Indian Pharma Inc - 2010 and beyond

Thursday, December 22, 2005 08:00 IST

Zarir H Charna

During the 1960's domestic Indian pharmaceutical companies were not able to produce any major drugs as they
were covered by patents that granted monopoly to the innovator of that drug till the patent expired. At that time
around 85% of the domestic healthcare market was controlled by MNCs and there were hardly any exports.

Things changed dramatically for the domestic pharma companies with the passing of the new Indian Patent Act in
1972 which ended the monopoly in the end product in areas of health & food. The monopoly could be enjoyed in
the production process for a period of seven years. Indian companies could henceforth manufacture and market
any drug using a non-infringing process. The sun finally shone on the Indian pharmaceutical industry and today
75% of the US$ 6 bn. Indian market and almost the total exports amounting to over US$ 3 bn., are accounted for
by Indian companies. The industry is growing at a CAGR of 13.7 %. Therapeutic segments include cardiovascular,
anti-diabetics, neuro-psychiatic, respiratory and NSAIDs

However, inspite of being the second largest populated country in the world, the Indian pharma industry is nowhere
among the top markets, having a 1.8% share in value terms and 8% in volume terms, of the world pharma market.
The future market size in 2010 as projected by Mckinsey is around US$25 bn.

Nevertheless, India has the potential to make its mark in the world market in the coming 5-10 years. Several top
domestic companies have started making their presence felt internationally. Their dream run in the US markets,
however, seems to have come to an end, with "authorized generics" being encouraged by MNCs. This has
prompted companies like DRL and Ranbaxy to go in for costly litigations which again cost them dear. These
companies need to revisit their strategies there.

However, post 2005, in the new product patent regime there are many other fish to fry, viz. Contract
manufacturing, clinical trials, contract research, custom manufacturing, bio-informatics and other services.
According to current statistics, the total global outsourcing market is around US$ 66 bn. of which contract research
is US$ 13 bn., contract manufacturing US$ 37 bn., contract sales US$6 bn and informatics US$ 10 bn. India's
share of this huge pie, in the next 2-3 years would well be around US$ 4-10 bn.

The Indian generics market is on a growth spree opening up varied opportunities for both domestic Indian and
MNC firms. Generics worth over $40 bn are going off patent in the next few years amounting to 15% of the total
US prescription market. Indian pharma companies notably Ranbaxy, DRL, Wockhardt, Cipla, Nicholas Piramal and
Lupin having been doing very well in the European markets, if not in the US market now, because they have
successfully exploited the opportunities in formulations, APIs, generics, NDDS, NCEs, biotechnology etc. Many
MNCs have already entered India to market their new drugs and conduct clinical trials giving Indian pharma
research, manufacturing and outsourcing a fillip. A case in point is GSK Plc. which has chosen India as a hub for
clinical research. It intends to undertake research in segments such as CNS, anti-infectives, respiratory, diabetic
and metabolic disorders, in collaboration with Indian research institutes and more importantly cancer research by
tying up with Indian Cancer Institute.

AstraZeneca has already established its state-of-the-art research centre in Bangalore where it is developing NCEs
for third world diseases. Pfizer and Eli Lilly are also carrying out some of their global research in India.

The Indian pharma industry carried out clinical trials worth US$70 mn. for global MNCs about three years ago. The
CT market is growing at 20% p.a. and is expected to be worth between US$ 500 mn. and 1.5 bn. by 2010. The
global R&D spend is about US$60 bn. annually, of which the non-clinical segment accounts for US$ 21 bn. and the
clinical segment US$ 39 bn. This translates into a CR potential of around US$ 15 bn for the Indian pharma
companies.

Post 2005, many global MNCs are willing to outsource manufacturing to Indian companies as their costs are much
lower. Indian companies are therefore seeking approval of international regulatory agencies such as USFDA for
their manufacturing facilities. India already has the largest number of USFDA approved manufacturing facilities
outside USA. The no. of DMFs filed with USA is also the largest, being 197.

As per Industry sources, Indian companies won manufacturing contracts worth 75mn. in 2004, and the Boston
Consulting Group has estimated that contract manufacturing of drugs would be worth US$ 900 mn in India by
2010.
Several Indian companies including M/s Matrix Labs, Shashun Chemicals, Strides Arocolabs, Jubilant Organosys,
Orchid Pharmaceuticals, Dishman Pharma and Divis Lab, have already started undertaking contract manufacturing
of APIs for global MNCs. MNCs like Merck, GSK, Sanofi Aventis, Novartis and Pfizer also source their APIs and
drug intermediates from Indian companies.

Indian companies are also on the lookout for mergers & acquisitions to strengthen their positions in the
international markets, to counteract pressures due to intense competition in the US market, increased investment
in the international markets and most importantly rising R&D costs. This will also help them to integrate and
increase their inorganic growth. They are seeking companies having better distribution networks in the regulated
markets like US, UK, Canada, Australia, Germany etc. to help them offset the loss of new product options and
improve distribution to penetrate new markets.

Matrix has made known its intention of buying a 60% stake in Mchem of China and has increased its stake in
Docpharma from 22% to 45%. Sun Pharma is buying a manufacturing site in Hungary. Jubilant Organosys is
acquiring Target Research a US based CRO.

Indian companies are also exploiting the possibility of JVs in the international markets. Matrix has entered into a JV
with a South African company for anti-retroviral drugs while Lupin has entered into a JV with another South African
company for developing anti TB drugs.

Domestic companies are also going in for marketing arrangements with MNCs to increase their strengths in
marketing. Lupin has joined hands with Kyowa for marketing formulations in Japan. Ranbaxy has forayed the
Italian pharma market with the launch of Ranbaxy Italia SPA in Italy, as a wholly owned subsidiary. Matrix Labs
and Arch Pharma Labs have signed agreements with Lodexis, a leading player in innovative bio-based solutions.

In conclusion, for India to really take its place in the sun and achieve the Mckinsy projection of US$ 25 bn. by
2010, the pharma industry will have to substantially increase its spend on innovative R&D which is currently a
paltry Rs.11.8 bn., a mere 4% of sales. Linkages between industry and academia will also have to be
strengthened.