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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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......................3 Growth rate..............................................................21 1......................................0 GLOBAL PHARMACEUTICAL INDUSTRY.......................... ............................................21 ............ EXECUTIVE SUMMARY...................21 The U..37 3.......7 C..........18 1...........................18 The growth rate for pharmaceutical industry was the highest in manufacturing sector............................. 4 B...............................................6 Industry Concentration.....................................................S................2 Top ten brands by global pharmaceutical sales.....4 Industry Segmentation by Products...........................................37 3....9 Research and Development...............................................................75 SWOT analysis of the Indian pharmaceutical Industry........................................................................................................5 Industry Segmentation by Distribution...........79 3.....................5 Enviornmental analysis (PEST)..............................................................10 Pricing and investment in a global market...........18 1..................................................8 D..............................1 Industry Segmentation by Size and Distribution...........................................................................19 1............ pharmaceutical industry is expected to maintain aboveaverage earnings growth through the end of the decade..........11 Relationship Pharmaceuticals – Healthcare......9 E.................................................................................................................................. LITERATURE SURVEY................................................10 F.....1 Introduction......16 1.............. MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED RESEARCH.....................43 Competitiveness of the Indian pharmaceutical industry ...Contents Contents............................................................2 Evolution of Indian Pharmaceutical Industry...................................28 1....................................................0 THE INDIAN PHARMACEUTICAL INDUSTRY......................................14 1............34 2..... 21 1...12 Industry Living Space.....81 Page | 4 ...........34 3...................20 1.......................22 1... RESEARCH METHODOLOGY.........................................75 Post 2005 scenario.......33 1..............................23 1..................... SCOPE AND IMPORTANCE OF THE PROJECT...........................7 Current Environment...............................................................8 The lifecycle of a drug..................................................
....................................14 IPR in the Indian context....10 Indian Pharmaceutical: Ripe For Consolidation .......................................130 5......7 Country experiences...........87 4......................................................................................................112 4................................151 7........97 4...............................11 Parallel import.........................................6 Stakeholders' views...........136 5..9 Mergers..........................8 The future of Indian Pharmaceutical industry.................................108 4..........................................12 The challenge..114 4....143 5..........................................10 Compulsory License..........12 Exceptions to the exclusive rights................................................................................................94 4........0 MERGERS AND ACQUISITIONS (M & A).....................114 4.....91 4.....106 4......133 5............6 Recent M&A.....110 4.....................................3 The importance of intellectual property rights for national development.......................................154 Page | 5 . Acquisitions and Alliances: Why they can Fail......7 Drug patents in India.......................11 Impact of Mergers and Acquisitions on Performance..133 5........................9 Standards for patentability........124 4..............................................................5 The history of the TRIPs negotiations............3...........................................2 Background................1 Introduction...............91 4..................................................................................................................................0 SUGGESTIONS........................................115 4..7 Steps involved in Mergers and Acquisitions (M&A): ..............................................0 THE TRIPS AGREEMENT........................................85 3...........141 5..141 5.....................................146 5......................133 5.......................1 Historical Background ................................13 Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition.......4 WHO's perspective on globalization and access to drugs...............................................................................................5 Facts on the Three Cases of Megamergers.....................................................................148 6..........4 Surviving the Scramble...............................................................3 Winners and Losers in Pharmaceutical M&A........................................................95 4............8 Reasons for mergers and acquisitions ..............92 4................0 OBSERVATIONS............................8 Technical issues................132 5......................................131 5......144 5......2 Mega-Deals Back on Pharma M&A Horizon...........131 5.........................15 A possible solution to the product patent issue....................................................................93 4.........................................................
.......0 PRELIMINARY REFERENCES..... Page | 6 ..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.........157 A............ A... A........155 9............1 To study the development of the modern pharmaceutical industry and analyze the current situation.................0 CONCLUSION............ major challenges and the prospects of the industry........................... A...............8. The broad objectives of this report are: 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..4 To track the significance of Mergers and Acquisitions in consolidation of pharmaceutical industry....2 To study the growth and trend of Indian Pharmaceutical Industry........
patients and the government often overlap but they are not identical. When it listed the 50 most admired businesses in 2009. the present regulatory system is failing to provide this. 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. Unfortunately. B. Few other industries can claim to have done as much for the well being of mankind. the average life expectancy in developed countries increased by over 20 years. An effective regulatory regime to ensure that the industry works in the public interest is essential.2 Identify key areas of pharmaceutical market growth and key opportunities for growth. B. The interests of pharmaceutical companies and those of the public. seven pharmaceutical companies were included.1 Quickly gain an overview into the pharmaceutical industry.B. only one of them .” The reader can use this report to: B. This crisis in public trust must be faced. its major companies and products. It is not in the long term interests of the industry for prescribers and the public to lose faith in it. We need an industry which is led by the values of its scientists not those of its marketing force. I think there have to be some big changes. That is very unfortunate for an industry that we should look up to and believe in.Johnson & Johnson . A significant part of this improvement can be attributed to pharmaceutical innovation. Page | 7 . SCOPE AND IMPORTANCE OF THE PROJECT Medicines contribute enormously to the health of a nation.3 Support internal planning and decision-making with an external perspective founded on detailed analysis. During the 20th century.made it on to the list. and that we should be supporting. When the Financial Times (FT) listed the 50 largest businesses by market capitalisation in 31 March 2009.
Goldman Sachs. Deusche Bank. RESEARCH METHODOLOGY The methodology will include a comprehensive review and critical analysis of literature. Stanford University.C. Pricewaterhouse Coopers. Additionally. various journals. WTO etc. will be analyzed. and pharmaceutical companies’ financial data. websites of various organizations like the WHO. and publications like Pharmabiz and Chemical weekly. newspaper articles from such respected sources as the Wall Street Journal. Kellog School of Management. Page | 8 . the effect of the patent regime and how it is being abused rather than used. Business Standard and other local newspapers will be reviewed. such as year-end income and expense amounts. challenges and opportunities. books. Among sources of the literature will be such publications as the Business Intelligence reports. research reports of Ernst & Young. I will look for the current status of the global and Indian pharmaceutical industry. various mergers and acquisitions and the real reason behind this. particularly literature in pharmaceutical journals and other publications providing insights about the industry. USFDA. In the process of the comprehensive literature review and analysis.
D. MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED RESEARCH Page | 9 .
qualitative reasons for the growing significance of generics in U.' Testifying to this. the policy-setting mechanism.2 per cent in December and to 14.8 per cent in November 2008. key trends. which was just 6. and respiratory drugs. Statistical information such as the present and estimated market size of the generic pharmaceuticals in the U. Estimations of the growth rate of the industry by few institutions (KPMG.2 Patent Expiry of Blockbuster Drugs and Push for Lower Healthcare Costs Drive Generic Pharmaceuticals Market. support statements made by the author.1 Pharmaceuticals .S. 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. increasing rural penetration. the author cites growth data provided by pharmaceutical industry researcher ORG-IMS. Government of India and the Confederation of Indian Industry.S. and backward vertical integration. vitamins and minerals. Business Standard (March 13.4 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. Growth has been witnessed in a number of segments of the industry such as anti-infectives. It includes a market overview. gynaecology.S. and Cipla. 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. Exploring several reasons for the ignorance of this segment by Page | 10 . According to the article. appears below E. Generic Pharmaceuticals Market Outlook. manufacture of branded generics. this article provides a brief overview of the impact of patent expiries in the U. E. Lastly.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. Yes Bank) are cited by the author. and opportunities. and so on.3 Domestic drug makers immune to slowdown. Nicholas Piramal. the growth of the domestic drug sector. 2009) PB Jayakumar in his article views the pharmaceutical industry as one of the few industries that is 'recession proof. The article also discusses the measures pharmaceutical companies are taking to counter the problem such as consolidation. (such as demand for lower healthcare costs) are furnished by the author. E. LITERATURE SURVEY Summary of some of the articles referred. geriatric medicines. Besides numerical evidence. generic pharmaceuticals market.e. The reasons attributed to the industry's growth are better health insurance coverage. drivers.4 per cent in January. E. The report provides extensive information concerning the industry. Lastly. information regarding companies' ranks based on total market share as estimated by ORG-IMS forms a part of the article. It aims to effectively present the India business perspective and leverage business partnerships in a globalising market-place.S. August 15.E. rising population. 2007 is based on a research report by Frost & Sullivan namely U. and a brief overview of the performance of key players such as Ranbaxy. improved to 13. Further. in the month of January in 2009.
Under this Page | 11 . 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. COPYRIGHT 2009 Asia Pulse Pty Ltd. the government is also working on framing regulations in such a way that it would promote R&D in the country. they will launch the programme within six months. . The author states that there are a few companies such as Mumbai-based Elder Pharmaceuticals which cater to the medicinal needs of the elderly. 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.5 Government plans to make India. Publication: PTI. The spread of diseases is more in countries with lower income levels. 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. among other things.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. 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 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. Publication Date: 15-MAR-09. South Asia and Latin America are also huge markets for companies which would develop medicines for diseases such as malaria and tuberculosis. 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. formulating a national policy for aged under the Ministry of Social Justice and Empowerment. Besides changes in the patent laws. E. geriatric medicines remain untouched to a large extent due to lack of clarity regarding the geriatrics market. By DEEPAK SHARMA in his article says that India is aiming to become one of the top five pharmaceutical innovation hubs globally. According to them Africa. insurance agencies and pharma companies. Besides this. the government plans to invest up to 2 billion dollars. 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. 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. making research in these areas less remunerative.the industry. or Rs 10. This proposal has already been sent to Prime Minister Manmohan Singh and are awaiting his approval. one of the top five pharmaceutical innovations hubs by 2020. However. annually till 2020. Once they get the approval of the Cabinet. 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. The IPI is now exposed to a host of new opportunities and risks.000 crore. will mobilize investment of two billion annually. According to them the proposal has the potential to add $20 billion to the GDP by 2020. The government has contributed to improving the situation by. E. along with creating lakh jobs.6 The Indian Pharmaceutical Industry – Prescription for growth published in 2008 .
Key reasons being increased competition in the highly regulated markets of the US and Europe and the steady appreciation of the rupee. 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.scenario. both locally and abroad. but also provide us an opportunity for rebuilding a more efficient set of research incentives.a unit of Cadila Healthcare . Lupin recently became the third drug maker to be accused of sub-standard manufacturing by the US Food and Drug Administration (FDA). To maintain robust incentives for medical research and to cure defects of the patent system. Technology. Zydus Cadila . E. making continued support an important national priority. Sun's' US-based subsidiary. Continued research into medical technologies is essential for improving the quality of life of Americans and eradicating diseases. E. the Fund marshals private sector efficiencies. as well as Wockhardt and Granules India.) · excessive amount of red tape · underdeveloped infrastructure and · The deficient legal framework (although the government is striving to improve the regulatory environment). On the other hand. and Engineering Policy White Paper Competition 2008. brought on by soaring R&D costs and competition with generic manufacturers. Caraco Pharmaceutical Laboratories. 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 .7 Promoting Pharmaceutical Research under National Health Care Reform by Science. which will attract greater scrutiny on the sector as a result. Upcoming health care reforms in the US will curtail the remaining incentives for pharmaceutical research. In December 2008. there are many barriers too like: · low per capita consumption · emphasis on generics (hampering the level of market development. 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.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. remaining regarded as a moderately attractive proposition. Pharmaceutical products have tremendous returns in increased lifespan and quality of life. and resources to innovating improvements in medical treatments. expertise. while Sun Pharma acquired 100% of the US-based narcotic producer and importer Chattem Chemicals. By setting proper incentives. 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. and has historically proven exceptionally cost effective. measured by Quality-Adjusted Life Years (QALYs). Growth of India's pharmaceutical export sector is down by more than half. Other Indian companies facing similar problems in the past include Ranbaxy Laboratories.purchased Italy-based Etna Biotech from Dutch biotechnology firm Crucell. Meanwhile generics industry continues to expand. The Fund will compensate innovators based on market success and medical efficacy. 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. National Pharmaceutical Innovation Fund was introduced.
Detailed research has been carried out which is apparent throughout the report. generic drugs. the segments within the industry. Complacency can be the reason for the doom of this sector. E. The report outlines India's position in the world pharmaceutical market as well as its standing among Asian countries. and wholesale distributors with expensive gifts. 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 change caused by the new patent regime since 2005.pharmaceutical market. it would be of great aid in making the report. To look after this concern the Organization of Pharmaceuticals Producers of India has published a voluntary "Code of Pharmaceutical Marketing Practices. but this success story is not as glamorous as its seem to be. competitively priced. pharmacists. Nevertheless. exports. Page | 13 . Summarily. Indian companies investments abroad and so on. 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.9 Uwe Perlitz( April 9. its key growth drivers.11 Manjeet Kripalani (March 25. Since the paper includes valuable information about the pharmaceutical industry.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. E. It puts forth the ‘patent system’ which hinders the future growth of this sector. the paper mentions the changes needed to be made for the pharmaceutical industry to rise and flourish. Especially during these troubled times. generics are on winning position when domestic front is considered." that calls for maintaining strict ethical standards when conducting promotional activities. In return doctors may prescribe drugs based on company incentives rather than the needs of patients. The future is positive for research and to make Medicare be preventive rather than just be used for curing. 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. And soon this code would be converted into law. Here the author emphasizes the need of a regulatory body to in India to take care of the patient’s well being. Some pharma companies tend to engage themselves in aggressive marketing tactics which include showering physicians. Thus innovative steps should be taken in time as an impetus to this sector. including topics such as its history. while the 2011 patent cliff provides yet the greatest opportunity for Indian generics exports.2009) in her research paper India's Pharmaceutical Industry course for globalization provides readers an insight into the Indian pharmaceutical industry. E. The information conveyed through the report is supported by substantial evidence which have been gathered from DB Research itself and a few external sources.
There are. Western-style lives and. Nevertheless.S. innovative drug treatments. A large market will likely open up as the result of a projected boom in health insurance. and can afford. and Eastern and Central Europe. a situation that led to India's current role as a world leader in the production of high quality. South America. utilizing each other's strengths for their mutual benefit. while for others it could represent unprecedented opportunities. they are beginning to suffer from Western. For the foreign firms. however. capitalizing on India's high levels of scientific expertise as well as low wages. lifestyle-related illnesses. while even greater opportunities may be presented by the rise of the new Indian consumer. only process patents were granted. New government initiatives seek to enable the majority of the population to access the life-saving drugs they need. as a result. In addition.F. 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. 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. 2005. a number of uncertainties. Now. more and more governments worldwide are seeking to curb their soaring prescription drug costs through greater use of generics. an area in which the country is currently woefully underdeveloped. The new regime may spell the end for the domestic sector's smaller players. the domestic industry is still Page | 14 . which was introduced on January 1. 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. but also comprehensive marketing and distribution networks operating throughout India's vast territories. Previously. for which they want. In addition. Both multinational and local drug manufacturers could eventually benefit from the market potential of India's population of over one billion. Asia. These opportunities are presenting themselves not only in India's traditional wealthy client markets such as the U. This group-urban. MNCs and domestic companies are starting to work together. this includes not only the Indian companies' research and manufacturing capabilities and their much lower operational cost levels. India's long-established position as a preferred manufacturing location for multinational drug manufacturers is quickly spreading into other areas of outsourcing activities. This untapped domestic market is also highly attractive to the pharmaceutical MNCs. affordable generics. and European Union nations but also in emerging economies with vast populations such as Africa. particularly the effects of India's new product patent system. middle class and wealthy-live fast-paced. 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).
Page | 15 . where the government has been particularly proactive in encouraging foreign investments in pharmaceuticals and biotechnology. pricing remains a problem. On the international front. Action is required soon. which must change quickly if it is even to begin to address these new opportunities and challenges.spending far too little on R&D. the industry still has some catching up to do in terms of quality assurance while. This is particularly urgent in the face of the strong competition from China. 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 local market. if India wants to be a significant player in the global pharmaceutical arena.
Total global sales in 200809 was about $750 billion. Some of the big global pharmaceutical companies are Johnson & Johnson (U. 1. Novartis (Switzerland).1.1 Industry Segmentation by Size and Distribution The industry has been growing at a steady pace. Its origins can be traced back to the nascent chemical industry of the late nineteenth century in the Upper Rhine Valley near Basel./Sweden). GlaxoSmithKline (U. especially with the introduction of regulations governing the manufacture of ‘generics’. a result of which the market for ‘branded generics’ emerged.S.).). The industry expanded rapidly in the sixties. Abbott laboratories (U. Figure 1: India’s pharmaceutical industry on course of expansion Page | 16 . Ciba-Geigy (the product of a merger between Ciba and Geigy). benefiting from new discoveries and a lax regulatory environment.S.K. The industry witnessed major developments in the seventies with the introduction of tighter regulatory controls. Pfizer (U. started.S. (U.).0 INTRODUCTION The modern pharmaceutical industry is a highly competitive non-assembled global industry.).K. Sanofi-Aventis (France). AstraZeneca (U.S.). Hoffmann La-Roche (Switzerland). Sandoz. Switzerland where companies like Hoffman-La Roche. Merck & Co. Novartis etc. The new regulations revoked permanent patents and established fixed periods on patent protection for branded products. Bayer (Germany).
the world pharmaceutical market is divided as shown in the figure.Geographically. Figure 2: Share of global market Page | 17 .
high blood pressure and schizophrenia were amongst the top ten brands worldwide.2 Top ten brands by global pharmaceutical sales In 2005. medicines for the treatment of high cholesterol.3 Growth rate The growth rate for pharmaceutical industry was the highest in manufacturing sector. stomach ulcers.1. Figure 3: Manufacturing trade average annual growth (%) 1994-2003 Page | 18 . Table 1: Top ten brands *COPD – Chronic Obstructive Pulmonary Disease 1.
4. Page | 19 .Table 2: Rank of the 10 Causes of Death by Age Group (in United States. which can't he dispensed without a physicians prescription. 2005) 1.1 Ethical (prescribed) drugs.4 Industry Segmentation by Products Pharmaceutical sales include: 1.
1. and may be produced and sold once the original drug's patent protection expires. which are readily available on drugstore shelves. Generics are less-expensive equivalents of brand-name prescribed drugs. The Page | 20 . nursing homes. Generic products. and retail pharmacies.4.4.1 1.5 Industry Segmentation by Distribution Three-quarters of industry sales consist of pharmaceuticals used in outpatient settings.1.4. Ethical drugs account for about 60% of total industry sales. health maintenance organizations (HMOs). with OTC products representing the balance. The ethical sector can be further segmented into: 1. and other inpatient facilities. with the balance administered in hospitals. Figure 4: Generic market shares in Europe 2006 1.2 Brand-name products.2 Over-the-counter (OTC) medications. About 70% of prescribed drugs are distributed through wholesalers to hospitals.1.
1 regulatory environment. 1. in contrast.7.1. 1.1 1. 1.2Key global push factors of growth are presented by: 1.remaining 30% is sold directly by manufacturers to physicians.2. especially in developing nations (like Russia and China) 1. Key global pull factors fuelling this growth include: rapid expansion in the older segments of the population. 1. Figure 5: Top ten companies worldwide by pharmaceutical sales 1.7. pharmaceutical industry is expected to maintain above-average earnings growth through the end of the decade.2 increasing life expectancies.7. hospitals.1. WHO forecasts the global over-65 population to rise from 380 million in 1997 to more than 690 million by the year 2025. Generic drug industry.7.7.1 1. retailers. The 10 1argest players account for about onethird of worldwide sales of ethical drugs.1.7.7 Current Environment The U.4 Large markets overseas. Page | 21 .S.1.3 large untreated patient populations. and others.6 Industry Concentration The industry is somewhat concentrated.7. is fairly fragmented.
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 Influence of the managed health care. they do not have to be incurred again in order to make the product available in other countries. R&D is an 'international' activity in this sense of the term.1. 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).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). so the activities become increasingly 'national' in scope.2. More formally. 1.7. 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.
Over the past years. the industry's R&D expenditures have risen sharply. 1. After the drug reaches the market. 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. Pre-clinical trials precede any testing on humans. and • Phase III: trials on larger groups of patients (typically 1. although much basic research is carried out in universities and publicly-funded institutes. These seek to identify any adverse drug reactions and continue throughout the lifetime of the drug. a considerable amount of time and money may have been spent on basic research to identify suitable entities for investigation. Within the EU. Three stages are carried out before drugs receive marketing authorisation. both in value terms and as a percentage of total sales. 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.000). and involve rigorous testing of selected NCEs in laboratories and animals. Page | 23 . 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. to gain further data on safety and efficacy. Marketing authorisation must then be obtained before drugs can be launched onto the market. Around 25 per cent of INDs progress through all three phases to a regulatory review. As discussed earlier. 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. 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. In addition. A third of INDs make it through both Phase I and II. Even before patent application. but can then expect rapid authorisation in other Member States in the absence of any specific objections. namely: • Phase I: trials in 20-100 healthy adults to test the drug's safety. A comparison of R & D expenditures in different industries appears below. • a mutual recognition procedure: firms first seek marketing authorisation in one Member State.000–3. some of the costs of global manufacturing facilities may also represent an 'international' cost element.9 Research and Development The drug industry is a research-oriented sector. Phase IV pharmacovigilance trials begin.countries.
000 compounds discovered ever reaches the pharmacist's shelf. only one in 10. Figure 9: The economics of R & D Page | 24 .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.
Let us explore available data relating to this assertion. DiMasi et al (2003) calculated R&D costs for a sample of 68 drugs first tested on humans between 1983 and 1994. R&D is not only a lengthy process but also a costly one. 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 .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.
a real cost of capital of 11. even for those drugs successfully marketed. Figure 11: Trends in capitalised spend per approved drug (US $ Mn) Page | 26 . 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. 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. Grabowski et al (2002) analysed global cash flows (sales value less production. They found that the single best selling drug (Zocor. distribution and marketing costs) through the life cycle for 118 new drugs entering the market between 1990 and 1994. 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. Comparison with earlier similar work suggests that R&D costs per approved drug are increasing rapidly (see Figure below).4 per cent between the 1980s and the 1990s. This illustrates the importance of unsuccessful R&D expenditure. In calculating capitalised costs. On the basis set out above (capitalised R&D costs per successful drug including unsuccessful R&D and the cost of capital). 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. a high proportion of revenue and cash flow is accounted for by a small number of 'blockbuster' drugs.0 per cent was used. DiMasi et al (2003) estimate a compound annual growth rate of about 9.5 per cent of drugs making it through the preclinical phase are successfully marketed. and about 7.4 per cent between the 1970s and the 1980s.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 13: Returns on Research and Development Page | 27 . Figure 12: The Pharma Productivity Gap Fewer than a third of marketed drugs actually achieving enough commercial success to cover their R&D investment. Second. the number of NCEs receiving approval has not been increasing and indeed has shown a steady decrease in recent years.$1. This reflects two trends. First. the absolute amount of R&D expenditure by the pharmaceutical industry has been rising rapidly over time.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.
Typically. We take this as our starting point in this analysis. and • major health purchasers – typically national governments 1. subject to a two types of constraints: • the range of demand side measures in place within the country concerned. In this case they will wish to maximise revenues. pricing is constrained further through competition from generic manufacturers. Pricing incentives Given that they have market power. 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.1.10. For newly launched drugs. In the absence of other structural or regulatory distortions. 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. firms with market power will engage in price discrimination if they can segment their market into buyers with different degrees of Page | 28 .1 Firm's objectives A reasonable assumption is that pharmaceutical firms will seek to set prices in order to maximise profits. free competition between off-patent drugs should lead to significant drops in price. pharmaceutical companies are typically able to acquire a patent. it will be useful to identify pricing strategies that pharmaceutical companies are likely to adopt in different national markets so as to maximise profits.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). granting them temporary rights to be the sole producer of that drug. For drugs whose patents have expired.
The relevant question is.recovered on individual drugs. at least on average across all drugs. In the context of the pharmaceutical sector. 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. (This is often described as 'Ramsey pricing'.price sensitivity. what pattern of mark-ups across countries represents the fairest and most efficient way of allowing firms to recover R&D costs. we would expect pharmaceutical companies to vary prices in relation to income per capita in each country. In this instance. the prices of drugs must reflect the value they bring to patients ( In formal terms. whilst not losing sales from buyers with a lower willingness to pay. which is applicable where there are common fixed costs associated with sales to different segments of a market. 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). however. Page | 29 . In this way. by charging mark-ups above marginal cost in inverse proportion to the price-sensitivity of buyers. 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. that is. For this outcome to be efficient. therefore. 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. we might expect that countries with a lower national income per capita might be more price sensitive. if income per capita is the key driver of differences in price sensitivity between buyers in different countries. Some have argued that this form of price discrimination may represent the best solution: • on efficiency grounds. including R&D. depending on the price sensitivity of the national buyer or buyers.or under. Generally. 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). because some drugs will be commercial successes and others will be failures). In such circumstances. 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). In order to understand why this might be the case. More importantly. 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. this could mean charging different prices in different countries. companies can extract as much rent as possible from buyers who are willing to pay higher prices. as well as being in the commercial interest of firms. and • on equity grounds. 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. they must have an expectation that they will be able to recover the cost of R&D. dynamic efficiency requires that investment. The pricing and reimbursement systems employed by major purchasers are a key tool in sending these signals. In order for firms to have an incentive to engage in R&D.
so as to prevent them becoming a source country for parallel trade. The existence of parallel trade will tend to weaken the ability of pharmaceutical companies to charge different prices.3% of GDP.8% of GDP in the United States. undermining incentives to invest. since average prices may be lower and parallel traders incur costs and earn profits from their activities. total pharmaceutical expenditure in Australia equalled 1.10. 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. pharmaceutical firms may have an incentive to delay launch or avoid launching altogether in low price countries.2 Government's objectives In 2002. Figure 14: Public and private expenditure on pharmaceuticals (percentage of GDP) In their role as healthcare providers. because if they seek to do so they risk losing revenue from sales in high price countries to parallel imports. In comparison. In response to this. with potential implications for their willingness to market drugs in low price countries and their incentive to innovate. 1. after suitable repackaging or re-labelling).5% in Japan. 1. parallel trade may reduce returns to the innovating companies. Where significant price differentials exist between countries. total pharmaceutical expenditure was equivalent to 1. Parallel trading thus imposes a constraint on pharmaceutical companies' ability to Price discriminate. 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. An alternative would be to view national governments as wishing to minimise healthcare Page | 30 .6% in Canada and 1. Moreover.Parallel trade Pharmaceutical companies may be constrained from price discriminating effectively by parallel trading.
the market from which the government buys is unlikely to be competitive. The buyer will therefore buy a lower quantity at a lower price than would be the case in the absence of buyer power. there is a constraint on price-minimising. they are almost certain to have buyer power in the market for pharmaceuticals—that is. In a longer-term context. In practice. Reasonable prices Typically. if a firm has buyer power. If governments can purchase existing volumes of drugs at lower prices. Within this longer-term framework. it would be possible for the government to steer a middle course between these two approaches. 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. In this case. there is a rising supply curve). 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. Clearly. In negotiating drug prices. governments' overall objective could be restated as maximising health outcomes for their citizens. the price would need to cover the 'national' element of drug costs. such a policy is unlikely to provide incentives for firms to locate R&D in a specific country. any pricing approach will involve a trade off between these objectives. it is able to take into account the effect that the quantity it buys has on the price of the product it is buying. there should therefore be consideration of the implications for the incentives for pharmaceutical companies to invest in R&D. At a minimum. however. In addition. In particular. such as industrial policy objectives. given the international nature of R&D costs. the existence of close therapeutic substitutes may mean that there are in fact several sellers of differentiated products: Page | 31 . In order to analyse the government's best use of its buyer power. (In the case of the market for a drug. However. In practice. both now and in the future. where many suppliers compete on price. given that patents grant pharmaceutical firms temporary rights to be the sole producer of a particular drug.expenditure for a given level of health outcomes. they may wish to use high drug prices to attract footloose pharmaceuticals' R&D and production to locate in their country. If a single buyer is buying in a competitive market. within the constraints of current and future health budgets. a saving in pharmaceutical expenditure could be used partly to increase other health spending and partly to reduce the overall health budget. use of buyer power would lead to a loss of overall welfare if the costs of supply increase with total output (that is. We now consider how a government could use its buyer power to achieve the policy objectives outlined above.) There are three principal objectives that governments might have in bargaining on pharmaceutical prices: • achieving reasonable pharmaceutical prices. For example. the starting point (or counterfactual) should in this case be taken as a monopoly. Since national governments are the principal purchasers of pharmaceuticals in most countries. they will be able to influence the prices at which they buy drugs. and • ensuring that there are adequate incentives for R&D on valuable new drugs. governments will wish to see new drugs being developed which will be of benefit to their citizens in the future. of course. there may be other non-healthcare objectives of importance to some governments in negotiating pharmaceutical prices.
Governments in turn can threaten to withhold reimbursement status. one might also expect a government. Ensuring that drugs are made available Of course.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. both with monopolies. a monopolist will sell a lower quantity at a higher price than in a competitive market. there are a range of possible outcomes consistent with either side using their market power. As long as demand is not completely price inelastic. concerned with its citizens health. but the buyer may be able to negotiate a lower price. one might expect them to agree on a quantity that maximises joint profits (Including both the monetary profits of the seller. sales in that country will have little effect on companies' global return Page | 32 . Globally common costs and 'free riding' R&D is a globally common cost. 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. it may be possible in this way for national governments to use buyer power to negotiate lower drug prices (although. In principle. Where two firms. 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). and the 'surplus' (non-pecuniary excess benefits) of the buyer) and then negotiate on a price. as discussed further below. 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. taking into account the effect that these prices will have on incentives for R&D into new drugs. In this case. Market outcomes (prices and quantities) may be determined as a result of negotiation between the two parties. 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. If a country accounts for a small proportion of Global sales. leading to a loss of overall welfare. 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. In the context of pharmaceutical pricing. If there is a single seller and a single buyer operating in one market. are involved. reallocating profits from the seller to the buyer. 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. the quantity produced will be the same as in the outcome where there is only one monopolist. However. to try to induce the monopoly to supply a higher quantity than that which maximises profits). with prices being agreed in the context of: • the threat of withholding reimbursement from government. in practice. Hence the price bargaining process is best analysed strategically.
healthcare system. governments may recognise their common interest in allowing higher prices that incentivise the development of new drugs. ensuring that each paid its 'fair share' (possibly according to some measure of ability to pay). seek to negotiate prices that reflect a drug's cost effectiveness. the solution to this problem would be to coordinate price setting between countries.2 Medicare and Medicaid: Managed care is also moving aggressively into Medicare and Medicaid markers. But the program doesn't provide Page | 33 . 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. Therefore.11. As a consequence. In particular. is expected to reach 90% by the end of it. The managed care providers discount purchases of pharmaceuticals and medical products. Managed care's share of the retail pharmaceutical market. although free riding may be rational for an individual country. This could affect the incentives governments have in exercising buyer power. governments may face an incentive to 'free ride' on global R&D by paying prices which do not contribute to this cost element. which has the effect of linking prices in different countries. however. The latter becomes more and more popular because of its ability to provide medical products and services in a cost-effective manner. 1. In order to ensure the national supply of a drug. Medicare is the principal healthcare financing program for Americans 65 years of age and older. a government may seek to negotiate prices that cover only national costs and avoidable international costs. 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. The incentive to free-ride may. be dampened by the practice of international reference pricing. 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.from R&D. companies may respond by delaying launch of a drug in that country. In the light of this. insisting on the use of low-cost generic drugs whenever possible.1 Managed Care Growth: The shape of the pharmaceutical marketplace transforms rapidly due to growth of managed care in the U. as well as physician and hospital services. If prices are linked. for innovative drugs. In principle. which was less than 30% at the start of this decade. Where governments seek to free ride in this way. 1.S. these countries will have a greater incentive to take account of long-run effects on innovation when exercising their buyer power.11 Relationship Pharmaceuticals – Healthcare 1. 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.11. leaving the globally common costs to be paid for by other countries. In practice. 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. or even not launching at all. Furthermore.
and FDA review. 1. it must undergo years of testing and receive government approval from the FDA. which is relatively constant over the years. Drug pricing is also relatively inelastic.reimbursement for outpatient prescribed drugs. The process is long and laborious.12.to 15-year period of discovery. the pharmaceutical industry was characterized as a high growth and high margin business with significant return on investment from new drug discovery and development. 1. due to the absence of alternate therapies for the most prescribed drugs. Even at current revenues.2 Life cycle of products: The product cycle of nearly all prescribed drugs is fairly stable. It takes several years of sales buildup in major markets in the U. At that point. Growth of medicare/managed care population increases drug utilization.12.12. a branded ethical drug has about 10 years of commercial life.12.12. etc before a drug reaches its full commercial potential. Competition in the market of OTC products is more straightforward. Medicare/managed care enrollment has more than doubled over the past four years.S. 1.5 Going generic: Generic competition usually appears immediately after patent expiry. with the vast majority of attempts unsuccessful. Branded prescription drugs effectively have about 10 years before generic competition erodes their profitability. 2. new competition of drugs similar in action may enter the market. 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. 1. Medicaid managed care plans are also poised for ongoing growth. After the average 10. the pharmaceutical industry still represents Page | 34 . development. and prices begin to fall. testing. Margins on products switched to OTC status are lower than those on the prescription products they replace. 1.4 Bringing the drug to market: Before a drug can be brought to market.0 GLOBAL PHARMACEUTICAL INDUSTRY Historically. medicare beneficiaries are typically given free or low-cost prescription coverage.1 Demand: The demand for medicine is tied to the health of the populace. Enrolling into managed care plans.3 Discovery: New drugs are discovered in scientific laboratories.12 Industry Living Space 1. but popular consumer medications can have almost infinite shelf lives.12.
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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000 units. Globally. while others exist in the small scale sector. the Indian industry ranks 4th in terms of volume and 13th in terms of value. Figure 16: Trends in the production of bulk drugs and formulations in India since the 1970s Page | 38 . Around 260 constitute the organized sector. Mumbai (Bombay).industry is valued at approximately $ 8. Ahmedabad and Bangalore. India has large number of pharmaceutical companies that produce even very new inventions without license from the innovators.0 billion. Figure 15: Location of pharmaceutical hubs in India Mainly based in the five major fine chemical and pharmaceutical manufacturing regions around Delhi. although many source intermediates domestically or from abroad. Antibiotics and nutritional supplements are important sector. and drug prices are very low compared to the ‘West’. Hyderabad. particularly since 1985. 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. Indian pharmaceuticals industry has over 20. particularly from China. India’s thousand-plus companies have built up a formidable industrial strength. The bigger pharmaceutical companies are back-integrated in the manufacture of bulk actives.
The pharmaceutical industry has witnessed tremendous transformation since the 1950s. This is against the value of the production of pharmaceuticals of a mere Rs 10 crore in 1950. The output of formulations has seen a phenomenal increase during the period under consideration but is less than 4% as against bulk drugs.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 Page | 39 . the production of pharmaceuticals has registered a tremendous increase over the years. The 1980s is the only period in which formulation growth had outperformed the growth of bulk drugs by a marginal 1%. At the global level. Propelled by the booming demand. which is just over 1% of the global market (ICRA 1999). The massive growth of the pharmaceutical industry could be attributed to a few domestic and international developments that took place particularly since the 1950s.471 crore in 2003-04 (IDMA 2004). Investment in the industry has steadily grown over the years from a mere Rs 23. both bulk drugs and formulations is estimated at Rs 35. in both the 1970s and 1990s. 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 size of the Indian pharmaceutical industry.
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. based on the anticipation of very productive discovery and generic drug pipelines (today. Cheminor and Dr. advanced intermediates and basic building blocks are normally about 17-18% of the total pharma industry value. particularly Italian and Spanish firms. approximately 40% of the value of this production is outsourced). These Indian ‘upstarts’ looked to be an emerging threat to Western European fine chemical players. Indian pharmaceutical fine chemical players have served their apprenticeship and are now embarking on their own voyage of conquest in this globalizing industry. first appeared on the RADAR scope of industry participants in the United States and Western Europe.. At the same time. Degussa. or about $85 Billion in 2005) was the expected increase in outsourcing starting in the mid-1990s. Even a brief survey of the situation. But today we can say that the Indian pharmaceutical fine chemicals industry has learned its lessons well. A key driver for significant growth in the global pharma fine chemicals segment (APIs. quickly and at acceptable cost. reveals an Indian industry that has: • • • • • many moderate to large players with a varied range of participation. lack of FDA certification and even environmental practices that slowed their progress in international markets. a handful of modest sized Indian companies. Rhodia. even some with international operations. Looking back to the early 1990s. New cGMP capacity was built by suppliers of all sizes. Clariant and DSM) made significant acquisitions to establish themselves as leading fine chemical and active ingredient suppliers to the Page | 40 .industry in general was then experiencing a major overhaul by vertically integrating operations such as production. become a reputable source of building blocks. As a result. 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. both technology start-ups and divisions of large chemical companies – jumped in to take advantage of the growing outsourcing opportunity. The protection given to the pharmaceutical industry through patents and brand names saw many top companies switch over to the production of specialty medicines. skilled technical labor that can now support not only fine chemical process development and production but also clinical development and contract research. At the time there were questions about consistent quality. and in the late 1990s several large chemical companies (e. advanced intermediates and active ingredients to the growing global generics market an improving track record with the FDA and other regulatory agencies. including firms such as Ranbaxy. management and financial resources to pursue acquisitions in other countries. Reddy’s Laboratories. marketing and research.g.
pharmaceutical industry. leaving the majority of the Indian population without realistic access to modern therapies. Unlike China. ICI’s propanolol and Beecham’s ampicillin were both specifically named in her speech in Geneva. including: industry overcapacity (about 70-75% capacity utilization industry-wide).” India’s pharmaceutical industry and thus its fine chemicals industry has also had to adapt to new realities. However. often via acquisitions or alliances and are poised to take a larger role in this globalizing industry. Rhodia. Today. 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. 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. While this industry evolution has been playing out largely in “the west. 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. At the same time. consolidation with continued in-sourcing by Western pharma companies. Glaxo and later ICI) developed their business in India as part of their international operations. such as Italy). 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. Drugs were priced at international levels. as well as some European countries. 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. Today. and mid-size European and North American based companies are putting themselves on the block). For many years the pipeline was regularly filled with new “me-too” products copied from global pharmaceutical majors. Common belief is that while Indian Pharma fine chemicals companies can continue to position themselves as low cost commodity suppliers. some Indian players have established foreign operating positions. 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. in which Page | 41 . and the net result has been a wholesale consolidation of both fine chemicals and pharmaceutical industry participants. While the Indian pharma fine chemicals segment has not been immune to the drivers of margin pressure. Margin pressure was further exacerbated by low productivity of the pharma drug pipeline. larger players in the Indian pharma fine chemical industry have simultaneously been building their export businesses and that will provide for better growth prospects. coupled with the improving quality of Indian and Chinese manufacturers created strong price competition and severe margin pressure on the fine chemicals industry. thus allowing the local companies to produce new drugs at a fraction of the price being asked by the multinationals. declining Chinese prices. This active capacity building. DSM and Clariant.
cheaper drugs that are often inadequate). 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. describes it as one of the largest and most advanced among developing countries. 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. Government of India. as a result of this action. which is higher than that filed by Spain. The Indians have ‘called this multinational bluff’. has been seen as ensuring health security of the poorer countries. China and Israel taken together. The Annual Report of the Department of Chemicals and Petrochemicals. it generates rising trade surpluses in pharmaceutical products by exporting to over 65 countries. Besides. however. 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. Figure 17: US DMF filings – Global vs India Page | 42 . Both finished drugs and bulk actives are exported. An interesting parallel now exists in South Africa. Italy. It produces life‐saving drugs belonging to all major therapeutic groups at a fraction of prices existing in the world market and thus. as a result. South American and African export markets. 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). Today. therefore. The Indian pharmaceutical industry. which had little technological capabilities to manufacture modern drugs locally in the 1950s. significantly competing with developed countries for global market share. Most other Asian countries have not developed their own industries and have. Many multinationals (particularly the US-based ones) eventually withdrew from the Indian market. the country’s strategy has largely paid off. having accepted the reintroduction of product patents.she defied the West with the statement that no government should be able to ‘legislate against life’. the industry has reached a watershed. become dependent on multinational companies (that sell at high prices that many of the people cannot afford) or WHO (which can only supply older. but from an Indian point of view. has emerged technologically as the most dynamic manufacturing segment in the Indian economy in the 1990s. One third of its people still have no access to modern drugs.
The nascent industry. the drug and pharmaceutical industry in the country today faces new challenges on account of liberalization of the Indian economy. tranquilizers. in turn. 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.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. antihistamine. antibiotics. innovation. Chennai (in Tamil Nadu). How does Indian pharma industry perform in a global setting? This issue.” Against the above backdrop of increasing attention of the policy makers on global competitiveness of the Indian pharmaceutical sector. through British initiatives. the issue of global competitiveness of the industry is still not rigorously addressed. hormones. productivity. Pastures Institute. foreign investment. etc. etc. Central Drug Research Institute. the globalization of the world economy and on account of new obligations undertaken by India under the WTO Agreements. 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. involves a comparative analysis of the Indian pharmaceutical industry in a cross‐ country setting and exploring its growth. The pharmaceutical industry has been identified as one of the most important knowledge based industries in which India has a comparative advantage. Kasauli (in Himachal Pradesh). 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. psycho pharmacological substances. exports. Coonoor (in Tamil Nadu). let us make an attempt to put the performance of the sector in a global setting. and drugs prices and public health. so that policy inputs are directed more towards promoting accelerated growth of the pharmaceutical industry and towards making it more internationally competitive. The need for radically improving the policy framework for knowledge‐based industry has also been acknowledged by the Government. vitamin. 3. 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. This culminated in the discontinuation of local production based on indigenous materials Page | 43 .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. however. However. These basic objectives still remain largely valid. 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. 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 Prime Minister’s Advisory Council on Trade and Industry has made important recommendations regarding knowledge‐based industry. as modified in 1994. strategic alliances and investment. However.
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. Pune. 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. 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 government decided to intervene through starting public sector enterprises. It also recognizes Page | 44 . In the first stage during 1950s–60s. Indian pharmaceutical industry exhibited four stages of growth. 3. Given the inadequate capabilities of the domestic sector to start local production of bulk drugs and hesitation of foreign firms to do so. This led to the establishment of the Indian Drugs and Pharmaceuticals Ltd. (IDPL) plants at Rishikesh and Hyderabad in 1961 and the Hindustan Antibiotics at Pimpri.1 The Stages of Growth Figure 18: Stages of Growth of the Indian Pharmaceutical Industry In the post‐independence period.2. Foreign firms. enjoying a strong patent protection under the Patent and Design Act 1911. were averse to local production and mostly opted for imports from home country as working of the patent. 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.and forced the industry to import bulk drugs meant for processing them into formulations and for selling in the domestic market. The second growth stage of the industry took place in the 1970s. in 1954 to manufacture penicillin.
started a new chapter in the history of Indian pharmaceutical sector where free imports. orals and injectibles and so on. 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 growth momentum unleashed by the strategic policy initiatives continued in the fourth stage of the evolution of the industry during 1990s. The trade deficits of the seventies have been replaced by trade surpluses during 1980s (See Table). New foreign investments were to be permitted only when the production involves high technology bulk drugs and formulations thereon. This stage has also witnessed dramatic changes in the policy regime governing the pharmaceutical industry. 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 Indian pharmaceutical industry is looking at this era of globalization as both an opportunity and a challenge. 1998). 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. In 1991. food and chemicals sectors. 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. 2005 came into force on 4th April 2005 and introduced product patents in drugs. 100 per cent foreign investment is permitted under automatic route. 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). These had a lasting impact on the competitive position of the domestic firms in the national and international markets. domestic companies innovated cost–effective processes and flooded the domestic market with cheap but quality drugs. 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. Page | 45 . 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. The licensing requirement for drugs has been abolished. The NDP 1978 has increased the pressure on foreign firms to manufacture bulk drugs locally and from the basic stage possible. reverse engineering and new process development. The enactment of the process patent contributed significantly to the local technological development via adaptation. 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. Otherwise were required to reduce their foreign ownership holding to 40 per cent. thus. The term of patenting has been increased to a 20 year period. and the scope of price control has been significantly reduced. India has carried out three Amendments in March 1999. These changes in the policy regime in the 1990s. In the third stage of its evolution. liquids.compulsory licensing after three years of the patent. The third and the final one. capsules. As there exits several ways to produce a drug. known as the Patents (Amendment) Act. foreign investment and technological superiority would determine the trade patterns and industrial performance. This led to the steady rise of the domestic firms in the market place.
1970–71 to 1999–2000 Page | 46 .Table 5: India’s Trade in Pharmaceutical Products.
This is especially true in the case of knowledge‐based industries like pharmaceuticals. bilateral. 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. The competitive strength of an industry in the global market can be seen in several ways. One simple way is to compare the relative size and growth performance in value‐added. For example. an assessment of the competitiveness of Indian pharmaceutical industry is presented. A stronger growth performance exhibited by a particular industry in cross country comparisons indicates rising level and strength of production.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. one country in the particular sector is required to produce relatively more output per input combination over time and among competing countries. 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. the issue of competitiveness is critical for understanding the strengths and weaknesses of a country in the global market place. The present section looks into the trends in above mentioned indicators to examine the global competitive strength of the Indian pharmaceutical industry. Most of the studies on cross– country and industry level comparisons of competitiveness also emphasized on the productivity level. The export market share and import coverage of the export (i.e. The strategic government policies can have a long‐ term impact on the growth and structure of an industry.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.2. to a certain extent. In order to achieve a relatively higher growth performance among countries. measure the competitive strength of the sector. 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. a comparison of the level of innovation can also. This view is known as the strategic trade theory in international economics.3.2. Hence. 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.74 per cent in 1990–95 and further to 15. which may drive the sector to emerge as a global player. 3. In what follows. import to export ratio) are also important indicators of competitive strength. regional and multi‐lateral levels. 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. then the concerned government can take facilitating policy measures to address the inadequacy. Page | 47 .8 per cent in 1995–2000.
there are ten countries surpassing India’s growth performance. In 1980–85.79 per cent to become Page | 48 . it is logical to expect a downward trend in the growth performance of the technology‐driven pharmaceutical sector. Indian pharmaceutical sector turns out to be one of the fastest growing industries in the global market place. 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. As a result of the consistently higher growth performance in the last two decades. India’s share of value‐added nearly doubled between 1980 and 2000. 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. Contrary to the slow‐down of the global trends. 1975–2000. It has grown at a phenomenal rate of 41 and 28 per cent per year during 1990–95 and 1995–00 respectively.Table 6: Growth of Pharm Industry in India vis-à-vis in other countries. from 3. 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. PPP $ Source: Central Statistical Organization Given the absence of blockbuster innovations in the last two decades. which has fallen to only three countries in 1985–90 and just two in 1990–2000.
Finland. 36 times the size of Norway and 10 times the size of Australia! It is even larger than the combined size of Austria.7. Figure 19: Size of Indian Pharma Industry and its share in global pharmaceutical value added Source: Based on Table 6 3. Productivity is a key determinant of competitiveness. Denmark. which is more than four‐times the value added generation in the year 1980 (PPP $10660).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. Therefore. Indian pharmaceutical industry has achieved a high level of growth performance and a scale that is comparable to the global peers.11 per cent. The Indian pharmaceutical sector has experienced high rates of productivity growth in 1990s as compared to its performance in 1980s. 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. especially in a technology‐intensive industry like pharmaceuticals. Canada.2. 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. The size of Indian pharmaceutical industry is estimated to be about PPP $ 11508 million in 2000. the industry generated about PPP $49242 of value‐added per unit of labour. In the year 2000. Belgium. which is about 43 times the size of Austria. How did the Indian pharmaceutical sector perform as compared to others in terms of productivity? Page | 49 .
000 units of which just 300 units are medium and large‐sized. Further. estimated to be about 10. India could generate only about PPP $26. Addressing these factors is very important for enhancing India’s global competitiveness. ahead of an improvement to reach PPP $23 in 2000. 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. 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. which tends to rely more on process than product development. PPP $ Source: Central Statistical Organization. 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. Table 7: Labour Productivity in Pharmaceutical Industry. Page | 50 . Annual Surveys of Industries. 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. The relative productivity of India in relation to the US has fallen to PPP $19 in 1985 and remained stagnant between 1990 and 1995. may be a reason for low level of productivity. This low productivity performance of India in comparison to global peers suggests that the country has to improve the quality of innovation. The other important factor for low productivity can be due to the nature of technological activities in the sector. scale and focus on high value added segment of pharmaceutical production. In India. 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.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 fragmented nature of Indian pharmaceutical sector characterized by the operation of a very large number of players.
For each PPP $100 worth of R&D expenditure incurred by the US pharmaceutical sector in 1990. The Indian pharmaceutical R&D has grown by 17 per cent during the period 1987–91. Table 8 presents the growth rates of pharmaceutical R&D in selected countries. Indian pharmaceutical sector had incurred just PPP $2 and 40 cents. production process. Unless the sector sets aside an increasing proportion of its value‐added for the R&D activities over time and across countries. these technological strengths are confined to a few large Indian pharmaceutical companies.3. Majority of the Indian companies suffered from limitation of financial. However. Two important points can be deduced from it. self‐reliance in producing quality raw materials and production led by quality management. In 1990. for a group of countries is furnished in Table 9. A recent study found that in a sample of 223 firms. Indian domestic pharmaceutical companies are known for their innovative cost‐effective processes. The pharmaceutical industry being one of the most technology‐ intensive industries. expanding global position would be difficult.3 per cent of firms are not engaged in innovative activities and another 21. First. both medium and small‐sized. In the period 1997– 2001. It can be seen that India had consistently pushed up its pharmaceutical R&D expenses since 1987. its R&D spending is not even one per cent of the value‐added and is the lowest in the cross‐ country comparison.2. India turned out to be second highest R&D growing pharmaceutical sector among the selected countries. there is a vast gap in the amount of pharmaceutical R&D expenses undertaken by the US and India. The growth rate has gone up to 26 and 83 per cent over the periods 1992–96 and 1997– 2001 respectively. about 62. Indian pharmaceutical industry as compared to global peers incurs a very small fraction of its value‐added for research and innovative activities. Although. In broad terms the process of technological change can occur through improvements in the products. the research activities in the sector are quite limited and inadequately focused on development of new drugs. discovery in novel drugs delivery system. The relative R&D spending of India in terms of the US spending has gone up to PPP $4 and 80 cents in 2000. As the Indian industry is dominated by a large number of companies.1 per cent firms undertake R&D. technical and skill resources to undertake any kind of R&D activities. 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. Using R&D as an indicator of technological activities.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. 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. Moreover. the extent and nature of innovation is crucial for countries to prolong their productivity growth and competitiveness in the long run. raw material and intermediate inputs. The R&D intensities. They have shown that technological development measured by patent and R&D expenditures have significant impact on the trade performance of the countries. India’s R&D relative to the US is also observed to be increasing. which is even less than 1 per cent of their sales in the year 1999–2000. Page | 51 . the relative gap in R&D spending is falling modestly over the years. the percentage of the value‐added devoted for the R&D activities. and through enhancements in the efficiency of the management system.
7 per cent.91 per cent to 8. its R&D intensity has increased by more than nine times from 0. 1987-2001 Table 9: Pharmaceutical R&D Intensity (%).Second. STAN Database 2004 Page | 52 . the R&D intensity of India is higher than that of Korea. Indian pharmaceutical industry has significantly improved its R&D intensity in the 1990s. PPP $ Source: OECD. Table 8: Growth of Pharmaceutical R&D. 1987–2000. In 2000. PPP $ Source: OECD R & D Expenditure in Industry database. Italy and matches that of Spain. Between 1990 and 2000.
Argentina. India is far from significantly increasing its global export share.6 Trade Performance Table 10 and figure 20 show the pharmaceutical exports of India and its growth rates over the periods 1990–94. it belongs to the selected group of eight countries. India and China. South Africa. i. 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. Figure 20: India’s Performance in Pharmaceutical Exports.2 billion. exporting more than the amount being imported. in $ mn and per cent Although. Page | 53 .2. Portugal. In relation to a group of selected twenty‐nine countries. 23 per cent in 1995–99 and 44 per cent in 2000–04. nearly five times the figure pertaining to 1990. These countries are Switzerland. Denmark. Mexico. France. 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. Brazil.e. Malaysia. during 1990–2004 (Table 10). 14 per cent in 1990–94. Sweden.4 in 2004. 1995–99 and 2000–04. China. It can be observed that India has increased its pharmaceutical exports at a rapid pace in the 1990s. As a consequence of rising trade balance. In fact. UK. Rep.75 in 1990 to 3. India is much ahead of fifteen countries in terms of growth performance in pharmaceutical exports during 2000–04. The total pharmaceutical exports in 2004 stood at US $2. Singapore and Hong Kong. Japan. irrespective of its impressive export growth rates. it is hovering around 1 per cent of market share. the export to import ratio has increased from 1. Italy. The exports have consecutively achieved higher growth rates. Thailand. India’s share in the global pharmaceutical exports has not shown any improvement. Germany. of Korea.3. Indonesia. However. which have consistently enjoyed favourable trade balance in pharmaceuticals. India’s 44 per cent growth rate is higher than that of the US.
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. For example. 3.2. technology and skills can allow them to emerge as global players. acquiring overseas business enterprises with new product portfolios. In the last decade. 2006. business location and sourcing of raw materials and intermediates inputs. they adopted a variety of global strategies for enhancing their market Page | 54 . Internationalization in the form of strategic collaborations with global pharmaceutical companies from developed countries for contract manufacturing.Table 10: Trade Balance in Pharmaceuticals Source: Based on the UN COMTRADE Database. research and marketing can also be beneficial for Indian companies to expand their global operations. the business strategies of Indian pharmaceutical companies with respect to the overseas market have undergone significant changes. Their business decisions are increasingly driven by global market orientation for their products. 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. After identifying strategic markets across the globe. as large number of Indian pharmaceutical firms lack technological capabilities for product development.
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. 220.127.116.11 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.
18.104.22.168.1 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.
22.214.171.124.2 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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The company has about 600 outlets across the country and has a 40 per cent market share in IV business. the company has set up a joint venture with Uzpharmprom in Uzbekistan for manufacturing IV fluids and tablets. These are two subsidiaries that are performing well with profits and are expected to improve their performance substantially. the company could not improve its economic performance. It is supplying products to more than 70 countries. 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. distribution network and quality of products. the company established two manufacturing plants for IV fluids. The Myanmar plant is build for Government of Myanmar at the cost of $5 million. Geographically. ointments and powders. exporting more than 35 per cent of the total production.2.2. It is the first Indian pharmaceutical company to receive the ISO certification. In 2002. It provides the most modern healthcare facilities like high quality I.3 CORE HEALTHCARE LIMITED (CHL) Gujarat‐based Core Healthcare Limited (CHL). leading manufacturers of intravenous (IV) fluids. tablets and penicillin capsules in Myanmar and Malaysia. 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.4 AJANTA PHARMACEUTICAL Ajanta Pharmaceutical is another Indian company that has adopted outward investment as a strategy to improve its position in international markets. the company with its assets and liabilities was acquired by another company named Nirma Ltd. fluids and other pharmaceutical products in Myanmar. As a result. However. 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 December 2004. the production of intravenous (IV) fluid reached the one billion mark and the company had attributed this achievement to its international operations.V. 3. has planned an aggressive entry into international markets. In 1999.3. Uzbekistan and Kyrgyz Republic. Maintaining highest levels of quality and resorting to joint ventures with overseas strategic partners has been crucial for higher export performance.1.1.7. Tajik Ajanta Pharma. Kazakh Ajanta Pharma. located near Yangon. This has helped the company to access the international markets extensively and presently it exports to over 50 countries around Page | 58 . The company realized that outward FDI meant for producing in the foreign markets may not always be a profitable option of market serving.7. despite maintaining growth and emphasizing on internationalization. However. injections. Tajikistan. capsules. In 1997. 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. other overseas ventures such as Ajanta Pharma (Tashkent). 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. majority of these outward ventures are directed at the CIS (Commonwealth of Independent States) markets such as Kazakhstan. It has some eight transborder subsidiaries and joint ventures (Table 15).
Mexico. 3. the company has strongly gone for direct production overseas. OTC products and nutraceuticals. This indicates that Strides is largely a multinational firm with business strategies and planning is more focused on global markets. 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). Its manufacturing activities now cover a spectrum of ethical pharmaceutical products. Strides Arcolab has grown to be a Rs. As a result of the trade‐ supporting type of FDI that the company has undertaken in the past. Brazil and India.5 STRIDES ARCOLAB LIMITED This company provides an example of a very young pharmaceutical company successfully expanding business in international market. Table 15: Subsidiaries and Joint Ventures of Ajanta Pharmaceutical Source: Ajanta Pharma Annual Report 2003–04. During 2004–05. In 2004–05 exports constituted about 80 % of the sales as compared to 72 per cent in 2003–04. 500 crore company and among top 15 pharmaceutical companies in India. Apart from undertaking exports and marketing activities. Page | 59 . The company has established strong marketing capabilities overseas with marketing presence in 49 countries. exports accounted for about 92 per cent of sales of the company.2.1. It is one of the top five softgel capsule manufacturers in the world with twelve internationally approved manufacturing plants in USA. a substantial part of its revenue is contributed by exports. Since its beginning in 1990 as a small pharmaceutical company engaged in formulations.the world with exports accounting a substantial part of the total revenues.7.
pp 1.Table 16: Geography of Strides Arcolab’ Revenues.8. 2002–03 to 2003–04 Source: Based on Strides Arcolab Annual Report 2003–04. Table 17: Subsidiaries and Joint Ventures of Strides Arcolab Source: Strides Arcolab Annual Report 2003–04 Page | 60 .
Dr. Table 18: Overseas Acquisitions by Indian Pharmaceutical Companies.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. nearly 76 per cent of the overseas acquisition cases.9 million. the amount of consideration involved in overseas acquisitions has increased by 71 times from just $7. 3. Between 1997 and 2005.5 million to reach $532. such activities are motivated to acquire foreign research capabilities. and others who have pursued the strategy of greenfield outward investment to expand business globally. Natco Pharma. As growing number of firms are undertaking this route of globalization. this indicates that Indian pharmaceutical companies are more global now than ever before.There are several other Indian pharmaceutical firms such as Dabur. Indian pharmaceutical companies have undertaken $1663 million worth of investments in acquiring overseas pharmaceutical companies.2. skills and intellectual properties. Reddy.7. brands and R&D laboratories. Most of these acquisitions. 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 . The number of investments for overseas acquisitions increased significantly from just 1 in 1995 to 21 in 2005 (Table 18). are directed at developed markets like Europe and North America. At the end of March 2006. Developing countries accounted for just about 18 per cent and Central and Eastern Europe about 5.6 per cent. This shows that overseas acquisition activities of Indian pharma companies are largely developed market oriented and apart from being as market entry strategy.
1995 to March 2006 Page | 62 .Table 19: Overseas Acquisitions by Indian Pharmaceutical Companies.
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for $86 million20. OPIH SARL. In December 2003.2.1 RANBAXY LABORATORIES Ranbaxy emerged as the largest overseas acquirer with 11 acquisitions during 1995– 2006 (Table 19). This acquisition. This is an important strategy since the company entered the US market in 1994.7. New Jersey. RPG Aventis and its subsidiary. Apart from Ranbaxy’s entry into the third largest generics market of the globe. an antihypertensive brand from Procter & Gamble Pharmaceuticals in Germany. 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). It has acquired Veratide. Ranbaxy announced four overseas acquisitions. The second acquisition in the year 2002 is liquid manufacturing facility from the New York‐based Signature Pharmaceuticals Inc. unbranded generic business of Allen SpA. In March 2006. In September 1995. entered into a strategic alliance to launch Ranbaxyʹs ethical and drug delivery system based products. Ranbaxy acquired France’s fifth largest generic player. 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. a move by the company to expand its European position through France. branded and generic products and helped in developing its presence in the US OTC market. has placed it amongst the top generic companies in the French market. The year 2002 saw three overseas acquisitions by Ranbaxy. the company acquired Basics GmbH. the company acquired Ohm Laboratories based in New Brunswick. central nervous system (CNS) and pain management segments. This acquisition provided Ranbaxy’s access to advanced manufacturing capabilities and processes to manufacture quality OTC (over-the‐counter) drugs. As a part of this acquisition. Ranbaxy acquired patents. The Page | 65 . This brand acquisition is to further strengthen Ranbaxy’s presence in the German market by augmenting Basics’ cardiovascular product portfolio.3. The first overseas acquisition is a strategy of acquiring firm‐specific intangible assets for autoinjector business. Ranbaxy has acquired a generic product portfolio covering eighteen products from the Spanish pharmaceutical company Efarmes. With the dual purpose of securing presence and augmenting existing product portfolio in Spain. trademarks and equipment used for the self‐administration of medicines from the US company Senetek. namely patents for autoinjector device of Senetek. 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. Terapia and Ethimed NV. The second one concerns with the company’s entry strategy into the Italian generic market. the deal has expanded its product portfolio by another twenty products hitherto marketed under Basics. the generics business of Bayer in Germany for a consideration of $4 million.2. besides generics in the Japanese market. SA. the parent company of Nihon Pharmaceutical. In April 2000. 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. This manufacturing facility with its latest testing. Ranbaxy and Nippon Chemiphar Limited (NC).
In April 2004. With a plan to expand business in the Argentine pharmaceutical market.2. one of the fastest growing markets in Europe. among top ten Belgium generics companies. As a part of this deal. The company acquired two FDA approved products from Clonmel Healthcare Ltd. The acquisition of Ethimed. The acquired company is engaged in manufacturing and marketing of generic‐drugs. Glenmark has acquired a marketing company Servycal SA engaged in cancer‐related products.2.14 per cent. With 21 approved product registrations in Brazil. The development expenses incurred by Caraco to get Sunʹs generic drugs into the US market constitute a substantial part of this loss.acquisition of unbranded generic business of Allen SpA. two are brand acquisitions and other three involve acquisition of manufacturing/marketing companies. The fourth acquisition is in continuation of the company’s strategy to strengthen its global position in the generic market. a South African sales and marketing company. Glenmark acquired Bouwer Bartlett. a division of GlaxoSmithKline. The third acquisition involved the two low cost manufacturing capacities of Terapia.2 million. Subsequently additional stakes were obtained in 2002 and 2004. this US strategy seems to have been costly for Sun Pharmaceutical as Caraco generated large losses as compared to revenues.2. to increase the total holding to about 63. In December 2005. Glenmark acquired a Brazilian firm. besides one manufacturing facility.7. 3. 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. 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.2. To enter the lucrative US generic markets.7. its products are registered in 12 other countries in South America. Initially. from Instituto Biochimico Indústria Farmacêutica Ltda for $4. 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. CNS & musculoskeletal therapeutic segments.89 million sales. 3.6 million in March 2005. for gaining entry into the South African market. In August 2004. Of the five acquisitions done by Glenmark Pharmaceuticals. The acquired company has a strong retail and hospital presence in Argentina and apart from Argentina. and the hormonal brand. In 1999. which is one of the largest and fastest growing pharmaceutical markets in Africa. Laboratorios Klinger. it has acquired about 30 per cent equity stakes in Detroit‐based Caraco Pharm Labs in 1997. would provide a strong manufacturing and marketing base for Ranbaxy to expand business operations in the Benelux countries. this acquisition would provide Glenmark an existing presence in branded generics and over‐the‐counter (OTC) drugs segment of the Brazilian market.3 SUN PHARMACEUTICAL Sun Pharmaceutical has undertaken five overseas acquisitions between 1997 and 2006 (Table 19). ensures Ranbaxy’s access to the Italian market. Uno‐Ciclo. its loss was $9.3 million as compared to $2. The acquired entity has manpower of 176 employees and 91 sales representatives. for $5.2 GLENMARK PHARMACEUTICALS Glenmark Pharmaceuticals emerged as the second aggressive overseas acquirers from Indian pharmaceutical industry with five overseas acquisitions each. Page | 66 .
Nicholas Piramal India and Wockhardt. MCC etc. it has also bought a dosage form plant at Bryan. Natco Pharma.8 bn (at 1/5th of US/EU costs) repectively.4 OTHERS The next group of aggressive overseas acquirers includes three Indian Pharmaceutical firms.3 Contract Manufacturing and Strategic Alliances 3. brands and intellectual properties have helped the company to quickly establish its presence in the new market. this translates into $7bn (at 1/3rd of US/EU costs) and $7. The global R&D spend is to the tune of $60 billion.2 Contract manufacturing Many global pharmaceutical majors are looking to outsource manufacturing from Indian companies. gynaecological Ortho‐Est and the anti‐migraine preparation Midrin. double the growth rate of the US generics market. with three acquisitions. Many Indian companies have made their plants cGMP compliant and India is also having the largest number of USFDA-approved plants outside USA. namely Dr Reddyʹs Laboratories. The Pharma companies are going for compliance with International regulatory agencies like USFDA. Aurobindo Pharma. from US‐based Womenʹs First Healthcare for about $5.4 million.2. In November 2005. This constitutes a total potential of $14. As a part of its strategy to enter the European generic market. Caraco’s sales grew by 24 per cent. Sun Pharmaceutical purchased three brands belonging to synthetic anti‐bacterial Bactrim. Sun Pharma acquired the dosage form manufacturing operations of the US‐based Able Laboratories for $23.3. Suven pharmaceuticals.2. This suggests that Indian pharmaceutical firms are aggressively pursuing mergers and acquisitions route to become global players by acquiring new technology.15 million. Torrent Pharmaceuticals. Jubilant Organosys and Stides Arcolab with four acquisitions each (Table 19). it will be an industry worth anywhere between $500 million to $1.7. this US story was a bigger success. have emerged as other important overseas acquirers. twenty‐four months later.1 Contract Research In 2002. The deal also includes intellectual property for 40 product portfolio being marketed by Able. brands and production capabilities abroad. the company bought Valeant Pharma’s Hungarian manufacturing facilities in August 2005.3.2.2.7. In September 2004. which enjoy much lower costs (both capital and recurring) than their western counterparts. move into new areas and boost its global operation. In terms of Indian prices. Dishman Pharmaceuticals and Matrix Laboratories have undertaken two overseas acquisitions while other firms like Kemwell.7.7. 3.8bn for the Indian pharma companies. 3. 3. owing to Sun’s products during the first half of 2005–06. Malladi Drugs. Marksans Pharma. This market is growing at a rate of 20% per annum. 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. In the same month. the industry for clinical trials in India was $ 70 million. These acquisition strategies of manufacturing plants.However. Ohio. for their manufacturing facilities. Page | 67 . Unichem and Zydus Cadila have one overases acquisition each. According to experts.2.5 billion by 2010. of which the non-clinical segment accounts for $21bn and the clinical segment accounts for $39bn.
A collaborative research agreement was reached between Ranbaxy and ‘Medicines for Malaria Venture’ (MMV) of Geneva to develop anti‐malarial drugs in May 2003. A few names can be mentioned like Ranbaxy Laboratories. Ranbaxy Laboratories announced a strategic marketing alliance with Mallinckrodt Baker Inc (MBI). As per the agreement Ranbaxy would manufacture and supply finished formulations of the product to Schwarz Pharma.7. 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. Schwarz Pharma AG of Germany announced a licensing deal with Ranbaxy to acquire the exclusive rights of developing. In February 2002. data management and laboratory services to global pharmaceutical companies. Page | 68 . but also access to new technologies. Diviʹs Laboratories. to market MBI JT Baker and Mallinckrodtʹs range of scientific laboratory products in the Indian market. outsourcing and strategic alliances not only provide additional sources of revenues. 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. besides offering contract services like marketing. Eligard® (leuprolide acetate for injectable suspension). licensing and collaborative research to strengthen its competitive strength in India and overseas markets. 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. marketing and distributing Ranbaxyʹs New Chemical Entity RBx‐2258 for the treatment of Benign Prostate Hyperplasia in USA.3.Very recently contract manufacturing emerged as a new growth strategy for many Indian pharmaceutical companies.2. Nicholas Piramal. Japan and Europe. marketing networks and best business practices abroad. In 2002 Ranbaxy entered into two overseas agreements for reverse outsourcing. Indian pharmaceutical companies with their low cost manufacturing capabilities meeting international regulatory standards. research.2. In July 2003. In June 2004 Ranbaxy obtained an exclusive licensing agreement from Atrix Laboratories to develop and commercialize the latter’s product. 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. The agreement also provides for joint development of other controlled release products. Lupin Labs. 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. Matrix Laboratories. clinical trials. For Indian firms. in India. and Sri Lanka and non‐exclusive rights in Mexico. Thailand. Shasun Chemicals and Jubilant Organosys. A large number of Indian companies diversified into the business of contract manufacturing in the 1990s. Dishman Pharmaceutical. USA. Singapore. 3. Philippines. In June 2002. Ranbaxy Laboratories concluded an agreement with Penwest Pharmaceuticals of USA to get exclusive marketing rights of Nifedipine XL in selected markets such as China. Malaysia. South Africa.1 Ranbaxy Laboratories was one of the first Indian companies to adopt the strategy of contract manufacturing.
manufacture and global marketing (except US. Kenya. Europe and Japan.2 Starting with the experience of contract supplying a key intermediate for the tuberculostatic ethambutol for American Cyanamid.2. AstraZeneca AB. namely Levobunolol and Brimonidine.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. Nigeria. Jordan. anti‐ glaucoma active pharmaceutical ingredients. One contract deal is from Allergan Inc of the US to whom Nicholas Piramal would supply two eye‐related. Sweden. Lupin entered into an agreement with Baxter Healthcare Corporation of the USA. 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. In November 2005. a long‐term contract manufacturing agreement between Pfizer International LLC and Nicholas Piramal was signed for animal health products. Additional annual revenue in the range of around $ 15–25 million is expected from this contract manufacturing arrangement. active ingredients or bulk drugs for supply to AstraZeneca.2. Nicholas Piramal will develop processes for Pfizer. in a marketing agreement with Chester Valley Pharmaceuticals. As per the deal.7. which are expected to add $30 million revenues per annum. Syria. Nicholas Piramal India is among the leaders in the contract‐research and manufacturing providers from the Indian pharmaceutical industry. Nicholas Piramal through its distributors and marketing agents would market three products. Sudan.3. Lupin Laboratories is also an early player into the business of contract manufacturing and alliances. South Africa & India) of selected Anti‐TB products. Nicholas Piramal will supply the opthalmic products to the American company for developed markets like the US.2. In February 2006. led to its emergence as a strong outsourcing partner for the global innovating firms based in the developed markets. In December 2003. namely Isoflurane. Lupin entered into a joint venture agreement with Aspen Pharmacare Holdings of South Africa for the development. Eygpt and Bangladesh. 3.7. signed a development and know‐how agreement with Nicholas Piramal. 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. Lupin will promote ZymarTM (gatifloxacin ophthalmic solution) in the US pediatric specialty segment. In December 2005. 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.3 Page | 69 . Nicholas Piramal got a five‐year outsourcing deal from Advanced Medical Optics Inc. As per this agreement. Enflurane and Sevoflurane in Russia. In March 2006. Lupin will promote Atopiclair™ Nonsteroidal Cream to paediatricians in the US. of the US. In February 2004. Nicholas Piramal is chosen as a partner in development of processes for the manufacture of intermediates. Under this agreement. 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. Ukraine. In another agreement in the same year with Allergan Inc of the US.2. provide scale‐up batches for Phase trials and contract manufacture after the product is launched. Iran. whereby the latter will exclusively distribute Lupin’s generic version of ceftriaxone sterile vials for injection in the USA market.
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.
126.96.36.199.2.5 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
188.8.131.52 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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Ranbaxy and Cipla.24 & 5. Table 21: Exports of Drugs. The other major exporters are Wockhardt Limited. Figure 22: Market share of top players Page | 73 . of which formulations contribute nearly 55% and the rest 45% comes from bulk drugs. The export revenue now contributes almost half of the total revenue for the top 3 pharma majors: Dr Reddy’s. The formulations and exports are largely to developing nations in CIS. Africa.2. India’s pharmaceutical exports are to the tune of $3.2. Pharmaceuticals and fine chemicals Table 22: Growth of pharmaceutical exports Source: DGCIS 3.9 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. Sun Pharmaceutical Industries Ltd and Lupin Laboratories. and Latin America. South East Asia.09 per cent market share on the basis of retail sales respectively).8 Exports The exports constitute almost 40% of the total production of pharmaceuticals in India. In the last 3 years generic exports to developed countries have picked up.3.5 bn currently.
trade and industrial policy and shift towards a strong patent regime postulated by the TRIPs at the global. thus. 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. The starting of public sector pharmaceutical companies for indigenous production of drugs has been the initial form of government intervention. 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. managerial. which led the domestic sector on a new technological trajectory and as a result. a soft patent regime was adopted since 1970. 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. which are readily and cheaply available to the industry for productive purposes. and general skills.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. This technological growth has also been contributed partly by the progress that India achieved in building its scientific. These national policies. its export share is still hovering around just one per cent. Although. India has consistently enjoyed a favourable trade balance in pharmaceutical products. a technologically vibrant domestic sector with remarkable technological capabilities to develop new cost‐effective processes and new drug delivery systems has emerged.3. productivity and R&D intensity of the Indian pharmaceutical industry is lowest among countries. but it has also created its own limitations in pushing forward its productivity and technological activities. bilateral levels and across individual countries has opened up new competitive challenges for the Indian Page | 74 . While the Indian policy regime has succeeded in bringing out its pharmaceutical sector as among the fastest growing in the world. Later.2. Due to these factors. regional. The policy liberalization of the past decade or so like liberalization of foreign investment.
the Indian pharmaceutical manufacturers won’t be able to manufacture patented drugs. Many Indian pharmaceutical firms are adopting new internationalization strategies for meeting such challenges and achieve their goal for global growth. A fragmented domestic market marked by a lower degree of domestic competition is not conducive for global competitiveness. The Indian government can take several policy measures for enhancing the nation’s competitiveness in the pharmaceutical sectors. The provision of low cost finance for research with subsidy facilities for indigenous research activities continues to be a key to competitive strategy. Government policies that encourage overseas acquisitions by the Indian companies for brands. different from the existing traditional ones. brands and research facilities. They are strengthening their geographical presence by starting their own subsidiaries and affiliates in different strategic overseas markets. Apart from undertaking green‐field investments. Hence. may result in improving India’s competitive advantages in the pharmaceutical sector. R&D and marketing for pharmaceutical companies from developed countries are also being employed by Indian pharmaceutical companies. Data protection. Strategic alliances with and contract manufacturing. 2005. technology and market access can also be important for strengthening firms’ technological capabilities. 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 . Increases in average firm size through M&As until the concentration index of the Indian pharmaceutical industry rises significantly. India met a WTO commitment to recognize foreign product patents from January 1. the culmination of a 10-year process. To adapt to this new patent regime. Competitiveness of the Indian pharmaceutical industry Post 2005 scenario By issuing the patent ordinance. In this new scenario. Indian pharmaceutical firms have been increasingly entering into global securities and finance markets. 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.pharmaceutical sector. the industry is exploring business models. etc can be useful policies. For financing their global expansion. investment and tax allowances for the outsourced production and R&D works. they are also aggressively acquiring overseas business enterprises. 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.
Page | 76 . IICT etc. The Indian companies are setting up their own R&D setups and are also collaborating with the research laboratories like CDRI.The focus of the Indian pharma companies is also shifting from process improvisation to drug discovery and R&D.
Industry Collaborations Page | 77 .Table 23: Government Run Research Organizations .
184.108.40.206 Threat from China China is becoming a major competitor to India. which are mostly dependant on government funding. 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. CHINDIA can lead the world pharma market!!! Page | 78 .3. which are today independent of government funding in contrast to institutions in India.3.3. 3.4.6 The companies are also allowed duty free import of capital equipment.7 Lower turnaround time for ships at Chinese ports make it conducive as a base for exports. If China and India can collaborate.3 More favourable labour policies like policy of hire and fire 220.127.116.11 in the world and is expected to become the world’s 5th largest by 2010. 3. 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. China is an important source of chemical and APIs.2.2. whereas India is stronger on the finished product / formulation side. wheras exports to US grew at 9 %.3.2.2. 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.2. 3.2 Labour charges are 40% lower in China than India.50 to 2.0 per KWH.3.2. especially in exports of active pharmaceutical ingredients (APIs). 3.4 China has established a large number of profit oriented research and development institutions. China’s pharmaceutical industry ranks no. The power costs range from Rs.3.1 The electricity costs are lower in China as compared to India.50 per KWH as against Indian cost of Rs.5 to 6. The reasons for Chinese competitive advantage are: 3.
4. Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery.4 3.2 The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers.4.3 Indian pharma market is one of the least penetrated in the world.4. Indian pharmaceutical industry posses excellent chemistry and process reengineering skills. the general belief is that demand for drugs is likely to grow steadily over the long-term.4. Irrespective of whether the economy is in a downturn or in an upturn. This adds to the competitive advantage of the Indian companies. 3.4.4. However. which are cost effective.1.3 3. The strength in chemistry skill help Indian companies to develop processes. But this has provided an upper hand to the Indian pharma companies.4.2.1 Strengths: 18.104.22.168 The Indian pharma companies are marred by the price regulation.2. Opportunity. which has a very low contribution in the Indian markets. The NPPA (National Pharma Pricing Authority).1 India with a population of over a billion is a largely untapped market. 3. Indian majors are relying on exports for Page | 79 . The SWOT analysis of the industry reveals the position of the Indian pharma industry in respect to its internal and external environment. Threat). 3. In fact the penetration of modern medicine is less than 30% in India. Weakness. With a scalable labor force. which is the authority to decide the various pricing parameters.2 Weakness: 3.4. 3. Over a period of time. The companies.1. sets prices of different drugs. are at advantage while those who cannot produce have either to stop production or bear losses.2 Indian pharma sector has been marred by lack of product patent.4. which leads to lower profitability for the companies. To put things in perspective. per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189.1. True in some sense. which are lowest cost producers. 3. growth has been slow to come by. This opens a huge market for lifestyle drugs. As a result. But are there risks? The succeeding paras gives a perspective of the Indian pharma industry by carrying out a SWOT analysis (Strength. this regulation has reduced the pricing ability of companies. Indian manufacturers are one of the lowest cost producers of drugs in the world.SWOT analysis of the Indian pharmaceutical Industry It is often said that the pharma sector has no cyclical factor attached to it.
The new patent product regime will bring with it new innovative drugs. Since generic drugs are commodities by nature.3.4. Indian producers have the competitive advantage. Though this is likely to have a Page | 80 .4. which reduces the growth of the industry in value term.1 The migration into a product patent based regime is likely to transform industry fortunes in the long term.2 Threats from other low cost countries like China and Israel exist. It might be possible that the new government may change certain provisions of the patent act formulated by the preceding government.4. This leads to the expansion of healthcare industry of which pharma industry is an integral part.growth.4.4. Very small players may not be able to cope up with the challenging environment and may succumb to giants. This makes Indian pharma market increasingly competitive. the growth in value terms was 8. as they are the lowest cost producers of drugs in the world.4% but due to price competition.4 Due to very low barriers to entry.22.214.171.124.4. in the year 2003. differentiation in the contract manufacturing side may wane. 3.4.4. 3. This migration could result in consolidation as well.2. However. the industry actually grew by 10. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry.4 Threats: 3. The industry witnesses price competition.3. Indian companies can become a global outsourcing hub for pharmaceutical products. To put things in perspective.1 There are certain concerns over the patent regime regarding its current structure.3 The short-term threat for the pharma industry is the uncertainty regarding the implementation of VAT. Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18. India is better placed relative to China.3 Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. 3. So.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. 3.2%) 3.2% (prices actually declined by 2. 3.000 small units spread across the country. on the quality front. To put things in to perspective.4 Being the lowest cost producer combined with FDA approved plants.4.3 Opportunities 3.4. 3.3. 3.
UK. 3. Only information technology has a higher expected growth rate of 12. EU and Japanese markets. 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. Germany.5 Summary of the SWOT Analysis 3. US.negative impact in the short-term. 3. rafts of patent expiries and volatile investor confidence have made the modern pharmaceutical industry an increasingly tough and competitive environment.6%. Majority of pharmaceutical sales originate in the US. tighter regulatory-compliance. Page | 81 .5% (2003-2010) and Health Care growth rate of 12. France.4.5. Political interest has also been generated because of the increasing social and financial burden of healthcare. Below is an analysis of the structure of the pharmaceutical industry using the PEST (political. overheads. economic. With a projected stock value growth rate of 10. Italy. Japan. Glaxo-Wellcome\SmithKline-Beecham and Novartis (a merger between Sandoz and Ciba Geigy)) and acquisitions.5. social and technological) model.2 Economic Value Added: In the decade to 2003 the pharmaceutical industry witnessed high value mergers (like Pfizer\Pharmacia. the implications over the long-term are positive for the industry.5% (20032010). Nine geographic markets account for over 80% of global pharmaceutical sales these are.5 Enviornmental analysis (PEST) Technological advancements. Canada.1 Increasing Political Attention: Over the years. the audited value of the global pharmaceutical market is estimated to reach a huge 500 billion dollars by 2004.
Figure 24: Porter’s Five Forces Model for Industry Analysis Page | 82 . This tends to restrict its dynamism. As a result. Of these markets. 3.4 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 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. In recent times.6 Structural industry analysis (Porter’s Five Forces) A summary of the pharmaceutical industry using Porter’s Five Forces model (see diagram below). The 5 forces approach can be used in initial diagnosis and as an aid to strategy development. the impact of various global epidemics e.5.g. the US is the fastest growing market and since 1995 it has accounted for close to 60% of global sales. In 2000 alone the US market grew by 16% to $133 billion dollars making it a key strategic market for pharmaceuticals. Scientific advancements have also highlighted the need for increased spending on Research and Development in order to encourage innovation. 3.5 Legal Environment: The pharmaceutical industry is a highly regulated and compliance bound industry. Its main value is as a thought provoking aid to help arrive at a shared understanding of the threats and opportunities facing the firm. The effect of the intense media and political attention has resulted in increasing industry efforts to create and maintain good government-industry-society communications. But in recent years. AIDS etc. SARS.5.5. 3. 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. 3. there are immense amount of regulatory and legal compliance overheads which the industry needs to absorb. have also attracted popular and media attention to the industry.Brazil and Spain.
tells us that in bigger companies this ratio is in the range of 3. in pharmaceutical industry product differentiation is not possible since India has followed process patents till date. 3. Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharmaceutical industry are very low. However. cost competitiveness is. Thus.3. companies like Pfizer and Glaxo have created big brands over the years which act as product differentiation tools. making it easier to succeed. with loss favouring imitators. High growth prospects make it attractive for new players to enter in the industry.000 different players fighting for the same pie.5-4 times.1 Industry competition Pharmaceutical industry is one of the most competitive industries in the country with as many as 10. An important fact is that.2 times average in India). The rivalry in the industry can be gauged from the fact that the top player in the country has only 6 % (2006) market share. albeit in a limited way. Consequently product differentiation is not a driver. Many small players that are focussed on a particular region have a better hang of the distribution channel. The product differentiation is one key factor which gives competitive advantage to the firms in any industry. The fixed asset turnover. Also contract research has assumed more importance now. 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. For smaller companies. it would be even higher. pharmaceutical is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1. the concentration ratio for this industry is very low. The fixed cost requirement is low but the need for working capital is high. Though volume growth has been consistent over a period of time value growth has not followed in tandem. Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical products discovered by MNCs at a lower cost and make good profit.2 Bargaining power of buyers Page | 83 .6. However. and the top 5 players together have about 18 %(2006) market share. which is one of the gauges of fixed cost requirements.6.
the buyers are scattered and they as such do not wield much power in the pricing of the products. plays an important role in regulating pricing through the NPPA (national pharmaceutical pricing authority). what can happen is that the supplier can go for forward integration to become a pharmaceutical company. Ranbaxy and Glaxo are likely to be key players.5 Threat of substitutes This is one of the great advantages of the pharmaceutical industry. it must be noted that any industry is not static in nature. However.6. in recent times the advances made in the field of biotechnology. 3. The new patent regime has raised the barriers to entry. who have no differentiating strengths. However. The change in the patent regime has made sure that new proprietary products Page | 84 . we look at the influence they have on the prices of the product. demand for pharmaceutical products continues and the industry thrives. This is owing to the fact that the industry will move towards consolidation. Going forward. which have used to analyse the pharmaceutical industry may itself evolve. The chemicals used in the pharmaceutical industry are largely a commodity.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. are likely to either be acquired or cease to exist. govt with its policies. pharmaceutical industry seems to have an infinite future. One of the key reasons for high competitiveness in the industry is that as an ongoing concern.3 Bargaining power of suppliers The pharmaceutical industry depends upon several organic chemicals. companies like Cipla. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies who turned themselves into pharmaceutical companies. In the Indian context. The consumer has no choice but to buy what doctor says. The capital requirement for the industry is very low.The unique feature of pharmaceutical industry is that the end user of the product is different from the influencer (read doctor). quality regulations by the government may put some hindrance for establishing new manufacturing operations. since the point of sales is restricted in this industry in India. Also. creating a regional distribution network is easy. The barriers to entry will increase going forward.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. However.6. when we look at the buyer’s power. Whatever happens.6. 3. But it is unlikely to discourage new entrants.6 Conclusion This model gives a fair idea about the industry in which a company operates and the various external forces that influence it. Smaller fringe players. 3. However. we foresee increasing competition in the industry but the form of competition will be different. can prove to be a threat to the synthetic pharmaceutical industry. However. The larger players in the industry will survive with their proprietary products and strong franchisee. creating brand awareness and franchisee among doctors is the key for long term survival. It’s dynamic and over a period of time the model. However. In pharmaceutical industry. as market for generics will be as huge. The chemical industry is again very competitive and fragmented. 3.
3. 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.1 Patent Protection under WTO.come up making imitation difficult. Besides government will have a bigger role to play. and it granted product patents for non-chemical substances. Considering the importance of sectors such as pharmaceuticals. 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 1991.7 Drug patents in India The Indian Patents Act. 1970 (effective since 1972) sought to provide only process patents for chemical substances including pharmaceuticals. WTO) sought to radically transform the patent Act in many countries. (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. 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. (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. or five years from the sealing of the patent.7.requires that the signatories to GATT must necessarily Page | 85 . 1995 The erstwhile GATT (since 1995. 1970 and TRIPS. 1970 and the change-over envisaged under TRIPS is given in table below Table 25: A synoptic comparison of Indian Patents Act. 1970 added a few provisions. 1995 The Patents Act. The specific article dealing with patents-Trade-Related Intellectual Property Rights (TRIPS) . 1970 has been instrumental in encouraging and developing the indigenous drug industry and indirectly containing medicine prices. The duration of process patents was fixed at seven years from the date of filling of the patent. whichever is earlier. Economies of scale will play an important part too. (i) Under the license rights. a process patent owner is obliged to sell the license to any third party fetching a maximum royalty of 4% in turn. 3. the Indian Patents Act. In fact. agrochemicals and food products. which sought to significantly restrict the scope of protection.
the price of patented products is bound to be high. Until then. food and agricultural sectors as well. whichever dominates the market. The provision of compulsory licensing (under the new dispensation) can be harnessed only when there is a clear case of national disaster or calamity. Even the Paris Convention specifically nails non-working or import of patentprotected products as an abuse of exclusive rights. The other retrograde step in the direction of TRIPS is the restrictions imposed on the free use of compulssory licensing provisions. Page | 86 . 1 January 2000 was fixed as the deadline for amending the Constitution. It needs to be noted that once patented products start proliferating in the market. particularly in the post-patent 1970 period. drug prices in India are expected to considerably escalate to a high level. Interestingly. would reduce or eliminate an inventor’s patent-induced market power. royalty and hence foreign exchange outflow. a provision allowed in the TRIPS agreement. etc. Lanjouw (1998) found drug prices in India. The Article on TRIPS requires member countries to change their Act in such a way that they grant product patent to the pharmaceutical.2 TRIPS and its likely impact Several issues need attention in the wake of a change from process to product patent. the composition of patented products in the total pharmaceutical market would undergo a drastic change in favour of the former. among the lowest in world. This would have a far-reaching influence on price. Domestic production of the patent-protected products is not mandatory wherein import is to be considered as a working of the patent. the upsurge in price would depend on the demand for new patented products or on the available alternative treatments. however. A sensitive and a highly controversial issue with regard to TRIPS is the concern about the high price of medicines. They further assert that when normal profits are granted the potential disincentive to invest would wither away resulting in recouping of R&D investment. 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. As a sequel to a transition to the product patents regime. The period of patent rights is to be changed in the Indian case from seven to twenty years. however. by allowing firms to charge normal profits in addition to production costs.amend their Constitution in accordance with this Article. it is estimated that only 10%-20% of the pharmaceutical products are under patent. Compulsory licensing is another tool to counter the adverse implications of conferring patent protection. 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. he and a few others argue that given the current market conditions. India was at the forefront in raising this issue backed by strong evidence. Developing countries like India have. exclusive marketing rights (EMRs) would have to be granted to those companies introducing newly invented products. and hence there is no need to focus on negative trends on the drug price front. However. For developing countries. 3. chemical. These issues include price rise. which were hitherto available in the present India Patents Act of 1970. technology transfer. been granted a five-year transition period till 2005.7. In any case. The study by Fink (2000) suggest a surge in pharmaceutical prices in the range of 9%-76% if product patent rights are introduced. A proper amendment needs to be made to the Constitution of respective member countries amending the present rules. foreign investment inflows. Recent studies. Price ceilings. Fink suggests that rapid acceleration in drug prices could be countered by various price control measures available with the local government. Simultaneously. as far as the impact on various therapeutic categories is concerned. if put into effective practice. market structure. import dependence.
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.8. By revising its R&D policies the government is trying to boost R&D in domestic pharmaceutical industry. as made evident in the intentions of government policy pronouncements (GOI 2001). a budding industry valued over US$ 118 million per year in India. Many more of these are likely to witness lifting of controls in the immediate future. This would naturally be reflected in the base price of the patented products. However. (iii) any effort to locally produce the patented medicine is nothing but monopoly production and consequently monopoly pricing. According to a McKinsey Report. India is holding a major share in world's contract research Clinical Research Outsourcing (CRO). 3. 3. which is almost 1/10th of its cost in US (US$ 100-150million). 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.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.1 What is in store for the future? Page | 87 . as MNCs are entering the market with ambitious plans. as forecasted by McKinsey. Products Patented in India. which will always be higher than the competitive price. whereas in US they cost between US$ 300-350 million each. catapulting it within top 10 Pharmaceutical Markets of the world. Japan. (ii) issuing compulsory licensing to any company in India would amount to enormous royalty fees. 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. The future of Indian pharmaceutical sector is very bright because of the following factors: • Clinical trials in India cost US$ 25 million each. The Indian companies are using the revenue generated from generic drug sales to promote drug discovery projects and new delivery technologies. will then value around US$ 2 billion contributing 10% of the IPM. particularly since the early 1990s. • In India investigational new drug stage costs around US$ 10-15 million. by 2015 Indian Pharmaceutical Industry will be of US$ 20 billion. conduct of clinical trials and generic drug research. is estimated to grow to US$ 380 million by 2010. • Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs. 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. and United States is now coming true. An appreciation of the overall structural adjustment in economies such as India show that over the years.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. in return. 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.
It is the classic “bird in the hand” principle – if the founders can earn a few billions without too much effort. There is not much incentive for companies to invest in new drugs. The present scenario presents an excellent opportunity for multinational enterprises to establish manufacturing bases in India through the take-over route. share of Indian companies in the U. why should they spend hundreds of millions and ten years or more in trying to develop new drugs. SEZs will play an important role in the future of the pharmaceutical industry. Moreover. market by increasing attention to the European market for generics. The availability of talented scientists at a relatively low cost makes India an ideal location for manufacturing quality drugs. one for the local market and another for the global market. and leading companies like Ranbaxy.8. companies are not risking concentration by focusing only on the U.• • • • • • We can expect a significant level of consolidation. Cipla and Dr. Influx of outsourced work from global pharmaceutical companies has given the necessary impetus for the creation of pharmaceutical Special Economic Zones (SEZ). The Indian government would do well to take another look at its policies.S. which would be one of the key drivers of outsourced pharmaceutical services growth in the coming future. Many of the existing players are family owned businesses. The corporations engaged in R&D need tax breaks and innovative incentives. Reddy's are making way for others. Figure 25: Expected market share of Indian Players in the US Generics Market By 2010-11. A word of caution is necessary though such enterprises may have to follow a dual pricing policy.2 Issues and challenges Page | 88 . market is expected to be more than 10 percent. No one should be surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come through. The opportunity for Indian pharma companies is sizeable as generic drugs manufactured in India are now being accepted worldwide. 3.S.a major portion of small players are likely to be wiped out.
As the pharmaceutical industry embraces these new challenges. To maintain or increase margins in the future. In recent times.2. 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. in particular in their behaviour.8. We can focus on intellectual property but that is the creation of the people. but this is a new competency for many companies.2. Indian pharma sector witnessed 25 Mergers & acquisition deals. alliances and partnerships is the need of the hour for the pharmaceutical industry rather than the preference. There is growing demand for skilled people but traditional labour markets are providing fewer new people with the right qualifications and experience. pharmaceutical companies need to start taking a proactive approach towards understanding costs. and the way they are motivated to behave in particular situations.8.8. We can talk about markets. recruits. 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. represent a living brand. It is possible to recruit from new markets. all contribute to constantly eroding margins. and companies are still trying to recruit people with ever-more-specialised knowledge. imminent patent expiries (revenue can decrease by up to 60% at patent expiry). 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. In practice we are describing the collective values and integrity of the individual members of staff.3. The key is how an organisation attracts. and motivates employees with competencies that set their business apart from those of the competitors. 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). as the generics business is weighed down by stiff competition and declining R&D productivity. In 2007. shorter pipelines and the emergence of China as a low cost manufacturing base. We can talk about brand but the people in a company. Thus. Increasing generic competition.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.1 Mergers and Acquisitions Currently. and people joining or leaving a company will add to or reduce the sustainable intellectual property. most of the leading players have inked M&A deals across the globe. Increasingly we talk about regulation and compliance as though they are some abstract function of a company. with 15 cross border transaction worth US$ 600-700 mn. The first challenge is that there are increasing signs of the labour market moving in favour of the employee rather than the employer. 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 . 3. develops. 3.2.3 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. In 2006.
a reorientation was required in India’s pharmaceutical industry. Page | 90 . this transition phase of reorientation is a challenge for the industry. This would mean a more than 100 GW. the hot and humid climate makes high demands on climate technology at production plants and on the refrigeration of finished products. However. increase on today's total. only about 6% are relatively well built National and State Highways. Insufficient energy supply also leads to a situation where production hours must be handled very flexibly. In many areas. But the government has launched an extensive investment programme entitled the National Highway Development Programme. The pharmaceuticals industry is especially dependent on road transport. there are no paved surfaces or there is only one lane for all traffic. In many cases. Moreover. the Indian government intends to expand power generation capacities to roughly 240 GW by the end of the 11th five-year plan in 2012.8. to be implemented by the middle of the next decade. companies have to start recognising and targeting costs today.4 Infrastructure Compared with western industrial nations. Thus.5 Impact of new patent law Legal changes in India in 2005 made it considerably more difficult to produce “new” generics. can no longer be copied by means of alternative production procedures and sold in the domestic market.8. 3. which enjoy 20 years of patent protection. To achieve this advantage. Foreign pharmaceuticals. It now focuses on drugs developed in-house and contract research or contract production for western drug makers. However.2.2. 3. the major transport links are chronically congested and many are in a poor state of repair. 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.throughout their organisation. Of the total road network covering just over 3. the country’s lacking transport infrastructure is increasingly turning into a major obstacle. Hence. This shortage can only be eliminated in the medium term and will require maximum effort. or nearly 90%.3 million kilometres.
such as compulsory licensing. but a framework that sets (minimum) standards and conditions for the protection of intellectual property. Moreover. there is growing concern about the impact of the intellectual property rights system on innovation and on investment. have expressed concern about the impact of the TRIPS Agreement on the availability and prices of drugs.4. in the case of abuse of rights and/or non-availability of the product. Proponents believe this will lead to an increase in investment and in R&D. as well as consumer groups.1 Introduction Most developed and developing countries are either members or observers of the World Trade Organization (WTO). These safeguards can be used to mitigate potential negative impacts of increased IPR protection in the pharmaceutical sector on access to drugs. Since previously many developing countries allowed only for limited patent protection in this area. a third party could be allowed to use the invention. and allows for exceptions which may facilitate the marketing of generic drugs. As such. However. A global process of rethinking is starting. which can be used to design legislation which is in the best interest of the country. and should encompass public health aspects. this represents a significant change in the pharmaceutical sector. One of these WTO Agreements is the Agreement on Trade Related aspects of Intellectual Property Rights (TRIPs). there is some room for manoeuvre. These are made operational via the national intellectual property rights (IPR) legislation. yet numerous public health experts. they reduce the risk of misuse of the monopoly rights conferred Page | 91 . since they signal to the patent holder that. Measures to protect the public interest ought to be included in the national legislation. TRIPS provides for a number of safeguards which may be used to protect public health and promote competition. this means they are committed to follow the rules laid down in its Agreements. In fact. 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. in which developing countries should actively participate. worldwide. Within the TRIPs framework. The TRIPS Agreement is not a uniform law.0 THE TRIPS AGREEMENT 4. The TRIPs Agreement makes the granting of patents for pharmaceuticals obligatory. or intend to make these commitments in future.
such as formulation patents. In the pharmaceutical sector. there is a presumption of validity. if society finds the Page | 92 . TRIPS requires that patents are granted when the typical standards for patentability. • to provide an economic incentive for people to invent or to engage in creative efforts. In the pharmaceutical sector. from a societal point of view it is important to consider who will reimburse the consumers. in exchange for a temporary monopoly on its use. monopolistic pricing may reduce people’s access. are met. this will nurture scientific progress or artistic inspiration. they can be used aggressively to (threaten to) litigate.that is. in order to make them available to others. the patent office). since. So historically. applying these criteria in a flexible way will facilitate the granting of ‘secondary’ patents. patents on polymorphs etc. in order to stop competition. patents are the most important form of IPR protection. If countries have strong provisional measures under their enforcement system. WTO member countries may decide how to apply these criteria.by a patent. they are only valid when issued and in the country where they are issued. The intellectual property rights system has been developed in order to try to achieve two contradictory aims: • to promote the publication of ideas. Similarly. it has to meet three criteria: novelty. inventions and creations. inventive step and industrial applicability. who can then further improve them. a patented invention will only return profits if it is successfully commercialized . A patent however does not in itself guarantee profits. either through direct exploitation. these can be used to prevent competition for instance while a lawsuit is pending (which can be several years). in exchange for making his/her idea known to society. The solution adopted was to give the inventor or creator a temporary monopoly. Because of this (temporary) monopoly. novelty. In other words. Even if such secondary patents are relatively weak. it is important to carefully state the grounds and conditions for their use in the national legislation. In the absence of competition.2 Background The philosophy of Intellectual Property Rights Intellectual property rights (IPR) deal with the creations of the human mind. by ensuring that the originator can reap financial rewards from his/her efforts. 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. that is. apart from being new. a patent was perceived to be an inexpensive way for society to encourage innovation and reward the inventor. if eventually a patent is found to be invalid or an enforcement rule to be unjustified. or through royalties in case a third party is given a license to use the invention. enforcement rules can have significant implications. and approved by. 4. once a patent has been granted. However. and how many people have in the meantime been denied access to essential medicines. A patent requires the inventor to disclose his invention. Patents are more difficult to obtain than other forms of IPR (an application has to be filed at. However. inventiveness and industrial applicability or utility. defining the scope of patentability at the national level is an important issue. Therefore. But the Agreement does not specify how these criteria should be defined. to ensure that such safeguards can be used effectively. the inventor will be able to earn a profit in case of commercialization of the invention.
R&D costs have to be recovered. Furthermore. With regard to impact on development. and. 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. in case the patentee misuses the monopoly rights. when the availability of the patented product falls seriously short of demand. the US Office of Technology Assessment has published a study. Obviously. which in turn insisted that this issue should be on the agenda of the Uruguay Round negotiations. so intellectual property rights should be looked at from this angle. patents may have positive 'dynamic effects' so far as they foster the development of new products that benefit society. Therefore. e. There are several reasons for the importance of patents for the pharmaceutical industry: 4. the costs of patent application. however.3Usually.g.3 The importance of intellectual property rights for national development In the pharmaceutical sector.3. Page | 93 . as well as of its protection (e.g. In fact. When contemplating the importance of patents for national development.1The costs of pharmaceutical R&D are high. most legal systems contain provisions for government intervention. which will reduce access. A product patent confers monopoly rights over the product. imitation is relatively easy. evaluate the importance of patents. the limited room for manoeuvre built into the TRIPs Agreement should be used. patents are very important.3. On the other hand. While the actual amount is being disputed. Production of the same product via a different production method however does not infringe a process patent and is allowed. when designing patent laws. litigation in case of infringement by an unauthorized party) are to be borne by the patentee (patent holder). Ultimately. at registration. two aspects of development can be distinguished: economic aspects and social or human aspects. in terms of social development. 4. the company can charge a higher price and earn more than would have been possible in case of free competition. from these profits. regardless of the production method. in order to make sure that the national patent law works in the interest of the country’s social as well as economic development. Because patents are private rights. Because of the monopoly rights the patent confers. the latter are the most important. taking into account the level of development. Patents can be granted for a product or for a (production) process.invention useful. the impact of pharmaceutical patents is negative. 4. policymakers should make a profile of their country. however. Pharmaceutical patents are a clear example: the inherent effect of patents is to increase the price. Moreover. the very existence of the TRIPs Agreement is due to the pressure from the big pharmaceutical companies on the US government. 4. it is in any case significant.3.3. A process patent on the other hand confers rights over the process and over the products directly produced by that process. 4. therefore the patent is important to protect the invention. based on that.2 There is a disclosure requirement.4It allows the company to make extra profits.
4.6 million of these deaths could have been prevented if those at risk would have had access to essential drugs.1 Public spending for healthcare in general and for drugs in particular is insufficient. One of the most effective strategies for promoting affordable prices is to increase competition (see figure 26). in 32 countries. affordable prices. essential drugs.4. however. leading to wastage and shortages. Price is only one of the factors in ensuring access to essential medicines. 4.4. Ensuring access to essential drugs depends on several factors. especially in developing countries.1. 10. 4. They fear therefore an increase in prices of medicines. The reasons for this are multiple and complex. in order to encourage (generic) competition.3 million children under five years of age died last year. For most developing countries.4. The TRIPs Agreement makes the granting of patents for pharmaceutical products and process inventions obligatory. 8. 4.1. especially for countries and populations with limited resources. such as rational selection of the drugs allowed on the market. Today.4. it is an important factor. most people. Previously.2 Health insurance is non-existent or has very limited coverage. In developing countries. for a minimum period of 20 years. WHO estimates that more than one third of world's population lacks regular access to the medicines they need. or only to a limited extent. Figure 26: Effect of competition on HIV/AIDS drug prices Page | 94 . and decreasing.4.4 WHO's perspective on globalization and access to drugs 4.3 New essential drugs are costly. these new standards represent a considerable increase in the protection granted for pharmaceuticals. many developing countries did not. have to pay for drugs out-of-pocket. grant patents for pharmaceutical products. and include the following factors: 4. more than half the population lacks regular access to basic.1.1 Global pharmaceutical challenges At the beginning of the 21st century. too many people still lack access to essential drugs. sufficient and sustainable financing for drugs and a reliable health care and drug supply system.4 Supply systems are often unreliable and poorly managed.1. and a further reduction in their population's already limited access.
WHO insists that access to essential drugs is a human right and that medicines are not simple commodities. 4. which may be used to protect public health and promote competition. equity pricing of newer essential drugs and making use of the TRIPs safeguards. 4. rather than to medical need.2. 4. promoting generic policies.4. allowing parallel imports.Adapted from: UNAIDS.2.4. However.4. in order to use these safeguards.2. this included a Page | 95 .3 Support should be given to any measures which will improve access to all essential drugs. WHO recommends that: 4. Before the Uruguay Round.4. it is useful to briefly consider the history of its negotiation. reducing duties. WHO recognizes that patents on pharmaceuticals will stimulate R&D of new drugs. Samb.2 WHO policy perspective: In the context of globalization and access to medicines. such as compulsory licensing and exceptions which facilitate the marketing of generic drugs ("Bolar exception").2 Public investment is needed to ensure development of new drugs.5 The history of the TRIPs negotiations In order to increase the understanding about the TRIPs Agreement. countries have to incorporate them in their national legislation. 2000 However.1 Patents on pharmaceuticals should be managed in an impartial way. Therefore. but also notices that research priorities tend to respond to (economic) demand. taxes and mark-ups. the TRIPs Agreement contains a number of safeguards. B. protecting the interest of the patent holder as well as safeguarding public health. including mechanisms to promote competition. 4. about 50 countries did not grant patent protection for pharmaceutical products. These safeguards can be used to mitigate the potential negative impact of the TRIPs Agreement on access to drugs. such as providing comparative price information.
would cease. therefore meant a significant change for the pharmaceutical industry. More importantly.should be looked at from this perspective. to an increase in royalty and profit payments abroad and to a greater market penetration by foreign firms. under the agreement there is a multilateral system for dispute settlement. the US has continued to use section 301. even before the adoption of TRIPs. For almost 3 years. innovation -the development of NCEs. TRIPs Article 27. unilateral action by the US -on the basis of "Special" section 301 of their Trade Act. suddenly patenting of pharmaceutical products was made almost universal. For developing countries. which had recently adopted patents for pharmaceutical products. the possibility that in other areas of the Uruguay Round negotiations. This is perhaps the most dramatic asymmetry in contemporary North-South relations. Page | 96 . Moreover. by having such a system. Mexico and Egypt. would have three main effects in developing countries: • there would be more foreign direct investment (FDI). India. But finally it was not possible. for most developing countries it seems there have been less benefits than expected. politically. as well as many developing countries. • it would promote the transfer of technology. The views of Japan and the EU during the negotiations are interesting too. such as Portugal and Spain. since all WTO member states were obliged to grant it. the TRIPs position on parallel import -countries are free to decide whether or not they allow this. Unfortunately. At that time. They realized that pharmaceutical production was highly concentrated in developed countries.was almost exclusively undertaken in industrialized countries. For instance. Japan was concerned about potential abuses of the system. the expectation was that. from 1986 until May 1989. Developing countries were reluctant to extend patent protection to pharmaceuticals. which have led to the granting of a number of compulsory licenses. the experience even of developed countries. developing countries could obtain benefits. First. the trade-offs. such as Italy. in developing countries. Second. In addition. Finally.number of developed countries. raised further doubt whether there would be any benefits. Unfortunately this expectation has not been fulfilled either. for instance access to markets for textiles and agricultural products. 96% of worldwide R&D expenditures took place in developed countries and only 4%. since it relates to the ability to create and apply new scientific and technologic knowledge. for instance Brazil. Their main interest was that. which states that patents should be granted in all fields of technology without exclusion. 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. it should not amount to a restriction to trade. to avoid the discussion and the drafting of the Agreement started. • patent protection would promote local R&D. developing countries refused to negotiate an agreement on intellectual property. in all areas of science and technology. there were two potential benefits in negotiating the TRIPs. in fact the US has quite a long tradition of anti-trust cases related to the abuse of IPR. as stated now in TRIPs Article 27. while an Agreement should establish a certain level of protection. 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'. a number of economic studies showed that patent protection for pharmaceuticals in developing countries would lead to an increase in prices for medicines.
but this is expensive and risky.1 The international innovative pharmaceutical industry's perspective 4.6 Stakeholders' views Three important stakeholders are the innovative pharmaceutical industry. Along with a well-functioning regulatory structure and marketing system.1. the exclusive use of his invention.1 The importance of intellectual property rights for pharmaceutical R&D New medicines and access to these new medicines. for a limited time. "The patent system ….4. secured to the inventor. The commercial sector discovers and develops nearly all new drugs and vaccines. 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 ." Abraham Lincoln. which will be vital in the fight against communicable and non-communicable diseases.6. 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. and thereby added the fuel of interest to the fire of genius in the discovery and production of new and useful things.6. 4. are dependent on strong patent and other intellectual property protection. 1859 The patent system represents a compromise between competing short-term and longterm economic and social interests. the national pharmaceutical industry and the consumers.
In some developing countries. often related to technology issues in industry mergers.g. 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. Finally. Table 26 shows that the first rank is held by the pharmaceutical industry. provided for in some way in most countries. fewer research funds will be allocated to that country or disease. the quality of the drug supply is improved. However. HIV/AIDS) is subject to CL policies. if a country adopts CL measures or if a disease area (e. • most damaging. However. "compulsory licensing" has been touted as a magic policy to improve access to medicines in developing countries. drug R&D has been rising. Problems of access to drugs With regard to inadequate access to drugs. which promises to improve the supply of effective new drugs and vaccines and to improve access to medicines for patients worldwide. which have adopted stronger patent protection in recent years. • it assumes that governments will use this "tool" as a pro-consumer tool. helps to clean up counterfeit products from the marketplace. governments tend to use CL measures for industrial policy. recently. 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.million dollars in R&D. 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. • The R&D Imbalance: While the relative incidence of infectious diseases is Page | 98 . 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. Compulsory licensing of a patent to a competitor. In addition. two major gaps can be identified: • a "discovery/development" gap between the morbidity/mortality and available remedies. also under TRIPs. The dependence of pharmaceutical and vaccine discovery and development on adequate and enforceable intellectual property rights is the highest among various sectors. leading to cheaper drugs. the protection of trademarks. The effect on public health is that through the reduction of trade in unregulated counterfeit products. The exposure of poorer countries to the discovery/development gap is particularly acute because of mitigating circumstances of poverty. This is a fundamental change. such as Korea. and • an "access imbalance" between consumption of medicines in the developing and the developed world. is normally limited in application to extraordinary circumstances. poor infrastructure and urbanization.
but prices are still above levels which most people in developing countries can pay. the linkage is weak or non-existent since price levels are determined by many factors: distribution conditions and markups. • Countries without effective patent protection could produce their own versions of patented products. the following issues should be considered: • Regarding the impact of patents on price. developing countries produce less than 1/10 of drug output. • The Urban/Rural Gap: The minority of the population living in towns receives three-quarters or more of medical services and products. • Patents do not. Cost and Price Issues There is no price at which a 'non-invented' drug can be purchased. • Generic production is not an automatic answer to access. with post-patent conditions making the product a generic 'commodity' subject to even greater competitive pricing pressures. "… countries which do not recognize IP…. These are just a few examples to illustrate existing barriers. according to the innovative pharmaceutical industry. China. in fact. the 'price' of a treatment or cure is infinite. which are primarily offpatent drugs. Republic of Korea. this is a global phenomenon. 2/3 of the latter production is concentrated in a few developing countries. inflation. Page | 99 . India already produces generic copies of patented AIDS drugs. but it bears most heavily on poorer populations in developing countries. therapeutic competition among alternative drugs drives market prices lower. • The Drug Production Imbalance: With over 3/4 of the world's population. The Children's Vaccine Initiative noted that while patents and royalties do not raise the price of vaccines 'dramatically'. generic producers in developing countries may charge lower prices than the original innovator. such as India. Innovation makes a therapeutic option available. further. price controls. large populations within India should have easy access to these generic versions of AZT and other medications. If patents were indeed the problem. taxes. funding is often insufficient to provide even the most basic healthcare services and products. may actually inadvertently hinder access to vaccines… by discouraging legal vaccine technology transfer and by failing to encourage domestic vaccine research and development". Moreover.higher in developing countries. measurement techniques etc. Indeed. but this is demonstrably not the case. until now little pharmaceutical research and development has taken place in these countries. have an influence on access to those drugs which most of the population in developing countries actually consumes. Improving access conditions means focusing on a wide number of factors restricting access to health care and medicines. and. In the absence of a new drug. many developing countries have choices of products from just a few sources. Egypt. Further. In fact. the time between the introduction of an innovative drug and of therapeutically similar products has lessened dramatically over time. in developing countries. For instance. people working in the informal sector cannot enter the social security health care system. Thus. • Patented products also face competition from off-patent products for the same conditions as well as from other therapeutic alternatives. Brazil. Usually. Access is poor in some countries regardless of the status of patents. A 1995 study showed that countries with intellectual property protection did not have higher prices than countries without such protection.
to long run. they can lead to higher prices in the medium. • 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. Price controls are a very short-sighted policy: while they may make current medicines cheaper. local companies must shift their activities from copying drugs to developing new drugs. a trend which has been observed in Europe as well as in Japan. • Develop a global "orphan-type" incentive plan. compared to permitting competitive pricing in the post patent period. either directly or indirectly. 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. such as the Medicines for Malaria Venture or the Global Alliance for Vaccines and Immunization. E. • Encourage local innovation by avoiding price controls. Price controls tend to reduce the supply of newer innovative therapies and can have a distinctly dampening effect on innovation in pharmaceuticals. 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. as price controls often go from being "price ceilings" to "price floors". which are important in the fight against priority diseases. in the long run they will make developing new drugs more difficult. • 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. Furthermore. • Stimulate the supply of affordable quality generics in developing countries by Page | 100 .
Another vital aspect of effective access to medicines relates to information about these medicines and their proper use. While industry does its own drug discovery and drug development research. the police and industry professionals to implement anti-counterfeiting legislation. it also has worked with public agencies. has the potential to be a positive resource. parallel trade increases opportunities for counterfeit and substandard products to enter the market. its mission is to improve the efficiency of the registration process for new pharmaceutical products. should be avoided. Negative approaches.working to inculcate the importance of quality manufacturing procedures locally. Trademarks are a sign of the origin of a medicine. even for importing countries. Thus the answer is to focus on quality. if it is assumed that parallel imports can make a significant difference in lowering the price domestically. which may seem seductive if a country's officials believe that they will be receiving relatively low-priced imports. such as attempting to withdraw trademarks for medicines. to build on basic research to bring new compounds to patients. When parallel trade is discussed. thus diverting them from the population who needs them. pooling the scientific expertise and resources of several countries. HIV/AIDS. it is always assumed by proponents that there are only parallel imports. Furthermore. • Empower consumers to choose well. Severe penalties should be imposed. The Internet. then someone else abroad must be paying more through this diversion. TB. Japan and the USA. One major effort. parallel traders would be buying up supplies of essential drugs in a low-price country for resale in higher-priced markets. as well as increasing the burden on inadequately resourced regulatory staff in developing countries. creating increased health and safety risks for consumers. because the former capture most of the "rents" arising from the differences in ex-manufacturer prices across countries. To deny trademarks rights would be to soften the pressure on generic drug producers to produce high standard medicines. the alleged benefits of parallel trade tend to be less than expected. However. is the International Conference on Harmonization (ICH). Patients and consumers around the world are increasingly seeking more information about medicines to empower themselves in their own medical care. cancer and depression over the next decade or so. • Consider creating publicly financed research centres in the region to foster medical research. but the use of the Internet to distribute medicines can also pose dangers. conducted in partnership between the public and private sectors. Improved access to medications can be helped through reducing unnecessary tasks and duplication in the review of drugs internationally. not consumers. Perhaps through such a mechanism ASEAN countries and local and international industry together could develop effective treatments for malaria. The European Union's experience shows that the benefits of parallel trade accrue mainly to the parallel traders. In addition. • Adopt global drug review standards to speed up the approval of new drugs. such as the National Institute of Health (NIH). However. Parallel trade is product diversion. If consumers avoid unbranded generics it is not because of trademarks. as a truly global medium. and that there is no diversion of key products via parallel exporters. to increase the capacity for research in diseases of regional interest. In the area of globalization of Page | 101 . but rather because consumers lack confidence in their quality. • Join with judicial authorities. and trademark owners must therefore stand behind the quality of the product. specifically in Europe. • Ensure the supply of needed drugs by working to prevent parallel trade.
6. governments and international institutions need to consider appropriate policies regarding this new health care medium. The national pharmaceutical industries therefore believe that Governments should introduce appropriate policies to alleviate possible negative implications. • The gap between local and multinational companies will widen. • Several case studies indicate that there is little evidence that the introduction of TRIPs compliant standards of IPR would stimulate transfer of technology. the implications of TRIPs Agreement on the national pharmaceutical industry might be: • When markets are small. such as impotence. 4. there will be no interest to invest in technology transfer.information and trade. • New medicines will be more expensive. obesity. of the introduction of TRIPs standards. • The introduction of new products by national industries will be delayed. such as those listed above. most of whom reside in developed. serious tropical diseases. that is. Table 27: Introduction of patents Source: World Bank Noting the above and other concerns. encourage foreign direct investment. • This may create an impression of denying people the right to new drugs. 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.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. While the debate deals with positive and negative implications. introduced product patents for drugs only relatively recently (see Table 27). Effects on distribution might be particularly strong with respect to the effects of patents on the price of medicines. Page | 102 . Intellectual property rights can disadvantage developing countries in two ways. after their pharmaceutical companies had attained a very high degree of development. • There will be a shift in market share from generics to branded/originator products. namely by increasing the knowledge gap and by shifting the bargaining power towards the producers of knowledge. It is also worth noting that most industrialized countries. rather than on widespread. industrial countries. National pharmaceutical industries in developing countries are concerned about trends to focus R&D efforts exclusively on problems for which lucrative markets exists. development and innovation and ensure early introduction ofnew products. due to the weak bargaining power of developing countries in negotiating prices with monopoly suppliers. while having a patent system in place since a long time. strengthen research. jet-lag and baldness.
Pharma Business. over two billion people do not have regular access to life-saving drugs. Currently. The prices fixed indiscriminately by the MNCs. only three were able to retain their ranking within the top ten after five years. p. Table 28 gives the US ten top prescription drugs in 1983 and traces their ranking during the following 14 years. (2) 1997 Ranking: Annual Report 500 Drugs: 500 Prescription Drugs by worldwide sales. this. distribution and sales of the patented drugs. If developing countries have to wait for 20 years to manufacture new lifesaving drugs.4.3 A consumer's perspective (Consumers International) Access to essential drugs and affordable medical services are major consumer concerns. The consumer organizations. Table 29: Retail prices in USD of 100 tablets Zantac in 11 Asian countries Page | 103 . and 4 drugs were not even in the list of the 500 top selling drugs that year. is a crisis situation. Generic manufacturers can copy them only after the patents expire. the patent holder will have an exclusive monopoly for the manufacture. 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. The multinational companies (MNCs). Modern drugs have a short lifespan. Of the top ten US prescription drugs in 1983. Table 28: Top prescription drugs in 1983 and their ranking in 1988 (US) and 1997 (world) Source: (1) 1983 & 1988 US ranking. therefore. particularly the American industry. Consumers reject this position because no drug at the end of 20 years will be worth manufacturing. 1381. Jan 27. 1989.6. None of them was in the top 100 in 1997. they will be waiting in vain. consumer organizations believe. The top sellers of today will be almost extinct in about 10-15 years. that the TRIPs Agreement should be implemented in ways which would prevent compulsory licensing and parallel imports. July/August 1998. SCRIP No. will prevent access of the life-saving drugs to over two billion people. 17. During this period.
technological and financial resources. which. 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. April 1998. are available in only 10 advanced industrial countries. we would need to know how much profits MNCs make. Therefore. at present. independent data on the cost of R&D are scarce. Comprehensive research and development to discover and develop new chemical entities require human. This seems to be a justifiable argument. • There should be a major review of the WTO multilateral trade agreements. Subsequent reforms should incorporate as a central objective the promotion of sustained development in the Third World. 100.Source: Retail Drug Prices: The Law of the Jungle. • The special problems of the least developed countries (LDCs) should receive Page | 104 . how much it costs to develop a new chemical entity and the amounts MNCs really spend on R&D. 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. 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.
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. from plant varieties to human life. the UNDP's Human Development Report 1999 has listed the following concerns: • Liberalisation. The rapid decline into poverty is due to rapid liberalisation. indigenous knowledge. recently. 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. undermining food security. consumers believe it is critical to examine the TRIPs Agreement and explore the best options in interpreting and incorporating relevant provisions into national legislation. which ultimately will ensure regular Page | 105 . • Trade policy should be a powerful instrument for economic development. there were 28 LDCs. • Despite the risks of genetic engineering. the rush and push of commercial interests are putting profits before people. not need. The result: a silent theft of centuries of knowledge from some of the poorest communities in developing countries. Seattle. In 1978. privatisation and tighter intellectual property rights are shaping the path for the new technologies. blocking developing countries from the dynamic knowledge sectors. institutions and practices that have been formulated by a selected few. The people’s response has been loud and clear during the violent events in Geneva. To conclude. according to the United Nations. Corporations define research agendas and tightly control the findings with patents. Cosmetic drugs and slow ripening tomatoes come higher on the priority list than drought-resistant crops or a vaccine against malaria. WTO. These laws ignore cultural diversity in the way innovations are created and shared – and diversity in views on what can and should be owned. money talks. • There is a need for a comprehensive review of the WTO Agreements to redress their perverse effects. But the privatisation and concentration of technology are going too far. In 1998 there were 48. People want a restructuring of the present global governance with a new set of rules. The better options will be those that will strengthen the technological.particular attention. economic and commercial development of the pharmaceutical sector in developing countries. they remain far out of reach. determining how they are used. • In defining research agendas. the best of the new technologies are priced for those who can pay. biosafety and access to healthcare. Based on analysis of empirical data on the impact of the TRIPs Agreement on access to drugs and health services in developing countries. imposed by WB/IMF structural adjustment programmes and. • From new drugs to better seeds. The TRIPs Agreement will enable multinationals to dominate the global market even more easily. • Poor people and poor countries risk being pushed to the margin in this proprietary regime controlling the world’s knowledge. Davos and other places. For poor people. institutions and practices that will ensure global responsibility. • Tighter property rights raise the price of technology transfer. • New patent laws pay scant attention to the knowledge of indigenous people. racing to lay claim to intellectual property under the rules set out in the TRIPs Agreement. Why have people reacted so violently? People see that power is controlled by market forces operating under faulty global governance supported by rules. and this aspect must not be lost sight of by narrowly focussing on liberalisation.
FDI in the pharmaceutical sector has not increased. A number of years after the introduction of these patents.1 Experiences with the introduction of patents for pharmaceuticals In most developing countries. What happened to foreign direct investment (FDI).7. License agreements usually mean that the patent holder provides the active ingredient. pharmaceuticals became patentable.1. there is no clear increase in transfer of technology to local companies.7. and the licensee is usually just formulating.1 Latin America Several Latin American countries. Italy was a reasonably large producer of pharmaceutical products and an exporter with a trade surplus. safe and effective drugs. Finally. Colombia and other Andean countries is that after the adoption of patent protection for drugs.7. 4. With regard to the transfer of technology. In addition. not the technology for the production of the active ingredient. transfer of technology and (local) R&D? What happened to drug prices? 4. So after the introduction of the patents. therefore time is too short to have evidence about its implications. It was revised in 1992. unfortunately. prices for medicines in Italy had increased significantly. As a result. a large number of formulation plants have been closed down. the situation is not better. But the experience of countries which have adopted pharmaceutical patents in the past decade is relevant in this context. the essence of the revision was the inclusion of pharmaceutical product and process patents. Therefore it can be concluded that transfer of technology in this area was never very substantial. good quality. there is little real transfer of technology. In general. almost 200 %. 4. A further revision.2 Italy Italy has introduced patent protection for pharmaceuticals in 1978. At that time. and has not increased. but to import.3 Thailand The first patent law in Thailand was enacted in 1979. and excluded pharmaceuticals. going from a trade surplus in pharmaceuticals to a very severe trade deficit in this area. many foreign companies have decided not to produce (or formulate) locally any more.1. with a mandate extending to global competition policy with antitrust provisions and a code of conduct for multinational corporations. nor are there any clear prospects that R&D for diseases relevant to developing countries will increase in industrialized countries.7. the experience of countries such as Chili.7 Country experiences 4. there is no sign of any increase in pharmaceutical R&D in these countries. such as Chili and the Andean countries changed their patent legislation in 1990/1991. With regard to FDI. and Italy began to be a net importer of pharmaceutical products. introducing petty patents and Page | 106 . 4.access to affordable. 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. many local companies have been acquired by foreign companies. Moreover. in the area of pharmaceuticals.1. But there has been no new investment. As mentioned. TRIPs standards became enforceable only a few months ago. except through the acquisition of local companies by foreign companies. long term solutions would include a World Trade Organization that ensures both free and fair international trade.
IP does not have to be contradictory to the policy objectives of developing countries.1 of the Agreement. However often IP has been equated with TRIPs and it is important to make a distinction. 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”. related to enforcement. Page | 107 . The development IP rights which are of interest to developing countries. • technology that could lead to R&D of new pharmaceutical products in Thailand is not likely to be transferred. • for products already on the market. Thus. of patent protection for pharmaceuticals concluded that: • technology transfer in the pharmaceutical sector has been minimal and has been limited to formulating techniques. there has been an increased tendency to import drugs (compared to local production). TRIPs enforcement should be part of a wider approach which comprehensively strengthens the legal and law enforcement infrastructures. paradigms and interests of industrialized nations. will only begin after the end of the transitional periods. the study did not reveal any price change. • Efforts related to the implementation of the TRIPs Agreement will not end by the end of the transitional periods. • 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. since the enforcement rules included in TRIPs may require the revision of national laws in respect of civil. in 1992. TRIPs leaves substantial room for an implementation in a way which takes specific national policies and priorities into account. This flexibility is built into the TRIPs Agreement. criminal and administrative procedures as well as a revision of the role of police and customs authorities. Developing countries therefore should implement the TRIPs while truly taking into account Article 1.7. the share of originator products as percentage of the total pharmaceutical market increased.2 Development of TRIPs-compliant legislation in developing countries While experience with the actual implementation of TRIPs in developing countries is limited. • Implementation will reach beyond the intellectual property offices. A study to assess the impact of the introduction. however. In fact TRIPs has been described as reflecting the legal culture. was enacted in March 1999.addressing the issue of parallel import. • since the enactment of the 1992 patent act. The workload and pressure on the legal system of developing countries. on average by 4% per year. no increase in technology transfer was seen after the enactment of the 1992 patent law. 4. in fact. indicating that foreign companies benefited more from change in patent law than local companies. the question of the impact on drug prices is in fact not answered by the study. due to the selection of products (all selected drugs had competitors in the Thai market) and a variety of interfering factors. since part 3 of the TRIPs Agreement provides minimum standards for the enforcement of IPR protection. a number of observations can be made based on countries' preparations for becoming "TRIPs compliant": • As mentioned earlier. some believe that increased protection of intellectual property rights may enhance the achievement of those objectives. • there has not been much foreign direct investment in the pharmaceutical sector since 1992.
namely the right of the patent owner to prevent unauthorized persons from using the patented process and making. Specifically.namely. 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. or importing8 the patented product or a product obtained directly by the patented process. whether a product or a process. 4.1 Patentability of pharmaceutical inventions The main rule relating to patentability is that patents shall be available for any invention. including to protect animal or plant life or health. and • Certain plant and animal inventions. inventive step and industrial applicability. 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. even during the patent term. Disclosure is crucial. 4. 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.covering their knowledge base and information resources. taking into account the legitimate interests of third parties. the minimum rights that must be conferred by a patent follow closely those that were found in most patent laws. since it makes important technical information publicly available so that others may use it for advancing technology in the area.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. 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. Under the TRIPs Agreement. • Diagnostic. therapeutic and surgical methods for the treatment of humans or animals.3 Limitations/exceptions to these rights Under the TRIPs Agreement. and it ensures that. many countries Page | 108 .8. the invention truly falls into the public domain. In addition.8. The WTO Panel in "Canada . Three types of exception to the above rule on patentable subject-matter are allowed. after the expiry of the patent term. It should be noted that. for example. in all fields of technology. using. offering for sale. 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. novelty. protection must last for at least 20 years from the date of filing of the patent application. the TRIPs Agreement does not contain an obligation to introduce such extension. provided the invention meets the standard criteria for patentability . 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. patent rights are not absolute but can be subject to the following limitations or exceptions: • Countries may make limited exceptions. Thus.8.2 The rights conferred and the term of protection According to TRIPs.8 Technical issues 4. 4.
The TRIPs Agreement makes it clear that WTO Members may. When a practice has been determined after due process of law. these periods differ according to the type of obligation and the stage of development of the country concerned. which did not grant patent protection for pharmaceutical products. from 1 January 1995. With regard to the protection of pharmaceutical inventions. many countries use price or reimbursement controls. 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.8. 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. as a general rule. In these countries. • 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. 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). in formulating or amending their rules and regulations. although a certain amount of adjustment in legislation. the grounds on which this can be done are not limited by the Agreement. 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. TRIPs in context Most developing and least developed countries already grant patent protection for pharmaceutical products. have until 1st January 2005 to introduce such protection. Two of the main conditions are that. st Page | 109 . the TRIPs Agreement will therefore not lead to fundamental changes. For example.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. against anti-competitive practices. 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. the two conditions specifically referred to above (regarding voluntary license and remuneration) may be relaxed. If found to be patentable by reference to their filing (or priority) date. the conditions for issuing compulsory licenses are more flexible. 4. to be anti-competitive. adopt measures necessary to protect public health and nutrition. a patent would have to be granted for the remainder of the patent term counted from the date of filing. For example. Unlike what was sought by some countries in the negotiations. consistent with TRIPs provisions. The Agreement also provides for consultation and cooperation between Member Countries in taking actions against anti-competitive practices. A small number of developing countries. The Bolar provision (see par. • Countries have the right to take measures.5) is another example of an exception. 3. provided that such measures are consistent with the provisions of the Agreement.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. an exclusive marketing right of up to five years will have to be granted provided that certain conditions are met. they have to provide a system where applications for pharmaceutical product patents can be filed (often referred to as a "mailbox" system). However. These applications do not have to be granted until after 1st January 2005. there are two situations.
in turn. that is. and this has created a lot of concern in developing countries. 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. This. it is also true that other countries attached great importance to other areas. This is the reason why. Under US law. patents have been granted. An example is the novelty requirement. in a strict way or in a very flexible way. This is not only reflected in the basic underlying balance related to disclosure and providing an incentive for R&D. This has drawn a lot of attention lately. The protection of pharmaceutical inventions is one aspect of much wider negotiations. some. this was an important theme in the negotiations. and therefore can destroy patentability. novelty. the novelty requirement means that a patent will not be granted if the invention has been disclosed anywhere in the world. Figure 28: Animal hat patent Page | 110 .for example in respect of patent term and compulsory licensing. have decided to provide such protection more quickly than is required under the TRIPs Agreement. will generate the resources required to tackle health problems. in the US. Novelty is not destroyed if disclosure was done through use of an invention outside the US. So there is room for WTO members to decide how to apply these criteria. for instance the “one-click” method for buying books by ecommerce. paradoxically perhaps. plants and genetic materials used for centuries in developing countries. But the Agreement does not specify how these criteria should be defined and applied. inventive step and industrial applicability. the way in which the inventive step requirement is applied. 4. is very loose. novelty is destroyed if an invention has been disclosed through publication or through use 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.9 Standards for patentability TRIPs requires that patents are granted when the typical standards for patentability. are met. novelty will only be destroyed if the disclosure took place via publication. This is the universal standard of novelty. A strong and vibrant multilateral trading system is believed to be essential for creating conditions for economic growth and development worldwide. But the US has standards for novelty which are lower. While it is true that some countries put particular emphasis on TRIPs matters in the Uruguay Round negotiations. because of a number of patents granted on so called business systems. Disclosure can take place through publication or through use (if an invention is used. for example textiles and agriculture. the Indian Neem tree is one of the well known cases. But outside the US. Similarly. including Brazil and Argentina. but also in the limitations and exceptions to rights that are permitted and in the transition provisions. it means the public knows it). Whether this balance has always been found in the right place is a question for discussion among WTO Members. Usually. on traditional or indigenous knowledge. may be necessary. These are the typical ways in which disclosure can destroy novelty. based on only one click. The TRIPs Agreement pays considerable attention to the need to find an appropriate balance between the interest of rights holders and users. Some countries apply these criteria in a very flexible way and. a good example is the US. This has been patented and as a result no other company can use a system for ordering a product via the internet.
969. since it has little economic importance. The first to sequence the gene that codifies for this protein was a US company. there is a large number of patents which relate to processes. Mexico and some other countries. and this has created considerable controversy. Argentina. in the US. a decision was taken in favor of Amgen. Genetics Institute (GI) also sequenced the gene and each claimed to be the inventor. Amgen. GI owns process patents related to ertythropoietin. on the basis of which it has tried to stop any production and commercialization of ertythropoietin. since around most NCEs. There are many other examples of trivial inventions for which patents have been granted. but in the meantime the defending company may already have gone out of business. Page | 111 . This creates a very difficult situation for companies which are interested in producing a generic version. about new chemical entities (NCEs). However. where it had lost. Maybe the defendant can prove after 2-3 years (this is how long it usually takes) that he has the right to produce ertythropoietin. A process patent puts the burden of proof on the defendant. because the patent was invalid or because a different process is being used. an important biotechnology based product. GI then applied for a number of process patents. such as pharmaceuticals. Yet thousands of pharmaceutical patents are being granted. So in Chili. In fact. it could be argued that the inventor was nature and that the companies just discovered it. The patent in this example is not very significant. therefore.Figure shows an example of a patent granted in the US in 1990. once the patent has been granted. But the same loose criteria are applied in other sectors. it can be used aggressively to stop competition since there is an assumption of validity. another company. But with 2-3 months time lag. Some concrete examples: • Processes: Ertythropoietin is a human protein. dosage forms.317 Animal Hat Apparatus and Method. and as a result GI was unable to commercialize this product in the US. Each year. but in several developing countries in Latin America. formulations etc. implicitly one thinks about new drugs. not in the US. only a limited number (less than 100) of NCEs are being developed. which is still in force: patent number 4. When thinking about patents for pharmaceuticals.
TRIPs further states that the conditions under which a compulsory license is granted should be regulated in accordance with the TRIPs Agreement (Article 31). 4. it is entirely up to the national law to decide which are the grounds. Conditions Page | 112 . So chemically. local or generic companies and stop competition. processes etc. So while there is a role for the patent system to protect real inventions. as in the US. dosage forms. Under US law. An example is AZT. simply states that compulsory licensing is allowed ‘for reasons of public interest’. the second patent was challenged and eventually invalidated. Other grounds are for instance emergency situations. because litigations are cumbersome and costly. a growing number of patents are granted. with which the patent protection would effectively have been extended for 4 to 5 years. Therefore. but this creates situations in which companies are forced to litigate. so there is a lot of flexibility. including patentability of secondary inventions. A well-known case is cimetidine. AZT was a known product but a new patent was granted for use in case of HIV infection. SK-F obtained a patent for cimetidine and 4 or 5 years later applied for and obtained a patent on a polymorph. The German law. Most countries have provisions for compulsory licenses. compulsory licenses can be issued to remedy anti-competitive practices and for use by the Federal Government. is a very crucial issue. Due to such flexible application of patentability criteria. Finally. it is important to realize that it is not relevant whether the secondary patents are strong. It is important for countries to consider whether they will grant patent protection for such new uses.. to remedy anti-competitive practices or to protect the environment.10 Compulsory License A compulsory license is an authorization which is granted by the government without the permission of the patent holder. these can include public health reasons. the system should not be misused by granting patents for polymorphs. either under their patent law or. the originator company asks for a new patent for a different polymorph. defining the scope of patentability. In this particular example. Polymorphs: Polymorphs are different crystals of the same molecule. which leads to over-protection. so it is under a fiction of novelty that such patents are granted. Grounds Countries have specified many different grounds for issuing compulsory licenses. epidemics. e. both these grounds are used extensively for issuing such licenses. Sometimes. There was no real novelty. it is the same thing. which limit the scope for generic introduction and competition.g.for granting compulsory licenses.• • Uses: Some countries are also issuing patents for new uses of a known product. for example. formulations. big companies can use them aggressively against small. a broad description that can be used in many situations. countries can only use those grounds which are allowed by their national legislation. public non-commercial use. the second indication for pharmaceuticals. this may lead to an extension of the patent protection. even if they are weak. The development of appropriate national legislation is therefore crucial. through anti-trust legislation. Under the TRIPs Agreement. countries have the right to issue such licenses. While the Agreement does not limit the grounds -or reasons.
such as the requirement to first try to obtain a voluntary license. would not be able to use CL provisions effectively. TRIPs does not require countries to provide for the right of injunction. This is practiced in the US. But regardless of whether or not they are used frequently. so some export is still possible. it could be argued that the patent holder lost nothing. this is important for the actual implementation of a CL for public use. Under US national law. but this does not have to be a judicial review. on reasonable terms. efforts should first be made to obtain a license from the patent holder (a so-called voluntary license). • In case of public non-commercial use or government use. They give a sign to the patent owner that in the case of abuse of rights and/or non-availability of the product. therefore it is a Page | 113 . TRIPs only requires that the review is independent. provisions for compulsory licensing are needed. e. as for instance in case of a formulation patent. compensation is based on what the patent holder has lost. What is considered ‘reasonable’ depends on national (case) law. because they will encourage the patent owner to behave correctly. UK. • A compulsory license shall be predominantly for the supply of the domestic market. Also. have granted a large number of compulsory licenses. TRIPs therefore specifies the conditions that need to be applied when countries want to grant a compulsory license. "predominantly" is not exclusively. one of the most important aspects of a compulsory license system is its impact on the actual behavior of the patent owner. The conditions mentioned in TRIPs merit careful reading. Again. a third party could be allowed to use the invention. An important condition is that each case shall be considered individually. Under US law. It seems advisable for developing countries to provide for an administrative review only. 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. the royalty rate can be lower. otherwise. in general. which frequently issues compulsory licenses to remedy such practices. many of the conditions do not apply. the US Government cannot be sued for infringement of a patent. countries with small markets.A compulsory license limits the rights of the patent holder. the fact that few such licenses have been granted is used as an argument against the compulsory license system. • A decision to issue a CL must be subject to review. A CL therefore would hardly interfere with practices of differential or tiered pricing.g. few compulsory licenses have been issued. However. So if the contribution of a patent is minor. such as the US. so countries may opt for an administrative review. but does not take those rights away. it can only be sued about the amount of compensation paid. Also. • If a CL is issued to remedy anticompetitive practices. While it is true that in some countries. In case of a CL to provide drugs to a population who would otherwise not be able to afford those drugs. only for payment of compensation. this prevents malpractice and misuse of the monopoly rights. where local production is not viable. In fact. which is less burdensome and much faster. Public interest groups advocate that export to a market where a CL has been issued. the restriction on export no longer applies. to prevent patent holders from blocking the use of a CL by initiating time-consuming court procedures. Main function At times. the same applies to contractors acting on behalf of the US Government. other countries. this is important for the US. should be allowed.
4. parallel import of medicines is forbidden by regulations related to Food and Drug Control. A market where price discrimination is common. however. which permits the use of patented products by generic producers for the purposes Page | 114 . and thereby enhance competition. These exceptions however can be challenged and subsequently reviewed by the WTO. in the US. However. Canada. companies would be tempted to react by harmonizing their prices across borders. This is speculation. without authorization of the patent holder. this will reduce the delay for generic products to enter the market after the patent has expired. obviously. 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. in order to collect the necessary data for submission to the registration authorities. where this product has been marketed by the patent holder or in another legitimate manner. In the context of pharmaceuticals. it is important to carefully state the grounds and conditions for its use in the national legislation. 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.11 Parallel import Parallel importation refers to the importation. However the benefits are quite clear and there is a strong economic rationale for developing countries to adopt parallel import. However. thereby leaving countries free to determine their own policy in this respect. instead of putting pressure on developing countries in this respect. A Bolar provision allows interested (generic) manufacturers to start producing test batches of a product before the patent expires. revenues would come under pressure if ‘high-price markets’ such as the US would start parallel importation of cheaper drugs from. 4. To the extend that developing countries do indeed benefit from preferential prices. TRIPs explicitly states that it does not address the issue of parallel import. currently there is considerable support in the US for allowing parallel import of drugs from Canada).12 Exceptions to the exclusive rights TRIPs Article 30 allows for limited exceptions to the rights conferred to the patent holder. The multinational pharmaceutical industry argues that parallel import will prevent preferential prices for developing countries. will fundamentally change if parallel import is allowed. It is worth noting that the US legislation on IPR allows parallel importation. these should include its use for reasons related to public health. in fact. into a country of a product from a third country. Parallel import is allowed under the TRIPs Agreement. The drug companies’ worries are understandable since. such as the pharmaceutical market where prices for the same product can vary considerably between countries.necessary element in any IPR law. The solution however seems to be to prevent parallel importation in industrialized countries. to ensure the system can be used effectively. the most common exception to the exclusive rights of the patent holder is often referred to as the 'Bolar provision'. a WTO Panel ruled that a provision in Canadian law. The text of the TRIPs Agreement does not specifically address this issue. in a recent WTO dispute. this could be true. for instance. If this were to happen (in fact.
However. ¶ Why is antitrust enforcement important to the emergence of generic drugs? Today consumers can purchase low-cost generic forms of Remeron. In some cases the firms used Page | 115 . Relafen. citizen petitions.2 The importance of generic competition It seems indisputable that competition from generic pharmaceutical manufacturers benefits every consumer. That is particularly true in generic pharmaceutical markets.13.S. Generic drugs not only result in cost savings. According to a CBO study in 1994 (when the rate of generic substitution was far lower).of seeking regulatory approval from the authorities for the marketing of their generic version soon after the patent expires. 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. Augmentin. is threatened by exclusionary conduct by dominant brand name firms. Taxol. Generic drugs typically sell for approximately 70% less than their branded alternatives. provided certain conditions are met. consumers in the U. 4. This section begins with a discussion of the importance of generic pharmaceuticals and preventing anticompetitive conduct that hampers generic entry. Generic drugs are as safe and efficacious as branded drugs. is allowed under TRIPs. and Platinol. the Panel effectively has decided that a 'Bolar type' provision is ‘TRIPs compliant'.13. but also enable more consumers to purchase safe essential drugs needed for their health and well being at the lowest price. The article then addresses three types of ongoing anticompetitive conduct by dominant brand name firms: product line extensions.13 Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition 4. Generic pharmaceuticals are instrumental to health care in the United States and offer low cost and high quality to millions of consumers. however. Lupron. 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. Paxil. Buspar. 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. For each of these drugs the branded company – a dominant firm – attempted to extend its patent monopoly through some form of alleged exclusionary conduct. saved $8-10 billion annually because of generic drugs. Generic drugs account for over 56% of all prescriptions but only account for 13% of pharmaceutical expenditures. 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. With this decision. . 4. Coumadin.1 Introduction This Antitrust law and antitrust enforcement play a crucial role in assuring that consumers receive the benefits of a competitive marketplace. The promise of generic drugs. In some respects generic pharmaceuticals are the model of a competitive market: there are numerous competitors and relatively limited barriers to entry. and authorized generics.
the courts and enforcers must be increasingly skeptical of claims that such efforts were based on the merits. In a situation where variable costs are small.questionable filings in the FDA orange book. 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. 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. • Distribution: Forms of distribution are complex Pharmaceuticals are distributed through numerous intermediaries. these drugs accounted for sales of over $10 billion a year before this anticompetitive conduct ceased. state attorneys general. No system of regulation is perfect. the insurance company. Page | 116 . but by finding loopholes to delay competition. In still other cases they found different ways to delay generic entry. competition. Consumers save billions of dollars annually because of these enforcement efforts. In a setting where serial litigation or regulatory filings may be a particularly fruitful tactic to delay competition. industry and innovation. 4. • Costs: Pharmaceuticals typically have high fixed costs and very low incremental costs.13. but assessing the identity of the buyer is quite complex in the pharmaceutical context. Is the ultimate buyer the consumer. Unfortunately. • Cost-Based Testing: The cost relationship means that cost-based tests for predatory conduct may often be misleading.3 Why pharmaceuticals are different • Regulation: Pharmaceuticals are heavily regulated. the Pharmacy Benefit Manager. using a cost-based test may not be instructive in attempting to identify exclusionary conduct. Not all distribution mechanisms are equally important and exclusion from some preferred mechanisms may pose especially significant concerns. antitrust litigation played a significant role in ending this anticompetitive conduct. 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. This regulation has a significant impact on entry and in turn. The costs of manufacturing and marketing drugs are modest compared to the cost of development. In other cases they engaged in sham litigation. Thanks to the efforts of the Federal Trade Commission. In other cases they engaged in inequitable conduct before the Patent and Trademark Office. • Buyer Identity: Who is the buyer? Antitrust seeks to protect the interests of buyers and consumers. the pharmaceutical industry offers many opportunities for dominant firms to manipulate a highly complex regulatory system to secure monopoly profits. and regulation almost always offers the opportunity for competitive mischief. It also may be important in determining which parties have standing to bring antitrust claims. In total. Policing exclusionary conduct by dominant firms in the pharmaceutical industry could not be a greater priority. not through superior foresight. and private antitrust attorneys representing buyers of these drugs.
would be removed from the market. sometimes a product line extension has anticompetitive effects. The expectation is that once a patent has elapsed. The FTC recognized this potential for anticompetitive conduct in its investigation of the merger of Cima and Cephalon. especially when it is coupled with additional conduct to create barriers to generic entry. This period of exclusivity provides an important incentive for brand name firms to invent new drugs or improvements to existing drugs. In that case. generic entry will occur. depriving consumers of the full benefits of generic competition. and the method of interaction. Product line extensions are common in almost every industry. as we can tell from the numerous products advertised as “new and improved. Moreover. This section focuses on three varieties of conduct by dominant firms that may raise competitive concerns: product line extensions. Cima was developing a similar drug.Safe Harbors: The complexity of distribution suggests that antitrust courts and enforcers should be extremely careful about using safe harbors in pharmaceutical distribution cases.” Without the Cephalon drug in the market. however. 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. advances can often improve the mechanism of delivery.” On the other hand. and authorized generics. However. generic entry would be deterred. 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. As the FTC observed. 4. whose patent was about to expire. When dominant firms face the threat of new entry they often turn to strategic conduct to hold rivals at bay.4 New forms of anticompetitive conduct by dominants Thanks to the effective enforcement of antitrust laws. often in exclusive dealing cases the courts will focus on the significance of a specific form of distribution in the entire market. dosage forms. For example. the patent-holding firm faces the loss of a significant revenue stream. Cephalon manufactured a drug to help alleviate pain after cancer treatments. brand name drug manufacturers increasingly have turned to underhanded means to delay competition.13. In order to avoid these potential anticompetitive Page | 117 • . As described below. many forms of exclusionary conduct by dominant branded pharmaceutical manufacturers have been stopped. there are several types of exclusionary conduct that the patent-holding firm may engage in to delay or dampen the effect of generic entry. Toward the end of a patent's life.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. “Cephalon’s ownership of both products will allow it to undermine generic entry by shifting patients [to the Cima product] prior to generic launch. 4. Facing the inevitable decrease in market share (and consequent decline in sales revenue) that follows the loss of patent protection and introduction of generics.4. or a generic firm has developed a non-infringing version of the drug (or the patent is declared invalid).13. But new forms are arising. questionable citizen petitions.
Instead. an inquiry into the effect of Defendants' formulation changes. Defendants allegedly prevented such a choice by removing the old formulations from the market while introducing new formulations. v. ‘The error costs of punishing technological change are rather high and courts should not condemn a product change. however. Abbott did not just change their product. suggesting that the tablet version did not have to be taken with food.” The defendants fundamentally claimed that any product improvement would be per se legal. the court stated that the rule of reason balancing approach of the D. among other improvements. and that the only purpose of the innovation was to eliminate the complementary product of a rival. The court began by observing the difficult task of analyzing a product innovation claim: Because. The removal of the product from the NDDF and the withdrawal of the product Page | 118 . If consumers are free to choose among products. consumers were not presented with a choice between fenofibrate formulations. In addition. But here. Impax. Rather than adopting the rule of per se legality suggested by the defendants. according to Plaintiffs. persuades me that the rule of reason approach should be applied here as well. and several groups of buyers alleging that Abbott’s changes to the drug Tricor violated Section 1 and 2 of the Sherman Act.effects.C. speaking generally. Further patent litigation ensued. 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. as described in Plaintiffs' allegations. Abbott changed the code for Tricor capsules in the National Drug Data File (“NDDF”) to “obsolete. Circuit in US v. 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. involving antitrust claims by Teva. Abbott stopped selling Tricor capsules and also bought back all the existing supplies of those capsules from pharmacies. After the FDA approved the tablet formulation. The court.” Changing the code to “obsolete” removed the Tricor capsule drug formulation from the NDDF. Teva. the FTC required Cephalon to enter into a licensing agreement to facilitate generic entry. Impax. Then Abbott changed the product from a capsule to a tablet version. unless they are relatively confident that the conduct in question is anticompetitive. and certain buyers of the drugs brought an antitrust suit challenging Abbott’s conduct. Tricor is a drug used to lower cholesterol with sales nearing one billion dollars. Microsoft was appropriate: The nature of the pharmaceutical drug market. therefore. According to their allegations. following the rule of reason approach. rejected the claim. The defendants filed a motion to dismiss that was rejected. innovation inflicts a natural and lawful harm on competitors. and ‘antitrust should not intervene when an invention pleases customers. is justified. Hence. then the success of a new product in the marketplace reflects consumer choice. and again Impax and Teva prevailed. they prevailed on all their patent claims and were poised to enter the market in 2003. challenging Abbott’s patents over the capsule version of Tricor. a court faces a difficult task when trying to distinguish harm that results from anticompetitive conduct from harm that results from innovative competition. preventing pharmacies from filling Tricor prescriptions with a generic capsule formulation. Teva.' 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. Teva and Impax battled for several years.
By removing the old products from the market and changing the NDDF code. • AstraZeneca marketed Nexium by saying it was superior to Prilosec. The court disagreed: a monopolist is not free to take certain actions that a company in a competitive (or even oligopolistic) market may take. 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. • While creating and marketing Nexium. The defendants argued that this conduct was not an antitrust violation because a monopolist does not have any duty to assist its competitors. In Canada. it stopped promoting about the drug’s effectiveness. but to obtain FDA approval. The specific alleged anticompetitive conduct included the following: • Up to 18 months before AstraZeneca was going to lose exclusivity for Prilosec. the company also effectively withdrew Prilosec from the market. when the patent for Losec expired. sought to produce the drug on which the patent had expired. AstraZeneca applied for two new patents with respect to the product. No natural Page | 119 . but did not incorporate this new technology into any of its products. Contrary to Defendants' assertion. that decision is on appeal to the Court of First Instance.” Anticompetitive conduct through regulatory abuse can be especially pernicious. In reality. Late last year AstraZeneca was found to have violated the Canadian Competition Act. The cost to the party engaging in such abuse typically is minimal. we can expect other competitors to arise and possibly displace them. it was essentially the same product. AstraZeneca was fined 60 million Euro for similar conduct. Defendants allegedly suppressed competition by blocking the introduction of Generic fenofibrate.13. while the anticompetitive effects resulting from such abuse often are significant and durable. causing managed care organizations to not cover the cost of its generic. One of the most effective ways for parties to acquire or maintain market power is through the abuse of government processes. The suit alleged that the “expensive. 4. Apotex. AstraZeneca challenged its entry because Apotex failed to secure approval on the two new patents.were critical. When a firm acquires a dominant position through competition in the marketplace.” 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. unnecessary and fraudulent conversion was undertaken solely in order to thwart and impede generic competition and thereby maintain defendants’ dominant position. because there is no market constraint on a monopolist's behavior…. 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. It also withdrew the additional product from the market. since these actions prevented generic substitution. In the EU. it assured the FDA that it would not say that Nexium was better.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. Plaintiffs allege harm to competition rather than simply harm to Teva and Impax.4.
Almost 30 years ago. where litigation and regulatory approval are necessary for market entry. One example involves the drug Coumadin. and similar cases brought by private plaintiffs. a brand company will file a frivolous petition on the eve of FDA approval of a generic equivalent. Increasingly. Often these public challenges are genuine and legitimate.” The FDA. Judge Robert H. In the mid. What the brand company can do is block competition for several months beyond the life of the 20-year patent. Consumers suffer as lower cost alternatives are kept off the market. it could take several months for the FDA to respond to a petition. The citizen petition approval process is time-consuming. petitioning the FDA. the U. scientific. which is when the brand company’s patent expires. like other regulatory agencies. There are no requirements for proof of the accusations made in a petition.competitive force. presents an increasingly dangerous threat to competition. some of the most prominent government enforcement actions against dominant firms have involved all abuse of the regulatory process. These cases. Inc. which is used by millions of Americans for blood-clotting disorders. This despite the fact that the FDA may have already granted a tentative approval.S. None of the petitions succeeded. Despite tentative approval of the generic drug. including administrative and judicial processes. no requirements for certifications to the accuracy of the information. or legal issues regarding a product anytime before its market entry. As one generic drug executive has observed in Senate testimony: Frequently. (“USP”). Not surprisingly. such as the FTC cases involving Buspar and Tiazac and the State Attorney General case involving Remeron. Bork observed that “predation by abuse of governmental procedures. One example of this regulatory abuse is sham orange book filings. The qualified generic is held in administrative limbo. The purpose of these efforts was to delay generic entry.” No statement could be more on point for anticompetitive conduct in the pharmaceutical industry and the practice of socalled “citizen petitions. state legislators and state regulatory bodies and engaging in an alleged misleading advertising campaign. during which time approval of the generic drug is held in limbo. These practices ceased after antitrust litigation brought by the generic manufacturer and groups of buyers. citizen petitions are often submitted on the eve of the completion of the FDA review. Coumadin's manufacturer engaged on a multifaceted course of conduct to raise questions about the safety and bioequivalence of the generic drug. penalties for Page | 120 . however. thereby extending its monopoly on the market. allows the public to petition the agency using ‘citizen petitions.” Citizen petitions can provide an opportunity for individuals to express their concerns about safety. Pharmacopeia Convention. These petitions are often based on information available well before the petitions are submitted.1990s. The brand is not required to submit petitions with merit. meaning that FDA already determined the generic product is safe and effective. 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. In order to slow the approval process. That is especially the case in the pharmaceutical industry. The FDA citizen petition process provides significant opportunities for deception. faced with the anticipated threat of generic entry. 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. can displace dominance acquired through abuse of the regulatory process.
4.inaccurate or improper filings. the brand company gained an estimated $7 million. The reality is that a trivial portion of the petitions are accepted by the FDA and found to require further action. Multiple citizen petitions can be filed during the review process of a single generic drug. One must wonder why any branded firm enters with a generic version of a high value product. Not surprisingly. for each day that the petition delayed generic drug entry. the FDA has ruled on 21. Of these 45 petitions. 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. in an effort to extend the review process as long as possible. Since the Medicare Modernization Act of 2003. According to the FDA. 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.13. FDA Chief Counsel Sheldon Bradshaw has acknowledged that he had seen “several examples” of citizen petitions seemingly designed to delay approval of generic drugs. there were about 170 citizen petitions pending compared to 90 in 1999. but on average they caused delays of an average of 10 months.3 Authorized generics Another practice that may raise competitive concerns is the creation of so-called “authorized generics. In other cases it has entered into arrangements with traditional generic firms to enter with a quasi-generic version of the drug.” Perhaps the most critical factor in evaluating this practice is the impact of the petitions. or 95%. it is rare that petitions present new issues that the FDA has not already considered. Although the doctrine protects a wide variety of legitimate petitioning. 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. Defenders of the citizen petition process would suggest that these petitions are immune (or per se legal) under the Noerr. In some cases the innovator firm has entered with its own version of a quasi-generic. None of these last minute petitions were approved. How is it in the economic interest of the branded firm to genericize a market? It Page | 121 . Some petitions contain little or no evidence and rely on obsolete. and there are no limits on how many petitions can be filed. we do not see Apple coming up with lower cost knock offs of an iPod. Eleven of the 21 petitions were “last minute petitions” filed within four months of the generic drug’s scheduled entry into the market.4. certain types of sham petitioning are not immune. Obviously this is an attractive mechanism to delay generic entry. The FTC’s recent report on the Noerr-Pennington doctrine properly identifies limits to that immunity. 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. In one case.” in which a branded company introduces a generic version of its own patented drug a short time before patent expiration. there has been a substantial increase in citizen petitions. of which they denied 20. or erroneous information. The FDA has cited incidents in which citizen petitions have been used for improper purposes. irrelevant. 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. Dale Conner. As of July 2006. the Director of the Division of Bioequivalence at the FDA Office of Generic Drugs. Filers even submit the same petitions again after they have already been denied.Pennington doctrine. Both courts and antitrust enforcers should recognize the pernicious effects of petitioning on generic entry. After all.
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. ¶ The purpose of this strategy may be to diminish the incentive for generic entry. Could such a strategy be successful? There is an interesting historical example. Ultimately this was challenged by the Justice Department in a successful antitrust case against the cigarette industry. generic firms might just decide not to enter these markets. In turn. time-consuming and costly. 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. consumers are deprived of the benefits of that generic competition. the successful challenger is the sole generic firm. The regulatory system effectively requires patent litigation in order to enter the market and this litigation is a multi-million dollar proposition. 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. it reaps substantial profits. Once these manufacturers were driven out. the generic firms may decide not to challenge certain patents if the opportunity for success and the potential rewards do not seem sufficiently significant. such as diminished generic competition. ¶ One can see the potential effect of an authorized generic strategy. “For some blockbuster drugs. Elimination or the reduction of the rewards from the 180-day exclusivity period. the HatchWaxman Act created a system to reward generics for creating non-infringing versions of a drug or successfully challenging patents.can only make sense if the branded firm sees some long term benefit. the cigarette manufacturers eliminated black label cigarettes and significantly increased branded prices. ¶Understandably. numerous other generic firms enter and quickly force prices down to marginal cost. As FTC Commissioner Jon Leibowitz has observed. the branded manufacturers came out with their own black label cigarettes. Another Page | 122 . In response to the emergence of these black label cigarettes. As the value of the exclusivity decreases. During that 180-day period of exclusivity. many firms might forego their efforts to challenge patents. This exclusivity is essential to the balance of the Hatch-Waxman Act. Just as patent law created a system of rewards to provide incentives to innovate.” What are the potential antitrust concerns raised via an authorized generic strategy? Obviously. After World War II. the branded firms are not interested in aggressive competition that may threaten to cannibalize their sales. cigarette manufacturers faced the increasing threat of black label or generic cigarettes. as such. With the authorized generic coming to market prior to the entry of the generic firm that has marketing exclusivity. generic companies will lose part of their incentives to enter markets by challenging invalid patents or developing non-infringing versions of the drug. the issue poses a difficult and challenging antitrust issue. Is the reduction of these generic incentives sufficiently significant to have an anticompetitive effect? Perhaps so. Inventing noninfringing drugs is risky. the value of that exclusivity may decrease substantially. Once the exclusivity period expires. They priced these black label cigarettes in a predatory fashion and eventually drove the independent private label manufacturers out of the 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. In other cases.
may forestall competition. but it may well diminish competition in the long term by signaling to generic manufacturers not to attempt to enter the market.4. ¶As a recent economic study sponsored by the Generic Pharmaceutical Association found: When authorized generics enter during the exclusivity period. If the authorized generic captures half the sales in the generic market. brand-name manufacturers could effectively raise the barriers to entry. but there is more to do. the patent holder actually controls the conditions of entry. by diminishing the incentives for generic firms to challenge their patents. are consumers. who will end up paying monopoly prices longer than necessary. 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. I suggest the following as an enforcement agenda: • The FTC should investigate a product line extension case. The Commission demonstrated this ability to grapple with complex technical issues in its recent Rambus decision. The generic challenger knows that even if it is successful. This could easily result in delays of several months or even longer in the arrival of generic competition.4 Conclusion Antitrust plays a vital role in maintaining rivalry as the lodestar of the marketplace. Competition is critically important. 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. Finally. The FTC. The incentive to aggressively litigate against a potentially invalid patent or invent around the patent will be dampened severely. of course. but rather be the first to enter into an alliance with the patent holder. The competitive issues raised by product line extensions are addressed above. The Commission’s recent enforcement action against Unocal for sham and deceptive conduct before state regulators has saved consumers over $500 million annually. 4. Many of the factors identified earlier. 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. Citizen petitions may be a particularly pernicious form of regulatory abuse. • The FTC should investigate a citizen petition case. the FTC is uniquely suited to handle the issues surrounding the allegations involving sham petitioning. The Commission should use that litigation expertise to Page | 123 . the reward to the generic company that successfully challenged the patents or discovered a noninfringing product will be reduced by much more than half. and private antitrust lawyers have played an important role in protecting pharmaceutical markets from artificial barriers to competition.13. then generic companies will respond by investing less in those areas. The goal no longer will be to be the first to successfully challenge a patent. state attorneys general. If the incentive to challenge patents and develop non-infringing products is severely reduced. This type of strategic conduct will not immediately foreclose competition. 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. however. Because of the Commission’s expertise in the Noerr-Pennington doctrine from both the FTC study and its enforcement action against Unocal. Thus. This means that there will inevitably be fewer challenges even to patents which appear to be relatively weak. this statutory incentive for generic companies to challenge patents and to develop non-infringing products is severely compromised.
reduced the duration of patents to 7 years from the date of filing or 5 years from the date of sealing whichever is lower.• • address sham and deceptive petitioning in the pharmaceutical industry where there may be similar competitive harm. A brief discussion of these policies may be in order. Through the decades of 1970s and 1980s. 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. there are numerous economic factors affecting the pharmaceutical industry which would make such broad standards harmful to effective antitrust enforcement. however. especially the TRIPS agreement establishing a new IPR environment. the industry is again at a watershed. trying to cope with the challenges of globalisation and reforms. including the Drug Price Control Orders (DPCO) 1970 and 1979. only new substances manufactured in India were entitled to patent protection). But right from its origin through the decades of the 1950s and 1960s. The decade of the 1970s has been of great importance to the IPR. excluded all imported substances from the domain of patent protection (i. 1970 Patent Act.e. 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. DPCO 1979 expanded the coverage of drug price Page | 124 . With the introduction of the Patent Act 1970. 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. In fact the decade of 1970s witnessed the passage of several government directives directly shaping the growth path of this sector.14 IPR in the Indian context The origins of the pharmaceutical industry in India can be traced back to the colonial (pre-independence) era. It is going through a turbulent phase of adjustment driven by the emerging international economic order of the WTO. 4. At the present juncture. Process revolution in Indian pharmaceuticals post 1970 1970 marked the beginning of a new era for the pharmaceutical industry in India. DPCO 1970 was the first concerted and rational effort to check the ever rising drug prices in India. Finally. and placed the burden of proof on the plaintiff in case of infringement. 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. New Drug Policy 1978 and of course. especially a weak patent regime. by contrast granted only process patent for chemical substances including pharmaceuticals. the IPR reached new heights of process capabilities to “knock off” any new drug with a noninfringing process and market them at low prices. which witnessed a “process revolution” through concerted effort at acquisition of technological capability fostered by a favourable policy environment. As suggested above. The FTC should participate as amici curiae in pharmaceutical antitrust cases in the district courts to clarify key legal principles. the Patent Act 1970. the industry remained largely dominated by foreign firms and drug prices were among the highest in the world. Foreign Exchange Regulation Act (FERA) of 1973.
during the decades of 1970s and 1980s respectively. solvent conditions. stirring methods. self sufficiency in drug production and easy and cheap availability of drugs. In case of the former. the bulk drug industry grew at a phenomenally high rate of 21 and 11% p. the excipients used and the chemical process of conversion from the active molecular compound to the final bulk drug. there has been widespread reverse engineering for non-infringing processes.. all of which have to be simultaneously optimised in order to arrive at the optimum process specification. the use of such processes infringes upon the intellectual property rights of the innovator of the original process. Indeed. which essentially implies decoding an original process for producing a bulk drug. It is possible to decode all of these parametric specifications of a process through reverse engineering. the formulation industry also registered impressive growth rates of 13 and 10% p.. with the exception of “Core” sectors (including pharmaceuticals). bringing about 80% of the Indian pharmaceutical industry (in value terms) under price regulation. respectively during the same periods. the industry acquired substantial technological capability of process development through reverse engineering. 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. A 40% ceiling was imposed on foreign equity share. As a result. A chemical process incorporates a complex set of parameters. 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). Against the backdrop of this policy environment. As a result. Non-infringing processes are relevant only in case of patented drugs. continued in the post 1970s. The impetus largely came from the massive expansion of Page | 125 . This is not to suggest that infringing process development (simple imitation) did not take place. time. 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. simple product development in conventional dosage forms which had already started in the post independence era. temperature.g. 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. This phenomenon has been often been referred to as the process revolution in the Indian pharmaceutical sector. Along with process revolution. Hence the scope of such activities is limited to off-patent drugs only. needless to mention. a reverse engineered process exactly matches the specifications and design of the original process and therefore.a. 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. which may be free from product patents but continue to enjoy process patent protection. The price fixing rules were made more rigid and stringent. the pharmaceutical industry in India embarked on a new trajectory of technological learning based on reverse engineering.control. e. 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. This involves a detailed understanding of the chemical properties of the active molecule.a. With the introduction of the Patent Act of 1970. use of various chemical and physical substances with different levels of purity etc. One can make a distinction between two types of reverse engineering activities: infringing and non-infringing processes. both infringing processes for off-patented molecules and noninfringing processes for patented molecules.
perhaps with a time lag marginally exceeding the demand lag. rationalise and eventually eliminate all forms of trade restrictions. 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. As an outcome of the policy framework. but RBI retained the monitoring authority of the dividend payment. While the policy environment favoured small producers. and technical know-how was deregulated. export import licenses. The new world order post-1990: India’s reforms process In tune with a newly emerging international economic order. But most drugs were now available in India at affordable prices. FEMA allows the pharmaceutical MNCs to Page | 126 . The idea is to pave the way for liberalised and market driven international flows of goods. This implied a wide variation in the quality and price of a drug in the market and multiplicity of formulations. lack of adequate quality regulations and control mechanisms often resulted in the supply of sub-optimal and ineffective drugs. services. MNCs became reluctant to launch their new drugs in India. the quality variations notwithstanding. 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. Policies towards foreign investment and foreign technologies have been relaxed. The policy environment facilitated free entry of a large number of producers of both bulk and formulation. Examples are numerous: Ranitidine (Glaxo) and Amlodipine (Pfizer) are two of the glaring examples of this phenomenon. Product regulations and standards. Indeed there has been a noticeable difference in the parameters of acceptable drug quality in India compared to that of the developed world. India’s economic reforms process began in the late 1980s/1990.bulk drugs due to the process revolution and the policies to deter captive consumption of bulk. WTO has been the prime architect of the broad framework of this new global order. Indian firms introduced these new drugs in the market using noninfringing processes. But that did not deprive the Indian patients from the latest drug discoveries without much delay in launching. capital and technology in a multilateral framework. India’s reform process began with trade reforms which sought to reduce. Reduction and removal of subsidies have accompanied trade reforms in India. quantitative restrictions and other non-tariff barriers. tariffs. 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. The monitoring of payments for imported raw material. Apart from deviations from the quality norms. especially when it serves the interest of developed countries. Ironically. one also finds provisions for bilateral negotiations and unilateral actions built into the WTO framework. primarily geared towards free trade and removal of “policy distortions” in all dimensions of a country’s economic activity. however. Problems of spurious drugs and irrational combinations have been a natural outcome of this phenomenon. most of them in the small scale and unorganised sector. FERA 1973 was modified to Foreign Exchange Management Act (FEMA) 1999. 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.
Licensing requirements for all bulk drugs and formulations are abolished with a few noted exceptions. It is interesting to note the clear policy shift in the stated principle for controlling drug prices. Automatic approval can be granted for foreign technology agreements in high priority industries up to a lump sum payment of Rs. Restrictions on import of bulk are largely removed. subject to a maximum ceiling. It stresses the need to implement Good Manufacturing Practices (GMP) for all manufacturing units. However. food products and agrochemical from the date of application. This is in contrast with the requirement of the earlier patent regime. acknowledging the need to monitor and regulate quality and promote rational use of drugs. • Compulsory licenses will be given by the government only on the merit of each case. The Patent Act of 2005 has been direct fallout of the WTO agreements. In Patent Act of 1970 burden of proof was on the original innovator. downsizing of employment and closure of production facilities of many units including that of multinationals. we attempt to trace this adjustment process for the organised segment of the industry. • 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. The salient features of the forthcoming patent regime are summarised below. or if the royalty is less than 5% of domestic sales or 8% of exports. virtual elimination of MRTP regulations. As a result. But the strong product regime is “supposed” to encourage basic and frontier research in the industry. Only 40% of the total finished dosage forms remain under price control in 2001 compared to 8590% in 1979. Major thrust is placed on drug quality. the DPCO 1995 clearly states that the objective is to prevent monopoly in any market segment. the burden of proof will rest with the party that infringes. the patent holder will be given a hearing and an opportunity to present his case for intellectual protection. DPCO 1987 followed by DPCO 1995 appeared as major landmarks reinforcing the policy move towards liberalisation. divestment of public sector units and de-reservation and reduction of benefits of the small-scale sector. • For process patents. With the enactment of this law. Other elements of the structural adjustments programme followed by India include industrial reforms leading to abolition of industrial licensing. 1994 and 2003. As opposed to the earlier objective of making drugs available at affordable prices.hike their stakes in India up to 74%. the IPR is going through a turbulent phase of adjustments. The earlier policy to deter captive consumption of bulk is reversed. Among the specific policy initiatives towards the pharmaceutical sector.10 m. In the following section. 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. Challenges and adjustments post 1990: quality and R&D as the Twin Pillars The challenges Page | 127 . the new policy environment has posed major challenges to the sector which is evident from rising drug prices. • Product patents are allowed in all fields of technology with a uniform duration of 20 years in pharmaceuticals. and would be granted in case of national emergency. The overall philosophy of the new policy regime is well echoed in the Drug Policy Statements of 1986. Although the IPR has continued to expand both in terms of production and trade during the decade of the 1990s. Both of these policies aimed at progressive decontrol of drug prices. the policy framework encouraging process development through reverse engineering activities disappears.
the Indian industry (organised sector) is going through a major phase of restructuring and adjustments. We restrict our analysis to two of the major dimensions of the adjustment process. A related quality parameter affecting product purity is contamination during the production process. The second looks at the changing role of R&D and technology in this new era of globalisation and reforms.• The major challenges posed by the new policy regime of globalisation and reforms to the Indian pharmaceutical industry. The global pharmaceutical market is becoming increasingly competitive both with respect to price as well as quality. • Limits to growth through process development. the conventional corporate growth strategy. Detailed documentation of all the production stages along with the quality control operations constitutes an added Page | 128 . new drug discovery might reduce the life span of existing drugs. The first relates to the response of the Indian industry to a new paradigm of drug quality. but are merely replacing existing drugs with better therapeutic efficacy and lower side effects. quality implies therapeutic efficacy and safety. the WTO allows for imposition of product regulations and standards to create barriers to free flow of trade. This is being fully exploited by the developed countries to protect their large pharmaceutical markets from low cost imports from the developing world. Not only keeping minimum impurity is important. Reverse engineering on off-patent drugs can.With the introduction of the new patent regime. Let us analyse and capture some of these. With a move towards quality harmonisation. adopted by the IPR till now. especially those in the organised sector can be synthesised as follows. In fact a market of about US$50b of pharmaceutical products will come off-patent in the next few years. Even with trade liberalisation. Reverse engineering on patented drugs will come to complete halt. Limits to the generic market . A new paradigm of drug quality Drug quality is a complex multi-dimensional concept. based on noninfringing process development for patented molecules to introduce the latest drugs in the Indian market. continue to give them an edge in the generic market. This in turn implies a high rate of obsolescence in the generic pharmaceutical market. In this regard. The adjustments To cope with these serious challenges. 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. but also consistency in the specified impurity profile over all batches of production must be adhered to. A high quality drug must be effective and should not produce any toxicity or side effects.Given that new drugs will now become the exclusive monopoly of the innovating firm. of course. 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. 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. drug quality will act as a principal parameter of success even for Indian firms in years to come. bio-availability acts as an important parameter of drug quality. A second and most commonly stated parameter of quality pertains to the impurity profile and stability of chemical ingredients. will no longer be a viable option. Since most these new drugs are not “new” in the sense of having a pioneering therapeutic use. First and foremost. Therefore new norms of drug quality are being introduced worldwide which will further limit the scope of access to the world generic market.
dimension of quality specification as it creates institutional memory and makes the entire production process transparent to all concerned parties. This has resulted in divergence of the technical requirements for quality specification and control in different countries. Page | 129 . Indian players have thus contributed to outward shifts in the global frontiers of drug quality. Some Indian firms have already succeeded in developing superior methods. the quality of active pharmaceutical ingredients (API or bulk) becomes all important. Europe. which have been incorporated in the global quality standards like USP and European Pharmacopoeia (EP). But in the new era of globalisation. Indeed with the threat of ICH. quality has added a new dimension to their R&D thrust. the governments of the three largest pharmaceutical markets (United States. • Detailed documentation is becoming an important facet of production and quality control. 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. a fast moving technology frontier and a move towards international harmonisation of quality standards. • Finally. • High quality standards as per the multidimensional definition given above demand up-gradation of production and quality control technology. 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. drug quality in India was loosely defined and remained far below international standards. firms will have to explore the growing international market for generic drugs. In this new era. Entry into this highly competitive market calls for stringent quality requirements. not only US but the entire global market may be subjected to stricter quality norms. • For formulations. The intermediates and excipients of the production process must also be non-hazardous and environment-friendly. the United States market in particular. characterised by a strict IPR regime. 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. This is not to suggest that there were no high quality producers even during this period. and Japan) have jointly initiated a move towards harmonisation of drug quality through the International Conference on Harmonisation (ICH) from the late 1980s. compelling the globalised industry to replicate many test procedures including clinical trials in order to market new products in different countries. the Indian manufacturers have to pay intensive attention to the concept of drug quality. • The environmental dimensions of quality necessitate increased attention towards effluent treatment and proper waste management using modern methods and equipment. In a sense. 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. To overcome this problem. Firms are now trying to develop new improved analytical methods for quality specification and control. Prior to the 1990s. But quality parameters did not receive much attention by the industry and the regulatory authorities in general.
As far as India’s pharmaceutical industry is concerned. a twenty year term of market exclusivity for new treatments is not reasonable if we expect to make real progress in containing the disease. But ultimately. it requires complete overhauling of the plant setup to install sophisticated (often imported) machinery and equipment for production and quality control. 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. the path currently is followed by international standards for patent protection moves inevitably toward a clash between public health and intellectual property. This would solve the problem of excessive hike in prices and would render the drugs more accessible to the millions suffering. novel drug delivery systems (NDDS) of first and second generations (NDDS1. Collaboration with the MNCs on various fronts such as research and development. Given the rapid evolution of the AIDS crisis throughout the world. various options are possible in the WTO regime. such as antiretroviral (ARV) agents. with more than 35 million cases alone in India. In many cases. It might well be appropriate for a governing body to clearly define a list of essential medicines. 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).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. Stringent intellectual property protection for pharmaceuticals would only retard public health initiatives in the coming years. Page | 130 . that would be subject to somewhat more relaxed patent protection compared to other drugs. NDDS2 respectively) and analytical methods for quality • New drug discovery research (NDDR) 4. manufacturing and marketing will help Indian Pharmaceutical companies make profitable breakthroughs.Most of these elements of higher drug quality entail increased automation of the production process.
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. increase efficiency or gain market power. It was also a huge transatlantic merger which combined the two world-leading pharmaceutical powers. There are various factors that influence different industries through varying periods in time. such as General Electric. 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. The common merger at that time was within the same industry between several producers. The first wave that occurred in the United States from 1890 to 1905 was. After the initial merger between the two large companies a row of mergers followed during the 90s and continued into the 21st century.K. Many U. and rest of Europe in the late 1980s and early 1990s.1 Historical Background A merger or acquisition happens when two or more companies join together. Focus lied towards expanding in areas where the firm had greater competitive advantage and downsizing in areas where they had not. The second wave came as a build-up phase after World War I in the 1920s. The first mergers started in the later half of the 19th century. Mergers and acquisitions. After World War II. 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. It is often thought of as a rather new phenomenon. and DuPont. but it helped companies to merge and create strong corporations after the war and earlier market crash in the early 1900s. It has been spoken of a fourth and a fifth wave as well.S. and an almost monopolistic market. Contrast with earlier waves was that the market experienced an active market in corporate assets. often to share costs. This was a merger with a total deal value of $8. all created through enormous mergers with the aim to lead research and development in every field of the pharmaceutical industry into the future. often referred to as M&A’s.9 billion that set a trend for future massive mergers in the industry. companies engaged in simultaneous expansions and downsizing of their businesses in the 1980’s. It was not near as big of an impact as the first wave. it is not a new phenomenon. a so called horizontal consolidation which created large corporate giants. The value of M&A’s was almost five times larger than the previous peak in 1989. a merger for monopoly. United States and Europe.0 MERGERS AND ACQUISITIONS (M & A) 5. is also a tool for expanding ones business or get around different laws or regulations such as tax laws or monopoly regulations. Eastman Kodak. AstraZeneca and Novartis. but also as the start of mergers around the world. sometimes as a method to expand market share almost into having a monopolistic market power. cable television and satellite communication. A plausible explanation for the last wave is the introduction if new technologies like the internet. It is not definitely known why these mergers come in wave patterns and it is common that the mergers occur within different industry clusters.K. in small proportion and started a trend that later would explode in the U. the big consolidations of huge companies creating world leading multinational corporations. the third wave of mergers came in the 1960s and was all about increasing market share by growth. Page | 131 . This has been known as the first wave of takeovers in the United States. At this time the M&A phenomenon also entered the U.5. Nevertheless. to unite in the search for generic drugs that could help us fight the diseases around the world.
in current market conditions with the huge pressure on the industry to match historic performance. GlaxoWellcome/SmithKline Beecham.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. between 1998 and 2000. three times higher than any other sector. Speculation that mega-deals are back on the pharmaceutical M&A horizon is rife. It dominates other industries in both the size and pace of deal activity with dollar transactions of $72 billion. a closer look at the data shows that while M&A activity continues unabated. produced three largescale. Table 31: Big Pharma M & As Page | 132 . However. the majority of recent deals focused on portfolio rationalization and strategic repositioning rather than megamerger. The third wave. is there any doubt. Despite an active rumor mill. 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 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.Figure 29: The Three Waves Cumulative M&A Spend 5. and Pharmacia & Upjohn/Monsanto with big deal activity falling sharply at the end of 2000. it is clear that mergers and acquisitions should not be undertaken lightly. 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. And yet. high-dollar mergers: Pfizer/Warner-Lambert.
who the original companies were.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. In the following text we discuss the three M&A’s chosen. and become the great corporations of today. At this rate. increased their technological advancement. 5. we focus on three strategies to endure the impending scramble for survival. These are some of the biggest companies in the industry. They were all started for different reasons and in different periods over time and they all operate all over the world.5. In an industry characterized by fragmentation.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. and thanks to these consolidations they have increased in size.5 Facts on the Three Cases of Megamergers There are numerous pharmaceutical companies in the world. This level of consolidation gives it a position almost 5% ahead of its closest competitor. the Pfizer/Pharmacia deal will give the new entity an unprecedented pro forma market share of 11. and why the consolidations occurred. the Top Five could become more powerful than the existing Top Ten. GlaxoSmithKline. within the next two to three years. The companies have often merged or acquired other firms more than once. Page | 133 . despite the potential pitfalls and expense. increased their portfolios. Figure 30: 2001 Global Market Share 5.9%. To realize the strategic benefits and shareholder value these mergers set out to achieve. no CEO can afford to be left out of the market share race. because. who acquired whom or if they merged. two things seem certain mergers and acquisitions will continue and these transactions will never be straightforward. This following text handles three different major M&A’s within the pharmaceutical industry. and many of them have become large corporations through mergers or acquisitions.
8 billions. Warner-Lambert’s history goes back to the middle of the 19th century when William R. 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. Warner-Lambert came to grow through several acquisitions in the 60s and 70s. and through building new high-tech manufacturing plants to further improve their production and canalizing their drugs out through the world. Louis selling antiseptic drugs. Pfizer expanded to South America and Europe. It was during the Civil war fought in the late 1870s. Pfizer was founded by Charles Pfizer in 1849 in Williamsburg. In the early 50s. and a couple of years later partnered with Japanese Taito to reach the Far East. and invented the early form of tablet-coating to make pills easier to consume. After the largest merger in American history with a deal value of $88.1 Pfizer Pfizer is the largest pharmaceutical corporation today. office. Pfizer and Warner-Lambert became the world’s fastest growing major pharmaceutical company under the name Pfizer. factory and warehouse. Warner starts up his drug store in Philadelphia. The two companies merged in 1955 and formed Warner-Lambert Pharmaceutical Company. and has become that just because of the many M&A’s through the years. John Wheat Lambert opened up his store in St. and through World War II that Pfizer grew to become a well known company throughout the USA. especially in the last decade. At the same time.5. and was established all over USA with a larger product portfolio and large manufacturing plants. they have the largest market share in the world. and partnered with a couple of more smaller companies to reach success around the world. withholding only one single building containing research. Page | 134 .5. Through constant concentration on research and development. It was not until the 21st century that Pfizer decided to grow substantially by merging or acquiring already large corporations. USA.
1 billion in 2003. "Today we go forward as a single company.On April 16. forging one of the world's fastest-growing and most valuable companies. Our new company is the global leader in discovering. developing and delivering innovative medicines and health care solutions essential to improving global public health and addressing unmet medical needs. "On any given day. With a research and development budget of $7. we estimate that nearly 40 million people around the world are treated with a Pfizer medicine.2 Bristol-Myers Squibb Bristol-Myers was founded in the late 19th century by William Bristol and John Myers in Clinton. The company grew through smaller acquisitions and would come to hold a broad portfolio of medicines. providing more products to help more patients than any other pharmaceutical company has ever done before. the new Pfizer is now the world's leading research-based pharmaceutical company. 2003. among them the first disinfectant toothpaste.5. The development of simpler products. New York. Pfizer purchased Pharmacia for an estimated $60 billion. Squibb was founded a few decades earlier than Page | 135 ." said Pfizer Chairman and Chief Executive Officer Hank McKinnell." 5. brought Bristol-Myers into the international market just after 15 years.
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. blood pressure and AIDS.6 Recent M&A A review of the recent acquisitions and mergers indicates acceleration of the following trends: Page | 136 . 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. They are now able to improve research and widen their portfolio including several important medicines that helps treating epilepsy. through more minor acquisitions. Beecham had their research and top medicines in the allergy field.3 GlaxoSmithKline The Glaxo-SmithKline merger is the most valuable pharmaceutical merger through the eventful years in the industry 1989-2003. SmithKline’s history goes back a long time and is formed through several mergers during the years. and in 1995 Glaxo merges with Burroughs Wellcome. 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. 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.Bristol-Myers on the east coast of USA. Glaxo would develop and launch one of the world’s top-selling medicines. Glaxo's history goes back 100 years and starts off by producing dried milk in New Zealand and exporting it to London. DuPont was founded over two centuries ago and started in the 1950s to develop their remedies for people that had smaller complaints. 5. Glaxo Wellcome is formed.5. Through the merger a portfolio containing allergy medicines. Squibb had opened the largest penicillin production plant in the world and Squibb started to develop its business to South America and Europe. After the merger in 1989 the research produced medicines that are still fundaments for today’s research and was. Glaxo discovers skin disease treatments and asthma medicines. The medicine would be successful for the future of Glaxo. and grew further. In 1982. 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. Glaxo acquires Meyer Laboratories Inc. after an acquisition. skin care treatments and different important vaccines. 5. The pharmaceutical research started of in the early 1900s and by the time of 1944. The 1st of October 2001. In 1989. and find a way into the American market. and later on starts up its business in London. A few years later. in 1994 the third largest over-the-counter medicines company in the world. 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. In the 60s. and with a big portfolio and leading research in respiratory treatment they become an increasingly important and powerful corporation in the pharmaceutical industry. and especially through Beecham Group’s acquisition of SmithKline Beckman in 1989.
generics (J&J.3 2. Taisho Fournier Polypharma Sciele Cougar $ billion 68 47 41 19. 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 2009.8 7.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.7 6 5.3 1.8 5. Roche).65 1. RNAi and stem cells technology platform and R&D pipeline of oncology projects. With low R&D productivity and patent expiry of several blockbuster drugs.7 16.6 1. Sanofi Aventis.1 1. and Daiichi Sankyo) and diagnosis (Roche). FDA new drug approvals in 2008 were 21 in comparison to 18 in 2007.6 2.4 1.6 2.4 6.0 3.6 14.6 15.7 7.5 2. generic and consumer health segment of the healthcare industry and consolidation in the European and Japanese pharmaceutical industry.3 4.5 8.9 1.8 6.75 1. Novartis.7 3.3 2. big pharmaceutical companies were diversifying into medical devices (J&J.6 2. Pfizer bid of $68 billion for Wyeth and Page | 137 .1 1. Biotechnology companies were acquired for monoclonal antibodies.4 1.0 Consolidation in medical device.
merge or become a target. Abbott and Novartis with devices. Diversified companies like Roche. Companies like Amgen. Takeda taking over Millenium and Roche making a failed offer of 44 billion for the remaining shares of Genentech. There was a strong emphasis on biologics in R&D pipeline of big pharma companies and partnership and deals with biotechnology companies. need more time to gain market share. to acquire. Astra Zeneca absorbing MedImmune. If a company was acquired for its R&D pipeline and development projects or platform technology. 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 . the second top selling biologics and best selling monoclonal antibody in 2008. are priced higher with respect to synthetic products and patent expiry had little effect on sales. Its acquisition of Centocor and monoclonal antibody provided it with Remicade. 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. These bids have revived the M&A market. and biosimilar or follow on biologic. 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. in majority of cases. generics and diagnostic performed better as compared to pure pharmaceutical R&D driven company in 2008. the acquiring company failed to derive full benefits and most of the projects were later discontinued or terminated. Salagen. Roche potential takeover of Genentech will be a success. Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS). BMS and Lilly need to act fast to grow. 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. J&J.Werner Lambert). 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. Velcade (Takeda-Millenium) and Aloxi. Hexalen (Eisai-MGI Pharma) will be successful. 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. unlike generics. 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. insulin’s and interferon. erythropoietin. As biologic drugs move into multibillion dollar annual sales. vaccines. This was evident by Merck acquiring Serono. New product derived mergers based on potential blockbuster marketed cancer drugs like Erbitux (Lilly-ImClone). 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. Zocor and Fosamax.Merck 41 billion bid for Schering Plough show the push of traditional pharma into biologics. Mergers and acquisitions were successful if driven by a blockbuster marketed products like Lipitor (Pfizer.
Stiefel is a dermatology specialist selling both prescription and OTC products including medications for acne. is an oral treatment and has shown impressive efficacy and safety results in four Phase II studies. and the companies worked closely and harmoniously. and the large market it addresses. open-label. single-arm studies. Page | 139 . In July 2008. This acquisition. oral administration.9 billion this April. The main motivation behind the acquisition for Roche was access to Genentech’s pipeline of marketed biologic agents for the treatment of cancer. GlaxoSmithKline acquired privately held Stiefel Labs for $2.7 million it paid. also known as CB7630.and acquisitions involving various combinations of acquirer type and target players. Among the highest-priced acquisitions. Big Pharma Buying a Large Biotech Roche’s $46. 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. which resulted in $550 million in sales last year. Herceptin. with Genentech focusing on earlier-stage research and taking programs up to Phase II. and Rituxan. Abiraterone could become a successful drug commercially with the potential to reach multiblockbuster status given its safety profile. we expect to see a shift in R&D. however. In terms of merger integration. representing a 16% premium on the previous day’s close. Additionally.8 billion acquisition of Genentech represents the former’s desire to gain access to Genentech’s revenues and its pipeline of oncology biologics. then J&J will benefit a lot more than the $893. In May J&J announced that it was willing to pay $43 per share in cash. Roche made an offer of $89 per share to acquire the remaining 44% of Genentech’s outstanding shares. 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. In another example of a big pharma acquiring a smaller biotech.7 million purchase of Cougar Biotechnology was for access to a single drug: abiraterone acetate. Over the past decade Roche had acquired a 56% stake in Genentech. including multiblockbusters Avastin. a Phase III prostate cancer treatment. Big Pharma Taking Over a Small Biotech Johnson & Johnson’s (J&J) $893. Abiraterone. however. is not without risk for J&J: All the data we have seen thus far from the abiraterone trials are from uncontrolled. It grossed about $900 million in sales during 2008. 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. The deal eventually closed in March 2009 for $95 per share. five involve big pharma and highlight their need to boost their pipelines and/or commercial portfolios. efficacy results albeit impressive will have to surpass the hurdle of translating into a survival and PFS benefit. The main impetus behind GSK’s acquisition of Stiefel was its desire to increase its presence in the dermatology space.
Plus it has one of the most promising pipelines among U. Schering-Plough. and Prevnar. generating about 70% of its revenue outside the U. The result is a company with a combined $71 billion in sales. but we remind investors that in 2000. In terms of cost savings. and marketing organizations.S. has relatively few products that are close to patent expiration. they mark a heightened level of interest on big pharma’s part in the biotech space. so the marriage of the two makes a lot of sense. On the other hand. which treats allergies and asthma. big pharma companies. a hypertension drug. with Schering-Plough and Pfizer with Wyeth. Merck is losing patent protection for Cozaar. Wyeth has its own blockbusters including Enbrel for the treatment of rheumatoid arthritis. combining the most powerful pharma sales and marketing machine with one of the most highly regarded and most “biotechy” of the U. sales. as well as Singulair. Schering-Plough has a strong ex-U. these acquisitions total $109 billion. The $68 billion price tag is nothing to sneeze at. on the other hand. Pfizer is undoubtedly known for its ability to take products it has acquired or inlicensed and market them extremely effectively. since its products are already on the market. The synergies and cost savings could come from the streamlining and re-focusing of the R&D. The drug has brought in about a quarter of the company’s revenues every year. The impetus behind Pfizer’s desire to acquire Wyeth has a lot to do with the impending Lipitor patent expiration in 2011. which is co-developed with Amgen. and questions remain as to whether we’ll see the bigger biotechs implement a similar acquisition strategy.S. All told. a pediatric vaccine.This acquisition is viewed as being completely on the other end of the spectrum from the J&J/Cougar acquisition in many ways. The next big pharma merger came in early March when Merck acquired ScheringPlough for $41 billion. of course. large-cap pharmas. The consequences of such major consolidations will not be evident for a while.S. Big Pharma Acquiring a Big Pharma Peer This year has seen two such mergers: Merck & Co. at least at the high level.S. presence. Page | 140 . Additionally. Finally. having come in such close succession. the companies believe they’ll save approximately $4 billion annually. Pfizer paid $89 billion for Warner Lambert. There is limited clinical and commercial risk associated with the Stiefel takeover. 2009 opened with the $68 billion Pfizer/Wyeth marriage. 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. which partially comes through a 15% reduction of their combined workforce.
or corporate culture – diverts resources away from new investment. For example. the deal had to get the approval of the Federal Communications Commission (FCC). a threat to competition in the industry. AT&T and Sprint. There are huge amounts of profits that go back to R&D. With many corporations trying to develop medicines for the same kind of diseases. Correcting problems caused by incompatibility – whether of technology. the new management may cut too many operations or personnel. the deal will be executed. Mergers and acquisitions can face scrutiny from regulatory bodies. the companies hope to benefit from the following: Staff reductions. the target company can resort to one of the options: Accept the Terms of the Offer and go ahead with the deal. 5. improved market reach and industry visibility. Many common reasons for a typical merger are not necessarily the ones most significant for the M&A’s in the pharmaceutical industry. 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.8 Reasons for mergers and acquisitions There are many driving forces for a merger. equipment. at the very least. utilize each Page | 141 . many mergers or acquisitions sometimes do just the opposite and result in a net loss of value due to problems. After merging. They can have pure financial motives. once the target company agrees to the tender offer and regulatory requirements are completed. This dilutes the acquiring company’s share and intercepts its control of the company. The FCC would probably regard a merger of the two giants as the creation of a monopoly or. creating inefficiency. wanted to merge. Once the tender offer has been made. The success of a merger or acquisition depends on whether this synergy is achieved. acquiring new technology.7 Steps involved in Mergers and Acquisitions (M&A): A company starts with a tender offer to purchase another company. Overlapping subsidiaries or redundant staff may be allowed to continue. The completion of a merger does not necessarily offer advantages to the resulting organisation.5. stock-for-stock transaction or a combination of both. But. An M&A deal can be executed by means of a cash transaction. the success of a merger is measured by whether the value of the buyer is enhanced by the action. when the two biggest telecom companies in the US. it sometimes makes more sense to merge to gather your forces with another company to maximize the efficiency to develop new drugs. Regardless of their category or structure. To execute its defense. and conversely. market share motives or as a mean to diversify ones portfolio. The biggest expenditures within the pharmaceutical industry are the investments in research and development and the production costs of making the medicines. and these problems may be exacerbated by inadequate research or by concealment of losses or liabilities by one of the partners. 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. These problems are similar to those encountered during takeovers. losing expertise and affecting employee morale. economies of scale. benefit from economies of scale. the target company grants all shareholders – except the acquiring company – options to buy additional stock at a huge discount. Attempt to Negotiate for a high price. Finally. In other words.
the private equity markets have dried up.and mid-size biotech firms directly. Acquisitions of both small and midsize biotechs and weaker pharma rivals are expected. Two other types of acquisitions might benefit pharmaceutical companies in the coming years. they will likely look to other sources of innovation. smaller acquisitions instead of a single mega-acquisition. both in 2000. Acquisitions of generics would provide a cash cow and also allow pharma companies to capitalize on their strengths in distribution and marketing. pharma might benefit from acquisitions of generics manufacturers. big pharma will increasingly look to acquire small to midsize biotech companies with strong R&D pipelines. private equity activity was extremely strong because of access to inexpensive financing. big pharma has begun to buy small. While acquisitions will continue to be a part of pharma’s strategy. too. which serve the large-volume. First. Page | 142 . Private equity investors also started holding onto their investments longer. 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. However. In 2007. pharma is showing renewed interest in collaborating with universities for inspiration in basic research. providing the wherewithal to pluck deals based on lower market caps without highly leveraging the deals.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. At the same time.to medium-sized biotechs and then quickly sell them to big pharma for a profit. licensing activity between universities and pharma is likely to increase. There are several examples of horizontal M&A activities that have not resulted in more efficient organizations. Financing The market valuations of biotech and pharma companies are at historic lows. Pfizer’s acquisition of Warner Lambert and the Glaxo Wellcome and SmithKline Beecham’s merger. Consequently. However. For example. since early 2008. pharma companies have a strong balance sheets and solid revenue streams. R&D efficiency often suffers during a horizontal merger of two large pharma companies. low-margin market. despite the financial turmoil. this type of deal is likely to draw regulatory scrutiny. 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. As a result. as a result of the credit crisis. While activities such as commercialization and distribution are often scalable. big pharma realizes that more efficiency can often be extracted from multiple. Private equity firms were able to buy small. Second. 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. indicating that big pharma might be able to acquire companies at deep discounts. Both public and private equity markets have experienced a recent decline in access to capital. Instead. are examples of reduced operational efficiency resulting from integration of equals.
particularly a sales presence and a relationship with the FDA.1 billion. However. private medtech companies are looking at being acquired. going public. due to the current economic uncertainty. there were many examples of foreign pharma companies acquiring US rivals. By understanding the strengths and weaknesses of the acquisition target. If the dollar loses value relative to other currencies in coming months. For example. These aspects of a working environment may not seem significant. flexible work schedules and a relaxed dress code. recent data indicates that the pendulum has shifted towards big pharma having the upper hand in negotiations. are necessary prior to any acquisition to ensure that the acquired organization is a good fit. US companies will become more attractive for acquisition. 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. Acquisitions and Alliances: Why they can Fail The chances of success are hindered if the corporate cultures of the companies are poles apart. At the same time. investors in small. because the companies often focus too intently on cutting costs following mergers. but few deals have closed. a global consultancy. 5. while revenues and profits suffer. but cultural differences are often ignored. Since September. companies will become more selective in the acquisitions they pursue. CardioNet and MAKO Surgical. there have been several reports of negotiations between biotechs and big pharma.6 billion. including assessments of IP and technology. has found from its research study that most mergers or acquisitions fail. big pharma is often reluctant to commit to the asking price. that they Page | 143 . Currency trends The acquisition of US-based pharmaceutical firms by foreign competitors allows the foreign firm to establish a presence in the US. Takeda Pharmaceuticals acquired Millenium Pharmaceuticals for $8. IPO activity declined precipitously in the first half of 2008. instead of an IPO.There was a substantial amount of activity on the public equity markets in 2007. employees at a target company might be accustomed to easy access to top management. For example.9 Mergers. Roche’s play for Genentech has not been completed despite months of negotiations. Merging companies focus on integration and cost-cutting so much. it is typically based on product or market synergies. with only two medtech companies. As a result. For example. When the dollar was weak in early 2008. Now. but if the new management removes them. Recently. such as Genentech. the US dollar has risen roughly 15 percent in value relative to the euro. McKinsey. Thorough due diligence. On the other hand. the result can be resentment and shrinking productivity. the Japanese yen has strengthened substantially against both the euro and the dollar. making foreign acquisitions more attractive to Japanese companies. When a company is acquired. and AstraZeneca bought MedImmune for $15. when a total of 13 med-tech company IPOs raised around $1. as their exit strategy.to mid-size. Biotech firms with strong pipelines. Currency trends could continue to influence acquisition activity in the pharma sector. 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. so deal valuations remain high.8 billion in cash. often have the upper hand in negotiations.
acquisitions and alliances. and jeopardising trust between them • Internal bickering. An Active Sector For M&A And Private Equity Deals Pharmaceutical. 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. 5. About 70% of alliances fail outright. The acquisition of India’s largest drug-maker Ranbaxy Laboratories by Daiichi Sankyo Company Limited. marginally below the Telecommunication sector which had total transactions worth Page | 144 . Healthcare & Biotechnology was one of the busiest sectors on the deal street of India in 2008. 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.57 billion. thereby prompting nervous customers to flee. non-delivery. The foreign pharma companies already operating in the Indian market are also trying to increase their stakes in the domestic subsidiaries. and consulting with stakeholders to keep the organisation informed and involved throughout the lifespan of a partnership. the intense competition in a highly fragmented market is posing a great challenge too. The stage is set for the next phase of growth accompanied by consolidation. 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. one of the largest professional services firms. misleading or confusing them. Such companies will be ideal candidates to join hands with strong multinational companies. which indicates the growing importance of this market for them. The leading multinational pharmaceutical companies are increasing their focus on emerging markets such as India and China in their growth plans.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. as pointed out by a global survey of top 15 pharmaceutical companies conducted by Ernst & Young. its partners.neglect day-to-day business. fall captive to shifting priorities. Internal alignment and understanding are important for mergers. a number of Indian pharmaceutical companies will find it difficult to pursue the growth path on their own. knowing who the relevant stakeholders are. This stage will see traction owing to the global meltdown of equity markets that has brought the valuations at very attractive levels. or acting inconsistently toward. Swiss firm Novartis International AG and Pittsburgh-headquartered Mylan Inc announced plans to significantly hike equity stakes in their Indian subsidiaries. In the last week of March. and strain on internal resources as people are left unclear about priorities and focus. and 55% fall apart within three years of their creation. At the same time. This loss in revenue momentum is one reason for its failure. one of the largest pharmaceuticals companies of Japan last year is an apt example in this context. or achieve only initial goals. 78% of mergers and acquisitions fall apart within three years of their inception. It was second in terms of total value with $5.
India’s largest drug-maker. In terms of volume. Out of the total 57 M&A deals in the sector. Ltd was on the top of the table of India’s largest deals in 2008..60 billion acquisition of Ranbaxy Laboratory.78 billion. according to a report of consulting firm Grant Thornton. Table 33: M & A’s by Indian companies Page | 145 . the Pharma sector had 57 deals. second to 102 deals in Information Technology & IT-enabled Services sector. 17 deals were domestic. by Japanese firm Daiichi Sankyo Co.$5. The $4.
35 respectively) compared to the other.07).7 and that of the non-merging firms are 4. which will result in the better performance. 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. The gains from the high export intensity may be offset by the high import intensity. another major determinant of sustaining market growth is the selling cost. Likewise the R&D intensity of the merging firms are very high (2. Mergers and acquisitions are expected to change the performance of merging firms in two ways. 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. which indicates that only a few merging firms are able to invest more on R&D. the next question arises would be to what extent the consolidation strategies helped them to improve their position. The high import intensity may be due to their dependence on bulk drug import. Even though mergers and acquisitions are expected to increase the capacity utilization of the merging firms due to the expansionary reasons. the coefficient of variation for the merging firms is so low as compared to that of nonmerging firms. The ratio for merging firms is 82. which force them to spend on marketing through sales representatives. However. Four measures of profitability such as Gross Profit Margin (GPM). capacity utilisation is lower than that of the nonmerging firms during the post merger period. which in turn will reduce the total cost of production of the merging firms. since the mid-1990 the ratio for the merging firms outweighs that of the other. Besides Research and Development expenditure. Merging vs. which could have helped them to derive marketing synergies along with this.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). Besides. One is through an increase in the scale factor. which result in loss of market shares and low profitability. Net Profit Margin (NPM). which is not a statistically significant difference too. Albeit. This is because the companies are approaching the prescribing doctors in the case of ethical drugs market rather than patients.5. Also if the industry is less colluded. The R&D intensity of the merging firms show high variability as compared to that of non-merging firms. Return on Capital Employed (ROCE) and Return on Net worth (RON) were studied. the combined market share of the merging firms could fall. these firms have also gone for many strategic marketing alliances. Non Merging Firms A merging firm arises only after making the first merger/ acquisition and until that it would be a non-merging firm.3 and 1. Merging firms are also having high export and import intensity. The average advertisement intensity for merging firms remained slightly higher than that of the nonmerging firms (1. 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.57 and for non-merging firms 87. Mergers and acquisitions enabled them to share common marketing outlets.29 and 1. which shows that even large firms among the merging firms are not spending more on marketing. Interestingly. mainly the marketing expenditure rather than advertisement expenditure. which reduced this expenditure considerably.58. Page | 146 . the average value of the marketing intensity of the merging firms is only 3.34.
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). Table 34: Product Diversification of Merging Firms between 1990 and 2005 Source: Compiled from Monthly Index of Medical Specialities. Mergers enable firms to diversify their production by adding new product to more therapeutic categories and thereby not only reduce risks. but also expand their market size. The synergy effect of merger will enable the firms to either deepen or extent product structure. then there is greater possibility of obtaining stable return. Any losses in one particular market can be offset by profit in some other market. Product Diversification through Consolidation Firms may opt for mergers in order to reduce the risk and uncertainty. Various Issues Page | 147 . If a firm is more diversified.
Similarly. Dental Care (denture cleaning tablets. shifting production from the acquired units to their cost effective Indian plants. the merger of Tamilnadu Dadha Pharmaceuticals with Sun Pharmaceuticals enabled Sun Pharmaceuticals to add oncology. 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. • The Company has a comprehensive. A few have been to develop a bouquet of products. it has taken at least three years for the other global acquisitions to see break-even. Further when Glaxo made the first domestic acquisition. FDA-approved manufacturing facility for injectables that plays a strategic role in driving the company’s growth through partnerships in contract manufacturing.1 Analysis of Wockhardt’s acquisition Wockhardt is a global. these three firms had their brands accounting for around one percent of the formulation market. The growth drivers for Wockhardt’s European business include exports. target valuations have substantially increased making it harder for Indian companies to fund the acquisition 5. • Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10 largest generics companies in UK and the second largest hospital generics supplier.12 The challenge While growth via acquisitions is a sound idea in principle. 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. with three successful acquisitions in the European market and two in the domestic space. Other than Wockhardt’s acquisition of CP Pharma and Esparma. and have expanded the global reach of the organization. which added to Glaxo’s product portfolio. by acquiring 100 percent equity stake in the Biddle Sawyer. penetration in the European Union through mutual recognition. powders and fixative creams).12. Meghdoot Chemicals and Cryodon Chemical Works in 1997. 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. Also. Private Label GSL / OTC Pharmaceuticals. • The acquisition of Esparma GmbH in 2004. new product launches. Acquisition Management The company has a strong track record in acquisition management. • Wockhardt UK has built up a critical mass in the segments of Retail Generics. pharmaceutical and biotechnology company that has grown by leveraging two powerful trends in the world healthcare market . there are challenges as well. 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. 5. orthopaedical gynacology and nephrology products. has given Wockhardt a strategic entry Page | 148 . biotechnology and anesthesiology to its diverse product portfolio. Hospital Generics. with the increasing spate of acquisitions. and strategic acquisitions.globalization and biotechnology. In several other cases acquisitions by Indian generic companies are small and have been primarily to expand geographical reach while at the same time. They had strength in anti-asthmatics.
particularly in the Japanese market. 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. Despite these strengths. Ltd. for itself. on the other hand. 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.point into Germany. Daiichi Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the generics segment and both companies acquired a broader product base. has gained a smoother access to and a strong foothold in the Japanese drug market. 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. To a large extent. therapeutic focus areas and well distributed risks.2 Implications of the merger of Ranbaxy and Daiichi Daiichi Sankyo Co. The immediate benefit for Ranbaxy was that the deal freed up its debt and imparted more flexibility to its growth plans. Ranbaxy’s addition is said to elevate Daiichi Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical market. While Daiichi Sankyo’s patenting activity has been rather mixed. Ranbaxy’s branded drug development initiatives for the developed markets will be significantly boosted through the relationship. Ranbaxy. assisted by a dedicated sales & marketing infrastructure. Ranbaxy continued to operate as Daiichi Sankyo’s subsidiary but was managed independently. neurology and diabetology. Most importantly. Synergies The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their respective presence in the developed and emerging markets. With R&D perhaps playing the most important role in the success of these two players. has witnessed a steady uptrend in Page | 149 . Ranbaxy gained access to Daiichi Sankyo’s research and development expertise to advance its branded drugs business. The company believes in value buys that would have a tactical fit with its core competencies and key strategic objectives. The acquisitions are mainly driven by market access since Wockhardt has an extensive pipeline of generics and biogenerics and needs a strategic front-end for the same. The 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. from its promoters. and have profound strength in striking lucrative alliances with other pharmaceutical companies.8% of Ranbaxy Laboratories Ltd.12. signed an agreement to acquire 34. Ranbaxy is now functioning as a low-cost manufacturing base for Daiichi Sankyo. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages. the largest generics market in Europe. the companies have a set of pain points that can pose a hindrance to the merger being successful or the desired synergies being realized. While Ranbaxy’s strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics business. After the acquisition. The main benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing infrastructure and supply chain strengths. 5. • Esparma has a strong presence in the high-potential segments of urology.
plant. Ranbaxy has become part of a Japanese corporate framework. we see that Daiichi Sankyo’s focus is to develop new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. • Given Ranbaxy’s intention to become the largest generics company in Japan. anti-retroviral. Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma. In fact. the acquisition provides the company with a strong platform to consolidate its Japanese generics business. 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. Page | 150 . which is extremely reputed in the corporate world. and impotency and anti-malarial drugs. Post-acquisition Objectives In light of the above analysis. Daiichi Sankyo’s portfolio has broadened to include steroids and other technologies such as sieving methods. veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal. As a generics player. A smooth entry into the Japanese market and access to widespread technologies including. horticulture. Ranbaxy is very well placed in both India and abroad. during 2007.its patenting activity until 2005. 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. and a host of therapeutic segments such as anti-asthmatics. • Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic drugs across 17 diverse therapeutic indications. Eesei and Takeda Pharmaceutical. From one of India's leading drug manufacturers. • Through the deal. the company’s patenting activity plunged by almost 60% as against 2006. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities. 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. • Furthermore.
with at least $1 billion in annual sales. The extent to which pharmaceutical companies bankroll doctors and hospitals by funding trials. But that rise comes five years after the merger. 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. 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. Big pharmaceutical companies were lulled into complacency by their reliance on a handful of best-selling “blockbuster” drugs. successful products can probably be traced to a small number of brilliant scientists and constant M&A activity muddies the water for these individuals. the sector has destroyed nearly $400 billion of value over the past four years. This has created bloated companies carrying too much fat. Pharmaceuticals used to be a safe investment: shareholders could rely on steady earnings and a 30% to 40% premium to fair value. AstraZeneca. The biggest threat to the industry's profitability is a slump in output by research departments responsible for creating new medicines. taken together. The potential for medical breakthroughs has never been more exciting.5bn-a-year painkiller Vioxx. The reputation of the “ethical pharmaceutical industry” has suffered still further as a result of its own activities. which saw 6000 people move jobs. Cost-reduction programmes announced in the wake of mergers and acquisitions will address only some of the challenges facing the industry.0 OBSERVATIONS Major pharmaceutical companies face a paradox. They lose control of projects and the ability to spot winners and champion them through the organisation and on to market. 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. Moreover. nearly every top-tier drugs company has resorted to acquisition to sustain its growth. whilst hiding a crisis of productivity in innovation. yet the operating environment has never been more difficult.6. now has 50% more drugs in the early stages of development as a result of reorganising Astra and Zeneca's research units. losing around 40% of market capitalisation between the end of 2000 and the middle of 2002. the industry has consistently disappointed. It has raised prices to the maximum in the USA and Western Europe. while assertive patients are more willing to take legal action against “big pharmaceuticals”. whose patents are now expiring. There is overwhelming antipathy to M&A among researchers and widespread fear among executives about the disruptive effect of consolidation on drug discovery. In any pharmaceutical company. since 2000. But. That poor performance is the result of a number of factors. However. in theory. they have destroyed the public’s regard for pharmaceutical companies. these may have been sensible actions. Demand for drugs should grow steeply for several reasons: Page | 151 . notably Merck's $2. for example. From a purely commercial standpoint. Pharmaceutical companies need to find some new remedies and operating strategies to restore growth. Yet. 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. Safety concerns have led to the worldwide withdrawal of several drugs.
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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intentions of leaders of several developed nations (Barack Obama.T. Dr. a large share of them doing so by marketing their drugs there directly. Big Pharma will lose 28% of their current sales." according to Wall Street. Significant advances have taken place in the field of research and marketing in the past decade. Page | 155 . is shaping decision-making at big drug makers. Since 2000. there have been more than 60 foreign acquisitions by Indian companies. and so on. according to pharmaceutical analyst James Kelly of Goldman Sachs--who is calling this period "the patent black hole. A number of Indian players have entered foreign nations. Analysts believe that the loss of blockbuster products like Pfizer's Lipitor for high cholesterol. 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. for instance).. etc. Belgium. the world's best-selling drug. After analyzing the industry from the global. and Eli Lilly's Zyprexa for schizophrenia.S. Analysts are already using such big scary metaphors to describe the challenges facing the drug industry in five years. Between 2010 and 2011. Ireland. given the plight of other industries the present economic scenario. in particular) to bring down healthcare costs." Starting in 2008 and going through 2011. Indian.8. from the United States to UK. Although the latter is far more desirable than the former. among other things. Indian companies have also purchased companies across the globe. progress in Research and Development (R&D). Poland. Romania in Europe. Germany. 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. The level of professionalism in the management of pharmaceutical companies has also risen. multiply to create an enviable future for the industry. 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. the availability of skilled labour and world-class manufacturing facilities. the current state of events does not indicate that the industry is turning in that direction. favourable industry outlook. What remains to be known is whether India will follow the path of the I. uncertainty about the various roles emerging markets will play in the near future.0 CONCLUSION Big Pharma is heading "off a cliff" and into "a black hole. Regardless of what path is followed. the President of U. when drug makers will face the worst series of patent expirations ever. growing public concern about the ethicality of the practices of large pharmaceutical companies (usage of the term ‘blockbuster’ drugs. the managerial capabilities of Indian pharmaceutical majors. 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. analysts predict annualized sales growth of only 2% for big drug makers. Understanding the industry from a local as well as global viewpoint has revealed. this: India’s importance in the global drugs and pharmaceutical industry has grown substantially and continues to grow. to South Africa and to Japan and Singapore in Asia. 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. France. Italy.
That’s when you have programs that move forward and succeed. It’s a business with more failures than successes. Daniel Vasella. the future of will be unpredictable. the skills. As Dr. You are constantly dealing with uncertainty.” Page | 156 . the continuous training. no matter what strategies one adopts. It’s just the fact and we have to accept it. You can put in place all the elements that you believe are essential: The people. but then you also have more programs that move forward and don’t succeed. But having said that. the money.At the end of the day. the technical resources. alliances with academia and with other partners…but there is no guarantee for success. you need to have people who are willing to bet their life that what they are doing is right. Chairman and CEO of Novartis AG rightly said “We can never read the future.
europa. Drugs and Pharmaceuticals: International Pharmaceutical Industry-A Snapshot. Roadblocks on the pharmaceutical competition highway: Strategies to delay generic competition. Uwe Perlitz (April 9.pdf (full report). Forecasting &Opportunity Assessment November 14.pdf (Executive summary). ICRA 7. Dept of Management Studies. Research paper on “Critical Challenges & Issues in Patent Documentation”by Ashutosh Nigam (Asst Professor.com 21. Angell. 14. August 2004.org/pag/documents/1.org/rxfacts> 4. Chakravorty M. http://www.0 PRELIMINARY REFERENCES 1. Random House. PhRMA. Retrieved on September 2004 from <http://www.html> 3. A guide to pharmaceutical patents.phrma. September 2004.html. The Truth About the Drug Companies: How They Deceive Us and What to Do About It. Manjeet Kripalani (March 25.2009) India's Pharmaceutical Industry course for globalization 9. 13. www. Volume I and II .eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report. Joint open letter from 18 organisations ““Patient information” by pharmaceutical companies comes up against almost unanimous opposition from civil society” www.9. Correa 12.europa. PhD on“Predicting 2008: Global Pharma Market Forecast” Global Practice Leader. Retrieved April 2003 from <http://www.citizen.eu/competition/sectors/pharmaceuticals/inquiry/exec_summary_en. An insider turns against drug industry. March 2002. March issue. ec.com 20.pdf 19.ich. http://www. P. Research and Development. Ads. Access to new drugs in India: Implications of TRIPS” 11.org/pag/documents/ISDB-decl-english. Promotions Drive Up Drug Costs. Rohtak) 6. Ray AS.2008 Symposium Series. 2007 8. 18.com Page | 157 . Presention by Jerry A.dbresearch.isdbweb. Rosenblatt. Duke Law and Technology Review .Carlos M.Vaish College of Engineering. Volume 9 4th issue 10.expresspharmaonline. America’s Other Drug Problem. 15. 2008) Indian Pharma: Hooked on the Hard Sell published in Business week. ec. Dated 2002.isdbweb. 2. M.business-standard.pdf 16. Public Citizen’s Congress Watch. Price Waterhouse Coopers "Pharma 2020: the vision: which path will you take?" 2008 17. C. Barry. ISDB “Declaration on Therapeutic Advance in the Use of Medicines” Paris 15-16 November 2001. “About ICH – Structure of ICH” www. 5.Jan 2004.org/issues/researchdev. Rowland. http://www. AARP Bulletin. The Boston Globe.org/cache/compo/276-254-1.
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