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A Study on
Growth and Recent Developments in

Submitted To:
Dr. R. Venkatamuni Reddy

Section E PGP 2008-10

Group 10

Submitted by:
Atreyee Nandy - 08PG294
Harkirt Kaur - 08PG306
Nalini Sharma - 08PG317
Sanaa Sadique - 08PG341
Santosh Prasad - 08PG342
Vineeth Gangadharan -

We would like to express our heartfelt gratitude and thankfulness towards our Industry
Analytics professors, Dr. R.Venkatamuni Reddy and Dr. Gervasio S.F.L Mendes for
giving us an opportunity to work on this project, which has helped us gain an in depth
understanding of the Indian Pharmaceutical Industry.

The timely advice given by Prof. Reddy and Prof. Mendes went a long way in
ensuring that we do not lose focus while working on the project. The constant
guidance and meaningful suggestions provided by them also helped in making this
project a relevant and a rich source of learning for the students of Industry Analytics.
We hope that this project would enable the readers understand the working of Indian
Pharmaceutical Industry in detail.


The Indian pharmaceutical industry has come a long way from waiting for imports of
bulk drugs from global players for re-processing to becoming an industry which is
driving the product development and is breaking new grounds in medical research

The Indian pharmaceutical industry has a unique amalgamation of two major critical
factors that make it so attractive and thereby add impetus to its growth. These are:
 The process patent regime

 Price controls

The implementation of Good Manufacturing Practices has further supplemented the

growth of this industry which is now producing bulk drugs for all the major therapy
segments, which are now most in demand. In addition to this, the competencies that
India has achieved in process re-engineering and organic synthesis have helped derive
the most cost-effective solutions which are also compliant with the quality standards.
The purpose of this report is to provide an extensive outlook on the pharmaceutical
industry. The broad objectives of this report are:

 To study the growth and trend of Indian Pharmaceutical Industry and its
contribution to Indian economy.
 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.
 To track the significance of Mergers and Acquisitions in consolidation of
Pharmaceutical Industry.

The report provides a complete synopsis on the Indian pharmaceutical market and its
present demographics. The reports also presents the future prospects of the industry,
which is an indicative of vast potential and growth opportunities, and also the possible
challenges that the Indian pharmaceutical industry may face ahead.

Chapter 1: GLOBAL REVIEW 6

 Origins and Evolution

 Global Scenario
 Therapeutic Market Segmentation

Chapter 2: COUNTRY REVIEW 16

 Indian Pharmaceutical Industry

 Industry Structure
 Domestic Growth Drivers
 Domestic Exports
 Critical Success Factors
 Pharmaceutical Regulatory Bodies In India

Chapter 3: PATENT- The key facet of the Indian Pharmaceutical Industry 35

 Background of Pharmaceutical Industry with respect to patents

 Patents Amendment Act (2005)
 Scenario Post Trips
 Novartis Case

Chapter 4: PRICING OF DRUGS 45

 Pricing of Drugs-Principle and Laws

Chapter 5: Merger and Acquisitions in the Indian Pharmaceutical Industry 54

 Drivers in Mergers and Acquisitions

 Mergers and Acquisition Trends in India
 Mergers and Acquisitions-Challenges

Chapter 6: Framework of Analysis 66

 Qualitative Analysis
 Quantitative Analysis

Chapter 7: Outlook 98

 Future Scenario
 Issues and Challenges
 Vision-2020

Bibliography 110





The modern pharmaceutical industry is a highly competitive non-assembled global
industry. Its origins can be traced back to the nascent chemical industry of the late
nineteenth century in the Upper Rhine Valley near Basel, Switzerland when dyestuffs
were found to have antiseptic properties. A host of modern pharmaceutical companies
all started out as Rhine-based family dyestuff and chemical companies e.g. Hoffman-
La Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba and Geigy),
Novartis etc. Most are still going strong today. Over time many of these chemical
companies moved into the production of pharmaceuticals and other synthetic
chemicals and they gradually evolved into global players. The introduction and
success of penicillin and other innovative drugs in the early forties institutionalized
research and development (R&D) efforts in the industry. The industry expanded
rapidly in the sixties, benefiting from new discoveries and a lax regulatory
environment. During this period healthcare spending boomed as global economies
prospered. The industry witnessed major developments in the seventies with the
introduction of tighter regulatory controls, especially with the introduction of
regulations governing the manufacture of ‘generics’. The new regulations revoked
permanent patents and established fixed periods on patent protection for branded
products, a result of which the market for ‘branded generics’ emerged.

The global pharmaceutical market can be classified into two categories: regulated and
unregulated/semi regulated. The regulated markets are governed by government
regulations like intellectual property protection, including product patent recognition.
As a result, they have greater stability in both volumes and prices like the United
States. The unregulated/semi-regulated markets have lower entry barriers in terms of
regulatory requirements and hence, they are highly competitive. The global
pharmaceutical companies till 2010 will be closely regulated by emerging issues like
patent safety, side effects, adverse action reporting, strengthening harmonization and
regulations and stronger clinical evidence. Global pharmaceutical market has

increased its focus on novel drugs, good delivery system, and new chemical entities.
The other factor which is driving the growth of global pharmaceutical market is
speeding up regulation in bio-generic segment. Moreover there will be shift in growth
from top ten markets to emerging economies. The global pharmaceutical market will
change its shape from primary care driven to specialty care driven that is oncology
and biotech. The global pharmaceutical industry will take a shape of virtually
integrated pharmaceutical company. There is a widening gap between mature market
performance and emerging market performance, which will require many
pharmaceutical companies all over the globe to make changes throughout their
operations from shifting their sales and market, revising there strategies, changing
there business models to fuel there growth.

For the global pharmaceutical industry, 2008 will be a year of softening growth and a
widening gap in performance between the increasingly generalized and cost-
constrained mature markets, as well as the burgeoning ‘pharmerging’ sectors where
demand is growing and economies and access to healthcare are expanding at record
levels. Marking an important inflection point for the industry, for the first time the
world’s seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will
drive less than half of the industry’s growth in 2008, while the pharmerging markets
will contribute nearly a quarter of growth worldwide (Figure 1). Further divergence
will be apparent between primary care-driven and specialist-driven therapy areas, and
between therapy classes with major unmet needs and innovations, and those
dominated by generics.


In the US,

pharmaceutical growth will slow to 4-5% in 2008, marking an all-time low for this
market. This is due in part to a lessening of the volume growth generated by the
Medicare Part D prescription drug benefit. It also reflects the continued high level of
genericisation in this market with approximately $15 billion in branded products
expected to lose patents in the 2008 timeframe. The US will also continue to feel the
impact of heightened safety scrutiny, as the US FDA acquires more power, slowing
the introduction of new medicines.
A similar level of growth is anticipated in the top five European markets (France,
Germany, UK, Italy and Spain), as the industry faces significant generics exposure
and governments struggle to manage their aging populations and embrace new
treatment innovations (Figure 2). Increasing therapeutic substitution can be expected
in these markets, along with an upturn in parallel trade, particularly with specialist-
driven products. Cost-saving initiatives are likely to become more aggressive and will
include price cuts, contracting and rebating, as well as the expansion of reference
pricing schemes in Germany, Italy and Spain. Value growth in these markets will be
limited to areas of unmet needs. In Japan, cost-containment drives – including
incentives for prescribing generics – will also impact market performance as the

country embarks on another year of national health insurance price cuts. Growth of 1-
2% is anticipated, compared with 4-5% in 2007. Notwithstanding this downturn,
Japan remains in economic recovery and access to drugs continues to improve for its
aging population. A rise in the level of new product launches is expected as the
Pharmaceutical and Medical Devices Agency becomes fully staffed and focuses on
accelerating approvals. This will be particularly noticeable in areas of unmet needs,
such as oncology, where approvals have already been granted for Avastin and Tarceva.


By contrast, much stronger growth of 12-13% is expected in the seven pharmerging

markets of China, India, Brazil, Russia, Mexico, Turkey and South Korea, driving
sales of $85-90 billion in 2008. Although these markets have their own unique
characteristics, common to each is a rising GDP and expanding access to both generic
and innovative new medicines as primary care improves and extends through rural
areas, and private health insurance becomes more commonly available. China will be
a particularly strong performer in 2008, reflecting the country’s booming economy

and greater
involvement in
policy. This
extends to
annual price
cuts, enforced
prescribing and
an anticorruption
campaign that
promotional activity, product approvals and manufacturing.

Overall, the global pharmaceutical market will grow 5-6% to over $735 billion in
2008, down from 6- 7% in 2007 (Figure 3). Key dynamics shaping this growth are the
continued wave of genericisation, expanded use of innovative specialty products,
increasing reliance on value-based medicine and higher levels of uncertainty around
safety issues.


Sales (US$ billion)

Source: IMS Health. Intelligence 360 Global Pharmaceutical Perspective



Fourteen pharmaceutical companies featured in the top 50 R&D spenders according to

European Commission research in 2007-08, including 3 in the top ten:
Pfizer, Johnson & Johnson, and GlaxoSmithKline. Other companies to feature were
Sanofiaventis, Roche, Novartis, Merck, AstraZeneca, Amgen, Bayer, Eli Lilly, Wyeth
and Abbott.
• Pharmaceutical companies ranked as the highest sector of R&D investment across
the world’s top 1400 companies, spending over €70 million euros.
• In 2007, Pfizer spent nearly US$7.6 billion on R&D globally, followed by Johnson
& Johnson (US$7.1 billion) and GlaxoSmithKline (US$6.9 billion).
• Of the top ten pharmaceutical companies, Amgen spent the largest proportion on
R&D with expenditure equalling over 24% of total sales.


Commencing with repackaging and preparation of formulations from imported bulk

drugs, the Indian industry has moved on to become a net foreign exchange earner, and
has been able to underline its presence in the global pharmaceutical arena as one of
the top 35 drug producers worldwide. Currently, there are more than 2,400 registered
pharmaceutical producers in India. There are 24,000 licensed pharmaceutical
companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured
here. India has more drug-manufacturing facilities that have been approved by the
U.S. Food and Drug Administration than any country other than the US. Indian
generics companies supply 84% of the AIDS drugs that Doctors without Borders uses
to treat 60,000 patients in more than 30 countries. However total pharmaceutical
market is as follows:

It is very much evident from above figure that chronic therapy area (Gastro Cardiac,
Respiratory, Neuro Psychiatry and Ant diabetics) is dominating the market in long




Pharmaceutical Industry in India is one of the largest and most advanced among the
developing countries. It is ranked 4th in volume terms and 11th in value terms
globally. It provides employment to millions and ensures that essential drugs at
affordable prices are available to the vast population of India. Indian Pharmaceutical
Industry has attained wide ranging capabilities in the complex field of drug
manufacture and technology. From simple pain killers to sophisticated antibiotics and
complex cardiac compounds, almost every type of drug is now made indigenously.

Indian Pharmaceutical Industry is playing a key role in promoting and sustaining

development in the vital field of medicines. Around 70% of the country's demand for
bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and vaccines is met by Indian pharmaceutical industry.
A number of Indian pharmaceutical companies adhere to highest quality standards and
are approved by regulatory authorities in USA and UK.

The Indian pharmaceutical industry traditionally relied on “reverse engineering” i.e.

product copying, through which vast profits were made. In recent years, however, the
larger domestic companies have realised the need to undertake original research and /
or penetrate into the regulated generics markets in the USA/EU in order to survive in
the global market. At the same time, the Indian pharmaceutical industry is renowned
for supplying affordable generic versions of patented drugs for illnesses like
HIV/AIDS to some of the world’s poorest countries.

Some of the strategies that have been followed by Indian pharmaceutical companies
for their growth in the global markets have been as follows:
 Geographic diversification with few companies focussing on increasing
presence in the regulated markets and others exploring the
developing/under-developed markets of the world.

 As a part of diversification strategy, some of the companies have acquired
brands, facilities and businesses overseas. Some companies have even
started their local marketing in foreign markets.
 Partnerships for supply of bulk drugs and formulations with the generic
companies as well as innovators.
 For regulated markets such as the US, there are companies focussing on
value added generics, niche segments or patent challenges in the US.
 Focus on offering research and manufacturing services on a contractual
basis(CMOs and CROs)

Apart from these strategies Indian companies have to devise newer strategies
continuously to survive in the highly competitive global market in an industry that is
characterised by - high capital requirement, high technical requirement, high process
skills, high value addition prospects, high export volumes, high market sophistication.
Indian companies are following the route of mergers and acquisitions to make inroads
in the foreign markets. They need to consolidate further in different parts of the world
to become trans-national players. Indian companies will have to rise above the
statement of Michael Porter (1990), that most multi-national firms are just national
firms with international operations. They shall certainly be at an advantage, as their
strong national identities will give them a competitive advantage in the global


The Pharmaceutical industry in India is fragmented with over 3,000 small/medium

sized generic pharmaceutical manufacturers. It has over 20,000 units out of which 300
units are in the organized sector; while others exist in the small scale/unorganised
sector. The leading 250 pharmaceutical companies control 70% of the market with
market leader holding nearly 7% of the market share. There are also 5 Central Public
Sector Units that manufacture drugs. These companies are:
• Indian Drugs & Pharmaceuticals
• Hindustan Antibiotics Ltd.
• Bengal Chemical and Pharmaceuticals Ltd.

• Bengal Immunity Ltd.
• Smith Stanistreet Pharmaceuticals Ltd.
The Indian pharmaceutical industry consists of manufacturers of bulk drugs and
formulations. Bulk drugs include the active pharmaceutical ingredients (APIs) which
are used for the manufacture of formulations. According to estimates, the proportion
of formulations and bulk drugs is in the order of 75:25. There are over 60,000
formulations manufactured in India in more than 60 therapeutic segments. More than
85% of the formulations produced in the country are sold in the domestic market.
India is largely self-sufficient in case of formulations, though some life saving, new-
generation-technology-barrier formulations continue to be imported.
The Indian pharmaceutical industry has the highest number of plants approved by the
US Food and Drug Administration outside the US. It also has the large number of
Drug Master Files (DMFs) filed which gives it access to the high growth generic bulk
drugs market. The industry now produces bulk drugs belonging to all major
therapeutic groups requiring complicated manufacturing processes and has also
developed “good manufacturing practices” (GMP) compliant facilities for the
production of different dosage forms. Setting up a plant is 40% cheaper in India
compared to developed countries and the cost of bulk drug production is 60-70
percent less. The strength of the industry is in developing cost effective technologies
in the shortest possible time for drug intermediates and bulk activities without
compromising on quality. In accordance with WTO stipulations, India grants product
patent recognition to all New Chemical Entities.


Ancient civilization allowed India to develop various kinds of medical and

pharmaceutical systems. In addition to the allopathic system, which is prevalent in the
United States, Japan and Europe, the following types of medical and pharmaceutical
systems are used by the Indian people:

Ayurveda: Ayurveda translates as the “science of life”. It encompasses fundamentals

and philosophies about the world and life, diseases and medicines. The knowledge of

Ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative
treatment lies in drugs, diet and general mode of life.

Siddha: The Siddha system is one of the oldest Indian systems of medicine. Siddha
means “achievement”. Siddhas were saintly figures who achieved healing through the
practice of yoga. The Siddha system does not look merely at a disease but takes into
account a patient’s age, sex, race, habits, environment, diet , physiological constitution
and so forth. Siddha medicines have been effective in curing some diseases, and
further work is needed to truly understand why this system works.

Unani: The Unani system originated in Greece and progressed to India during the
medieval period. It involves promotion of positive health and prevention of disease.
The system is based on the humoral theory i.e. the presence of blood, phlegm, yellow
bile and black bile. A person’s temperament is accordingly expressed as sanguine,
phlegmatic, choleric or melancholic. Drugs derived from plant, metal, mineral and
animal origins are used in this system.
Homeopathy: Homoeopathy is a branch of therapeutics that treats the patient on the
principle of “SIMILIA SIMILIBUS CURENTUR” which simply means “Let likes
be cured by likes”. Homeopathy seeks to stimulate the body's defense mechanisms
and processes so as to prevent or treat illness. Treatment involves giving very small
doses of substances called remedies that, according to homeopathy, would produce the
same or similar symptoms of illness in healthy people if they were given in larger
doses. Treatment in homeopathy is individualized (tailored to each person).
Homeopathic practitioners select remedies according to a total picture of the patient,
including not only symptoms but lifestyle, emotional and mental states, and other
Yoga and Naturopathy: Yoga and Naturopathy are ways of life. In naturopathy one
applies simple laws of nature. It advocates proper attention to eating and living habits.
It also involves hydrotherapy, mud packs, baths, massage and so forth. Yoga consists
of eight components: restraint, observance of austerity, physical postures, breathing
exercises, restraining of the sense organs, contemplation, meditation and Samadhi.
Increasing interest exists in revisiting these ancient drug systems.


Indian pharmaceutical industry can be widely classified into bulk drugs, formulations
and contract research. Bulk drugs are the Indian name for Active Pharmaceuticals
Ingredients (API). Formulations cover both branded products and generics. Indian
pharmaceutical sector is self sufficient in meeting domestic demand and exports
successfully to various markets globally. The existence of process patents in India till
January 2005 fuelled the growth of domestic pharmaceutical companies and
developed them in areas like organic synthesis and process engineering, as a result of
which, Indian pharmaceuticals sector is able to meet almost 95 percent of the
country’s pharmaceutical needs. India is globally recognized as a low cost, high
quality bulk drugs and formulations manufacturer and supplier. Contract Research, a
nascent industry in India has witnessed commendable growth in the last few years. As
per Yes Bank /OPPI report (2007-08), formulation segment (including domestic
formulation and formulation exports) constituted 72%of the total pharmaceutical
industry (in terms of sales) while bulk drugs and contract research constituted 25%
and 3% of pharmaceutical industry respectively.

Fig: Segment-wise sales


Bulk drug industry is the backbone of the Indian pharmaceutical industry. Growth of
Indian bulk drug industry in the last five decades has been impressive and highest

among developing countries. From a mere processing industry, Indian bulk drug
industry has evolved into sophisticated industry today, meeting global standards in
production, technology and quality control. Today, India stands among the top five
producers of bulk drugs in the world. The market is fragmented with far too many
players. About 300 organised companies are involved in the production of bulk drugs
in India. Over 70 percent of India’s bulk drug production is exported to more than 50
countries and the balance is sold locally to other formulators. Indian bulk drug
industry is mainly concentrated in the following regional belts - Mumbai to
Ankleshwar, Hyderabad to Madras and Chandigarh. Around, 18000 bulk drug
manufacturers exist in India. Some major producers of bulk drugs in Indian
pharmaceutical industry are Ranbaxy Laboratories, Sun Pharma, Cadila, Wockhardt,
Aurobindo Pharma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals &
Chemicals, Nicholas Piramal, Lupin, Aristo Pharmaceuticals, etc. Most are involved
in bulk as well as formulations while a few are solely into bulk drugs.

India is the world’s fifth largest producer of bulk drugs. The market size is expected to
grow at higher percentages in future years with more and more international
companies depending on India to meet their bulk-drug supply needs. Moreover, India
is way ahead of competitors in the total number of Drug Master File (DMF) filings.
Of the overall DMF filings to US FDA, the portion of filings by Indian players has
jumped from around 14% in 2000 to 46% of total filings in 2008( January-June) This
growth in proportion speaks volumes about the quality standards followed in Indian
manufacturing facilities.

Fig: Increasing share of Indian companies in DMF filings (US FDA)

The growing number of DMF filings signifies the increase in number of contracts that
Indian players have garnered. While India has recorded 1671 DMF filings, China
shows a tally of 520, the second largest number of DMF filings after India. In 2008
(January-June), India’s DMF filings were around 3.5 times that of China -187 from
India vis-à-vis 51 from China.

The bulk drug segment is a low-margin and volume-driven business. The thrust is on
manufacturing. In manufacturing operation, efficiency through better process skills to
reduce both manufacturing time and cost is critical. Low cost manufacturing is a
distinct advantage gained by Indian companies over a period of time with a steep
learning curve. Bulk Drugs exports have grown significantly in the past on account of
growth in generic industry, increasing share of Indian companies in DMF filings and
contract manufacturing opportunity.

Bulk drugs exports grew robustly by 28% CAGR between 2001-02 and 2007-08 to
reach an estimated USD4.2 billion.

Fig. India’s Bulk Drug Export (CRISINFAC, YES BANK/ OPPI)

As already explained, India has carved a niche for itself by being one of the largest
bulk drug suppliers. India offers a number of distinctive advantages in the
pharmaceutical industry, as illustrated in the figure below:

Fig: Advantage India-API
India has many local manufacturing equipment manufacturers. These equipments are
of high quality and low cost, thus reducing the cost of capital. According to industry
estimates, Indian companies are able to reduce the upfront capital cost of setting up a
project by as much as 25-50%due to locally manufactured equipment and high quality
technology/engineering skills. Competition in the India’s domestic formulation market
has made it inevitable for API suppliers to continuously develop alternative
production methods to improve yield or reduce costs. This ensures that India has a
significant cost advantage due to process engineering.

Apart from availability of a high number of skilled chemists, India also offers
scientists with vast experience and unmatched skills. The scientific staff in India
though equivalent or better qualified are also available at a fraction of the cost. This
makes Indian research firms more competitive than many international firms while
being cost competitive. Labour costs are also low in India, being almost 1/7 th of that in
many developed countries and offer an obvious cost advantage.


Formulations are broadly categorized into patented drugs and generic drugs. A
patented drug is an innovative formulation that is patented for a period of time
(usually 20 years) from the date of its approval. A generic drug is a copy of an expired
patented drug that is similar in dosage, safety, strength, method of consumption,
performance and intended use.

Formulation Industry can be subdivided into two segments:

 Domestic Formulation Industry
 Indian Formulation Exports

Domestic Formulation Industry

Between 2002 and 2007, the domestic formulation industry grew at a CAGR of 14%
from around USD4.3 billion in 2002 to USD 8.4 billion in 2007. Demand in India is
growing markedly due to rising population, increasing per capita income, increasing
access to medicine, especially in the rural areas and an increasing population of over
sixty years of age.

Fig: Growth in domestic formulation industry (OPPI, ORGIMS)


Presently, the growth of a domestic pharmaceutical company is critically dependant
on its therapeutic presence. In terms of end-use, the pharmaceutical industry is sub-
divided into several therapeutic segments. These segments are broadly defined on the
basis of therapeutic application. Some of these segments are low-volume, high margin
segments, while the others are high-volume with relatively low margins. The new
lifestyle categories like Cardiac, Respiratory and Vitamins are expanding at double-
digit growing rates. The long term ailment, chronic therapies is now accounting 24%
of the market. The only growth driver for acute therapies is the new product
introduction under this segment. Today, anti-infective which used to be the single
largest therapeutic segment in Indian pharmaceutical industry is increasing. Anti-
infective segment is now 1st in terms of value contribution followed by
Gastrointestinal and Cardiac.

The key therapeutic segments include:

 Anti-infective
 Cardio vascular
 Central nervous system drugs
Anti-infective is currently the largest therapeutic segment in India. It accounts for one-
fifth of total market turnover. Next in line, and accounting for one-tenth each, are
cardio-vascular preparations, cold remedies, pain killers and respiratory solutions.

Fig. Therapeutic wise distribution (ORGIMS)



Indian formulation exports grew at a CAGR of 23.2% touching around USD 4 billion
in 2007-08. The growth has been spurred mainly due to the focus on regulated
markets by most Indian companies, thereby increasing revenues.

Fig: Indian Formulation Exports



Increasing costs of R&D, coupled with low productivity and poor bottom lines, have
forced major pharmaceutical companies worldwide to outsource part of their research
and manufacturing activities to low-cost countries, thereby saving costs and time in
the process. The global pharmaceutical outsourcing market was worth USD57.2
billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by
2010. Global market for Contract Research and Manufacturing Services (CRAMS) in
2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market,
contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract
manufacturing was USD38.89 billion accounting for the major share (approximately
68%) of the total global pharmaceutical outsourcing market.

India, with more than 80 US FDA-approved manufacturing facilities, is one of the

most preferred locations for outsourcing manufacturing services in India by the

multinationals and global pharmaceutical companies. The Indian pharmaceutical
outsourcing market was valued at USD1.27m in 2007 and is expected to reach
USD3.33 billion by 2010, growing at a CAGR of 37.6%. The Indian CRAMS market
stood at USD1.21 billion in 2007, and is estimated to reach USD3.16 billion by 2010.

India holds the lion's share of the world's contract research business as activity in the
pharmaceutical market continues to explode in this region. Over 15 prominent
contract research organisations (CROs) are now operating in India attracted by her
ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in
the field of new drug discovery and the rest 65 per cent of business is in the clinical
trials arena. India offers a huge cost advantage in the clinical trials domain compared
to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of
hiring a chemist in the West.


Pharmaceutical sector is one of the most globalized sectors among the Indian
industries. The downside is pharmaceutical sector traditionally has been immune to
business cycles. The upside of Indian pharmaceutical sector, however, is influenced by
a mix of global and local factors. Global factors are important as most Indian
companies ship a major portion of their production to overseas markets. Also,
multinationals operating in the Indian market follows the central research and global
marketing model. Their actions are largely dictated by global trends although local
issues are given due importance. The domestic market is critical for both Indian
companies and multinationals. For Indian companies, the domestic market lends
stability to bottom line and offer means to cope with fluctuations in global demand.
The growth drivers for Indian pharmaceutical market are:

 Growing Population and Improving Incomes: Household incomes are rising

in India; the proportion of middleclass in Indian population is also increasing.
Statistics show a clear migration of population towards middle and upper
classes. Rise in income levels is always accompanied by greater demand for
medical facilities and pharmaceutical products. Middle class is already 70
million strong and is expected to grow even fast, accounting for a higher share
of total population. Increase in living standards will lead to longer life
expectance and higher consumption of drugs and health care services.

 Changing lifestyles: Rising incomes and improving literacy rates are leading
to change in lifestyles. While incomes provide the means to access medical
facilities and products, improving literacy boost awareness about diseases and
lead to higher consumption of drugs. Changing lifestyles, however, is leading
to a change in disease profile especially in urban areas. Hectic lifestyles and
high cholesterol diets are resulting growing incidence of diseases such as
cardio vascular diseases and cancer.

 Research and Development: The R&D efforts of Indian companies have

been largely focussed on chemical synthesis of molecules and their cost
effective production thereof. India has a large pool of technical and scientific
personnel with good English language skills. Indian scientists have developed
a high degree of chemical synthesis skills while engineers have developed
competencies in producing molecules cost effectively. These skills have helped
Indian companies tap generic markets abroad successfully in the past and will
continue to do so.

 Healthcare Expenditure: Indian healthcare system is largely run by the govt

with private sector playing a small, but important part. The healthcare system
in India comprises government hospitals in cities and towns and a network of
health centres in rural areas. This is supplemented by a string of private
hospitals and clinics in largely urban areas. The public expenditure on health
has been growing at a decent rate while private expenditure has been recording
marginal growth.

 Insurance Sector giving a Lift: Indian insurance sector has been thrown open
to private sector. Large sections of Indian population are not covered by health
insurance schemes. Currently, less than 10% of the Indian population is
covered by some form of health insurance.


Pharmaceutical exports touched a level of Rs. 24942 crores during 2006-07. Exports
constitute a substantial part of the total production of pharmaceuticals in India.

YEAR EXPORT (Rs. in Crores)

1998-1999 6256.06
1999-2000 7230.16
2000-2001 8757.47
2001-2002 9751.20
2002-2003 12826.10
2003-2004 15213.24
2004-2005 17857.80
2005-2006 22578.98
2006-2007 24942.00

(Source:-Directorate General of Commercial Intelligence and Statistics - DGCIS, Kolkata)

The formulations contribute nearly 55% of the total exports and the rest 45% comes
from bulk drugs. Pharmaceutical exports clocked $7.2 billion in 2007-08, accounting
for six per cent of the country’s total exports, according to Pharmexcil, the
Pharmaceutical Export Promotional Council.


The rules of pharmaceutical business are changing. Indian pharmaceutical companies

can no longer get away with plundering intellectual properties of multinational
companies. Pharmaceutical business has become a new ballgame altogether after the
introduction of product patents in January 2005.


Pre 2005: New product development efforts of Indian pharmaceutical companies in
process patents era were limited to reverse engineering molecules discovered by other
companies. Thanks to absence of product patents, Indian companies did not have to go
through long winded drug development process. Nor did Indian companies have to
expend any effort on research focus. Indian companies simply zeroed in on
blockbuster drugs and tried to come up with an alternative process as fast as they
could. The focus of the Indian companies was to launch a copy of a blockbuster drug
ahead of their rivals in India and abroad.

Key areas to focus on R&D for Indian companies:

1. Potential product identification
 Complex API
 Complex finished product
 Commercial potential of products
 Out-licensing opportunity to MNCs

2. Novel Drug Delivery System (NDDS)

3. New Drug Development
Post 2005: A large number of drugs are going “off patent” in the next few years.
According to IMH Health, more than $60 billion worth of drugs are going “off
patent” by 2011. Thus, Indian companies will not be short of new products for at least
another two years. In the long run, however Indian companies may find it hard to
make money from drugs coming off patent. Already competition in generic market is
intense and likely to increase further in the future. Hence, new molecules rather than
generics will drive revenues and profits in the product patents area. Indian companies
need to discover new drugs either through their own efforts or research alliances.
Perhaps licensing deals with multinationals could also provide Indian companies
access to new drugs. Focus on basic research will come with its own issues. Indian
companies will have to acquire the skills of identifying research areas that offer
excellent revenue and profit potential. This will entail a closer tracking of disease
profiles and related therapies as well as keeping a close tab on the research
programmes of rivals. Besides, Indian companies will have to pay more attention to

economics of drug development process. A product patent is granted for a period of
20 years


Pre-2005: In the absence of product patents, Indian pharmaceutical companies did
not feel the need to focus on specific therapeutic areas. Most Indian pharmaceutical
companies eschewed narrow focus and tried to cover as many therapeutic areas as
possible. Now the product portfolio of many Indian companies has considerable
breadth and depth. Given the price controls in the market, diversification worked to
the advantage of companies in the domestic markets. In the export markets, a wider
product portfolio gave companies the option of picking and choosing from an array
of opportunities.
Post 2005: Opinion is divided over the therapeutic strategy that Indian companies
should pursue in product patent era. Some companies believe that focus on select
therapeutic segment will fetch them greater dividends in terms of new chemical
entities and market share. Other companies believe such a strategy is risky given the
size of Indian companies and that a big setback in research could sink the company.
Instead such companies are pursuing a de-risking strategy of building a wide product
portfolio. In the domestic market, such a strategy will result in economies of scale at
production and marketing stage, putting the company in a better place to weather
competition from multinationals. In the export markets even after the introduction of
product patents, products under patent protection will comprise only 15 percent of
the market. So a vast chunk of the market will be still open for competition although
margins will be wafer thin.

Pre-2005: Most Indian companies focused on exports. Exports improve the valuation
of companies owing to higher margin in overseas markets. Indian companies built
fortunes by making cheaper versions of blockbuster drugs and selling them in
domestic and export markets. Indian companies built especially strong position in
manufacture of bulk drugs. Out of the total exports, formulations constituted 55
percent and bulk drugs constituted 45 percent. Success in export market allowed
some Indian companies to build a strong position in the domestic market organically
and through acquisitions of brands and companies.

Post 2005: Exports has continued to be a priority for Indian companies. Major
blockbuster drugs will come off patent in the near future, creating a big generic
opportunity for Indian companies. Also, a growing demand for anti-AIDS drugs in
Africa will keep Indian companies busy. Exports have and will continue to provide
Indian companies with the strength to withstand the onslaught of multinationals in
the domestic market.


Pre-2005: Indian pharmaceutical companies have mastered the science of producing
drugs cheaply. Thanks to benign patents regime, Indian companies have developed a
high level of chemical synthesis skills. The absence of development costs together
with efficient production has enabled Indian companies to establish a solid position
in bulk drug manufacturing. But scale did not receive as much importance as it
should have, because the cost of Indian pharmaceutical companies was already low
owing to aforesaid reasons. Many Indian companies did not find the return on
investment of world class plants compelling enough.
Post 2005: By 2011, drugs worth $60 billion will come off patent, presenting a huge
generic opportunity to Indian companies. But the competition in the generic market
will be brutal, resulting in thin margins. The cost of production will hold the key to
success in the generic market. The production cost in turn depends on scale. Indian
pharmaceutical companies need to build global scale to stand a chance in the generics


National Pharmaceutical Pricing Authority (NPPA)-

• NPPA is an organization of the Government of India which was established,
to fix/ revise the prices of controlled bulk drugs and formulations and to
enforce prices and availability of the medicines in the country, under the
Drugs (Prices Control) Order, 1995.
• The organization is also entrusted with the task of recovering amounts
overcharged by manufacturers for the controlled drugs from the consumers.

• It also monitors the prices of decontrolled drugs in order to keep them at
reasonable levels.

Central Drugs Standard and Control Organization (CDSCO) -

CDSCO lays down standards and regulatory measures of drugs, cosmetics,

diagnostics and devices in the country. It regulates clinical trials and market
authorization of new drugs. It also publishes the Indian Pharmacopeia. The main
functions of the Central Drug Standard Control Organization (CDSCO) include
control of the quality of drugs imported into the country, co-ordination of the activities
of the State/UT drug control authorities, approval of new drugs proposed to be
imported or manufactured in the country, laying down of regulatory measures and
standards of drugs and acting as the Central Licensing Approving Authority in respect
of whole human blood, blood products, large volume parenterals , sera and vaccines.
The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port offices.
The four Central Drug Laboratories carry out tests of samples of specific classes of

Department of Chemicals & Petrochemicals (DCP)

DCP is responsible for the policy, planning, development, and regulation of the
chemical, petrochemical, and pharmaceutical industries in India. This department
• To provide impartial and prompt services to the public in matters relating
to chemical, pharmaceutical and petrochemical industries;
• To take steps to speedily redressal of grievances received;
• To formulate policies and initiate consultations with Industry associations
and to amend them whenever required.



Patent is a legal document granted by the government giving an inventor the
exclusive right to make, use and sell an invention for a specified period of time. It is
also available for significant improvements on previously invented articles. The
underlying idea behind granting patents is to encourage innovators to advance the
state of technology. According to the UN definition, a patent is a legally enforceable
right granted by country’s government to its inventor.
Patent Law represents one branch of a larger legal field known as intellectual
property rights. Patent Law centres on the concept of novelty and non-obvious
inventions. The invention must me legally useful. The imitators and all independent
devisors are prevented from using the invention for duration of patent.



Indian Pharmaceutical industry is undergoing fast paced changes. The Indian

Generics market is witnessing rapid growth opening up immense opportunities for
firms. This is further triggered by the fact that generics worth over $40 billion are
going off patent in the coming few years which is close to 15% of the total
prescription market of the US. The Indian pharmaceutical companies have been
doing extremely well in developed markets such as US and Europe. The quality and
affordability of generic drugs have made India a virtual pharmacy to the world.
Nearly 70 percent of generic drugs manufactured in India are exported to other
developing countries. The expansion of AIDS treatment over the past few years has
been driven by the accessibility and affordability of generic ARVs (anti-retro viral
drugs) from India.
Pharmaceutical multinationals have maintained a low-key presence in Indian market
due to absence of product patents and rigid price controls. In the domestic market,
the share of Indian companies has steadily increased from around 20 per cent in 1970
to 70 percent now
The industry has thrived so far on reverse engineering skills exploiting the lack of
process patent in the country. This has resulted in the Indian pharmaceutical players
offering their products at some of the lowest prices in the world. The quality of the

products is reflected in the fact that India has the highest number of manufacturing
plants approved by US FDA, which is next only to that in the US.
Patents Act 1970 in its original form does not differentiate between Process and
Product patents for medicines, food and chemicals. One of the important features of
the Act was that it did not provide product patents for the three mentioned industries.
These industrial sectors were covered by product patent only. In addition the Drug
Price control Order, 1970 put a cap on the maximum price that could be charged and
ensured that the life saving drugs are available at reasonable prices. The Act of 1970
safeguards the interests of the inventor and consumer in an even-handed manner. The
Act has been promulgated in keeping with the Socialistic Principles outlined in the
Directive Principles of State Policy.
Therefore with a regulatory system focused only on process patents, helped to
establish the foundation of a strong and highly competitive domestic pharmaceutical
industry which in the grip of a rigid price control framework transformed into a
world supplier of bulk drugs and medicines at affordable prices to common man in
India and the developing world.


The Indian Patents Act of 1972 granted independence to the Indian pharmaceutical
industry. There was nothing much that Cipla or any other Indian pharmaceutical
company could do before that.
The hands of all the Indian pharmaceutical companies were tied by the then patent law
that put the interest of foreign monopolies before the health of millions of suffering
Indians. April 20, 1972 was a red-letter day for India. It was the day when the Patents
Act (Act 39 of 1970) came into force, replacing the Indian Patents and Designs Act of
1911. The new Patents Act abolished product patents and allowed process patents for
seven years only.
Come to think of it, the rationale behind the patent amendment of 1972 was not very
different from the rationale behind the Independence movement. Our freedom-fighters
essentially fought for the right to decide what was best for our country rather than be
dictated to by foreign powers.
The Indian Patents Act of 1972 granted the pharmaceutical sector the right to produce
any drugs the country needed. It did away with the shackles imposed by monopoly. It

refused to let multinational corporations (MNCs) wear the noble garb of intellectual
If IT professionals give a thought to the significance of this old law they can
easily imagine what could have been the plight of the Indian IT industry if Microsoft
and other software giants were to prevent any Indian from doing any developmental
work on their software platforms???
There are no two opinions on the view that the Amendment brought by the Act in
1972, played an important role in avoiding the health care catastrophe.
In 1971, MNCs had an over 70 per cent share of the Indian pharmaceutical industry.
In 2007, in a reversal of roles, Indian companies commanded 83 per cent. In 1971,
Alembic was the only Indian among the top 12 companies in the Indian
pharmaceutical market. In 2007, there are only three MNCs in the top-12 list.
Pharmaceutical business models are changing. The world is now discovering India as
a preferred place for clinical research. In more ways than one, the industry appears set
to keep up its growth and progress, but for the 2005 Act.
Now we shall see in the next section of the report what exactly does the Patent Act
2005 indicate and suggest.


The Patent Amendment Act 2005 passed by the Parliament in its budget session of
2005 brings the Indian Patent Act in full conformity with the intellectual property
system in all respects. The major amendments introduced in Sections 2 and 3 of the
India patent Act suggest:
An invention in order to be patentable, should:
(i) involve an inventive step capable of industrial application;
(ii) involve technical advances as compared to the existing knowledge or having
economic significance or both; and
(iii) not be obvious to a person skilled in art.
Section 3 outlines various situations where an invention (properly so called) can yet
be not patentable.
Section 3(d) of the Patents Act 1970 has been amended under the new Act to
prescribe a class of discovery which cannot be subject matter of patent under the
following clauses:

• Mere discovery of a new form of known substance which does not result in
the enhancement of the known efficacy of that substance
• Mere discovery of any new property or new use for a known substance
• Mere use of a known process, machine or apparatus unless such known
process results in a new product or employs at least one new reactant.
Product Patents have been extended to fields of technology such as drugs, food and
chemicals but granting of patents are subject to restrictions as mentioned above
(Section 3(d)). This section prevents frivolous inventions from being patented.
The amendments introduced in the Patents Act exhibit the essence of patentability in
the pharmaceuticals and chemicals is inventive ingenuity, novelty and existence of
industrial application or economic significance of the new product or process.


The amendment of 2005 extends full TRIPS coverage to food, drugs and medicines.
It requires patents to be provided to products as well. The other implications for the
pharmaceutical sector under the new act are as follows
• The term of a patent protection has been extended to twenty years
compared to the seven years which was provided by the act of 1970.
• If the law of the country provides so, then the use of the subject matter
of the patent shall be permitted without the authorization of the patent
holder, including use by the government or any other third party
authorized by the government. However such use shall be permitted
only if prior to such use, the user has made efforts to obtain the
authorization of the patent holder and such efforts have not been
successful within a reasonable period of time. This requirement can be
waived in case of a national emergency after notifying the patent
• The onus of proving on a legal complaint that the process used by one
enterprise is totally different from that which has been used by another
would lie on the defendant. Prior to the amendment the responsibility
was on the patent holder to establish patent infringement.


If 1972 was motivated by national interest, 2005 was prompted by international

pressure, by an ill-perceived need to "belong" to the international community. The
Patents Act 1972 resurrected a flagging domestic pharmaceutical industry. This Act
had a much wider purpose; to help the Indian who had to fight TB, diabetes and a
multitude of diseases with affordable medicines.
Every country has its own specific need-based patent laws, which are national laws.
There is no harmonization in patent laws of different countries. Each country has to
decide for itself its own destiny.
Today we have a population of over 1,100 million. The diseases that used to worry us
the most are still around. There is the additional scourge of HIV/AIDS. Millions of
Indians need medicines. Most of them cannot afford to pay high prices.
Going by global experience, product patents that are now again enforced, can only
lead to monopolies and these, in turn, to high prices. Africa and the AIDS issue of
1990-2000 is a clear example.
India needs to build in enough safeguards even in our current patent law. Perhaps in
our haste to join WTO, we neglected many important issues.
A product patent system will make India dependent on the multinational companies
for technology and for permission to produce the patented drug. Exorbitant prices
will be charged and the Indian pharmaceutical industry will become subservient to
the MNCs. They will lose the position that they had gained in the wake of the Act of
The immediate and the most drastic effect that TRIPS compliance and introduction
of the new Act of 2005 will have will be with respect to the health sector in India.
The patients are the ultimate beneficiaries of the pharmaceutical research and
development. By denying product patents India will be able to encourage bulk
generic drug production at cheap prices.
However generics are not the only solution to counter the problem of access to
medicines. Generic production of drugs will not necessarily result in the innovation
of new and more effective drugs and by not acknowledging innovation India will run
the risk of not having access to future medicines which will in turn affect public

The actual problem lies in the fact that the product patents not only increase the cost
of the drugs and medicines, but that most of them fail to introduce research and
development in the neglected diseases. Hence while on one side the introduction of
product patents will help in development of new and more effective drugs, the
problem still remains that the research and development undertaken by the drug
manufactures evade the neglected diseases and the diseases which are region specific
such as medicines for malaria and tuberculosis which are found prevailing in
developing countries like India.


Protestors marched in India against Novartis. WHY?

Nearly a quarter of a million people from 150 countries voiced concerns over the
negative impact of a legal challenge brought by Novartis that could have on access to
medicines in developing countries and had asked Novartis to drop the case. Had the
challenge been won by Novartis it would have been a major blow to production,
domestic use and exports of generics to the world. The drug at issue was a cancer
drug (Glivec) which Novartis sold at US$2500 per patient per month while generic
versions of Glivec in India only cost about US$175 per patient per month.
A court case brought by Swiss drugs giant Novartis in India could define how the
industry distributes discount medicine to the developing world while maintaining
Novartis moved the court on contesting that India's patent law could leave millions
without access to affordable drugs. Opponents accused the Basel-based firm of
squeezing the competition.
In 2005, the Indian government introduced patent protection for drugs for the first
time. But the law only protects completely new compounds that were invented after
1995, a deviation of the industry standard.
The Novartis leukaemia drug Gleevec (Glivec in some countries) fell foul of this
ruling as it was deemed to be a new form of an existing treatment that was developed
before the cut-off date.
This opened the door for generic pharmaceutical companies to copy the treatment,
which was earlier distributed free to thousands of patients in India, at a fraction of the

"We are deeply convinced that patents save lives. If the patent law is undermined the
way it is happening in India, there will be no more investment into the discovery of
lifesaving drugs," said Novartis head of corporate research Paul Herrling.
The company insisted that it will continue to offer Gleevec free to patients in India
who cannot afford it.
Watchdog groups such as Médicins sans Frontières, said generic competition has
dramatically reduced the cost of drugs. They launched a petition against Novartis
while hundreds of activists protested in the streets of the Indian capital, New Delhi.

Lot at stake

The Geneva-based International Federation of Pharmaceutical Manufacturers and

Associations (IFPMA) was "very concerned" about the Indian patent law.
Companies need to have assurances that they can obtain adequate patent protection
that gives a fixed period of legal monopoly in which they can recoup what they have
invested in research so that they can continue their research.
Otherwise they would not have a sustainable industry and that will preclude their
ability to improve treatments.
But the Médicins sans Frontières argued that blocking cheaper generic copies would
keep the cost of treatments such as Gleevec artificially high.
The consequence of a ruling in favour of Novartis would have led to fewer and fewer
drugs in the market. In the long term it would have killed the competition from
generic drugs.
However it was admitted that even the Indian generic drug companies, although
capable of producing Gleevec at a tenth of that charged by Novartis for a monthly
dose, were also looking to make a profit.
Thus it cannot be said that Novartis are the bad guys of the movie and that the


The most practicable solution to the problem which at the same time allows for
TRIPs compliance would be granting of dual licenses. 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. This would solve the problem of excessive hike in prices and
would render the drugs more accessible to the millions suffering. Collaboration with
the MNCs on various fronts such as research and development, manufacturing and
marketing will help Indian Pharmaceutical companies make profitable
As far as India’s pharmaceutical industry is concerned, various options are possible
in the WTO regime. But ultimately, the path currently is followed by international
standards for patent protection moves inevitably toward a clash between public
health and intellectual property.
Stringent intellectual property protection for pharmaceuticals would only retard
public health initiatives in the coming years. Given the rapid evolution of the AIDS
crisis throughout the world, with more than 35 million cases alone in India, a twenty-
year term of market exclusivity for new treatments is not reasonable if we expect to
make real progress in containing the disease. It might well be appropriate for a
governing body to clearly define a list of essential medicines, such as antiretroviral
(ARV) agents, that would be subject to somewhat more relaxed patent protection
compared to other drugs.




The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to
ensure proper market conditions –
• turnover
• market monopoly
• market competition.
Under this, prices of 74 bulk drugs and their formulation are being controlled
representing approximately 20% of the pharmaceutical market. Bulk drugs, with a
turnover of over Rs40 million, are under the purview of the DPCO, excluding
those drugs with sufficient market competition. Sufficient market competition is
defined as the presence of at least five bulk producers and 10 formulations, with
no producer's market share exceeding 40 per cent. In case a single producer
controls about 90 per cent of the market for a drug, which has a turnover in the
range of Rs.10-40 million, the drug is considered to be under the purview of the
price order (ICRA, 2000).
Industrial licensing has been abolished for all drugs, formulations and drug
intermediates except for the five drugs which are reserved for public sector. Moreover,
price controls have been waived for a period of five years for drugs which have been
developed indigenously there is a price controls under DPCO, still a majority of drugs
in the market are not regulated and the price rise during this period is still considered
to be minimal. In short, while the DPCO has evolved in a step-by-step ad hoc fashion,
it has managed to strike a rough balance between regulating prices to ensure adequate
access to essential medicines for the rural and urban poor, while allowing the
emergence of a globally competitive Indian domestic drug industry. The new research
environment has added important new elements to the risk environment of
pharmaceutical research as a by-product of the dramatic exploration of entirely new
areas of application. Manufacturers that venture into new territory are less certain of
what they will find and less confident of what it will be worth when they find it—they
face new uncertainties over both supply and demand.


As a developing country, India has much more limited fiscal and economic resources
alongside a much larger population of low-wage urban workers and small farmers. As
a result, establishing a European-style drug reimbursement scheme, even with a
combination of public and private financing, would require a vast expansion of public
subsidies by the Indian Government.
Although reference pricing is the most common international cost-containment tool,
adopting a European drug pricing system and referencing prices to foreign prices also
would have serious disadvantages in an Indian context. Even if Indian prices were
referenced to, the prices of most advanced drugs would still be prohibitively high and
likely well beyond the reach of the common man. While a European-style universal
health insurance system and a comprehensive public drug benefit could be used to
alleviate the burden on the common man through a public subsidy, it would impose a
massive long-term fiscal burden on the Indian Government. According to the OECD,
in 2003 per capita drug expenditures averaged $606 in France, $507 in Canada, $393
in Japan, $353 in Australia, $284 in the Czech Republic, and $225 in Poland.
Even if these costs were partially subsidized by the Indian Government or the states,
the cost would be prohibitive and would likely displace other vital government
programmes. On the other hand, if the prices of advanced drugs were referenced to
other developing countries, or domestic generic drug prices, such controls would keep
drug prices lower, but undermine the global competitiveness of India's world-class
pharmaceutical companies, and deter future private sector investments in advanced
biopharmaceutical discovery. In such a situation, research by Indian companies and
patenting activity of scientists would likely shift offshore, probably to the U.S. or to
the U.K.


If a government sets the same price for generic and patented medicines, consumers
naturally tend to choose the more advanced product, since it provides better value or
greater quality assurance. Accordingly, demand for unbranded generics in price
controlled markets tends to be artificially reduced.
It is universally acknowledged that drug discovery is an extremely expensive process;

That for every molecule that finally makes it into a product, there are several that are
abandoned on the road to discovery;
Thus the patenting system provides an opportunity to recover developmental costs
over the patent period. The new research environment has added important new
elements to the risk environment of pharmaceutical research as a by-product of the
dramatic exploration of entirely new areas of application.
Manufacturers that venture into new territory are less certain of what they will find
and less confident of what it will be worth when they face new uncertainties over both
supply and demand.


Of the numerous factors that create uncertainty over the demand for new drugs, two
stand out. First, many new drugs address conditions that have not been systematically
treated. Data on the prevalence, health consequences, and social costs are sparse
because conditions that are not treated tend not to be studied. Second, even if one does
know the number of those suffering from a condition and the health consequences of
that condition, we still may have only a vague idea of what people are willing to pay
for the drugs that alleviate those conditions.
• Uncertainty over the health benefits from a new drug is therefore one problem,
• Uncertainty over what consumers are willing to pay for those benefits is


Price controls on pharmaceutical products produce a variety of negative consequences

for national health systems and reduce social welfare by depressing the number of
new drugs added to the global pharmacopoeia. It can also reduce the availability of
some innovative medicines in foreign countries, with the effect of limiting
competition and requiring national health system to forgo the benefits of those
innovations in reducing health care costs.
The economic models also indicate that benefits of lower prices to consumers were
less than the benefits to society of new drugs foregone.


The new pharmaceuticals pricing policy envisaged that all patented drugs that would
be launched in India after 1 January 2005 would be subject to price negotiations
before granting them marketing approval, and that the Drugs and Cosmetics Act 1940
would be suitably amended to provide for this. The Department of Chemicals and
Petrochemicals in consultation with the Department of Health would lay down
necessary guidelines for determining the negotiated prices. Government on 18 January
2007 notified a committee to examine the issue of price negotiations for patented
drugs. The committee was to interact with industry and to propose a system of
reference pricing/price negotiations/differential prices that could be used for price
negotiations of patented drugs and medical devices before their marketing approval in
India. The committee submitted its report by mid April 2007.The considerations
weighed by the committee were-
• An approach was one that would determine the price premium enjoyed by the
drug in the lowest price market abroad compared with the closest therapeutic
equivalent in the same country, and to apply that same premium to the closest
therapeutically equivalent prevailing in the domestic market. That is to say, the
same premium factor prevailing in the domestic market would become one of
the markers.
• Another approach under consideration was the principle of purchase parity
pricing being used in Europe between member countries. Under this
methodology, the price arrived at could be at a substantial discount to the U.S.
prices, even less than 50%.
• There was a push towards looking at prices charged abroad with a view to
determining the lowest of the prices charged overseas.
But every one of these approaches was market distorting, and suffered from several
The National Pharmaceutical policy therefore suggested that all patented drugs that
would be launched in India after 1 January 2005 would be subject to price
negotiations before granting them marketing approvals, and for this the Drugs and
Cosmetics act was amended and was enacted in 2008.

Given the high number of pharmaceutical firms in the informal/unorganized sector,
domestic and foreign drug companies in India also run a large risk that their patented
drugs will be pirated even with protected product patent system.

Price controls benefit health delivery in countries that have a well regulated public
health delivery system. Public health expenditures in Indian states continue to be low,
with a wide disparity in effectiveness of delivery between states. There is a large
private sector and unorganized access to medicines. In these circumstances, price
controls would lead to market distortions, excessive regulation and the development
of grey markets. High duties and transaction costs impose a heavy burden on the
consumer—there are examples where these distort prices enormously, against
imported drugs. A mindset that creates negativity towards imported drugs needs to be



The above analysis makes clear that India should develop a new approach that avoids
the costs of European-style drug price controls, while also avoiding the inequities of a
free market style.
The issue of drug availability is to ensure that-
• the latest clinical treatment and drugs must be available
• these should be accessible to the entire population
• there should be incentives for development of new drugs through R&D that
would require adequate compensation for development costs.
India presents a unique situation. Absence of product patents for over three decades, a
large indigenous industry, coupled with political economy requirements of a welfare
state; require a balance between incentives and control. It is important that the latest
drugs and formulations are available, that they can be reached to all, whether in the
public health or the private health systems. It is equally important that there be an
environment for industry and research to grow, and that global firms are comfortable

using the talent pool in India for R&D and drug discovery, assured of reasonable
Given wide income disparities, a range of public health and private care systems, and
freedom of choice, and the distortions likely to be caused by the price fixing for
patented products, it is important to consider creative solutions that would suit a
developing country like India. A possible alternative that could be adopted in India for
patented drugs is the adoption of a two tier price system.
For example, in some states like Tamil Nadu, drug purchases for public hospitals by
the government are negotiated with the companies. Each tablet carries a distinctive
mark and the strips are separately labelled to indicate that they are not for sale, but
part of the public health care system. The same drugs are available in the open market
at market prices. Such a twin pricing system has the advantage of delivering drugs at
low costs to the public health care system without distorting the market mechanism.
In the case of patented drugs it is conceivable that producers may be willing to accept
prices that are close to marginal costs of production plus fixed returns, if allowed to
access the market for pricing that covers development costs. In this approach, the
Department of Petrochemicals would finalize a list of patented drugs that it intends to
be used in the public health system. Using this approach, the producing companies
would be invited to convey the prices at which these drugs would be made available to
government hospitals and dispensaries. These would be distinctively packaged and
labelled and supplied to the health departments of the states against invoices raised by
them, and accepted terms of payment. Outside this, firms would be free to charge
market prices, and enjoy IP protection in full for their products.
Such an approach might offer a short term solution to drug access concerns, while
longer term structural reforms are explored. In the long-term, any solution to India's
drug access problem requires major structural reforms to the health care system. In
formulating such reforms, a balance must be struck between the markets for free sales
and government supplies. The government cannot supply the entire demand for drugs
unless it is prepared to commit to massive public subsidies and drastic price controls.
A fresh approach is needed.


• The Government has an overriding responsibility to ensure that the citizens of

India – especially the common man -- have access to affordable medicines for
treating the most common and important disease conditions.
• At the same time, any new policy must maintain a world-class Indian life
sciences capability. India is a world leader in the advanced life sciences. The
Indian pharmaceutical industry dominates global generics markets and has
begun making serious investments in innovative drug discovery. Given
adoption of the Product Patents Act and increasing competition from Chinese
generic companies in the international generics marketplace, the future of the
Indian biopharmaceutical industry rests on its ability to innovate. Thus, any
new policy must balance improved access to key medicines for the common
man with support for India's continued capability to discover and develop
advanced medicines, which represents a long-term national asset.


Such a solution requires a two-track approach.

• First, the government should strengthen the public health infrastructure to
ensure that rural and urban poor have universal access to treatments for basic
medical needs. Such a system should be built around government bulk
purchases of low-cost generic medicines. Also, instead of seeking to provide
the latest state-of-the-art treatments for the rural and urban poor, the focus
should be on the low-cost delivery of high-quality, essential care for all.
• While patients in the public health system should be free to purchase more
expensive patented or branded drugs, this could be achieved through a
"balanced-billing" arrangement in which the government would subsidize
only the cost of the basic generic drug, with the remainder being contributed
by the patient. Such an approach would avoid the prohibitive cost of have the
Central or State governments subsidize state-of-the-art foreign medicines,

allowing government funds to be allocated to an expansion of basic care to a
larger number of people.

• A second way is that the government should aim to facilitate the continued

evolution of private health care markets, including private hospitals, private

insurance, and high-cost patented drugs. Creating a separate private market
would ensure that the cost of such advanced care would be borne by middle-
income household. This two-track system would avoid the bureaucratic
complications and prohibitive cost of transferring a European-style
government health care system to a developing country like India.


The "third way" would address the expanding needs of the Indian middle-class for
world-class health care, whilst creating a strong domestic home base for Indian
biopharmaceutical companies to launch their new innovative patented products. And it
would offer a new and creative third-way drug pricing model for developing countries
around the world, which look to India for continued leadership.



The healthcare sector in India has experienced a paradigm a shift due emerging
trends in globalization, developing markets, industry dynamics and increasing
regulatory and competitive pressures.
Companies across the world are reaching out to their counterparts to take mutual
advantage of the other’s core competencies in R&D, Manufacturing, Marketing and
the niche opportunities offered by the changing global pharmaceutical environment.

The pharmaceutical sector offers an array of growth opportunities. This sector has
always been dynamic in nature and the pace of change has never been as rapid as it is
now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology
companies have evolved distinctive business models to take advantage of their
inherent strengths and the "Borderless" nature of this sector. These differentiated
business models provide the pharmaceutical and biotechnology companies’ the
necessary competitive edge for consolidation and growth.


Today, there is a global trend towards consolidation and going forward, as pressures
on the pharmaceutical industry increase, this trend will continue. The driving factors
for mergers and acquisitions in the global pharmaceutical industry are:-
• The lack of research and development (R&D) productivity
• expiring patents

• generic competition
• high profile product recalls
This sector is unique in the sense that it traverses across geographies, as health
has no boundaries, and this very boundary-less nature supports consolidation in
this Industry. With the easy availability of capital and increased global interest in
the pharmaceutical and biotech industry, the sector has become quite a `mergers-
and-acquisitions' favourite.
Apart from the patented pharmaceutical and biotech companies scouting for newer
geographies to launch their patented molecules, the global generics market also has
undergone an unprecedented consolidation wave in the past three years. In 2007,
Teva acquired US generics major IVAX for $7.4 bn, to become the world’s largest
generics company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz
is the generics arm of the Swiss pharmaceutical group.
Novartis, has been buying small generics companies to grow in size.
Sandoz bought Hexal and Eon Laboratories in Germany, as well as Croatia’s Lek,
Canada’s Sabex and Denmark’s Durascan in 2004 and 2005.
Deflation in the generic industry would lead to displacement of weaker players
leading to consolidation. The trend has gathered momentum with the $1.9bn buyout
of Andrx by Watson to create the 3rd largest specialty pharma company
There are three levels of integration that are currently being sought in the generics
• Back-end manufacturing capability (API/formulation)
• Product integration (ANDA pipeline)
• Front-end (marketing and distribution) in the developed world
The US and European generics companies are scouting for alliances/buyouts at the
back end of the chain, which would allow them to offset any manufacturing cost
advantage held by companies in the developing markets. The Indian companies are
looking at the front-end integration as building a front-end distribution set-up from
scratch could take significant time. The product side integration is common to both
sides, with weaker US/European generics companies looking at anyone that could
offer a basket of products. This is because the US/European pipeline is weak while
Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly,
and are looking for geographic expansion.


Mergers and Acquisitions (M&A) interest in India is currently very high in the
pharmaceutical industry. Size and end-to-end connectivity are major detriments in the
global markets. To achieve them, Western MNC’s have to look to Indian companies.
India’s changing therapeutic requirements and patent laws will provide new
opportunities for big pharmaceutical for launching their patented molecules. While,
India’s strong manufacturing base will stand global generic companies in good stead
as a low-cost development and manufacturing destination.
Besides consolidation in the domestic industry and investments by the US and
European firms, the spate of mergers and acquisitions by Indian companies has
ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning
curve through partnerships and alliances with international pharmaceutical firms,
Indian pharmaceutical companies have now moved up a step in the value chain and
are looking at inorganic route to growth through acquisitions. Many top and mid tier
Indian companies have gone on a global "shopping spree" to build up critical mass in
International markets. Also, given the easy access to global finance the Indian
companies are finding it easier to fund their acquisitions.

Incentives for Mergers and Acquisitions by Indian companies

• Build critical mass in terms of marketing, manufacturing and research
• Establish front end presence
• Diversification into new areas: Tap other geographies / therapeutic segments /
customers to enhance product life cycle and build synergies for new products
• Enhance product, technology and intellectual property portfolio
• Catapulting market share
The Indian companies excel as far as the back end of the pharmaceutical value chain
is concerned i.e manufacturing APIs and formulations. Over the past few years the
Indian pharmaceutical companies have also stepped up their efforts in product

development for the global generic market and this is visible with the DMF filings at
the US FDA. About 30% of the new DMF filings at the US FDA are being filed by
Indian companies. What the Indian companies are short of is the front-end
distribution and marketing infrastructure in the developed world. The current stress is
on bridging this gap through any / or all of the following strategies. The type of tactic
employed would depend on the companies’ existing capabilities, available resources,
nature and scale of expansion planned and on the targeted geographical market. The
following is a table of major mergers and acquisitions involving Indian companies.

Acquisitions are the quickest way to front end access. What is interesting is the fact
that apart from market access – i.e marketing and distribution infrastructure, the
acquiring company also gets an established customer base as well as some amount of
product integration (the acquired entities generally have a basket of products) without
the accompanying regulatory hurdles.
There are also entry barriers for companies from the developing countries and
acquisitions make it easy for these organizations to find a foothold in the developed
Over the last two years, several Indian companies have targeted the developed
markets in their pursuit of growth, especially via the inorganic route. Companies such
as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one or more
European acquisitions, while others such as Torrent are also scouting for potential

Table: Merger and Acquisition in Recent Years
Announ Target Acquirer Reason Deal Target
ce data Value Country
Feb-06 Betapharm Dr.Reddy’s Front end line in Germany 570 Germany
Dec-05 Bouwer Glenmark Front end line in SA NA South Africa
Dec-05 Able Labs Sun Mfg facility in US, 23 US
Pharma Turnaround potential
Nov-05 Nihon Ranbaxy Increasing stake to 50% to NA Japan
Pharma take advantage of Japanese
Generic Oppurtunity
Nov-05 Roche’s API Dr.Reddy’s Increasing presence in 58.97 Mexico
Facility Labs Contract Mfg
Oct-05 Avecia Nicholas Increasing presence in 17.1 UK,Canada
Piramal Contract Mfg
Oct-05 Servycal SA Glenmark NA NA South Africa
Oct-05 Target Jubilant Capitalizing on CRO 33.5 NA
Research Organosys oppurtunity
Sep-05 Explora Labs Matrix Explora’s expertise in bio- NA Switzerland
SA Labs catalyst would help in dev of
high potency API’s
Sep-05 Valeant Mfg Sun Controlled substance mfg NA US
Pharma facility
Jul-05 Trinity Labs Jubilant US FDA Facility inUS, 12.3 US
Inc Organsys pipeline of ANDA’s
Jun-05 Heumann Torrent Entry in German market NA Germany
Gmbh & Co
Jun-05 Doc Pharma Matrix Lab Front-end in Europe 263 Belgium
Jun-05 Generic Prod Ranbaxy Spanish Generic Market-18 NA Spain
Portfolio products
Jun-05 Biopharma Strides Entry into new market - 1 Latin

Arcolab Venezuela America
Mar-05 Uno-Cicle Glenmark Establish brand presence in 4.6 Brazil
Hormonal Brazilian market
Feb-05 Strides Strides Additional 12.5% stake to 6 Brazil
Latina Arcolab establish presence in
Brazilian market
Feb-05 Mchem Matrix Lab Backward integration, ARV NA China
Pharma mfg in China
Dec-04 Rhodia Nicholas International Product line 14
Anathetic Piramal
Jun-04 Psi Jubilant NA NA Belgium
SupplyNV Organsys
May-04 Trigenesis Dr.Reddy’s Niche Technology 11 US
Therapeutics Labs
May-04 Espama Wockhardt Front end line in Germany 11 Germany
Apr-04 Laboratories Glenmark Entry in Brazil 5.2 Brazil
Klincer Do
Dec-03 RPG Aventis Ranbaxy Front end in France 84 France
Jul-03 Alpharma Cadila Front end in France 6.2 France
Saa healthcare
Jul-03 CP Pharma Wockhardt Front end and mfg in Europe 17.7 UK


While growth via acquisitions is a sound idea in principle, there are challenges as
well, 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. In several other cases acquisitions by Indian
generic companies are small and have been primarily to expand geographical reach
while at the same time, shifting production from the acquired units to their cost-
effective Indian plants. A few have been to develop a bouquet of products. Other than
Wockhardt’s acquisition of CP Pharma and Esparma, it has taken at least three years
for the other global acquisitions to see break-even.
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. Also, with the increasing spate of acquisitions, target valuations
have substantially increased making it harder for Indian companies to fund the


Wockhardt is a global, pharmaceutical and biotechnology company that has grown by

leveraging two powerful trends in the world healthcare market - globalization and
Acquisition Management
The company has a strong track record in acquisition management, with three
successful acquisitions in the European market and two in the domestic space.

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,
and have expanded the global reach of the organization.

The growth drivers for Wockhardt’s European business include exports, new product
launches, penetration in the European Union through mutual recognition, and
strategic acquisitions.
• Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10
largest generics companies in UK and the second largest hospital generics
• The Company has a comprehensive, FDA-approved manufacturing facility for
injectables that plays a strategic role in driving the company’s growth through
partnerships in contract manufacturing
• Wockhardt UK has built up a critical mass in the segments of Retail Generics,
Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care
(denture cleaning tablets, powders and fixative creams)
• The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic
entry point into Germany, the largest generics market in Europe
• Esparma has a strong presence in the high-potential segments of urology,
neurology and diabetology, assisted by a dedicated sales & marketing
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. 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 company has plans for
further acquisitions in the developed markets of Europe and US to further consolidate
and strengthen their positions in these geographies.


We will study the implications of the merger between Ranbaxy and Daiichi Sankyo,
from an intellectual property as well as a market point of view.
Why did Ranbaxy go in for a merger with Daichii?

Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy
Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to
operate as Daiichi Sankyo’s subsidiary but was managed independently.
The main benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost
manufacturing infrastructure and supply chain strengths. Ranbaxy gained access to
Daiichi Sankyo’s research and development expertise to advance its branded drugs
business. Daiichi Sankyo’s strength in proprietary medicine complemented Ranbaxy’s
leadership in the generics segment and both companies acquired a broader product
base, therapeutic focus areas and well distributed risks. Ranbaxy is now functioning as
a low-cost manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a
smoother access to and a strong foothold in the Japanese drug market. The immediate
benefit for Ranbaxy was that the deal freed up its debt and imparted more flexibility
to its growth plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi
Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical

The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their
respective presence in the developed and emerging markets. While Ranbaxy’s
strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the
potential of the generics business, Ranbaxy’s branded drug development initiatives for
the developed markets will be significantly boosted through the relationship.
To a large extent, 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, particularly in the
Japanese market.
Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and
have profound strength in striking lucrative alliances with other pharmaceutical
companies. Despite these strengths, the companies have a set of pain points that can
pose a hindrance to the merger being successful or the desired synergies being
With R&D perhaps playing the most important role in the success of these two
players, 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. While Daiichi Sankyo’s patenting activity
has been rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in
its patenting activity until 2005. In fact, during 2007, the company’s patenting activity
plunged by almost 60% as against 2006.

Post-acquisition Objectives
In light of the above analysis, we see that Daiichi Sankyo’s focus is to develop new
drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. In a global
pharmaceutical industry making a shift towards generics and emerging market
opportunities, Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of
its global counterparts Novartis and local competitors Astellas Pharma, Eesei and
Takeda Pharmaceutical.
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


• 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, Daiichi Sankyo’s portfolio has broadened to include steroids and
other technologies such as sieving methods, and a host of therapeutic segments
such as anti-asthmatics, anti-retroviral, and impotency and anti-malarial drugs.
• Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic
drugs across 17 diverse therapeutic indications.
• Through the deal, Ranbaxy has become part of a Japanese corporate
framework, which is extremely reputed in the corporate world. As a generics
player, Ranbaxy is very well placed in both India and abroad.
• Given Ranbaxy’s intention to become the largest generics company in Japan,
the acquisition provides the company with a strong platform to consolidate its
Japanese generics business. From one of India's leading drug manufacturers,
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. A smooth entry into the Japanese market and access to widespread
technologies including, plant, horticulture, veterinary treatment and cosmetic
products are some things Ranbaxy can look forward as main benefits from the










The SWOT analysis of the industry reveals the position of the Indian pharmaceutical
industry in respect to its internal and external environment.


1. India with a population of over a billion is a largely untapped market. In fact

the penetration of modern medicine is less than 30% in India. 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.
2. The growth of middle class in the country has resulted in fast changing
lifestyles in urban and to some extent rural centres. This opens a huge market
for lifestyle drugs, which has a very low contribution in the Indian markets.
3. Indian manufacturers are one of the lowest cost producers of drugs in the
world. With a scalable labour force, Indian manufactures can produce drugs at
40% to 50% of the cost to the rest of the world. In some cases, this cost is as
low as 90%.
4. The fact that despite the low level of unit labour costs India boasts a highly
skilled workforce has enabled the country's pharmaceutical industry at a
relatively early stage to offer quality products at competitive prices. Each year,
roughly 115,000 chemists graduate from Indian universities with a master’s
degree and roughly 12,000 with a PhD.4 The corresponding figures for Germany
– just fewer than 3,000 and 1,500, respectively – are considerably lower. After
many chemists from India migrated to foreign countries over the last few years,
they now consider their chances of employment in India to have improved. As a
result, a smaller number is expected to go abroad in the coming years; some may
even return.
5. Indian pharmaceutical industry possesses excellent chemistry and process
reengineering skills. This adds to the competitive advantage of the Indian

companies. The strength in chemistry skill helps Indian companies to develop
processes, which are cost effective.


1. The Indian pharmaceutical companies are marred by the price regulation. Over
a period of time, this regulation has reduced the pricing ability of companies.
The NPPA (National Pharmaceutical Pricing Authority), which is the authority
to decide the various pricing parameters, sets prices of different drugs, which
leads to lower profitability for the companies. The companies, which are
lowest cost producers, are at advantage while those who cannot produce have
either to stop production or bear losses.
2. Indian pharmaceutical sector has been marred by lack of product patent, which
prevents global pharmaceutical companies to introduce new drugs in the
country and discourages innovation and drug discovery. But this has provided
an upper hand to the Indian pharma companies.
3. Indian pharma market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on
exports for growth. To put things in to perspective, India accounts for almost
16% of the world population while the total size of industry is just 1% of the
global pharma industry.
4. Due to very low barriers to entry, Indian pharma industry is highly fragmented
with about 300 large manufacturing units and about 18,000 small units spread
across the country. This makes Indian pharma market increasingly
competitive. The industry witnesses price competition, which reduces the
growth of the industry in value term. To put things in perspective, in the year
2003, the industry actually grew by 10.4% but due to price competition, the
growth in value terms was 8.2% (prices actually declined by 2.2%)


1. The migration into a product patent based regime is likely to transform

industry fortunes in the long term. The new patent product regime will bring
with it new innovative drugs. This will increase the profitability of MNC
pharma companies and will force domestic pharma companies to focus more
on R&D. This migration could result in consolidation as well. Very small
players may not be able to cope up with the challenging environment and may
succumb to giants.
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. Since generic drugs are commodities by nature, Indian producers have
the competitive advantage, as they are the lowest cost producers of drugs in
the world.
3. Opening up of health insurance sector and the expected growth in per capita
income are key growth drivers from a long-term perspective. This leads to the
expansion of healthcare industry of which pharma industry is an integral part.
4. Being the lowest cost producer combined with FDA approved plants; Indian
companies can become a global outsourcing hub for pharmaceutical products.

1. There are certain concerns over the patent regime regarding its current
structure. It might be possible that the new government may change certain
provisions of the patent act formulated by the preceding government.
2. Threats from other low cost countries like China and Israel exist. However, on
the quality front, India is better placed relative to China. So, differentiation in
the contract manufacturing side may wane.
3. The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the
short-term, the implications over the long-term are positive for the industry.



Pharmaceutical industry is one of the most competitive industries in the country with
as many as 10,000 different players fighting for the same pie. The rivalry in the
industry can be gauged from the fact that the top player in the country has only 6
%(2006) market share, and the top 5 players together have about 18 %(2006) market

Thus, the concentration ratio for this industry is very low. High growth prospects
make it attractive for new players to enter in the industry. Another major factor that
adds to the industry rivalry is the fact that the entry barriers to pharmaceutical industry
are very low. The fixed cost requirement is low but the need for working capital is

The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells
us that in bigger companies this ratio is in the range of 3.5-4 times. For smaller
companies, it would be even higher.

Many small players that are focussed on a particular region have a better hang of the
distribution channel, making it easier to succeed, albeit in a limited way.

An important fact is that, pharmaceutical is a stable market and its growth rate
generally tracks the economic growth of the country with some multiple (1.2 times
average in India). Though volume growth has been consistent over a period of time
value growth has not followed in tandem.

The product differentiation is one key factor which gives competitive advantage to the
firms in any industry. However, in pharmaceutical industry product differentiation is

not possible since India has followed process patents till date, with loss favouring
imitators. Consequently product differentiation is not a driver, cost competitiveness is.
However, companies like Pfizer and Glaxo have created big brands over the years
which act as product differentiation tools.

Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical

products discovered by MNCs at a lower cost and make good profit. 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. Also contract research
has assumed more importance now.


The unique feature of pharmaceutical industry is that the end user of the product is
different from the influencer (read doctor). The consumer has no choice but to buy
what doctor says. However, when we look at the buyer’s power, we look at the
influence they have on the prices of the product. In pharmaceutical industry, the
buyers are scattered and they as such do not wield much power in the pricing of the
products. However, govt with its policies, plays an important role in regulating pricing
through the NPPA (national pharmaceutical pricing authority).


The pharmaceutical industry depends upon several organic chemicals. The chemical
industry is again very competitive and fragmented. The chemicals used in the
pharmaceutical industry are largely a commodity. 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, what can happen is that
the supplier can go for forward integration to become a pharmaceutical company.
Companies like Orchid Chemicals and Sashun Chemicals were basically chemical
companies who turned themselves into pharmaceutical companies.


Pharmaceutical industry is one of the most easily accessible industries for an
entrepreneur in India. The capital requirement for the industry is very low; creating a
regional distribution network is easy, since the point of sales is restricted in this

industry in India. However, creating brand awareness and franchisee among doctors is
the key for long term survival. Also, quality regulations by the government may put
some hindrance for establishing new manufacturing operations. The new patent
regime has raised the barriers to entry. But it is unlikely to discourage new entrants, as
market for generics will be as huge.

This is one of the great advantages of the pharmaceutical industry. Whatever happens,
demand for pharmaceutical products continues and the industry thrives. One of the
key reasons for high competitiveness in the industry is that as an ongoing concern,
pharmaceutical industry seems to have an infinite future. However, in recent times the
advances made in thee field of biotechnology, can prove to be a threat to the synthetic
pharmaceutical industry.

This model gives a fair idea about the industry in which a company operates and the
various external forces that influence it. However, it must be noted that any industry is
not static in nature. It’s dynamic and over a period of time the model, which have used
to analyse the pharmaceutical industry may itself evolve.

Going forward, we foresee increasing competition in the industry but the form of
competition will be different. 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.
This is owing to the fact that the industry will move towards consolidation. The larger
players in the industry will survive with their proprietary products and strong

In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key
players. Smaller fringe players, who have no differentiating strengths, are likely to
either be acquired or cease to exist.

The barriers to entry will increase going forward. The change in the patent regime has
made sure that new proprietary products come up making imitation difficult. 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.
Economies of scale will play an important part too. Besides government will have a
bigger role to play.




We have analyzed the top five companies in the Indian pharmaceutical industry for the
purpose of doing the quantitative analysis. Our rationale behind selecting the top five
companies has been the –SALES AND PROFIT.

We studied the sales and profit figures of the companies operating in this industry and
zeroed in on the following companies:


On a similar basis, we chose the bottom three companies in the Indian Pharmaceutical
industry. These are:
• SIRIS Ltd.
We have analyzed the financial position of these companies using the RATIO
ANALYSIS. The first step was to identify the key ratios and study the performance of

the companies using these ratios as the base. After this, we made inter- firm
comparison of the companies, followed by detailed ratio analysis for the last five

In the following pages, we will be studying the detailed analysis of all the above
mentioned companies.



Reddy's Piramal Sun Ranbaxy
Cipla Labs Health Pharma. Labs.
YRC Aggregate 3 200803 200803 200803 200712
Key Ratios
Debt-Equity Ratio 0.98 0.1 0.09 0.43 0.18 1.37
Long Term Debt-
Equity Ratio 0.69 0.1 0 0.28 0.18 0.92
Current Ratio 1.58 2.66 2.37 1.54 3.04 0.98

Turnover Ratios
Fixed Assets 1.78 2.05 2.27 1.74 3.62 2.04
Inventory 5.02 3.9 6.11 8.34 8.88 4.64
Debtors 4.53 3.38 3.53 7.5 3.96 4.72
Interest Cover Ratio 5.82 47.45 40.76 5.61 208.94 9.29

Debt equity ratio is an important indicator of the solvency of a firm. This ratio
indicates the relationship between the external equities or the outsider’s funds and the
internal equities or the shareholder’s funds. A wise mix of debt and equity increases
the return on equity because:
- Debt is generally cheaper than equity

- Interest payments tax deductible expenses, where as dividend are paid from
taxed profits.
- A high debt to equity ratio indicates aggressive use of leverage and a high
leveraged company is more risky for creditors.
- A low ratio on the other hand indicates that the company is making little use
of leverage and is too conservative.

If we compare the debt equity ratio, then Ranbaxy Lab, with its debt equity ratio of
1.37, establishes itself as the most risk taking company. The ratio is greater than the
satisfactory ratio of 1:1 and this indicates that the claims of the outsiders are greater
than those of the owners. Dr Reddy’s labs and Cipla with the ratio of 0.09 and 0.1
respectively indicates low debt financing and a higher margin of safety to the creditors
at the time of liquidation of the firm. But too low a ratio of these companies also does
indicate that they have not been able to use low cost outsiders’ funds to magnify their


From the long term creditors point of view, a low ratio is considered favourable,
which is why , Dr Reddy’s labs with a ratio of zero holds an edge overall others as a
high proportion of owner’s funds provide a larger margin of safety for them.
Ranbaxy with a ratio of almost equal to 0.92, which is almost equal to 1, may not be
able to get credit without paying very high interest and without accepting undue
pressures and conditions of the creditors.


Current ratio evaluates the liquidity of the business. It is a ratio of current assets to
current liabilities and is an indicator of a company’s abilities to pay its debts in the
short term. Current ratio is expected to be atleast2:1. And if we have a look at the
figures, we see that this criterion is met by Sun Pharma, Cipla and Dr.Reddy’s lab. On
the other hand the rest of the companies lag behind in their current ratio with Ranbaxy
having lowest current ratio of 0.98.
But the most important aspect that cannot be ignored is that current ratio is
independently, can hardly convey any useful information. Even a high current ratio

may not be good news if the proportion of liquid assets in the total assets is far less
than the proportion of the stuck inventories. We shall therefore analyze the Quick ratio
and Inventory turnover ratio together.
The inventory turnover ratio indicates the no. of times the inventory of the company
is turned into sales. A high inventory turnover ratio means fast moving inventory and
thus a low risk of obsolescence.
From the Inventory turnover ratio, we have calculated the operating cycle or the
average time in which the inventory gets converted into sales for each company. This
is tabulated below:

77.5 92.3 58.9 43.16 40.5

Piramal has a current ratio of 1.54 which is almost half the current ratio Sun Pharma
with an average operating cycle of 43.16 days. Ranbaxy has a still lower current ratio
of 0.98 with an average operating cycle of inventory of 77.5 days Thus it shows that
Ranbaxy has less current assets and those current assets take more time to get
converted to sales which indicates less liquid assets’ proportion.
Cipla with a current ratio of 2.66, which is almost comparable to Dr Reddy’ s labs
ratio of 2.37, portrays a different picture, when it comes to inventory operating cycle.
Dr.Reddy’s Lab takes approximately 33 days less than Cipla to convert its inventory
to sales. Thus with almost the same amount of fixed assets , Dr Reddy’s labs shows
faster moving inventories as compared to Cipla. It shows that Cipla though has a
good amount of current assets yet the proportion of liquid assets is less as current
assets spend more time as inventory.
Sun Pharma tops the chart of current assets with a figure of 3.04 and also has the
highest inventory turnover ratio of 8.88. This shows that Sun Pharma has more current
assets than any other company, but is still managing its inventory so well that its
average operating cycle is the least i.e. 40.5 days.


Fixed asset turnover ratio measures the efficiency of the firm in utilizing its assets. A
fixed asset turnover ratio indicates that the company ids tuning over its fixed assets

such that it generates greater sales. A low fixed assets turnover ratio indicates that the
company has more fixed assets than it actually needs for its operations. Sun Pharma
has the highest fixed asset turnover ratio of 3.62 which indicates that it generates
highest sales than any other company. It may also mean that Sun Pharma has fewer
amounts of fixed assets than Cipla which has more of fixed assets but falls short on
fixed asset management.


It is measures the ability of a company to collect credit from its customers in a prompt
manner and enhance its liquidity. This ratio measures how efficient is firm’s credit
and collection policy and also says about the quality of firm’s debtors. If we look at
the figures, we see that Piramal has the highest debtor turnover ratio of 7.50 followed
by Ranbaxy and Sun Pharma. Cipla is the poorest performer in this category with a
debtor turnover ratio of 3.38. We have calculated the average debt collection period of
all these companies, as illustrated below:
76.20 106.5 101.98 48 90.90

The above mentioned figures clearly indicate that Cipla’s portfolio of debtors is
comparatively poor with Dr Reddy’s lab also following Cipla’s footsteps. These
companies have a debt collection period of more than 3 months and therefore run a
risk of debts becoming bad debts. A note must be taken care of that the average debt
collection period of a company is in sync with the company’s credit period. If the
former lags than the latter, it is an alarming sign. Piramal with an average debt
collection period of 48 days shows that debtors have a good credibility. Though
Piramal is far behind than any of the companies in management of fixed assets and
also does not put up a good show as far as the amount of current assets is concerned,
yet its management of its limited resources to the maximum speaks volumes about the
company. Thus, no questions that Piramal’s growth, though slow, will be steady and
sustainable in the long run. A good portfolio of debtors is essential as granting of
credit to customers without taking a note of their credibility was the sole reason which
triggered the crash of banks in US.

The Sun pharma’s interest cover ratio is approximately four times more than
that of Cipla. This is an interesting fact as the debt equity ratio of Sun pharma is more
than that of Cipla. It means that inspite of more outside funds than Cipla it has low
interest cover ratio. It can happen only when the profits earned by Sun pharma are
more than those of Cipla. Thus, even though Sun pharma is a higher risk taker than
Cipla it has better margins of safety to cover up its interest expenses.
Ranbaxy’s figure of 9.29 is very low as it also has high debt equity ratio of
1.37. This indicates that inspite of having a larger proportion of outside funds (debts)
its profits are not sufficient enough to cover the interest expenses.
Following is a comparison of the debt equity ratio & interest cover of Ranbaxy
Debt-Equity ratio = 1.37
Interest cover ratio = 9.29
The debt equity ratio is approximately 0.14 times more than the interest cover ratio.
In case of Sun pharma,
Debt equity ratio = 0.18
Interest cover ratio = 208.94
It is seen that the interest cover ratio is approximately 1160 times more than the debt
equity ratio. Thus we can infer that higher the interest cover ratio of a company in
comparison to debt equity ratio the more safe is the company to continue its
operations in conditions of decreased earnings.


Ratios Krebs Siris Morpen

CURRENT RATIO 1.41 3.56 4.84



Debt equity ratio of Kerbs, Siris and Morepen is very less, not even equal to 1 which
suggests that these companies are very conservative in their approach i.e. depend only
upon their shareholder’s funds.
Morepen’s debt equity ratio as well as long term debt equity ratio is zero, signifying
that the entire capital is contributed by the shareholders only. In spite of less outside
funds, Kerbs fares a bit well than the other two. Ratio for their low debt equity ratio
may be that creditors are unsure of getting back their amount and interests on the due
dates, which is why they are apprehensive of investing in these companies.


Current ratio of Morepen and Siris exceeds the normally required 2:1 ratio. Only
Kerbs fall short of this specification. Current ratio does not portray a healthy and
sound position of the companies .We can also see that the debtor turnover ratio is zero
for Siris and Morepen which indicates that though the company has debtors( current
assets) but those debtors are not turning up with payments on due dates. Thus, the
current assets (debtors) are high but it is of no use because of their no chance of
getting recovered.
The figures of the zero in case of Siris and Morepen suggest that the return from fixed
assets is nil. Also in case of Kerbs, it is minimal. This suggests that these companies

have though invested in fixed assets, yet are not gaining anything from those capital
expenditure. In short those fixed assets are not operational.


Siris and Morepen figures suggest that the inventory is not at all getting converted in
to sales. This is an indication of permanently stuck inventory- a loss to the company.
Though Kerbs does have an inventory ratio figure of 1.17, it is no good as it indicates
that the operating cycle for inventory is a around 340 days, which is only slightly than
a year. Thus in a year, inventory gets converted into sales only once.


For Kerbs, the debtor turnover ratio is approximately 2 , which means that the average
debt a collection period is somewhere around 180 days. In case of Siris and Morepen ,
this ratio is zero. This means that the debtors are not at all turning up or we can say
that the debts have become bad debts in this year.


Morepen has interest cover ratio of 0, which shows that there are no profits at all and
it cannot cover up for its interest expenses. There is no margin of safety in case the
company has low earnings. In case of the other two companies the negative Interest
cover ratio indicates that the company is making losses. Thus we can say that in case
of these companies the interest expense are not covered. In addition the companies are
not even able to cover up their operating expenses.

• The Company has pushed the frontiers of possibility, both horizontally and
• Growth through scientific breakthroughs and strategic initiatives has been
achieved. This is more evident after the merger of RANBAXY with DAIICHI.
• The clear aspiration is to achieve global sales of US $ 5 Bn by 2012 and
position itself among the top 5 global generic companies.


• Ranbaxy achieved Global Sales of US $ 1,619 Mn, a growth of 21%.

Emerging markets strengthened their presence in the Company's overall sales
mix, and comprised 54% of the total sales (49% in 2006).

• Went into merger with Daiichi in June 2008.


2004 2005 2006 2007 2008
DEBT EQUITY RATIO 0.04 0.24 0.89 1.37 1.37
LONG TERM DEBT EQUITY 0 0.03 0.5 0.92 0.92
CURRENT RATIO 1.63 1.21 1.06 0.98 0.98
FIXED ASSET TURNOVER 2.95 2.29 2.09 2.04 2.04
INVENTORY TURNOVER RATIO 4.72 4.1 4.44 4.64 4.64
DEBTOR TURNOVER RATIO 5.97 4.6 4.51 4.72 4.72
INTEREST COVERAGE RATIO 58.23 6.66 8.58 9.29 9.29

 Debt equity ratio and the long term debt equity ratio of the company have increased
from 2004 to 2008, indicating the aggressive strategy adopted by the company to
depend more on debt than on equity. The heavy dependence of Ranbaxy on the debt
took its toll as the company ran into losses on account of nonpayment of required
interests and principal disbursements on time. Because of this Ranbaxy was taken
over by Daiichi – a Japanese pharmaceutical company, which offered Ranbaxy,
monetary assistance to overcome deep debts. Hence it is clear that playing too much
risk without foresight may force liquidation of the company or may result into a
forced acquisition or merger!

 Current ratio has decreased between 2004 -2007, indicating that the company went
into a current asset deficit. The current asset from 2005 went even below the mean of
the total current assets over 5 years. This current asset ratio figure falls way short of the
satisfactory ratio of 2:1.

 A continuous decline in the fixed asset turnover ratio over the 4 years indicates
acquisition of fixed assets. This acquisition of fixed assets does not go in favor of the
company as increase in fixed asset will also result in cost of maintenance and for that
the company is not showing an increase in the cash in hand.

 Inventory turnover ratio, though reduced by around 13 % in 2005over 2004, but

showed an improvement in the operating cycle of inventory in the successive years.
This period was also marked by the amendments in the Patent Act. Amendments in the
act must have come as a respite as it checked the inflow of generic drugs in the market.

 Debtor turnover ratio of Ranbaxy has increased over the years. Though the company
has bettered its average debt collection period by 4.65%in 2007 over 2006, yet its
average debt collection at the end of 2007 showed an increase of 26.48% over the year
2004. (Being 76 days in 2007 and 60 days in 2004).

 Interest coverage ratio decreased considerably in 2005 by about 88.56% thus

reducing the safety margin to cover the interest requirements. It was when Ranbaxy
was taken over by Daiichi that Cipla made it to the top position in 2008.

In 2008–09, Dr.Reddy’s lab will complete 25 years of being in business.

It is a significant milestone.
Between 1999–2000 and 2007–08, the Company has increased its revenues at an
exponential trend rate of growth (i.e. trend CAGR) of 27 per cent per year, measured
in US dollars.
During 2007–08, the Company successfully launched RedituxTM in India; a
monoclonal antibody used in the treatment of cancer and thus demonstrated its
technological prowess in manufacturing a product in the biologics space

Financial Highlights Consolidated Revenues

• Consolidated revenues decreased by 23% to Rs. 50,006 million or U.S. $. 1.25
billion in 2007– 08 from Rs. 65,095 million in 2006–07.
• Operating Income decreased by 70% to Rs. 3,358 million in 2007–08 from Rs.
11,331million in 2006–07.
• Profit before tax and minority interest decreased by 67% to Rs. 3,438 million
in 2007–08 from Rs. 10,500 million in 2006–07.
• Profit after tax decreased by 50% to Rs. 4,678 million in 2007–08 from Rs.
9,327 million in 2006–07.
• Fully diluted earnings per share decreased to Rs. 27.73 in 2007–08 from Rs.
58.56 in 2006–07.

The company launched 10 new products in the US generics market in 2007–08,

including two over-the- counter (OTC) products. The company had filed 122
cumulative Abbreviated New Drug Applications (ANDAs) in 2007-08.

Key Financial Ratios

2004 2005 2006 2007 2008

DEBT EQUITY RATIO 0.02 0.08 0.28 0.19 0.09
LONG TERM DEBT EQUITY 0.01 0.01 0.04 0.02 0
CURRENT RATIO 3.73 2.49 1.85 2.21 2.37
FIXED ASSET TURNOVER 2.33 1.79 2.05 3.45 2.27
INVENTORY TURNOVER 6.99 5.79 5.64 8.69 6.11
DEBTOR TURNOVER RATIO 3.97 3.78 4.21 4.94 3.53
INTEREST COVERAGE RATIO 72.71 3.82 10.39 27.29 40.76


 The debt equity ratio shows fluctuation with an increase in 2005, followed by
a decrease, again by an increase and then finally by a decrease. In spite of
these fluctuations, the range of debt equity ratio is from 0.02 to 0.19. This
range shows that the debt equity proportion of the company remained almost
constant. Long term debt equity ratio trends
Also hardly show any fluctuation as the minimum of it is 0.00 and a maximum
of 0.04. This signifies that the company did not rely too much on either the
debts or the equity, rather maintained a balance between the two.

 Current ratio also shows fluctuations with first an increasing trend till 2006
followed by a decrease and finally an increasing trend in the next two
successive years. We can infer that when the economy was hit in 2008 by
financial crisis then the company wisely decreased its debts and increased its
current assets, thus aiming to minimize the liquidity crunch.
 Fixed assets turnover ratio over the five years show a dip in 2008 over the
2007 figures revealing the fact that the company could not generate better
revenues from fixed assets in 2008 than in 2007. It can be attributed to a
decline in consumer demand in 2008 which led to a decrease in the efficient
utilization of the fixed assets.
 Inventory turnover ratio increased in 2007 over 2006 by 54% followed by a
sharp decline of approx 30%in 2008. Thus, in 2008 the inventory took longer
time to convert to sales than in 2007.

 Debtor’s turnover ratio increased consistently till 2007 showing a good trend
in average debt collection period but fell to 3.53 in 2008 showing that debtors
failed to turn up quickly as compared to previous years.
 Interest cover ratio though increased in 2008 over the last three years is a
positive sign inspite of the earnings of the company showing a dip. Hence the
company managed to keep a wide safety margin to cover up its interest


Dr. K Hameed set up in 1935 The Chemical, Industrial & Pharmaceutical
Laboratories, which came to be popularly known as Cipla.
On August 17, 1935, Cipla was registered as a public limited company with an
authorised capital of Rs 6 lakhs.
Cipla was officially opened on September 22, 1937 when the first products were ready
for the market.


 Topped pharma rankings with 5.42% market share, a head of Ranbaxy and
 Cipla Laboratories continues to be the largest pharmaceutical company in
the domestic market.
 According to an article published in Business Standard on Jan1, 2008
Cipla topped the ORG-IMS rankings for with a market share of 5.42 per
cent and sales of Rs 146.32 crore, edging out Ranbaxy which stood at
second position with 5.09 per cent market share and Rs 137.49 crore sales.
 Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the
largest pharmaceutical company in the domestic market for the first time in
May 2008.


Key Financial Ratio
2004 2005 2006 2007 2008
DEBT EQUITY RATIO 0.13 0.14 0.19 0.11 0.1
LONG TERM DEBT EQUITY 0.11 0.12 0.16 0.1 0.1
CURRENT RATIO 1.87 1.89 2.06 2.42 2.66
FIXED ASSET TURNOVER 3.19 2.73 2.59 2.24 2.05
INVENTORY TURNOVER 3.14 3.54 3.55 3.65 3.9
DEBTOR TURNOVER RATIO 4.63 4.29 4.13 3.71 3.38
INTEREST COVERAGE RATIO 30.28 39.73 45.17 73.4 47.45


 The debt equity ratio over the five years is indicative of the fact that there has
not been any significant change in figures. Though this ratio first changed
from 2004 to 2006 with marginal increase, it again dropped back in 2007, even
below the 2004 figures. The 2008 figures are still lower. It shows that from
2004 to 2006, the company relied more on debts from outside sources than on
equity from shareholders. The reason may be that the company decided to
restrain from dividend payment as these are taxed profits. In the two
successive years, the company’s less reliance on outside funds and more on
shareholder’s funds indicates a shift from aggressive to conservative strategy.
This move seems a sensible one in the wake of economic slowdown. With
drawl from risk debt financing, may though affect the returns on investment,
but is a better choice in the present scenario , where the companies are finding
it difficult to make interest payments on due days. Hopefully, for a year or so,
the companies will continue to rely more on equity.
 Long term debt equity ratio also follows the same trend; first an increase till
2006 and then a decrease till 2008, showing less dependency on long term
debts. This can be again attributed to 2 reasons
• Cipla is apprehensive of whether it’ll meet the interest payment deadlines.

• No creditor is interested or rather resource sufficient to lend to the
companies because of the liquidity crunch in the market.
 An incessant and a significant increase in the current ratio indicates the
company is going strong each year in discharging its current liabilities or short
term obligations.
 On the other hand fixed asset turnover ratio has shown a consistent fall over
these years indicating that the returns from fixed assets have decreased or the
company has gone into more acquisition of fixed assets. It can be inferred that
the company has gone for expansion.
 Inventory turnover ratio’s consistent increase shows the improvement of Cipla
in the inventory management. A decrease of 13 % in the average operating
inventory cycle within 4 years is a testimony of the inventory getting
converted into sales more rapidly.
 The continuous decrease in the debtor turnover ratio is one area which needs
immediate attention as the average debt collection period has gone up from
2004 to 2008. A rise in this ratio must be checked else the company may fall
short of liquidity.

 Interest coverage ratio shows that the company performed well in keeping and
also increasing the margin of safety that it provides to its creditors. But a sharp
decline in the 2008 shows that the company’s profits have considerably
reduced. This sharp decline cannot be attributed to increased interest expense
because the debt equity ratio indicates the decline in the debts of the company
in the same year. It can be hence referred that profits are not sufficient to cover
the interest requirements, and this can be detrimental for the company, in case
the earnings of the company also drop. It is important the management thinks
twice before going for massive acquisition of fixed assets.



• Net sales for the year ending 31 March 2008, up 57%.

• International markets are at 55% sales, further strengthening its presence as an

international pharma generic company.
• India formulations continue to be a large part of our turnover, accounting for 43% of
its business.
Ex- US branded generics grew 10% in value terms.
Sales of 76% subsidiary in the US, Caraco Pharma
• A total of 215 patents have been have been filed so far, of
which 59 were granted.


2004 2005 2006 2007 2008

DEBT 0.21 1.08 1.39 0.72 0.18
LONG TERM 0.16 1.03 1.37 0.72 0.18
CURRENT 1.92 3.34 5.46 4.62 3.04
FIXED 2.35 2.23 2.57 2.91 3.62
INVENTORY 6.3 7.2 7.74 7.72 8.88
DEBTOR 6.13 6.9 7.09 5.61 3.96
INTEREST 82.22 29.2 44.52 73.79 208.94


 Both debt equity ratio and long term debt equity ratio show the similar trend of first
increasing from 2004 to 2006 and hen decreasing till 2008. The mean of these two
ratios is 0.716 and 0.692 respectively. The figures of the last 2 years show that Sun
Pharma has reduced on its debt and increased its equity. Thus the company is playing
safe by following a conservative approach.
 Current ratio also shows an increasing trend till 2006 before showing decline till
2008. In spite of this decline, the current ratio has shown a net increase of 58.33% in
2008 over the figures in 2004.
 Fixed asset turnover ratio has consistently increased from 2004 till 2006, thus
showing an increase in revenue from fixed asset over these years. It shows that the
capital investment strategy of the company is quite sound because the long term
investments made, are generating returns for Sun Pharma.
 The continuous increase in the Inventory turnover ratio shows improvement in the
inventory management. The inventory operating cycle for 2008 is approx 41 days
which is 16 days less than which the company used to take to convert its inventory to
sales in 2004.

 Debtor turnover ratio shows a significant drop in 2008. The figure at 3.96 is
approximately 33% less than the mean debtor turnover ratio (5.94). Thus a decrease in
both current ratio and debtor turnover ratio indicates towards a decline in cash in
 Interest cover ratio has increased manifold from 2004 to 2008, with a net increase of
about 2.5 times. It is indicative of an increase in the safety margin for payment of
interests from profits. One reason for this increase is the decrease in the debts of the
company, which has led to the decrease in the interest payment liability.


The VISION of Piramal is to

become the most admired Indian pharmaceutical company with
leadership in market share, research and profits by-
• Building distinctive sales & marketing capabilities
• Evolving from licensing to globally launching our patented products
• Inculcating a high performance culture
• Being the partner of choice for global pharmaceutical companies

• 2008 marked the 20th year of Piramal group’s foray intothe healthcare space.
Since their acquisition of Nicholas labs in 1988, the company has come a long
way to stand tall as one the largest healthcare companies in our country.
• Revenues for the year grew 16.2% to Rs. 28.7 billion.
• Operating Profit grew 41.3% to Rs. 5.4 billion.
• Operating Margin increased from 15.5% to 18.9%.
• Net Profit grew 53.1% to Rs. 3.3 billion.
• In Healthcare Solutions:
(i) Thirty new products & line extensions launched, new products (launched
during the last 24 months) form 4.9% of sales.
(ii) Top-10 brands grew by 8.5% for financial year 2008.

• In Allied Businesses:

(i) Piramal Diagnostic Services (Pathlabs & Radiology) business grew by 71.8%
to Rs.1.2 billion.
(ii) Piramal Diagnostic Services acquired 16 new Laboratories during the year.
(iii)New joint-venture formed with ARKRAY Inc. for marketing Diagnostic
Products in India.

Key Financial Ratio

2004 2005 2006 2007 2008

DEBT 0.75 0.7 0.36 0.29 0.43
LONG TERM 0.65 0.49 0.18 0.17 0.28
CURRENT 1.59 1.2 1.14 1.39 1.54
FIXED 2.78 1.9 1.83 1.67 1.74
INVENTORY 7.84 5.58 6.25 7.78 8.34
DEBTOR 8.34 8.27 9.53 8.42 7.5
INTEREST 6.35 5.77 8.02 6.58 5.61


 Both debt equity ratio and long term debt equity ratio have decreased over the
years except for a slight increase in 2008, indicating that Piramal has not
changed the mix of debt and equity significantly.

 Current ratio of Piramal decreased from 2004 to 2006 followed by an increase

till 2008. The trend of increase and decrease is such that whatever drop is seen
in current ratio till 2006 is recovered till 2008. Thus the current ratio at the end
of the year 2008 was restored to 1.54, almost equal to 1.59 in 2004.
 Fixed asset turnover ratio shows a decreasing trend till 2007 after which,
improvement is registered in 2008, thereby indicating greater revenue
generation from the amount invested in fixed assets.

 Inventory turnover ratio, apart from a decrease in 2005, shows a continuous

increase over the 5 years with a net decrease of 50% in the inventory operating
cycle of 2008 over 2004. From 2004 onwards the inventory operating cycle is
45days, 64 days, 57 days, 46 days, and 43 days respectively for each
successive year till 2008.
 Debtor turnover ratio decreased by a mere 0.83% in 2005 followed by an
increase of 15.23% in 2006. In 2007, again the debt turnover ratio decreased
by 13.18% followed by a further decrease of 11%in 2008. Thus we see the
average debt collection period varies from approximately 38 days to 48 days,
with a mean period of 43days.
 Interest coverage ratio also shows the fluctuating trend followed by alternate
increase and decrease. It shows that the company needs to manage its interest
expenses by keeping a sustained cover that is, margin of safety. This can be
achieved by one or all of the following:
• Decrease in debts
• Increase in profits
• Taking debt at low interest rate.




The dream of Indian pharmaceutical companies for marking their presence globally
and competing with the pharmaceutical companies from the developed countries like
Europe, Japan, and United States is now coming true. 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, conduct of clinical
trials and generic drug research. With market value of about US$ 45billion in 2005,
the generic sector is expected to grow to US$ 100billion in the next few years.

The Indian companies are using the revenue generated from generic drug sales to
promote drug discovery projects and new delivery technologies. Contract research in
India is also growing at the rate of 20-25% per year and was valued at US$ 10-
120million in 2005. India is holding a major share in world's contract research
Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118
million per year in India, is estimated to grow to US$ 380 million by 2010, as MNCs
are entering the market with ambitious plans. By revising its R&D policies the
government is trying to boost R&D in domestic pharmaceutical industry. 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

The future of Indian pharmaceutical sector is very bright because of the following
• Clinical trials in India cost US$ 25 million each, whereas in US they cost
between US$ 300-350 million each.
• Indian pharmaceutical companies are spending 30-50% less on custom
synthesis services as compared to its global costs.
• In India investigational new drug stage costs around US$ 10-15 million, which
is almost 1/10th of its cost in US (US$ 100-150million).


• We can expect a significant level of consolidation- a major portion of small

players are likely to be wiped out.
• Many of the existing players are family owned businesses .No one should be
surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come
through. It is the classic “bird in the hand” principle –if the founders can earn a
few billions without too much effort, why should they spend hundreds of
millions and ten years or more in trying to develop new drugs.
• The present scenario presents an excellent opportunity for multinational
enterprises to establish manufacturing bases in India through the take-over
route. The availability of talented scientists at a relatively low cost makes India
an ideal location for manufacturing quality drugs. A word of caution is
necessary though such enterprises may have to follow a dual pricing policy,
one for the local market and another for the global market.
• The Indian government would do well to take another look at its policies
.There is not much incentive for companies to invest in new drugs. The
corporations engaged in R&D need tax breaks and innovative incentives.

SPECIAL ECONOMIC ZONES - To play an important role in the future of the

pharmaceutical industry

Influx of outsourced work from global pharmaceutical companies has given the
necessary impetus for the creation of pharmaceutical Special Economic Zones
(SEZ),which would be one of the key drivers of outsourced pharmaceutical services
growth in the coming future'

It was in February 2006, when plans matured and finally the Special Economic Zone
Act came into force. The Act brought along many promises of creating an
internationally competitive and hassle free environment for exports. Consequently,

with the setting up of SEZs, India witnessed a revival of interest amongst many
players from the pharmaceutical and biotech sector. SEZs are instrumental in
attracting companies to set up manufacturing facilities and rendering a base for
services in India. SEZs served as a big boon for the Indian pharmaceutical industry,
which has a strong focus on exports, and derives 50 percent of its revenues from
exports, With the Act in place, the confidence of investors was reconfirmed. As a
result, many big pharmaceutical companies and biotech players like Ranbaxy,
Wockhardt, Dr Reddy's, Lupin, Jubilant, Biocon, Divi's Lab, Zydus and Nicholas
Piramal joined the camp. SEZs are instrumental in bringing in fast globalisation by
establishing close global contacts. SEZs, therefore, offer distinct advantages to export
oriented pharmaceutical companies who are present in these zones. These companies,
through their SEZ units, can remain in contact with markets globally and add to the
growth of globalisation. Besides, unlike those outside SEZs, companies which have
located units in an SEZ are able to reflect the advantages they get in terms of tax sops
and better technology in the final selling price of their products.

The Draft National Pharmaceutical Policy, 2006 has recognized the need and benefits
of developing pharmaceutical parks/SEZs in India and proposes a scheme for setting
up separate SEZs for bulk and formulations. "It is proposed to set up 25
pharmaceutical parks over five years in India. This kind of a development will
strengthen India's competitiveness, develop world class infrastructure for the industry
and fuel the growth of pharmaceutical exports considerably," opines Gajaria.

Although Indian pharmaceutical companies continue to view SEZs as an opportunity

to further facilitate India's integration in the global pharmaceutical industry, it still
remains to be seen if these estimates and perceptions stand the test of time.


1. Mergers and Acquisitions

Currently, as the generics business is weighed down by stiff competition and declining
R&D productivity, alliances and partnerships is the need of the hour for the
pharmaceutical industry rather than the preference. In recent times, most of the
leading players have inked M&A deals across the globe. In 2006, 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). In 2007, Indian pharma sector witnessed 25 Mergers & acquisition
deals, with 15 cross border transaction worth US$ 600-700 mn.
Table: Mergers and Acquisition in Recent Years

Thus, mergers and acquisitions have proven tool to seize growth opportunities and is
widely resorted to by players by either moving up the value chain or by integrating
downstream production. 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.

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. We can talk about brand but the people in a company, in particular in their
behaviour, represent a living brand. We can focus on intellectual property but that is
the creation of the people, and people joining or leaving a company will add to or
reduce the sustainable intellectual property. We can talk about markets, but to access
any market you need people with a good understanding of that market and the culture
and values of customers and suppliers. Increasingly we talk about regulation and

compliance as thought they are some abstract function of a company. In practice we
are describing the collective values and integrity of the individual members of staff,
and the way they are motivated to behave in particular situations. So people are key
but how any organisation ensure that it can attract, recruit, develop, and motivate
those individuals with the competencies that will set that business apart from those of
competitors. The first challenge is that there are increasing signs that the labour
market is moving in favour of the employee rather than the employer. There is
growing demand for skilled people but traditional labour markets are providing fewer
new people with the right qualifications and experience; and companies are still
trying to recruit people with ever-more-specialised knowledge. It is possible to
recruit from new markets, but this is a new competence for many companies.

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. 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. Increasing
generic competition, imminent patent expiries (revenue can decrease by up to 60% at
patent expiry), shorter pipelines and the emergence of China as a low cost
manufacturing base all contribute to constantly eroding margins. To maintain or
increase margins in the future, leading pharmaceutical companies have to start taking
a proactive approach immediately to understanding costs. As the pharmaceutical
industry embraces these new challenges, the companies that emerge at the forefront
will be those who address the issues now and are able to account for all the costs
throughout their organisation. To achieve this advantage, companies have to start
recognising and targeting costs today. Research & Development (R&D) costs are
spiralling as companies race to discover the next blockbuster, but where is the money
to fund this research going to come from? These questions are important as the costs
of operations are concerned.
• How are costs distributed throughout your company?
• Where should you focus your cost reduction efforts for greatest benefit?
• How are you going to use to tackle these costs?
• Have you identified all the hidden costs?
• How do you compare to the best-in-class?

• What is your baseline and what can you achieve?
• Where are you going to start?
Cost is complicated, ranging from back office through manufacturing and quality to
sales. To gain real benefits a structured programme of cost identification and
improvement has to be in place.

4. Infrastructure
Compared with western industrial nations, 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. In many areas, the hot and humid climate makes
high demands on climate technology at production plants and on the refrigeration of
finished products. Insufficient energy supply also leads to a situation where
production hours must be handled very flexibly. This shortage can only be eliminated
in the medium term and   will   require   maximum   effort.  However, India’s government
intends to expand power generation capacities to roughly 240 GW by the end of the
11th five-year plan in 2012. This would mean a more than 100 GW, or nearly 90%,
increase on today's total. Moreover, the country’s lacking transport infrastructure is
increasingly turning into a major obstacle. The pharmaceuticals industry is especially
dependent on road transport. However, the major transport links are chronically
congested and many are in a poor state of repair. Of the total road network covering
just over 3.3 million kilometres, only about 6% are relatively well built National and
State Highways. In many cases, there are no paved surfaces or there is only one lane
for all traffic. But the government has launched an extensive investment programme
entitled the National Highway Development Programme, to be implemented by the
middle of the next decade.

5. Impact of new patent law

Legal changes in India in 2005 made it considerably more difficult to produce “new”
generics. Foreign pharmaceuticals, which enjoy 20 years of patent protection, can no
longer be copied by means of alternative production procedures and sold in the
domestic market. Hence, a reorientation was required in India’s pharmaceutical
industry. It now focuses on drugs developed in-house and contract research or contract

production for western drug makers. Thus this transition phase of reorientation is a
challenge for the industry.


The pharmaceutical industry in India is expected to grow from $5.5 billion now to $25
billion by 2010 and $75 billion USD by the year 2020. By 2020, global integration of
most sectors in the world economy would be much more pronounced, and the
pharmaceutical industry will not be an exception. In fact the Indian pharmaceutical
industry, which currently has strong linkages with the global pharmaceutical market,
will become even more strongly integrated. Globally the pharmaceutical market is
undergoing a transformation led by change in demand patterns, realignment of supply
chains, and global regulatory shifts. In order to predict the state of the Indian
pharmaceutical market in 2020, it is useful to understand the current global
environment of the pharmaceutical market and its key trends and analyse the
implications that these factors will have on the global as well as on the domestic

pharmaceutical market. Key trends of global pharmaceutical industry are declining
R&D productivity, increasing spread of generics and increasing outsourcing.

India is expected to host 30% of the world's contract research within the next 10-15
years, driven by the attractions of low cost and high quality standards, says the India
Brand Equity Foundation, IBEF. The IBEF quotes a McKinsey forecast for the value
of pharmaceutical clinical trial outsourcing in India at $1.23 billion by 2010. This
would represent 7% of the total world market, projected by Biopharm at $18.5 billion
in 2010.

India offers a huge cost advantage in clinical trials compared with Western countries.
A multinational company moving R&D to India could save as much as 30-50%, IBEF
says. Indian companies can conduct clinical trials at less than one-tenth of US costs.
The US National Institutes of Health trial registry ( lists 272
trials actively recruiting patients in the country, of which 60% are Phase III. There are
currently 70 CROs in India, according to Biopharm’s Contract Research Annual
Review 2006 - a number that is projected by to increase in the coming years.
Several western CROs, including Aptuit (US), Synergy Research Group (Russia) and
ethica Clinical Research (Canada) have formed alliances or joint ventures with their
Indian counterparts in recent months. Investment has also flowed in the opposite
direction, with US CROs Radiant Research and Taractec both being acquired by
Indian groups this year.

India is likely to be in the league of top 10 pharmaceutical markets by 2020. As per

the Government of India's annual report 06-07 the Indian pharma industry is worth
about $12 billion (over Rs 55,000 crores) as of now which includes $4.5 billion in
exports of drugs, pharma and fine chemicals. The pharma industry needs to focus
more on R&D and better productivity to capitalise on the immense existing
opportunities. India, with its inherent competitive advantages and cost-effective
manufacturing capabilities, has now become one of the most preferred destinations for
Contract Research and Manufacturing Services (CRAMS). As per the KPMG report,
India holds huge potential to tap the $20 billion CRAMS business, which is expected
to reach $ 31 billion by 2010. India with its intrinsic competitive advantages remains
as one of the most preferred outsourcing destinations and is now playing a vital role in

manufacturing as well as drug development value chain of various innovator

The Indian Pharmaceutical Industry is entering an era where the value chain
components are reassessed and redesigned to realize optimum value. While the cost of
doing business is increasing, the customers are demanding more innovative
pharmaceutical products at more competitive prices. The change in patent regime has
also become heralded a change in the industry dynamics. On one hand, patents on
blockbuster drugs are expiring and on the other hand, there are insufficient drugs in
the pipeline. The changing industry dynamics both at the domestic level as well as the
international level has forced the pharmaceutical players to rethink their traditional
business strategies.


The Indian market has some unique advantages. India has a 60-year-old thriving
democracy. It has an educated work force and English is business language. It has a
solid legal framework and strong financial markets. More than 9,000 companies are
publicly listed. Professional services are easily available. There is already an
established international industry and business community. It has a good network of
world-class educational institutions and established strengths in information
technology. The country is now committed to an open economy and globalisation.
Above all, it has about 200 million middle class markets, which is continuously
growing. Over time the international pharmaceutical industry has been finding great
opportunities in India.

The Indian pharmaceutical industry players in the future can continue to look forward

with confidence. There are immense opportunities for pharmaceutical players both at
the domestic as well as the global level, but along with opportunities are challenges
which need to be overcome in order to achieve sustainable growth in the future. The
future will be extremely promising with many more milestones to come in the journey
of the Indian pharmaceutical industry.


On the basis of the detailed analysis of the Indian pharmaceutical industry, we have
been able to link the following research findings with our pre-determined objectives:-

• Our first objective was to study the contribution of Indian pharma industry on
the Indian economy. It was earlier growing at a rate of 14% annually but like
all other industries it is also hit by recession. Because of this presently, the
growth of this industry is expected to be at 7%-8% and is expected to rise to
13% of GDP by 2015.
• While going about the second objective of the impact of the Patents on Indian
pharma industry the following findings were zeroed in on:
(i) Indian pharma industry registered a growing trend post 1970 because
of the existence of merely process patents and the absence of product

(ii) Being a member of WTO, India had to amend its patent law in
compliance with the TRIPS agreement; thus Product patent became an
integral part of Indian patent law in 2005.

(iii) The impact of this amendment gave rise to many controversies as this
amendment on one hand guarantees protection of the rights of drug
producers while on the other makes medical facilities expensive.

(iv) One of the major inferences of our research with regard to patent is that
irrespective of the unending debate on product patent inclusion it can
be unequivocally said that this amendment is bound to encourage more
investments in R&D by the Indian pharmaceutical Companies. Thus
we can very well expect that Indian pharma industry will better its
position globally which is presently 13th in terms of value.
• Our third objective of research analysis was concerned with the study of how
mergers and acquisitions will impact the pharmaceutical industry. In the past
few years many mergers and acquisition deals have been inked across the
globe. Indian pharmaceutical industry itself witnessed over 25 merger and
acquisition deals with 15 cross border transaction worth US$ 600-700 million.
Mergers like Ranbaxy and Daiichi will help the companies move up the value
chain through increased sales, increased patents and better asset management.


1. Research paper on “Critical Challenges & Issues

in Patent Documentation”by Ashutosh Nigam
(Asst Professor, Dept of Management
Studies,Vaish College of Engineering, Rohtak)

2. Drugs and Pharmaceuticals: International

Pharmaceutical Industry-A Snapshot,Jan 2004,

3. Presention by Jerry A. Rosenblatt, PhD
on“Predicting 2008: Global Pharma Market
Forecast” Global Practice Leader, Forecasting &
Opportunity Assessment November 14, 2007