Four Opportunities in India's Pharmaceutical Market: Healthcare

HEALTHCARE
Four opportunities in
Indias pharmaceutical
market
132
THE McKINSEY QUARTERLY 1996 NUMBER 4
Since price decontrol the nominal growth rate has

increased to 19 percent per year
One key option: outsource production of bulk actives
or intermediates
Even ater shipping costs, import duties, and local trade
margins, formulations sourced from India to international
markets are likely to generate hety margins
Previous experience has led multinational pharmaceutical
companies to cast a jaundiced eye on Indias basic
research capabilities. They should reconsider
Rajesh Garg Gautam Kumra

Asutosh Padhi Anupam Puri
OR THE PAST QUARTER OF A CENTURY, multinational
pharmaceutical companies have shown limited

interest in India. Protectionist policies introduced
by the Indian government in 1970 hit profits hard, and
companies have been further deterred by the lack of
intellectual property rights. As a result, MNCs have just
30 percent of Indias pharmaceutical market, compared
with 80 percent 25 years ago (Exhibits 1 and 2). Yet the
climate is changing. As part of government eforts to
liberalize the economy, regulations governing the industry are being abolished or simplified, and price levels
are rising. At the same time, increased personal spending, fuelled by economic growth and greater access to
medical care, is helping to expand the market.
These changes make it an appropriate time for multinationals to reconsider India. Opportunities exist not
only to expand market share rapidly in the country itself,
but also to use it as a base for sourcing bulk actives and
We would like to thank Rajan Anandan, Michael Fernandes, Sankar
Krishnan, Ranjit Pandit, and Srinivasan Ramesh for their help in
developing the ideas in this article, and Amit Chattopadhyay and Jody
Kattef for their assistance in preparing it.
Raj Garg is a consultant in McKinseys New York ofice. Gautam

Kumra and Asutosh Padhi are consultants in the New Delhi ofice and
Tino Puri is a director in the Mumbai ofice. Copyright 1996
McKinsey and Company. All rights reserved.
133
FOUR OPPORTUNITIES IN INDIAS PHARMACEUTICAL MARKET
Exhibit 1
MNC market share

Percent
80
1970
50
1982
30
1994
Source: OPPI
50 share points
Exhibit 2
Pre-tax profits as percent of sales

Percent
20
intermediates,* for sourcing formulations for

export to other developing nations, and for
research and development. Together, these
four areas of opportunity could represent
from $300 million to $800 million of net
present value to a leading multinational. To
capture this value, however, MNCs will have
to consider fundamental strategic and operational changes, which in turn will require
them to rethink traditional management
policies and practices.
15
A change of climate
10
The regulatory changes initiated in 1970 were

aimed at establishing a thriving domestic
0
pharmaceuticals industry driven by low costs
1970
1980
1990
1996
and pirated or generic products. Drug prices
Note: Until recently pre- and post-tax profits were equal for
many Indian companies because they had minimal tax liability
were set at levels that were sometimes no
Source: OPPI
more than 4 percent of developed market
prices (resulting in a market ranked sixth in volume terms, but about fourteenth in market value), import tarifs were high (above 200 percent in the
1970s) in order to encourage domestic manufacturing and prevent the outflow
of foreign exchange, and foreign direct investment in any business was limited
to 40 percent, curbing MNCs earnings from Indian operations. Patent laws
protected processes only product patents were open to reverse engineering.
5
These restrictions had various efects on MNC s activities. Some stopped

selling products that were priced too low, while others continued to
compete but created new local brands to prevent their international brands
being exported from India and sold cheaply elsewhere. Ceilings on foreign
equity led to creative methods of redirecting or securing earnings: some
subsidiaries entered into royalty-bearing licensing agreements with their
parent companies; some parent companies charged inflated prices for raw
materials. In addition, Indian subsidiaries were discouraged from exporting;
export markets were more profitably served by an MNC s 100-percentowned operations.
The absence of patent protection led many multinationals to limit their
portfolios to patent-expired products or a few selected patented products
a move that further eroded their market share as local competitors went
Bulk actives are biochemically active molecules in their finished form ater all synthetic
manufacturing steps have been completed. Intermediates are either ingredients used to
manufacture bulk actives or interim products generated at diferent stages of the bulk active
manufacturing process.
134
ahead and introduced the most advanced medicines through reverse

engineering. Additionally, for medical, legal, or economic reasons, most were
unwilling to introduce products not already on their international product
list simply to cater for the Indian market, limiting their participation in the
Indian-branded generic market. Finally, MNCs were generally unwilling
to introduce products that infringed other companies non-Indian patents
(despite local company practices and the regulatory freedom to do so). Again,
they lost market share.
From an MNCs point of view, the environment has now changed for the
better. Price controls cover only 76 bulk drugs, accounting for about half of
drug sales, and the industry is lobbying for
gradual but complete decontrol of prices by
Multinationals often limited
2000. Some observers estimate that, at worst,
their portfolios to patent-expired
price controls will apply to only 30 percent
products, but local competitors
of drugs by then. Import tarifs have been
went ahead and introduced the
reduced to 42 percent on bulk drugs and
most advanced medicines
intermediates and further reductions are
likely. The limits on foreign direct investment
have also been lited, allowing MNCs full ownership of Indian subsidiaries.
Some (including Bristol Myers Squibb, Hofman LaRoche and SmithKline
Beecham) are forming, or have formed, wholly-owned subsidiaries.
Meanwhile, India has signed GATT, and will have to conform to worldwide
patent standards by 2005. During the phase-in period, it will have to provide
MNCs with exclusive marketing rights and a mailbox provision that allows
them to file patent applications now for consideration once patent protection comes into force. The government has said it will pass legislation that
recognizes intellectual property rights in the current parliamentary session.
Besides benefiting from a more liberal market, MNCs can also expect the
market to grow. In 1995, the year price controls were eased, it expanded at a
nominal rate of 14 percent, while real volume growth was about 9 percent.
Since the liting of price controls, however, the nominal market growth rate
has increased to 19 percent, and prices are rising by about 7 percent a year.
Volume growth has accelerated further to about 12 percent.
These trends are likely to continue. Prices will rise further, although the
government will be reluctant to let them soar. Volumes will increase as
healthcare spending rises and healthcare coverage grows from the current
35 percent. These factors combined could see the market expand from about
$2.5 billion today to $6 billion by 2001, assuming current exchange rates
(Exhibit 3). Still higher growth is possible depending on the rate of price
decontrol, healthcare penetration, economic growth, and the phase-in of
healthcare insurance as well as new products such as cancer drugs.
135
Exhibit 3
Market growth
Key factors
Overall economic growth and
personal spending
Increasing healthcare penetration
Price decontrol
Introduction of health insurance
Growth drivers
Sales growth
Percent per year
$ billion
Volume
growth
Price
growth
New products
12
7
1996
2.5
2001
6.0
CAGR = 19%
New opportunities
Multinational pharmaceutical companies have four opportunities in India.
1. The domestic market

Companies that tap Indiaa latent demand for pharmaceuticals can expect to
expand market share rapidly. To do so, they will have to make strategic and
operational changes.
Strategic considerations. A mix of government regulations, poor patent
protection, and product portfolio decisions has led MNCs to rely on just a
few products for most of their revenues in India, with a consequent loss of
marketing advantage. Although MNCs are recognized for their quality and
brand image, physicians regard Indian companies such as Cipla and Sun as
having better therapeutic expertise and a broader range of products within
therapeutic areas. Indian manufacturers therefore take a greater share of
revenue from these areas.
To increase their Indian market share, multinationals should first consider
tailoring their products to local conditions by ofering diferent dosages
for Indian patients or formulations better suited to the climate and introducing drugs that are particularly needed, such as antimalarials. Second, they
should consider the selective introduction of of-patent generics that complement and extend their therapeutic area oferings. Third, companies with more
specialized product portfolios should supplement their niche therapeutic
areas with of-patent generics.
An alternative approach would be to consider acquiring a local competitor.1
The MNC would probably see an immediate rise in market share (some
Indian pharmaceutical companies are trading at low price/earnings ratios
in certain cases less than 5), and gain the advantages of the Indian competitors business system, including process-engineering skills, cheaper
manufacturing, an experienced salesforce, broad generic product lines, local
reputation, and export distribution channels in some international markets.
1
Notes appear on page 145.
136
Operational considerations. Multinationals can also enhance their market

position by improving the eficiency of their supply chain and the performance of their salesforce.
Supply chain. The Indian operations of most multinationals tend to have
unreliable supply chains. Planning, for example, is oten poorly coordinated
among purchasing, manufacturing, and sales functions. Purchasing may fail
to obtain timely delivery of key raw materials (oten because of late notification of need), while manufacturing may run into unforeseen technical
problems, or encounter delays in batch sample delivery to the quality control
laboratory. In addition, because some multinationals in India contract out
their manufacturing, schedules are delayed because the contractor has other
commitments. Both central and regional distributors may fail to detect low
inventories or to dispatch stock in a timely manner.
The upshot of all these problems is oten lost sales; Indian pharmacists report
that up to half of prescription substitutions are made because the prescribed
product is unavailable. It means high working capital levels as companies
attempt to prevent medicines going out of stock by maintaining excessive
product and raw material inventories.
Three alterations are needed to make the supply chain more eficient. First,
planning should be centralized to allow more rapid response to changes in
requirements. Second, MNCs need to gather better information by tracking
stock levels at local wholesalers, regional distributors, and the central
warehouse, using IT solutions for daily reporting where possible. Third,
MNCs can raise contract manufacturers performance by installing on-site
technical and quality controls.
Salesforce. Indian pharmaceutical retailers are influential because they
have to recommend substitutes for prescribed products that are out of stock,
and oten fail to adhere to prescriptions even when the prescribed product is
in stock. So it is critical for multinationals to detail both doctors and retailers
(there are almost half a million of each). They also need to be able to tap
latent demand in remoter regions, as 70 percent of Indias population is rural.
To meet these challenges, local companies have already enlarged their
salesforces, although most MNCs have yet to act. Low labor costs mean there
is little financial risk in employing more sales people as long as they are wellqualified and well-managed. MNCs should ensure they are deployed by the
beginning of the sales cycle, provide upfront training, and evaluate performance early to identify problems areas and provide coaching. But before they
hire new people, multinationals need to make their existing sales organizations more productive by ensuring that they focus on markets with the
most potential, that detailing is based on customer needs, and that scheduling
137
routes take into account how dificult some customers are to reach. Welldesigned and well-managed incentive schemes will improve performance, as
will co-marketing, mail-based detailing, and the outsourcing of remoter areas
to local commission agents.
2. The sourcing of bulk actives and intermediates

India is an attractive base from which to source bulk actives and intermediates. The bulk industry has more than 800 local manufacturers,
many of whom have developed world-class skills in chemical synthesis and
process engineering in the course of copying patented products launched
in developed markets. Salaries, infrastructure costs, and equipment costs
are low, encouraged by competition in the domestic industry and
government price controls. Consequently,
bulk actives even for mature, of-patent
Salaries, infrastructure costs,
products cost only half or a third as much
and equipment costs are low,
as they do in the US.
encouraged by competition in
the domestic industry and
government price controls
Indian companies are already taking advantage of these strengths. Exports of bulk
actives and intermediates have risen by about
15 percent a year over the past three years, and currently stand at $380
million. They are forecast to reach more than $800 million by the end of the
decade. And although most exports have been in low value-added product
categories, some leading companies such as Ranbaxy, DRL, and Lupin have
penetrated the high value-added US market. Several have FDA-approved
good manufacturing practices (GMP) facilities. Ranbaxy is currently selling
antibiotics in the US and has tied up with Eli Lilly to market generics there.
DRL is among the leading manufacturers globally of ibuprofen and currently
sells to the US. Both DRL and Lupin have recently tied up with PRI in the US
to gain access to regulatory and marketing capabilities for selling bulk actives
and, ultimately, generics there.
Multinationals could also take advantage of Indias low costs and strong
process-engineering and manufacturing capabilities by outsourcing the
production of bulk actives or intermediates to Indian companies. (Today,
total global bulk actives consumption is estimated to be about $25 billion,
$10 billion to $15 billion of which is produced by multinational companies
internally.) Initially, the most suitable products for outsourcing are likely
to be mature intermediates that are under cost pressure (and so less risky
to outsource), or specialized intermediates required for products under
development. Process-development skills, GMP systems, manufacturing
facilities, local market position, and quality of management team are all
key criteria in selecting local suppliers. As MNCs develop confidence in
Indian suppliers they should be able to outsource more products, including finished actives, and develop deeper relationships with them. Some
138
multinationals have already formed outsourcing alliances with leading

Indian bulk actives manufacturers.
3. The sourcing of formulations for export to developing nations

Multinationals currently supply a number of fast-growing, developing markets
by importing formulations. Governments of the larger developing markets
are likely to limit imports to encourage local production, however, leaving
only smaller markets that are unable to sustain full-scale MNC manufacturing operations. Using India as a base, MNCs could export generic products
sourced from Indian companies and their own, locally manufactured
patented products to these smaller markets.
Exhibit 4
Manufacturing cost comparison

R&D MNC pharmaco cost structure indexed to 100
COGS*
Overhead
Sales and marketing
R&D
27
13
40
20
R&D MNC pharmaco
100
Generics pharmaco
43
27
Indian pharmaco
24
18
2 31
About 45% lower
About 75% lower
* COGS assumes 50% raw materials and 50% other manufacturing costs; Indian pharmaco COGS assumes raw materials costs equal
to R&D MNC pharmacos and Generics pharmacos; other manufacturing costs (labor and infrastructure combined) are estimated
to be about 65% less than R&D MNC and Generics pharmaco cost.
Exhibit 5
FO
M
um
ba
Sh
in ip
i
su p
i
r n
Im an g,
po ce,
rt fre
du ig
t ie h t
Lo
s
ca
lt
ra
de
m
ar
gi
ns
An Indian pharmaceutical companys costs are about 45 percent lower

than those of a generics manufacturer in a developed country, and 75
percent lower than those of an R&D -based multinational (Exhibit 4).
Much of the diferential stems from lower labor expenses (which are
about 80 percent less), and infrastructure costs (about 40 percent less).
Manufacturing costs can be further reduced by purchasing raw materials
from India or China at a 10
to 30 percent cost saving. Potential margin by sourcing from India
Even with shipping costs,
import duties, and local
trade margins, Indias cost
Off-patent anti-infective
structure is likely to mean a
$ per 1,000 capsules
hety margin on formulation
Sourced from India
39.20
19.70
0.80 8.50 10.20
exports sourced there a
MRP in China
particularly appealing prosAbout 25% margin opportunity
pect in low-price markets
On-patent anti-infective
$ per vial
(Exhibit 5). Leading Indian
companies already enjoy exSourced from India
3.84
1.64
0.75 1.00 0.45
port margins 50 to 100 perMRP in China
cent higher than domestic
About 45% margin opportunity
market margins.2
139
52.00
7.00
4. Research and development

Indias research and development facilities represent the fourth area of
opportunity for MNCs.
Research. Experience has led multinationals to cast a jaundiced eye over
Indias basic research facilities. They question the quality of the countrys
infrastructure, the expertise of its scientists, and its ability to maintain
confidentiality. These issues stem from the historical dependence of Indian
research institutes on inadequate government funding, the bureaucratic
organization and leadership of its scientific institutions, the lack of significant
links between industry and academia, and the absence of intellectual
property protection.
But again, circumstances are changing. Funding has shited to a mix of public
and private provision, while new government regulations will encourage
patent protection and collaboration with industry. The government has
targeted biotechnology, microbiology, and human genetics in particular for
further investment, leading to the establishment of new biological science
programs at a number of institutions. Leaders of scientific organizations are
setting higher research standards, and are keen to collaborate with industry.
They are also fast learning the need to maintain confidentiality if they are
to attract partners.
In the light of these changes, Indias strengths in R&D its rich scientific
base and low costs are more apparent. It has the second-largest Englishspeaking scientific base in the world, with more than 200 universities and
2,000 research institutes, including up to ten leading biology/chemistry
institutes.3 Some (including NCL, IICT, CDRI, and IMTECH) have capabilities
in organic chemical synthesis and natural-products screening. CDRI and
IMTECH, along with IISc and CCMB, are developing skills in new research
areas such as rational drug design, genomics, development of new animal
models, and high throughput screening. IISc, for example, is seeking new
targets based on gene identification, cloning, and expression; IISc reports
that its scientists are training in combinatorial chemistry; and IICT has
launched a cluster of discovery labs to find new molecules in anticipation
of the new intellectual property regime.
Several institutions have reported early success in clinical trials of drugs for
the treatment of breast cancer, malaria, filariasis, helminthic disease, inflammation, and allergies. Clinical trials are also being conducted of vaccines
against leprosy and as a contraceptive.
Since India accepted GATT, leading domestic companies have been working
with Indian scientists to discover new drugs, although their total research
budget is 5 percent of sales at most. DRL has a research foundation of 70
140
scientists that has filed for US patents and is conducting clinical trials on
four compounds, including an anti-diabetic and three anti-cancer drugs;
Cipla has started marketing an indigenously developed drug, deferiprone,
for -thalassemia.
On the costs front, a skilled PhD can be employed for 20 percent of the
prevailing US rate. Given the number of new graduate chemists and
biologists entering the workforce each year, supply is likely to far exceed
demand and wage equilibrium is at least ten years away.4 Physical infrastructure and overhead costs, depending on location, are 40 to 60 percent
of US rates although equipment and supply expenses are on a par.
Nonetheless, CDRI estimates that it could
develop a drug from scratch for about 30
Multinationals question
percent of US costs.
the quality of the countrys

infrastructure, the expertise
of its scientists, and its ability
to maintain confidentiality
Multinationals wanting to take advantage

of the countrys scientific expertise and low
costs to conduct research should initially
focus, as several MNCs already do, on its
strong organic synthesis and natural-products capabilities. They might also
collaborate in research into molecules or vaccines targeted at infectious
diseases, an area on which Indian centers focus. Given the research expertise,
MNCs could probably contract out projects in these areas.
Multinationals should also pay more attention to how particular Indian

centers CCMB, for instance could assist them in supporting new research
activities such as combinatorial chemistry and high throughput screening.
(The limited Indian accomplishment in these areas could mean a closer, more
collaborative working arrangement would be needed, and perhaps some
technology transfer.)
In both cases MNCs should consider four success factors: they must define
the disease, molecule, or target objectives; agree on the process, underlying
milestones, and time periods; ensure necessary skills will be available; and
remain in close contact to ensure linkage to the MNC.
Development. India is an attractive site for preclinical and clinical development activities. The lack of patent regulation that has driven domestic
companies to reverse engineer patented products in order to introduce them
into the local market means they have engaged in preclinical development
activities such as stability testing, bioequivalence studies, excipient selection,
and process scale-up.
Research institutions such as CDRI have also conducted extensive preclinical
research into pharmacokinetics, drug metabolism, and toxicology. The cost
141
and time restrictions under which both they and commercial companies
operate means they have developed almost world-class skills, as well as
having low costs advantages that multinationals can use to conduct
preclinical development activities in India not only for generics, but also
for new molecules.
Similarly, India could be a competitive source of clinical research for use in
international drug dossiers. There are three reasons for this. First, there is a
vast pool of patients for most indications, which means faster enrolment rates;
patient enrolment rates for a phase III study can be up to six times higher in
India than the US. Second, Indias low costs even ater accounting for additional investments required to meet good clinical practices (GCP) standards
and clinical research skills can result in a cost advantage of up to 85 percent.
Finally, the prevalence of certain diseases
notably malaria and hepatitis makes the
The availability of a vast pool
country an attractive clinical research locaof often untreated patients and
tion for such indications.
rapid enrolment rates makes

the country an attractive
clinical research location
One obstacle is whether clinical data are

acceptable to regulatory authorities in the
US and Europe: India has to establish a
reputation for excellence so that data generated there is generally accepted.
Another is the time it can take up to two years for a clinical site to gain
regulatory approval or establish GCP quality. Other obstacles include a
government ban on concurrent phase trials (only trials with one phase lag
are allowed), and a lack of GCP-trained biostatisticians. Nonetheless, there
are signs that the government will soon allow concurrent trials (they are
already happening informally), while biostatistical skills could be brought up
to standard within two years given MNCs assistance.
Multinationals can exploit development opportunities in three ways. First,

they can encourage in-house, broad-based clinical development skills in
conjunction with a reputable clinical facility; the facility should have leading
physicians capable of serving as investigators on studies, and be committed to
developing GCP through investment and policy or procedural changes. For its
part, the MNC would need to provide carefully selected staf with experience
in GCP trials, intensive training for local clinical research assistants, clear
documentation of standard operating procedures and guidelines, and
continuous monitoring.
Second, MNCs could choose to establish limited operations, such as clinical
data-management centers, to take advantage of low costs and faster turnaround times without performing actual clinical trials. A third possibility is for
MNCs to forge links with leading western clinical research organizations that
are expanding into Asia. Such an arrangement would enable multinationals
142
to reap the benefits of clinical development without taking on extra overheads

or logistical responsibilities.
Capturing value
How much are these four opportunities worth to a leading multinational?5
Much depends upon how aggressively each one is pursued. By increasing
domestic market share by 2 to 5 percent, for example, a company could
generate $120 million to $300 million in net present value. Similarly, the bulk
actives market ofers the potential to create $85 million to $260 million in
value, depending on the MNCs current bulk actives costs and how much it
outsources. Exporting formulations from India to developing nations could
yield another $40 million to $70 million, while the value of pursuing R&D
in India could range from $45 million to $135 million.
Exhibit 6
Yet tapping into this value will

not be easy. Many multinationals have to resolve management issues first (Exhibit
6). To take a greater share of
the domestic market, they
might have to grant Indian
subsidiaries more strategic
and operational freedom than
they are generally comfortable with and allow them to
introduce generic products,
source inputs from the most
competitive suppliers, redesign the supply chain, or expand the salesforce.
Issues for MNCs to confront

Overall
How much strategic and operating freedom is the MNC

willing to give its Indian subsidiary?
Is the MNC willing to tap Indian strengths to benefit its
global operations?
Domestic
market
Will the MNC be comfortable if its subsidiary

manufactures a broader range of generic products or
moves away from the MNCs core therapeutic segments?
Will the MNC allow changes to operations that require
investment? If so, with what limits or performance
conditions?
Active
substances
Is the MNC willing to consider sourcing relationships

with Indian suppliers of bulk?
What effect will such relationships have on MNC plants
and existing contracts?
Would the MNC (and the subsidiary) consider investing
in building a bulk drug manufacturing base in India?
If so, would the MNC/subsidiary sell actives and
intermediates to other companies?
Formulations Do developing markets provide sufficient opportunity

for the MNC to devote effort to them?
Is the MNC confident in the quality and reliability of
Indian manufactured/sourced formulations?
What role and control will the MNCs Indian subsidiary
have on manufactured/sourced formulations for
developing markets? Will the Indian subsidiary receive
any revenue or profit credit?
An MNC will also have to decide whether it is willing to exLocal R&D

Are Indian R&D capabilities relevant to the MNCs
program?
pand its operations in India
Is the MNC willing to entrust/test local capabilities
while patent regulations are
(either on a partnership or go-it-alone basis)?
still evolving, and whether it
Is the MNC willing to invest resources in building R&D
infrastructure and capabilities as well as forging links
will allow a flexible pricing
with other MNC R&D centers?
Is the MNC willing to enter contract research or
system coupled with local
partnering arrangements with local R&D centers?
Under what conditions?
trade names that permit
more aggressive local price
competition while protecting against gray market exports. Finally, MNCs
should use country managers who are culturally sensitive, attuned to local
business practices, and comfortable in the local social fabric; this can increase
efectiveness in extracting performance from local operations.6
143
To realize the opportunity bulk actives represent, MNCs need to consider

whether they are willing to trust and test Indian manufacturers or, alternatively, make long-term investments in local manufacturing facilities and
research bases. They also need to understand the impact of their relationships
with Indian suppliers on their own existing bulk actives manufacturing
facilities and sourcing contracts. Building a self-sustaining, competitive,
independent operation may mean granting it the freedom to sell actives and
intermediates abroad to companies other than the MNC or its afiliates.
Sourcing generics for developing markets requires MNCs to understand
whether the market is large enough to warrant the efort. In addition, they
must ensure that product quality standards can be adhered to and that
developing markets can be served reliably from India. Further, the MNC will
need to decide what role and degree of control its Indian operation will have
with respect to formulations sourcing.
With regard to R&D, an MNC will need to assess the extent to which Indian
R&D capabilities are relevant to its specific research activities and the size
of investment and degree of technology transfer it is comfortable with. It will
need to reach specific decisions regarding who to partner with, the structure
of the relationship, the level of control, and the degree of interaction required
to achieve success.
Indian market growth is so strong that multinational pharmaceutical

companies operating there will benefit whether or not they modify their
Indian businesses. But a few fundamental changes to their strategic, operational, and management policies could greatly increase the prize. Such
adjustments may not come easily to those accustomed to doing business
in the developed world MNCs will need to be more adaptable and flexible
than they are used to being, and willing to work with local players using local
assets but their rewards could extend well beyond the local market to
greater growth around the world.
144
NOTES
1
Until recently local acquisitions, especially hostile ones, were dificult. Guidelines issued recently
make the process easier.
Indian formulation exports in 1994 amounted to $220 million (at current exchange rates), of
which 90 percent were for patent-expired products.
These centers include the Indian Institute of Chemical Technology (IICT), National Institute of
Immunology (NII), Central Drug Research Institute (CDRI), National Chemical Laboratory
(NCL), Centre for Cellular & Molecular Biology (CCMB), Indian Institute of Science (IISc),
Institute of Microbial Technology (IMTECH), Centre for Biochemical Technology (CBT), Indian
Institute of Chemical Biology (IICB), Indian Toxicology Research Centre (ITRC), and Central
Institute of Medicinal and Aromatic Plants (CIMAP).
This time period is consistent with the experience of the Indian sotware industry, which is
approaching wage parity ater almost ten years of participation in the international market.
All values are estimates. We base the value of opportunities on a pharmaceutical company with
about $7 billion in global sales. Other assumptions for all value calculations include cost of
capital of 15 percent, a tax rate of 40 percent, and a terminal growth rate of 5 percent. For the
domestic market opportunity, we assume Indian market size in 2001 of $6 billion and about 10
percent cash to sales. For the bulk actives opportunity, we assume a total bulk actives cost of
10 percent of sales, and that 5 to 15 percent of the total is outsourced to India at a cost advantage
of 40 percent. For generic formulations exports, we assume 15 percent profit ater tax. For the
R&D opportunity, we assume annual R&D spending of $1.2 billion, and that 1 to 3 percent of
total activity is outsourced with a cost saving of 60 percent.
See John A. Quelch and Helen Bloom, The return of the country manager, The McKinsey
Quarterly, 1996 Number 2, pp. 3043.
145

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HEALTHCARE

THE McKINSEY QUARTERLY 1996 NUMBER 4

Since price decontrol the nominal growth rate has

Rajesh Garg Gautam Kumra

pharmaceutical companies have shown limited

Raj Garg is a consultant in McKinseys New York ofice. Gautam

THE McKINSEY QUARTERLY 1996 NUMBER 4