research and development. Figure 31: Mergers and Acquisitions of Pfizer In June 2000 Pfizer merged Warner-Lambert to form one of the largest growing corporations in the world. and invented the early form of tablet-coating to make pills easier to consume. Page | 134 .8 billions. and partnered with a couple of more smaller companies to reach success around the world. and through World War II that Pfizer grew to become a well known company throughout the USA. At the same time. and through building new high-tech manufacturing plants to further improve their production and canalizing their drugs out through the world. Warner-Lambert came to grow through several acquisitions in the 60s and 70s. and has become that just because of the many M&A’s through the years. John Wheat Lambert opened up his store in St. they have the largest market share in the world. Pfizer was founded by Charles Pfizer in 1849 in Williamsburg. USA. It was during the Civil war fought in the late 1870s. After the largest merger in American history with a deal value of $88. and a couple of years later partnered with Japanese Taito to reach the Far East. Louis selling antiseptic drugs. especially in the last decade.1 Pfizer Pfizer is the largest pharmaceutical corporation today. In the early 50s. Pfizer and Warner-Lambert became the world’s fastest growing major pharmaceutical company under the name Pfizer.5.5. office. The two companies merged in 1955 and formed Warner-Lambert Pharmaceutical Company. factory and warehouse.

2 Bristol-Myers Squibb Bristol-Myers was founded in the late 19th century by William Bristol and John Myers in Clinton. the new Pfizer is now the world's leading research-based pharmaceutical company. among them the first disinfectant toothpaste. The development of simpler products. developing and delivering innovative medicines and health care solutions essential to improving global public health and addressing unmet medical needs. New York. providing more products to help more patients than any other pharmaceutical company has ever done before. The company grew through smaller acquisitions and would come to hold a broad portfolio of medicines. Squibb was founded a few decades earlier than Page | 135 . "On any given day. 2003. we estimate that nearly 40 million people around the world are treated with a Pfizer medicine.On April 16. "Today we go forward as a single company. forging one of the world's fastest-growing and most valuable companies. With a research and development budget of $7.5. brought Bristol-Myers into the international market just after 15 years." 5." said Pfizer Chairman and Chief Executive Officer Hank McKinnell. Our new company is the global leader in discovering. Pfizer purchased Pharmacia for an estimated $60 billion.1 billion in 2003.

5. After the merger in 1989 the research produced medicines that are still fundaments for today’s research and was. A few years later.5. Glaxo discovers skin disease treatments and asthma medicines. SmithKline’s history goes back a long time and is formed through several mergers during the years. Glaxo acquires Meyer Laboratories Inc. and grew further. DuPont Pharmaceuticals was formed and would eight years later form a joint venture with Merck & Co which would lead to a developing business for DuPont. and with a big portfolio and leading research in respiratory treatment they become an increasingly important and powerful corporation in the pharmaceutical industry. DuPont was founded over two centuries ago and started in the 1950s to develop their remedies for people that had smaller complaints. through more minor acquisitions. In the 60s. Glaxo would develop and launch one of the world’s top-selling medicines. and in 1995 Glaxo merges with Burroughs Wellcome. and especially through Beecham Group’s acquisition of SmithKline Beckman in 1989. Up until the merger between the two big companies. Bristol-Myers Squibb accelerated their research and developed the second HIV-treating medicine by 1991 and launched one of the world’s most widely used cancer treatments. In January 2001 Glaxo Wellcome and SmithKline Beecham fused into GlaxoSmithKline and is today one of the world’s leading research-based pharmaceutical and health oriented companies. Glaxo's history goes back 100 years and starts off by producing dried milk in New Zealand and exporting it to London. Glaxo Wellcome is formed.Bristol-Myers on the east coast of USA. and find a way into the American market. skin care treatments and different important vaccines. and later on starts up its business in London. The 1st of October 2001.3 GlaxoSmithKline The Glaxo-SmithKline merger is the most valuable pharmaceutical merger through the eventful years in the industry 1989-2003. 5. Bristol-Myers Squibb acquired the pharmaceutical division of DuPont and formed Bristol-Myers Squibb Company which is one of the world’s leading research and development pharmaceutical companies in the world with an immense position in HIV/AIDS and cancer treatment. They are now able to improve research and widen their portfolio including several important medicines that helps treating epilepsy. In 1989. Squibb had opened the largest penicillin production plant in the world and Squibb started to develop its business to South America and Europe. Bristol-Myers acquired Squibb in a $12 billion deal and created one of the leading pharmaceutical corporations in the world and what was then the second-largest pharmaceutical enterprise. Beecham had their research and top medicines in the allergy field. In 1982. in 1994 the third largest over-the-counter medicines company in the world. blood pressure and AIDS. The pharmaceutical research started of in the early 1900s and by the time of 1944.6 Recent M&A A review of the recent acquisitions and mergers indicates acceleration of the following trends: Page | 136 . The medicine would be successful for the future of Glaxo. Through the merger a portfolio containing allergy medicines. The single merger deal value between Glaxo and SmithKline was worth over $172 billions and tops every other merger with over twice the value of the others. after an acquisition.

3 2.4 6.5 2. Taisho Fournier Polypharma Sciele Cougar $ billion 68 47 41 19. Sanofi Aventis.6 14.3 1.7 7.0 Consolidation in medical device.6 2.3 4.6 2.6 15. Biotechnology companies were acquired for monoclonal antibodies.1 1.1 1.8 5. FDA new drug approvals in 2008 were 21 in comparison to 18 in 2007.7 16. and Daiichi Sankyo) and diagnosis (Roche).8 6.4 1.75 1.5 8.4 1.8 7. big pharmaceutical companies were diversifying into medical devices (J&J. generics (J&J. RNAi and stem cells technology platform and R&D pipeline of oncology projects. Novartis.Table 32: Recent Mergers and Acquisitions Company Pfizer Roche Merck Bayer J&J AstraZeneca Schering Plough Takeda Sankyo Teva Novartis Mylan Nycomed UCB Novartis Daiichi Sankyo Abbott GSK Shire Sanofi Aventis Barr Reckitt Benckiser Lilly Dainippon Watson Watson GSK King Toyama Solvay Richter Gedeon Shionogi J&J Target company Wyeth Genentech Schering Plough Schering Pfizer OTC MedImmune Organon Millennium Daiichi Ivax Eon Merck KGA generic Atlanta Schwartz Hexal Ranbaxy Kos Steifel New River Pharma Zantiva Pliva Adams respiratory Icos Sumitomo Andrx Arrow Reliant Pharma Alpharma Fujifilm.6 1.9 1. generic and consumer health segment of the healthcare industry and consolidation in the European and Japanese pharmaceutical industry. Roche). Genentech rejected a $44 billion offer from its majority shareholder Roche for the remaining shares in 2008 but Roche has not given up and offered only $47 billion due to uncertain market conditions in early 2009.0 3. Pfizer bid of $68 billion for Wyeth and Page | 137 .7 6 5. With low R&D productivity and patent expiry of several blockbuster drugs.3 2.6 2.7 3.65 1.

Abbott and Novartis with devices.Merck 41 billion bid for Schering Plough show the push of traditional pharma into biologics. Merck announced its entry into biosimilar biologics and the entry of 6 biosimilar erythropoietin in Europe and black box warnings and restrictions in dosage and clinical use resulted in loss of sales of all blockbuster EPO brands. Astra Zeneca absorbing MedImmune. Takeda taking over Millenium and Roche making a failed offer of 44 billion for the remaining shares of Genentech. Roche potential takeover of Genentech will be a success. The market and sales data in 2008 provides once again strong support for the R&D paradigm shift to biologic and within biologic towards human monoclonal antibodies. to acquire. and biosimilar or follow on biologic. insulin’s and interferon. Hexalen (Eisai-MGI Pharma) will be successful. As biologic drugs move into multibillion dollar annual sales. vaccines. Wyeth only brings the best selling vaccine Prevnar and marketing rights to the best selling biotechnology (biologic) Enbrel to the combined company and has a week R&D pipeline and facing patent expiry of its blockbuster brands like Pfizer. unlike generics. Companies like Amgen. There was a strong emphasis on biologics in R&D pipeline of big pharma companies and partnership and deals with biotechnology companies. Diversified companies like Roche. This was evident by Merck acquiring Serono. Salagen. BMS and Lilly need to act fast to grow. are priced higher with respect to synthetic products and patent expiry had little effect on sales. New product derived mergers based on potential blockbuster marketed cancer drugs like Erbitux (Lilly-ImClone). Its acquisition of Centocor and monoclonal antibody provided it with Remicade. Pfizer takeover of Wyeth and Merck of Schering Plough will not resolve the low productivity of combined R&D to produce blockbuster drugs to replace Lipitor. the acquiring company failed to derive full benefits and most of the projects were later discontinued or terminated. Zocor and Fosamax. merge or become a target. Analysts have termed it more a cost cutting effort and a shock absorber to patent expiry of Lipitor in 2011 as merger will dilute the affect of patent expiry. Major M & As in 2009 During the first half of 2009 we have seen the continuation of a trend toward consolidation in the biopharmaceutical industry with a number of significant mergers Page | 138 . Mergers and acquisitions were successful if driven by a blockbuster marketed products like Lipitor (Pfizer. J&J is one of the most successful acquiring company and with a Warren Buffett like approach of leaving the company management in place and benefiting from innovation. erythropoietin. These bids have revived the M&A market. generics and diagnostic performed better as compared to pure pharmaceutical R&D driven company in 2008.Werner Lambert). Pharmaceutical companies’ outright acquisition of biotechnology companies and licensing of technology/late stage projects in development has increased significantly despite market downturn and significant loss of market value of many biotechnology companies. need more time to gain market share. Velcade (Takeda-Millenium) and Aloxi. If a company was acquired for its R&D pipeline and development projects or platform technology. in majority of cases. the second top selling biologics and best selling monoclonal antibody in 2008. J&J. Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS).

however. is not without risk for J&J: All the data we have seen thus far from the abiraterone trials are from uncontrolled. five involve big pharma and highlight their need to boost their pipelines and/or commercial portfolios. we expect to see a shift in R&D. is an oral treatment and has shown impressive efficacy and safety results in four Phase II studies. including multiblockbusters Avastin. oral administration. Should the strong data on PSA responses and tumor shrinkage translate into overall and progression-free survival (PFS) advantages in the two pivotal Phase III trials. It grossed about $900 million in sales during 2008. The main motivation behind the acquisition for Roche was access to Genentech’s pipeline of marketed biologic agents for the treatment of cancer. In terms of merger integration. Abiraterone could become a successful drug commercially with the potential to reach multiblockbuster status given its safety profile. however. Page | 139 . The main impetus behind GSK’s acquisition of Stiefel was its desire to increase its presence in the dermatology space. Roche with its deeper pockets and longer experience will likely take over once a program is ready for Phase III testing and run late-stage trials. then J&J will benefit a lot more than the $893. and the companies worked closely and harmoniously. with the Swiss pharma giant receiving a lot of credit around the industry for leaving— at least for the most part—the princess of biotech alone to develop its oncology treatments. efficacy results albeit impressive will have to surpass the hurdle of translating into a survival and PFS benefit. Abiraterone. representing a 16% premium on the previous day’s close. Roche made an offer of $89 per share to acquire the remaining 44% of Genentech’s outstanding shares. single-arm studies. In July 2008. with Genentech focusing on earlier-stage research and taking programs up to Phase II.and acquisitions involving various combinations of acquirer type and target players. Over the past decade Roche had acquired a 56% stake in Genentech.9 billion this April. In another example of a big pharma acquiring a smaller biotech.7 million it paid. The deal eventually closed in March 2009 for $95 per share. which resulted in $550 million in sales last year. Big Pharma Taking Over a Small Biotech Johnson & Johnson’s (J&J) $893. Herceptin. In May J&J announced that it was willing to pay $43 per share in cash. Big Pharma Buying a Large Biotech Roche’s $46. and Rituxan.7 million purchase of Cougar Biotechnology was for access to a single drug: abiraterone acetate. Stiefel is a dermatology specialist selling both prescription and OTC products including medications for acne. Additionally. GlaxoSmithKline acquired privately held Stiefel Labs for $2. This acquisition. Among the highest-priced acquisitions.8 billion acquisition of Genentech represents the former’s desire to gain access to Genentech’s revenues and its pipeline of oncology biologics. open-label. a Phase III prostate cancer treatment. and the large market it addresses. also known as CB7630.

On the other hand. having come in such close succession. since its products are already on the market. combining the most powerful pharma sales and marketing machine with one of the most highly regarded and most “biotechy” of the U. Pfizer is undoubtedly known for its ability to take products it has acquired or inlicensed and market them extremely effectively. with Schering-Plough and Pfizer with Wyeth. at least at the high level. Additionally. big pharma companies.S. on the other hand.S.This acquisition is viewed as being completely on the other end of the spectrum from the J&J/Cougar acquisition in many ways. as well as Singulair. The result is a company with a combined $71 billion in sales. which is co-developed with Amgen. All told. Big Pharma Acquiring a Big Pharma Peer This year has seen two such mergers: Merck & Co. which partially comes through a 15% reduction of their combined workforce. but we remind investors that in 2000. These large biotechnology firms continue to face the need to replenish their pipelines given the demand for continued revenue and bottom-line growth and the ever increasing threat from biosimilars. they mark a heightened level of interest on big pharma’s part in the biotech space. The impetus behind Pfizer’s desire to acquire Wyeth has a lot to do with the impending Lipitor patent expiration in 2011. generating about 70% of its revenue outside the U. and Prevnar. The synergies and cost savings could come from the streamlining and re-focusing of the R&D. the companies believe they’ll save approximately $4 billion annually. Pfizer paid $89 billion for Warner Lambert. and marketing organizations. a pediatric vaccine. Page | 140 .S. The $68 billion price tag is nothing to sneeze at. so the marriage of the two makes a lot of sense. of course. Finally. The consequences of such major consolidations will not be evident for a while. The next big pharma merger came in early March when Merck acquired ScheringPlough for $41 billion. Plus it has one of the most promising pipelines among U. In terms of cost savings. large-cap pharmas. Wyeth has its own blockbusters including Enbrel for the treatment of rheumatoid arthritis. which treats allergies and asthma. a hypertension drug. 2009 opened with the $68 billion Pfizer/Wyeth marriage. sales. and questions remain as to whether we’ll see the bigger biotechs implement a similar acquisition strategy. these acquisitions total $109 billion. Schering-Plough. presence. The drug has brought in about a quarter of the company’s revenues every year. Merck is losing patent protection for Cozaar.S. Schering-Plough has a strong ex-U. has relatively few products that are close to patent expiration. There is limited clinical and commercial risk associated with the Stiefel takeover.

the target company grants all shareholders – except the acquiring company – options to buy additional stock at a huge discount. An M&A deal can be executed by means of a cash transaction. The FCC would probably regard a merger of the two giants as the creation of a monopoly or. With many corporations trying to develop medicines for the same kind of diseases. improved market reach and industry visibility. stock-for-stock transaction or a combination of both. at the very least. the deal will be executed. a threat to competition in the industry. Correcting problems caused by incompatibility – whether of technology. and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. once the target company agrees to the tender offer and regulatory requirements are completed. Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock.8 Reasons for mergers and acquisitions There are many driving forces for a merger. the deal had to get the approval of the Federal Communications Commission (FCC). creating inefficiency. In other words. Many common reasons for a typical merger are not necessarily the ones most significant for the M&A’s in the pharmaceutical industry. equipment. the companies hope to benefit from the following: Staff reductions. acquiring new technology. the target company can resort to one of the options: Accept the Terms of the Offer and go ahead with the deal. all mergers and acquisitions have one common goal of creating synergy that makes the value of the combined companies greater than the sum of the two parts. But. when the two biggest telecom companies in the US. market share motives or as a mean to diversify ones portfolio. the new management may cut too many operations or personnel. many mergers or acquisitions sometimes do just the opposite and result in a net loss of value due to problems. it sometimes makes more sense to merge to gather your forces with another company to maximize the efficiency to develop new drugs.5. or corporate culture – diverts resources away from new investment. This dilutes the acquiring company’s share and intercepts its control of the company. After merging. The biggest expenditures within the pharmaceutical industry are the investments in research and development and the production costs of making the medicines. Once the tender offer has been made. The success of a merger or acquisition depends on whether this synergy is achieved. wanted to merge. For example. Mergers and acquisitions can face scrutiny from regulatory bodies. benefit from economies of scale. economies of scale. Regardless of their category or structure. The completion of a merger does not necessarily offer advantages to the resulting organisation. Overlapping subsidiaries or redundant staff may be allowed to continue. To execute its defense. There are huge amounts of profits that go back to R&D. They can have pure financial motives. 5. losing expertise and affecting employee morale. These problems are similar to those encountered during takeovers. utilize each Page | 141 . Attempt to Negotiate for a high price. AT&T and Sprint. the success of a merger is measured by whether the value of the buyer is enhanced by the action. and conversely.7 Steps involved in Mergers and Acquisitions (M&A): A company starts with a tender offer to purchase another company. Finally.

and mid-size biotech firms directly. One way that companies might avoid a drop-off in revenue in the coming years is to use their cash and strong balance sheets to acquire smaller/weaker rivals. Page | 142 . Consequently. Loss of Patent Protection Big Pharma is expected to experience the loss of patent protection on a substantial number of drugs between 2010 and 2013. big pharma realizes that more efficiency can often be extracted from multiple. providing the wherewithal to pluck deals based on lower market caps without highly leveraging the deals.to medium-sized biotechs and then quickly sell them to big pharma for a profit. In 2007. big pharma has begun to buy small. Second. Private equity firms were able to buy small. pharma might benefit from acquisitions of generics manufacturers. However. Instead. However. pharma companies have a strong balance sheets and solid revenue streams. While activities such as commercialization and distribution are often scalable. Economies of Scale There is a growing consensus that horizontal mergers between equals often do not result in efficiencies and savings in the pharma sector. too. low-margin market. licensing activity between universities and pharma is likely to increase. Both public and private equity markets have experienced a recent decline in access to capital. Financing The market valuations of biotech and pharma companies are at historic lows. big pharma will increasingly look to acquire small to midsize biotech companies with strong R&D pipelines. At the same time. the private equity markets have dried up. private equity activity was extremely strong because of access to inexpensive financing. despite the financial turmoil. which serve the large-volume. While acquisitions will continue to be a part of pharma’s strategy. Acquisitions of both small and midsize biotechs and weaker pharma rivals are expected. smaller acquisitions instead of a single mega-acquisition. As a result. are examples of reduced operational efficiency resulting from integration of equals. they will likely look to other sources of innovation. Two other types of acquisitions might benefit pharmaceutical companies in the coming years.others manufacturing plants and use each others channels for distribution and finally to expand into new geographic markets and to lower costs by reducing excess capacities. Acquisitions of generics would provide a cash cow and also allow pharma companies to capitalize on their strengths in distribution and marketing. this type of deal is likely to draw regulatory scrutiny. as a result of the credit crisis. For example. both in 2000. indicating that big pharma might be able to acquire companies at deep discounts. First. Private equity investors also started holding onto their investments longer. There are several examples of horizontal M&A activities that have not resulted in more efficient organizations. pharma is showing renewed interest in collaborating with universities for inspiration in basic research. since early 2008. R&D efficiency often suffers during a horizontal merger of two large pharma companies. Pfizer’s acquisition of Warner Lambert and the Glaxo Wellcome and SmithKline Beecham’s merger.

1 billion. the US dollar has risen roughly 15 percent in value relative to the euro. but if the new management removes them. and AstraZeneca bought MedImmune for $15. At the same time. instead of an IPO. when a total of 13 med-tech company IPOs raised around $1.9 Mergers. but cultural differences are often ignored. big pharma will be able to maximize the market potential for the acquired products/platform technologies and anticipate any challenges that are presented after the acquisition. By understanding the strengths and weaknesses of the acquisition target. it is typically based on product or market synergies. When the dollar was weak in early 2008. Merging companies focus on integration and cost-cutting so much. big pharma is often reluctant to commit to the asking price. Acquisitions and Alliances: Why they can Fail The chances of success are hindered if the corporate cultures of the companies are poles apart. because the companies often focus too intently on cutting costs following mergers. but few deals have closed. If the dollar loses value relative to other currencies in coming months. Recently. These aspects of a working environment may not seem significant. On the other hand. US companies will become more attractive for acquisition.There was a substantial amount of activity on the public equity markets in 2007. has found from its research study that most mergers or acquisitions fail. often have the upper hand in negotiations. flexible work schedules and a relaxed dress code. there were many examples of foreign pharma companies acquiring US rivals. For example. including assessments of IP and technology. that they Page | 143 . a global consultancy. Currency trends could continue to influence acquisition activity in the pharma sector. as their exit strategy. 5. McKinsey. due to the current economic uncertainty. For example. Takeda Pharmaceuticals acquired Millenium Pharmaceuticals for $8. so deal valuations remain high. Biotech firms with strong pipelines. while revenues and profits suffer. When a company is acquired. investors in small. As a result. there have been several reports of negotiations between biotechs and big pharma. making foreign acquisitions more attractive to Japanese companies. For example. Conclusion Big pharma will continue to look for acquisition opportunities to increase their product pipelines and utilize their core strengths in product development and distribution. However.8 billion in cash. companies will become more selective in the acquisitions they pursue.to mid-size. private medtech companies are looking at being acquired. Now. recent data indicates that the pendulum has shifted towards big pharma having the upper hand in negotiations. the result can be resentment and shrinking productivity. the Japanese yen has strengthened substantially against both the euro and the dollar. Currency trends The acquisition of US-based pharmaceutical firms by foreign competitors allows the foreign firm to establish a presence in the US. such as Genentech. with only two medtech companies. are necessary prior to any acquisition to ensure that the acquired organization is a good fit. IPO activity declined precipitously in the first half of 2008. going public. particularly a sales presence and a relationship with the FDA. CardioNet and MAKO Surgical. Roche’s play for Genentech has not been completed despite months of negotiations. Thorough due diligence.6 billion. Since September. employees at a target company might be accustomed to easy access to top management.

one of the largest pharmaceuticals companies of Japan last year is an apt example in this context. misleading or confusing them. About 70% of alliances fail outright.10 Indian Pharmaceutical: Ripe For Consolidation The Indian pharmaceutical industry is characterised by the twin benefit of strong domestic consumption growth on the one hand and robust export opportunities on the other. The foreign pharma companies already operating in the Indian market are also trying to increase their stakes in the domestic subsidiaries. Healthcare & Biotechnology was one of the busiest sectors on the deal street of India in 2008. knowing who the relevant stakeholders are. 78% of mergers and acquisitions fall apart within three years of their inception. Internal alignment and understanding are important for mergers. This loss in revenue momentum is one reason for its failure. as pointed out by a global survey of top 15 pharmaceutical companies conducted by Ernst & Young. This stage will see traction owing to the global meltdown of equity markets that has brought the valuations at very attractive levels. non-delivery. and strain on internal resources as people are left unclear about priorities and focus. fall captive to shifting priorities. its partners. It was second in terms of total value with $5.57 billion. The leading multinational pharmaceutical companies are increasing their focus on emerging markets such as India and China in their growth plans. and jeopardising trust between them • Internal bickering. The acquisition of India’s largest drug-maker Ranbaxy Laboratories by Daiichi Sankyo Company Limited. 5. Such companies will be ideal candidates to join hands with strong multinational companies. or achieve only initial goals. marginally below the Telecommunication sector which had total transactions worth Page | 144 . Having the capability to build and maintain internal alignment is defined as having an effective implementation process for identifying key decisions and issues related to a partnership.neglect day-to-day business. Lack of internal alignment and understanding leads to: • Poor or uninformed decisions about whether to enter into an alliance • Significant risk of sending confusing messages to. In the last week of March. one of the largest professional services firms. or acting inconsistently toward. which indicates the growing importance of this market for them. With the increasing need of capital for sustaining the growth momentum or even sustaining in the business due to the highly competitive environment and limitations on the ability to introduce new drugs due to the new patent regime. the intense competition in a highly fragmented market is posing a great challenge too. At the same time. a number of Indian pharmaceutical companies will find it difficult to pursue the growth path on their own. The stage is set for the next phase of growth accompanied by consolidation. and 55% fall apart within three years of their creation. and consulting with stakeholders to keep the organisation informed and involved throughout the lifespan of a partnership. thereby prompting nervous customers to flee. acquisitions and alliances. Swiss firm Novartis International AG and Pittsburgh-headquartered Mylan Inc announced plans to significantly hike equity stakes in their Indian subsidiaries. An Active Sector For M&A And Private Equity Deals Pharmaceutical.

India’s largest drug-maker. Out of the total 57 M&A deals in the sector..78 billion. the Pharma sector had 57 deals. Table 33: M & A’s by Indian companies Page | 145 .60 billion acquisition of Ranbaxy Laboratory. according to a report of consulting firm Grant Thornton.$5. Ltd was on the top of the table of India’s largest deals in 2008. by Japanese firm Daiichi Sankyo Co. 17 deals were domestic. second to 102 deals in Information Technology & IT-enabled Services sector. The $4. In terms of volume.

Mergers and acquisitions enabled them to share common marketing outlets. The gains from the high export intensity may be offset by the high import intensity.11 Impact of Mergers and Acquisitions on Performance Having analysed the nature and structure of mergers and acquisitions in this industry. Interestingly all these ratios have shown that the merging firms are more profitable compared to the non-merging firms and this difference is statistically significant at one percent level and both type of firms are volatile as shown by the CV (Co-efficient of Variation). The high import intensity may be due to their dependence on bulk drug import. which in turn will reduce the total cost of production of the merging firms. mainly the marketing expenditure rather than advertisement expenditure. which shows that even large firms among the merging firms are not spending more on marketing. capacity utilisation is lower than that of the nonmerging firms during the post merger period. Merging firms are also having high export and import intensity.34.29 and 1.57 and for non-merging firms 87. Sometimes mergers will reduce the performance of the merging firms if it acquires loss-making firms and are not able to derive the expected synergies.7 and that of the non-merging firms are 4. The average advertisement intensity for merging firms remained slightly higher than that of the nonmerging firms (1. Albeit. which is not a statistically significant difference too. Page | 146 . It is also likely that mergers and acquisitions may give monopoly power to the merging firms in the market and this will give them powers to increase the ‘mark-up’ which again lead to high prices and ultimately to high profits. Besides.3 and 1. Return on Capital Employed (ROCE) and Return on Net worth (RON) were studied. which result in loss of market shares and low profitability. another major determinant of sustaining market growth is the selling cost.5. which could have helped them to derive marketing synergies along with this. Net Profit Margin (NPM). Four measures of profitability such as Gross Profit Margin (GPM). This is because the companies are approaching the prescribing doctors in the case of ethical drugs market rather than patients. the combined market share of the merging firms could fall. Besides Research and Development expenditure. Also if the industry is less colluded. the next question arises would be to what extent the consolidation strategies helped them to improve their position. The R&D intensity of the merging firms show high variability as compared to that of non-merging firms. The ratio for merging firms is 82. Likewise the R&D intensity of the merging firms are very high (2. these firms have also gone for many strategic marketing alliances. which force them to spend on marketing through sales representatives. which indicates that only a few merging firms are able to invest more on R&D. the coefficient of variation for the merging firms is so low as compared to that of nonmerging firms. which will result in the better performance. the average value of the marketing intensity of the merging firms is only 3.07). Even though mergers and acquisitions are expected to increase the capacity utilization of the merging firms due to the expansionary reasons. Non Merging Firms A merging firm arises only after making the first merger/ acquisition and until that it would be a non-merging firm. Merging vs. since the mid-1990 the ratio for the merging firms outweighs that of the other. Mergers and acquisitions are expected to change the performance of merging firms in two ways. This is done in a comparative framework of the performance of merging and non-merging firms on the one hand and pre and post merger performance on the other. However. which reduced this expenditure considerably.35 respectively) compared to the other. Interestingly.58. One is through an increase in the scale factor.

Figure 32: Performance of Merging and Non-merging Firms Thus from the above discussion it is clear that the performance of merging firms during the post-merger period was far better as compared to the non-merging firms in terms of most of the performance indicators (see Figure 32). but also expand their market size. If a firm is more diversified. Any losses in one particular market can be offset by profit in some other market. Mergers enable firms to diversify their production by adding new product to more therapeutic categories and thereby not only reduce risks. then there is greater possibility of obtaining stable return. The synergy effect of merger will enable the firms to either deepen or extent product structure. Table 34: Product Diversification of Merging Firms between 1990 and 2005 Source: Compiled from Monthly Index of Medical Specialities. Product Diversification through Consolidation Firms may opt for mergers in order to reduce the risk and uncertainty. Various Issues Page | 147 .

the merger of Tamilnadu Dadha Pharmaceuticals with Sun Pharmaceuticals enabled Sun Pharmaceuticals to add oncology. Acquisition Management The company has a strong track record in acquisition management. which relate mainly to the stretched valuations of acquisition targets and the ability to turn them around within a reasonable period of time. The acquisitions of RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of acquisitions proving to be a drain on the company’s profitability and return ratios for several years post acquisition. Thus it becomes very clear that mergers and acquisitions enabled the merging firms to expand their product portfolio and thus reduce their risk as well as helped them to derive marketing synergies. with three successful acquisitions in the European market and two in the domestic space. The growth drivers for Wockhardt’s European business include exports. new product launches. Also. has given Wockhardt a strategic entry Page | 148 . Hospital Generics. target valuations have substantially increased making it harder for Indian companies to fund the acquisition 5. FDA-approved manufacturing facility for injectables that plays a strategic role in driving the company’s growth through partnerships in contract manufacturing. In several other cases acquisitions by Indian generic companies are small and have been primarily to expand geographical reach while at the same time. • The Company has a comprehensive. • Wockhardt UK has built up a critical mass in the segments of Retail Generics. these three firms had their brands accounting for around one percent of the formulation market. Most of the acquiring companies have to pay greater attention to post merger integration as this is a key for success of an acquisition and Indian companies have to wake up to this fact. and have expanded the global reach of the organization. there are challenges as well.12 The challenge While growth via acquisitions is a sound idea in principle. • Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10 largest generics companies in UK and the second largest hospital generics supplier. which added to Glaxo’s product portfolio. 5.globalization and biotechnology. Private Label GSL / OTC Pharmaceuticals. powders and fixative creams). shifting production from the acquired units to their cost effective Indian plants. it has taken at least three years for the other global acquisitions to see break-even. A few have been to develop a bouquet of products.1 Analysis of Wockhardt’s acquisition Wockhardt is a global. by acquiring 100 percent equity stake in the Biddle Sawyer. and strategic acquisitions. Other than Wockhardt’s acquisition of CP Pharma and Esparma. Further when Glaxo made the first domestic acquisition. biotechnology and anesthesiology to its diverse product portfolio. They had strength in anti-asthmatics. • The acquisition of Esparma GmbH in 2004. pharmaceutical and biotechnology company that has grown by leveraging two powerful trends in the world healthcare market . The acquisitions in Europe and the subsequent integration of their operations have strengthened Wockhardt’s position in the high-potential markets of UK and Germany. penetration in the European Union through mutual recognition.12. with the increasing spate of acquisitions. Dental Care (denture cleaning tablets. Meghdoot Chemicals and Cryodon Chemical Works in 1997. orthopaedical gynacology and nephrology products.Similarly.

Ltd. While Ranbaxy’s strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics business. has witnessed a steady uptrend in Page | 149 . While Daiichi Sankyo’s patenting activity has been rather mixed.point into Germany. • Esparma has a strong presence in the high-potential segments of urology. 5. Ranbaxy’s addition is said to elevate Daiichi Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical market. from its promoters. Most importantly. Despite these strengths. the largest generics market in Europe. Ranbaxy gained access to Daiichi Sankyo’s research and development expertise to advance its branded drugs business.8% of Ranbaxy Laboratories Ltd. therapeutic focus areas and well distributed risks. To a large extent. signed an agreement to acquire 34. Daiichi Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the generics segment and both companies acquired a broader product base. and have profound strength in striking lucrative alliances with other pharmaceutical companies. Ranbaxy’s branded drug development initiatives for the developed markets will be significantly boosted through the relationship. Ranbaxy continued to operate as Daiichi Sankyo’s subsidiary but was managed independently. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages. assisted by a dedicated sales & marketing infrastructure. has gained a smoother access to and a strong foothold in the Japanese drug market. The main benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing infrastructure and supply chain strengths. Synergies The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their respective presence in the developed and emerging markets. The company has plans for further acquisitions in the developed markets of Europe and US to further consolidate and strengthen their positions in these geographies. for itself. it is imperative to explore the intellectual property portfolio and the gaps that exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by both companies in the period 1998-2007.2 Implications of the merger of Ranbaxy and Daiichi Daiichi Sankyo Co. the companies have a set of pain points that can pose a hindrance to the merger being successful or the desired synergies being realized. With R&D perhaps playing the most important role in the success of these two players. The immediate benefit for Ranbaxy was that the deal freed up its debt and imparted more flexibility to its growth plans.12. particularly in the Japanese market. on the other hand. After the acquisition. Ranbaxy is now functioning as a low-cost manufacturing base for Daiichi Sankyo. The acquisitions are mainly driven by market access since Wockhardt has an extensive pipeline of generics and biogenerics and needs a strategic front-end for the same. The key to Wockhardt’s successful acquisition management is the management’s ability to turnaround the acquired company in record time and thus create value out of the acquisition. Ranbaxy. Ranbaxy. neurology and diabetology. The company believes in value buys that would have a tactical fit with its core competencies and key strategic objectives. Daiichi Sankyo will be able to reduce its reliance on only branded drugs and margin risks in mature markets and benefit from Ranbaxy’s strengths in generics to introduce generic versions of patent expired drugs.

during 2007. Eesei and Takeda Pharmaceutical. • Furthermore. which is extremely reputed in the corporate world. Post-acquisition Objectives In light of the above analysis. Benefits to Ranbaxy and Daiichi from the merger • Daiichi Sankyo’s move to acquire Ranbaxy has enabled the company to gain the best of both worlds without investing heavily into the generic business. plant. Ranbaxy can leverage the vast research and development resources of Daiichi Sankyo to become a strong force to contend with in the global pharmaceutical sector. From one of India's leading drug manufacturers. As a generics player. Daiichi Sankyo’s portfolio has broadened to include steroids and other technologies such as sieving methods. we see that Daiichi Sankyo’s focus is to develop new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. Post acquisition challenges included:• Managing the different working and business cultures of the two organizations • Undertaking minimal and essential integration • Retaining the management independence of Ranbaxy without hampering synergies. horticulture. • Through the deal. the company’s patenting activity plunged by almost 60% as against 2006. • Given Ranbaxy’s intention to become the largest generics company in Japan. anti-retroviral. and impotency and anti-malarial drugs. Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities. A smooth entry into the Japanese market and access to widespread technologies including.its patenting activity until 2005. Ranbaxy is very well placed in both India and abroad. veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal. the acquisition provides the company with a strong platform to consolidate its Japanese generics business. In fact. • Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic drugs across 17 diverse therapeutic indications. Ranbaxy has become part of a Japanese corporate framework. Page | 150 . and a host of therapeutic segments such as anti-asthmatics.

Cost-reduction programmes announced in the wake of mergers and acquisitions will address only some of the challenges facing the industry. Moreover. There's a productivity problem at the most basic level and the industry is not getting output consistent with the increased R&D spending it's providing. research and conferences is another area where they are vulnerable to accusations of improper practices. Even though it has clawed back half of that fall since 2002. It has raised prices to the maximum in the USA and Western Europe. they have destroyed the public’s regard for pharmaceutical companies. whose patents are now expiring. But that rise comes five years after the merger. That poor performance is the result of a number of factors. Pharmaceuticals used to be a safe investment: shareholders could rely on steady earnings and a 30% to 40% premium to fair value. Big pharmaceutical companies were lulled into complacency by their reliance on a handful of best-selling “blockbuster” drugs. The reputation of the “ethical pharmaceutical industry” has suffered still further as a result of its own activities. successful products can probably be traced to a small number of brilliant scientists and constant M&A activity muddies the water for these individuals. with at least $1 billion in annual sales. In any pharmaceutical company. AstraZeneca. while assertive patients are more willing to take legal action against “big pharmaceuticals”. losing around 40% of market capitalisation between the end of 2000 and the middle of 2002. in theory. This has created bloated companies carrying too much fat. Safety concerns have led to the worldwide withdrawal of several drugs. From a purely commercial standpoint. now has 50% more drugs in the early stages of development as a result of reorganising Astra and Zeneca's research units. Yet. There is overwhelming antipathy to M&A among researchers and widespread fear among executives about the disruptive effect of consolidation on drug discovery. Demand for drugs should grow steeply for several reasons: Page | 151 .6. Pharmaceutical companies need to find some new remedies and operating strategies to restore growth. the industry has consistently disappointed. taken together. However. the sector has destroyed nearly $400 billion of value over the past four years. And pharmaceutical companies are spending too heavily on marketing: around half of their marketing costs are accounted for by free samples handed out to doctors to persuade them and their patients to use new medicines and most of the remainder is spent on the salaries and commissions of medical sales representatives.0 OBSERVATIONS Major pharmaceutical companies face a paradox. for example. But. They lose control of projects and the ability to spot winners and champion them through the organisation and on to market. nearly every top-tier drugs company has resorted to acquisition to sustain its growth. The extent to which pharmaceutical companies bankroll doctors and hospitals by funding trials. the industry’s long-term prospects seem attractive. used every legal means at its disposal to defend patents and been reluctant to provide cheaper medicines to developing countries. since 2000. The potential for medical breakthroughs has never been more exciting. The biggest threat to the industry's profitability is a slump in output by research departments responsible for creating new medicines. these may have been sensible actions. notably Merck's $2. which saw 6000 people move jobs.5bn-a-year painkiller Vioxx. yet the operating environment has never been more difficult. whilst hiding a crisis of productivity in innovation.

• •

Economic and demographic changes. Developing nations become richer as life expectancy rises and are able to increase spending on healthcare. In developed nations, the population is ageing, driving demand for drugs to treat the chronic diseases of old age, while the younger population is increasingly suffering from chronic “lifestyle” diseases such as hypertension. There is a strong economic case for greater spending on medicines rather than on more expensive hospital treatments. The evolution of medical understanding, including the mapping of human genome, has raised to prospect of important further advances in treatment through pharmacology.

It is necessary for pharmaceutical companies to address the complex subject - how to provide broader access to their intellectual property. Keeping prices high in poor developing countries limits sales and inflict public relations backlash. The matter is thornier in middle-income countries, where pharmaceutical companies have more at stake. However, lower prices in these middle-income countries could be used as benchmarks by rich countries to negotiate better prices - that would put even more pressure on prices. On the other hand, sporadic pickings of relatively small royalties are less attractive than the tiered pricing since license a patent to rivals under pressure is not a sensible thing to do. In addition, governments can invoke their rights to “compulsory license” a medicine when their citizens are threatened by a public health crisis (such as an avian flu pandemic). And, it is not easy to drive a hard bargain with multiple governments while many international organisations are watching and giving friendly but unwanted advice. The principle of tiered pricing has already been established with HIV/Aids anti-retroviral. Therefore, this method of pricing to both developing and developed countries makes business sense. There is consensus within the pharmaceutical industry that small is beautiful: large size in research organisations is an impediment to good inter-disciplinary team effort, especially in discovery and the early stages of development. We also believe that research strategy for drug discovery and development matters just as much. Companies must re-assess their mix of biologic and small molecule approaches to known and novel targets. While small molecule or chemical drugs that target novel mechanisms are much less successful than those designed to work against known targets (6% success rate for novel targets compared with 19% for known), the difference in success rates for biologics is much smaller (21% success rate for novel targets compared with 27% for known). Companies must also re-assess their technology mix in specific disease areas like cancer. For example, broad-acting cancer therapies are less successful than targeted therapies (5% compared with 30%), and yet companies continue to invest almost half their budget in researching broad-acting therapies. Pharmaceutical companies need to take a hard look at detailed data on success rates before making investment decisions, and to manage their portfolio risk more effectively to take account of these figures. At the same time, companies need to re-evaluate their business strategies. Among the leading pharmaceutical companies, there is very little consensus about the best way to compete. For example, as understanding of human genetic variation influences the choice of drugs, Roche has chosen to focus on specialty medicines and a diagnostic business designed to put it at the forefront of “personalised medicine”. Novartis now operates the world’s largest generic business, after paying €6 billion to merge Hexel with its Sandoz subsidiary. Johnson & Johnson has placed its faith in decentralising
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its various businesses, diversifying into the fast growing market for medical devices as well as pharmaceuticals. Johnson & Johnson also achieved its target of cutting costs by $1 billion in 2004, while a fourth consecutive year of flat or falling profits prompted Merck to pledge deep cost reductions across the company, including $300 million of savings planned for 2005 and a further 5100 job cuts by end of 2004 on top of 4400 job cuts which had previously been announced. Yet the $6 billion cost reduction programme announced by Pfizer after combining with Pharmacia in 2003 indicates just how much fat remains in the sector.

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7.0 SUGGESTIONS The steps required to boost the competitiveness of the pharma industry are: 7.1 Extension of deduction of 150% of R&D expenses. This would encourage more and more companies to invest in R&D. The government has earmarked 150 crores for R&D. This is just not enough. It should be augmented to at least 2000 crores. 7.2 To rationalize Drug Price Control Order (DPCO). The objective of the price control was to ensure adequate availability of quality medicines at affordable prices. In this context, a liberalized price control regime becomes more important. 7.3 Income tax exemptions should be given on clinical trials and contract research done outside the company and abroad. This is because India is seen as emerging as a major center for outsourcing of clinical trials for the Pharmaceutical MNCs. 7.4 The problem of spurious drugs has to be tackled. Most of the cases relating to spurious drugs remain undecided for years. Hence there is a strong need for setting up separate courts for speedy trials of such offences. 7.5 India should exploit its know-how in herbal medicines. Since these medicines do not come under the purview of the TRIPS regime and the research in new chemical entities involves millions of dollars of investment, the Indian companies should engage in R&D in herbal medicine. The companies should try to exploit the Indian traditional knowledge in ayurveda and herbal cures and file as many patents for herbal medicine as they can. For this the government should set up R&D laboratories undertaking research exclusively in the area of herbal medicines and support the companies in their research and patent filing. 7.6 The government should encourage setting up of USFDA-compliant plants by providing tax holidays for a specified period; so that the Indian companies can exploit the opportunity arising out of patented drugs and take up marketing of generics in the developed countries like USA.

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the availability of skilled labour and world-class manufacturing facilities. the President of U. the managerial capabilities of Indian pharmaceutical majors. etc. A number of Indian players have entered foreign nations. a large share of them doing so by marketing their drugs there directly. Reddy’s Labs acquisition of Betapharm of Germany for US$ 597 million stands fourth amongst the top ten acquisitions by Indian companies based on deal value. and individual organizations’ perspective it remains impossible to predict its future due to several reasons such as the flurry of shape-shifting activities taking place at the global level. Indian companies have also purchased companies across the globe. the current state of events does not indicate that the industry is turning in that direction. this: India’s importance in the global drugs and pharmaceutical industry has grown substantially and continues to grow. the world's best-selling drug. intentions of leaders of several developed nations (Barack Obama. Indian. France. is shaping decision-making at big drug makers. and so on. Dr. Big Pharma will lose 28% of their current sales. and Eli Lilly's Zyprexa for schizophrenia. among other things. according to pharmaceutical analyst James Kelly of Goldman Sachs--who is calling this period "the patent black hole.8. Most important about the Indian chapter of the drugs and pharmaceutical industry is that it is not dependant on foreign aid and neither is it incapable of going beyond where it stands at present. The level of professionalism in the management of pharmaceutical companies has also risen. Germany." Starting in 2008 and going through 2011. Ireland. What remains to be known is whether India will follow the path of the I. Although the latter is far more desirable than the former. when drug makers will face the worst series of patent expirations ever. Between 2010 and 2011. growing public concern about the ethicality of the practices of large pharmaceutical companies (usage of the term ‘blockbuster’ drugs. After analyzing the industry from the global. Significant advances have taken place in the field of research and marketing in the past decade. to South Africa and to Japan and Singapore in Asia. Romania in Europe.0 CONCLUSION Big Pharma is heading "off a cliff" and into "a black hole. from the United States to UK. for instance). given the plight of other industries the present economic scenario. Italy. analysts predict annualized sales growth of only 2% for big drug makers. favourable industry outlook. Regardless of what path is followed. in particular) to bring down healthcare costs. Analysts believe that the loss of blockbuster products like Pfizer's Lipitor for high cholesterol. uncertainty about the various roles emerging markets will play in the near future. industry and become a outsourcer/low-cost hub or will it do something not preceded by any other industry by climbing onto the global innovation map. multiply to create an enviable future for the industry. Such acquisitions have widened the companies’ markets and provided them access to knowledge and technology that would have otherwise taken years to get a hold of..S. Page | 155 . Analysts are already using such big scary metaphors to describe the challenges facing the drug industry in five years. progress in Research and Development (R&D). Since 2000. Poland.T. Understanding the industry from a local as well as global viewpoint has revealed. Belgium. there have been more than 60 foreign acquisitions by Indian companies." according to Wall Street.

the money. That’s when you have programs that move forward and succeed. You can put in place all the elements that you believe are essential: The people. You are constantly dealing with uncertainty. the technical resources. the skills. no matter what strategies one adopts. you need to have people who are willing to bet their life that what they are doing is right. the continuous training.” Page | 156 . As Dr. It’s a business with more failures than successes.At the end of the day. alliances with academia and with other partners…but there is no guarantee for success. Chairman and CEO of Novartis AG rightly said “We can never read the future. Daniel Vasella. the future of will be unpredictable. It’s just the fact and we have to accept it. but then you also have more programs that move forward and don’t succeed. But having said that.

15.europa. Price Waterhouse Coopers "Pharma 2020: the vision: which path will you take?" 2008 17. August 2004. Presention by Jerry A. Volume 9 4th issue 10. Ray AS.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.org/pag/documents/1. Rowland. Forecasting &Opportunity Assessment November 14. Rosenblatt. Dept of Management Studies. Research paper on “Critical Challenges & Issues in Patent Documentation”by Ashutosh Nigam (Asst Professor. Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition. 18.Jan 2004.2008 Symposium Series.org/issues/researchdev. March 2002. http://www. A guide to pharmaceutical patents. Joint open letter from 18 organisations ““Patient information” by pharmaceutical companies comes up against almost unanimous opposition from civil society” www.org/cache/compo/276-254-1. The Boston Globe. Correa 12. Chakravorty M.Vaish College of Engineering. www. ec. Volume I and II . Drugs and Pharmaceuticals: International Pharmaceutical Industry-A Snapshot.com 20.citizen. Duke Law and Technology Review .phrma.ich. PhRMA. 2007 8.html. Manjeet Kripalani (March 25.pdf 16.pdf (full report).eu/competition/sectors/pharmaceuticals/inquiry/exec_summary_en. C. Research and Development. Ads. AARP Bulletin. ec.isdbweb.2009) India's Pharmaceutical Industry course for globalization 9. Angell.Carlos M.0 PRELIMINARY REFERENCES 1. ISDB “Declaration on Therapeutic Advance in the Use of Medicines” Paris 15-16 November 2001.pdf (Executive summary). P.com 21. “About ICH – Structure of ICH” www. http://www. Retrieved April 2003 from <http://www. Retrieved on September 2004 from <http://www. The Truth About the Drug Companies: How They Deceive Us and What to Do About It. America’s Other Drug Problem. http://www.business-standard. 13. 2008) Indian Pharma: Hooked on the Hard Sell published in Business week. 5. Dated 2002. An insider turns against drug industry. Access to new drugs in India: Implications of TRIPS” 11. September 2004.org/rxfacts> 4. PhD on“Predicting 2008: Global Pharma Market Forecast” Global Practice Leader.isdbweb. Promotions Drive Up Drug Costs.org/pag/documents/ISDB-decl-english. Public Citizen’s Congress Watch.html> 3.expresspharmaonline. March issue. ICRA 7. Barry. 2. Random House. Rohtak) 6.9. M.dbresearch. Uwe Perlitz (April 9.europa.com Page | 157 .pdf 19. 14.

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