The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs

at affordable prices are available to the vast population of this subcontinent.

Richard Gerster
Indian pharmaceutical market set to grow by over 7 per cent to become a US$ 11.6 billion opportunity by 2009. With an estimated market value of US$ 8.2 billion (at consumer prices) in 2004, India accounts for a little fewer than two per cent of the world market for pharmaceuticals and ranks as the fourth largest globally in terms of volume after US, Japan and China and the 13th largest by value. Summary of the Indian Pharmaceutical Market in 2004 Market Size (US$ millions) as % of total health expenditure As% of GDP As% of world market Growth rate % Per capita expenditure (US$) 8,200 25.3 1.3 1.6 7.2 8

A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of medicines, Indian Pharma Industry boasts of quality producers and many units approved by regulatory authorities in USA and UK. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. It is an extremely fragmented market with severe price competition and government price control. There are about 250 large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India. These units produce the complete range of pharmaceutical

formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemicals having therapeutic value and used for production of pharmaceutical formulations.

ADVANTAGE INDIA
Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services are easily available. Cost-effective chemical synthesis: its track record of development, particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Legal & Financial Framework: India has a 60 year old democracy and hence has a solid legal framework and strong financial markets. There is already an established international industry and business community. Globalization: The country is committed to a free market economy and globalization. Above all, it has a 70 million middle class market, which is continuously growing. Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place in India.

THE GROWTH SCENARIO

The Industry is a largely fragmented and highly competitive with a large number of players having interest in it. The following chart shows the breakup of the growth (YoY) of Indian pharmaceutical industry in last six years ending 2003.

*Vol. growth of existing products

Indian contract research industry growing at 40-50 per cent The Indian contract research Industry has grown tremendously over the past few years. It has witnessed the emergence of several CROs in the area of drug discovery & development over the last decade. India to capture US$ 250-300 million or 10 per cent of global clinical trials by 2010. India is emerging as a favored global destination for global drug development companies. Recent changes in Indias healthcare policies and a maturing regulatory environment have significantly brought down the risk of shifting more clinical research from the developed countries to India. The clinical research industry in India is presently estimated at over US$ 100 million.

New product launches underlie market growth

The market has been growing between 6-8 per cent over the last two years, primarily driven by new launches and to some extent by volumes. In the last two years, more than 3,900 new products (largely branded generics) have been launched in India, contributing about US$ 355.6 million (million) worth of market value. While the Indian pharma majors launched more than ten products per year, global MNCs averaged one or two annually.

The Key Players in the Indian Pharmaceutical Industry

Dr. Reddy Cipla Glaxo SmithKline Aurobindo Pharma Aventis Pharma Cadila Health Alembic Aarti Drugs Elder Pharma Ajanta Pharma Abbott India Astrazeneca Pharma Ind Swift Lab Strides Arcolab Ranbaxy Sun Pharma Nicholas Piramal Torrent Pharma Lupin Novartis Pfizer Wockhardt Wyeth Ltd Sterling Biotech Ipca Laboratories Unichem Lab Panacea Biotech Orchid Chemicals

SWOT Analysis
It is often said that the pharma sector has no cyclical factor attached to it. Irrespective of whether the economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow steadily over the long-term.

Strengths:
1. India with a population of over a billion is a largely untapped market. To put things in perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189. 2. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets. 3. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. 4. Indian pharmaceutical industry possesses excellent chemistry and process reengineering skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill helps Indian companies to develop processes, which are cost effective.

Weaknesses:
1. The Indian pharma companies are marred by the price regulation. The National Pharma Pricing Authority, which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses. 2. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. 3. Due to very low barriers to entry, Indian pharma industry is highly fragmented. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term.

Opportunities
1. The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new product patent regime will bring with it new innovative drugs. 2. Large number of drugs going off-patent in Europe and in the US during 2005 - 2009 offers a big opportunity for the Indian companies to capture this market. Since generic

drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. 3. Being the lowest cost producer combined with FDA approved plants; Indian companies can become a global outsourcing hub for pharmaceutical products.

Threats:
1. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. 2. The short-term threat for the pharma industry is the implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry.

DEMAND AND SUPPLY CONDITIONS

The uninterrupted availability of essential medicines is one of the prime requirements of providing quality health care especially in public health facilities. Non-availability of essential medicines in health system not only causes inconvenience to the users but often the credibility of the health facility is questionable. Though much of supply system depends on budgetary allocation, accurate forecasting of future consumption is the first step in ensuring timely availability of medicines and other products. As health comes under the state's list, the major share of healthcare falls on state government. It is estimated that around 30-40 per cent of the health budget is spent on medicines. Even then, the non-availability of medicines is a common problem. Though many other factors may be responsible for such problem, the inaccurate forecasting or estimation of medicine requirement is the one of the major cause. Poor estimation of future requirements leads to: Chronic and widespread shortage of essential medicines despite adequate funding and efficient logistic system Surpluses of smaller number of commonly used medicines Inequity of supply between different levels of health services. Hospitals and urbanbased centers are generally better supplied than rural based facilities Inadequate cost effectiveness practice. The prescriber may use an expensive broad-spectrum antibiotic in absence of a cost effective cheap alternative

Irrational adjustment to budgetary constraint leading irrational order quantities. When the budget is limited an inexperienced administrative person may just reduce the purchase quantity taking all medicines are of equal value. But in reality is not the case

Irrational and ineffective prescribing. The prescribers faced with inadequate or inappropriate supplies usually shorten treatment on an attempt to stretch the available supply

On the other hand, accurate forecasting helps in: Preparing and justifying budget for medicine purchase Planning for new programmes Optimizing medicine budget based on priority health problems and the most cost effective treatment approaches Keeping contingency plan for disasters and natural calamities Comparing current drug consumption with public health priorities and usage in other health systems

Quantification methods
Four important methods are suggested in literatures: The consumption method, the morbidity method, the adjusted consumption method and the service level quantification method.

Consumption method
It uses data on medicine use and predicts future needs most accurately. However it assumed that the current pattern of usage would continue for next year too. The reliable consumption data must be available and it needs adjustment for stock out periods and anticipated changes in demand and use. However, this method may or my not reflect rational use of medicines in the health facilities. This is the most widely used medicine forecasting method.

Morbidity method
It forecasts the quantity of medicines required for treatment of specific diseases, based on projections of incidence of those diseases. It needs reliable data on morbidity and patient attendance, which are often incomplete or inaccurate. This is the most complex among all the four methods suggested. However, it is very useful for health facilities with limited number of health problems like small health centers or primary health care

facilities.

Adjusted consumption method

When either of the above methods is not feasible because of lack past consumption or morbidity data, this method can be used. Data from other facilities, regions, or countries are compiled and extrapolated to the health facility for which quantification is required. It is best useful to yield projection when the facilities are similar or belong to same type of geographic or climatic environment.

Service level projection

This method is useful when budget requirement is the target not the medicine requirement. When the target system and reference system are comparable in terms of patient attendance, morbidity conditions treated, and the pattern of drug use.

Future Forecasts
Accurate forecasting of medicine and other health supplies that are likely to be necessary is the only way to ensure that neither too much nor too less are ordered. Too much may over burden the distribution system; too few may create stock outs. Right now there is a wide gap that exists between the demand and supply levels of medicines and other pharmaceutical products due to improper or incorrect forecasting. If the above mentioned methods are put to use practically by the industry as a whole the gap can be significantly reduced. Also proper budgetary allocation and proper demand forecasts by the government will enable to eradicate stock out conditions in India as timely supply of medicines is essential.

Profitability and Cost Structure

Source: Business Today Mar 05 Net Sales(Rs Millions) 7735 5350 3560 3048 2015 1095 733 791 PAT (Rs Millions) 677 1056 -88 921 380 230 93 4 Mar 04 Net Sales(Rs Millions) 8125 5994 3969 2349 1943 983 828 1023 PAT (Rs Millions) 1485 1017 -351 887 411 220 144 209 YoY% Change Net Sales (%) -4.80% 10.70% 10.30% 29.80% 3.70% 11.40% 11.50% 22.70% PAT (%) -54.4 % 3.80% NA 3.80% -7.50% 4.50% 35.40% 98.10%

Name Ranbaxy Cipla Dr.Reddy Sun Pharma Wockhardt Divis Lab E Merck Novartis

Overall results of most pharma companies fell below expectations. Uncertainties over VAT, increasing operating expenses, product patent issues and pricing pressures in US and Europe hit the bottom lines of most companies.

Indian pharma companies have undertaken combined total capex of over US$ 1 billion between FY03 and FY05, and the net fixed assets of Indian pharma companies have grown by 50 per cent to US$ 1.6 billion during this period.

Most of the capex has been in USFDA-approved plants in anticipation of the large wave of patent expiries in 2006. There has also been a surge in the number of plants receiving USFDA approval in India.

Source Company Annual Reports;Citigroup Investment research. This includes - Ranbaxy, Reddy, Cipla, Sun Pharma, Wockhardt, Cadila, Jubilant, Matrix, Glenmark, Aurobindo, Nicholas and Biocon.

Market Structure
Today's business environment is extremely competitive and in economics parlance where perfect competition exists, the profits of the firms operating in that industry will become zero. However, this is not possible because, firstly no company is a price taker (i.e. no company will operate where profits are zero). Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to be one of the foremost gurus' of management, developed the famous five-force model, which influences an industry.

We apply this model for the Indian pharma industry.

Changing Disease Patterns: Market shares of therapeutic segments are changing. Antibiotics are expected to fall from a current share of 15.7 per cent (highest) owing to increasing incidence of lifestyle diseases such as cardiovascular and central nervous system diseases. Market Size As a % of total health expenditure :- 25.3% As a % of GDP :- 1.3%

Market Share Domestic Players :- 70% MNCs :- 30%

Sales Domestic Sales :- US $ 5.7 bn Exports Sales :- US $ 3.1 bn

HAS THE STRUCTURE CHANGED OVER A PERIOD OF TIME?

India with a population in excess of one billion people is still largely an untapped market. Household incomes are rising in India. The proportion of middleclass in Indian population is also increasing. Statistics show a clear migration of population towards middle and upper classes. Increase in living standards will lead to longer life expectancy and higher consumption of drugs and health care services. Changing lifestyles, however, is leading to a change in disease profile especially in urban areas. Hectic lifestyles and high cholesterol diets are resulting growing incidence of diseases such as cardio vascular diseases and cancer. Thus, higher incidence of lifestyle diseases will lead to better demand for pharmaceutical products.

Household Income 2001-2006:

Low cost advantage and large talent pool India is fast becoming a hub of pharmaceutical outsourcing thanks to its cost and quality advantage. Indian scientists have developed a high degree of chemical synthesis skills while engineers have developed competencies in producing molecules cost effectively. Just to illustrate Indian manufacturers can produce at 40-50 per cent cost of the rest of the world and in some cases less than that. Thus, Indian pharmaceutical companies have mastered the science of producing drugs cheaply.

Entry Barriers
Pharma industry being the most easily accessible industries for an entrepreneur in India, the capital requirement for the industry is very low, creating a regional distribution network which is easy. However, creating brand awareness and franchisee amongst doctors is the key for longterm survival. Also, quality regulations by the government may put some hindrance for establishing new manufacturing operations. As the patent regime is in picture since 2005, there is a huge demand for entry into Indian generics market. Barriers to entry may be rated medium. Actually, the greatest barriers to entry are the established relationships with investigators and sites that provide patents. By analyzing the results of the five force competitive strategy, a company can ascertain potential entrants may play a role. One strategy recommended is to benchmark the activities of the Medical Information Department against those provided by a medical education company.

Future Prospects
The Indian pharmaceutical market has been forecast to grow to as much as US$ 25 billion by 2010 as per Organization of Pharmaceutical Producers of India (OPPI) estimates. However, Espicom's market projections forecast more modest but stable annual market growth of around 7.2 per cent, putting the market at US$ 11.6 billion by 2009. The global economy is expected to grow at 4.9% in 2006. It is expected that India's GDP would grow more than 8% during 2006-07. With regard to the pharmaceutical industry in India, it is expected to maintain a similar growth rate for the coming quarter with more new product launches; increase in exports and increase in investments both in manufacturing and research domain. In the coming quarter, Indian pharma companies will continue acquiring pharma companies in the European market and investment management organizations are expected to increase their stake in the Indian pharma companies.

Projected Pharmaceutical Market, 2004-2009

Year 2004 2005 2006 2007 2008 2009

Market (US$ millions) 8,200 8,790 9,423 10,102 10,829 11,609

Source: Epsicom

A new development in the area of outsourcing is that the outsourcing activities are progressively moving out of U.S. and Europe to others, notably, China, India, Korea, Russia and Taiwan. Over the years some of the premier companies in the U.S. such as Albany Molecular research Inc, JStar Research of New Jersey and many others have seen a decline in revenues due to more companies going off-shore primarily due to lower costs. For example, it has been reported that while the cost to a company of a Ph.D. scientist in a CRO is $ 250,000 in U.S. the corresponding figures in these countries will be between $ 45000 to 70,000. Indian pharmaceutical industry does not figure among the top markets in the world although it has the second largest population in the world. Indian pharmaceutical industry has not lived up to its potential due to economic and regulatory reasons. In fact, the list of problems is endless. Health insurance sector is in its infancy. The consumption rates are too low . Large parts of population do not have access to health care facilities. Yet no other market holds as much promise as India does. There are several reasons behind this optimism . GDP growth of Indian economy has been consistently been above 5.5 per cent in the past five years. Indian economy is expected to grow at a fast rate in the coming years leading to a rise in real incomes. Higher incomes will improve demand for medical products and services. Indian market may also see new concepts such as pharmaceutical benefit management or healthcare solutions. Market growth will be accompanied by structural changes. The ageing of Indian population presents a unique set of opportunities to pharmaceutical companies. Research is an area calling for big decisions. Indian companies have been so far concentrating on process researchplundering molecules invented by others at will. But introduction of product patents will curb such piracy. Now Indian companies have to figure out ways of laying their hands on new chemical entities. Some Indian companies have forayed into basic research and met with mixed success. A big market is

opening up in contract production and contract research. Multinationals are looking at outsourcing as a way of cutting costs. With strengths in low cost production and a large pool of technical and scientific personnel, India could develop as a manufacturing base for global pharmaceutical industry. Contract research is another area offering plenty of opportunities. Indian players will also have to decide on their export strategy. Indian companies have made money by exporting products to countries where product patents were not in force. But this market will progressively shrink with more and more countries embracing product patents. With India embracing product patents, production of patented drugs will cease. This leaves Indian players with export markets in either generic markets or outsourcing. Once in a lifetime opportunity is set to unfold in the generic markets in the next few years. Patented products worth US$40-50 billion will lose patent protection in the couple of years. But exploiting this opportunity will mean sizeable commitment of funds in terms of filing Abbreviated New Drugs Applications (ANDAs). Rising health care expenditures all over the world are also forcing substitution of prescription drugs with cheaper generics. Global generic markets definitely hold a lot of promise, but the competition will be intense and the margins are thin. Indian companies have the capability to succeed in this space.

Change in demand and supply conditions

The Indian pharmaceuticals industry is set to grow rapidly in the next few years as global patents on billions of dollars worth of drugs will expire by 2007-08, setting the stage for a spurt in both exports and output. An industry study projects that exports will rise 18 per cent within the next two years, especially in the area of generic drugs since as much as US$40-$50 billion worth of drugs will go off patent over this period in the U.S. and Europe. The study thus expects export volumes to touch Rs. 30,000 crore by 2007-08 from Rs. 18290 crore in 2004-05. Output will also rise steeply with an 11 per cent growth rate projected over this period bringing the turnover of the pharma sector to Rs. 60,000 crore by 2007-08 as against Rs. 43,290 crore in 2004-05.

The study carried out by the Associated Chambers of Commerce and Industry of India (Assocham), says the pharma industry would reach a turnover of Rs. 48,015 crore in 2005-06 with export volumes likely to exceed Rs. 21,582 crore. Low production costs would give India an edge over other countries, particularly China and Israel, in the case of generic drugs. It would be easier for Indian manufacturers to seize a larger market share of overseas markets than in the domestic market where price controls are likely to continue. Consequently, pharma majors would have no options but to explore export opportunities. The chamber is also of the view that the migrations into a new regime of product patent would change the fortunes of domestic pharma industry in the long term and would bring with it new innovative drugs. Though this will increase the profitability of multinational pharma companies, and force domestic players to focus on research and development, besides forcing consolidation of small players who may not be able to cope up with the challenging environment

Change in market structure?

Indian pharmaceutical sector appears to be well set to meet the future challenges in the post 2005 era. This is evident from the excellent performances by large and medium scale pharmaceutical companies in India during 2003-'04 and the first two quarters of 2005. A study of financial highlights of 50 listed pharmaceutical companies, conducted by Pharmabiz, shows that higher exports, new product launches, mergers and acquisitions, increased focus on R&D and a constant search for new markets have contributed to exemplary performance of this sector. Indian pharmaceutical companies have been the most aggressive in overseas ventures over the past year. Dr Reddys (DRL), Ranbaxy and Matrix Laboratories have all made large foreign acquisitions, taking over generic drug manufacturers in the EU market. Domestic pharma companies are increasingly viewing Europe as a counterweight to the high-risk, high-value US generic market; hence, they are bidding aggressively for European assets. Betapharm, which was finally acquired by DRL for $570m, was a particularly coveted asset. Other Indian companies -- Ranbaxy and Wockhardt -- were also in the race for the German company. Other domestic pharma companies are betting big on contract manufacturing and using the organic route to expand their business. Nicholas Piramal, Jubilant Organosys and Shasun have recently acquired manufacturing companies in the US and Europe. Buying an existing company gives the buyer a critical mass, as well as ongoing contracts and technology. However, in order to make their contract global manufacturing business competitive, Nicholas Piramal and Shasun will need to integrate the newly-acquired entities with their Indian assets and ramp up supplies.

Large Deals In the Pharma sector

Target Betapharm Doc Pharma Terapia Solutias Pharma Business Pfizers Morpeth Facility Buyer Dr Reddys Matrix Ranbaxy Dishman Pharma Nicholas Piramal Value ($ million) 570 400 324 74.5 50

Further, companies also entered into marketing tie-ups with foreign companies or set up their subsidiaries. The acquisition is not only in the other parts, but these companies are spreading their business by acquiring domestic companies also. According to analysts the acquisition root is saving tremendous efforts and time of these companies and M&A activity will increase in the near future. The Indian pharma companies have entered very aggressively into international market giving tough competition to international giants. Major players are concentrating on advanced profitable markets like USA and Europe. Indian pharma companies, of late, are spending heavily on R&D to meet the new challenges and overcome competition. Ranbaxy is spending over $ 100 million for capacity expansion in the current year. Nicholas Piramal planning investment of Rs 200 crore on R&D and up gradation. Lupin is investing Rs 20 crore in Aurangabad for manufacturing anti-TB products. Ranbaxy is set to launch 20 new products and Lupin is launching herbal products. Dr Reddy launched Ibuprofen and Nefazodone in North America. Ranbaxy's US subsidiary received tentative approval from USFDA for manufacture of Auinapril Hydrochloride tablets for hypertension drugs. The future of the pharma companies, however, to a great extend depend on the government policies such as DPCO, VAT and implementation of new patent law. Thus with Mergers and Acquisitions and the spending on R&D would lead to change in the market structure of the pharmaceutical industry. Taking into account the scenario of the pharmaceutical industry in the global market, we would take short and long term planning to overcome the crisis in the industry brought about by increasing cost, reduced productivity in R&D, dropping net selling prices. Its been seen that new revenue equations will favor the pharma industry in the coming five years.

We will focus on targeted treatment solutions with health care kiosk, integrated network approach. The kiosk will aim at the managed care model along with personalized drugs. New revenue models are favoring pharma companies despite the fall of block busters. We need to significantly cut down costs, by as much as 13.5% of the revenues, and offset future loss of revenues caused by withdrawing block busters. The winning proposition will come in the form of short and long term strategies. Short term strategies are mainly geared towards pre and post patent expiry directives and the launch of semi block busters. Long term strategies revolve around owned health care kiosks and consistent improvement in efficiency and cost reduction with the help of the integrated network model.

The deciding factors for profitable growth and survival of this industry will be

Efficient use of Knowledge engineering techniques Structured management of innovation Setting up systems to enforce the acquired rights and At the same time evolving creative process of cooperative working and sharing of benefits