The strengthening of patent law and the increasing cost pressures on branded drug makers in the West are fueling the growth tempo of Indian pharmaceutical sector.
Indian Pharmaceutical sector was once tarnished for making cheap clones of Western medicines and selling them in developing countries. However, this is no longer the case; seasoned in the basics of medicine making, it is now playing a significant role in the global drug industry. The industry achieved phenomenal progress over the years and is currently valued at $21.4 bn. According to the consultancy KPMG, the industry is expected to grow at a compound annual growth rate (CAGR) of about 18% till 2013-14. The Indian pharma market has become the third largest in the world in terms of volume and is ranked 14th in terms of value at over Rs 1 tn. During 2009-10, Indian pharmaceutical was among the few sectors that managed revenue growth despite the global economic recession. Another positive development has been the development of biotechnology sector in India.
Driven by increasing affordability, the industry is undergoing a major transformation and is slated to move into the world’s top-ten pharmaceutical market by 2015. Until recently, global pharmaceutical players have been incredibly proud and never outsourced from countries like India. However, analysts predict that everything in the value chain will move to different parts of the world destinations, which are cost competitive. India is going to be a major beneficiary because of this. The pharma outsourcing is no longer confined to preclinical trials but has also moved to the more sophisticated end of the drug making spectrum, including research and development (R&D) for the global drug giants and even development of proprietary medicines for Indian players. The global pharma giants have shown high interest in India going by sustained economic growth, healthcare reforms and patent-related regulations.
The industry strength is no longer confined to generic manufacturing as it has mastered developing and manufacturing generic versions of branded or patented drugs. Reverse-engineering has been one of the greatest boons to domestic players. Moreover, the strength in generic manufacturing has also given them the confidence to challenge patents of some of the top global pharmaceutical giants. With these strengths, the country has fast become the hub of research and development outsourcing.
The Indian pharmaceutical market has emerged a leader in novel drug delivery systems, custom synthesis of new molecules. To add to this, much of the work done by domestic contract research and manufacturing firms is being patented by multinational pharmaceutical corporations.
During the 1990s, there were hardly any exports to regulated markets from India. However, today over 40% of $8 bn exports to North America and Western Europe alone. The industry has a presence in 150 markets, which is more than any other industry in India. According to the data released by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total turnover of the industry between September 2008 and September 2009 was $21.04 bn. Of this, the domestic market was worth $12.26 bn. According to the US Food and Drug Administration (FDA) data, it also accounts for 1,735 Drug Master Files (DMF) as against 1,054 from US domestic companies and more than the combined total of European and Japanese companies in 2008. This is a remarkable achievement in a decade.
For instance, in 1998, India filed only three Abbreviated New Drug Applications (ANDAs). In 2009, it filed 181 ANDAs. Satish Reddy, Managing Director and Chief Operating Officer, Dr Reddy’s Laboratories Ltd. applauds Indian market, and adds that, “The understanding of market dynamics and adapting to them quickly is a huge strength that India has. This is illustrated in the number of DMF filings alone that Indian pharma has with the US drugs regulator.” Though the industry has emerged from generics market through innovation as well as hub for contract and manufacturing, it is yet to prove itself in commercializing a New Chemical Entity (NCE). Hitesh Gajaria, Executive Director, KPMG opines “New drug discovery and development has not reached its full potential in India. However, the number of compounds in the Indian pipeline and in the advanced stages of development is also increasing. It is therefore not appropriate to say that India has failed in NCE innovation.”
As domestic pharma players initiated investing in NCE research in 1998, industry experts are of the view that a span of 12 years is too short to judge success or failure. Echoing the same view, G Shah, Secretary General, Indian Pharmaceutical Alliance says, “It takes seasoned players 10 to 12 years to get a molecule from lab to market. Give them (Indian pharma) at least 20 years and required funding support before sitting in judgment.”
Renowned Business Models
The industry has grown over a period of time and has seen many ups and downs during its evolution process. To meet the challenges of new initiatives, especially in the post patent era, the industry has started probing new business models to meet the ongoing changes in market opportunities and competitive scenario. Experts say in an ever-changing global environment, a homogenous business model is unlikely to work. To navigate competition and opportunities, domestic pharmaceutical players are adopting a combination of alternative business models. These include collaborative R&D and licensing of innovations.
On the collaborative model, Indian market has a huge potential for conducting effective and economical R&D activities and clinical trials, primarily because of the availability of a skilled and competent workforce, availability of diverse ethnic and genetic population, familiarity with Western medical facilities, competency in the English language, world-class medical infrastructure and more importantly, the cost-effectiveness of domestic players.
With the advent of patent provisions, domestic players will not be able to produce and market, generic versions of previously patented drugs. Therefore, they have to focus on innovation, instead of generic drug manufacturing. Over the last few years, they have been actively involved in the area of R&D either independently or as a contract research partner of a foreign company.
They have adopted harmonious business models, some of them focused on innovation and intellectual property (IP) for licensing (product strategy), others merely embraced a pure services provider model to leverage high-quality, low-cost workforce to bring value to global customers (services strategy). Thus, most of domestic players are in the process of transforming from manufacturing companies to higher-value integrated pharmaceutical companies.
Brand Portfolio Management
While the Indian generics industry has only a 20% share globally, it is time to focus on supplies of ARVs for treatment of HIV/AIDS in developing countries to grab the biggest share in this segment. Analysts argue that if Indian companies had not intervened in this sector with their significantly cheaper versions, a very large number of HIV/AIDS patients would have gone untreated. The government should play an active role to ensure that the potential of the industry is realized. Global consultancy firm McKinsey suggests raising spending on healthcare to 3% of GDP, increasing investments in rural and tier-2 healthcare infrastructure, adopting measures to contain healthcare costs and increasing the number of doctors in the system as policy measures to aid the industry. Industry experts say brand building is a continuous process and it takes time for a product to become a brand. Kedar Rajadnye, Vice-President, OTC Division, Piramal Healthcare suggests, “To create a brand is a time and capital-consuming exercise. Along with many years of investing, a product has to earn the trust of consumers to become a reputed brand, which is very difficult.” Therefore, building of large brands through brand portfolio management is the need of the hour to grab the global market share.
Despite the industry’s commendable achievements, India contributes a meager share of the global pharmaceutical market sales. According to a study done by Pharmabiz, the top Indian pharmaceutical companies seem to be less enthusiastic about the R&D activity if one goes by the expenditure incurred by them during last year. The study reveals that the overall R&D spending of top 20 companies increased by just 5% during 2009-10 to Rs 2,989 cr as against Rs 2,845 cr in the previous year. This worked out to 7.5% of their stand-alone net sales during 2009-10 as compared to 7.9% in previous year. R&D expenditure of Indian pharma companies is considerably lower than the global standards.
Strong pricing competition among local players leads to low margins which in turn lead to limited capital to R&D. The post patent regime would not allow the launch of ‘me-too’ or ‘copycat’ products in the market. Analysts say “deterring research focus and priorities is the key challenge.
Since discovery research is a long-term activity, it requires lot of patience and calls for different attitude as the failure rate is also very high.” Indian players are yet to consolidate this approach as it may take years to get good lead. Apart from this R&D, regulatory environment is also another key challenge going by increasing due diligence and compliance with standards which leads to cost overrunning and delay in new product launches. Beyond industry concerns, other problems like frequent power cuts and lack of proper transport are also act as another drawback to the growth of the industry.
Healthy Future Ahead
According to a report by PricewaterhouseCoopers (PwC), India will join the league of top 10 global pharmaceutical markets in terms of sales by 2020 with the total value reaching $50 bn. Industry observers are of the view that many premium drugs coming of patent and the increased confidence of international companies on India due to the product patent regime would mean a boom for the pharmaceutical industry. On the other hand, Indian players should focus more on R&D and better productivity to capitalize on the immense existing opportunities and the future will be extremely promising. Though the expenditure on R&D still remains sluggish, some leading players such as Ranbaxy and Dr Reddy Laboratories are leading the show for new formulations and molecules. Nevertheless, according to McKinsey, sustained progressive and collaborative efforts by the government and the pharma industry hold the key to achieving India’s full potential.
N Janardhan Rao, Senior Economist.