In another five years from now, the top dozen Indian pharma companies will emerge as the key suppliers of drugs to the US and European healthcare system while the present medium and small scale companies will dominate the domestic pharmaceutical scene of the country. Perhaps this is the best possible distinction the Indian industry could achieve in a short span of 25 to 30 years
Indian pharmaceutical industry has transformed itself into powerful and prominent generic player in the world pharmaceutical scene today. It is no more a cheap API supplier to the US and European pharmaceutical industry and traders, an image it acquired in the eighties. Pharmaceutical companies from India are the suppliers of quality generic formulations belonging to most therapeutic categories to more than 200 countries at far cheaper rates than any other pharmaceutical producing country in the world. India, thus, exports almost 40 percent of total production of pharmaceuticals valued at Rs.60,000 crore. Many leading players like Ranbaxy, Dr Reddy's , Cipla, Sun Pharma, Wockhardt, Lupin, Zydus Cadila and Orchid export 60 per cent or more of their production. In another five years from now, the top dozen Indian pharma companies will emerge as the key suppliers of drugs to the US and European healthcare system while the present medium and small scale companies will dominate the domestic pharmaceutical scene of the country. Perhaps this is the best possible distinction the Indian industry could achieve in a short span of 25 to 30 years.
A new dimension of Indian pharmaceutical industry that is emerging now is the shifting of its export operations to overseas, the next logical step for further growth and globalization. Over two dozen of India's leading pharma companies have already established export bases in the US, Europe, Latin America, Africa and China either by acquiring companies there or by floating joint ventures. And amongst the overseas markets, European Union and CIS are now emerging as highly potential market for Indian pharmaceutical products. And some of the top Indian players are increasingly picking up manufacturing units in Europe. The acquisition of Betapharm in Germany, a leading generic manufacturer, by Dr Reddy's remains as the largest acquisition by any Indian drug company. By this acquisition Dr Reddy's will have a strong base in German and West European generic market.In March this year, Ranbaxy acquired Terapia, the largest generic company of Romania, for a sum of $324 million. The acquisition will give Ranbaxy two manufacturing units, bioequivalence centres, 60 products and access to Terapia's coverage of nearly 4,000 pharmacies and 450 hospitals in Romania. Ranbaxy will be using these two manufacturing facilities as its hub for manufacturing in Europe. Ranbaxy had subsequently acquired Allen Spa, a division of GSK in Italy and a generic company in Spain this year. These acquisitions will make it possible for Ranbaxy to have a strong base in the rapidly growing European Union and the CIS markets. Some of the medium sized Indian companies which have entered the European market since last year through the acquisition route are Dishman Pharma, Strides Arcolab, Matrix Labs, Shasun Chemicals and Aurobindo. Indian pharmaceutical companies have spent a total of 1.6 billion dollars in 2005 for buying out companies in the US, Europe and Latin America. International bankers predict that an investment of over 3 billion dollars will be used by Indian drug makers for buying out companies in these markets in the next 12 months. And at least 10 buy out deals by medium size Indian companies are currently in various stages of negotiations.
Such a magnificent growth and expansion of Indian pharmaceutical industry would not have been possible without the strong policy support by the Indian government. A key legislation that has changed the fortunes of Indian pharmaceutical industry came in 1970 with the enactment of the Indian Patent Act. By not recognizing product patent in the country, the Patent Act has enabled Indian pharmaceutical units to manufacture and market any new drugs introduced in the world markets by way of reverse engineering. Thus, in a matter of 6 to 7 years the Indian industry developed the capability to manufacture any new molecule introduced in the world market, many of them from the very basic stages. That efficiency of Indian entrepreneurs brought down the prices of a large number of widely used drugs and formulations in the country posing a threat to most of MNCs operating in the country. Then came the first Drug Policy in1978 and a comprehensive price control in 1979. Although the price control affected the profitability of almost the entire pharmaceutical industry, some of the other policy directions had openly supported the domestic industry and discouraged the existence of MNCs. An important thrust of the policy was the self sufficiency in bulk drug production in the country, an area MNCs were unwilling to enter into for several years. These two policy initiatives from the government had transformed the Indian pharmaceutical industry into a leading manufacturer and exporter of APIs. And for almost a decade India remained as the quality supplier of APIs at competitive prices in the international market. With the entry of China as a cheap supplier of APIs in the world market in the mid nineties, Indian pharmaceutical producers have started gradually withdrawing and started concentrating on value added product like generics. Exporting of generic drugs has called for substantial improvement in manufacturing facilities and standards conforming to world standards. The companies like Ranbaxy and Dr Reddy's had, thus, started modernizing their manufacturing standards during early eighties. This was followed by others who also started getting orders for generic drugs from MNCs. Several large Indian companies have thus adopted Good Manufacturing Practices on their own at least for the exports.
The imposition of Schedule M provisions, in process, forced a large number of small and tiny drug units exit from this sector but brought about a general upgradation in manufacturing standards in this industry
The need for standardizing manufacturing facilities and adopting GMP in the pharmaceutical industry was also felt by the government as these products are life saving and essential. Although there has been stiff opposition from the small scale sector against imposing GMP in this industry, government decided to go ahead with the plan. The Schedule M of the Drugs & Cosmetics Act was thus amended by the central government making GMP compulsory in drug manufacturing sector from 2005. The imposition of Schedule M provisions, in process, forced a large number of small and tiny drug units exit from this sector but brought about a general upgradation in manufacturing standards in this industry.
One other statute change involving pharmaceutical industry, that had taken place last year, was the amendment to the Patent Act as a part of TRIPS Agreement. The amended Act has been notified in January 2005 bringing back the product patent regime after a gap of 34 years. Introduction of product patent in this industry may not have any serious consequences to the Indian pharmaceutical companies in the near future, as the main revenue for the pharmaceutical companies will continue to be from selling of generics. The current liberal price control policy of the government is also helping the companies to maximize profits. Financial performances of most of the large and medium size companies have been excellent for the last 3 years. A Pharmabiz study of the financial performances of 75 listed pharmaceutical companies during 2005-06 indicative of the healthy profile of the industry. During 2005-06, these 75 companies reported a net profit growth of 27 per cent over the previous year. The net combined sales of these companies went up by 18.4 per cent to Rs 36,093 crore in 2005-06 from Rs 30,478 crore reported in the previous year. The performances of top ten companies are still better. The top ten companies out of these 75 dominate the overall working and their share worked out to around 50 per cent of aggregate net sales and around 55.1 per cent of aggregate net profit. The net sales of the top ten namely Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, GSK, Aurobindo, Nicholas Piramal, Sun Pharma, Cadila Healthcare and Wockhardt, touched Rs 17,896 crore during 2005-06 as against Rs 15,180 crore in the previous year, registering a growth of 17.9 per cent. Similarly, their net profit increased sharply by 24.7 per cent to Rs 2,832 crore from Rs 2,271 crore. Dr Reddy's Laboratories, Orchid Chemicals, Lupin and Panacea Biotec pushed their net profit by more than 100 per cent during 2005-06. DRL's net profit went up by a record 222 per cent to Rs 211.13 crore from Rs 65.46 crore in the previous year. This was possible on account of higher exports and reduction in R&D expenditure during 2005-06. Orchid net profit saw a growth of 167 per cent to Rs 82.90 crore and that of Lupin's net profit moved up by 117 per cent to Rs 182.72 crore. Besides these majors, companies like Suven Life Sciences, Ankur Drugs, Surya Pharmaceuticals, Ahlcon Parenterals Venus Remedies, Natco Pharma and Hiran Orgochem achieved profit growth of more than 100 per cent during 2005-06.
Although the profitability in pharmaceutical industry is far higher than many other industrial segments in the country, not many pharma companies are capable of investing in new molecular research. It is a high risk activity involving huge sums of money for a long period with the possibility of not getting a marketing approval in the end. Ranbaxy, Dr.Reddy's, Lupin, Wockhardt, Glenmark and few others are all into it at huge costs for some years now. One blockbuster drug is enough to hit the jackpot but no Indian company is anywhere near to that goal so far. What is being tried by these hopeful Indian companies is to out license the compound to MNCs at some small amount once the animal trials are completed. Dr.Reddy's and Ranbaxy had done that in the past and a few weeks ago Glenmark did the same. And there is no guarantee that the MNCs will be able to bring the out licensed compound into the market place after the human trials. Drug development costs several millions of dollars by way of three phase human trials in multi country locations for nearly 10 years. And it is beyond the financial capabilities of even top companies of India at present. Medium size Indian companies have realized this fact long back and are only looking at the option of developing novel drug delivery systems (NDDS) of the existing drugs, a far less expensive R&D activity.
New molecular research is turning into a high risk business with a steady decline in the number of new drug approvals since 1996 even for the global pharma companies. The latest figures from the US FDA indicate that new product launches by pharmaceutical companies fell to a low of 21 molecules in 2003 from 36 in 2002. Global pharma industry had the largest number of 53 approvals for new molecules in 1996. Some of the top pharmaceutical companies could not even get a single new drug approval in 2003. For instance, Merck launched just three new drugs between 2000 and 2004 despite its $3 billion annual research budget and R&D staff of 10,000. A recent study by Bain & Company estimated that the cost of development of a new drug to commercialization has reached 1.7 billion dollars while success rate of compounds entering preclinical stage has declined by about 50 per cent. The picture is quite alarming for an industry which is spending close to 18 per cent of its turnover of on R&D. In situation like this, global pharma industry has to explore low cost options to outsource research and manufacturing. The current boom in outsourcing business in India is an inevitable fall out of this helplessness of global pharma companies. The global pharmaceutical outsourcing market, which currently stands at 24 billion dollars, is estimated to reach 53 billion dollars by 2010. Low cost manpower and a large base of US FDA approved plants have given a great advantage to India as a major outsourcing location. Suven Life Sciences, GVK Biosciences, Jubilant Organosys, Nicholas Piramal and Shasun Chemicals are among the leading Indian players in this segment. Custom manufacturing for innovator companies stands out as another outsourcing opportunity for Indian pharma sector.For several medium sized Indian pharma companies, customs manufacturing is thus a major contributor to the overall export revenue. Nicholas Piramal's custom manufacturing business recorded revenues of around Rs 300 crore in 2005-06. Jubilant Organosys recently added to its order book, annual contracts with various global life sciences companies worth 68 million dollars for calendar years 2006 and 2007.
Indian companies are increasingly looking out to buy distressed contract manufacturing facilities in various countries to have a global presence in this segment. With the recent acquisition of Roche's API business in Mexico, Dr. Reddy's Labs expects its custom manufacturing business to grow substantially in the coming months. Acquisitions of UK's Avecia Pharma by Nicholas Piramal and French Rhodia Pharma Solutions by Shasun Chemicals are indications of this new trend amongst the Indian companies. Shasun expects to grow its contract manufacturing business by 20% growth in the current year and by another 40 percent growth in 2007-08. The company had a turnover of Rs.38 crore from its contract manufacturing business in 2005-06.
R&D outsourcing mainly clinical research is perhaps a much bigger business opportunity for Indian pharmaceutical sector today. The clinical trials market worldwide is placed at over USD 45 billion and the industry has an estimated 2,10,000 people in the US alone which form one third of the total R&D staff US pharma industry. And India is being projected as the emerging hub for global clinical research. According to Mckinsey report, the global clinical trial outsourcing opportunity for India is Rs 5,000 crore by 2010 with the requirement of approximately 50,000 Clinical research professionals in the next few years. Currently there are more than 100 major CRO's operating in the country. Their number has risen to over hundred from less than eight just three years ago. McKinsey estimates that European and US pharmaceutical companies will spend US$1.5 billion per year on clinical trials in India by 2010. In short, production of medicines for the domestic market will shrink to a very small activity of Indian pharmaceutical sector in the next few years from now.