Department of Commerce Confederation of Indian Industry Government of India Buildin in India Conference & Expositio 3h De, Hyot Racer Background Note From a predominantly bulk drug manufacturer to pharmaceutical formulators and more recently into developing novel drug delivery systems and foraying into new chemical entities, the Indian pharmaceutical industry is carving a niche for itself in the global village. Why is India so attractive as an R&D hub? It is not just cost arbitrage but value arbitrage that India offers. Skill base, knowledge, innovative capacity, reduced timelines & costs are only a few of the advantages. To build innovative pharma in India, we need to create a conducive environment for R&D, streamlining the regulatory process to make it simple, transparent and accountable. Having a huge and rich bank of human capital is going to be critical in enabling this. Encouraging research in Universities and Medical colleges, upgrading training & technical facilities, creating world class toxicological laboratories etc can trigger economic, technological & intellectual growth. It is therefore imperative to network Government, Industry & Academia and envisage necessary support to create centres of excellence. Finally, itis essential to have an environment where creation and protection of intellectual property is encouraged. Today's world economy is held in Intellectual Property. Wealth creation requires protection of IPR and adequate patent system. As India is ushering in product patent regime by January 2005 in compliance with the TRIPS agreement, increasing the R&D base becomes one of the key options for Indian players. Conference & Exposition on "Building Innovation Pharma in India" 1Background Paper Indian Pharmaceutical Industry Indian pharmaceutical market is worth US$ 6.6 billion in 2002-03, displaying a growth of 15% since 1997-98 and is expected to touch US$ 25 bn by 2010. The industry is highly fragmented with about 15,000 plus registered units with only about 300 in the organized sector. The industry is one of the globally competitive industries in India, with exports accounting for nearly 43% of the total revenue to over 65 countries. Globally, pharmaceutical industry in India ranks 4th in volume term and 13th in value (largely because of very low prices). However, India's share in world sales is miniscule, the total Indian production constitutes about 1.3% of the world market in value terms and 8% in volume terms. From being almost non-existent before 1970 to a prominent provider of healthcare products, the Indian pharmaceutical industry has come along way. The industry has increased from Rs. 400 crore in 1970-71 to Rs. 30,257 crore in 2002-03, at a compound annual growth rate of 14.5% per annum. India pharma companies are currently doing very well. The share of multinational companies in this sector, which dominated with a market share of 90% in 1970-71 has came down to 28% in 2002-03. Indian pharmaceutical Industry is moving up the value chain. From being a pure reverse engineering industry focused on the domestic market, the industry is moving towards basic research driven, export oriented industry with a global presence. It ruled on the global pharmaceutical map in 2002-03 with its low-cost medicines, which made HIV/AIDS treatment accessible to a million poor in sub-Saharan Africa and Asia and it helped India emerge as favourites’ in the global markets. The cost of HIV/AIDS treatment was reduced from $ 15,000 per year to $ 140 per year. Indian companies have now started thinking and acting globally. Leading pharma majors export upto 40-70% of their output to over 100 countries. Ranbaxy, the largest pharmaceutical company in the country with annual revenues inching close to $ 1 billion exports its products to over 100 countries, with ground operations in 28 countries and manufacturing facilities in more than seven countries. Dr Reddy's has presence in more than 50 countries with USA, UK, Russia and China as its main markets. In FY2005 Indian companies are expected to file 60 ANDAs (a fifth of total generic applications in the US). The leading two, Ranbaxy and DRL, are already filing about 18-20 ANDAs each every year. 2 Conference & Exposition on “Building Innovation Pharma in India"Background Paper Indian pharma companies have also been on a buying spree in the last few years to acquire a global capability. Ranbaxy's acquisition of RPG Aventis, Zydus Cadilla's acquisition of Alpharma and Wockhardt's acquisition of CP Pharma are just some of the examples SWOT ANALYSIS Strengths Trained Manpower and knowledge base High chemistry and process reengineering skills Quick adoption of new technology Access to talented scientist both in India and abroad Avery rich base of traditional knowledge in therapeutics i.e. Ayurveda, Sidha & Unani Global ranking in Volume terms- 4th, Value terms- 13th Low cost strong manufacturing base Low cost of manpower Strong marketing and distribution network Large untapped domestic market Weaknesses Lack of pricing power impacts growth Lack of product patents Characterised by low domestic margins 1/6th of world population, yet its share in world market is just 1% in value terms Highly fragmented industry Low success rates of finding a new molecule Low R&D spending Lack of venture capital Ambiguity in policies and laws Regulatory agency not fully equipped to handle New Drug Applications (INDs and NDAs) Conference & Exposition on "Building Innovation Pharma in India" 3Background Paper Opportunities Being low cost producer combined with FDA approved plants, India can establish as a global sourcing hub of bulk drugs and formulations Potential to become a leading supplier to other LDCs and countries with lesser-developed pharma sector (under compulsory licensing) Significant export potential Rising R & D cost abroad, hence outsourcing hub for R&D Potential for developing India as a centre for international clinical trials Opening up of the health insurance sector Product patent protection from 2005 will result in FDI inflow in this sector New DPCO Large number of drugs going off patent Marketing alliances to sell MNC products in domestic market Contract manufacturing arrangements with MNCs Threats Threats from other low cost countries like China, Eastern Europe and Israel exist Ambiguity on VAT Loopholes in the Patent Bill Growing generic competition leading to lower margins A weak regulatory framework & low entry barriers hence spurious drugs problem Market share of top 10 pharma companies in India (2004) Ranbaxy 47 Nicholas Piramal 43 Zydus 3.9 Sun 3.1 Pfizer 2.6 Dr. Reddy's 2.5 Knoll 2.5 Aventis 2.3 Cipla 5.5 GSK 5.5 Source: ORG MAT, Bloomberg 4 Conference & Exposition on “Building Innovation Pharma in India"Background Paper Policy Developments The Indian pharma industry is a success story now primarily due to series of policies in 1970's that aimed at moving the country towards self-sufficiency in medicines. Much of the country's pharmaceutical consumption was met by imports at that time. During that period, of the top ten firms by retail sales, only two were Indian firms and the rest were subsidiaries of multinationals An important part of the policy package was the passage of the Patents Act 1970 (effective April, 1972). It was the instrument that made it possible for domestic pharmaceutical companies to expand rapidly. This legislation greatly weakened intellectual property protection in India, particularly for pharmaceutical innovations. Pharmaceutical product innovations, as well as those for food and agrochemicals, became unpatentable, allowing innovations patented elsewhere to be freely copied and marketed in India. Under the IPA, substances used in foods and pharmaceuticals were not granted product patents, however process patents were allowed. The statutory term was shortened to 5 years from the date of patent grant or 7 years from the date of filing for patent, whichever was earlier. The act legalised ‘reverse engineering’ of drugs that are patentable as products throughout the industrialised world but unprotectable in India. Other aspects of the policy package was to encourage the domestic production of pharmaceuticals by imposing restrictions on the import of finished formulations, high tariff rates, ratio requirements (where imports of bulk drugs had to be matched by purchases from domestic sources at a fixed ratio) and equity ceilings on foreign participation to 40% through implementation of FERA (Foreign Exchange Regulation Act) in 1973. Further, the strict price control regulation was introduced with Drugs Price Control Order in 1970, which effectively put a ceiling on prices of certain mass-usage bulk drugs and their formulations. While making the production of pharmaceuticals less profitable for all firms selling in the Indian market, it made the Indian market unattractive for foreign firms with market options elsewhere. Thus even the price control regime contributed to the shift towards a greater share of production being met by Indian firms. However, all these policies resulted in lack of transfer of technology, discouraged R&D, and flow of foreign funds into this sector. The process of liberalization set in motion in 1991. Industrial licensing for the manufacture of all drugs and pharmaceuticals was abolished and many non-tariff barriers to imports were demolished. Conference & Exposition on "Building Innovation Pharma in India" 5Background Paper In 1994, India became a signatory of the GATT (now WTO) and therefore a signatory to the TRIPS under the TRIPS agreement. The country is now under compulsion to introduce a product patent regime by 2005 after a transition period of ten years TRIPS and Pharmaceutical Patents: The WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) attempts to strike a balance between the long- term social objective of providing incentives for future inventions and creation, and the short-term objective of allowing people to use existing inventions and creations. The balance works in three ways + Intellectual property protection encourages inventors and creators because they can expect to earn some future benefits from their creativity. This encourages new inventions, such as new drugs, whose development costs can sometimes be extremely high, so private rights also bring social benefits. * The way intellectual property is protected can also serve social goals. For example, patented inventions have to be disclosed, allowing others to study the invention even while its patent is being protected. This helps technological progress and technology dissemination and transfer. After a period, the protection expires, which means that the invention becomes available for others to use. All of this avoids re-inventing the wheel. * The TRIPS Agreement provides flexibility for governments to fine tune the protection granted in order to meet social goals. It allows governments to make exceptions to patent holders rights such as in national emergencies, anti-competitive practices, or if the right-holder does not supply the invention, provided certain conditions are fulfilled. Also countries that cannot make medicines themselves are allowed to import pharmaceuticals made under compulsory licence. Under TRIPS, WTO members have to provide patent protection for any invention, whether a product (such as a medicine) or a process (such as a method of producing the chemical ingredients for a medicine), while allowing certain exceptions'. Patent protection has to last at least 20 years from the date the patent application was filed. To qualify for a patent, an invention has to be new (novelty), it must be an inventive step (i.e. it must not be obvious) and it must have industrial applicability (it must be useful). nal or plant ie orhealth 6 Conference & Exposition on “Building Innovation Pharma in India"Background Paper Under TRIPS agreement, government can make limited exceptions to the patents rights. Research Exception And Bolar Provision Many countries use this provision to advance science and technology. They allow researchers to use a patented invention for research, in order to understand the invention more fully. In addition, some countries allow manufacturers of generic® drugs to use the patented invention to obtain marketing approval for example from public health authorities without the patent owners permission and before the patent protection expires. The generic producers can then market their versions as soon as the patent expires Anti-Competitive Practice The TRIPS Agreement says governments can also act, again subject to certain conditions, to prevent patent owners and other holders of intellectual property rights from abusing intellectual property rights, unreasonably restraining trade, or hampering the international transfer of technology. Compulsory Licensing Compulsory licensing is when a government allows someone else to produce the patented product or process without the consent of the patent owner to promote access to existing drugs. The term compulsory licensing does not appear in the TRIPS Agreement, instead, the phrase ‘other use without authorization of the right holder' appears in the title of Article 31. The TRIPS Agreement does not vividly specify the list of reasons that might be used to justify compulsory licensing. However, as mentioned in Article 31, for national emergencies, other circumstances of extreme urgency, public non commercial use (or government use) and anti- competitive practices compulsory licensing is acceptable, even without applying for a voluntary licence first Parallel Imports, Grey Imports and Exhaustion of Rights Parallel or grey-market imports are not imports of counterfeit products or illegal copies. These are products marketed by the patent owner Generic arugs are copies of paterted drugs or drugs whose patents have expred Parallel imports are rot generics, Conference & Exposition on "Building Innovation Pharma in India" 7Background Paper (or trademark- or copyright-owner, etc) or with the patent owners permission in one country and imported into another country without the approval of the patent owner. Even if a country allows parallel imports in a way that another country might think violates the TRIPS Agreement, this cannot be raised as a dispute in the WTO due to the principle of exhaustion, which says that once the company has sold a batch of its product, its patent rights are exhausted on that batch and it no longer has any rights over what happens to that batch. Importing Under Compulsory Licensing Countries can import cheaper generics made under compulsory licensing if they are unable to manufacture the medicines themselves. The decision waives exporting countries obligations under Article 31(f)°. Any member country can export generic* pharmaceutical products made under compulsory licences to meet the needs of importing countries, provided certain conditions are met. The waiver is interim; the ultimate goal is to amend the TRIPS Agreement itself in 2004. Some governments were unsure of how these TRIPS flexibilities would be interpreted, and how far their right to use them would be respected. Thereafter in India the following developments on regulatory front took place. The first amendment to IPA was enacted in 1999 with Patent (Amendment) Act consequent to a WTO ruling following a complaint filed by the European Union and the US. Under this Act, the legislation to allow Exclusive Marketing Rights was cleared. The Patents (Second Amendment) Bill was introduced in the Parliament for making Indian patent law TRIPs compliant. It addressed the following issues: * The definition of the term "invention" has been modified in consonance with international practices and consistent with TRIPS. * The present Act has been modified to include exclusions permitted by TRIPS, specifically exclude the inventions, which in effect are traditional knowledge. * The rights of patentee have been aligned as per Article 28 of the TRIPS. if) ofthe TRIPS. reement say imports are rat generis. 8 Conference & Exposition on “Building Innovation Pharma in India"Background Paper * Aprovision for reversal of burden of poof in case of infringement, suit on process patent, in accordance with Article 34 of the TRIPS, has been added. The provision allows any party to use the patented invention (during the term of the patent) to facilitate his/ her entry into the market as soon as the patent term is over. * — It provides for the extension in the life of a patent to 20 years. The provisions relating to compulsory licensing have been modified to suit the public interest requirements and also to comply with TRIPS Agreement. « Aprovision has been incorporated for enabling parallel import of patented products at lowest international prices. * To ensure smooth transition of a product from the monopoly status created by the patent to the public domain, a provision has been incorporated for obtaining marketing approval from the appropriate regulatory authorities before the expiration of the patent term. * The opportunity has also been utilised to harmonise the patent granting procedures with international practices and to make the system user friendly. In pharmaceutical industry, FDI through automatic route was raised from 51% and 74% in March 2000 and further to 100% in May 2001. However, prior government approval is required for FDI proposals wherein the activity attracts compulsory licensing. Also, automatic approval for Foreign Technology Agreements is being given in the case of all bulk drugs, their intermediates and formulations except those produced by the use of recombinant DNA technology, for which the procedure prescribed by the Government would be followed. In the run-up to meet the deadline of ushering in the product patent regime from January 1, 2005, the Government introduced the crucial Patents (Amendment) Bill, 2003, providing for introduction of product patent protection in all fields of technology and covering the provisions left out of the First and Second Amendments Some of the salient features of the Bill include: * — Introduction of product patent protection in all fields of technology as per Article 27 of the TRIPs agreement. * Deletion of the provisions pertaining to exclusive marketing rights. * — Introduction of a transitional provision for safeguarding exclusive marketing rights (EMRs) already granted. Conference & Exposition on "Building Innovation Pharma in India" 9Background Paper + — Introduce a provision for enabling grant of compulsory licence for export of medicines to countries, which have insufficient, or no manufacturing capacity to meet emergent public health situations. With these amendments and the third amendment to the Patent Act, India is expected to transition to the new regime of product patents by 2005. Research & Development Indian industry has started investing heavily in R&D in the last ten years. Leading players like Ranbaxy are investing in excess of 6% of their revenues on R&D and the total investment by the industry now exceeds USD 80 million. Indian companies are shifting their focus to innovative research, i.e, developing non-infringing processes, Novel Drug Delivery Systems (NDDS), biotechnology and bioinformatics. Ranbaxy has licensed out an NDDS of ciprofloxacin to Bayer AG. Lupin is developing an innovative pipeline for oral-controlled release systems and platform technologies. Nicholas Piramal is inaugurating a new state-of-the art Research Centre in Mumbai and (through WellQuest CRO) has set up facilities to undertake clinical trials and offer their services to global majors. The pharma sector now commands attention as one of the key building blocks of the Indian outsourcing story. Restructuring over the past years leading to higher returns, outsourcing contracts in low-end R&D activities and contract manufacturing from MNCs have been a major driver of the index performance on the bourses Company R&D R&D as a% (in crore) | of Net Sales FY'03 FY'03 | FY'98 Ranbaxy Laboratories Ltd. 276.1 6.6 3.8 Dr. Reddy'S Laboratories Ltd 163.5 10.1 2.4 Cipla Ltd. 58.0 4.0 4.3 Glaxosmithkline Pharmaceuticals Ltd.| 3.5 0.3 05 Aurobindo Pharma Ltd. 22.0 2.0 0.0 LUPIN 36.0 3.5 1.3 Nicholas Piramal India Ltd 18.5 1.9 0.0 Cadila Healthcare Ltd 38.3 41 1.6 Sun Pharmaceutical Inds. Ltd. 65.8 8.7 47 Wockharat Ltd 60.4 8.3 10.8 Sample 994.3 3.9 1.7 10 Conference & Exposition on “Building Innovation Pharma in India"Background Paper The analysis reveals that their combined expenditure on R&D has increased at a CAGR of 35% in last six years and accounted for Rs 994 crore during FY'03. The top ten pharma companies contribute 75% of this amount, reflecting that big players are serious in investing in R& D. For industry as a whole, R&D expenditure as a % of net sales has improved to 4% in FY'03 from 1.7% in FY'98. Among the top pharma companies, Ranbaxy and Dr Reddy's stand out as the leading spenders in R&D with R&D as a percentage to sales at 6.6% and 10.1% respectively. In absolute terms they together spent Rs. 439 crore, close to 45% of the total R&D spending. Sun and Workhardt is also getting serious in this area, with R&D as a % of sales over 8%. Although these big companies are spending good amount of money on R&D now, itis still far less when compared to the R&D expenditures incurred by pharma companies abroad. Table below shows the data of top six R&D spenders globally. % of Sales US $ bn Pfizer 17.5 7A Novartis 15.1 3.8 Aventis 16.4 3.5 Merck | 14.5 | 32 Glaxo SmithKline 9.5 2.7 Eli Lily 18.8 24 Source: Equity Master On an average global players are spending over 15% of their revenue on R&D. When compared to global majors, the R&D spends of Indian companies is minuscule in absolute term as well as in percentage terms. For FY' 2003, while the world's largest pharma company, Pfizer, spent about US$ 7.1 bn on R&D (close to 17% of revenues), India's largest pharma company, Ranbaxy, spent a little more than USS 58 m, which is 7% of revenues. As product patents come into effect, only companies with high R&D investment will survive and Indian players have a realisation that without investing in R&D, there is no hope in years to come. And the pressure on pharma companies to spend more on R&D will only increase with the advent of the product patent regime from 2005. Till recently research in the Indian pharmaceuticals industry was focused on process re-engineering and development of drug delivery systems. This is changing with increased emphasis on research into the discovery of new chemical entities. Since pharma companies are not Conference & Exposition on "Building Innovation Pharma in India" 1Background Paper financially strong vis-a-vis their global counterparts and R&D has inherent risks as well due to low success rates, all companies may not be able to embark on new molecular research but they can opt for areas like clinical trials (which constitute about 70% of the R&D expenditure abroad) or contract research. Contract research - The most critical challenge for the global pharma industry is the increasing cost of drug discovery and development, the cost of bringing a new drug from discovery to market is over US$800m. This can be attributed largely to the declining R&D productivity (high attrition rates and cost of failures) and increasing regulatory demands of the USFDA (in terms of higher number of patients in clinical trials) for drug approval. With strong analytical skills that Indians possess and their proven chemistry capabilities, contract research can be a viable option for Indian companies. India's superior and low cost chemical synthesis skills are suited for collaborative R&D at the pre clinical stage, and custom manufacturing at the clinical stage. Custom manufacturing- With growing competition and pressure to reduce costs, have forced the global players to outsource manufacturing of drugs. Indian pharma companies offer a unique value proposition for offshoring manufacturing services due to low labour costs advantage, low error rate, better quality and strong manufacturing base. This can result in 40-50% net savings for the global manufacturers. Also, it has largest number of U.S. FDA approved manufacturing facilities outside U.S.A. which makes it an ideal destination for contract manufacturing. Clinical Research Outsourcing- This is a potential US$10 bn market, where clinical trials will be conducted in Indian facilities. Table below shows data from the tufts report on cost of development. Stages Probability of | Expected cost Cost of entering asa% developing phase (%) of TC Product ($mn) Preclinical 100 20 335 Clinical 31.4 80 467 Total 31.4 100 802 Source: Tufts Center for Study in Drug Development, 2004 Though the cost of developing a new drug has fallen over last few years, itis still high close to US $800mn. Of the total cost, a significant chunk is spent on Clinical trails, approx 80%. With its vast disease 12 Conference & Exposition on “Building Innovation Pharma in India"Background Paper patient population, India has a competence to do this kind research at 1/3rd of the cost compared to western counterparts. Also, the cost of R&D experts is relatively lower in India when compared to international standards. India can capitalize on this opportunity. Conference & Exposition on "Building Innovation Pharma in India" 13