India has emerged as one of the two quickest emerging economies in the world with its GDP increasing by more than three times since 2000, coming second only to China in terms of GDP growth rate. The country has continued to register strong growth throughout the last decade and is emerging as a global economic leader. Overall, the GDP growth during 2010-11 was 8.5 per cent, a healthy increase above the eight per cent  registered in 2009-10. India's growth prospects over the next few years remain robust and the economy is expected to be four times of what it was in 2007, by 2020.

Indian firms have been successful in integrating into global production chains and have realized rapid growth of exports, with exports increasing by 38 per cent in FY11 to reach US$ 246 billion. With appropriate investments and technology, rapid industrial growth is likely to continue for most industries in India.

Life sciences industry is one which has performed exceedingly well and experienced significant growth which exceeds the country's growth. India's increasing involvement with the World Trade Organization (WTO) during the last decade has encouraged the country's pharmaceutical companies to adopt a R&D based growth strategy. Apart from the manufacturing of drugs, the Indian pharmaceutical industry is a hub for outsourcing of clinical manufacturing and research. By strengthening regulations for intellectual property protection and complying with WTO guidelines, India can create vast opportunities in exports and also become a global hub in the area of high-end R&D, drug discovery and biotechnology. The government is proactively looking to raise scientific R&D spend significantly from the current levels.

Life sciences industry's total market-size in India is projected to more than double by 2015, driven by a rise in disposable income, aging population and improving medical infrastructure, introduction of product patent regime, increasing accessibility and booming demand for Indian generic drugs. The GDP spend on health care in India is projected to rise to 2-3 per cent  in 2012 from a mere 1.1 per cent in 2010, which will have a significant impact on the growth of the industry. Also, the relatively lower cost of operations and skilled manpower base, has made India a key emerging location for global Life Sciences companies' research and manufacturing activities.

The  Indian   pharmaceutical   industry   has greatly evolved over the last 50 years. From being   a   market,   almost   completely dominated by MNC companies with a high concentrated focus on exports of ingredients, India has now proven its strength and capabilities in the areas of manufacturing, drug discovery and generics. The domestic industry is now moving into the phase of innovation, with the large players as well as the smaller niche players, focusing on strengthening their research and drug development capabilities and expanding to the developed and regulated international markets. The adoption of the new product patent regime along with vast infrastructure improvements, have been the major factors for driving this change.

However, ongoing problems such as lack of infrastructure and gaps in the new patent regime continue to hamper the sector's development. Also, India has to still address issues related to implementation and enforcement of product patent regime.

Key segments Pharmaceuticals (Pharma)
The Indian pharmaceutical industry is now the third largest in the world in terms of volume (accounting for around 10 per cent  of world's production) and 14th largest in terms of value (accounting for around two per cent, due to lower prices), with a market size of around US$ 21 billion in FY10. The domestic pharma sector exhibited strong growth in 2010 and recorded a 16.5 per cent growth during January-December 2010. Over the last four years, the industry grew in the range of 13-17 per cent.

The increasing acceptance of generic versions of drugs has been a major factor driving this growth. Indian generics are highly in demand globally as they are recognized for their high quality standards. India has the second highest number of US FDA approved plants, after only the US itself.

The industry produces about 400 Active Pharmaceutical Ingredients (APIs) or bulk drugs and an extensive range of formulations related to all major therapeutic groups. However, the industry is highly fragmented with over 20,000 odd players of which approximately 250 medium to large corporations control about 70 per cent of the total domestic market.

The pharmaceutical industry is now witnessing consolidation, with smaller companies combining their operations with larger players through mergers, while almost all established players are on the look-out for acquisitions to boost their product and brand portfolio and expand market share and presence.

Going forward, export of bulk drugs is likely to grow at a faster rate, as global pharma companies' look to increasingly outsource manufacturing of bulk drugs for patented (through loan licensing agreements) as well as generic drugs to low cost countries. Domestic formulations segment is also set to grow with the growing middle class and increasing access to healthcare in India pushing up demand.

Biotechnology (Biotech)
Biotechnology industry in India, comprising  around 380 companies, has doubled in size in the last five years, to reach US$ 4 billion in FY11. India's biotechnology sector is benefiting from several advantages like its cost -effectiveness, research and development (R&D) expertise, and personnel skills. India is now widely recognized as an ideal location for manufacturing biotech products and for conducting high-level research programmes in the field. Increasing investments, outsourcing activities and exports are key drivers for growth in the biotech sector.

The global investing environment for biotech companies has been negative since 2008, as the recession severely impacted funding for the sector, which is considered to be high-risk, high-return in nature. The situation is improving now, with most domestic innovator companies and MNCs focusing on the biosimilars segment to gain entry into the fledgling Indian biotech sector.

Medical devices
The Indian medical devices sector is on a high-growth trajectory The medical devices sector is ranked among the world's top 20 by sales, with its turnover nearing US$ 5 billion in 2011, growing at a CAGR of over 20 per cent. The sector comprises of over 700 manufacturers in India and is still largely unregulated, with MNC companies constituting around 55 per cent of the industry by value.

Indian companies are challenged by lack of skills for R&D and funding crunch, as the sector is viewed as highly-capital intensive with a long gestation period, which results in a majority of domestic manufacturers continuing to focus on low margin - low technology products like disposables and medical equipment.

However, increasing expenditure by hospitals and public healthcare providers, as they expand their presence and services through smaller and rural-based hospitals to fulfil the increasing demand, is increasing emphasis on ambulatory services, diagnostic clinics, etc. which in turn is spurring the medical device sector. Also, diagnostics and medical electronics are high growth segments, being propelled by increasing focus on accessible and affordable healthcare.

Despite strong growth rates, the market remains disproportionately small, ranking among the top 20 in the world, but with low per capita spending. High quality products are sought after, particularly in the private sector, and the high-tech end of the medical device market is dominated by multinationals with extensive service networks.

Contract Research & Manufacturing Services (CRAMS)
India has achieved a leadership in the segment and has established itself as a hub for CRAMS, as it offers a substantial cost advantage and high quality manufacturing capabilities. Big pharmaceutical companies from the developed markets are increasingly outsourcing their operations, in a strategic manner, to India to leverage on these advantages.

The global CRAMS market (excluding clinical trials) reached US$ 67 billion in 2010, with the Indian sector being valued at US$ 3.5 billion or a little over five per cent of the total market. This indicates a vast growth opportunity, and the Indian CRAMS sector has been and is further projected to grow at a rate that is three  times higher than that of the global market.

The global Contract Manufacturing Organization (CMO) market is growing at a CAGR of 13 per cent to reach around US$ 42 billion in 2010, with the Indian CMO industry contributing US$ 2.2 billion, growing at nearly 40 per cent, year-on-year. It is expected that Indian CMO business would reach US$ 7-8 billion opportunity by 2015 driven by increased funding infusion from institutional and private investors.

The global Contract Research Organization (CRO) market grew at a CAGR of 19 per cent to achieve around US$ 25 billion in sales in 2010. The Indian CRO industry, with revenue of around US$ 1.3 billion in 2010, is increasingly being recognized for its drug discovery and development outsourcing, which grew at a rate of 45 per cent, year-on-year. There is a vast scope of expansion in this sector, as domestic companies build capabilities in highly technical niche areas.

Key growth drivers & opportunities
Outsourcing of research and manufacturing functions by global  companies
The recognition of product patents in India in 2005 resulted in stronger IPR protection for global pharmaceutical companies, which led to the opening up of the contract research and manufacturing services (CRAMS) segment. Today, India has the largest number of US FDA-approved manufacturing plants, around 180, outside of the United States.

Outsourcing of activities such as manufacturing and R&D work to low cost destinations such as India and China, leads to cost-arbitrage of more than 50 per cent when compared to developed countries. As a result non-core activities such as manufacturing of APIs, dosage development, packaging are increasingly being out-sourced.

In the recent past, the segment suffered in line with the global slowdown and resultant consolidation in the life sciences industry, with the viability of an emerging-market based CRAMS model being questioned. The segment's growth is likely to be challenged in the near term due to continuing consolidation of the supplier base by Big Pharma companies.

It is believed that global pharmaceutical players will continue to close facilities in developed markets, increasingly transferring work across the pharma value chain to India/China-based facilities to optimize their cost structures. In the last two years, several innovator pharma companies such as Merck, AstraZeneca, Pfizer, Bayer, Bristol Myer Squibb and Johnson & Johnson had announced restructuring plans that led to closing down of several of their R&D and manufacturing facilities and outsourcing them to third parties. Global CRAMS companies are also shifting a bulk of their operations to the low-cost emerging markets to remain competitive in terms of price. This trend is likely to continue going forward and Indian companies, like Dishman, Jubilant Life Sciences, Sun Pharma, Lupin, Aurobindo, Glenmark and Matrix Laboratories are set to capitalize on this trend. The areas where outsourcing is set to increase maximum is discovery and manufacturing of formulations.

Increasing push for generics driving India's pharma industry
The main driver for growth in the generics segment is Big Pharma companies' increasing focus on this segment, as their R&D pipelines dry-up and they are unable to be internally replenished, in line with the ongoing patent expirations. Increasing emergence of government healthcare reforms worldwide, with a special focus on promoting the use of generic drugs to control healthcare costs is another key driver for the strong growth of generics.

Emerging markets are seeing far higher growth in generic drug sales, due to improved awareness and access, coupled with rising expenditure on public health. At present, India constitutes around eight per cent  of total global generic market, by volume, while the US, Europe and Japan accounted for over 70 per cent  of the market. This indicates a huge opportunity in emerging markets and other non-regulated markets.

The global generics market has been growing at over 18 per cent over the last five years, positively impacting India's formulation exports, driving steady growth. Indian pharmaceutical manufacturers are expected to gain at least an additional US$ 1 billion worth of market share due to the ongoing patent expirations. In the next five  years, products worth over US$ 100 billion are set to expire in the US. It is expected that by 2015, generic drugs will dominate the global market, with patented products constituting only 10 per cent  of the total market by volume.

Focus shift to emerging markets
The life sciences industry in emerging markets has been exhibiting double digit growth in the last few years, while the industry in the developed markets of North America, Europe and Japan has been stagnating with low single digit growth.

The key emerging markets, including India are expected to contribute nearly half of the annual market growth of global pharmaceutical industry in next three years. These markets are likely to expand by US$ 90 billion during the period 2009 to 2013.

Emerging markets drug sales are expected to equal drug sales in the rest of the world by 2020.

The primary drivers for this are the growing affluence of the populace in these countries coupled with increasing prevalence of lifestyle diseases. There is a large untapped population which is now beginning to gain access to healthcare through ongoing reforms.

The Big Pharma companies are focusing on growing their emerging market sales to try and offset the market saturation in the developed markets and the revenue decline caused by blockbuster drugs going off patent.

Rise in exports to regulated markets
India had the highest pharmaceutical exports in the Asia-Pacific region in 2010. However, there is still a vast opportunity available with the global pharmaceutical markets being estimated at around US$ 825 billion in 2010.

Pharmaceutical exports from India are estimated to have crossed US$ 10 billion for the 2010-2011 period, growing at a CAGR of nearly 15 per cent. Indian exporters see a much larger opportunity opening up with an increasing number of drugs turning off-patent and greater acceptance of Indian generic drugs in regulated markets, which is likely to spike up pharmaceutical exports growth by a CAGR of over 30 per cent by 2015.

While India's exports to regulated markets have achieved double-digit growth over the last three years, exports to certain emerging markets like Russia, Brazil, Ukraine and Israel, declined significantly in FY10. Several untapped business segments, like biopharmaceuticals and new markets exist, and the room to enhance the country's pharmaceutical exports is vast.

The Indian Government has implemented several initiatives to promote growth of exports, including Duty Entitlement Pass Book (DEPB) scheme. DEPB is an incentive offered by the Government to exporters, whereby it refunds the customs duty paid on inputs used for manufacturing goods, which are exported. The scheme was due for withdrawal but has been extended to September 30, 2011. The industry is strongly against the withdrawal of this scheme, which could have a significant impact on the growth of pharmaceutical exports.

Key risks and challenges Intensifying competition
Competition from international generic players is increasing, as they are entering the market through acquisitions and alliances to leverage the low-cost advantage and large resource base. The MNC companies are also trying to capitalize on India's status as one of the fastest growing emerging markets by formulating country-specific pricing and marketing strategies. Big Pharma companies like Merck and GlaxoSmithKline are launching drugs and vaccines in India at substantially lower prices than in their home countries.

This development has resulted in Indian companies re-strategizing their growth plans. Domestic companies are now looking to collaborate instead of competing with MNC players and are trying to either consolidate or divest some of their operations. Some larger Indian players are also making acquisitions in the developed markets and filing their generic products for launch in the regulated markets of US and Europe.

Inadequacies in  new patent regime
The Indian patent regime underwent a massive change in 2005, by shifting from process patent to product patent. Following this, large global pharmaceutical players have increasingly started establishing and expanding their footprint in the country. However, at present majority of their activities in the country are operational and low-value. MNC companies are still wary of bringing in their patented technologies and products to the country due to perceived weaknesses in the new patent regime.

Provisions related to Section 3{d) of the Patent (Amendment) Act 2005 do not allow new patent applications for existing drugs, thus preventing the ever-greening of drug patents. In addition, compulsory licensing allows Indian players to continue manufacturing generics of patented products for export to under-developed countries.

Due to these conditions, which are aimed at improving healthcare access, the most innovative technologies available internationally have not entered the domestic market, resulting in domestic  companies' R&D operations lagging far behind those of their global counterparts.

Lack of risk funding for new entrants & R&D investments
Investors in India are wary of investing in high-technology and long-gestation period projects, which they perceive as having high risk, resulting in a funding crunch for certain segments like biotech. Limited available funding from financial institutions and venture capitalists is restricting the development of innovative companies, especially for start-up companies looking to scale up their operations or invest in research and development (R&D). The government is rolling-out several initiatives for supporting small life science companies, but there is still a large gap.

Indian companies have long been criticized for their low level of investment in R&D. This fact has prevented them from becoming serious players in global markets and instead being viewed as a developing country that gets along by copying western products. Most Indian pharma companies spend a small fraction of their sales on R&D, often less than one per cent  of their sales turnover. In comparison, companies in the developed markets spend on an average 15 to 20 per cent of their sales on R&D.

Further, strong pricing competition among local manufacturers has led to pressurized margins and limited capital for investing in R&D.

However, this is beginning to change, with domestic companies taking proactive action to increase their R&D expenditure. Still, the majority of the spending on R&D is by a limited number of established companies. The government is trying to encourage an increase in industry spending on R&D, with incentives such as benefits in the form of tax deduction on the amount spent on R&D and accelerated depreciation rates for equipment purchase for R&D purposes.

India's image as a "Copycat" manufacturer
India is known as the hub for contract manufacturing and research and as an emerging leader in the area of generics. However, till date there have been no innovator drugs originating from the country. This has resulted in India being known as a "copycat" manufacturer globally and innovative products from India find it tougher to prove themselves in the global markets.

Constrained availability of funds to back R&D activities due to the long gestation period of product development and the associated high degree of uncertainty are the main factors for this aspect of the Indian life sciences industry. Further, India lacks skilled manpower, with expertise in designing and implementing the complete discovery and development process for innovative products and its commercialisation. This can result in a product being unable to realize its full market potential and lower a company's expectations in returns from R&D and hence lower R&D investments.