A project report on

THE
THE
PHARMACEUTICAL
INDUSTRY

Submitted by-
 Navin Karnani
Roll No: 30367
Executive MBA (WP)

Dissertation Presented
Presented in partial fulfilment of 
Executive MBA programme

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DECLARATION

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ACKNOWLEDGEMENT

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Contents

Contents...................................................................................................... 4

B. SCOPE AND IMPORTANCE OF THE PROJECT.............................................. 7

C. RESEARCH METHODOLOGY...................................................................... 8

D. MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED RESEARCH............9

E. LITERATURE SURVEY.............................................................................. 10

F. EXECUTIVE SUMMARY............................................................................. 14

1.1 Industry Segmentation by Size and Distribution................................16

1.2 Top ten brands by global pharmaceutical sales................................. 18
1.3 Growth rate....................................................................................... 18
 The growth rate for pharmaceutical industry was the highest in
manufacturing sector......................................................................18
1.4 Industry Segmentation by Products...................................................19
1.5 Industry Segmentation by Distribution.............................................. 20
1.6 Industry Concentration...................................................................... 21
............................................................................................................ 21

1.7 Current Environment......................................................................... 21

 The U.S. pharmaceutical industry is expected to maintain above-
average earnings growth through the end of the decade. ................... 21

1.8 The lifecycle of a drug....................................................................... 22

1.9 Research and Development.............................................................. 23
1.10 Pricing and investment in a global market....................................... 28
1.11 Relationship Pharmaceuticals – Healthcare..................................... 33
1.12 Industry Living Space......................................................................34
2.0 GLOBAL PHARMACEUTICAL INDUSTRY..................................................34

3.0 THE INDIAN PHARMACEUTICAL INDUSTRY............................................ 37

3.1 Introduction......................................................................................37
3.2 Evolution of Indian Pharmaceutical Industry...................................... 43
Competitiveness of the Indian pharmaceutical industry ........................75
Post 2005 scenario.................................................................................. 75
SWOT analysis of the Indian pharmaceutical Industry.............................78
3.5 Enviornmental analysis (PEST)......................................................... 81

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 3.7 Drug patents in India......................................................................... 84
3.8 The future of Indian Pharmaceutical industry....................................86
4.0 THE TRIPS AGREEMENT........................................................................90

4.1 Introduction......................................................................................90
4.2 Background.......................................................................................91
4.3 The importance of intellectual property rights for national
development........................................................................................... 92
4.4 WHO's perspective on globalization and access to drugs................... 93
4.5 The history of the TRIPs negotiations................................................ 95
4.6 Stakeholders' views........................................................................... 96
4.7 Country experiences.......................................................................105
4.8 Technical issues..............................................................................107
4.9 Standards for patentability............................................................. 109
4.10 Compulsory License...................................................................... 111
4.11 Parallel import............................................................................... 113
4.12 Exceptions to the exclusive rights................................................. 113
4.13 Roadblocks on the pharmaceutical competition highway: Strategies
to delay generic competition................................................................. 114
4.14 IPR in the Indian context............................................................... 123
4.15 A possible solution to the product patent issue............................. 129
5.0 MERGERS AND ACQUISITIONS (M & A)................................................ 129

5.1 Historical Background .................................................................... 129

5.2 Mega-Deals Back on Pharma M&A Horizon...................................... 131
5.3 Winners and Losers in Pharmaceutical M&A.................................... 132
5.4 Surviving the Scramble................................................................... 132
5.5 Facts on the Three Cases of Megamergers...................................... 132
5.6 Recent M&A....................................................................................135
5.7 Steps involved in Mergers and Acquisitions (M&A): ........................ 139
5.8 Reasons for mergers and acquisitions ............................................140
5.9 Mergers, Acquisitions and Alliances: Why they can Fail...................142
5.10 Indian Pharmaceutical: Ripe For Consolidation ............................. 143
5.11 Impact of Mergers and Acquisitions on Performance..................... 144
5.12 The challenge................................................................................ 147
6.0 OBSERVATIONS.................................................................................. 150

7.0 SUGGESTIONS.................................................................................... 153

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8.0 CONCLUSION...................................................................................... 154

9.0 PRELIMINARY REFERENCES.................................................................156

A. OBJECTIVE OF THE PROJECT

The objective of this project is to provide a complete synopsis of the pharmaceutical

market and to present the future prospects and also possible challenges that the industry
may face in the times to come. The broad objectives of this report are:

A.1 To study the development of the modern pharmaceutical industry and analyze the
current situation, major challenges and the prospects of the industry;

A.2 To study the growth and trend of Indian Pharmaceutical Industry;

A.3 To study the bottlenecks in patenting and suggest suitable measures in the light of 
the problematic issues in patenting with a focus on TRIPS Agreement.

A.4 To track the significance of Mergers and Acquisitions in consolidation of 

 pharmaceutical industry.

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B. SCOPE AND IMPORTANCE OF THE PROJECT
Medicines contribute enormously to the health of a nation. During the 20th century, the
average life expectancy in developed countries increased by over 20 years. A
significant part of this improvement can be attributed to pharmaceutical innovation.
Few other industries can claim to have done as much for the well being of mankind.
The interests of pharmaceutical companies and those of the public, patients and the
government often overlap but they are not identical. An effective regulatory regime to
ensure that the industry works in the public interest is essential. Unfortunately, the
 present regulatory system is failing to provide this. When the Financial Times (FT)
listed the 50 largest businesses by market capitalisation in 31 March 2009, seven
  pharmaceutical companies were included. When it listed the 50 most admired
 businesses in 2009, only one of them - Johnson & Johnson - made it on to the list. This
crisis in public trust must be faced. It is not in the long term interests of the industry for 
 prescribers and the public to lose faith in it. We need an industry which is led by the
values of its scientists not those of its marketing force. The comments of Sir Richard
Sykes would be a guiding light to find medicines for healing the industry
“Today the industry has got a very bad name. That is very unfortunate for an industry
that we should look up to and believe in, and that we should be supporting. I think there
have to be some big changes.”

The reader can use this report to:

B.1 Quickly gain an overview into the pharmaceutical industry, its major companies
and products.

B.2 Identify key areas of pharmaceutical market growth and key opportunities for 
growth.

B.3 Support internal planning and decision-making with an external perspective

founded on detailed analysis.

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C. RESEARCH METHODOLOGY

The methodology will include a comprehensive review and critical analysis of 
literature, particularly literature in pharmaceutical journals and other publications
 providing insights about the industry, challenges and opportunities.
Among sources of the literature will be such publications as the Business Intelligence
reports; research reports of Ernst & Young, Pricewaterhouse Coopers, Goldman Sachs,
Deusche Bank, Stanford University, Kellog School of Management; websites of various
organizations like the WHO, USFDA, WTO etc; various journals; and
 publications like Pharmabiz and Chemical weekly.

Additionally, books, newspaper articles from such respected sources as the Wall Street
Journal, Business Standard and other local newspapers will be reviewed, and
  pharmaceutical companies’ financial data, such as year-end income and expense
amounts, will be analyzed.

In the process of the comprehensive literature review and analysis, I will look for the
current status of the global and Indian pharmaceutical industry, the effect of the patent
regime and how it is being abused rather than used, various mergers and acquisitions
and the real reason behind this.

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D. MY QUALIFICATIONS TO UNDERTAKE THE PROPOSED
RESEARCH

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E. LITERATURE SURVEY
Summary of some of the articles referred, appears below

E.1 Pharmaceuticals - Market and Opportunities 2007 Ernst & Young Indian
Brand Equity Foundation reveals that India Brand Equity Foundation (IBEF) is a
 public-private partnership between the Ministry of Commerce & Industry, Government
of India and the Confederation of Indian Industry. It aims to effectively present the
India business perspective and leverage business partnerships in a globalising market-
 place. The report provides extensive information concerning the
industry. It includes a market overview, the policy-setting mechanism, key trends,
drivers, and opportunities, and a brief overview of the performance of key players such
as Ranbaxy, Nicholas Piramal, and Cipla.

E.2 Patent Expiry of Blockbuster Drugs and Push for Lower Healthcare Costs
Drive Generic Pharmaceuticals Market, August 15, 2007 is based on a research
report by Frost & Sullivan namely U.S. Generic Pharmaceuticals Market Outlook, this
article provides a brief overview of the impact of patent expiries in the U.S. generic
  pharmaceuticals market. Statistical information such as the present and estimated
market size of the generic pharmaceuticals in the U.S. support statements made by the
author. Besides numerical evidence, qualitative reasons for the growing significance of 
generics in U.S. (such as demand for lower healthcare costs) are furnished by the
author. The article also discusses the measures pharmaceutical companies are taking to
counter the problem such as consolidation, manufacture of branded generics, and
 backward vertical integration. Lastly, the article advocates that low-cost manufactur-ing
locations will play a pivotal role since pricing pressures would intensify as low-cost
versions of blockbuster generics take centre stage in the pharmaceutical market.

E.3 Domestic drug makers immune to slowdown, Business Standard (March 13,
2009) PB Jayakumar in his article views the pharmaceutical industry as one of the few
industries that is 'recession proof.' Testifying to this, the author cites growth data
 provided by pharmaceutical industry researcher ORG-IMS. Growth has been witnessed
in a number of segments of the industry such as anti-infectives, gynaecology, vitamins
and minerals, and respiratory drugs, in the month of January in 2009. According to the
article, the growth of the domestic drug sector, which was just 6.8 per cent in November 
2008, improved to 13.2 per cent in December and to 14.4 per cent in January. Further,
information regarding companies' ranks based on total market share as estimated by
ORG-IMS forms a part of the article. The numerous reasons for the buoyancy of the
  pharmaceutical industry in recent times find mention in the article along with the
sources of this information. The reasons attributed to the
industry's growth are better health insurance coverage, increasing rural penetration,
rising population, and so on. Lastly, Estimations of the growth rate of the industry by
few institutions (KPMG, Yes Bank) are cited by the author.

E.4 Old is not gold? 2009 in Express Pharma Suja Nair says that among the most
ignored segments of the pharmaceutical industry is the medicine for the elderly i.e.
geriatric medicines. Exploring several reasons for the ignorance of this segment by the

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 industry, the author provides an insight into the geriatrics market and the important
 place it will occupy in the future as today's young population grows old. The author 
states that there are a few companies such as Mumbai-based Elder Pharmaceuticals
which cater to the medicinal needs of the elderly. However, geriatric medicines remain
untouched to a large extent due to lack of clarity regarding the geriatrics market. The
government has contributed to improving the situation by, among other things,
formulating a national policy for aged under the Ministry of Social Justice and
Empowerment. The author says that geriatric medicines need to be given more attention
and this is possible through a strong pro-active government that starts and
strengthens collaborations between the healthcare industry, insurance agencies and
 pharma companies.

E.5 Government plans to make India, one of the top five pharmaceutical
innovations hubs by 2020, will mobilize investment of two billion annually.
Publication: PTI. Publication Date: 15-MAR-09, COPYRIGHT 2009 Asia Pulse
Pty Ltd, By DEEPAK SHARMA in his article says that India is aiming to become one
of the top five pharmaceutical innovation hubs globally, the government plans to invest
up to 2 billion dollars, or Rs 10,000 crore, annually till 2020. The entire amount would
 be spent on developing more effective medicines to cure diseases such as malaria and
tuberculosis that hits millions every in India and other developing countries. The spread
of diseases is more in countries with lower income levels, making research in these
areas less remunerative. Rich multinational drug maker are not willing to participate in
this because this drugs fetch less profits. Taking this
into consideration department of pharmaceuticals proposed to offer incentives to
domestic as well as multinational drug makers to encourage new drug discovery in the
country. According to them the proposal has the potential to add $20 billion to the GDP
 by 2020, along with creating lakh jobs. This proposal has already been sent to Prime
Minister Manmohan Singh and are awaiting his approval. . Once they get the approval
of the Cabinet, they will launch the programme within six months. According to them
Africa, South Asia and Latin America are also huge markets for companies which
would develop medicines for diseases such as malaria and tuberculosis. The
government would invest in building infrastructure for R&D in the country and a
significant amount from the proposed investment would be spent on upgrading human
resources also. Besides this, the government is also working on framing regulations in
such a way that it would promote R&D in the country.

E.6 The Indian Pharmaceutical Industry – Prescription for growth published in

2008 - Care Research Report says that the playing field for the domestic
  pharmaceutical companies changed completely with the advent of product patent
regime from January 2005. The IPI is now exposed to a host of new opportunities and
risks. This has led the domestic pharmaceutical companies to pursue various strategies
on the business and R&D front with the aim of achieving long-term sustainable growth
under the new regulatory regime. Besides changes in the patent laws, the issues with
respect to drug pricing and the Union Pharmaceutical policy will shape the regulatory
environment for the industry in future. CARE Research believes that the growth of the
Indian pharmaceutical companies in the domestic market get restricted with the MNCs
introducing newer patented drugs in the country. It also believes that the growth of the
Indian pharmaceutical companies in the domestic market get restricted with the MNCs
introducing newer patented drugs in the country. Under this scenario, the growth for the

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 formulation companies is likely to come from the generics opportunity in the regulated
markets and geographic expansion in the
semi/non regulated markets. The investment in R&D is also on the rise as it has become
important for Indian companies to start innovating new drugs in order to ensure long
term sustainable growth and remain competitive at the global level.
E.7 Promoting Pharmaceutical Research under National Health Care Reform by
Science, Technology, and Engineering Policy White Paper Competition 2008.
Jacob Heller says the pharmaceutical industry is suffering a productivity crisis, brought
on by soaring R&D costs and competition with generic manufacturers. Upcoming
health care reforms in the US will curtail the remaining incentives for pharmaceutical
research, but also provide us an opportunity for rebuilding a more efficient set of 
research incentives. Continued research into medical technologies is essential for 
improving the quality of life of Americans and eradicating diseases, and has historically
 proven exceptionally cost effective. To maintain robust incentives for medical research
and to cure defects of the patent system, National Pharmaceutical Innovation Fund was
introduced. The Fund will compensate innovators based on market success and medical
efficacy, measured by Quality-Adjusted Life Years
(QALYs). By setting proper incentives, the Fund marshals private sector efficiencies,
expertise, and resources to innovating improvements in medical treatments.
Pharmaceutical products have tremendous returns in increased lifespan and quality of 
life, making continued support an important national priority.

E.8 Indian Pharmaceuticals and HealthCare Reports Q1 2009 article says that India
holds an unchanged eighth position in BMI's Q109 regional Business Environment
Rankings for Asia Pacific, remaining regarded as a moderately attractive proposition.
India is fast-growing population representing one of the main drivers of pharmaceutical
growth in the coming years, there are many barriers too like:
· low per capita consumption
· emphasis on generics (hampering the level of market development.)
· excessive amount of red tape
· underdeveloped infrastructure and
· The deficient legal framework (although the government is striving to improve
the regulatory environment).
In December 2008, India's drug price regulator decided to lower prices of 46 brands and
to include 254 new medicine brands in the list of price-controlled drugs. Meanwhile
generics industry continues to expand, both locally and abroad. Zydus Cadila - a unit of 
Cadila Healthcare - purchased Italy-based Etna Biotech from Dutch biotechnology firm
Crucell, while Sun Pharma acquired 100% of the US-based narcotic producer and
importer Chattem Chemicals. On the other hand, Lupin recently became the third drug
maker to be accused of sub-standard manufacturing by the US Food and Drug
Administration (FDA), which will attract greater scrutiny on the sector as a result.
Other Indian companies facing similar problems in the past include Ranbaxy
Laboratories, Sun's' US-based subsidiary, Caraco Pharmaceutical Laborat-ories, as well
as Wockhardt and Granules India. Growth of India's pharmaceutical export sector is
down by more than half, Key reasons being increased competition in the highly
regulated markets of the US and Europe and the steady appreciation of the rupee. Even
victory of Barack Obama and the Democratic Party in the US general election in
 November 2008 will increase generic substitution in the world's largest

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  pharmaceutical market, while the 2011 patent cliff provides yet the greatest
opportunity for Indian generics exports. Nevertheless, generics are on winning position
when domestic front is considered.

E.9 Uwe Perlitz( April 9,2009) in her research paper  India's Pharmaceutical
Industry course for globalization   provides readers an insight into the Indian
 pharmaceutical industry, including topics such as its history, the segments within the
industry, the change caused by the new patent regime since 2005, its key growth
drivers, exports, Indian companies investments abroad and so on. Detailed research has
 been carried out which is apparent throughout the report. The information conveyed
through the report is supported by substantial evidence which have been gathered from
DB Research itself and a few external sources. The report outlines India's position in
the world pharmaceutical market as well as its standing among Asian countries.
Summarily, the paper mentions the changes needed to be made for the pharmaceutical
industry to rise and flourish. Since the paper includes valuable
information about the pharmaceutical industry, it would be of great aid in making the
report.

E.10 Jacob Heller and Gabriel Rocklin (2008) in the article Promoting Pharmace-
utical Research under National Health Care Reform   brings to light the current
 problems and scope of improvement of the Drug and Pharmaceutical sector of United
States of America. It puts forth the ‘patent system’ which hinders the future growth of 
this sector. There is a need to start focusing on preventive measures which could be
only attained by channeling funds towards research and development in drugs and
 pharmaceutical sector. Complacency can be the reason for the doom of this sector. Thus
innovative steps should be taken in time as an impetus to this sector. Especially during
these troubled times. The future is positive for research and to make Medicare be
 preventive rather than just be used for curing.

E.11 Manjeet Kripalani (March 25, 2008) in her article Indian Pharma: Hooked on
the Hard Sell talks about the unethical marketing practices being carried out by pharma
companies in India. Some pharma companies tend to engage themselves in aggressive
marketing tactics which include showering physicians, pharmacists, and wholesale
distributors with expensive gifts. In return doctors may prescribe drugs based on
company incentives rather than the needs of patients. Here the author emphasizes the
need of a regulatory body to in India to take care of the patient’s well being. To look 
after this concern the Organization of Pharmaceuticals Producers of India has published
a voluntary "Code of Pharmaceutical Marketing Practices," that calls for maintaining
strict ethical standards when conducting promotional activities. And soon this code
would be converted into law. Hence it is clearly evident that though the Indian pharma
industry has been growing enormously in the past few
years and has been coming up with new high quality, competitively priced, generic
drugs, but this success story is not as glamorous as its seem to be.

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F. EXECUTIVE
EXEC UTIVE SUMMARY
SUMM ARY
India's pharmaceutical industry has been growing at record levels in recent years but
now has unprecedented opportunities to expand in a number of fields. The domestic
industry's long-established position as a world leader in the production of high-quality
generic medicines is set to reap significant new benefits as the patents on a number of 
 blockbuster drugs are scheduled to expire over the next few years. In addition, more and
more governments worldwide are seeking to curb their soaring prescription drug costs
through greater use of generics. These opportunities
opportunities are presenting themselves not only
in India's traditional wealthy client markets such as the U.S. and European Union
nations but also in emerging economies with vast populations such as Africa, South
America, Asia, and Eastern and Central Europe.

In addition, India's long-established position as a preferred manufacturing

manufacturing location for 
multinational drug manufacturers
manufacturers is quickly spreading into other areas of outsourcing
activities. Soaring costs of R&D and administration are persuading drug manufacturers
manufacturers
to move more and more of their discovery research and clinical trials activities to the
subcontinent or to establish administrative centers there, capitalizing on India's high
levels of scientific expertise as well as low wages. Both multinational and local drug
manufacturers could eventually benefit from the market potential of India's population
of over one billion. A large market will likely open up as the result of a projected
projected boom
in health insurance, an area in which the country is currently woefully underdeveloped.
 New government initiatives seek to enable the majority of the population to access the
life-saving drugs they need, while even greater opportu-nities may be presented by the
rise of the new Indian consumer. This group-urban, middle class and wealthy-live fast-
 paced, Western-style lives and, as a result, they are beginning to suffer from Western,
lifest
lifestyle
yle-re
-relat
lated
ed illnes
illnesses
ses,, for which
which they
they want,
want, and can can afford
afford,, innova
innovativ
tivee drug
drug
trea
treatm
tmen
ents
ts.. This
his unta
untapp
pped
ed dome
domest
stic
ic mark
markeet is also
also high
highlly attr
attrac
acti
tive
ve to the the
 pharmaceutical MNCs, which recently have returned to India in large numbers (many
had left when the regime allowing process patents only was intro-duced in the early
1970s). Now, MNCs and domestic companies are starting to work together, utilizing
each other's strengths for their mutual benefit. For the foreign firms, this includes not
only the Indian companies' research and manufacturing capabilities and their much
lower
lower oper
operatiationa
onall cost
cost level
levels,
s, but also
also comp
comprerehen
hensiv
sivee marke
marketin
ting
g and distr
distribu
ibutio
tion
n
networks operating throughout India's vast territories.

There are, however, a number of uncertainties, particularly the effects of India's new
 product patent system, which was introduced on January 1, 2005. Previously, only
 process patents were granted, a situation that led to India's current role as a world leader 
in the production of high quality, affordable generics. The new regime may spell the
end for the dom
domes
estic
tic sector
sector's
's small
smaller
er playe
players,
rs, while
while for others
others it could
could repre
represen
sentt
unprecedented opportunities. Nevertheless, the domestic industry is still spending far 

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too little on R&D, which must change quickly if it is even to begin to address these new
opportunities
opportunities and challenges.

On the international front, the industry still has some catching up to do in terms of 
quality assurance while, on the local market, pricing remains a problem. There is a need
for regulatory reform in India to encourage leading global players to continue and
accelerate the outsourcing of their R&D activities-beginning with discovery
resear
research-
ch-to
to the subco
subconti
ntine
nent.
nt. Th
This
is is parti
particul
cularl
arly
y urgent
urgent in the face
face of the strong
strong
competi
competition
tion from China, where
where the governme
governmentnt has been particularly
particularly proactive
proactive in
encouraging foreign investments in pharmaceuticals
pharmaceuticals and biotechnology.
Acti
Action
on is requ
requir
ired
ed soon
soon,, if Indi
Indiaa want
wantss to be a sign
signif
ific
ican
antt play
player
er in the
the glob
global
al
 pharmaceutical
 pharmaceutical arena.

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1.0 INTRODU
INTRODUCTION
CTION

The modern pharmaceutical industry is a highly competitive non-assembled global

industry. Its origins can be traced back to the nascent chemical industry of the late
nineteenth century in the Upper Rhine Valley near Basel, Switzerland where companiescompanies
like Hoffman-La Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba
and Geigy
Geigy), ), Novar
Novartis
tis etc.
etc. starte
started.
d. The indust
industry
ry expan
expande
dedd rapidl
rapidly
y in the sixtie
sixties,
s,
  benef
benefiti
iting
ng from
from new discov
discoveri
eries
es and a lax regul
regulato
atory
ry enviro
environme
nment.
nt. Th
Thee indust
industry
ry
witne
witnesse
ssedd major
major devel
develop
opme
ments
nts in the seven
seventie
tiess with
with the introd
introduct
uction
ion of tighte
tighter 
r 
regula
regulator
tory
y contro
controls,
ls, espec
especial
ially
ly with
with the introd
introduct
uction
ion of regul
regulati
ations
ons gov
gover
erning
ning the
manuf
manufact
acture
ure of ‘gener
‘generics
ics’.
’. Th
Thee new regula
regulatio
tions
ns revok
revoked
ed perma
permanen
nentt pate
patents
nts and
established fixed periods on patent protection for branded products, a result of which
the market for ‘branded generics’ emerged.
emerged.

Some of the big global pharmaceutical companies

companies are Johnson & Johnson (U.S.), Pfizer 
(U.S.), Bayer (Germany), GlaxoSmithKline (U.K.), Novartis (Switzerland),
(Switzerland), Sanofi-
Aventis
Aventis (France),
(France), Hoffmann
Hoffmann La-Roc
La-Rochehe (Switze
(Switzerland
rland),
), AstraZe
AstraZeneca
neca (U.K./S
(U.K./Swed
weden),
en),
Merck & Co. (U.S.), Abbott laboratories (U.S.).

1.1 Industry Segmentation by Size and Distribution

The industry has been growing at a steady pace. Total global sales in 2008-09
was about $750 billion.

Figure 1: India’s pharmaceutical industry on course of expansion

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Geographically, the world pharmaceutical market is divided as shown in the figure.

Figure 2: Share of global market

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1.2 Top ten brands by global pharmaceutical sales
In 2005, medicines for the treatment of high cholesterol, stomach ulcers, high blood
 pressure and schizophrenia were amongst the top ten brands worldwide.

Table 1: Top ten brands

*COPD – Chronic Obstructive Pulmonary Disease

1.3 Growth rate

The growth rate for pharmaceutical industry was the highest in manufacturing
sector.

Figure 3: Manufacturing trade average annual growth (%) 1994-2003

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Table 2: Rank of the 10 Causes of Death by Age Group (in United S tates, 2005)

1.4 Industry Segmentation by Products

Pharmaceutical sales include:

1.4.1  Ethical (prescribed) drugs, which can't he dispensed without a

 physicians prescription;

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 1.4.2 Over-the-counter  (OTC) medications, which are readily
available on drugstore shelves.

Ethical drugs account for about 60% of total industry sales, with OTC products
representing the balance.

The ethical sector can be further segmented into:

1.4.1.1 Brand-name products;

1.4.1.2 Generic products.

Generics are less-expensive equivalents of brand-name prescribed drugs, and may be

 produced and sold once the original drug's patent protection expires.

Figure 4: Generic market shares in Europe 2006

1.5 Industry Segmentation by Distribution

Three-quarters of industry sales consist of pharmaceuticals used in outpatient settings,
with the balance administered in hospitals, nursing homes, and other inpatient facilities.
About 70% of prescribed drugs are distributed through wholesalers to hospitals, health
maintenance organizations (HMOs), and retail pharmacies. The remaining 30% is sold
directly by manufacturers to physicians, hospitals, retailers, and others.

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1.6 Industry Concentration
The industry is somewhat concentrated. The 10 1argest players account for about one-
third of worldwide sales of ethical drugs. Generic drug industry, in contrast, is fairly
fragmented.

Figure 5: Top ten companies worldwide by pharmaceutical sales

1.7 Current Environment

The U.S. pharmaceutical industry is expected to maintain above-average earnings

growth through the end of the decade.

1.7.1 Key global pull factors fuelling this growth include:

1.7.1.1 rapid expansion in the older segments of the population; WHO forecasts
the global over-65 population to rise from 380 million in 1997 to more than 690
million by the year 2025.
1.7.1.2 increasing life expectancies;
1.7.1.3 large untreated patient populations;
1.7.1.4 Large markets overseas, especially in developing nations (like Russia
and China)

1.7.2 Key global push factors of growth are presented by:

1.7.2.1 regulatory environment;
1.7.2.2 Influence of the managed health care.

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1.8 The lifecycle of a drug
The diagram below shows the typical length of time that it takes for a new drug to go
through the various stages of its life cycle (from patent to patient).

Figure 6: The drug lifecycle

It is possible in the diagram to distinguish between components of the production

 process that can be considered 'international' (namely can be located anywhere in the
world for supply to any given country) and those that are 'national' (that is need to be
located in the country in question). As the diagram moves from left to right and
 becomes lighter, so the activities become increasingly 'national' in scope.

More formally, the term 'international' is used to denote those stages of a drug's
lifecycle for which:
• the activity can be located anywhere in the world where a suitable environment exists
• once the costs of that activity have been incurred somewhere in the world, they do not
have to be incurred again in order to make the product available in other countries.

R&D is an 'international' activity in this sense of the term, as it can be located wherever 
a suitable research environment exists, and once a drug has been developed the R&D
cost does not need to be incurred again to make the drug available in other countries. In
addition, some of the costs of global manufacturing facilities may also represent an
'international' cost element.

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The different stages shown in the chart above normally follow the patent application
and are described in the next few paragraphs. Even before patent application, a
considerable amount of time and money may have been spent on basic research to
identify suitable entities for investigation, although much basic research is carried out in
universities and publicly-funded institutes.

Pre-clinical trials   precede any testing on humans, and involve rigorous testing of 
selected NCEs in laboratories and animals. There are very high attrition rates at this
stage of development: less than one per cent of compounds successfully make the
transition from pre-clinical trials to clinical studies in humans.

Clinical trials are carried out in humans. Three stages are carried out before drugs
receive marketing authorisation, namely:
• Phase I: trials in 20-100 healthy adults to test the drug's safety. 70 per cent of 
investigational new drugs (INDs) proceed successfully through Phase I
• Phase II: trials in 100-300 patient volunteers to determine the safety and efficacy of 
the drug. A third of INDs make it through both Phase I and II, and
• Phase III: trials on larger groups of patients (typically 1,000–3,000), to gain further 
data on safety and efficacy. Around 25 per cent of INDs progress through all three
 phases to a regulatory review.

Marketing authorisation must then be obtained before drugs can be launched onto
the market. Within the EU, there are two main routes for obtaining marketing approval:
• a centralised procedure run by the European Medicines Agency (EMEA): new drugs
may be granted a single marketing authorisation valid throughout the EU.
• a mutual recognition procedure: firms first seek marketing authorisation in one
Member State, but can then expect rapid authorisation in other Member States in the
absence of any specific objections.

After the drug reaches the market, Phase IV pharmacovigilance trials  begin. These
seek to identify any adverse drug reactions and continue throughout the lifetime of the
drug.

As discussed earlier, generic manufacturers are able to enter the market and sell generic
copies of the drug after a drug's patent (and any supplementary protection certificate)
has expired.

1.9 Research and Development

The drug industry is a research-oriented sector. Over the past years, the industry's R&D
expenditures have risen sharply, both in value terms and as a percentage of total sales.
A comparison of R & D expenditures in different industries appears below.

Figure 7: R&D Expenditures as a Percent of Sales for US Industrial Sectors

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Figure 8: R & D expenditures of the top ten pharmaceutical companies worldwide

Drug manufacturing is also a high-risk business; only one in 10,000 compounds

discovered ever reaches the pharmacist's shelf.

Figure 9: The economics of R & D

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R&D costs per approved drug
It is often reported that the costs of R&D per approved drug have risen considerably
over the past 30 years. Let us explore available data relating to this assertion.
R&D is not only a lengthy process but also a costly one. DiMasi et al (2003) calculated
R&D costs for a sample of 68 drugs first tested on humans between 1983 and 1994. The
results are shown in the table and figure below:

Table 3: Cost of Research and Development at different stages

Figure 10: Breakdown of R & D spend

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Total 'out of pocket' expenditure on R&D (including the cost of R&D on drugs that did
not successfully make it to marketing approval) averaged $403 million per approved
new drug. Adding in the cost of capital between the time of R&D expenditure and the
time of marketing approval increases this substantially—the capitalised value of R&D
expenditure averages $802 million per approved new drug. In calculating capitalised
costs, a real cost of capital of 11.0 per cent was used.

DiMasi et al (2003)'s estimates suggest about 42 per cent of total capitalised

expenditure on R&D is incurred in the preclinical phase but only about 21.5 per cent of 
drugs making it through the preclinical phase are successfully marketed. This illustrates
the importance of unsuccessful R&D expenditure.

 Not only is a high proportion of R&D unsuccessful (in the sense that it is spent on drugs
that are not ultimately approved for marketing) but, even for those drugs successfully
marketed, a high proportion of revenue and cash flow is accounted for by a small
number of 'blockbuster' drugs. Grabowski et al (2002) analysed global cash flows (sales
value less production, distribution and marketing costs) through the life cycle for 118
new drugs entering the market between 1990 and 1994. They found that the single best
selling drug (Zocor, the originator brand of simvastatin) accounted for nine per cent of 
the present value of cash flows and the top ten per cent of drugs accounted for 52 per 
cent of present value of cash flows.

Comparison with earlier similar work suggests that R&D costs per approved drug are
increasing rapidly (see Figure below). On the basis set out above (capitalised R&D
costs per successful drug including unsuccessful R&D and the cost of capital), DiMasi
et al (2003) estimate a compound annual growth rate of about 9.4 per cent between the
1970s and the 1980s, and about 7.4 per cent between the 1980s and the 1990s.

Figure 11: Trends in capitalised spend per approved drug (US $ Mn)

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 $1,200

$802

$318
$138

1975 1987 2001 2006

Source: PhMRA Pharmaceuticals Industry Profiles 2007

The rapid increase in R&D spend per successful new drug shows that the productivity
of expenditure has been falling. This reflects two trends.
First, the absolute amount of R&D expenditure by the pharmaceutical industry has been
rising rapidly over time.
Second, the number of NCEs receiving approval has not been increasing and indeed h as
shown a steady decrease in recent years.

Figure 12: The Pharma Productivity Gap

Fewer than a third of marketed drugs actually achieving enough commercial success to
cover their R&D investment.

Figure 13: Returns on Research and Development

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1.10 Pricing and investment in a global market
Price-setting within an individual country is the outcome of bargaining between:
• global pharmaceuticals companies (which may have market power in particular 
therapeutic areas), and
• major health purchasers – typically national governments

1.10.1 Firm's objectives

A reasonable assumption is that pharmaceutical firms will seek to set prices in order to
maximise profits. We take this as our starting point in this analysis.
For newly launched drugs, pharmaceutical companies are typically able to acquire a
 patent, granting them temporary rights to be the sole producer of that drug. In this case
they will wish to maximise revenues, subject to a two types of constraints:
• the range of demand side measures in place within the country concerned, including
 pricing and reimbursement policies adopted by the public buyer (which are likely to
 bite to a greater extent if therapeutic substitutes are available
• international linkages, in particular the extent to which parallel trading and
international reference pricing constrains the discretion the company has in setting
 prices in any individual country.
For drugs whose patents have expired, pricing is constrained further through
competition from generic manufacturers. In the absence of other structural or regulatory
distortions, free competition between off-patent drugs should lead to significant drops
in price.

Pricing incentives
Given that they have market power, it will be useful to identify pricing strategies that
 pharmaceutical companies are likely to adopt in different national markets so as to
maximise profits. Typically, firms with market power will engage in price
discrimination if they can segment their market into buyers with different degrees of 

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  price sensitivity, that is, by charging mark-ups above marginal cost in inverse
 proportion to the price-sensitivity of buyers. In this way, companies can extract as much
rent as possible from buyers who are willing to pay higher prices, whilst not losing sales
from buyers with a lower willingness to pay. (This is often described as 'Ramsey
 pricing', which is applicable where there are common fixed costs associated with sales
to different segments of a market. In such circumstances, an efficient way to recover 
these fixed costs is to set prices for each customer group such that the mark-up above
marginal cost varies inversely with the elasticity of demand).

In the context of the pharmaceutical sector, this could mean charging different prices in
different countries, depending on the price sensitivity of the national buyer or buyers.
Generally, we might expect that countries with a lower national income per capita
might be more price sensitive. In this instance, we would expect pharmaceutical
companies to vary prices in relation to income per capita in each country.

It is worth noting at this point that such pricing behaviour may be beneficial for Society
overall (considered from a global rather than a national perspective), as well as being in
the commercial interest of firms.

In order to understand why this might be the case, the starting point is to remember that
R&D is a globally common cost and forms a substantial proportion of the lifetime cost
of a drug. In order for firms to have an incentive to engage in R&D, they must have an
expectation that they will be able to recover the cost of R&D, at least on average across
all drugs. This means that they have to be able to charge prices (somewhere in the
world) which are above the marginal cost of manufacturing and marketing drugs. The
relevant question is, therefore, what pattern of mark-ups across countries represents the
fairest and most efficient way of allowing firms to recover R&D costs.

Some have argued that this form of price discrimination may represent the best
solution:
• on efficiency grounds, setting differential prices based on the price sensitivity of 
national buyers allows firms to recover R&D costs in a way which minimises any effect
on the take-up of drugs, and
• on equity grounds, if income per capita is the key driver of differences in price
sensitivity between buyers in different countries, then price discrimination by firms will
tend to have the effect that rich countries contribute more to the cost of R&D than poor 
ones.

For this outcome to be efficient, however, mark-ups over marginal cost must be limited
on average across all drugs to what is necessary to recover R&D costs (R&D costs
might still be over- or under- recovered on individual drugs, because some drugs will be
commercial successes and others will be failures). More importantly, the prices of drugs
must reflect the value they bring to patients ( In formal terms, dynamic efficiency
requires that investment, including R&D, is made up to the point where the present
value of the total benefits to all patients (for whom the benefit exceeds the marginal
cost) is greater than the present value of total costs). The pricing and reimbursement
systems employed by major purchasers are a key tool in sending these signals.

Parallel trade

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 Pharmaceutical companies may be constrained from price discriminating effectively by
 parallel trading. Where significant price differentials exist between countries, there is an
incentive for parallel trade (that is for third parties to engage in arbitrage by buying
drugs in low-price countries and reselling them in high-price countries, after suitable
repackaging or re-labelling).

The existence of parallel trade will tend to weaken the ability of pharmaceutical
companies to charge different prices, because if they seek to do so they risk losing
revenue from sales in high price countries to parallel imports.

In response to this, pharmaceutical firms may have an incentive to delay launch or 
avoid launching altogether in low price countries, so as to prevent them becoming a
source country for parallel trade. Moreover, since average prices may be lower and
 parallel traders incur costs and earn profits from their activities, parallel trade may
reduce returns to the innovating companies, undermining incentives to invest.

Parallel trading thus imposes a constraint on pharmaceutical companies' ability to Price

discriminate, with potential implications for their willingness to market drugs in low
 price countries and their incentive to innovate.

1.10.2 Government's objectives

In 2002, total pharmaceutical expenditure in Australia equalled 1.3% of GDP. In
comparison, total pharmaceutical expenditure was equivalent to 1.8% of GDP in the
United States, 1.6% in Canada and 1.5% in Japan.

Figure 14: Public and private expenditure on pharmaceuticals (percentage of GDP)

In their role as healthcare providers, we would expect national governments to be

interested in maximising health outcomes for their citizens within the constraints of 
their health budget (This assumes that the healthcare budget is fixed. An alternative
would be to view national governments as wishing to minimise healthcare expenditure
for a given level of health outcomes. In practice, of course, it would be possible for the
government to steer a middle course between these two approaches. For example, a

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saving in pharmaceutical expenditure could be used partly to increase other health
spending and partly to reduce the overall health budget.)

There are three principal objectives that governments might have in bargaining on
  pharmaceutical prices:
• achieving reasonable pharmaceutical prices. If governments can purchase existing
volumes of drugs at lower prices, this will release some of the healthcare budget for 
spending on higher drug volumes or on other healthcare treatments
• ensuring that drugs are made available in their country. Clearly, there is a constraint
on price-minimising. Governments have to offer pharmaceutical companies a price
which is sufficiently high that they are willing to continue to supply the drug in that
country. At a minimum, the price would need to cover the 'national' element of drug
costs, and
• ensuring that there are adequate incentives for R&D on valuable new drugs. In a
longer-term context, governments' overall objective could be restated as maximising
health outcomes for their citizens, both now and in the future, within the constraints of 
current and future health budgets. Within this longer-term framework, governments will
wish to see new drugs being developed which will be of benefit to their citizens in the
future. In negotiating drug prices, there should therefore be consideration of the
implications for the incentives for pharmaceutical companies to invest in R&D.

In practice, any pricing approach will involve a trade off between these objectives. In
addition, there may be other non-healthcare objectives of importance to some
governments in negotiating pharmaceutical prices, such as industrial policy objectives.
In particular, they may wish to use high drug prices to attract footloose pharmaceuticals'
R&D and production to locate in their country. However, given the international nature
of R&D costs, such a policy is unlikely to provide incentives for firms to locate R&D in
a specific country.

Since national governments are the principal purchasers of pharmaceuticals in most

countries, they are almost certain to have buyer power in the market for 
 pharmaceuticals—that is, they will be able to influence the prices at which they buy
drugs. We now consider how a government could use its buyer power to achieve the
 policy objectives outlined above.

Reasonable prices
Typically, if a firm has buyer power, it is able to take into account the effect that the
quantity it buys has on the price of the product it is buying. The buyer will therefore
 buy a lower quantity at a lower price than would be the case in the absence of buyer 
  power. If a single buyer is buying in a competitive market, where many suppliers
compete on price, use of buyer power would lead to a loss of overall welfare if the costs
of supply increase with total output (that is, there is a rising supply curve).
In this case, however, the market from which the government buys is unlikely to be
competitive, given that patents grant pharmaceutical firms temporary rights to be the
sole producer of a particular drug. In order to analyse the government's best use of its
 buyer power, the starting point (or counterfactual) should in this case be taken as a
monopoly, (In the case of the market for a drug, the existence of close therapeutic
substitutes may mean that there are in fact several sellers of differentiated products: the
case of a monopoly is presented for simplicity) where a single firm is able to exert its
seller power by taking into account the effect the quantity it sells has on the price. As

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long as demand is not completely price inelastic, a monopolist will sell a lower quantity
at a higher price than in a competitive market, leading to a loss of overall welfare.

If there is a single seller and a single buyer operating in one market, there are a range of 
  possible outcomes consistent with either side using their market power. Market
outcomes (prices and quantities) may be determined as a result of negotiation between
the two parties. Where two firms, both with monopolies, are involved, one might expect
them to agree on a quantity that maximises joint profits (Including both the monetary
 profits of the seller, and the 'surplus' (non-pecuniary excess benefits) of the buyer) and
then negotiate on a price. In this case, the quantity produced will be the same as in the
outcome where there is only one monopolist, but the buyer may be able to negotiate a
lower price, reallocating profits from the seller to the buyer. In principle, it may be
 possible in this way for national governments to use buyer power to negotiate lower 
drug prices (although, as discussed further below, one might also expect a government,
concerned with its citizens health, to try to induce the monopoly to supply a higher 
quantity than that which maximises profits).

Ensuring that drugs are made available

Of course, in practice, governments are constrained in the extent to which they can push
down prices by the threat that companies have not to supply the drug in question if a
 price cannot be agreed. Governments in turn can threaten to withhold reimbursement
status. Hence the price bargaining process is best analysed strategically, with prices
 being agreed in the context of:
• the threat of withholding reimbursement from government, and

• the threat of pharmaceutical companies withdrawing the supply of a drug to a

 particular country

Incentives to invest in valuable drugs

The use of buyer power can also have effects on incentives to invest.
In the context of pharmaceutical pricing, the long term objective of maximising health
outcomes for people into the future implies that governments will wish there to be
adequate incentives for R&D into new drugs. Ensuring that there are adequate
incentives for R&D therefore forms a constraint on governments using their buyer 
 power to negotiate as low drug prices as possible. The optimal set of drug prices from a
government's perspective will therefore be the one that maximises all health outcomes
(now and in the future), taking into account the effect that these prices will have on
incentives for R&D into new drugs.

However, the global nature of R&D costs means that the effect of prices in any one
country (particularly a small one) on investment is less clear.

Globally common costs and 'free riding'

R&D is a globally common cost. If a country accounts for a small proportion of Global
sales, sales in that country will have little effect on companies' global return from R&D.
As a consequence, prices in such countries are likely to have little direct effect on the
level of R&D and hence on the pace of pharmaceutical innovation.

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 This could affect the incentives governments have in exercising buyer power. In
 particular, governments may face an incentive to 'free ride' on global R&D by paying
 prices which do not contribute to this cost element. In order to ensure the national
supply of a drug, a government may seek to negotiate prices that cover only national
costs and avoidable international costs, leaving the globally common costs to be paid
for by other countries. Where governments seek to free ride in this way, companies may
respond by delaying launch of a drug in that country, or even not launching at all.

Furthermore, although free riding may be rational for an individual country, if many
governments successfully adopt this approach then there would be significant aggregate
effects on global returns to R&D and hence on companies' incentive to develop new
drugs. In the light of this, governments may recognise their common interest in
allowing higher prices that incentivise the development of new drugs. The objectives of 
the PPRS specifically refer to promoting an industry 'capable of such sustained R&D as
should lead to the future availability of new and improved medicines' while our 
international survey of pharmaceutical pricing and reimbursement schemes suggests a
number of countries do not just seek to set as low a price as possible but, for innovative
drugs, seek to negotiate prices that reflect a drug's cost effectiveness.

In principle, the solution to this problem would be to coordinate price setting between
countries, ensuring that each paid its 'fair share' (possibly according to some measure of 
ability to pay). In practice, concerns to retain national sovereignty over drug pricing
mean that such an approach is not likely to be implemented in the near or medium term.

The incentive to free-ride may, however, be dampened by the practice of international

reference pricing, which has the effect of linking prices in different countries. If prices
are linked, an individual country may have a greater effect on global returns to R&D
than the size of that country's pharmaceutical market might initially suggest. Therefore,
these countries will have a greater incentive to take account of long-run effects on
innovation when exercising their buyer power.

1.11 Relationship Pharmaceuticals – Healthcare

1.11.1 Managed Care Growth: The shape of the pharmaceutical marketplace
transforms rapidly due to growth of managed care in the U.S. healthcare system. The
latter becomes more and more popular because of its ability to provide medical
 products and services in a cost-effective manner. Managed care's share of the retail
 pharmaceutical market, which was less than 30% at the start of this decade, is expected
to reach 90% by the end of it. The managed care providers discount purchases of 
  pharmaceuticals and medical products, as well as physician and hospital services,
insisting on the use of low-cost generic drugs whenever possible.

1.11.2 Medicare and Medicaid: Managed care is also moving aggressively into
Medicare and Medicaid markers. Medicare is the principal healthcare financing
 program for Americans 65 years of age and older. But the program doesn't provide
reimbursement for outpatient prescribed drugs. Enrolling into managed care plans,
medicare beneficiaries are typically given free or low-cost prescription coverage.
Growth of medicare/managed care population increases drug utilization.
Medicare/managed care enrollment has more than doubled  over the past four years.
Medicaid managed care plans are also poised for ongoing growth.

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1.12 Industry Living Space

1.12.1 Demand: The demand for medicine is tied to the health of the populace, which
is relatively constant over the years. Drug pricing is also relatively inelastic,
due to the absence of alternate therapies for the most prescribed drugs.

1.12.2 Life cycle of products: The product cycle of nearly all prescribed drugs is fairly
stable. After the average 10- to 15-year period of discovery, development,
testing, and FDA review, a branded ethical drug has about 10 years of 
commercial life.

1.12.3 Discovery:  New drugs are discovered in scientific laboratories. The process is
long and laborious, with the vast majority of attempts unsuccessful.

1.12.4 Bringing the drug to market: Before a drug can be brought to market, it must
undergo years of testing and receive government approval from the FDA. It takes
 several years of sales buildup in major markets in the U.S. etc before a drug reaches its
full commercial potential. At that point, new competition of drugs similar in action may
enter the market.

1.12.5 Going generic: Generic competition usually appears immediately after patent
expiry, and prices begin to fall. Branded prescription drugs effectively have about 10
 years before generic competition erodes their profitability.

1.12.6 Going OTC: Companies sometimes switch a patent-expired product from

 prescription-only status to over-the-counter (OTC) status to broaden its market and
extend its economic life. Competition in the market of OTC products is more
straightforward. Margins on products switched to OTC status are lower than those on
the prescription products they replace, but popular consumer medications can have
almost infinite shelf lives.

2.0 GLOBAL PHARMACEUTICAL INDUSTRY

Historically, the pharmaceutical industry was characterized as a high growth and high
margin business with significant return on investment from new drug discovery and
development. Even at current revenues, the pharmaceutical industry still represents only
about 8% of total healthcare expenditures. However, given the fact that drugs are often
an out-of-pocket expenditure, the pricing of drugs has come under a lot of scrutiny.
Over the past two decades, the industry has also dealt with the emergence of a generic
segment as products brought to market largely since the sixties went off patent and
firms emerged to produce knock-offs that sold at much lower prices (today at about 15-
20% of initial price at product launch).

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The industry has also found challenges in:

• The rising cost of new drug discovery and development through final FDA approval;
estimated variously at $400 m to $800 m for each new product,

• A declining product pipeline and the withdrawal of several blockbuster drugs from
the market due to dangerous side effects impacting a tiny percentage of users,

• The emergence of a biotechnology based pharma industry that is both a threat and an
opportunity for traditional synthetic drug developers,

• Legislative scrutiny on drug pricing and spending on marketing and sales,

 particularly in the US, while prices in many regions are far less,

• Increasing emphasis on FDA enforcement of cGMP as a result of some recent

 problems as well as Canadian re-importation trends,

• Drug safety issues resulting from the recent Vioxx and Celebrex market withdrawal,

• Increasing complexity of drug molecules as the industry selectively targets specific

diseases, with the result being declining potential patient populations,

• Conducting clinical trials globally while ensuring uniform standards and genetic
diversity controls.

Despite these issues and recent declines in earnings, the industry is forecast to grow at
8.2% per annum to 2011 to a total of $967 billion dollars.

One final thought is that there has been rapid growth of the pharma industry in both
India and China and they are steadily improving in quality while maintaining low cost
and increasing innovation. It is projected that by 2010, China will become the fifth
largest global pharmaceutical market.

The value of pharma fine chemicals is first assessed at the active pharma ingredient
(API) level, about 10% of total industry revenues or some $52 billion. The industry also
supplies advanced intermediates for an additional value of some $20-25 billion and
 basic building blocks for an additional $10-12 billion. Thus the industry is valued in
total at some $85 billion. Of this, an estimated 40% is sourced on the merchant market
and the balance is produced by the captive operations of pharmaceutical companies.

The key issue for API production is the ability of the supplier to produce in compliance
with cGMP requirements set by the FDA in the US. To source or supply APIs and
advanced intermediates in other regions, the FDA must still certify the plant site.
Today, Europe lags the US in site inspections and the European pharma fine chemical
industry sees this as a serious competitive risk. Specifically, large quantities of Asian
APIs of questionable quality are entering the EU and undercutting the pricing of 
regional players. If this is not corrected, the industry believes both the safety of the
 public and the competitiveness of local manufacturers will be at risk.

Historically, fine chemical producers were largely captive operations of integrated

chemical and life science firms. A few large independents, Eastman Fine Chemical,
EMS Dottikon and Lonza did emerge as early third party producers surrounded by
hundreds of small ($5MM to $30MM) players. In pharmaceuticals, most production of 
fine chemicals was conducted by their internal manufacturing operations for security

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 and regulatory risk management. As financial pressure to improve both the income
statement and the balance sheet at big pharma companies increased during the 1990s,
 pharma companies moved to cut costs and extract value to support R&D and marketing
  by adopting chemical outsourcing strategies. In response, a merchant pharma fine
chemical market emerged and has seen constant change through regulatory skill
development, roll-up acquisitions, technology start-ups, consolidation, restructuring of 
 both integrated chemical firms and pharma companies with a subsequent spin out of 
assets, and big acquisitions to secure step-change positions.

Today, suppliers to the pharma (and general fine chemical) industry tend to operate in
one of following modes from a manufacturing and technology perspective.

First, is a full service provider that has both a broad range of production technologies
and assets, including some which are either complex, hazardous or leading edge.
Competitive position is achieved by being able to carry out multiple synthesis steps
within a single supply chain and also contribute what may be a key technology
 practiced by only a few firms.

Second, are the specialist players who differentiates and seeks to operate under the
umbrella of the broad based supplier by focusing on a particular synthesis step
(phosgenation for example) that may be hazardous or require unique equipment. These
firms seek to outsource their specialty even from the large supplier.

And a Third group have entered the pharma fine chemicals industry as start-ups driven
 by a new, unique skill (chiral separations or early stage process development and kilo
scale production) or a unique position (chiral building blocks, peptide synthesis, or 
mammalian cell culture).

A Fourth category of participants have emerged largely from India and China, that
 being low cost producers of the “me-too” products using a range of basic multi-step
organic synthesis skills. These firms tend not to practice any unique chemistry and
historically competed in their home markets while exporting opportunistically to the
“west” purely on a cost basis. Early on, the quality from these largely Asian producers
was highly suspect, but first in India and now China these quality gaps are being closed.
The NA and European firms still have a lead on unique and emerging technologies and
are the centre of innovation for the pharma industry, but their capital equipment and
manpower cost positions are well above the Asian players, and the skill and education
gap probably no longer exists. In fact, Indian pharma firms and NA and WE firms have
 begun to establish significant R&D operations in the region that may well lead to a true
globalization of the industry.

The early pharma fine chemical industry was considered highly attractive from a
margin perspective as high prices could be charged for custom manufacturing services
when compared with the internal cost of inefficient captive manufacturing. In fact, two
of the early drivers of outsourcing were per kilo cost reduction and capital investment
reduction that improved the ROCE of innovator drug companies.

During the 1990s a generic pharma actives industry grew as patents on older drugs
expired. This generics market fostered the growth of entrepreneurial players initially in
Italy and Spain and later in India. As these firms grew in capabilities, they began to
target a broader range of merchant business. The Indian industry, faced with limited

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 brand equity chose to compete on price and drove the trend to competitive pricing and
margin erosion in merchant pharma fine chemicals during the latter half of the 1990s.

Another aspect of this competition was the shift from high initial margins on advanced
intermediates and actives, with slow erosion of pricing during the early years of 
commercial production, to aggressive pricing and rapid erosion of per kilo prices and
margins even on late stage clinical trial quantities. Rather than begin production of a
new molecule with a price of say $1000/kilo and then manage its decline to maybe
$600/kilo over time, competitive firms began actively bidding down prices even below
the $600/kilo level in order to capture the long term supply commitment.

In the early 2000s, as the pharma pipeline failed to deliver a growing number of new
molecules and thus outsourcing opportunities, prices and margins took a further hit as
too many players and too much capacity chased too few opportunities. With high
capital costs due to inflated acquisition prices, excess often high cost capacity
demanding rationalization, increasing competition from both Indian and Chinese
suppliers, and reduced outsourcing by big pharma, firms such as Clariant, DSM,
Rhodia, and Degussa have struggled to achieve desired growth and profitability.

The pharma fine chemicals industry may be in a better position now to benefit from a
recovery, if the product pipeline and pharma sourcing strategies move in positive
directions. However, the industry is in serious need of restructuring because there are
 both too many players and too much capacity chasing too few opportunities, leading to
continued pressure on prices and margins.

3.0 THE INDIAN PHARMACEUTICAL INDUSTRY

3.1 Introduction
The Indian Pharmaceuticals sector has come a long way, being almost non-existing
during 1970, to a prominent provider of health care products, meeting almost 95% of 
country’s pharmaceutical needs. The domestic pharmaceutical output has increased at a
compound growth rate (CAGR) of 13.7% per annum. Currently the Indian pharma
industry is valued at approximately $ 8.0 billion. Globally, the Indian industry ranks 4th
in terms of volume and 13th in terms of value. Indian pharmaceuticals industry has over 
20,000 units. Around 260 constitute the organized sector, while others exist in the small
scale sector.

India has large number of pharmaceutical companies that produce even very new
inventions without license from the innovators. Antibiotics and nutritional supplements
are important sector, and drug prices are very low compared to the ‘West’.

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The bigger pharmaceutical companies are back-integrated in the manufacture of bulk 
actives, although many source intermediates domestically or from abroad, particularly
from China. The smaller drug companies source bulk actives from the many smaller 
fine chemical operations set up to produce fine chemicals for the domestic and overseas
markets.

Figure 15: Location of pharmaceutical hubs in India

Mainly based in the five major fine chemical and pharmaceutical manufacturing regions
around Delhi, Hyderabad, Mumbai (Bombay), Ahmedabad and Bangalore, India’s
thousand-plus companies have built up a formidable industrial strength, particularly
since 1985.

Figure 16: Trends in the production of bulk drugs and formulations in India since the 1970s

Page | 38
 The pharmaceutical industry has witnessed tremendous transformation since the 1950s.
The size of the Indian pharmaceutical industry, both bulk drugs and formulations is
estimated at Rs 35,471 crore in 2003-04 (IDMA 2004), which is just over 1% of the
global market (ICRA 1999). This is against the value of the production of 
 pharmaceuticals of a mere Rs 10 crore in 1950. Investment in the industry has steadily
grown over the years from a mere Rs 23.64 crore in 1950 to a moderate Rs 500 crore in
1980 and went up considerably to reach around Rs 4000 crore in 2003. Propelled by the
  booming demand, the production of pharmaceuticals has registered a tremendous
increase over the years.

Table 4: Growth rate of bulk drugs and formulations production in India since the 1970s

The growth rate of bulk drugs recorded in the 1970s and 1990s is almost double-around
20%-that of the production registered for the 1980s is evident from the above table. The
output of formulations has seen a phenomenal increase during the period under 
consideration but is less than 4% as against bulk drugs, in both the 1970s and 1990s.
The 1980s is the only period in which formulation growth had outperformed the growth
of bulk drugs by a marginal 1%. The massive growth of the pharmaceutical industry
could be attributed to a few domestic and international developments that took place
 particularly since the 1950s. At the global level, the industry in general was then

Page | 39
 experiencing a major overhaul by vertically integrating operations such as production,
marketing and research. The protection given to the pharmaceutical industry through
 patents and brand names saw many top companies switch over to the production of 
specialty medicines.

Indian pharmaceutical fine chemical players have served their apprenticeship and are
now embarking on their own voyage of conquest in this globalizing industry. Looking
 back to the early 1990s, a handful of modest sized Indian companies, including firms
such as Ranbaxy, Cheminor and Dr. Reddy’s Laboratories, first appeared on the
RADAR scope of industry participants in the United States and Western Europe. These
Indian ‘upstarts’ looked to be an emerging threat to Western European fine chemical
  players, particularly Italian and Spanish firms, and some discovery based drug
companies based on manufacturing and skilled labor cost advantages and limited
 protection for intellectual property. At the time there were questions about consistent
quality, lack of FDA certification and even environmental practices that slowed their 
 progress in international markets. But today we can say that the Indian pharmaceutical
fine chemicals industry has learned its lessons well.

Even a brief survey of the situation, reveals an Indian industry that has:

• many moderate to large players with a varied range of participation, even

some with international operations,

• management and financial resources to pursue acquisitions in other 

countries,

•  become a reputable source of building blocks, advanced intermediates and

active ingredients to the growing global generics market

• an improving track record with the FDA and other regulatory agencies,

• skilled technical labor that can now support not only fine chemical process
development and production but also clinical development and contract
research.

A key driver for significant growth in the global pharma fine chemicals segment (APIs,
advanced intermediates and basic building blocks are normally about 17-18% of the
total pharma industry value, or about $85 Billion in 2005) was the expected increase in
outsourcing starting in the mid-1990s, based on the anticipation of very productive
discovery and generic drug pipelines (today, approximately 40% of the value of this
 production is outsourced). Industry analysts expected the human genome project to lead
to the introduction of new drugs of increasing complexity and these drugs would
require competent outsourcing partners with real know-how to effectively bring this
growing portfolio of life saving products to market, quickly and at acceptable cost. At
the same time, an increasing number of older drugs would go through patent expiry and
expand opportunities for generic suppliers. As a result, both technology start-ups and
divisions of large chemical companies – jumped in to take advantage of the growing
outsourcing opportunity. New cGMP capacity was built by suppliers of all sizes, and in
the late 1990s several large chemical companies (e.g., Degussa, Rhodia, Clariant and
DSM) made significant acquisitions to establish themselves as leading fine chemical
and active ingredient suppliers to the pharmaceutical industry. This active capacity

Page | 40
  building, coupled with the improving quality of Indian and Chinese manufacturers
created strong price competition and severe margin pressure on the fine chemicals
industry. Margin pressure was further exacerbated by low productivity of the pharma
drug pipeline, and the net result has been a wholesale consolidation of both fine
chemicals and pharmaceutical industry participants.

While this industry evolution has been playing out largely in “the west,” India’s
 pharmaceutical industry and thus its fine chemicals industry has also had to adapt to
new realities. For many years the pipeline was regularly filled with new “me-too”
 products copied from global pharmaceutical majors. Today, India’s passage of a new
Patent Law has raised the IP (intellectual property) hurdle so that Indian firms cannot
 produce patented active ingredients and dosage form pharmaceuticals in advance of 
  patent expiry! This points to a near term slow down in growth in the domestic
 pharmaceutical market which will impact both pharma companies and the fine chemical
supply network. However, larger players in the Indian pharma fine chemical industry
have simultaneously been building their export businesses and that will provide for 
 better growth prospects. At the same time, some Indian players have established foreign
operating positions, often via acquisitions or alliances and are poised to take a larger 
role in this globalizing industry. While the Indian pharma fine chemicals segment has
not been immune to the drivers of margin pressure, including: industry overcapacity
(about 70-75% capacity utilization industry-wide), consolidation with continued in-
sourcing by Western pharma companies, declining Chinese prices, and increased
emphasis on quality – the “survival of the fittest” points to a significant new
opportunity! And that is the ability to significantly extend its reach into foreign markets
to offset slower growth in domestic markets.

Today, Indian fine chemical companies can enter foreign markets both organically
(playing on their cost advantage and adding further sophistication) and inorganically
(several of the high-cost acquisitions of the past 10 years are being written down by
firms such as Degussa, Rhodia, DSM and Clariant, and mid-size European and North
American based companies are putting themselves on the block).

Common belief is that while Indian Pharma fine chemicals companies can continue to
 position themselves as low cost commodity suppliers, the opportunity is open – through
innovation and strategic thinking – to move up the value chain in multiple ways.

Unlike China, India was an imperial colony at the end of the last world war (just) and so
the emerging pharmaceutical companies (particularly British companies such as
Beecham, Glaxo and later ICI) developed their business in India as part of their 
international operations. Drugs were priced at international levels, leaving the majority
of the Indian population without realistic access to modern therapies. The patent regime
and the law was identical to that in Great Britain and so no copy products could be
 produced at low cost (as was then practiced by all  other Asian countries, as well as
some European countries, such as Italy). Several Indian-owned (‘indigenous’)
companies had been set up even before independence and they eventually (in 1971)
 persuaded the government of Indira Gandhi to repeal the country’s product patent laws,
thus allowing the local companies to produce new drugs at a fraction of the price being
asked by the multinationals. ICI’s propanolol and Beecham’s ampicillin were both
specifically named in her speech in Geneva, in which she defied the West with the
statement that no government should be able to ‘legislate against life’. An interesting
 parallel now exists in South Africa, where the new government is threatening to repeal

Page | 41
 product patents in order to gain access to low cost treatment for AIDS (the African
 pandemic of AIDS is threatening to undermine the future welfare of many countries in
the region). Many multinationals (particularly the US-based ones) eventually withdrew
from the Indian market, as a result of this action. The Indians have ‘called this
multinational bluff’, however, and have been able to build up an impressive
infrastructure to supply both the majority of its own needs and those of an increasing
 proportion of the Asian, South American and African export markets. Both finished
drugs and bulk actives are exported.
Today, the industry has reached a watershed, having accepted the reintroduction of 
 product patents. It is the judgement of the government and its advisers that India has
more to gain than to lose by acceding to the West’s demands. One third of its people
still have no access to modern drugs, but from an Indian point of view, the country’s
strategy has largely paid off. Most other Asian countries have not developed their own
industries and have, as a result, become dependent on multinational companies (that sell
at high prices that many of the people cannot afford) or WHO (which can only supply
older, cheaper drugs that are often inadequate).
The Indian pharmaceutical industry, which had little technological capabilities to
manufacture modern drugs locally in the 1950s, has emerged technologically as the
most dynamic manufacturing segment in the Indian economy in the 1990s. Besides, it
generates rising trade surpluses in pharmaceutical products by exporting to over 65
countries, therefore, significantly competing with developed countries for global market
share. It produces life‐saving drugs belonging to all major therapeutic groups at a
fraction of prices existing in the world market and thus, has been seen as ensuring
health security of the poorer countries.

The Annual Report of the Department of Chemicals and Petrochemicals, Government

of India, describes it as one of the largest and most advanced among developing
countries. The industry today posseses the largest number of US Food & Drug
Administration (FDA) approved manufacturing facilities outside the US and has filed
110 Drug Master Files (DMFs) with the US FDA for drug exports to the US, which is
higher than that filed by Spain, Italy, China and Israel taken together.

Figure 17: US DMF filings – Global vs India

The phenomenal progress made by the industry over the last three decades has instilled
a strong belief in the government and the pharmaceutical companies in India that the

Page | 42
 country has a competitive strength and it should be enhanced by suitable policy
measures and firm‐specific actions with regard to export, innovation, strategic
alliances and investment. The Pharmaceutical Policy 2002 echoes the same sentiment
and has shifted the focus of the policy from self ‐reliance in drugs manufacturing to
the objective of enhancing global competitiveness. The introduction of the Policy says:
“The basic objectives of Government’s Policy relating to the drugs and pharmaceutical
sector were enumerated in the Drug Policy of 1986. These basic objectives still remain
largely valid. However, the drug and pharmaceutical industry in the country today faces
new challenges on account of liberalization of the Indian economy, the globalization of 
the world economy and on account of new obligations undertaken by India under the
WTO Agreements. These challenges require a change in emphasis in the current
 pharmaceutical policy and the need for new initiatives beyond those enumerated in the
Drug Policy 1986, as modified in 1994, so that policy inputs are directed more towards
 promoting accelerated growth of the pharmaceutical industry and towards making it
more internationally competitive. The need for radically improving the policy
framework for knowledge‐  based industry has also been acknowledged by the
Government. The Prime Minister’s Advisory Council on Trade and Industry has made
important recommendations regarding knowledge‐ based industry. The pharmaceutical
industry has been identified as one of the most important knowledge based industries in
which India has a comparative advantage.”

Against the above backdrop of increasing attention of the policy makers on global
competitiveness of the Indian pharmaceutical sector, let us make an attempt to put the
  performance of the sector in a global setting. Most of the recent studies on Indian
  pharma industry deal with the impact of economic liberalization and new global
intellectual property rights (IPR) regime on industry performance like R&D and
 patenting, foreign investment, exports, and drugs prices and public health. However, the
issue of global competitiveness of the industry is still not rigorously addressed. How
does Indian pharma industry perform in a global setting? This issue, in turn, involves a
comparative analysis of the Indian pharmaceutical industry in a cross‐country setting
and exploring its growth, productivity, technology and trade performance vis‐à‐vis
global peers in the sector and an analysis of new competitive strategies that Indian firms
are adopting to compete in the global market.

3.2 Evolution of Indian Pharmaceutical Industry

The pharmaceutical production in India began in 1910s when private initiatives
established Bengal Chemical and Pharmaceutical Works in Calcutta and Alembic
Chemicals in Baroda and setting up of pharmaceutical research institutes for tropical
diseases like King Institute of Preventive Medicine, Chennai (in Tamil Nadu), Central
Drug Research Institute, Kasauli (in Himachal Pradesh), Pastures Institute, Coonoor (in
Tamil Nadu), etc. through British initiatives. The nascent industry, however, received
setbacks in the post World War II period as a result of new therapeutic developments in
the Western countries that triggered natural elimination of the older drugs from the
market usage by newer drugs like sulpha, antibiotics, vitamin, hormones, antihistamine,
tranquilizers, psycho pharmacological substances, etc. This culminated in the
discontinuation of local production based on indigenous materials and forced the
industry to import bulk drugs meant for processing them into formulations and for 
selling in the domestic market.

Page | 43
3.2.1 The Stages of Growth
Figure 18: Stages of Growth of the Indian Pharmaceutical Industry

In the post‐independence period, Indian pharmaceutical industry exhibited four stages

of growth. In the first stage during 1950s–60s, the industry was largely dominated by
foreign enterprises and it continued to rely on imported bulk drugs notwithstanding its
inclusion in the list of ‘basic industries’ for plan targeting and monitoring. Foreign
firms, enjoying a strong patent protection under the Patent and Design Act 1911, were
averse to local production and mostly opted for imports from home country as working
of the patent. Given the inadequate capabilities of the domestic sector to start local
  production of bulk drugs and hesitation of foreign firms to do so, the government
decided to intervene through starting public sector enterprises. This led to the
establishment of the Indian Drugs and Pharmaceuticals Ltd. (IDPL) plants at Rishikesh
and Hyderabad in 1961 and the Hindustan Antibiotics at Pimpri, Pune, in 1954 to
manufacture penicillin. The starting of the public sector enterprises has been an
important feature in the evolution of the pharmaceutical industry as it assumed initiative
roles in producing bulk drugs indigenously and led to significant knowledge spillovers
on the private domestic sector.

The second growth stage of the industry took place in the 1970s. The enactment of the
Indian Patent Act (IPA) 1970 and the New Drug Policy (NDP) 1978 during this stage
are important milestones in the history of the pharmaceutical industry in India. The IPA
1970 brought in a number of radical changes in the patent regime by reducing the scope
of patenting to only processes and not pharmaceutical products and also for a short
 period of seven years from the earlier period of 16 years. It also recognizes compulsory
licensing after three years of the patent. The enactment of the process patent contributed
significantly to the local technological development via adaptation, reverse engineering
and new process development. As there exits several ways to produce a drug, domestic

Page | 44
 companies innovated cost–effective processes and flooded the domestic market with
cheap but quality drugs. This led to the steady rise of the domestic firms in the market
 place. The NDP 1978 has increased the pressure on foreign firms to manufacture bulk 
drugs locally and from the basic stage possible. Foreign ownership up to 74 per cent
under the Foreign Exchange Regulation Act (FERA) 1973 was permitted to only those
firms producing high technology drugs. Foreign firms that are simply producing
formulations based on imported bulk drugs were required to start local production from
the basic stage within a two year period. Otherwise were required to reduce their 
foreign ownership holding to 40 per cent. New foreign investments were to be
  permitted only when the production involves high technology bulk drugs and
formulations thereon. The outcomes of the strategic government interventions in the
form of a soft patent policy and a regime of discrimination against foreign firms
affected the industry with a time lag and provided strong growth impetus to the
domestic sector during 1980s.

In the third stage of its evolution, domestic enterprises based on large‐scale reverse
engineering and process innovation achieved near self ‐sufficiency in the technology
and production of bulk drugs belonging to several major therapeutic groups and have
developed modern manufacturing facilities for all dosage forms like tablets, capsules,
liquids, orals and injectibles and so on. These had a lasting impact on the competitive
 position of the domestic firms in the national and international markets. In 1991,
domestic firms have emerged as the main players in the market with about 70 and 80
  per cent market shares in the case of bulk drugs and formulations respectively
(Lanjouw, 1998). The industry turns out to be one of the most export‐oriented sectors
in Indian manufacturing with more than 30 per cent of its production being exported to
foreign markets. The trade deficits of the seventies have been replaced by trade
surpluses during 1980s (See Table).
The growth momentum unleashed by the strategic policy initiatives continued in the
fourth stage of the evolution of the industry during 1990s. The production of bulk drugs
and formulations have grown at very high rates and the share of bulk drugs in total
 production has gone up to 19 per cent in 1999–2000 from a low of 11 per cent in 1965– 
66. This stage has also witnessed dramatic changes in the policy regime governing the
 pharmaceutical industry. The licensing requirement for drugs has been abolished, 100
 per cent foreign investment is permitted under automatic route, and the scope of price
control has been significantly reduced. India has carried out three Amendments in
March 1999, June 2002 and April 2005 on the Patent Act 1970 to bring Indian patent
regime in harmony with the WTO agreement on Trade Related Intellectual Property
Rights (TRIPs). The third and the final one, known as the Patents (Amendment) Act,
2005 came into force on 4th April 2005 and introduced product patents in drugs, food
and chemicals sectors. The term of patenting has been increased to a 20 year period.
These changes in the policy regime in the 1990s, thus, started a new chapter in the
history of Indian pharmaceutical sector where free imports, foreign investment and
technological superiority would determine the trade patterns and industrial
 performance. The Indian pharmaceutical industry is looking at this era of globalization
as both an opportunity and a challenge.

Table 5: India’s Trade in Pharmaceutical Products, 1970–71 to 1999–2000

Page | 45
3.2.2 Comparative Analysis of the Competitive Strength of the Indian
Pharmaceutical Industry

Page | 46
With the arrival of global patent regime and widespread liberalization measures
measures at the
indi
indivi
vidu
dual
al coun
countr
try,
y, bila
bilate
tera
ral,
l, regi
region
onalal and
and mu
mult
ltii‐late
latera
rall leve
levels
ls,, the
the issu
issuee of 
competitiveness is critical for understanding the strengths and weaknesses of a country
in the global market place. The strategic government policies can have a long‐term
impact on the growth and structure of an industry. This view is known as the strategic
trade theory in international economics. The relevance of government policy continues
to be critical even in an era of liberalization and this holds for knowledge‐ based
industries in developing countries. For example, the government promotion of local
technological activities through fiscal or other incentives is always needed when free
market forces are not capable of scaling up the developing country’s capabilities
capabilities in high
tech
techno
nolo
logy
gy inte
intens
nsiv
ivee indu
indust
stri
ries
es.. Once
Once it is knowknown n wher
wheree a coun
countrtry
y lack
lacked
ed in
competitiveness vis‐à‐vis othe others
rs,, then
then the
the conc
concer
erne
nedd gove
govern
rnmement
nt can
can take
take
facilitating policy measures to address the inadequacy. In what follows, an assessment
of the competitiveness
competitiveness of Indian pharmaceutical
pharmaceutical industry is presented.

The competitive strength of an industry in the global market can be seen in several
ways. One simple way is to compare the relative size and growth performance in
value‐added. A stronger growth performance exhibited by a particular industry in
cross country comparisons indicates rising level and strength of production, which may
drive the sector to emerge as a global player. Most of the studies on cross–country and
industry
industry level
level compari
comparisons
sons of compet
competitive
itiveness
ness also emphasi
emphasized
zed on the producti
productivity
vity
level. In order to achieve a relatively higher growth performance among countries, one
country in the particular sector is required to produce relatively more output per input
combination over time and among competing countries. Innovation is an important
source of cross–country differences in the productivity performance. This is especially
true
true in the
the case
case of know
knowleledg
dgee‐  based
based industrie
industriess like pharmac
pharmaceuti
euticals.
cals. Hence,
Hence, a
compar
compariso
isonn of the level of innov
innovati
ation
on can also,
also, to a certa
certain
in exten
extent,
t, measu
measure
re the
competitive strength of the sector. The export market share and import coverage of the
export (i.e. import to export ratio) are also important indicators of competitive strength.
An industry doing very well in the international market suggests that it is scaling up its
supplier
supplier position
position vis‐à‐vis othe otherr comp
competetit
itor
orss and
and in fact
fact poss
posses
esse
sess a stro
strong
ng
comparative advantage in the product. The present section looks into the trends in
above mentioned indicators to examine the global competitive strength of the Indian
 pharmaceutical
 pharmaceutical industry.

3.2.3 Growth and Relative Size

The Table below provides a picture of growth performance among eighteen selected
countries in the pharmaceutical sector since late 1970s. The growth rate of global
 pharmaceutical value‐added has consecutively slowed down and has fallen from an
estimated rate of 25 per cent in 1980–85 to 18.74 per cent in 1990–95 and further to
15.8 per cent in 1995–2000.

Table 6: Growth of Pharm Industry in India vis-à-vis in other countries, 1975–2000, PPP $

Page | 47
Source: Central Statistical Organization
Organization

Given the absence of blockbuster innovations in the last two decades, it is logical to
expec
expectt a downw
downwardard trend
trend in the growt
growth
h perfo
perform
rmanc
ancee of the techn
technolo
ology
gy‐driven
  phar
pharma
mace
ceuti
utical
cal sector
sector.. Contr
Contrary
ary to the slow
slow‐down
down of thethe glob
globalal tren
trends
ds,, Indi
Indian
an
 pharmaceutical sector turns out to be one of the fastest growing industries in the global
mark
marketet plac
place.
e. In 1980
1980–8
–85,
5, ther
theree are
are ten
ten coun
countr
trie
iess surp
surpas
assi
sing
ng Indi
India’
a’ss grow
growth
th
 performance,
 performance, which has fallen to only three countries in 1985–90 and just two in 1990– 
2000. It has grown at a phenomenal rate of 41 and 28 per cent per year during 1990–95
and 1995–00 respectively, standing as the third largest growing pharmaceutical
pharmaceutical industry
amongst the selected countries. The rapid rise of India in the late 1980s can be partly
attributed to the suitable policy measures including a soft patent regime that the Indian
government adopted
adopted during 1970s and partly to the growth of generic segment in world
 pharmaceutical market following the off ‐ patenting of a number of drugs in the late
1990s. The off ‐ patenting phenomenon helped many Indian firms enter the generic‐
space of international market with their own cost‐effective processes and the rise of a
few Indian companies like Ranbaxy,
Dr Reddy
Reddy and Cipla
Cipla to marke
markett their
their own
own formul
formulati
ations
ons after
after obtain
obtaining
ing US‐FDA
approval. As a result of the consistently higher growth performance in the last two
decades, the size of Indian pharmaceutical industry has increased impressively with
significant gains in the share of world pharmaceutical value‐added. India’s share of 
value‐added nearly doubled between 1980 and 2000, from 3.79 per cent to become
7.11 per cent. The size of Indian pharmaceutical
pharmaceutical industry is estimated to be about PPP $
11508 million in 2000, which is about 43 times the size of Austria, 36 times the size of 

Page | 48
 Norway and 10 times the size of Australia! It is even larger than the combined size of 
Austria, Belgium, Canada, Denmark, Finland, Netherlands and Norway! The size of the
Indi
Indian
an phar
pharma
mace
ceut
utic
ical
al indu
indust
stry
ry woul
would
d have
have been
been even
even mumuch
ch larg
larger
er sinc
sincee the
the
unorganized segment of the industry has not been taken into account in the study.
There
Th erefor
fore,
e, Indian
Indian pharma
pharmace
ceuti
utical
cal indust
industry
ry has achie
achieved
ved a high
high level
level of grow
growth
th
 performance
 performance and a scale that is comparable
comparable to the global peers.

Figure 19: Size of Indian Pharma Industry and its share in global pharmaceutical value added

Source: Based on Table 6

3.2.4 Productivity
The relatively rapid growth of output may not be sufficient to ensure competitiveness
competitiveness of 
a country in the long run unless there is sustained increase in the efficiency with which
resources are employed in value‐added activity. Productivity is a key determinant of 
competitiveness, especially in a technology‐intensive industry like pharmaceuticals.
Those countries that produce increased value‐added per unit of inputs overtime vis‐
à‐vis other countries are sure to perform better in the international market.
market.
The Indian pharmaceutical sector has experienced high rates of productivity growth in
1990s as compared to its performance in 1980s. In the year 2000, the industry generated
about PPP $49242 of value‐added per unit of labour, which is more than four ‐times
the value
value added
added gener
generati
ation
on in the year
year 198
19800 (PPP
(PPP $10$1066
660).
0). How did the India
Indian
n
 phar
 pharma
mace
ceuti
utical
cal secto
sectorr perfo
perform
rm as comp
compare
ared
d to other
otherss in term
termss of produ
product
ctivi
ivity?
ty? It
appears that relative productivity of Indian pharmaceutical sector is one of the lowest in
the world and continued to be so between 1980 and 2000. The series on relative labour 
 productivity presented in Table 7 suggests that for each PPP $100 of the value‐added

Page | 49
 that USA generated per person employed in 1980, India could generate only about PPP
$26. The relative productivity of India in relation to the US has fallen to PPP $19 in
1985 and remained stagnant between 1990 and 1995, ahead of an improvement
improvement to reach
PPP $23 in 2000. This shows that India’s impressive growth in value‐added as
observed in the previous sub‐section is not accompanied by a commensurate rise in
the level of relative productivity in terms of the cross–country analysis. The fragmented
fragmented
nature of Indian pharmaceutical sector characterized by the operation of a very large
number of players, estimated to be about 10,000 units of which just 300 units are
medium and large‐sized, may be a reason for low level of productivity. The other 
important
important factor for low productivity can be due to the nature of technological activities
in the sector, which tends to rely more on process than product development.
development. Further, it
may be that Indian companies are focusing at the low end of value‐chains in the
 pharmaceuticals like producing generics than opting for branded products or supply
  bul
bulk
k drug
drugss to glob
global
al play
player
erss than
than mark
marketet form
formul
ulat
atio
ions
ns of thei
theirr own.
own. Th
This
is low
low
  productivity performance of India in comparison to global peers suggests that the
country has to improve the quality of innovation, scale and focus on high value added
segment of pharmaceutical production. Addressing these factors is very important for 
enhancing
enhancing India’s global
global compet
competitive
itiveness.
ness. It should
should be mentione
mentionedd that low labour 
labour 
 productivity of India as compared to the US does not necessarily reflect that India is
sliding on the path of global competition since higher value addition in the US reflect
higher compensation
compensation to labour and capital in the form of higher wages to skilled labour 
and charging higher profit margins and taxes on capital. In India, domestic companies
are known to have lower profit margin because of charging lower prices for drugs and
Indian skilled manpower works at much lower wages than what their counterparts get in
the US.

Table 7: Labour Productivity in Pharmaceutical Industry, PPP $

Source: Central Statistical Organization, Annual Surveys of Industries.

3.2.5 Innovation
Several studies on the economics of technological
technological change and technology gap approach
approach
to inter
internat
nation
ional
al trade
trade have
have broug
brought
ht out that
that growt
growthh perfor
performa
mance
nce and compet
competiti
itive
ve

Page | 50
advantages of countries go together with their activities of technological innovation and
imitation. They have shown that technological development measured by patent and
R&D expenditures have significant impact on the trade performance of the countries.
The pharmaceutical industry being one of the most technology‐intensive industries,
the extent and nature of innovation is crucial for countries to prolong their productivity
growth and competitiveness in the long run.

In broad terms the process of technological change can occur through improvements in
the products, production process, raw material and intermediate inputs, and through
enhancements in the efficiency of the management system. Indian domestic
 pharmaceutical companies are known for their innovative cost‐effective processes,
discovery in novel drugs delivery system, self ‐reliance in producing quality raw
materials and production led by quality management. However, these technological
strengths are confined to a few large Indian pharmaceutical companies. As the Indian
industry is dominated by a large number of companies, both medium and small sized,
‐

the research activities in the sector are quite limited and inadequately focused on
development of new drugs. Majority of the Indian companies suffered from limitation
of financial, technical and skill resources to undertake any kind of R&D activities. A
recent study found that in a sample of 223 firms, about 62.3 per cent of firms are not
engaged in innovative activities and another 21.1 per cent firms undertake R&D, which
is even less than 1 per cent of their sales in the year 1999–2000.
Using R&D as an indicator of technological activities, Table 8 presents the growth rates
of pharmaceutical R&D in selected countries. It can be seen that India had consistently
  pushed up its pharmaceutical R&D expenses since 1987. The Indian pharmaceutical
R&D has grown by 17 per cent during the period 1987–91. The growth rate has gone up
to 26 and 83 per cent over the periods 1992–96 and 1997–2001 respectively. This high
growth rate of India in pharmaceutical R&D seems to be due to the low base of 
 pharmaceutical R&D in the base years. In the period 1997–2001, India turned out to be
second highest R&D growing pharmaceutical sector among the selected countries.
Moreover, India’s R&D relative to the US is also observed to be increasing. For each
PPP $100 worth of R&D expenditure incurred by the US pharmaceutical sector in 1990,
Indian pharmaceutical sector had incurred just PPP $2 and 40 cents. The relative R&D
spending of India in terms of the US spending has gone up to PPP $4 and 80 cents in
2000. Although, there is a vast gap in the amount of pharmaceutical R&D expenses
undertaken by the US and India, the relative gap in R&D spending is falling modestly
over the years. The growing trends of R&D expenses may be a good sign but not a
sufficient condition to ensure a rising competitiveness for Indian pharmaceutical sector.
Unless the sector sets aside an increasing proportion of its value added for the R&D
‐

activities over time and across countries, expanding global position would be difficult.
The R&D intensities, the percentage of the value added devoted for the R&D
‐

activities, for a group of countries is furnished in Table 9. Two important points can be
deduced from it.
First, Indian pharmaceutical industry as compared to global peers incurs a very small
fraction of its value added for research and innovative activities. In 1990, its R&D
‐

spending is not even one per cent of the value added and is the lowest in the cross
‐ ‐

country comparison.
Second, Indian pharmaceutical industry has significantly improved its R&D intensity in
the 1990s. Between 1990 and 2000, its R&D intensity has increased by more than nine
times from 0.91 per cent to 8.7 per cent. In 2000, the R&D intensity of India is higher 
than that of Korea, Italy and matches that of Spain.

Page | 51
Table 8: Growth of Pharmaceutical R&D, PPP $

Source: OECD R & D Expenditure in Industry database, 1987-2001

Table 9: Pharmaceutical R&D Intensity (%), 1987–2000, PPP $

Source: OECD, STAN Database 2004

3.2.6 Trade Performance
Table 10 and figure 20 show the pharmaceutical exports of India and its growth rates
over the periods 1990–94, 1995–99 and 2000–04. It can be observed that India has
increased its pharmaceutical exports at a rapid pace in the 1990s. The total

Page | 52
 pharmaceutical exports in 2004 stood at US $2.2 billion, nearly five times the figure
 pertaining to 1990. The exports have consecutively achieved higher growth rates, 14 per 
cent in 1990–94, 23 per cent in 1995–99 and 44 per cent in 2000–04. In relation to a
group of selected twenty nine countries, India is much ahead of fifteen countries in
‐

terms of growth performance in pharmaceutical exports during 2000–04. India’s 44 per 

cent growth rate is higher than that of the US, China, Italy, Indonesia, Malaysia,
Mexico, Brazil, Rep. of Korea, Portugal, Japan, Thailand, South Africa, Argentina,
Singapore and Hong Kong. However, irrespective of its impressive export growth rates,
India’s share in the global pharmaceutical exports has not shown any improvement. In
fact, it is hovering around 1 per cent of market share. India’s recent export growth rate
has not yet translated into gains in export share as India’s growth performance is much
lower when compared to the 60 per cent growth rate of world pharmaceutical exports
during 2000–2004 and also its contribution to the global sum is minimal.

Figure 20: India’s Performance in Pharmaceutical Exports, in $ mn and per cent

Although, India is far from significantly increasing its global export share, it belongs to
the selected group of eight countries, which have consistently enjoyed favourable trade
 balance in pharmaceuticals, i.e. exporting more than the amount being imported, during
1990–2004 (Table 10). These countries are Switzerland, Germany, UK, France,
Sweden, Denmark, India and China. India’s trade surplus in the pharmaceutical product
has increased by eight‐times between 1990 and 2004 from a low of US $195 million
to $1616 million. As a consequence of rising trade balance, the export to import ratio
has increased from 1.75 in 1990 to 3.4 in 2004.

Table 10: Trade Balance in Pharmaceuticals

Page | 53
Source: Based on the UN COMTRADE Database, 2006.

3.2.7 New Global Strategies of the Indian Pharmaceutical Enterprises

Competitive advantages of the Indian pharmaceutical industry also critically hinges
upon the types of global strategies adopted by its firms. Internationalization strategy
that tends to complement and upgrade the technological strength of Indian
  pharmaceutical companies can be very crucial for sustaining and enhancing their 
competitive position in the world market. For example, as large number of Indian
 pharmaceutical firms lack technological capabilities for product development, acquiring
overseas business enterprises with new product portfolios, technology and skills can
allow them to emerge as global players. Internationalization in the form of strategic
collaborations with global pharmaceutical companies from developed countries for 
contract manufacturing, research and marketing can also be beneficial for Indian
companies to expand their global operations. In the last decade, the business strategies
of Indian pharmaceutical companies with respect to the overseas market have
undergone significant changes. Their business decisions are increasingly driven by
global market orientation for their products, business location and sourcing of raw
materials and intermediates inputs. After identifying strategic markets across the globe,
they adopted a variety of global strategies for enhancing their market position like
undertaking direct investment for Greenfield projects and overseas acquisitions, tapping
foreign securities and capital markets, entering into contract manufacturing with global

Page | 54
 players, strategic alliances, apart from the traditional method of exporting. Various
segments of value‐added activities of Indian pharmaceutical firms like manufacturing,
distribution and marketing, R&D, are now being coordinated and formulated according
to considerations of global geographical advantages and worldwide business
environment. In this section we look at these global strategies that the Indian
 pharmaceutical companies have adopted to expand their operations globally.

3.2.7.1 Outward Greenfield Foreign Direct Investment

A growing number of Indian pharmaceutical firms are undertaking outward FDI to
diversify their business overseas. The number of joint and wholly‐owned ventures
undertaken by Indian pharmaceutical companies has consistently increased from just 1
in 1990 to a peak of 31 in 1997 (Table 11). Between 1990 and 2000 their total numbers
stood at 165 joint and wholly‐owned overseas ventures involving about $243 million.
The number of outward investing firms has increased from 1 in 1990 to 11 in 1995 to
14 in 2000. A total of 52 pharmaceutical firms are observed to have been engaged in
overseas green field investment activities during 1990–2000. It is interesting to note
that outward FDI activity of Indian pharmaceutical industry is not entirely confined to
the large‐sized firms alone. Rather a number of medium‐sized firms like Parenteral
Drugs, Ace Laboratories, Max India, Claries Life Sciences, Gufic Ltd., etc., are also
active in such overseas investment activity. However, the top fifteen largest outward
investors from Indian pharmaceutical industry are large‐sized pharmaceutical
companies.
Geographically, developing countries are the major host of outward investments
accounting for 55.2 per cent of the total number of outward FDI projects during the
 period 1990–2000. Developed countries claimed about 37.6 per cent and Central and
Eastern Europe countries a share of 7.3 per cent.

Table 11: Wholly‐owned and Joint ‐ventures by Indian pharma companies abroad, 1990-
2000

 Note: * Total number of firms that have undertaken O ‐FDI at least once between 1990 and March
2001.
Source: i. Indian Investment Centre (1998)  Indian Joint Ventures & Wholly owned Subsidiaries Abroad 
 Approved during the year 1996 , New Delhi;
ii. Indian Investment Centre (1998)  Indian Joint Ventures & Wholly owned Subsidiaries Abroad 
 Approved up‐to December 1995, New Delhi;

Page | 55
iii. Unpublished firm level outward investment data collected from the Ministry of Finance through
Research and Information System (2002), New Delhi.

3.2.7.1.1 WOCKHARDT LIMITED

It turns out to be one of the aggressive outward investors among the Indian
 pharmaceutical firms. It has identified generics and bio‐generics as important future
growth strategies and has adopted outward investment in greenfield and brownfield
forms to achieve them. The company, at the end of 2004, made its presence felt in the
leading and emerging markets of the world via its seven subsidiaries (Table 12).
In 2004, more than 50 per cent of the consolidated sales of the company came from
overseas markets, namely the USA and Western European markets. The consolidated
sales from these markets have increased by more than 55 per cent to Rs. 6239 million in
the year 2004 from Rs. 1426 million in the year 20038. The European operation of the
company is undertaken by Wockhardt UK Ltd. in the UK and esparma GmbH in
Germany—both are wholly‐owned subsidiaries. Wockhardt UK Ltd is the integrated
and synergized entity of the two UK ‐ based companies, Wallis Laboratory and CP
Pharmaceuticals, which were acquired by Wockhardt in 1998 and 2003 respectively. It
is amongst the 10 largest generics companies in the UK and has US FDA‐approved
manufacturing facilities for injectables such as cartridges, vials and ampoules
(including lyophilized products). Wockhardt has adopted the same inorganic route to
enter into Germany, the second largest generics market in Europe after the UK. It had
acquired esparma GmbH in the year 2004 and gained a strategic and strong presence in
the high potential therapeutic segments of urology, diabetology and neurology. The
establishment of Wockardt USA Inc. is helping the company to strengthen its marketing
networks in the US, apart from support for ANDA filings with a full fledged regulatory
team.

Table 12: List of Subsidiaries of Wockhardt Limited

Source: Wockardt Annual Report 2004.

3.2.7.1.2 SUN PHARMACEUTICALS

It is one of the top 5 pharmaceutical companies in India with strong manufacturing
focus on speciality bulk actives of over 90 bulk drugs including ornidazole, iopamidol
and iohexol and formulations. Its manufacturing facilities at four plants have US and
European approvals for compliance with international good manufacturing practices,
safety and quality. Like many other Indian pharmaceutical firms, overseas investment
has been a key strategy for Sun Pharmaceuticalʹs drive for internationalization. Apart
from exporting, the company has gone for overseas acquisition, greenfield investment
and joint ventures to serve the international market. It has eight subsidiaries catering to
the different regions of the international market (Table 13). Caraco Pharmaceutical

Page | 56
 Laboratories provided a presence of the company in high value generic markets in the
US. Subsidiaries in Brazil and Mexico have recently been started to strengthen the
company’s presence in the Latin American markets, besides commissioning a
manufacturing facility in Bangladesh. Since 1996, the company has used overseas
acquisitions to gain access to markets and manufacturing capabilities. It had acquired
about 30 per cent equity in Detroit‐ based Caraco Pharm Labs in 1997 and Hungary-
 based Valeant Pharmaʹs manufacturing operation in 2005, apart from several brand
acquisitions. International sales account for about 28 per cent of the company’s total
sales in 2005 (Table 15). Between 2004 and 2005, the international sales of the
company have grown twice the growth rate of the domestic sales, suggesting increasing
internationalization of the company. In this process of internationalization, overseas
subsidiaries have played an important role. For example, the US sales of the company
are increasingly driven by its subsidiary, Caraco Pharmaceutical Labs: “Increasing US
sales at our subsidiary, Caraco, building on the advantage of backward integration, have
helped it compete more aggressively in the competitive US generic market.” (Sun
Pharmaceutical Annual Report, 2004–05, pp 2)

Table 13: List of Subsidiaries of Sun Pharmaceutical Industries Ltd.

Table14: Consolidated sales of Sun Pharma and Subsidiaries, Rs million

Source: Sun Pharmaceutical Annual Report, 2004–2005, pp. 2.

3.2.7.1.3 CORE HEALTHCARE LIMITED (CHL)

Page | 57
 Gujarat‐ based Core Healthcare Limited (CHL), leading manufacturers of intravenous
(IV) fluids, has planned an aggressive entry into international markets. It is supplying
  products to more than 70 countries, exporting more than 35 per cent of the total
 production. In 2002, the production of intravenous (IV) fluid reached the one billion
mark and the company had attributed this achievement to its international operations,
distribution network and quality of products. It is the first Indian pharmaceutical
company to receive the ISO certification. The company has about 600 outlets across the
country and has a 40 per cent market share in IV business. Maintaining highest levels of 
quality and resorting to joint ventures with overseas strategic partners has been crucial
for higher export performance. In 1997, the company has set up a joint venture with
Uzpharmprom in Uzbekistan for manufacturing IV fluids and tablets. In 1999, the
company established two manufacturing plants for IV fluids, tablets and penicillin
capsules in Myanmar and Malaysia. The Myanmar plant is build for Government of 
Myanmar at the cost of $5 million, located near Yangon. It provides the most modern
healthcare facilities like high quality I.V. fluids and other pharmaceutical products in
Myanmar. However, despite maintaining growth and emphasizing on
internationalization, the company could not improve its economic performance. The
financial strength of the company was severely hurt due to delayed and high‐cost of 
financing since 1996 and internal resources were not enough for meeting the high
growth plan adopted by the company and also partly due to management concerns. As a
result, the company emerged as one of the biggest bank defaulters companies and has
 been referred to the Board of Industrial and Financial Reconstruction (BIFR) in March
2000 to be declared as a sick unit. In December 2004, the company with its assets and
liabilities was acquired by another company named Nirma Ltd.

3.2.7.1.4 AJANTA PHARMACEUTICAL

Ajanta Pharmaceutical is another Indian company that has adopted outward investment
as a strategy to improve its position in international markets. It has some eight
transborder subsidiaries and joint ventures (Table 15). Geographically, majority of these
outward ventures are directed at the CIS (Commonwealth of Independent States)
markets such as Kazakhstan, Tajikistan, Uzbekistan and Kyrgyz Republic. Subsidiaries
in two countries such as Mauritius and Turkmenistan have world‐class manufacturing
facilities with state‐of ‐the‐art infrastructure to manufacture various dosage forms
like tablets, capsules, injections, ointments and powders. These are two subsidiaries that
are performing well with profits and are expected to improve their performance
substantially. However, other overseas ventures such as Ajanta Pharma (Tashkent),
Tajik Ajanta Pharma, Kazakh Ajanta Pharma, Surkhan Ajanta Pharma and Kyrgyz
Ajanta Pharma have turned out to be non‐ performing ventures and the company is in
the process of exiting from all of them. The company realized that outward FDI meant
for producing in the foreign markets may not always be a profitable option of market
serving. Rather outward FDI in the form of opening own marketing offices and trade
supporting networks that ensure prompt delivery and follow‐up programs is helpful
for exporting from the home country. The company with a view to expand overseas
 business operations has established an extensive marketing network in foreign markets.
This has helped the company to access the international markets extensively and
 presently it exports to over 50 countries around the world with exports accounting a
substantial part of the total revenues. In 2004–05 exports constituted about 80 % of the
sales as compared to 72 per cent in 2003–04.

Page | 58
Table 15: Subsidiaries and Joint Ventures of Ajanta Pharmaceutical

Source: Ajanta Pharma Annual Report 2003–04.

3.2.7.1.5 STRIDES ARCOLAB LIMITED

This company provides an example of a very young pharmaceutical company
successfully expanding business in international market. Since its beginning in 1990 as
a small pharmaceutical company engaged in formulations, Strides Arcolab has grown to
 be a Rs. 500 crore company and among top 15 pharmaceutical companies in India. Its
manufacturing activities now cover a spectrum of ethical pharmaceutical products, OTC
 products and nutraceuticals. It is one of the top five softgel capsule manufacturers in the
world with twelve internationally approved manufacturing plants in USA, Mexico,
Brazil and India. The company has established strong marketing capabilities overseas
with marketing presence in 49 countries. As a result of the trade‐supporting type of 
FDI that the company has undertaken in the past, a substantial part of its revenue is
contributed by exports. During 2004–05, exports accounted for about 92 per cent of 
sales of the company. Apart from undertaking exports and marketing activities, the
company has strongly gone for direct production overseas. It has about twelve overseas
subsidiaries across the world (Table 17) and about 95 per cent of its global revenues is
contributed by foreign markets (Table 16). This indicates that Strides is largely a
multinational firm with business strategies and planning is more focused on global
markets.

Table 16: Geography of Strides Arcolab’ Revenues, 2002–03 to 2003–04

Page | 59
Source: Based on Strides Arcolab Annual Report 2003–04, pp 1.8.

Table 17: Subsidiaries and Joint Ventures of Strides Arcolab

Source: Strides Arcolab Annual Report 2003–04

There are several other Indian pharmaceutical firms such as Dabur, Dr. Reddy, Natco
Pharma, and others who have pursued the strategy of greenfield outward investment to
expand business globally. As growing number of firms are undertaking this route of 

Page | 60
globalization, this indicates that Indian pharmaceutical companies are more global now
than ever before.

3.2.7.2 Brownfield Overseas Investment

Last ten years or so have seen Indian pharmaceutical firms progressively adopting
  brownfield investment as an alternative strategy for trans‐  border growth through
acquisitions of business enterprises abroad. The number of investments for overseas
acquisitions increased significantly from just 1 in 1995 to 21 in 2005 (Table 18).
Between 1997 and 2005, the amount of consideration involved in overseas acquisitions
has increased by 71 times from just $7.5 million to reach $532.9 million. At the end of 
March 2006, Indian pharmaceutical companies have undertaken $1663 million worth of 
investments in acquiring overseas pharmaceutical companies, brands and R&D
laboratories. Most of these acquisitions, nearly 76 per cent of the overseas acquisition
cases, are directed at developed markets like Europe and North America. Developing
countries accounted for just about 18 per cent and Central and Eastern Europe about 5.6
 per cent. This shows that overseas acquisition activities of Indian pharma companies are
largely developed market oriented and apart from being as market entry strategy, such
activities are motivated to acquire foreign research capabilities, skills and intellectual
 properties.

Table 18: Overseas Acquisitions by Indian Pharmaceutical Companies, 1995 to March 2006

 Note: In calculating amount of consideration only those acquisition deals are included
for whom information on consideration is available.

Table 19: Overseas Acquisitions by Indian Pharmaceutical Companies, 1995 to March 2006

Page | 61
Page | 62
Page | 63
Page | 64
 3.2.7.2.1 RANBAXY LABORATORIES
Ranbaxy emerged as the largest overseas acquirer with 11 acquisitions during 1995– 
2006 (Table 19). In September 1995, the company acquired Ohm Laboratories based in
 New Brunswick, New Jersey. This is an important strategy since the company entered
the US market in 1994. This acquisition provided Ranbaxy’s access to advanced
manufacturing capabilities and processes to manufacture quality OTC (over-the‐
counter) drugs, branded and generic products and helped in developing its presence in
the US OTC market. In April 2000, the company acquired Basics GmbH, the generics
 business of Bayer in Germany for a consideration of $4 million. Apart from Ranbaxy’s
entry into the third largest generics market of the globe, the deal has expanded its
 product portfolio by another twenty products hitherto marketed under Basics. The year 
2002 saw three overseas acquisitions by Ranbaxy. It has acquired Veratide, an
antihypertensive brand from Procter & Gamble Pharmaceuticals in Germany. This
 brand acquisition is to further strengthen Ranbaxy’s presence in the German market by
augmenting Basics’ cardiovascular product portfolio. The second acquisition in the year 
2002 is liquid manufacturing facility from the New York ‐  based Signature
Pharmaceuticals Inc. This manufacturing facility with its latest testing, research and
quality assurance capabilities is a strategic fit for Ranbaxy’s business in the US for the
 production of certain liquid‐ based dosage forms. The third acquisition in the year 
2002 is that of acquiring 10 per cent equity stake in a generic company named Nihon
Pharmaceutical Ltd in Japan. As a part of this acquisition, Ranbaxy and Nippon
Chemiphar Limited (NC), the parent company of Nihon Pharmaceutical, entered into a
strategic alliance to launch Ranbaxyʹ s ethical and drug delivery system based
  products, besides generics in the Japanese market. In December 2003, Ranbaxy
acquired France’s fifth largest generic player, RPG Aventis and its subsidiary, OPIH
SARL, for $86 million20. This acquisition, a move by the company to expand its
European position through France, has placed it amongst the top generic companies in
the French market. It also added to Ranbaxy’s product portfolio by another 52
molecules of which 18 are among the 20 best selling molecules in the French market.
With the dual purpose of securing presence and augmenting existing product portfolio
in Spain, Ranbaxy has acquired a generic product portfolio covering eighteen products
from the Spanish pharmaceutical company Efarmes, SA. This acquisition has helped
the company to significantly improve its ability to provide a wide range of quality
generics belonging to the cardio vascular system (CVS), central nervous system (CNS)
and pain management segments. In March 2006, Ranbaxy announced four overseas
acquisitions, namely patents for autoinjector device of Senetek, unbranded generic
 business of Allen SpA, Terapia and Ethimed NV. The first overseas acquisition is a
strategy of acquiring firm‐specific intangible assets for autoinjector business.
Ranbaxy acquired patents, trademarks and equipment used for the self ‐administration
of medicines from the US company Senetek. The second one concerns with the
company’s entry strategy into the Italian generic market. The acquisition of unbranded

Page | 65
 generic business of Allen SpA, a division of GlaxoSmithKline, ensures Ranbaxy’s
access to the Italian market, one of the fastest growing markets in Europe. The third
acquisition involved the two low cost manufacturing capacities of Terapia, which
would allow Ranbaxy to leverage its new found production base in the Romanian
 pharmaceutical market to strengthen its presence in the European Union and the CIS
markets. As a part of this deal, Ranbaxy’s product portfolio has been expanded by
Terapia’s product basket of 157 marketing authorisations with a strong focus on the fast
growing CVS, CNS & musculoskeletal therapeutic segments. The fourth acquisition is
in continuation of the company’s strategy to strengthen its global position in the generic
market. The acquisition of Ethimed, among top ten Belgium generics companies, would
 provide a strong manufacturing and marketing base for Ranbaxy to expand business
operations in the Benelux countries.

3.2.7.2.2 GLENMARK PHARMACEUTICALS

Glenmark Pharmaceuticals emerged as the second aggressive overseas acquirers from
Indian pharmaceutical industry with five overseas acquisitions each. Of the five
acquisitions done by Glenmark Pharmaceuticals, two are brand acquisitions and other 
three involve acquisition of manufacturing/marketing companies. In April 2004,
Glenmark acquired a Brazilian firm, Laboratorios Klinger, for $5.2 million. The
acquired entity has manpower of 176 employees and 91 sales representatives, besides
one manufacturing facility. With 21 approved product registrations in Brazil, this
acquisition would provide Glenmark an existing presence in branded generics and
over ‐the‐counter (OTC) drugs segment of the Brazilian market. The company
acquired two FDA approved products from Clonmel Healthcare Ltd. In August 2004,
and the hormonal brand, Uno‐Ciclo, from Instituto Biochimico Indústria Farmacêutica
Ltda for $4.6 million in March 2005. With a plan to expand business in the Argentine
  pharmaceutical market, Glenmark has acquired a marketing company Servycal SA
engaged in cancer ‐related products. The acquired company has a strong retail and
hospital presence in Argentina and apart from Argentina, its products are registered in
12 other countries in South America. In December 2005, Glenmark acquired Bouwer 
Bartlett, a South African sales and marketing company, for gaining entry into the South
African market, which is one of the largest and fastest growing pharmaceutical markets
in Africa. The acquired entity currently has a basket of 22 products mostly covering the
dermatology segment and this acquisition would help the long‐term strategy of 
Glenmark to emerge as a company having its own marketing channels for drugs.

3.2.7.2.3 SUN PHARMACEUTICAL

Sun Pharmaceutical has undertaken five overseas acquisitions between 1997 and 2006
(Table 19). To enter the lucrative US generic markets, it has acquired about 30 per cent
equity stakes in Detroit‐ based Caraco Pharm Labs in 1997. The acquired company is
engaged in manufacturing and marketing of generic‐drugs. Subsequently additional
stakes were obtained in 2002 and 2004, to increase the total holding to about 63.14 per 
cent. Initially, this US strategy seems to have been costly for Sun Pharmaceutical as
Caraco generated large losses as compared to revenues. In 1999, its loss was $9.3
million as compared to $2.89 million sales. The development expenses incurred by
Caraco to get Sunʹs generic drugs into the US market constitute a substantial part of 
this loss.
However, twenty‐four months later, this US story was a bigger success. Caraco’s sales
grew by 24 per cent, owing to Sun’s products during the first half of 2005–06, double
the growth rate of the US generics market. This is impressive since the market is

Page | 66
 witnessing severe price erosion and the sales of other Indian players in the US like
Ranbaxy and Dr Reddy’s has fallen sharply. In September 2004, Sun Pharmaceutical
 purchased three brands belonging to synthetic anti‐ bacterial Bactrim, gynaecological
Ortho‐Est andand the
the ant
antii migra
‐ igrain
inee pre
prepa
para
rattion
ion Mid
Midrrin,
in, fr
from US
‐US base
based
d Wo
Women s
ʹ

First Healthcare for about $5.4 million. In the same month, it has also bought a dosage
form plant at Bryan, Ohio. As a part of its strategy to enter the European generic
market, the company bought Valeant Pharma’s Hungarian manufacturing facilities in
August 2005. In November 2005, Sun Pharma acquired the dosage form manufacturing
oper
operat
atio
ions
ns of the
the US base
‐ based
d Able
Able Labo
Labora
rato
torie
riess for
for $23.
$23.15
15 mill
millio
ion.
n. The deal
deal also
also
includes intellectual property for 40 product portfolio being marketed by Able. These
acquisition strategies of manufacturing plants, brands and intellectual properties have
helped the company to quickly establish its presence in the new market, move into new
areas and boost its global operation.

3.2.7.2.4 OTHERS
The next group of aggressive overseas acquirers includes three Indian
Phar
Pharma
mace
ceut
utic
ical
al firm
firms,
s, name
namely
ly Dr Redd
Reddyyʹ s Labo
Laborarato
tori
ries
es,, Jubi
Jubila
lant
nt Orga
Organo nosy
syss and
and
Stides Arcolab with four acquisitions each (Table 19). Aurobindo Pharma, Nicholas
Piramal India and Wockhardt, with three acquisitions, have emerged as other important
overseas acquirers. Dishman Pharmaceuticals
Pharmaceuticals and Matrix Laboratories have undertaken
undertaken
two overseas acquisitions while other firms like Kemwell, Malladi Drugs, Marksans
Pharma, Natco
Natco Pharma, Suven
Suven pharmaceuticals,
pharmaceuticals, Torrent Pharmaceutica
Pharmaceuticals,ls, Unichem
and Zy
Zydus
dus Cadil
Cadilaa have
have one overas
overases
es acquis
acquisiti
ition
on each.
each. Th
Thisis sugge
suggests
sts that
that Indian
Indian
  pharma
pharmaceut
ceutical
ical firms
firms are aggressiv
aggressively
ely pursuing
pursuing mergers
mergers and acquisiti
acquisitions
ons route to
 become global players by acquiring new technology, brands and production capabilities
capabilities
abroad.

3.2.7.3 Contract Manufacturing and Strategic Alliances

Alli ances

3.2.7.3.1 Contract Research

In 2002, the industry for clinical trials in India was $ 70 million. This market
market is growing
at a rate of 20% per annum. According to experts, it will be an industry worth anywhere
 between $500 million to $1.5 billion by 2010. The global R&D spend is to the tune of 
$60 billion, of which the non-clinical segment accounts for $21bn and the clinical
segment accounts for $39bn. In terms of Indian prices, this translates into $7bn (at 1/3rd
of US/EU costs) and $7.8 bn (at 1/5th of US/EU costs) repectively. This constitutes a
total potential of $14.8bn for the Indian pharma companies.

3.2.7.3.2 Contract manufacturing

Many
Many global
global pharma
pharmaceut
ceutical
ical majors
majors are looking
looking to outsourc
outsourcee manufac
manufacturin
turing
g from
Indian companies, which enjoy much lower costs (both capital and recurring) than their 
western counterparts. Many Indian companies have made their plants cGMP compliant
and India is also having the largest number of USFDA-approved plants outside USA.
The Pharma companies are going for compliance
compliance with International regulatory agencies
like USFDA, MCC etc. for their manufacturing facilities.
Very recently contract manufacturing emerged as a new growth strategy for many
Indian pharmaceutical companies, besides offering contract services like marketing,
rese
resear
arch
ch,, clin
clinic
ical
al tria
trials
ls,, data
data mana
managegeme
mentnt and
and labo
labora
rato
tory
ry serv
servic
ices
es to glob
global
al
 pharmaceutical companies. The process of outsourcing brings substantial economic
gains to large global firms as they contract the production of their products to those who

Page | 67
 can work cost effectively and qualitatively and thus relieve them to focus on their core
compet
competenc
encies
ies and high
high value
value added
‐ added operati
operations
ons like researc
researchh and marke
marketin
ting.
g. Indian
Indian
  pharma
pharmaceut
ceutical
ical compani
companies
es with
with their
their low cost manufac
manufacturin
turingg capabili
capabilitie
tiess meeting
meeting
international regulatory
regulatory standards, expertise in process research and easy availability of 
qualified workforce in India are better placed globally to get real boost from this global
trend of outsourcing. For Indian firms, outsourcing and strategic alliances not only
 provide additional sources of revenues, but also access to new technologies, marketing
networks and best business practices abroad. A large number of Indian companies
diversified into the business of contract manufacturing in the 1990s. A few names can
  be mentione
mentioned d like Ranbaxy
Ranbaxy Laborat
Laboratories
ories,, Lupin
Lupin Labs,
Labs, Nichola
Nicholass Piramal
Piramal,, Dishman
Dishman
Pharm
Pharmace
aceuti
utical Diviʹs Labor
cal,, Divi Laborat
atori
ories,
es, Matri
Matrixx Labor
Laborato
atorie
ries,
s, Shasun
Shasun Chemica
Chemicals ls and
Jubilant Organosys.

3.2.7.3.2.1 Ranbaxy Laboratories was one of the first Indian companies to adopt the
strategy of contract manufacturing, licensing and collaborative research to strengthen its
competitive strength in India and overseas markets. It entered into a joint venture with
Eli Lilly of USA in 1992 to market selected Lilly products in India and in 1993 Eli Lilly
started sourcing Cefaclor intermediates from Ranbaxy. In 2002 Ranbaxy entered into
two overseas agreements for reverse outsourcing. In June 2002, Schwarz Pharma AG of 
Germany announced a licensing deal with Ranbaxy to acquire the exclusive rights of 
deve
develolopi
ping
ng,, marke
marketi ting
ng and dist
distri
ribu
buti
ting
ng Ranb
Ranbaxaxy
ʹy s New Che Chemi
mica
call Entit
Entity
y RBx
RBx 225
‐ 22588
for the treatment of Benign Prostate Hyperplasia
Hyperplasia in USA, Japan and Europe. As per the
agreement Ranbaxy would manufacture and supply finished formulations of the product
to Schwarz Pharma. Adcock Ingram formed a joint venture with Ranbaxy to obtain
exclusive selling and
distri
distribut
buting
ing rights
rights of Ranb axyʹ s range
Ranbaxy range of anti
anti‐retroviral products in South Africa. In
Febr
Februauary
ry 2002002, Ranb
Ranbax
axyy Labo
Labora
rato
tori
ries
es conc
conclu
lude
dedd an agre
agreem
emenentt with
with Penw
Penwes
estt
Pharmaceuticals
Pharmaceuticals of USA to get exclusive marketing rights of Nifedipine XL in selected
markets such as China, Malaysia, Singapore, Thailand, Philippines, South Africa, and
Sri Lanka and non‐exclusive rights in Mexico. The agreement also provides for joint
development of other controlled release products. In July 2003, Ranbaxy Laboratories
announced a strategic marketing alliance with Mallinckrodt Baker Inc (MBI), USA, to
marke
markett MBI
MBI JT Baker
Baker and Mallinc
Mallinckro dtʹ s range
krodt range of scientif
scientific
ic laborat
laboratory
ory produc
products
ts in
the Indian market. A collaborative research agreement was reached between Ranbaxy
and ‘Medicines for Malaria Venture’ (MMV) of Geneva to develop anti‐malarial
drugs in May 2003. Another collaborative research agreement with GlaxoSmithKline
GlaxoSmithKline of 
UK for new drug discovery and development of new chemical entities for selected
ther
therap
apeu
euti
ticc grou
groups
ps usin
using GSKʹ s port
g GSK portfo
foli
lio
o of pate
patent
nted
ed mo
molelecu
cule
less was
was reac
reache
hed
d in
October 2003. In June 2004 Ranbaxy obtained an exclusive licensing agreement from
Atrix
Atrix Labor
Laboratoatorie
riess to devel
develop
op and comme
commercirciali
alize
ze the latter
latter’s
’s produc
product,
t, Eliga
Eligard®
rd®
(leuprolide acetate for injectable suspension), in India.

3.2.7.3.2.2
3.2.7.3.2.2 Starting with
with the experience of contract supplying
supplying a key intermediate
intermediate for 
the tuberculostatic ethambutol for American Cyanamid, Lupin Laboratories is also an
early player into the business of contract manufacturing and alliances. In February
2004, Lupin entered into an agreement with Baxter Healthcare Corporation of the USA,
whereby the latter will exclusively distribute Lupin’s generic version of ceftriaxone
sterile vials for injection in the USA market. In another agreement in the same year with

Page | 68
 Aller
Allergan
gan Inc of the US,
US, LuLupin
pin will
will prom
promote
ote Zy
Zyma
marT
rTM
M (gati
(gatiflo
floxac
xacin
in ophth
ophthalm
almic
ic
solution) in the US pediatric specialty segment. In February 2006, Lupin entered into a
  joint venture agreement with Aspen Pharmacare Holdings of South Africa for the
development, manufacture and global marketing (except US, South Africa & India) of 
selected Anti‐TB products. This joint venture is motivated to derive synergies from
Lupin’s strengths in Anti‐TB formulations and Active Pharmaceutical
Pharmaceutical Ingredients and
Aspen’s a range of MDR ‐TB products. In March 2006, in a marketing agreement with
Chester Valley Pharmaceuticals, Lupin will promote Atopiclair™ Nonsteroidal Cream
to paediatricians in the US. These cases show that Indian pharmaceutical firms like
Lupin with their extensive sales networks and sales force in the overseas markets are
entering into marketing agreements with global firms to market the latter’s products.

3.2.7.3.2.3  Nicholas Piramal India is among the leaders in the contract‐research

and
manufact
manufacturing
uring provider
providerss from the Indian
Indian pharmace
pharmaceutica
uticall industry.
industry. The company
company’s ’s
strategies of not infringing upon the intellectual property rights of its customers and
competitors and of not entering into the lucrative overseas generic markets, led to its
emergence as a strong outsourcing partner for the global innovating firms based in the
developed markets. In December 2003, Nicholas Piramal got a five‐year outsourcing
deal from Advanced Medical Optics Inc. of the US. As per the deal, Nicholas Piramal
will supply the opthalmic products to the American company for developed markets
like the US, Europe and Japan. Additional annual revenue in the range of around $ 15– 
25 million is expected from this contract manufacturing arrangement. In the same year 
the company entered into an agreement with the US‐  based Minrad for exclusive
distribut
distribution
ion and marketi
marketingng of a new generation
generation of inhalatio
inhalation n anesthet
anesthetic
ic product
products.
s.
 Nicholas Piramal through its distributors and marketing agents would market three
  products, namely Isoflurane, Enflurane and Sevoflurane in Russia, Ukraine, Nigeria,
Kenya, Sudan, Syria, Jordan, Iran, Eygpt and Bangladesh. The year 2004 has seen
  Nich
Nichola
olass Piram
Piramal al enter
entering
ing into
into strate
strategic
gic allian
alliance
ce with
with Pierre
Pierre Fabre
Fabre of Franc
Francee to
excl
exclus
usiv
ivel
ely
y sell
sell the latterʹ s derm
latter dermat
atol
olog
ogyy‐related or skincare products in India and
getting two new custom manufacturing agreements from two US drug companies,
which are expected to add $30 million revenues per annum. One contract deal is from
Allergan Inc of the US to whom Nicholas Piramal would supply two eye‐related,
anti‐glau
glauco
coma
ma actiactive
ve phar
pharma
mace
ceut
utic
ical
al ingr
ingred
edie
ient
nts,
s, name
namely ly Levo
Levobu
bunol
nololol and
and
Brimonidine.
Brimonidine. In November
November 2005, AstraZeneca
AstraZeneca AB, Sweden,
Sweden, signed a development
development and
know‐how agreement with Nicholas Piramal. As per this agreement, Nicholas Piramal
is chosen as a partner in development of processes for the manufacture of intermediates,
active ingredients or bulk drugs for supply to AstraZeneca. In December 2005, a long‐
term contract manufacturing agreement between Pfizer International LLC and Nicholas
Piramal was signed for animal health products. Under this agreement,
agreement, Nicholas Piramal
will
will develop
develop processe
processess for Pfizer,
Pfizer, provide
provide scale
scale‐up batche
batchess for Phase trial
trialss and
contract manufacture after the product is launched.

3.2.7.3.2.4 A pure pure cont

contra
ract
ct‐manufact
manufacturing
uring player,
player, Dishman
Dishman Pharmac
Pharmaceuti
euticals
cals,,
signed
its first contract manufacturing agreement with Solvay Pharmaceuticals of Netherlands
in 2001 for production and supply of an active ingredient of an anti‐
hypertension drug, Teveten, still under patent. This was the first case of a patented
molecule to be manufactured in India on a contract basis. The contract is for eight years

Page | 69
 with an estimated value of more than $10 million. Since then it is providing contract
services to a growing number of global pharmaceutical firms including AstraZeneca,
GlaxoSmithKline and Merck. In July 2005, Dishman entered into an agreement with
  NU SCAAN of the UK to develop and manufacture bulk actives for nutraceutical
 products of NU Scaan.

3.2.7.3.2.5 Shasun Chemicals and Drugs is another aggressive contract manufacturer 

from the industry. In the third quarter that ended on December 2005, contract research
and manufacturing business contributed about 12 per cent of the turnover of the
company. The company, which had experience of contract manufacturing for Indian
companies such as Ranbaxy Laboratories and Glenmark has expanded its focus to
foreign pharmaceutical companies since 1999. It has entered into a joint venture with
the US based company, Austin Chemical, in December 1999. The primary focus of the
venture is on joint process development and custom manufacturing to serve
multinational pharmaceutical companies operating in the regulated American market. In
June 2004, it had entered into a strategic partnership with another US firm, Eastman
Chemical, to collaborate on the development and manufacture of performance
chemicals for the pharmaceutical industry. In May 2005, US firm Codexis and Shasun
entered into a manufacturing and supply agreement under which Shashun will
manufacture the intermediate for a generic drug and Codexis will market the products
worldwide to the generic pharmaceutical industry. The company has other strategic
  partnerships for supplying ranitidine (anti‐ulcer drug) and ibuprofen (anti‐
inflammatory pain reducer) to the US‐ based Apotex and for anti TB drugs with Eli
Lilly.

The above discussed cases demonstrate that Indian pharmaceutical companies have
adopted contract manufacturing as a means of expanding overseas business links and
very recently this has taken the form of contract research services to big multi-nationals
companies. This technological partnership with global players has been seen across the
firms, irrespective of size differences. The most recent example of strategic
technological agreement is the case of Jubilant Organosys entering into a five‐year 
R&D contract with Eli Lilly in January 2006. Under this agreement, Jubilant would
 provide a range of collaborative drug discovery services to Eli Lilly, the US‐ based
  pharmaceuticals company. These growing numbers of R&D contracts not only
acknowledge the research capabilities of Indian companies, but also provide them with
technological learning to emerge as global players albeit in cooperative relationship
with global companies from developed countries.

To summarize, Indian companies are proving to be better at developing APIs than their 
competitors from target markets and that too with non-infringing processes. Indian
drugs are either entering in to strategic alliances with large generic companies in the
world of off-patent molecules or entering in to contract manufacturing agreements with
innovator companies for supplying complex under-patent molecules.
Some of the companies like Dishman Pharma, Divis Labs and Matrix Labs have been
undertaking contract jobs for MNCs in the US and Europe. Even Shasun Chemicals,
Strides Arcolabs, Jubilant Organosys, Orchid Pharmaceuticals and many other large
Indian companies started undertaking contract manufacturing of APIs as part of their 
additional revenue stream. Top MNCs like Pfizer, Merck, GSK, Sanofi Aventis,
 Novartis, Teva etc. are largely depending on Indian companies for many of their APIs
and intermediates. The Boston Consulting Group estimated that the contract

Page | 70
manufacturing market for global companies in India would touch $900 million by 2010.
Industry estimates suggest that the Indian companies bagged manufacturing contracts
worth $75 million in 2004.

Figure 21: Contract Manufacturing Service Providers Across the Service Chain

Table 20: Select Contract Manufacturing Deals in India

Page | 71
 3.2.7.4 Raising Resources Abroad
In 1990s, Indian pharmaceutical firms have increasingly drawn on the global avenues of 
financing for their growth. As increasing number of Indian firms are setting up
subsidiaries abroad or going for inorganic growth through overseas acquisitions, they
need to raise resources for these purposes. In true sense of internationalization, their 
finance‐raising activities have spilled over the national boundary. A large number of 
firms have raised resources abroad by issuing Foreign Currency Convertible Bonds
(FCCBs) and from foreign capital markets like Luxembourg, New York, London, and
Singapore by sponsoring GDRs (Global Depository Receipts) and/or ADRs (American
Depository Receipts). Since Indian pharmaceutical firms already have good business
record and brand image in the regulated markets, tapping the global financial markets
 becomes easier for them. A good number of firms including Ranbaxy Laboratories, Dr 
Reddyʹs Laboratories, Matrix Laboratories, Sun Pharmaceuticals, Nicholas Piramal
India, Cipla, Jubilant Organosys, Strides Arcolab, Lupin, Glenmark Pharmaceuticals,
Cadila Healthcare, Wockhardt Ltd, Biocon, Dishman Pharmaceuticals and Torrent
Pharma have been observed to have raised resources abroad in recent years.

3.2.8 Exports
The exports constitute almost 40% of the total production of pharmaceuticals in India.

Page | 72
 India’s pharmaceutical exports are to the tune of $3.5 bn currently, of which
formulations contribute nearly 55% and the rest 45% comes from bulk drugs.
The export revenue now contributes almost half of the total revenue for the top 3
  pharma majors: Dr Reddy’s, Ranbaxy and Cipla. The other major exporters are
Wockhardt Limited, Sun Pharmaceutical Industries Ltd and Lupin Laboratories. The
formulations and exports are largely to developing nations in CIS, South East Asia,
Africa, and Latin America. In the last 3 years generic exports to developed countries
have picked up.

Table 21: Exports of Drugs, Pharmaceuticals and fine chemicals

Table 22: Growth of pharmaceutical exports

Source: DGCIS

3.2.9 Market Segmentation

Due to high level of fragmentation none of the players had a market share of more than
6 % (even the top players Cipla & Ranbaxy commands only 5.24 & 5.09 per cent
market share on the basis of retail sales respectively).

Figure 22: Market share of top players

3.2.10 Conclusions and Policy Options

Page | 73
 It has been a long journey for the Indian pharmaceutical industry from being merely an
import dependent to emerge as a self ‐reliant producer and later as an innovation‐
driven developing country competitor in the global market. The government of India
has employed a variety of policy tools to develop the domestic pharmaceutical sector 
and to protect it from large multinational firms operating in and dominating the
industry. The starting of public sector pharmaceutical companies for indigenous
 production of drugs has been the initial form of government intervention. Later, a soft
  patent regime was adopted since 1970, which led the domestic sector on a new
technological trajectory and as a result, a technologically vibrant domestic sector with
remarkable technological capabilities to develop new cost‐effective processes and
new drug delivery systems has emerged. This technological growth has also been
contributed partly by the progress that India achieved in building its scientific,
managerial, and general skills, which are readily and cheaply available to the industry
for productive purposes. These national policies, thus, have contributed to the rise of the
Indian pharmaceutical industry and to make it competitive in the world markets as
among the cheapest producers of drugs internationally.
While the Indian policy regime has succeeded in bringing out its pharmaceutical sector 
as among the fastest growing in the world, but it has also created its own limitations in
 pushing forward its productivity and technological activities. The fragmented nature of 
  policy that had encouraged a large number of small‐ and medium‐sized
 pharmaceutical firms appears to have placed a constraint on the scale of production and
capabilities to further upgrade the technological strength. Due to these factors,
 productivity and R&D intensity of the Indian pharmaceutical industry is lowest among
countries. Although, India has consistently enjoyed a favourable trade balance in
 pharmaceutical products, its export share is still hovering around just one per cent. The
 policy liberalization of the past decade or so like liberalization of foreign investment,
trade and industrial policy and shift towards a strong patent regime postulated by the
TRIPs at the global, regional, bilateral levels and across individual countries has opened
up new competitive challenges for the Indian pharmaceutical sector. Many Indian
 pharmaceutical firms are adopting new internationalization strategies for meeting such
challenges and achieve their goal for global growth. They are strengthening their 
geographical presence by starting their own subsidiaries and affiliates in different
strategic overseas markets. Apart from undertaking green‐field investments, they are
also aggressively acquiring overseas business enterprises, brands and research facilities.
Strategic alliances with and contract manufacturing, R&D and marketing for 
 pharmaceutical companies from developed countries are also being employed by Indian
 pharmaceutical companies. For financing their global expansion, Indian pharmaceutical
firms have been increasingly entering into global securities and finance markets.
The Indian government can take several policy measures for enhancing the nation’s
competitiveness in the pharmaceutical sectors. A fragmented domestic market marked
 by a lower degree of domestic competition is not conducive for global competitiveness.
Hence, policy measures are needed to encourage mergers and acquisitions among
domestic firms to offset the scale disadvantage and to overcome the trap of low R&D
intensity. Increases in average firm size through M&As until the concentration index of 
the Indian pharmaceutical industry rises significantly, may result in improving India’s
competitive advantages in the pharmaceutical sector. Government policies that
encourage overseas acquisitions by the Indian companies for brands, technology and
market access can also be important for strengthening firms’ technological capabilities.
Incentives and facilitation policies for encouraging global pharmaceutical companies to
outsource their production and R&D works to Indian firms shall be put in place. Data

Page | 74
  protection, investment and tax allowances for the outsourced production and R&D
works, etc can be useful policies. The provision of low cost finance for research with
subsidy facilities for indigenous research activities continues to be a key to competitive
strategy.

Competitiveness of the Indian pharmaceutical industry

Post 2005 scenario

By issuing the patent ordinance, India met a WTO commitment to recognize foreign
 product patents from January 1, 2005, the culmination of a 10-year process. In this new
scenario, the Indian pharmaceutical manufacturers won’t be able to manufacture
 patented drugs.
To adapt to this new patent regime, the industry is exploring business models, different
from the existing traditional ones.
New Business Models include:
• Contract research (drug discovery and clinical trials)
• Contract manufacturing
• Co-marketing alliances

Figure 23: Emerging models to capture the outsourcing opportunity

Page | 75
The focus of the Indian pharma companies is also shifting from process improvisation
to drug discovery and R&D. The Indian companies are setting up their own R&D
setups and are also collaborating with the research laboratories like CDRI, IICT etc.

Table 23: Government Run Research Organizations - Industry Collaborations

Page | 76
3.3.2 Threat from China

Page | 77
 China is becoming a major competitor to India, especially in exports of active
 pharmaceutical ingredients (APIs). China’s pharmaceutical industry ranks n o.7 in the
world and is expected to become the world’s 5th largest by 2010. China’s domestic
drug sales have been estimated at about US$8 billion in 2003 and the exports are
growing at the rate of about 20% per annum.
The reasons for Chinese competitive advantage are:
3.3.2.1 The electricity costs are lower in China as compared to India. The power costs
range from Rs.1.50 to 2.50 per KWH as against Indian cost of Rs.4.5 to 6.0 per KWH.
3.3.2.2 Labour charges are 40% lower in China than India.
3.3.2.3 More favourable labour policies like policy of hire and fire
3.3.2.4 China has established a large number of profit oriented research and
development institutions, which are today independent of government funding in
contrast to institutions in India, which are mostly dependant on government funding.
3.3.2.5 The Chinese government provides an income tax holiday of 100 per cent for the
first two winning years (profit making years) and 50 per cent for the next 3 years.
3.3.2.6 The companies are also allowed duty free import of capital equipment.
3.3.2.7 Lower turnaround time for ships at Chinese ports make it conducive as a base
for exports.

China is an important source of chemical and APIs, whereas India is stronger on the
finished product / formulation side. A comparison of competencies of the two countries
is presented below

Table 24: Competencies of India and China

India is the second largest export destination for bulk drugs / APIs for China (after US)
and exports to India grew at 42 % in 2006, wheras exports to US grew at 9 %.

If China and India can collaborate, CHINDIA can lead the world pharma market!!!

SWOT analysis of the Indian pharmaceutical Industry

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

Page | 78
for drugs is likely to grow steadily over the long-term. True in some sense. But are there
risks? The succeeding paras gives a perspective of the Indian pharma industry by
carrying out a SWOT analysis (Strength, Weakness, O pportunity, Threat). The SWOT
analysis of the industry reveals the position of the Indian pharma industry in respect to
its internal and external environment.

3.4.1 Strengths:

3.4.1.1 India with a population of over a billion is a largely untapped market. In fact the
 penetration of modern medicine is less than 30% in India. 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.

3.4.1.2 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.

3.4.1.3 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.

3.4.1.4 Indian pharmaceutical industry posses excellent chemistry and

 process reengineering skills. This adds to the competitive advantage of 
the Indian companies. The strength in chemistry skill help Indian
companies to develop processes, which are cost effective.

3.4.2 Weakness:

3.4.2.1 The Indian pharma companies are marred by the price regulation. Over a period
of time, this regulation has reduced the pricing ability of companies. The NPPA
(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.

3.4.2.2 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. But this has provided an upper hand to the Indian
 pharma companies.

3.4.2.3 Indian pharma market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on exports for 
growth. To put things in to perspective, India accounts for almost 16% of the world
 population while the total size of industry is just 1% of the global pharma industry.

3.4.2.4 Due to very low barriers to entry, Indian pharma industry is highly fragmented
with about 300 large manufacturing units and about 18,000 small units spread across

Page | 79
 the country. This makes Indian pharma market increasingly competitive. The industry
witnesses price competition, which reduces the growth of the industry in value term. To
 put things in perspective, in the year 2003, the industry actually grew by 10.4% but due
to price competition, the growth in value terms was 8.2% (prices actually declined by
2.2%)

3.4.3 Opportunities

3.4.3.1 The migration into a product patent based regime is likely to transform industry
fortunes in the long term. The new patent product regime will bring with it new
innovative drugs. This will increase the profitability of MNC pharma companies and
will force domestic pharma companies to focus more on R&D. This migration could
result in consolidation as well. Very small players may not be able to cope up with the
challenging environment and may succumb to giants.

3.4.3.2 Large number of drugs going off-patent in Europe and in the US

 between 2005 to 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.

3.4.3.3 Opening up of health insurance sector and the expected growth

in per capita income are key growth drivers from a long-term
 perspective. This leads to the expansion of healthcare industry of which
 pharma industry is an integral part.

3.4.3.4 Being the lowest cost producer combined with FDA approved plants,
Indian companies can become a global outsourcing hub for 
  pharmaceutical products.

3.4.4 Threats:

3.4.4.1 There are certain concerns over the patent regime regarding its current structure.
It might be possible that the new government may change certain provisions of the
 patent act formulated by the preceding government.

3.4.4.2 Threats from other low cost countries like China and Israel exist.
However, on the quality front, India is better placed relative to China.
So, differentiation in the contract manufacturing side may wane.

3.4.4.3 The short-term threat for the pharma industry is the uncertainty
regarding 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.

3.4.5 Summary of the SWOT Analysis

Page | 80
3.5 Enviornmental analysis (PEST)
Technological advancements, tighter regulatory-compliance, overheads, rafts of patent
expiries and volatile investor confidence have made the modern pharmaceutical
industry an increasingly tough and competitive environment. Below is an analysis of 
the structure of the pharmaceutical industry using the PEST (political, economic, social
and technological) model.

3.5.1 Increasing Political Attention:

Over the years, the industry has witnessed increased political attention due to the
increased recognition of the economic importance of healthcare as a component of 
social welfare. Political interest has also been generated because of the increasing social
and financial burden of healthcare.

3.5.2 Economic Value Added:

In the decade to 2003 the pharmaceutical industry witnessed high value mergers (like
Pfizer\Pharmacia, Glaxo-Wellcome\SmithKline-Beecham and Novartis (a merger 
  between Sandoz and Ciba Geigy)) and acquisitions. With a projected stock value
growth rate of 10.5% (2003-2010) and Health Care growth rate of 12.5% (2003-2010),
the audited value of the global pharmaceutical market is estimated to reach a huge 500
 billion dollars by 2004. Only information technology has a higher expected growth rate
of 12.6%. Majority of pharmaceutical sales originate in the US, EU and Japanese
markets. Nine geographic markets account for over 80% of global pharmaceutical sales
these are, US, Japan, France, Germany, UK, Italy, Canada, Brazil and Spain. Of these
markets, the US is the fastest growing market and since 1995 it has accounted for close
to 60% of global sales. In 2000 alone the US market grew by 16% to $133 billion
dollars making it a key strategic market for pharmaceuticals.

3.5.3 The Social Dimension:

Good health is an important personal and social requirement and the unique role played
  by pharmaceutical companies in meeting the society’s need for popular wellbeing

Page | 81
cannot be underestimated. In recent times, the impact of various global epidemics e.g.
SARS, AIDS etc. have also attracted popular and media attention to the industry. The
effect of the intense media and political attention has resulted in increasing industry
efforts to create and maintain good government-industry-society communications.

3.5.4 Technological Advances:

Modern Scientific and Technological advances are forcing industrial players to adapt
even faster to the evolving environments in which they are participating. Scientific
advancements have also highlighted the need for increased spending on Research and
Development in order to encourage innovation.

3.5.5 Legal Environment:

The pharmaceutical industry is a highly regulated and compliance bound industry. As a
result, there are immense amount of regulatory and legal compliance overheads which
the industry needs to absorb. This tends to restrict its dynamism. But in recent years, the
government have begun to request industry proposals on regulatory overheads so as not
to discourage innovation in the face of mounting global challenges from external
market.

3.6 Structural industry analysis (Porter’s Five Forces)

A summary of the pharmaceutical industry using Porter’s Five Forces model (see
diagram below). The 5 forces approach can be used in initial diagnosis and as an aid to
strategy development. Its main value is as a thought provoking aid to help arrive at a
shared understanding of the threats and opportunities facing the firm.

Figure 24: Porter’s Five Forces Model for Industry Analysis

3.6.1 Industry competition

Pharmaceutical industry is one of the most competitive industries in the country with as
many as 10,000 different players fighting for the same pie. The rivalry in the industry
can be gauged from the fact that the top player in the country has only 6 % (2006)
market share, and the top 5 players together have about 18 %(2006) market share. Thus,

Page | 82
 the concentration ratio for this industry is very low. High growth prospects make it
attractive for new players to enter in the industry. Another major factor that adds to the
industry rivalry is the fact that the entry barriers to pharmaceutical industry are very
low. The fixed cost requirement is low but the need for working capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us
that in bigger companies this ratio is in the range of 3.5-4 times. For smaller companies,
it would be even higher. Many small players that are focussed on a particular region
have a better hang of the distribution channel, making it easier to succeed, albeit in a
limited way.
An important fact is that, pharmaceutical is a stable market and its growth rate generally
tracks the economic growth of the country with some multiple (1.2 times average in
India). Though volume growth has been consistent over a period of time value growth
has not followed in tandem.
The product differentiation is one key factor which gives competitive advantage to the
firms in any industry. However, in pharmaceutical industry product differentiation is
not possible since India has followed process patents till date, with loss favouring
imitators. Consequently product differentiation is not a driver, cost competitiveness is.
However, companies like Pfizer and Glaxo have created big brands over the years
which act as product differentiation tools.
Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical
 products discovered by MNCs at a lower cost and make good profit. But today the
scene is different with the arrival of the patent regime which has forced Indian
companies to rethink its strategies and to invest more on R&D. Also contract research
has assumed more importance now.

3.6.2 Bargaining power of buyers

The unique feature of pharmaceutical industry is that the end user of the product is
different from the influencer (read doctor). The consumer has no choice but to buy what
doctor says. However, when we look at the buyer’s power, we look at the influence they
have on the prices of the product. In pharmaceutical industry, the buyers are scattered
and they as such do not wield much power in the pricing of the products. However, govt
with its policies, plays an important role in regulating pricing through the NPPA
(national pharmaceutical pricing authority).

3.6.3 Bargaining power of suppliers

The pharmaceutical industry depends upon several organic chemicals. The chemical
industry is again very competitive and fragmented. The chemicals used in the
  pharmaceutical industry are largely a commodity. The suppliers have very low
 bargaining power and the companies in the pharmaceutical industry can switch from
their suppliers without incurring a very high cost. However, what can happen is that the
supplier can go for forward integration to become a pharmaceutical company.
Companies like Orchid Chemicals and Sashun Chemicals were basically chemical
companies who turned themselves into pharmaceutical companies.

3.6.4 Barriers to entry

Pharmaceutical industry is one of the most easily accessible industries for an
entrepreneur in India. The capital requirement for the industry is very low; creating a
regional distribution network is easy, since the point of sales is restricted in this
industry in India. However, creating brand awareness and franchisee among doctors is
the key for long term survival. Also, quality regulations by the government may put

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some hindrance for establishing new manufacturing operations. The new patent regime
has raised the barriers to entry. But it is unlikely to discourage new entrants, as market
for generics will be as huge.

3.6.5 Threat of substitutes

This is one of the great advantages of the pharmaceutical industry. Whatever happens,
demand for pharmaceutical products continues and the industry thrives. One of the key
reasons for high competitiveness in the industry is that as an ongoing concern,
 pharmaceutical industry seems to have an infinite future. However, in recent times the
advances made in the field of biotechnology, can prove to be a threat to the synthetic
 pharmaceutical industry.

3.6.6 Conclusion
This model gives a fair idea about the industry in which a company operates and the
various external forces that influence it. However, it must be noted that any industry is
not static in nature. It’s dynamic and over a period of time the model, which have used
to analyse the pharmaceutical industry may itself evolve. Going forward, we foresee
increasing competition in the industry but the form of competition will be different. It
will be between large players (with economies of scale) and it may be possible that
some kind of oligopoly or cartels come into play. This is owing to the fact that the
industry will move towards consolidation. The larger players in the industry will
survive with their proprietary products and strong
franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to
 be key players. Smaller fringe players, who have no differentiating strengths, are likely
to either be acquired or cease to exist. The barriers to entry will increase going forward.
The change in the patent regime has made sure that new proprietary products come up
making imitation difficult. The players with huge capacity will be able to influence
substantial power on the fringe players by their aggressive pricing thereby creating
hindrance for the smaller players. Economies of scale will play an important part too.
Besides government will have a bigger role to play.

3.7 Drug patents in India

The Indian Patents Act, 1970 (effective since 1972) sought to provide only process
 patents for chemical substances including pharmaceuticals, agrochemicals and food
 products, and it granted product patents for non-chemical substances. The duration of 
 process patents was fixed at seven years from the date of filling of the patent, or five
years from the sealing of the patent, whichever is earlier. Considering the importance of 
sectors such as pharmaceuticals, the Indian Patents Act, 1970 added a few provisions,
which sought to significantly restrict the scope of protection.
(i) Under the license rights, a process patent owner is obliged to sell the license to any
third party fetching a maximum royalty of 4% in turn.
(ii) The Government retained the right to issue compulsory licenses (after 3 years from
the date of sealing of a patent) if the product under question was above ‘reasonable’
 prices or if it did not satisfy public interests.
(iii) Import of patent protected products is not considered to be ‘working of patent’ and
therefore the patentee must necessarily produce the same in the country within three
years from the date of sealing of a patent.

3.7.1 Patent Protection under WTO, 1995

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 The Patents Act, 1970 has been instrumental in encouraging and developing the
indigenous drug industry and indirectly containing medicine prices, but is currently
under threat with the conclusion of the last Uruguay Round of General Agreement on
Tariffs and Trade (GATT) negotiations in 1993 and the establishment of World Trade
Organization (WTO) on 1 January 1995. In fact, extension of pharmaceutical product
 patents to all member countries was the key and controversial issue and also the last
issue to be hammered out prior to tabling of the Draft Agreement at the end of 1991. A
gist of the patents system, 1970 and the change-over envisaged under TRIPS is given in
table below

Table 25: A synoptic comparison of Indian Patents Act, 1970 and TRIPS, 1995

The erstwhile GATT (since 1995, WTO) sought to radically transform the patent Act in
many countries. The specific article dealing with patents-Trade-Related Intellectual
Property Rights (TRIPS) - requires that the signatories to GATT must necessarily
amend their Constitution in accordance with this Article. The Article on TRIPS requires
member countries to change their Act in such a way that they grant product patent to the
 pharmaceutical, chemical, food and agricultural sectors as well. The period of patent
rights is to be changed in the Indian case from seven to twenty years. A proper 
amendment needs to be made to the Constitution of respective member countries
amending the present rules. For developing countries, 1 January 2000 was fixed as the
deadline for amending the Constitution. Developing countries like India have, however,
 been granted a five-year transition period till 2005. Until then, exclusive marketing
rights (EMRs) would have to be granted to those companies introducing newly invented
  products. Domestic production of the patent-protected products is not mandatory
wherein import is to be considered as a working of the patent. Even the Paris
Convention specifically nails non-working or import of patent-protected products as an
abuse of exclusive rights. The other retrograde step in the direction of TRIPS is the
restrictions imposed on the free use of compulssory licensing provisions, which were
hitherto available in the present India Patents Act of 1970. The provision of compulsory
licensing (under the new dispensation) can be harnessed only when there is a clear case
of national disaster or calamity.
3.7.2 TRIPS and its likely impact
Several issues need attention in the wake of a change from process to product patent.
These issues include price rise, market structure, foreign investment inflows,
technology transfer, royalty and hence foreign exchange outflow, import dependence,
etc. A sensitive and a highly controversial issue with regard to TRIPS is the concern
about the high price of medicines. India was at the forefront in raising this issue backed
 by strong evidence. It is natural that many recent findings on this matter focused on
likely price trends in India in the event of amending the present patents Act. Lanjouw

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 (1998) found drug prices in India, particularly in the post-patent 1970 period, among
the lowest in world. As a sequel to a transition to the product patents regime, drug
 prices in India are expected to considerably escalate to a high level. Simultaneously,
however, he and a few others argue that given the current market conditions, it is
estimated that only 10%-20% of the pharmaceutical products are under patent, and
hence there is no need to focus on negative trends on the drug price front. It needs to be
noted that once patented products start proliferating in the market, the composition of 
 patented products in the total pharmaceutical market would undergo a drastic change in
favour of the former. This would have a far-reaching influence on price.
Recent studies, clearly show the extent of price increase that would be likely in the near 
future with a changeover from the present system to a patent monopoly era. The study
 by Fink (2000) suggest a surge in pharmaceutical prices in the range of 9%-76% if 
  product patent rights are introduced. However, as far as the impact on various
therapeutic categories is concerned, the upsurge in price would depend on the demand
for new patented products or on the available alternative treatments, whichever 
dominates the market. Interestingly, Fink suggests that rapid acceleration in drug prices
could be countered by various price control measures available with the local
government, a provision allowed in the TRIPS agreement. Compulsory licensing is
another tool to counter the adverse implications of conferring patent protection. Price
ceilings, if put into effective practice, by allowing firms to charge normal profits in
addition to production costs, would reduce or eliminate an inventor’s patent-induced
market power. They further assert that when normal profits are granted the potential
disincentive to invest would wither away resulting in recouping of R&D investment. In
any case, the price of patented products is bound to be high.
This could be because of several reasons:
(i) formulation activity would be costly as multinationals would normally set high
 prices for the bulk drugs imported in view of global reference pricing;
(ii) issuing compulsory licensing to any company in India would amount to enormous
royalty fees, in return. This would naturally be reflected in the base price of the
 patented products;
(iii) any effort to locally produce the patented medicine is nothing but monopoly
 production and consequently monopoly pricing, which will always be higher than the
competitive price. However, a point worth noting in this context is that one must
actually analyse the entire gamut of issues related to the pharmaceutical market and one
cannot merely take such provision as given. An appreciation of the overall structural
adjustment in economies such as India show that over the years, particularly since the
early 1990s, pharmaceutical prices have been decontrolled to a substantial degree and in
fact presently only a few drugs (75 essential drugs in 1998) are actually controlled.
Many more of these are likely to witness lifting of controls in the immediate future, as
made evident in the intentions of government policy pronouncements (GOI 2001).
According to a McKinsey Report, by 2015 Indian Pharmaceutical Industry will be of 
US$ 20 billion, catapulting it within top 10 Pharmaceutical Markets of the world.
Products Patented in India, as forecasted by McKinsey, will then value around US$ 2
 billion contributing 10% of the IPM.

3.8 The future of Indian Pharmaceutical industry

The dream of Indian pharmaceutical companies for marking their presence globally and
competing with the pharmaceutical companies from the developed countries like
Europe, Japan, and United States is now coming true. The new patent regime has led

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many multinational pharmaceutical companies to look at India as an attractive
destination not only for R&D but also for contract manufacturing, conduct of clinical
trials and generic drug research. The Indian companies are using the revenue generated
from generic drug sales to promote drug discovery projects and new delivery
technologies. Contract research in India is also growing at the rate of 20-25% per year 
and was valued at US$ 10-120 million in 2005. India is holding a major share in world's
contract research Clinical Research Outsourcing (CRO), a budding industry valued over 
US$ 118 million per year in India, is estimated to grow to US$ 380 million by 2010, as
MNCs are entering the market with ambitious plans. By revising its R&D policies the
government is trying to boost R&D in domestic pharmaceutical industry. It is giving tax
exemption for a period of ten years and relieving customs and excise duties of all the
drugs and material imported or exported for clinical trials to promote innovative R&D.
The future of Indian pharmaceutical sector is very bright because of the following
factors:
• Clinical trials in India cost US$ 25 million each, whereas in US they cost
 between US$ 300-350 million each.
• Indian pharmaceutical companies are spending 30-50% less on custom synthesis
services as compared to its global costs.
• In India investigational new drug stage costs around US$ 10-15 million, which
is almost 1/10th of its cost in US (US$ 100-150million).

3.8.1 What is in store for the future?

• We can expect a significant level of consolidation- a major portion of small
 players are likely to be wiped out.
• Many of the existing players are family owned businesses. No one should be
surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come
through. It is the classic “bird in the hand” principle – if the founders can earn a
few billions without too much effort, why should they spend hundreds of 
millions and ten years or more in trying to develop new drugs.
• The present scenario presents an excellent opportunity for multinational
enterprises to establish manufacturing bases in India through the take-over 
route. The availability of talented scientists at a relatively low cost makes India
an ideal location for manufacturing quality drugs. A word of caution is
necessary though such enterprises may have to follow a dual pricing policy, one
for the local market and another for the global market.
• The Indian government would do well to take another look at its policies. There
is not much incentive for companies to invest in new drugs. The corporations
engaged in R&D need tax breaks and innovative incentives.
• SEZs will play an important role in the future of the pharmaceutical industry.
Influx of outsourced work from global pharmaceutical companies has given the
necessary impetus for the creation of pharmaceutical Special Economic Zones
(SEZ), which would be one of the key drivers of outsourced pharmaceutical
services growth in the coming future.
• The opportunity for Indian pharma companies is sizeable as generic drugs
manufactured in India are now being accepted worldwide, and leading
companies like Ranbaxy, Cipla and Dr. Reddy's are making way for others.

Figure 25: Expected market share of Indian Players in the US Generics Market

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 By 2010-11, share of Indian companies in the U.S. market is expected to be
more than 10 percent. Moreover, companies are not risking concentration by
focusing only on the U.S. market by increasing attention to the European
market for generics.

3.8.2 Issues and challenges

3.8.2.1 Mergers and Acquisitions

Currently, as the generics business is weighed down by stiff competition and declining
R&D productivity, alliances and partnerships is the need of the hour for the
 pharmaceutical industry rather than the preference. In recent times, most of the leading
 players have inked M&A deals across the globe. In 2006, the domestic pharma sector 
executed more than 40 deals with 32 cross border transaction worth US$ 2000 mn and
it includes deals like Dr Reddy’s acquisition of Betapharm of Germany for Euro 480
mn (Rs 2550 cr) and Ranbaxy Terapia buy in Romania for US$ 324 mn (Rs 1250 cr 
approx). In 2007, Indian pharma sector witnessed 25 Mergers & acquisition deals, with
15 cross border transaction worth US$ 600-700 mn. Thus, mergers and acquisitions has
 proved to be an important tool to seize growth opportunities and is widely resorted to
  by players by either moving up the value chain or by integrating downstream
 production. More mergers & acquisitions and consolidation activity in near future is
expected which is driven in the medium term by implementation of the new patent
regime and generic companies looking to establish a low-cost base out of the country.

3.8.2.2 Attracting and retaining a skilled workforce

The pharmaceutical business is knowledge and experience business and people have
always been one of the most important resources for any pharmaceutical or biotech
company. We can talk about brand but the people in a company, in particular in their 
 behaviour, represent a living brand. We can focus on intellectual property but that is the
creation of the people, and people joining or leaving a company will add to or reduce
the sustainable intellectual property. We can talk about markets, but to access any
market you need people with a good understanding of that market and the culture and
values of customers and suppliers. Increasingly we talk about regulation and
compliance as though they are some abstract function of a company. In practice we are
describing the collective values and integrity of the individual members of staff, and the
way they are motivated to behave in particular situations. The key is how an

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organisation attracts, recruits, develops, and motivates employees with competencies
that set their business apart from those of the competitors. The first challenge is that
there are increasing signs of the labour market moving in favour of the employee rather 
than the employer. There is growing demand for skilled people but traditional labour 
markets are providing fewer new people with the right qualifications and experience;
and companies are still trying to recruit people with ever-more-specialised knowledge.
It is possible to recruit from new markets, but this is a new competency for many
companies.

3.8.2.3 Controlling operating costs

It is accepted knowledge that the pressure to control and reduce costs is one of the next
major challenges to be faced by the pharmaceutical industry. But how is this done and
what is the best approach? Understanding and controlling operating costs is a critical
first step to developing or sustaining competitive advantage. Increasing generic
competition, imminent patent expiries (revenue can decrease by up to 60% at patent
expiry), shorter pipelines and the emergence of China as a low cost manufacturing base,
all contribute to constantly eroding margins. To maintain or increase margins in the
future, pharmaceutical companies need to start taking a proactive approach towards
understanding costs. As the pharmaceutical industry embraces these new challenges, the
companies that emerge at the forefront will be those who address the issues now and are
able to account for all the costs
throughout their organisation. To achieve this advantage, companies have to start
recognising and targeting costs today.

3.8.2.4 Infrastructure
Compared with western industrial nations, energy prices are low but companies must
expect repeated power cuts and offset fluctuations in the electricity network with the
help of emergency power generators. In many areas, the hot and humid climate makes
high demands on climate technology at production plants and on the refrigeration of 
finished products. Insufficient energy supply also leads to a situation where production
hours must be handled very flexibly. This shortage can only be eliminated in the
medium term and will require maximum effort. However, the Indian government
intends to expand power generation capacities to roughly 240 GW by the end of the
11th five-year plan in 2012. This would mean a more than 100 GW, or nearly 90%,
increase on today's total. Moreover, the country’s lacking transport infrastructure is
increasingly turning into a major obstacle. The pharmaceuticals industry is especially
dependent on road transport. However, the major transport links are chronically
congested and many are in a poor state of repair. Of the total road network covering just
over 3.3 million kilometres, only about 6% are relatively well built National and State
Highways. In many cases, there are no paved surfaces or there is only one lane for all
traffic. But the government has launched an extensive investment programme entitled
the National Highway Development Programme, to be implemented by the middle of 
the next decade.

3.8.2.5 Impact of new patent law

Legal changes in India in 2005 made it considerably more difficult to produce “new”
generics. Foreign pharmaceuticals, which enjoy 20 years of patent protection, can no
longer be copied by means of alternative production procedures and sold in the
domestic market. Hence, a reorientation was required in India’s pharmaceutical
industry. It now focuses on drugs developed in-house and contract research or contract

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 production for western drug makers. Thus, this transition phase of reorientation is a
challenge for the industry.

4.0 THE TRIPS AGREEMENT

4.1 Introduction
Most developed and developing countries are either members or observers of the World
Trade Organization (WTO); this means they are committed to follow the rules laid
down in its Agreements, or intend to make these commitments in future. One of these
WTO Agreements is the Agreement on Trade Related aspects of Intellectual Property
Rights (TRIPs). The TRIPs Agreement makes the granting of patents for 
 pharmaceuticals obligatory. Since previously many developing countries allowed only
for limited patent protection in this area, this represents a significant change in the
  pharmaceutical sector. Proponents believe this will lead to an increase in investment
and in R&D, yet numerous public health experts, as well as consumer groups, have

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 expressed concern about the impact of the TRIPS Agreement on the availability and
 prices of drugs. Moreover, worldwide, there is growing concern about the impact of the
intellectual property rights system on innovation and on investment. A global process of 
rethinking is starting, in which developing countries should actively participate.
The TRIPS Agreement is not a uniform law, but a framework that sets (minimum)
standards and conditions for the protection of intellectual property. These are made
operational via the national intellectual property rights (IPR) legislation. Within the
TRIPs framework, there is some room for manoeuvre, which can be used to design
legislation which is in the best interest of the country. Measures to protect the public
interest ought to be included in the national legislation, and should encompass public
health aspects. In fact, TRIPS provides for a number of safeguards which may be used
to protect public health and promote competition, such as compulsory licensing, and
allows for exceptions which may facilitate the marketing of generic drugs. These
safeguards can be used to mitigate potential negative impacts of increased IPR 
 protection in the pharmaceutical sector on access to drugs. However, these safeguards
can only be used if they have been incorporated in the national Legislation Safeguards
such as provisions for compulsory licensing are an essential element of IPR legislation,
since they signal to the patent holder that, in the case of abuse of rights and/or non-
availability of the product, a third party could be allowed to use the invention. As such,
they reduce the risk of misuse of the monopoly rights conferred by a patent. However,
to ensure that such safeguards can be used effectively, it is important to carefully state
the grounds and conditions for their use in the national legislation. TRIPS requires that
  patents are granted when the typical standards for patentability, that is, novelty,
inventive step and industrial applicability, are met. But the Agreement does not specify
how these criteria should be defined; WTO member countries may decide how to apply
these criteria. In the pharmaceutical sector, applying these criteria in a flexible way will
facilitate the granting of ‘secondary’ patents, such as formulation patents, patents on
 polymorphs etc. Even if such secondary patents are relatively weak, they can be used
aggressively to (threaten to) litigate, in order to stop competition. Therefore, defining
the scope of patentability at the national level is an important issue. Similarly,
enforcement rules can have significant implications, since, once a patent has been
granted, there is a presumption of validity. If countries have strong provisional
measures under their enforcement system, these can be used to prevent competition for 
instance while a lawsuit is pending (which can be several years). In the absence of 
competition, monopolistic pricing may reduce people’s access. However, if eventually a
 patent is found to be invalid or an enforcement rule to be unjustified, from a societal
 point of view it is important to consider who will reimburse the consumers, and how
many people have in the meantime been denied access to essential medicines.

4.2 Background
The philosophy of Intellectual Property Rights
Intellectual property rights (IPR) deal with the creations of the human mind. The
intellectual property rights system has been developed in order to try to achieve two
contradictory aims:
• to promote the publication of ideas, inventions and creations, in order to make
them available to others, who can then further improve them; this will nurture
scientific progress or artistic inspiration;

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 • to provide an economic incentive for people to invent or to engage in creative
efforts, by ensuring that the originator can reap financial rewards from his/her 
efforts.
The solution adopted was to give the inventor or creator a temporary monopoly, in
exchange for making his/her idea known to society.
In the pharmaceutical sector, patents are the most important form of IPR protection.
Patents are more difficult to obtain than other forms of IPR (an application has to be
filed at, and approved by, the patent office); they are only valid when issued and in the
country where they are issued. For an invention to be patentable, it has to meet three
criteria: novelty, inventiveness and industrial applicability or utility. In other words,
apart from being new, an invention should not be obvious to people skilled in the art or 
field of technology and it should have a potential for industrial application in order to
 be patentable.
A patent requires the inventor to disclose his invention, in exchange for a temporary
monopoly on its use. Because of this (temporary) monopoly, the inventor will be able to
earn a profit in case of commercialization of the invention, either through direct
exploitation, or through royalties in case a third party is given a license to use the
invention. So historically, a patent was perceived to be an inexpensive way for society
to encourage innovation and reward the inventor.
A patent however does not in itself guarantee profits; a patented invention will only
return profits if it is successfully commercialized - that is, if society finds the invention
useful. Because patents are private rights, the costs of patent application, as well as of 
its protection (e.g. litigation in case of infringement by an unauthorized party) are to be
  borne by the patentee (patent holder). Furthermore, most legal systems contain
 provisions for government intervention, in case the patentee misuses the monopoly
rights, e.g. when the availability of the patented product falls seriously short of demand.
Patents can be granted for a product or for a (production) process. A product patent
confers monopoly rights over the product, regardless of the production method. A
 process patent on the other hand confers rights over the process and over the products
directly produced by that process. Production of the same product via a different 
 production method however does not infringe a process patent and is allowed.

4.3 The importance of intellectual property rights for national development

In the pharmaceutical sector, patents are very important. In fact, the very existence of 
the TRIPs Agreement is due to the pressure from the big pharmaceutical companies on
the US government, which in turn insisted that this issue should be on the agenda of the
Uruguay Round negotiations. There are several reasons for the importance of patents
for the pharmaceutical industry:
4.3.1 The costs of pharmaceutical R&D are high. While the actual amount is being
disputed, it is in any case significant.
4.3.2 There is a disclosure requirement, at registration,
4.3.3 Usually, imitation is relatively easy; therefore the patent is important to protect
the invention.
4.3.4 It allows the company to make extra profits. Because of the monopoly rights the
 patent confers, the company can charge a higher price and earn more than would
have been possible in case of free competition. Obviously, from these profits,
R&D costs have to be recovered; however, the US Office of Technology

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 Assessment has published a study, which showed that profits in the
 pharmaceutical industry are considerably higher than in other industries and that
the rate of return is much higher than what is needed to cover the costs. With
regard to impact on development, two aspects of development can be
distinguished: economic aspects and social or human aspects. Ultimately, the
latter are the most important, so intellectual property rights should be looked at
from this angle. Pharmaceutical patents are a clear example: the inherent effect
of patents is to increase the price, which will reduce access. Therefore, in terms
of social development, the impact of pharmaceutical patents is negative. On the
other hand, however, patents may have positive 'dynamic effects' so far as they
foster the development of new products that benefit society. When
contemplating the importance of patents for national development,
 policymakers should make a profile of their country, taking into account the
level of development, and, based on that, evaluate the importance of patents.

Moreover, when designing patent laws, the limited room for manoeuvre built into the
TRIPs Agreement should be used, in order to make sure that the national patent law
works in the interest of the country’s social as well as economic development.

4.4 WHO's perspective on globalization and access to drugs

4.4.1 Global pharmaceutical challenges

At the beginning of the 21st century, too many people still lack access to essential
drugs. WHO estimates that more than one third of world's population lacks regular 
access to the medicines they need. In developing countries, 10.3 million children under 
five years of age died last year; 8.6 million of these deaths could have been prevented if 
those at risk would have had access to essential drugs. Today, in 32 countries, more
than half the population lacks regular access to basic, essential drugs. The reasons for 
this are multiple and complex, and include the following factors:
4.4.1.1 Public spending for healthcare in general and for drugs in particular is
insufficient, and decreasing.
4.4.1.2 Health insurance is non-existent or has very limited coverage; most people,
especially in developing countries, have to pay for drugs out-of-pocket.
4.4.1.3 New essential drugs are costly.
4.4.1.4 Supply systems are often unreliable and poorly managed, leading to wastage
and shortages.
Ensuring access to essential drugs depends on several factors, such as rational selection
of the drugs allowed on the market, affordable prices, sufficient and sustainable
financing for drugs and a reliable health care and drug supply system. Price is only one
of the factors in ensuring access to essential medicines; however, especially for 
countries and populations with limited resources, it is an important factor. One of the
most effective strategies for promoting affordable prices is to increase competition (see
figure 26). Previously, many developing countries did not, or only to a limited extent,
grant patents for pharmaceutical products, in order to encourage (generic) competition.
The TRIPs Agreement makes the granting of patents for pharmaceutical products and
 process inventions obligatory, for a minimum period of 20 years. For most developing
countries, these new standards represent a considerable increase in the protection
granted for pharmaceuticals. They fear therefore an increase in prices of medicines, and
a further reduction in their population's already limited access.

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Figure 26: Effect of competition on HIV/AIDS drug prices

 Adapted from: UNAIDS, B. Samb, 2000

However, the TRIPs Agreement contains a number of safeguards, which may be used
to protect public health and promote competition, such as compulsory licensing and
exceptions which facilitate the marketing of generic drugs ("Bolar exception"). These
safeguards can be used to mitigate the potential negative impact of the TRIPs
Agreement on access to drugs. However, in order to use these safeguards, countries
have to incorporate them in their national legislation.

4.4.2 WHO policy perspective:

In the context of globalization and access to medicines, WHO insists that access to
essential drugs is a human right and that medicines are not simple commodities. WHO
recognizes that patents on pharmaceuticals will stimulate R&D of new drugs, but also
notices that research priorities tend to respond to (economic) demand, rather than to
medical need. Therefore, WHO recommends that:
4.4.2.1 Patents on pharmaceuticals should be managed in an impartial way,
 protecting
the interest of the patent holder as well as safeguarding public health.
4.4.2.2 Public investment is needed to ensure development of new drugs.
4.4.2.3 Support should be given to any measures which will improve access to all
essential drugs, including mechanisms to promote competition, such as providing
comparative price information, promoting generic policies, reducing duties, taxes and
mark-ups, allowing parallel imports, equity pricing of newer essential drugs and making
use of the TRIPs safeguards.

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4.5 The history of the TRIPs negotiations
In order to increase the understanding about the TRIPs Agreement, it is useful to briefly
consider the history of its negotiation. Before the Uruguay Round, about 50 countries
did not grant patent protection for pharmaceutical products; this included a number of 
developed countries, such as Portugal and Spain, as well as many developing countries,
for instance Brazil, India, Mexico and Egypt. TRIPs Article 27, which states that
 patents should be granted in all fields of technology without exclusion, therefore meant
a significant change for the pharmaceutical industry; suddenly patenting of 
 pharmaceutical products was made almost universal, since all WTO member states
were obliged to grant it. Industrialized countries argued that patent protection in all
fields of technology, as stated now in TRIPs Article 27, would have three main effects
in developing countries:
• there would be more foreign direct investment (FDI),
• it would promote the transfer of technology,
•  patent protection would promote local R&D.
Developing countries were reluctant to extend patent protection to pharmaceuticals.
They realized that pharmaceutical production was highly concentrated in developed
countries. More importantly, innovation -the development of NCEs- was almost
exclusively undertaken in industrialized countries. At that time, 96% of worldwide
R&D expenditures took place in developed countries and only 4%, in all areas of 
science and technology, in developing countries. This is perhaps the most dramatic
asymmetry in contemporary North-South relations, since it relates to the ability to
create and apply new scientific and technologic knowledge. In addition, even before the
adoption of TRIPs, a number of economic studies showed that patent protection for 
  pharmaceuticals in developing countries would lead to an increase in prices for 
medicines, to an increase in royalty and profit payments abroad and to a greater market
 penetration by foreign firms. Finally, the experience even of developed countries, such
as Italy, which had recently adopted patents for pharmaceutical products, raised further 
doubt whether there would be any benefits. For almost 3 years, from 1986 until May
1989, developing countries refused to negotiate an agreement on intellectual property.
But finally it was not possible, politically, to avoid the discussion and the drafting of the
Agreement started. For developing countries, there were two potential benefits in
negotiating the TRIPs.
First, the trade-offs; the possibility that in other areas of the Uruguay Round
negotiations, developing countries could obtain benefits, for instance access to markets
for textiles and agricultural products. Unfortunately, for most developing countries it
seems there have been less benefits than expected.
Second, under the agreement there is a multilateral system for dispute settlement; the
expectation was that, by having such a system, unilateral action by the US -on the basis
of "Special" section 301 of their Trade Act- would cease. The US applies the 301 or 
super 301 section in order to threaten or retaliate with trade sanctions against countries
on the basis of what they consider to be 'non-compliance with adequate standards of 
intellectual property'. Unfortunately this expectation has not been fulfilled either; the
US has continued to use section 301. The views of Japan and the EU during the
negotiations are interesting too. Their main interest was that, while an Agreement
should establish a certain level of protection, it should not amount to a restriction to
trade. For instance, the TRIPs position on parallel import -countries are free to decide
whether or not they allow this- should be looked at from this perspective. Moreover,
Japan was concerned about potential abuses of the system, since rights on intangible

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 property may be properly used but also can be abused; in fact the US has quite a long
tradition of anti-trust cases related to the abuse of IPR, which have led to the granting of 
a number of compulsory licenses.

4.6 Stakeholders' views

Three important stakeholders are the innovative pharmaceutical industry, the national
 pharmaceutical industry and the consumers.

4.6.1 The international innovative pharmaceutical industry's perspective

4.6.1.1 The importance of intellectual property rights for pharmaceutical R&D
 New medicines and access to these new medicines, which will be vital in the fight
against communicable and non-communicable diseases, are dependent on strong patent
and other intellectual property protection.
"The patent system …. secured to the inventor, for a limited time, the exclusive use of 
his invention; and thereby added the fuel of interest to the fire of genius in the discovery
and production of new and useful things." Abraham Lincoln, 1859
The patent system represents a compromise between competing short-term and long-
term economic and social interests. Along with a well-functioning regulatory structure
and marketing system, it allows the private pharmaceutical industry to operate and
contribute to a socially driven public health sector by providing it with cost-effective
new technologies.
The commercial sector discovers and develops nearly all new drugs and vaccines, but
this is expensive and risky; the patent system provides the incentive necessary to
investigate thousands of new compounds and to invest an average of several hundred

Table 26: Importance of patent protection for development of innovative products in various
industries

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 million dollars in R&D. The dependence of pharmaceutical and vaccine discovery and
development on adequate and enforceable intellectual property rights is the highest
among various sectors. Table 26 shows that the first rank is held by the pharmaceutical
industry. In some developing countries, which have adopted stronger patent protection
in recent years, such as Korea, drug R&D has been rising. This is a fundamental
change, which promises to improve the supply of effective new drugs and vaccines and
to improve access to medicines for patients worldwide.
However, recently, "compulsory licensing" has been touted as a magic policy to
improve access to medicines in developing countries. Compulsory licensing of a patent
to a competitor, provided for in some way in most countries, is normally limited in
application to extraordinary circumstances, often related to technology issues in
industry mergers. Proponents of an activist compulsory licensing (CL) system see the
issue in terms of consumer price benefits arising from effectively abrogating the patent's
marketing exclusivity. They ignore many of the problems with this approach:
• it assumes that there is a licensee that can duplicate the originator's skills in
manufacturing an equally safe and effective product;
• it assumes that governments will use this "tool" as a pro-consumer tool, leading
to cheaper drugs. However, governments tend to use CL measures for industrial
 policy;
• most damaging, if a country adopts CL measures or if a disease area (e.g.
HIV/AIDS) is subject to CL policies, fewer research funds will be allocated to
that country or disease.
Finally, the protection of trademarks, also under TRIPs, helps to clean up counterfeit
 products from the marketplace. The effect on public health is that through the reduction
of trade in unregulated counterfeit products, the quality of the drug supply is improved.

 Problems of access to drugs

With regard to inadequate access to drugs, two major gaps can be identified:
• a "discovery/development" gap between the morbidity/mortality and available
remedies; and

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 • an "access imbalance" between consumption of medicines in the developing and
the developed world.
The exposure of poorer countries to the discovery/development gap is particularly acute
 because of mitigating circumstances of poverty, poor infrastructure and urbanization.
In addition, there are other pharmaceuticals-related gaps that contrast the health
situation in the "North-South" context:
• The Quality/Counterfeit Medicines Gap: Patients in developing countries are
more frequently exposed to substandard products and counterfeits, due to the relatively
large gap in regulatory capability and training between developed and developing
countries as well as the differences in enforceability and penalties for counterfeiting
activities;
• The R&D Imbalance: While the relative incidence of infectious diseases is
higher in developing countries, until now little pharmaceutical research and
development has taken place in these countries;
• The Urban/Rural Gap: The minority of the population living in towns receives
three-quarters or more of medical services and products; this is a global phenomenon,
 but it bears most heavily on poorer populations in developing countries; and,
• The Drug Production Imbalance: With over 3/4 of the world's population,
developing countries produce less than 1/10 of drug output; further, 2/3 of the latter 
 production is concentrated in a few developing countries, such as India, China, Egypt,
Republic of Korea, Brazil. Thus, many developing countries have choices of products
from just a few sources.
Improving access conditions means focusing on a wide number of factors restricting
access to health care and medicines. For instance, in developing countries, funding is
often insufficient to provide even the most basic healthcare services and products.
Usually, people working in the informal sector cannot enter the social security health
care system. These are just a few examples to illustrate existing barriers.

Cost and Price Issues

There is no price at which a 'non-invented' drug can be purchased. In the absence of a
new drug, the 'price' of a treatment or cure is infinite. Innovation makes a therapeutic
option available. Further, therapeutic competition among alternative drugs drives
market prices lower, with post-patent conditions making the product a generic
'commodity' subject to even greater competitive pricing pressures.
Moreover, according to the innovative pharmaceutical industry, the following issues
should be considered:
• Regarding the impact of patents on price, the linkage is weak or non-existent
since price levels are determined by many factors: distribution conditions and markups,
 price controls, inflation, taxes, measurement techniques etc. A 1995 study showed that
countries with intellectual property protection did not have higher prices than countries
without such protection. The Children's Vaccine Initiative noted that while patents and
royalties do not raise the price of vaccines 'dramatically', "…countries which do not
recognize IP…. may actually inadvertently hinder access to vaccines… by discouraging
legal vaccine technology transfer and by failing to encourage domestic vaccine research
and development".
• Patents do not, in fact, have an influence on access to those drugs which most
of the population in developing countries actually consumes, which are primarily off-
 patent drugs.
• Countries without effective patent protection could produce their own versions

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 of patented products. In fact, India already produces generic copies of patented AIDS
drugs. If patents were indeed the problem, large populations within India should have
easy access to these generic versions of AZT and other medications; but this is
demonstrably not the case. Access is poor in some countries regardless of the status of 
 patents.
• Patented products also face competition from off-patent products for the same
conditions as well as from other therapeutic alternatives. Indeed, the time between the
introduction of an innovative drug and of therapeutically similar products has lessened
dramatically over time.
• Generic production is not an automatic answer to access; generic producers in
developing countries may charge lower prices than the original innovator, but prices are
still above levels which most people in developing countries can pay.

Figure 27: Estimated Drug Life Cycle

Source: Dr H. E. Bale

Recommendations
The following global actions are suggested to improve access and innovation in the
areas of medicines and vaccines for the benefit of developing countries:
• Encourage public-private partnerships for the development and distribution of 
medicines and vaccines where existing therapies are lacking or not getting adequately
distributed.
• Develop a global "orphan-type" incentive plan, using market exclusivity and
tax incentives to encourage companies both in the North and South to perform research
and develop drugs for currently neglected diseases.
• Foster public-private vaccine partnerships to stimulate the development of 
new drugs and vaccines and/or to increase international financing for their distribution,
such as the Medicines for Malaria Venture or the Global Alliance for Vaccines and
Immunization.
• Foster local industry investment in R&D and transfer of know-how into

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 developing countries by accelerating the adoption of TRIPs standards for intellectual
 property rights; local companies must shift their activities from copying drugs to
developing new drugs, which are important in the fight against priority diseases.
•  Encourage local innovation by avoiding price controls, either directly or 
indirectly. Price controls tend to reduce the supply of newer innovative therapies and
can have a distinctly dampening effect on innovation in pharmaceuticals, a trend which
has been observed in Europe as well as in Japan. Price controls are a very short-sighted
 policy: while they may make current medicines cheaper, in the long run they will make
developing new drugs more difficult. Furthermore, as price controls often go from
 being "price ceilings" to "price floors", they can lead to higher prices in the medium- to
long run, compared to permitting competitive pricing in the post patent period.
• Stimulate the supply of affordable quality generics in developing countries by
working to inculcate the importance of quality manufacturing procedures locally.
 Negative approaches, such as attempting to withdraw trademarks for medicines, should
 be avoided. Trademarks are a sign of the origin of a medicine, and trademark owners
must therefore stand behind the quality of the product. If consumers avoid unbranded
generics it is not because of trademarks, but rather because consumers lack confidence
in their quality. Thus the answer is to focus on quality. To deny trademarks rights
would be to soften the pressure on generic drug producers to produce high standard
medicines.
• Ensure the supply of needed drugs by working to prevent parallel trade.
Parallel trade is product diversion, which may seem seductive if a country's officials
 believe that they will be receiving relatively low-priced imports. However, parallel
traders would be buying up supplies of essential drugs in a low-price country for resale
in higher-priced markets, thus diverting them from the population who needs them.
When parallel trade is discussed, it is always assumed by proponents that there are only
 parallel imports, and that there is no diversion of key products via parallel exporters.
However, if it is assumed that parallel imports can make a significant difference in
lowering the price domestically, then someone else abroad must be paying more
through this diversion.
Furthermore, even for importing countries, the alleged benefits of parallel trade tend to
 be less than expected. The European Union's experience shows that the benefits of 
 parallel trade accrue mainly to the parallel traders, not consumers, because the former 
capture most of the "rents" arising from the differences in ex-manufacturer prices across
countries. In addition, parallel trade increases opportunities for counterfeit and
substandard products to enter the market, creating increased health and safety risks for 
consumers, as well as increasing the burden on inadequately resourced regulatory staff 
in developing countries.
• Consider creating publicly financed research centres in the region to foster 
medical research, pooling the scientific expertise and resources of several countries, to
increase the capacity for research in diseases of regional interest. While industry does
its own drug discovery and drug development research, it also has worked with public
agencies, such as the National Institute of Health (NIH), to build on basic research to
  bring new compounds to patients. Perhaps through such a mechanism ASEAN
countries and local and international industry together could develop effective
treatments for malaria, TB, HIV/AIDS, cancer and depression over the next decade or 
so.
• Join with judicial authorities, the police and industry professionals to
implement anti-counterfeiting legislation. Severe penalties should be imposed.
• Adopt global drug review standards to speed up the approval of new drugs.

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 Improved access to medications can be helped through reducing unnecessary tasks and
duplication in the review of drugs internationally. One major effort, conducted in
 partnership between the public and private sectors, is the International Conference on
Harmonization (ICH); its mission is to improve the efficiency of the registration process
for new pharmaceutical products, specifically in Europe, Japan and the USA.
• Empower consumers to choose well. Another vital aspect of effective access
to medicines relates to information about these medicines and their proper use. Patients
and consumers around the world are increasingly seeking more information about
medicines to empower themselves in their own medical care. The Internet, as a truly
global medium, has the potential to be a positive resource, but the use of the Internet to
distribute medicines can also pose dangers. In the area of globalization of information
and trade, governments and international institutions need to consider appropriate
 policies regarding this new health care medium.

4.6.2 The national pharmaceutical industry's perspective

Intellectual property rights are a compromise between the incentive to create knowledge
and the desirability of disseminating knowledge at little or no cost. While the debate
deals with positive and negative implications, there is no systematic empirical evidence
for either concerns that intellectual property rights would slow innovation or for their 
alleged positive impact on research and development. Intellectual property rights can
disadvantage developing countries in two ways, namely by increasing the knowledge
gap and by shifting the bargaining power towards the producers of knowledge, most of 
whom reside in developed, industrial countries. Effects on distribution might be
 particularly strong with respect to the effects of patents on the price of medicines, due
to the weak bargaining power of developing countries in negotiating prices with
monopoly suppliers. National pharmaceutical industries in developing countries are
concerned about trends to focus R&D efforts exclusively on problems for which
lucrative markets exists, such as impotence, obesity, jet-lag and baldness, rather than on
widespread, serious tropical diseases. It is also worth noting that most industrialized
countries, while having a patent system in place since a long time, introduced product
  patents for drugs only relatively recently (see Table 27); that is, after their 
 pharmaceutical companies had attained a very high degree of development.

Table 27: Introduction of patents

Source: World Bank 

 Noting the above and other concerns, the implications of TRIPs Agreement on the
national pharmaceutical industry might be:
• When markets are small, there will be no interest to invest in technology transfer.
• Several case studies indicate that there is little evidence that the introduction of 
TRIPs compliant standards of IPR would stimulate transfer of technology, encourage

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 foreign direct investment, strengthen research, development and innovation and
ensure early introduction ofnew products.
• The introduction of new products by national industries will be delayed.
•  New medicines will be more expensive.
• This may create an impression of denying people the right to new drugs.
• The gap between local and multinational companies will widen.
• There will be a shift in market share from generics to branded/originator products.
The national pharmaceutical industries therefore believe that Governments should
introduce appropriate policies to alleviate possible negative implications, such as those
listed above, of the introduction of TRIPs standards.

4.6.3 A consumer's perspective (Consumers International)

Access to essential drugs and affordable medical services are major consumer concerns.
Currently, over two billion people do not have regular access to life-saving drugs, this,
consumer organizations believe, is a crisis situation. The multinational companies
(MNCs), particularly the American industry, have been advocating that developing
countries need to provide strong patent protection for pharmaceuticals (20 years) in
their national legislation. During this period, the patent holder will have an exclusive
monopoly for the manufacture, distribution and sales of the patented drugs. Generic
manufacturers can copy them only after the patents expire. If developing countries have
to wait for 20 years to manufacture new lifesaving drugs, they will be waiting in vain.
Modern drugs have a short lifespan. The top sellers of today will be almost extinct in
about 10-15 years. Table 28 gives the US ten top prescription drugs in 1983 and traces
their ranking during the following 14 years.

Table 28: Top prescription drugs in 1983 and their ranking in 1988 (US) and 1997 (world)

Source: (1) 1983 & 1988 US ranking, SCRIP No. 1381, Jan 27, 1989, p. 17.
(2) 1997 Ranking: Annual Report 500 Drugs: 500 Prescription Drugs by worldwide sales, Pharma
 Business, July/August 1998.

Of the top ten US prescription drugs in 1983, only three were able to retain their 
ranking within the top ten after five years. None of them was in the top 100 in 1997,
and 4 drugs were not even in the list of the 500 top selling drugs that year. The
consumer organizations, therefore, reject the position taken up by MNCs, that the
TRIPs Agreement should be implemented in ways which would prevent compulsory
licensing and parallel imports. Consumers reject this position because no drug at the

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end of 20 years will be worth manufacturing. The prices fixed indiscriminately by the
MNCs, will prevent access of the life-saving drugs to over two billion people.

Table 29: Retail prices in USD of 100 tablets Zantac in 11 Asian countries

Source: Retail Drug Prices: The Law of the Jungle, HAI News No. 100, April 1998.

A major argument put forward by multinational drug companies for strong patent
 protection is to have exclusive rights for a period of time so that they can earn adequate
 profits to cover their costs of R & D and to continue further R&D. This seems to be a
  justifiable argument. Therefore, we would need to know how much profits MNCs
make, how much it costs to develop a new chemical entity and the amounts MNCs
really spend on R&D. Unfortunately, independent data on the cost of R&D are scarce.
Comprehensive research and development to discover and develop new chemical
entities require human, technological and financial resources, which, at present, are
available in only 10 advanced industrial countries. The United Nations Industrial
Development Organization (UNIDO) has classified 190 countries into 5 groups based
on the degree of development of pharmaceutical technology and industrial production.

Table 30: A typology of world’s pharmaceutical industries

*) Each country in this group discovered and marketed at least one NCE
Consumers have expressed the following concerns:
• The TRIPs Agreement represents an unprecedented transfer of power over 
economic functioning from the heads of nation states to MNCs.
• There should be a major review of the WTO multilateral trade agreements.

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 Subsequent reforms should incorporate as a central objective the promotion of sustained
development in the Third World.
• The special problems of the least developed countries (LDCs) should receive
 particular attention. In 1978, according to the United Nations, there were 28 LDCs. In
1998 there were 48. The rapid decline into poverty is due to rapid liberalisation,
imposed by WB/IMF structural adjustment programmes and, recently, WTO.
• Trade policy should be a powerful instrument for economic development, and this
aspect must not be lost sight of by narrowly focussing on liberalisation. Based on
analysis of empirical data on the impact of the TRIPs Agreement on access to drugs and
health services in developing countries, the UNDP's Human Development Report 1999
has listed the following concerns:
• Liberalisation, privatisation and tighter intellectual property rights are shaping
the path for the new technologies, determining how they are used. But the
 privatisation and concentration of technology are going too far. Corporations define
research agendas and tightly control the findings with patents, racing to lay claim
to intellectual property under the rules set out in the TRIPs Agreement.
• Poor people and poor countries risk being pushed to the margin in this
 proprietary regime controlling the world’s knowledge.
• In defining research agendas, money talks, not need. Cosmetic drugs and slow
ripening tomatoes come higher on the priority list than drought-resistant crops or a
vaccine against malaria.
• Despite the risks of genetic engineering, the rush and push of commercial
interests are putting profits before people.
• From new drugs to better seeds, the best of the new technologies are priced for 
those who can pay. For poor people, they remain far out of reach.
• Tighter property rights raise the price of technology transfer, blocking develo-
 ping countries from the dynamic knowledge sectors. The TRIPs Agreement will
enable multinationals to dominate the global market even more easily.
•  New patent laws pay scant attention to the knowledge of indigenous people.
These laws ignore cultural diversity in the way innovations are created and shared
 – and diversity in views on what can and should be owned, from plant varieties to
human life. The result: a silent theft of centuries of knowledge from some of the
 poorest communities in developing countries.
• There is a need for a comprehensive review of the WTO Agreements to redress
their perverse effects, undermining food security, indigenous knowledge, biosafety
and access to healthcare.

The people’s response has been loud and clear during the violent events in Geneva,
Seattle, Davos and other places. Why have people reacted so violently? People see that
  power is controlled by market forces operating under faulty global governance
supported by rules, institutions and practices that have been formulated by a selected
few. People ask that they be given a participatory role in decision making to ensure that
 people will be put at the centre of development and that the highest priority be given to
goals of enhancing social development and ensuring human well-being for all
throughout the world. People want a restructuring of the present global governance with
a new set of rules, institutions and practices that will ensure global responsibility, so
that the benefits of globalisation will be shared equally by all the people of the world
and not exclusively by the 20 per cent of the people living in the richest countries. To
conclude, consumers believe it is critical to examine the TRIPs Agreement and explore
the best options in interpreting and incorporating relevant provisions into national

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legislation. The better options will be those that will strengthen the technological,
economic and commercial development of the pharmaceutical sector in developing
countries, which ultimately will ensure regular access to affordable, good quality, safe
and effective drugs. Moreover, long term solutions would include a World Trade
Organization that ensures both free and  fair  international trade, with a mandate
extending to global competition policy with antitrust provisions and a code of conduct
for multinational corporations.

4.7 Country experiences

4.7.1 Experiences with the introduction of patents for pharmaceuticals

In most developing countries, TRIPs standards became enforceable only a few months
ago; therefore time is too short to have evidence about its implications. But the
experience of countries which have adopted pharmaceutical patents in the past decade is
relevant in this context. What happened to foreign direct investment (FDI), transfer of 
technology and (local) R&D? What happened to drug prices?

4.7.1.1 Latin America

Several Latin American countries, such as Chili and the Andean countries changed their 
 patent legislation in 1990/1991; pharmaceuticals became patentable. With regard to
FDI, the experience of countries such as Chili, Colombia and other Andean countries is
that after the adoption of patent protection for drugs, FDI in the pharmaceutical sector 
has not increased, except through the acquisition of local companies by foreign
companies. But there has been no new investment. In addition, a large number of 
formulation plants have been closed down. So after the introduction of the patents,
many foreign companies have decided not to produce (or formulate) locally any more,
 but to import. As a result, there was no increase in FDI and the trade deficit in this area
has increased substantially due to the substitution of local production by direct import.
With regard to the transfer of technology, unfortunately, the situation is not better. As
mentioned, many local companies have been acquired by foreign companies; there is no
clear increase in transfer of technology to local companies. In general, in the area of 
 pharmaceuticals, there is little real transfer of technology. License agreements usually
mean that the patent holder provides the active ingredient, not the technology for the
  production of the active ingredient, and the licensee is usually just formulating.
Therefore it can be concluded that transfer of technology in this area was never very
substantial, and has not increased. Finally, there is no sign of any increase in
 pharmaceutical R&D in these countries, nor are there any clear prospects that R&D for 
diseases relevant to developing countries will increase in industrialized countries.

4.7.1.2 Italy
Italy has introduced patent protection for pharmaceuticals in 1978. At that time, Italy
was a reasonably large producer of pharmaceutical products and an exporter with a
trade surplus. A number of years after the introduction of these patents, prices for 
medicines in Italy had increased significantly, almost 200 %, and Italy began to be a net
importer of pharmaceutical products, going from a trade surplus in pharmaceuticals to a
very severe trade deficit in this area.

4.7.1.3 Thailand

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 The first patent law in Thailand was enacted in 1979, and excluded pharmaceuticals. It
was revised in 1992; the essence of the revision was the inclusion of pharmaceutical
  product and process patents. A further revision, introducing petty patents and
addressing the issue of parallel import, was enacted in March 1999. A study to assess
the impact of the introduction, in 1992, of patent protection for pharmaceuticals
concluded that:
• technology transfer in the pharmaceutical sector has been minimal and has been
limited to formulating techniques; no increase in technology transfer was seen
after the enactment of the 1992 patent law;
• technology that could lead to R&D of new pharmaceutical products in Thailand is
not likely to be transferred;
• since the enactment of the 1992 patent act, there has been an increased tendency to
import drugs (compared to local production), indicating that foreign companies
 benefited more from change in patent law than local companies; the share of originator 
 products as percentage of the total pharmaceutical market increased, on average by 4%
 per year;
• there has not been much foreign direct investment in the pharmaceutical sector 
since 1992;
• for products already on the market, the study did not reveal any price change,
however, due to the selection of products (all selected drugs had competitors in the Thai
market) and a variety of interfering factors, the question of the impact on drug prices is
in fact not answered by the study.

4.7.2 Development of TRIPs-compliant legislation in developing countries

While experience with the actual implementation of TRIPs in developing countries is
limited, a number of observations can be made based on countries' preparations for 
 becoming "TRIPs compliant":
• As mentioned earlier   , TRIPs leaves substantial room for an implementation in a
way which takes specific national policies and priorities into account. This flexibility is
 built into the TRIPs Agreement. Developing countries therefore should implement the
TRIPs while truly taking into account Article 1.1 of the Agreement, which provides that
members are free “to determine the appropriate method of implementing the provisions
of this agreement within their own legal system and practice”.
• Efforts related to the implementation of the TRIPs Agreement will not end by the
end of the transitional periods, since part 3 of the TRIPs Agreement provides minimum
standards for the enforcement of IPR protection. The workload and pressure on the
legal system of developing countries, related to enforcement, will only begin after the
end of the transitional periods.
• Implementation will reach beyond the intellectual property offices, since the
enforcement rules included in TRIPs may require the revision of national laws in
respect of civil, criminal and administrative procedures as well as a revision of the role
of police and customs authorities. Thus, TRIPs enforcement should be part of a wider 
approach which comprehensively strengthens the legal and law enforcement
infrastructures.
• A final important observation relates to post-TRIPs era: the legal structure of 
TRIPs emerged from and belongs to the legal and historical traditions of developed
countries. In fact TRIPs has been described as reflecting the legal culture, paradigms
and interests of industrialized nations. However often IP has been equated with TRIPs
and it is important to make a distinction. IP does not have to be contradictory to the

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  policy objectives of developing countries; in fact, some believe that increased
  protection of intellectual property rights may enhance the achievement of those
objectives. The development IP rights which are of interest to developing countries,
covering their knowledge base and information resources, may make IP a more positive
discipline for these countries and can present an important aspect of sustaining the
effectiveness and acceptance of IP systems worldwide. Specifically, a lot of interest has
  been expressed on the part of developing countries for standards providing for the
 protection of traditional medicine and know-how and biodiversity.

4.8 Technical issues

4.8.1 Patentability of pharmaceutical inventions

The main rule relating to patentability is that patents shall be available for any
invention, whether a product or a process, in all  fields of technology, provided the
invention meets the standard criteria for patentability - namely, novelty, inventive step
and industrial applicability. In addition, countries are required to make the grant of a
  patent dependent on adequate disclosure of the invention and they may require
information on the best mode for carrying it out. Disclosure is crucial, since it makes
important technical information publicly available so that others may use it for 
advancing technology in the area, even during the patent term, and it ensures that, after 
the expiry of the patent term, the invention truly falls into the public domain. Three
types of exception to the above rule on patentable subject-matter are allowed; these
exceptions may be of interest from a public health perspective:
• Inventions the revention of whose commercial exploitation is necessary to protect
ordre public or morality, including to protect animal or plant life or health;
• Diagnostic, therapeutic and surgical methods for the treatment of humans or 
animals; and
• Certain plant and animal inventions.

4.8.2 The rights conferred and the term of protection

According to TRIPs, the minimum rights that must be conferred by a patent follow
closely those that were found in most patent laws, namely the right of the patent owner 
to prevent unauthorized persons from using the patented process and making, using,
offering for sale, or importing8 the patented product or a product obtained directly by
the patented process. Under the TRIPs Agreement, protection must last for at least 20
years from the date of filing of the patent application. The WTO Panel in "Canada -
Term of Patent Protection" recently found that this rule applied not only to new patents
 but also to patents in force at the end of a Member country's transition period. It should
 be noted that, although the issue of patent term extension to compensate for regulatory
delays in the marketing of new pharmaceutical products was raised in the Uruguay
Round negotiations, the TRIPs Agreement does not contain an obligation to introduce
such extension.

4.8.3 Limitations/exceptions to these rights

Under the TRIPs Agreement, patent rights are not absolute but can be subject to the
following limitations or exceptions:
• Countries may make limited exceptions, provided that such exceptions do not

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 unreasonably conflict with a normal exploitation of the patent and do not unreasonably
 prejudice the legitimate interests of the patent owner, taking into account the legitimate
interests of third parties. Thus, for example, many countries allow third parties to use a
 patented invention for research purposes where the aim is to understand more fully the
invention as a basis for advancing science and technology. The Bolar provision (see
 par. 3.5) is another example of an exception.
• Countries may authorize the use by third parties (compulsory licenses) or for public
non-commercial purposes (  government use) without the authorization of the patent
owner. Unlike what was sought by some countries in the negotiations, the grounds on
which this can be done are not limited by the Agreement, but the Agreement contains a
number of conditions that have to be met in order to safeguard the legitimate interests
of the patent owner (see Article 31). Two of the main conditions are that, as a general
rule, an effort must first have been made to obtain a voluntary license on reasonable
commercial terms and that adequate remuneration shall be paid to the right holders.
• Countries have the right to take measures, consistent with TRIPs provisions,
against anti-competitive practices. When a practice has been determined after due
 process of law, to be anti-competitive, the conditions for issuing compulsory licenses
are more flexible. For example, the two conditions specifically referred to above
(regarding voluntary license and remuneration) may be relaxed. The Agreement also
 provides for consultation and cooperation between Member Countries in taking actions
against anti-competitive practices.

4.8.4 Other policy instruments

It should be remembered that governments may use public policy measures outside the
field of intellectual property to address issues of access to and prices of drugs. For 
example, many countries use price or reimbursement controls. The TRIPs Agreement
makes it clear that WTO Members may, in formulating or amending their rules and
regulations, adopt measures necessary to protect public health and nutrition, provided
that such measures are consistent with the provisions of the Agreement.
Transition provisions
The TRIPs Agreement lays down some rather complicated transition provisions which
give countries periods of time to adapt their legislation and practices to their TRIPs
obligations; these periods differ according to the type of obligation and the stage of 
development of the country concerned. With regard to the protection of pharmaceutical
inventions, there are two situations. The basic rule is that developing countries have
until the 1st January 2000 and least developed countries until 1st January 2006 to meet
their obligations. A small number of developing countries, which did not grant patent
 protection for pharmaceutical products, have until 1st January 2005 to introduce such
  protection. However, from 1 January 1995, they have to provide a system where
applications for pharmaceutical product patents can be filed (often referred to as a
"mailbox" system). These applications do not have to be granted until after 1st January
2005. If found to be patentable by reference to their filing (or priority) date, a patent
would have to be granted for the remainder of the patent term counted from the date of 
filing. In the event that a pharmaceutical product that is the subject of a "mailbox"
application obtains marketing approval prior to the decision on the grant of a patent, an
exclusive marketing right of up to five years will have to be granted provided that
certain conditions are met.
TRIPs in context 

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 Most developing and least developed countries already grant patent protection for 
  pharmaceutical products. In these countries, the TRIPs Agreement will therefore not
lead to fundamental changes, although a certain amount of adjustment in legislation, for 
example in respect of patent term and compulsory licensing, may be necessary. With
respect to the fairly limited number of countries that did not provide patent protection
for pharmaceutical products at the time of entry into force of the WTO Agreement,
some, including Brazil and Argentina, have decided to provide such protection more
quickly than is required under the TRIPs Agreement. The TRIPs Agreement pays
considerable attention to the need to find an appropriate balance between the interest of 
rights holders and users; this was an important theme in the negotiations. This is not
only reflected in the basic underlying balance related to disclosure and providing an
incentive for R&D, but also in the limitations and exceptions to rights that are permitted
and in the transition provisions. Whether this balance has always been found in the right
  place is a question for discussion among WTO Members. The protection of 
 pharmaceutical inventions is one aspect of much wider negotiations, covering not only
the protection of intellectual property in general in a coherent and non-discriminatory
way but also further liberalization and strengthening of the multilateral trading system
as a whole. While it is true that some countries put particular emphasis on TRIPs
matters in the Uruguay Round negotiations, it is also true that other countries attached
great importance to other areas, for example textiles and agriculture. A strong and
vibrant multilateral trading system is believed to be essential for creating conditions for 
economic growth and development worldwide. This, in turn, will generate the resources
required to tackle health problems.

4.9 Standards for patentability

TRIPs requires that patents are granted when the typical standards for patentability, that
is, novelty, inventive step and industrial applicability, are met. But the Agreement does
not specify how these criteria should be defined and applied. So there is room for WTO
members to decide how to apply these criteria, in a strict way or in a very flexible way.
Some countries apply these criteria in a very flexible way and, paradoxically perhaps, a
good example is the US. An example is the novelty requirement. Usually, the novelty
requirement means that a patent will not be granted if the invention has been disclosed
anywhere in the world. This is the universal standard of novelty. Disclosure can take
 place through  publication or through use (if an invention is used, it means the public
knows it). These are the typical ways in which disclosure can destroy novelty, and
therefore can destroy patentability. But the US has standards for novelty which are
lower. Under US law, novelty is destroyed if an invention has been disclosed through
 publication or through use in the US. But outside the US, novelty will only be destroyed
if the disclosure took place via publication. Novelty is not destroyed if disclosure was
done through use of an invention outside the US. This is the reason why, in the US,
 patents have been granted, and this has created a lot of concern in developing countries,
on traditional or indigenous knowledge, plants and genetic materials used for centuries
in developing countries; the Indian Neem tree is one of the well known cases. Similarly,
the way in which the inventive step requirement is applied, is very loose.
This has drawn a lot of attention lately, because of a number of patents granted on so
called business systems, for instance the “one-click” method for buying books by
ecommerce. This has been patented and as a result no other company can use a system
for ordering a product via the internet, based on only one click.

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Figure 28: Animal hat patent

Figure shows an example of a patent granted in the US in 1990, which is still in force:
 patent number 4,969,317 Animal Hat Apparatus and Method. There are many other 
examples of trivial inventions for which patents have been granted, and this has created
considerable controversy. The patent in this example is not very significant, since it has
little economic importance. But the same loose criteria are applied in other sectors, such
as pharmaceuticals.
When thinking about patents for pharmaceuticals, implicitly one thinks about new
drugs, about new chemical entities (NCEs). Each year, only a limited number (less than
100) of NCEs are being developed. Yet thousands of pharmaceutical patents are being
granted, since around most NCEs, there is a large number of patents which relate to
 processes, dosage forms, formulations etc. This creates a very difficult situation for 
companies which are interested in producing a generic version. Some concrete
examples:
•  Processes: Ertythropoietin is a human protein, an important biotechnology
 based product. The first to sequence the gene that codifies for this protein was a
US company, Amgen. But with 2-3 months time lag, another company,
Genetics Institute (GI) also sequenced the gene and each claimed to be the
inventor. In fact, it could be argued that the inventor was nature and that the
companies just discovered it. However, in the US, a decision was taken in favor 
of Amgen, and as a result GI was unable to commercialize this product in the
US. GI then applied for a number of process patents, not in the US, where it had
lost, but in several developing countries in Latin America. So in Chili,
Argentina, Mexico and some other countries, GI owns process patents related to
ertythropoietin, on the basis of which it has tried to stop any production and
commercialization of ertythropoietin. A process patent puts the burden of proof 
on the defendant, therefore, once the patent has been granted, it can be used
aggressively to stop competition since there is an assumption of validity. Maybe
the defendant can prove after 2-3 years (this is how long it usually takes) that he
has the right to produce ertythropoietin, because the patent was invalid or 
 because a different process is being used, but in the meantime the defending
company may already have gone out of business.

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 • Uses: Some countries are also issuing patents for new uses of a known product;
e.g. the second indication for pharmaceuticals. An example is AZT. AZT was a
known product but a new patent was granted for use in case of HIV infection.
There was no real novelty, so it is under a fiction of novelty that such patents
are granted. It is important for countries to consider whether they will grant
 patent protection for such new uses.
•  Polymorphs: Polymorphs are different crystals of the same molecule. So
chemically, it is the same thing. Sometimes, the originator company asks for a
new patent for a different polymorph; this may lead to an extension of the patent
  protection. A well-known case is cimetidine. SK-F obtained a patent for 
cimetidine and 4 or 5 years later applied for and obtained a patent on a
  polymorph, with which the patent protection would effectively have been
extended for 4 to 5 years. In this particular example, the second patent was
challenged and eventually invalidated, but this creates situations in which
companies are forced to litigate. Due to such flexible application of patentability
criteria, a growing number of patents are granted, which leads to over-
  protection. So while there is a role for the patent system to protect real
inventions, the system should not be misused by granting patents for 
 polymorphs, dosage forms, formulations, processes etc., which limit the scope
for generic introduction and competition. Finally, it is important to realize that it
is not relevant whether the secondary patents are strong; even if they are weak,
  big companies can use them aggressively against small, local or generic
companies and stop competition, because litigations are cumbersome and costly.
Therefore, defining the scope of patentability, including patentability of 
secondary inventions, is a very crucial issue.

4.10 Compulsory License

A compulsory license is an authorization which is granted by the government without
the permission of the patent holder. Most countries have provisions for compulsory
licenses, either under their patent law or, as in the US, through anti-trust legislation.
Under the TRIPs Agreement, countries have the right to issue such licenses. While the
Agreement does not limit the grounds -or reasons- for granting compulsory licenses,
countries can only use those grounds which are allowed by their national legislation.
The development of appropriate national legislation is therefore crucial. TRIPs further 
states that the conditions under which a compulsory license is granted should be
regulated in accordance with the TRIPs Agreement (Article 31).
Grounds
Countries have specified many different grounds for issuing compulsory licenses; these
can include public health reasons. Other grounds are for instance emergency situations,
epidemics, public non-commercial use, to remedy anti-competitive practices or to
 protect the environment; it is entirely up to the national law to decide which are the
grounds, so there is a lot of flexibility. The German law, for example, simply states that
compulsory licensing is allowed ‘for reasons of public interest’; a broad description that
can be used in many situations. Under US law, compulsory licenses can be issued to
remedy anti-competitive practices and for use by the Federal Government; both these
grounds are used extensively for issuing such licenses.

Conditions

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 A compulsory license limits the rights of the patent holder, but does not take those
rights away. TRIPs therefore specifies the conditions that need to be applied when
countries want to grant a compulsory license. An important condition is that each case
shall be considered individually. Also, in general, efforts should first be made to obtain
a license from the patent holder (a so-called voluntary license), on reasonable terms.
What is considered ‘reasonable’ depends on national (case) law. The conditions
mentioned in TRIPs merit careful reading, and it is important to select carefully the
wording when translating TRIPs into national legislation:
• Remuneration for the patent holder shall take into account (not "be equal to" or 
"be based on") the economic value of the authorization. So if the contribution of 
a patent is minor, as for instance in case of a formulation patent, the royalty rate
can be lower. Under US national law, compensation is based on what the patent 
holder has lost. In case of a CL to provide drugs to a population who would
otherwise not be able to afford those drugs, it could be argued that the patent
holder lost nothing.
• In case of public non-commercial use or government use, TRIPs does not 
require countries to provide for the right of injunction, only for payment of 
compensation. Again, this is important for the actual implementation of a CL for 
 public use. This is practiced in the US; the US Government cannot be sued for 
infringement of a patent, it can only be sued about the amount of compensation
 paid. Under US law, the same applies to contractors acting on behalf of the US
Government.
• A decision to issue a CL must be subject to review, but this does not have to be
a judicial review; TRIPs only requires that the review is independent, so
countries may opt for an administrative review, which is less burdensome and
much faster. It seems advisable for developing countries to provide for an
administrative review only, to prevent patent holders from blocking the use of a
CL by initiating time-consuming court procedures.
• A compulsory license shall be  predominantly for the supply of the domestic
market. A CL therefore would hardly interfere with practices of differential or 
tiered pricing. However, "predominantly" is not exclusively, so some export is
still possible. Public interest groups advocate that export to a market where a CL
has been issued, should be allowed; otherwise, countries with small markets,
where local production is not viable, would not be able to use CL provisions
effectively.
• If a CL is issued to remedy anticompetitive practices, many of the conditions do
not apply, such as the requirement to first try to obtain a voluntary license. Also,
the restriction on export no longer applies; this is important for the US, which
frequently issues compulsory licenses to remedy such practices.
 Main function
At times, the fact that few such licenses have been granted is used as an argument
against the compulsory license system. While it is true that in some countries, e.g. UK,
few compulsory licenses have been issued, other countries, such as the US, have
granted a large number of compulsory licenses. But regardless of whether or not they
are used frequently, provisions for compulsory licensing are needed, because they will
encourage the patent owner to behave correctly. They give a sign to the patent owner 
that in the case of abuse of rights and/or non-availability of the product, a third party
could be allowed to use the invention; this prevents malpractice and misuse of the
monopoly rights. In fact, one of the most important aspects of a compulsory license
system is its impact on the actual behavior of the patent owner, therefore it is a

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necessary element in any IPR law. However, to ensure the system can be used
effectively, it is important to carefully state the grounds and conditions for its use in the
national legislation; these should include its use for reasons related to public health.

4.11 Parallel import

Parallel importation refers to the importation, without authorization of the patent holder,
into a country of a product from a third country, where this product has been marketed
 by the patent holder or in another legitimate manner. It is mainly used when the price in
the third country is considerably lower than the price the patent holder charges in the
country concerned. Parallel import is allowed under the TRIPs Agreement; in fact,
TRIPs explicitly states that it does not address the issue of parallel import, thereby
leaving countries free to determine their own policy in this respect. At times it is being
argued that allowing parallel import in developing countries will result in an increase in
counterfeit and/or substandard products in the market and will therefore have a negative
impact on consumers. This is speculation. However the benefits are quite clear and
there is a strong economic rationale for developing countries to adopt parallel import. A
market where price discrimination is common, such as the pharmaceutical market
where prices for the same product can vary considerably between countries, will
fundamentally change if parallel import is allowed. The multinational pharmaceutical
industry argues that parallel import will prevent preferential prices for developing
countries. To the extend that developing countries do indeed benefit from preferential
  prices, this could be true. The drug companies’ worries are understandable since,
obviously, revenues would come under pressure if ‘high-price markets’ such as the US
would start parallel importation of cheaper drugs from, for instance, Canada. If this
were to happen (in fact, currently there is considerable support in the US for allowing
  parallel import of drugs from Canada), companies would be tempted to react by
harmonizing their prices across borders. The solution however seems to be to prevent
  parallel importation in industrialized countries, instead of putting pressure on
developing countries in this respect. It is worth noting that the US legislation on IPR 
allows parallel importation; however, in the US, parallel import of medicines is
forbidden by regulations related to Food and Drug Control.

4.12 Exceptions to the exclusive rights

TRIPs Article 30 allows for limited exceptions to the rights conferred to the patent
holder. These exceptions however can be challenged and subsequently reviewed by the
WTO. In the context of pharmaceuticals, the most common exception to the exclusive
rights of the patent holder is often referred to as the 'Bolar provision'. A Bolar provision
allows interested (generic) manufacturers to start producing test batches of a product
 before the patent expires, in order to collect the necessary data for submission to the
registration authorities; this will reduce the delay for generic products to enter the
market after the patent has expired, and thereby enhance competition. The text of the
TRIPs Agreement does not specifically address this issue. However, in a recent WTO
dispute, a WTO Panel ruled that a provision in Canadian law, which permits the use of 
 patented products by generic producers for the purposes of seeking regulatory approval
from the authorities for the marketing of their generic version soon after the patent
expires, is allowed under TRIPs. However, the Panel also decided that manufacturing

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 and stockpiling of patented medicines by generic producers during the six months prior 
to the expiry of the patent term (which was also permitted under Canadian law) is not 
allowed. With this decision, the Panel effectively has decided that a 'Bolar type'
 provision is ‘TRIPs compliant', provided certain conditions are met.

4.13 Roadblocks on the pharmaceutical competition highway: Strategies to delay

generic competition

4.13.1 Introduction
This Antitrust law and antitrust enforcement play a crucial role in assuring that
consumers receive the benefits of a competitive marketplace. That is particularly true in
generic pharmaceutical markets. In some respects generic pharmaceuticals are the
model of a competitive market: there are numerous competitors and relatively limited
 barriers to entry. Generic pharmaceuticals are instrumental to health care in the United
States and offer low cost and high quality to millions of consumers. The promise of 
generic drugs, however, is threatened by exclusionary conduct by dominant brand name
firms.
This section describes various types of exclusionary conduct and explains that without
effective use of antitrust law to restrain exclusionary conduct by dominant firms the
 promise of generic competition may be diminished or forestalled. This section begins
with a discussion of the importance of generic pharmaceuticals and preventing
anticompetitive conduct that hampers generic entry. It then addresses how the
 pharmaceutical market is different from other types of markets and how the rules for 
dominant firm conduct should be adapted to those industry-specific factors. The article
then addresses three types of ongoing anticompetitive conduct by dominant brand name
firms: product line extensions, citizen petitions, and authorized generics. It closes with
four suggestions for antitrust enforcement in order to assure that the competitive market
for generics is protected from exclusionary conduct by dominant pharmaceutical
companies.

4.13.2 The importance of generic competition

It seems indisputable that competition from generic pharmaceutical manufacturers
 benefits every consumer. Generic drugs typically sell for approximately 70% less than
their branded alternatives. Generic drugs are as safe and efficacious as branded drugs.
Generic drugs account for over 56% of all prescriptions but only account for 13% of 
 pharmaceutical expenditures. According to a CBO study in 1994 (when the rate of 
generic substitution was far lower), consumers in the U.S. saved $8-10 billion annually
 because of generic drugs. Generic drugs not only result in cost savings, but also enable
more consumers to purchase safe essential drugs needed for their health and well being
at the lowest price. ¶
Why is antitrust enforcement important to the emergence of generic drugs? Today
consumers can purchase low-cost generic forms of Remeron, Relafen, Buspar, Taxol,
Augmentin, Paxil, Lupron, Coumadin, and Platinol. For each of these drugs the branded
company – a dominant firm – attempted to extend its patent monopoly through some
form of alleged exclusionary conduct. In some cases the firms used questionable filings
in the FDA orange book. In other cases they engaged in inequitable conduct before the
Patent and Trademark Office. In other cases they engaged in sham litigation. In still
other cases they found different ways to delay generic entry. In total, these drugs

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 accounted for sales of over $10 billion a year before this anticompetitive conduct
ceased. Thanks to the efforts of the Federal Trade Commission, state attorneys general,
and private antitrust attorneys representing buyers of these drugs, antitrust litigation
  played a significant role in ending this anticompetitive conduct. Consumers save
 billions of dollars annually because of these enforcement efforts. Perhaps one sign of 
the importance of these cases is that the rate of generic substitution has increased from
44% to 56% in the past decade.
Policing exclusionary conduct by dominant firms in the pharmaceutical industry could
not be a greater priority. Unfortunately, the pharmaceutical industry offers many
opportunities for dominant firms to manipulate a highly complex regulatory system to
secure monopoly profits, not through superior foresight, industry and innovation, but by
finding loopholes to delay competition.

4.13.3 Why pharmaceuticals are different

• Regulation: Pharmaceuticals are heavily regulated. This regulation has a
significant impact on entry and in turn, competition. No system of regulation is
 perfect, and regulation almost always offers the opportunity for competitive
mischief.
• Buyer Identity: Who is the buyer? Antitrust seeks to protect the interests of 
 buyers and consumers, but assessing the identity of the buyer is quite complex
in the pharmaceutical context. Is the ultimate buyer the consumer, the insurance
company, the Pharmacy Benefit Manager, the physician who describes the drug
or a combination of some or all of these? Determining the buyer is important in
identifying competitive alternatives and defining the relevant market. It also
may be important in determining which parties have standing to bring antitrust
claims.
• Costs: Pharmaceuticals typically have high fixed costs and very low incremental
costs. The costs of manufacturing and marketing drugs are modest compared to
the cost of development.
• Distribution: Forms of distribution are complex Pharmaceuticals are distributed
through numerous intermediaries. Not all distribution mechanisms are equally
important and exclusion from some preferred mechanisms may pose especially
significant concerns. What do these special factors suggest about the standards
for single firm conduct in the pharmaceutical industry? The following factors
counsel for a more careful antitrust analysis in three areas:
• Deceptive Conduct: The regulatory setting suggests that antitrust enforcers and
courts must be particularly attentive to the opportunities of dominant firms to engage in
deceptive or sham conduct. In a setting where serial litigation or regulatory filings may
 be a particularly fruitful tactic to delay competition, the courts and enforcers must be
increasingly skeptical of claims that such efforts were based on the merits.
• Cost-Based Testing: The cost relationship means that cost-based tests for 
 predatory conduct may often be misleading. In a situation where variable costs are
small, using a cost-based test may not be instructive in attempting to identify
exclusionary conduct.
• Safe Harbors: The complexity of distribution suggests that antitrust courts and
enforcers should be extremely careful about using safe harbors in pharmaceutical
distribution cases. For example, often in exclusive dealing cases the courts will focus on
the significance of a specific form of distribution in the entire market. However, not all
forms of distribution are equally important.

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 4.13.4 New forms of anticompetitive conduct by dominants
Thanks to the effective enforcement of antitrust laws, many forms of exclusionary
conduct by dominant branded pharmaceutical manufacturers have been stopped. But
new forms are arising. This section focuses on three varieties of conduct by dominant
firms that may raise competitive concerns: product line extensions, questionable citizen
 petitions, and authorized generics.

It is necessary to understand the incentives created by the pharmaceutical regulatory

system to understand the nature of these practices. Patent laws and the Hatch-Waxman
Act provide a period of exclusivity for brand name drugs during which there can be no
competition. This period of exclusivity provides an important incentive for brand name
firms to invent new drugs or improvements to existing drugs. Toward the end of a
 patent's life, the patent-holding firm faces the loss of a significant revenue stream. The
expectation is that once a patent has elapsed, or a generic firm has developed a non-
infringing version of the drug (or the patent is declared invalid), generic entry will
occur. As described below, however, there are several types of exclusionary conduct
that the patent-holding firm may engage in to delay or dampen the effect of generic
entry.

When dominant firms face the threat of new entry they often turn to strategic conduct to
hold rivals at bay. Facing the inevitable decrease in market share (and consequent
decline in sales revenue) that follows the loss of patent protection and introduction of 
generics, brand name drug manufacturers increasingly have turned to underhanded
means to delay competition.

4.13.4.1 Product line extensions

Innovation is the lifeblood of the pharmaceutical industry and advances in drug
technology mean that a growing number of medical conditions can be treated more
effectively and safely. Moreover, advances can often improve the mechanism of 
delivery, dosage forms, and the method of interaction. Product line extensions are
common in almost every industry, as we can tell from the numerous products advertised
as “new and improved.”
On the other hand, sometimes a product line extension has anticompetitive effects,
especially when it is coupled with additional conduct to create barriers to generic entry.
The FTC recognized this potential for anticompetitive conduct in its investigation of the
merger of Cima and Cephalon. In that case, Cephalon manufactured a drug to help
alleviate pain after cancer treatments. Cima was developing a similar drug. The merger 
raised competitive concerns in part because of the FTC’s belief that if the merger was
consummated the Cephalon drug, whose patent was about to expire, would be removed
from the market. As the FTC observed, “Cephalon’s ownership of both products will
allow it to undermine generic entry by shifting patients [to the Cima product] prior to
generic launch, depriving consumers of the full benefits of generic competition.”
Without the Cephalon drug in the market, generic entry would be deterred. In order to
avoid these potential anticompetitive effects, the FTC required Cephalon to enter into a
licensing agreement to facilitate generic entry.

Perhaps the most prominent case in this area is Abbott Labs. v. Teva, involving antitrust
claims by Teva, Impax, and several groups of buyers alleging that Abbott’s changes to
the drug Tricor violated Section 1 and 2 of the Sherman Act. Tricor is a drug used to
lower cholesterol with sales nearing one billion dollars. Teva and Impax battled for 

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 several years, challenging Abbott’s patents over the capsule version of Tricor.
According to their allegations, they prevailed on all their patent claims and were poised
to enter the market in 2003. Then Abbott changed the product from a capsule to a tablet
version, suggesting that the tablet version did not have to be taken with food, among
other improvements. Further patent litigation ensued, and again Impax and Teva
 prevailed. Abbott did not just change their product. After the FDA approved the tablet
formulation, Abbott stopped selling Tricor capsules and also bought back all the
existing supplies of those capsules from pharmacies. In addition, Abbott changed the
code for Tricor capsules in the National Drug Data File (“NDDF”) to “obsolete.”
Changing the code to “obsolete” removed the Tricor capsule drug formulation from the
 NDDF, preventing pharmacies from filling Tricor prescriptions with a generic capsule
formulation. Teva, Impax, and certain buyers of the drugs brought an antitrust suit
challenging Abbott’s conduct. The defendants filed a motion to dismiss that was
rejected. The court began by observing the difficult task of analyzing a product
innovation claim: Because, speaking generally, innovation inflicts a natural and lawful
harm on competitors, a court faces a difficult task when trying to distinguish harm that
results from anticompetitive conduct from harm that results from innovative
competition. ‘The error costs of punishing technological change are rather high and
courts should not condemn a product change, therefore, unless they are relatively
confident that the conduct in question is anticompetitive. If consumers are free to
choose among products, then the success of a new product in the marketplace reflects
consumer choice, and ‘antitrust should not intervene when an invention pleases
customers.'
The defendants argued that in order to prevail the plaintiff would have to demonstrate
that “the innovator knew before introducing the improvement into the market that it was
absolutely no better than the prior version, and that the only purpose of the innovation
was to eliminate the complementary product of a rival.” The defendants fundamentally
claimed that any product improvement would be per se legal. The court, however,
rejected the claim.
Rather than adopting the rule of per se legality suggested by the defendants, the court
stated that the rule of reason balancing approach of the D.C. Circuit in US v. Microsoft 
was appropriate: The nature of the pharmaceutical drug market, as described in
Plaintiffs' allegations, persuades me that the rule of reason approach should be applied
here as well. The per se standard proposed by Defendants presupposes an open market
where the merits of any new product can be tested by unfettered consumer choice. But
here, according to Plaintiffs, consumers were not presented with a choice between
fenofibrate formulations. Instead, Defendants allegedly prevented such a choice by
removing the old formulations from the market while introducing new formulations.
Hence, an inquiry into the effect of Defendants' formulation changes, following the rule
of reason approach, is justified.

Here the critical element was the conduct Abbott engaged in that limited consumer 
choice. The removal of the product from the NDDF and the withdrawal of the product
were critical, since these actions prevented generic substitution. The defendants argued
that this conduct was not an antitrust violation because a monopolist does not have any
duty to assist its competitors. The court disagreed: a monopolist is not free to take
certain actions that a company in a competitive (or even oligopolistic) market may take,
  because there is no market constraint on a monopolist's behavior…. Contrary to
Defendants' assertion, Plaintiffs allege harm to competition rather than simply harm to
Teva and Impax. By removing the old products from the market and changing the

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 NDDF code, Defendants allegedly suppressed competition by blocking the introduction
of Generic fenofibrate.

In some respects the Tricor case is similar to the  Losec case pursued by the European
Union and Canada against AstraZeneca for making patent filings after patent expiration
to delay generic competition. In Canada, when the patent for Losec expired,
AstraZeneca applied for two new patents with respect to the product, but did not
incorporate this new technology into any of its products. It also withdrew the additional
 product from the market. When the generic manufacturer in Canada, Apotex, sought to
 produce the drug on which the patent had expired, AstraZeneca challenged its entry
  because Apotex failed to secure approval on the two new patents. Late last year 
AstraZeneca was found to have violated the Canadian Competition Act. In the EU,
AstraZeneca was fined 60 million Euro for similar conduct; that decision is on appeal to
the Court of First Instance.

A more recent case in the United States was filed by several groups of drug buyers
against AstraZeneca for anticompetitive conduct involving the conversion of the drug
Prilosec to Nexium just as Prilosec was losing its patent protection. The suit alleged that
the “expensive, unnecessary and fraudulent conversion was undertaken solely in order 
to thwart and impede generic competition and thereby maintain defendants’ dominant
 position.” The suit claimed that AstraZeneca’s conversion of the market from Prilosec
to Nexium forced drug purchasers to pay more than $2 billion in increased drug costs
since December 2002.

The specific alleged anticompetitive conduct included the following:

• Up to 18 months before AstraZeneca was going to lose exclusivity for Prilosec,
it stopped promoting about the drug’s effectiveness.
• While creating and marketing Nexium, the company also effectively withdrew
Prilosec from the market, causing managed care organizations to not cover the
cost of its generic.
• AstraZeneca marketed Nexium by saying it was superior to Prilosec, but to
obtain FDA approval, it assured the FDA that it would not say that Nexium was
 better. In reality, it was essentially the same product.

4.13.4.2 Citizen petitions

The court system and the regulatory process can be used as tools to delay the entry or 
expansion of rivals to dominant firms. One of the most effective ways for parties to
acquire or maintain market power is through the abuse of government processes. The
cost to the party engaging in such abuse typically is minimal, while the anticompetitive
effects resulting from such abuse often are significant and durable.” Anticompetitive
conduct through regulatory abuse can be especially pernicious.
When a firm acquires a dominant position through competition in the marketplace, we
can expect other competitors to arise and possibly displace them. No natural
competitive force, however, can displace dominance acquired through abuse of the
regulatory process.
That is especially the case in the pharmaceutical industry, where litigation and
regulatory approval are necessary for market entry. Not surprisingly, some of the most
 prominent government enforcement actions against dominant firms have involved all
abuse of the regulatory process. One example of this regulatory abuse is sham orange
 book filings, such as the FTC cases involving Buspar and Tiazac and the State Attorney

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 General case involving Remeron. These cases, and similar cases brought by private
 plaintiffs, have saved consumers hundreds of millions of dollars.

One example involves the drug Coumadin, which is used by millions of Americans for 
 blood-clotting disorders. In the mid- 1990s, faced with the anticipated threat of generic
entry, Coumadin's manufacturer engaged on a multifaceted course of conduct to raise
questions about the safety and bioequivalence of the generic drug, petitioning the FDA,
the U.S. Pharmacopeia Convention, Inc. (“USP”), state legislators and state regulatory
  bodies and engaging in an alleged misleading advertising campaign. None of the
 petitions succeeded. The purpose of these efforts was to delay generic entry. These
  practices ceased after antitrust litigation brought by the generic manufacturer and
groups of buyers.
Almost 30 years ago, Judge Robert H. Bork observed that “predation by abuse of 
governmental procedures, including administrative and judicial processes, presents an
increasingly dangerous threat to competition.” No statement could be more on point for 
anticompetitive conduct in the pharmaceutical industry and the practice of so-called
“citizen petitions.”
The FDA, like other regulatory agencies, allows the public to petition the agency using
‘citizen petitions.” Citizen petitions can provide an opportunity for individuals to
express their concerns about safety, scientific, or legal issues regarding a product
anytime before its market entry. Often these public challenges are genuine and
legitimate. Increasingly, pharmaceutical companies have been exploiting the citizen
 petition process by filing baseless and redundant petitions in an effort to delay FDA
approval of generic drugs.
As one generic drug executive has observed in Senate testimony: Frequently, a brand
company will file a frivolous petition on the eve of FDA approval of a generic
equivalent. This despite the fact that the FDA may have already granted a tentative
approval, meaning that FDA already determined the generic product is safe and
effective. The brand strategy is that it will take several months for the FDA to decide
the petition, during which time approval of the generic drug is held in limbo. The brand
is not required to submit petitions with merit. What the brand company can do is block 
competition for several months beyond the life of the 20-year patent, thereby extending
its monopoly on the market.
In order to slow the approval process, citizen petitions are often submitted on the eve of 
the completion of the FDA review, which is when the brand company’s patent expires.
These petitions are often based on information available well before the petitions are
submitted. The citizen petition approval process is time-consuming. Despite tentative
approval of the generic drug, it could take several months for the FDA to respond to a
 petition. The qualified generic is held in administrative limbo. Consumers suffer as
lower cost alternatives are kept off the market.
The FDA citizen petition process provides significant opportunities for deception.
There are no requirements for proof of the accusations made in a petition; no
requirements for certifications to the accuracy of the information; penalties for 
inaccurate or improper filings; and there are no limits on how many petitions can be
filed. Multiple citizen petitions can be filed during the review process of a single
generic drug. Often petitions are filed over an extended period of time, in an effort to
extend the review process as long as possible. Some petitions contain little or no
evidence and rely on obsolete, irrelevant, or erroneous information. Filers even submit
the same petitions again after they have already been denied.

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 The FDA has cited incidents in which citizen petitions have been used for improper 
 purposes. FDA Chief Counsel Sheldon Bradshaw has acknowledged that he had seen
“several examples” of citizen petitions seemingly designed to delay approval of generic
drugs. According to the FDA, it is rare that petitions present new issues that the FDA
has not already considered. The Office of Generic Drugs denies a high percentage of 
the petitions that it receives and few have ever altered FDA policies towards generic
drugs. Dale Conner, the Director of the Division of Bioequivalence at the FDA Office
of Generic Drugs, claims that most petitions are rejected because they are baseless:
“Most of the time their motivation is simply to make it harder for the competition to
come to market.”
Perhaps the most critical factor in evaluating this practice is the impact of the petitions.
The reality is that a trivial portion of the petitions are accepted by the FDA and found to
require further action. Since the Medicare Modernization Act of 2003, brand companies
have filed 45 separate citizen petitions requesting that the FDA delay the approval of a
generic drug. Of these 45 petitions, the FDA has ruled on 21, of which they denied 20,
or 95%. Eleven of the 21 petitions were “last minute petitions” filed within four months
of the generic drug’s scheduled entry into the market. None of these last minute
 petitions were approved, but on average they caused delays of an average of 10 months.
In one case, for each day that the petition delayed generic drug entry, the brand
company gained an estimated $7 million.
Obviously this is an attractive mechanism to delay generic entry. Not surprisingly, there
has been a substantial increase in citizen petitions. The FDA Center for Drug
Evaluation and Research (CDER) recorded an almost a 50% increase in the number of 
citizen petitions it received from 2003 to 2004. As of July 2006, there were about 170
citizen petitions pending compared to 90 in 1999. Defenders of the citizen petition
 process would suggest that these petitions are immune (or per se legal) under the Noerr-
Pennington doctrine. Although the doctrine protects a wide variety of legitimate
 petitioning, certain types of sham petitioning are not immune. The FTC’s recent report
on the Noerr-Pennington doctrine properly identifies limits to that immunity. Both
courts and antitrust enforcers should recognize the pernicious effects of petitioning on
generic entry.

4.13.4.3 Authorized generics

Another practice that may raise competitive concerns is the creation of so-called
“authorized generics,” in which a branded company introduces a generic version of its
own patented drug a short time before patent expiration. The “authorized” or “branded”
generic undercuts the inevitable market penetration and profitability of the other would-
 be generic competitors by capturing a large part of the generic market prior to the entry
of traditional generics. In some cases the innovator firm has entered with its own
version of a quasi-generic. In other cases it has entered into arrangements with
traditional generic firms to enter with a quasi-generic version of the drug.
One must wonder why any branded firm enters with a generic version of a high value
 product. After all, we do not see Apple coming up with lower cost knock offs of an
iPod. How is it in the economic interest of the branded firm to genericize a market? It
can only make sense if the branded firm sees some long term benefit, such as
diminished generic competition. ¶
The purpose of this strategy may be to diminish the incentive for generic entry. Just as
 patent law created a system of rewards to provide incentives to innovate, the Hatch-
Waxman Act created a system to reward generics for creating non-infringing versions
of a drug or successfully challenging patents. One of the key aspects of the Hatch-

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 Waxman Act is a 180-day period of market exclusivity which is granted to the first firm
to successfully challenge a patent on an innovator drug. During that 180-day period of 
exclusivity, the successful challenger is the sole generic firm; as such, it reaps
substantial profits. Once the exclusivity period expires, numerous other generic firms
enter and quickly force prices down to marginal cost.
This exclusivity is essential to the balance of the Hatch-Waxman Act. Inventing non-
infringing drugs is risky, time-consuming and costly. The regulatory system effectively
requires patent litigation in order to enter the market and this litigation is a multi-
million dollar proposition. But for the potential reward of six months of exclusivity
which represents the vast majority of potential profits from generic entry, many firms
might forego their efforts to challenge patents. ¶
One can see the potential effect of an authorized generic strategy. With the authorized
generic coming to market prior to the entry of the generic firm that has marketing
exclusivity, the value of that exclusivity may decrease substantially. As the value of the
exclusivity decreases, generic companies will lose part of their incentives to enter 
markets by challenging invalid patents or developing non-infringing versions of the
drug. In turn, consumers are deprived of the benefits of that generic competition.
Is the reduction of these generic incentives sufficiently significant to have an
anticompetitive effect? Perhaps so. As FTC Commissioner Jon Leibowitz has observed,
“For some blockbuster drugs, the pot of gold will still be large enough so that some
generics will fight to be the first to file and the first to market. But we could very well
see fewer generic applications for smaller drugs—the ones that warrant several hundred
million dollars a year in revenue—and this could lead to fewer generic products on the
market which would be bad for consumers.”
What are the potential antitrust concerns raised via an authorized generic strategy?
Obviously, the issue poses a difficult and challenging antitrust issue. There is a battle
  between the apparent short-term benefits of having a new product come to market
sooner and the potential long term harm of reducing the incentive and perhaps the
ability of generic firms to effectively challenge patents and enter the market.
Elimination or the reduction of the rewards from the 180-day exclusivity period,
generic firms might just decide not to enter these markets. In other cases, the generic
firms may decide not to challenge certain patents if the opportunity for success and the
  potential rewards do not seem sufficiently significant. ¶Understandably, the branded
firms are not interested in aggressive competition that may threaten to cannibalize their 
sales.
Could such a strategy be successful? There is an interesting historical example. After 
World War II, cigarette manufacturers faced the increasing threat of black label or 
generic cigarettes. In response to the emergence of these black label cigarettes, the
 branded manufacturers came out with their own black label cigarettes. They priced
these black label cigarettes in a predatory fashion and eventually drove the independent
 private label manufacturers out of the market. Once these manufacturers were driven
out, the cigarette manufacturers eliminated black label cigarettes and significantly
increased branded prices. Ultimately this was challenged by the Justice Department in a
successful antitrust case against the cigarette industry. Another potential competitive
concern is that a manufacturer may develop a reputation for introducing authorized
generics when entry by “true” generic competitors seems likely. This type of strategic
conduct will not immediately foreclose competition, but it may well diminish
competition in the long term by signaling to generic manufacturers not to attempt to
enter the market. Thus, by diminishing the incentives for generic firms to challenge
their patents, brand-name manufacturers could effectively raise the barriers to entry.

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 ¶As a recent economic study sponsored by the Generic Pharmaceutical Association
found: When authorized generics enter during the exclusivity period, this statutory
incentive for generic companies to challenge patents and to develop non-infringing
 products is severely compromised. If the authorized generic captures half the sales in
the generic market, the reward to the generic company that successfully challenged the
 patents or discovered a non-infringing product will be reduced by much more than half.
If the incentive to challenge patents and develop non-infringing products is severely
reduced, then generic companies will respond by investing less in those areas. This
means that there will inevitably be fewer challenges even to patents which appear to be
relatively weak. This could easily result in delays of several months or even longer in
the arrival of generic competition. The ultimate losers from such delays, of course, are
consumers, who will end up paying monopoly prices longer than necessary. Finally, the
threat of a patent holder entering into an authorized generic agreement may compel
generic challengers to drop their patent challenges and enter into settlements. The
generic challenger knows that even if it is successful, the patent holder actually controls
the conditions of entry. The incentive to aggressively litigate against a potentially
invalid patent or invent around the patent will be dampened severely. The goal no
longer will be to be the first to successfully challenge a patent, but rather be the first to
enter into an alliance with the patent holder.

4.13.4.4 Conclusion
Antitrust plays a vital role in maintaining rivalry as the lodestar of the marketplace.
Competition is critically important. Many of the factors identified earlier, however, may
forestall competition. The FTC, state attorneys general, and private antitrust lawyers
have played an important role in protecting pharmaceutical markets from artificial
  barriers to competition, but there is more to do. I suggest the following as an
enforcement agenda:
• The FTC should investigate a product line extension case. The competitive
issues raised by product line extensions are addressed above. One of the most
difficult issues in a product extension case is whether the new product is truly an
improvement over the current product or merely an attempt to extend an
expiring patent. The FTC may be more capable of addressing issues of product
improvement because of the administrative litigation setting and the expertise of 
the Commission in pharmaceuticals. The Commission demonstrated this ability
to grapple with complex technical issues in its recent Rambus decision.
• The FTC should investigate a citizen petition case. Citizen petitions may be a
 particularly pernicious form of regulatory abuse. Because of the Commission’s
expertise in the Noerr-Pennington doctrine from both the FTC study and its
enforcement action against Unocal, the FTC is uniquely suited to handle the
issues surrounding the allegations involving sham petitioning. The
Commission’s recent enforcement action against Unocal for sham and deceptive
conduct before state regulators has saved consumers over $500 million
annually. The Commission should use that litigation expertise to address sham
and deceptive petitioning in the pharmaceutical industry where there may be
similar competitive harm.
• The FTC should participate as amici curiae in pharmaceutical antitrust cases in
the district courts to clarify key legal principles. Perhaps one of the most
important actions as amici was the FTC brief in the Bristol Myers case that
clarified for the court that sham orange book filings were not protected by the
 Noerr doctrine because they were merely “ministerial” filings.

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 • Finally, the FTC and the Antitrust Division should be extremely cautious about
articulating broad pronouncements in amicus filings in monopolization cases on
the standards for exclusionary conduct. As suggested above, there are numerous
economic factors affecting the pharmaceutical industry which would make such
 broad standards harmful to effective antitrust enforcement.

4.14 IPR in the Indian context

The origins of the pharmaceutical industry in India can be traced back to the colonial
(pre-independence) era. But right from its origin through the decades of the 1950s and
1960s, the industry remained largely dominated by foreign firms and drug prices were
among the highest in the world. The decade of the 1970s has been of great importance
to the IPR, which witnessed a “process revolution” through concerted effort at
acquisition of technological capability fostered by a favourable policy environment,
especially a weak patent regime. Through the decades of 1970s and 1980s, the IPR 
reached new heights of process capabilities to “knock off” any new drug with a non-
infringing process and market them at low prices. At the present juncture, however, the
industry is again at a watershed, trying to cope with the challenges of globalisation and
reforms. It is going through a turbulent phase of adjustment driven by the emerging
international economic order of the WTO, especially the TRIPS agreement establishing
a new IPR environment.

Process revolution in Indian pharmaceuticals post 1970

1970 marked the beginning of a new era for the pharmaceutical industry in India. With
the introduction of the Patent Act 1970, there was a concerted effort at generating
indigenous technological capability (in production as well as in research) in the
 pharmaceutical sector with the goal of increasing access to drugs at affordable costs. In
fact the decade of 1970s witnessed the passage of several government directives
directly shaping the growth path of this sector, including the Drug Price Control Orders
(DPCO) 1970 and 1979, Foreign Exchange Regulation Act (FERA) of 1973, New Drug
Policy 1978 and of course, the Patent Act 1970. A brief discussion of these policies
may be in order.
The  Patent Act 1970 was a radical departure from the earlier Patent Law which
accorded product as well as process patent protection up to a period of 10 years
(extendable by another 6 years) and acted as a major deterrent to the creation of 
indigenous technological capability especially through reverse engineering. 1970 Patent
Act, by contrast granted only process patent for chemical substances including
 pharmaceuticals, reduced the duration of patents to 7 years from the date of filing or 5
years from the date of sealing whichever is lower, excluded all imported substances
from the domain of patent protection (i.e. only new substances manufactured in India
were entitled to patent protection), and placed the burden of proof on the plaintiff in
case of infringement.  DPCO 1970 was the first concerted and rational effort to check 
the ever rising drug prices in India. DPCO 1979 expanded the coverage of drug price
control, bringing about 80% of the Indian pharmaceutical industry (in value terms)
under price regulation. The price fixing rules were made more rigid and stringent.
  FERA 1973 was introduced to restrict and regulate the operations of foreign
(multinational) companies in India to protect and develop indigenous industrial and
technological capability. A 40% ceiling was imposed on foreign equity share, with the
exception of “Core” sectors (including pharmaceuticals), where up to 74% foreign
equity was allowed to high technology bulk and formulation producers provided their 

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 50% of the bulk is supplied to non-associated formulators and the share of own bulk in
their formulation should not exceed 1/5. The spirit of this policy regime of the 1970s
was reinforced by   Drug Policy 1978 with its three-fold objective of self reliance in
 pharmaceutical technology, self sufficiency in drug production and easy and cheap
availability of drugs. This in a sense summarises the policy framework adopted in the
1970s with a clear emphasis on import substitution and self-reliance in the production
of bulk as well as formulations and on creating indigenous technological capability of 
  process development (bulk). Against the backdrop of this policy environment, the
  pharmaceutical industry in India embarked on a new trajectory of technological 
learning based on reverse engineering , which essentially implies decoding an original
  process for producing a bulk drug. This involves a detailed understanding of the
chemical properties of the active molecule, the excipients used and the chemical
 process of conversion from the active molecular compound to the final bulk drug. A
chemical process incorporates a complex set of parameters, e.g., solvent conditions,
temperature, time, stirring methods, use of various chemical and physical substances
with different levels of purity etc., all of which have to be simultaneously optimised in
order to arrive at the optimum process specification. It is possible to decode all of these
 parametric specifications of a process through reverse engineering. One can make a
distinction between two types of reverse engineering activities: infringing  and non-
infringing   processes. In case of the former, a reverse engineered process exactly
matches the specifications and design of the original process and therefore, needless to
mention, the use of such processes infringes upon the intellectual property rights of the
innovator of the original process. Hence the scope of such activities is limited to off-
 patent drugs only. The second category of reverse engineering activities is somewhat
more complex as it results in the development of non-infringing processes whereby the
same bulk drug may be produced through a different route. Non-infringing processes
are relevant only in case of patented drugs, which may be free from product patents but
continue to enjoy process patent protection. With the introduction of the Patent Act of 
1970, there has been widespread reverse engineering for non-infringing processes. This
is not to suggest that infringing process development (simple imitation) did not take
  place. In fact many of the firms began with such simple technological activities
(perhaps on off-patent drugs) to acquire more complex capabilities at a later stage.
Indeed, the industry acquired substantial technological capability of process
development through reverse engineering, both infringing processes for off-patented
molecules and non-infringing processes for patented molecules. This phenomenon has
 been often been referred to as the  process revolution in the Indian pharmaceutical 
 sector . As a result, the bulk drug industry grew at a phenomenally high rate of 21 and
11% p.a. during the decades of 1970s and 1980s respectively. Along with process
revolution,   simple product development in conventional dosage forms which had
already started in the post independence era, continued in the post 1970s. As a result,
the formulation industry also registered impressive growth rates of 13 and 10% p.a.
respectively during the same periods. The impetus largely came from the massive
expansion of bulk drugs due to the process revolution and the policies to deter captive
consumption of bulk. Indeed there was a marked increase in R&D expenditure of the
industry during this period: it stood at Rs 500 million in 1986 accounting for nearly 2%
of the industry’s sales turnover compared to less than 1% prior to 1970.
The policy environment facilitated free entry of a large number of producers of both
 bulk and formulation, most of them in the small scale and unorganised sector. The
resultant market structure was characterised by a limited number of large organised
sector units enjoying the lion’s share of the market on one hand and a very large

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 number (thousands) of small producers each producing a microscopic fraction of the
total industry sales. This implied a wide variation in the quality and price of a drug in
the market and multiplicity of formulations. Problems of spurious drugs and irrational
combinations have been a natural outcome of this phenomenon. While the policy
environment favoured small producers, lack of adequate quality regulations and control
mechanisms often resulted in the supply of sub-optimal and ineffective drugs. Apart
from deviations from the quality norms, the norm itself was often kept at a low level by
the regulatory authority to encourage small producers who may not be able to afford
sophisticated equipments for various tests/ assays. Indeed there has been a noticeable
difference in the parameters of acceptable drug quality in India compared to that of the
developed world. But most drugs were now available in India at affordable prices, the
quality variations notwithstanding . As an outcome of the policy framework, MNCs
 became reluctant to launch their new drugs in India. But that did not deprive the Indian
 patients from the latest drug discoveries without much delay in launching . Indian firms
introduced these new drugs in the market using non-infringing processes, perhaps with
a time lag marginally exceeding the demand lag. Examples are numerous: Ranitidine
(Glaxo) and Amlodipine (Pfizer) are two of the glaring examples of this phenomenon.

The new world order post-1990: India’s reforms process

In tune with a newly emerging international economic order, India’s economic reforms
 process began in the late 1980s/1990. WTO has been the prime architect of the broad
framework of this new global order, primarily geared towards free trade and removal of 
“policy distortions” in all dimensions of a country’s economic activity. The idea is to
 pave the way for liberalised and market driven international flows of goods, services,
capital and technology in a multilateral framework. Ironically, however, one also finds
  provisions for bilateral negotiations and unilateral actions built into the WTO
framework, especially when it
serves the interest of developed countries. Product regulations and standards, anti-
dumping and other safeguard measures are examples of WTO provisions which can be
misused (mainly by the developed nations) to counter the spirit of multilateral trade
liberalisation propagated by the WTO and the proponents of this new world order.
India’s reform process began with trade reforms which sought to reduce, rationalise and
eventually eliminate all forms of trade restrictions, tariffs, export import licenses,
quantitative restrictions and other non-tariff barriers.
 Reduction and removal of subsidies have accompanied trade reforms in India. Policies
towards  foreign investment and foreign technologies have been relaxed. FERA 1973
was modified to Foreign Exchange Management Act (FEMA) 1999. The monitoring of 
 payments for imported raw material, and technical know-how was deregulated, but RBI
retained the monitoring authority of the dividend payment. FEMA allows the
 pharmaceutical MNCs to
hike their stakes in India up to 74%. Automatic approval can be granted for foreign
technology agreements in high priority industries up to a lump sum payment of Rs.10
m, or if the royalty is less than 5% of domestic sales or 8% of exports, subject to a
maximum ceiling. For other  non-high priority industries automatic permission will be
given according to the same guidelines if no free foreign exchange is required for any
 payments. The  Patent Act of 2005 has been direct fallout of the WTO agreements. The
salient features of the forthcoming patent regime are summarised below.
• Product patents are allowed in all fields of technology with a uniform duration of 20
years in pharmaceuticals, food products and agrochemical from the date of application.

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 • Compulsory licenses will be given by the government only on the merit of each case,
and would be granted in case of national emergency. However, the patent holder will be
given a hearing and an opportunity to present his case for intellectual protection.
• There will be no discrimination between imported and domestic goods in so far as
intellectual property protection is concerned as per the national treatment clause in
WTO.
• For process patents, the burden of proof will rest with the party that infringes. This is
in contrast with the requirement of the earlier patent regime. In Patent Act of 1970
 burden of proof was on the original innovator. With the enactment of this law, the
  policy framework encouraging process development through reverse engineering
activities disappears. But the strong product regime is “supposed” to encourage basic
and frontier research in the industry.
Other elements of the structural adjustments programme followed by India include
industrial reforms leading to abolition of industrial licensing, virtual elimination of 
MRTP regulations, divestment of public sector units and de-reservation and reduction
of benefits of the small-scale sector. Among the specific policy initiatives towards the
  pharmaceutical sector,   DPCO 1987  followed by   DPCO 1995 appeared as major 
landmarks reinforcing the policy move towards liberalisation. Both of these policies
aimed at  progressive decontrol of drug prices. It is interesting to note the clear policy
shift in the stated principle for controlling drug prices. As opposed to the earlier 
objective of making drugs available at affordable prices, the DPCO 1995 clearly states
that the objective is to prevent monopoly in any market segment. Only 40% of the total
finished dosage forms remain under price control in 2001 compared to 85-90% in 1979.
The overall philosophy of the new policy regime is well echoed in the  Drug Policy
Statements of  1986, 1994 and 2003. Licensing requirements for all bulk drugs and
formulations are abolished with a few noted exceptions. Restrictions on import of bulk 
are largely removed. The earlier policy to deter captive consumption of bulk is
reversed. Major thrust is placed on drug quality, acknowledging the need to monitor 
and regulate quality and promote rational use of drugs. It stresses the need to implement
Good Manufacturing Practices (GMP) for all manufacturing units. Although the IPR 
has continued to expand both in terms of production and trade during the decade of the
1990s, the new policy environment has posed major challenges to the sector which is
evident from rising drug prices, downsizing of employment and closure of production
facilities of many units including that of multinationals. As a result, the IPR is going
through a turbulent phase of adjustments. In the following section, we attempt to trace
this adjustment process for the organised segment of the industry.

Challenges and adjustments post 1990: quality and R&D as the Twin Pillars
The challenges
The major challenges posed by the new policy regime of globalisation and reforms to
the Indian pharmaceutical industry, especially those in the organised sector can be
synthesised as follows.
• Limits to growth through process development- With the introduction of the
new patent regime, the conventional corporate growth strategy, based on non-
infringing process development for patented molecules to introduce the latest
drugs in the Indian market,
adopted by the IPR till now, will no longer be a viable option. Reverse engineering on
 patented drugs will come to complete halt, raising a big question mark as to how far the
Indian pharmaceutical can exploit its process development capabilities acquired through
conscious R&D effort during the last quarter of the century. Reverse engineering on

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 off-patent drugs can, of course, continue to give them an edge in the generic market . In
fact a market of about US$50b of pharmaceutical products will come off-patent in the
next few years.
• Limits to the generic market - Given that new drugs will now become the exclusive
monopoly of the innovating firm, we believe that the   generic market  will become
extremely crowded  both in India and the world since all non-innovating firms will have
to rely on the generic market. A further limit on the scope of business development
 based on the generic market may be posed by the high rate of new drug discovery in the
1990s. Since most these new drugs are not “new” in the sense of having a pioneering
therapeutic use, but are merely replacing existing drugs with better therapeutic efficacy
and lower side effects, new drug discovery might reduce the life span of existing drugs.
This in turn implies a high rate of obsolescence in the generic pharmaceutical market.
The global pharmaceutical market is becoming increasingly competitive both with
respect to price as well as quality. Even with trade liberalisation, the WTO allows for 
imposition of product regulations and standards to create barriers to free flow of trade.
This is being fully exploited by the developed countries to protect their large
 pharmaceutical markets from low cost imports from the developing world. Therefore
new norms of drug quality are being introduced worldwide which will further limit the
scope of access to the world generic market. With a move towards quality
harmonisation, drug quality will act as a principal parameter of success even for Indian
firms in years to come.

The adjustments
To cope with these serious challenges, the Indian industry (organised sector) is going
through a major phase of restructuring and adjustments. Let us analyse and capture
some of these. We restrict our analysis to two of the major dimensions of the
adjustment process.
The first relates to the response of the Indian industry to a new paradigm of drug
quality. The second looks at the changing role of R&D and technology in this new era
of globalisation and reforms. A new paradigm of drug quality Drug quality is a complex
multi-dimensional concept. First and foremost, quality implies therapeutic efficacy and 
 safety. A high quality drug must be effective and should not produce any toxicity or side
effects. In this regard, bio-availability acts as an important parameter of drug quality. A
second and most commonly stated parameter of quality pertains to the impurity profile
and stability of chemical ingredients. A related quality parameter affecting product
 purity is contamination during the production process. Not only keeping minimum
impurity is important, but also consistency in the specified impurity profile over all
 batches of production must be adhered to. Detailed documentation of all the production
stages along with the quality control operations constitutes an added dimension of 
quality specification as it creates institutional memory and makes the entire production
  process transparent to all concerned parties. The third set of quality parameters
stipulates that the production process should be environment friendly and should not
create any health hazards within and outside the production unit. The intermediates and
excipients of the production process must also be non-hazardous and environment-
friendly. The relative importance of each of these diverse parameters in the final quality
specification would vary from country to country depending on the composition of their 
 pharmacopoeial committee and socio-economic priorities of the government. This has
resulted in divergence of the technical requirements for quality specification and control
in different countries, compelling the globalised industry to replicate many test
 procedures

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 including clinical trials in order to market new products in different countries. To
overcome this problem, the governments of the three largest pharmaceutical markets
(United States, Europe, and Japan) have jointly initiated a move towards harmonisation
of drug quality
through the International Conference on Harmonisation (ICH) from the late 1980s. The
US Pharmacopoeia (USP) has dominated this harmonisation movement with an in-built
 bias towards increasingly stringent norms for impurity profile through sophisticated
instrumentation and analytical methods. Prior to the 1990s, drug quality in India was
loosely
defined and remained far below international standards. This is not to suggest that there
were no high quality producers even during this period. But quality parameters did not
receive much attention by the industry and the regulatory authorities in general. But in
the new era of globalisation, characterised by a strict IPR regime, a fast moving
technology frontier and a move towards international harmonisation of quality
standards, firms will have to explore the growing international market for generic drugs,
the United States market in particular. Entry into this highly competitive market calls
for stringent quality requirements. Indeed with the threat of ICH, not only US but the
entire global market may be subjected to stricter quality norms. In this new era, the
Indian manufacturers have to pay intensive attention to the concept of drug quality,
which was hitherto largely ignored and adopt the following operational and
organisational changes:
• Quality control  must be much more rigorous with   stricter parameters and
 sophisticated instrumentation .
• For formulations, the quality of active pharmaceutical ingredients (API or bulk)
 becomes all important.
• High quality standards as per the multidimensional definition given above demand
up-gradation of production and quality control technology.
• The environmental dimensions of quality necessitate increased attention towards
effluent treatment and proper waste management using modern methods and
equipment.
•  Detailed documentation is becoming an important facet of production and quality
control.
• Finally, quality has added a new dimension to their R&D thrust. Firms are now trying
to develop new improved analytical methods for quality specification and control. Some
Indian firms have already succeeded in developing superior methods, which have been
incorporated
in the global quality standards like USP and European Pharmacopoeia (EP). In a sense,
Indian players have thus contributed to outward shifts in the global frontiers of drug
quality.
Most of these elements of higher drug quality entail increased automation of the
 production process. In many cases, it requires complete overhauling of the plant set-up
to install sophisticated (often imported) machinery and equipment for production and
quality control.
From “Business driven R&D” to “R&D driven Business” Technological capability of 
the Indian pharmaceutical industry can be classified into three broad groups:
• Process development capabilities (bulk drug)
• infringing and non-infringing
• Product development capabilities (formulations)

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 • conventional dosage forms (CDF), novel drug delivery systems (NDDS) of first
and second generations (NDDS1, NDDS2 respectively) and analytical methods
for quality
•  New drug discovery research (NDDR)

4.15 A possible solution to the product patent issue

The most practicable solution to the problem which at the same time allows for 
TRIPs compliance would be granting of dual licenses. This would mean that the
 patent would be partly product patent and after a reasonable time being given to the
inventor to make a reasonably large profit it would be converted to a process patent
whereby the patented drug can be manufactured by competing manufacturers using
an alternative process. This would solve the problem of excessive hike in prices and
would render the drugs more accessible to the millions suffering. Collaboration with
the MNCs on various fronts such as research and development, manufacturing and
marketing will help Indian Pharmaceutical companies make profitable breakthroughs.

As far as India’s pharmaceutical industry is concerned, various options are possible

in the WTO regime. But ultimately, the path currently is followed by international
standards for patent protection moves inevitably toward a clash between public
health and intellectual property.

Stringent intellectual property protection for pharmaceuticals would only retard

 public health initiatives in the coming years. Given the rapid evolution of the AIDS
crisis throughout the world, with more than 35 million cases alone in India, a twenty
year term of market exclusivity for new treatments is not reasonable if we expect to
make real progress in containing the disease. It might well be appropriate for a
governing body to clearly define a list of essential medicines, such as antiretroviral
(ARV) agents, that would be subject to somewhat more relaxed patent protection
compared to other drugs.

5.0 MERGERS AND ACQUISITIONS (M & A)

5.1 Historical Background

A merger or acquisition happens when two or more companies join together, often to
share costs, increase efficiency or gain market power. Mergers and acquisitions, often
referred to as M&A’s, is also a tool for expanding ones business or get around different
laws or regulations such as tax laws or monopoly regulations. It is often thought of as a
rather new phenomenon, the big consolidations of huge companies creating world
leading multinational corporations. Nevertheless, it is not a new phenomenon. The first
mergers started in the later half of the 19th century, sometimes as a method to expand
market share almost into having a monopolistic market power. This has been known as

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 the first wave of takeovers in the United States, but also as the start of mergers around
the world.
It is not definitely known why these mergers come in wave patterns and it is common
that the mergers occur within different industry clusters. There are various factors that
influence different industries through varying periods in time. The first wave that
occurred in the United States from 1890 to 1905 was, a merger for monopoly. The
common merger at that time was within the same industry between several producers, a
so called horizontal consolidation which created large corporate giants, and an almost
monopolistic market, such as General Electric, Eastman Kodak, and DuPont. The
second wave came as a build-up phase after World War I in the 1920s. It was not near 
as big of an impact as the first wave, but it helped companies to merge and create strong
corporations after the war and earlier market crash in the early 1900s. After World War 
II, the third wave of mergers came in the 1960s and was all about increasing market
share by growth. At this time the M&A phenomenon also entered the U.K. in small
 proportion and started a trend that later would explode in the U.K. and rest of Europe in
the late 1980s and early 1990s.
It has been spoken of a fourth and a fifth wave as well. Many U.S. companies engaged
in simultaneous expansions and downsizing of their businesses in the 1980’s. Focus lied
towards expanding in areas where the firm had greater competitive advantage and
downsizing in areas where they had not. Contrast with earlier waves was that the
market experienced an active market in corporate assets. The fifth wave came in the
1990’s and is said to be the mother of all waves when it comes to the financial size of 
the mergers. The value of M&A’s was almost five times larger than the previous peak 
in 1989. A plausible explanation for the last wave is the introduction if new
technologies like the internet, cable television and satellite communication.
The first large M&A according to deal value that took place in the pharmaceutical
industry was the consolidation in July 1989 when Philadelphia-based SmithKline
Beckman was acquired by British Beecham Group to form SmithKline Beecham. This
was a merger with a total deal value of $8.9 billion that set a trend for future massive
mergers in the industry. It was also a huge transatlantic merger which combined the two
world-leading pharmaceutical powers; United States and Europe, to unite in the search
for generic drugs that could help us fight the diseases around the world. After the initial
merger between the two large companies a row of mergers followed during the 90s and
continued into the 21st century. Many renowned corporations in today’s society has
 been formed in the last 15 years and has become a multi billion dollar industry with
giant corporations such as Pfizer, AstraZeneca and Novartis, all created through
enormous mergers with the aim to lead research and development in every field of the
 pharmaceutical industry into the future.

Figure 29: The Three Waves Cumulative M&A Spend

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5.2 Mega-Deals Back on Pharma M&A Horizon
From the circumstantial evidence of mediocre returns to the investment required to
finance a major deal, it is clear that mergers and acquisitions should not be undertaken
lightly. And yet, is there any doubt, in current market conditions with the huge pressure
on the industry to match historic performance, that we will see yet another round of 
consolidation and a fourth wave of pharma M&A? Merger statistics for the first half of 
2002 show that the healthcare industry is at the forefront of the current M&A frenzy. It
dominates other industries in both the size and pace of deal activity with dollar 
transactions of $72 billion, three times higher than any other sector. However, a closer 
look at the data shows that while M&A activity continues unabated, the majority of 
these deals are almost insignificant when compared to the mega-mergers of the past
M&A waves these deals represent millions rather than billions of dollars. The third
wave, between 1998 and 2000, produced three large-scale, high-dollar mergers:
Pfizer/Warner-Lambert, GlaxoWellcome/SmithKline Beecham, and Pharmacia &
Upjohn/Monsanto with big deal activity falling sharply at the end of 2000. Despite an
active rumor mill, the majority of recent deals focused on portfolio rationalization and
strategic repositioning rather than megamerger. Then came the announcement mid-2002
of the Pfizer/Pharmacia merger and the will-they/won’t-they rumors of a tie-up between
GlaxoSmithKline and the beleaguered Bristol-Myers Squibb. Speculation that mega-
deals are back on the pharmaceutical M&A horizon is rife.

Table 31: Big Pharma M & As

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5.3 Winners and Losers in Pharmaceutical M&A
So are the mega-mergers of the 1990s back again for another round? The answer is
almost certainly yes, because, despite the potential pitfalls and expense, no CEO can
afford to be left out of the market share race. In an industry characterized by
fragmentation, the Pfizer/Pharmacia deal will give the new entity an unprecedented pro
forma market share of 11.9%. This level of consolidation gives it a position almost 5%
ahead of its closest competitor, GlaxoSmithKline. At this rate, within the next two to
three years, the Top Five could become more powerful than the existing Top Ten.

Figure 30: 2001 Global Market Share

5.4 Surviving the Scramble

While we can only speculate what the new landscape will look like as evolving market
  pressures begin to bite and the short term rush to merge gives way to longer term
acquisition strategies, two things seem certain mergers and acquisitions will continue
and these transactions will never be straightforward. To realize the strategic benefits
and shareholder value these mergers set out to achieve, we focus on three strategies to
endure the impending scramble for survival.

5.5 Facts on the Three Cases of Megamergers

There are numerous pharmaceutical companies in the world, and many of them have
 become large corporations through mergers or acquisitions. The companies have often
merged or acquired other firms more than once, and thanks to these consolidations they
have increased in size, increased their portfolios, increased their technological
advancement, and become the great corporations of today. This following text handles
three different major M&A’s within the pharmaceutical industry. These are some of the
 biggest companies in the industry. They were all started for different reasons and in
different periods over time and they all operate all over the world. In the following text
we discuss the three M&A’s chosen; who the original companies were, who acquired
whom or if they merged, and why the consolidations occurred.

5.5.1 Pfizer

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 Pfizer is the largest pharmaceutical corporation today, and has become that just because
of the many M&A’s through the years, especially in the last decade. Pfizer was founded
 by Charles Pfizer in 1849 in Williamsburg, USA, withholding only one single building
containing research, office, factory and warehouse. It was during the Civil war fought in
the late 1870s, and through World War II that Pfizer grew to become a well known
company throughout the USA. In the early 50s, Pfizer expanded to South America and
Europe, and a couple of years later partnered with Japanese Taito to reach the Far East,
and partnered with a couple of more smaller companies to reach success around the
world. It was not until the 21st century that Pfizer decided to grow substantially by
merging or acquiring already large corporations.

Figure 31: Mergers and Acquisitions of Pfizer 

In June 2000 Pfizer merged Warner-Lambert to form one of the largest growing
corporations in the world. Warner-Lambert’s history goes back to the middle of the 19th
century when William R. Warner starts up his drug store in Philadelphia, and invented
the early form of tablet-coating to make pills easier to consume. At the same time, John
Wheat Lambert opened up his store in St. Louis selling antiseptic drugs. The two
companies merged in 1955 and formed Warner-Lambert Pharmaceutical Company.
Warner-Lambert came to grow through several acquisitions in the 60s and 70s, and was
established all over USA with a larger product portfolio and large manufacturing plants.
After the largest merger in American history with a deal value of $88.8 billions, Pfizer 
and Warner-Lambert became the world’s fastest growing major pharmaceutical
company under the name Pfizer. Through constant concentration on research and
development, and through building new high-tech manufacturing plants to further 
improve their production and canalizing their drugs out through the world, they have
the largest market share in the world.
On April 16, 2003, Pfizer purchased Pharmacia for an estimated $60 billion, forging
one of the world's fastest-growing and most valuable companies. With a research and

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development budget of $7.1 billion in 2003, the new Pfizer is now the world's leading
research-based pharmaceutical company.

"Today we go forward as a single company, providing more products to help more

 patients than any other pharmaceutical company has ever done before," said Pfizer 
Chairman and Chief Executive Officer Hank McKinnell. "On any given day, we
estimate that nearly 40 million people around the world are treated with a Pfizer 
medicine. Our new company is the global leader in discovering, developing and
delivering innovative medicines and health care solutions essential to improving global
 public health and addressing unmet medical needs."

5.5.2 Bristol-Myers Squibb

Bristol-Myers was founded in the late 19th century by William Bristol and John Myers
in Clinton, New York. The development of simpler products, among them the first
disinfectant toothpaste, brought Bristol-Myers into the international market just after 15
years. The company grew through smaller acquisitions and would come to hold a broad
 portfolio of medicines. Squibb was founded a few decades earlier than Bristol-Myers on
the east coast of USA. The pharmaceutical research started of in the early 1900s and by
the time of 1944, Squibb had opened the largest penicillin production plant in the world

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 and Squibb started to develop its business to South America and Europe, and grew
further. In 1989, Bristol-Myers acquired Squibb in a $12 billion deal and created one of 
the leading pharmaceutical corporations in the world and what was then the second-
largest pharmaceutical enterprise. Bristol-Myers Squibb accelerated their research and
developed the second HIV-treating medicine by 1991 and launched one of the world’s
most widely used cancer treatments. DuPont was founded over two centuries ago and
started in the 1950s to develop their remedies for people that had smaller complaints. In
1982, after an acquisition, DuPont Pharmaceuticals was formed and would eight years
later form a joint venture with Merck & Co which would lead to a developing business
for DuPont. The 1st of October 2001, Bristol-Myers Squibb acquired the
 pharmaceutical division of DuPont and formed Bristol-Myers Squibb Company which
is one of the world’s leading research and development pharmaceutical companies in
the world with an immense position in HIV/AIDS and cancer treatment.

5.5.3 GlaxoSmithKline
The Glaxo-SmithKline merger is the most valuable pharmaceutical merger through the
eventful years in the industry 1989-2003. The single merger deal value between Glaxo
and SmithKline was worth over $172 billions and tops every other merger with over 
twice the value of the others. Glaxo's history goes back 100 years and starts off by
 producing dried milk in New Zealand and exporting it to London, and later on starts up
its business in London. In the 60s, Glaxo discovers skin disease treatments and asthma
medicines. Glaxo acquires Meyer Laboratories Inc. and find a way into the American
market. A few years later, Glaxo would develop and launch one of the world’s top-
selling medicines. The medicine would be successful for the future of Glaxo, and in
1995 Glaxo merges with Burroughs Wellcome. They are now able to improve research
and widen their portfolio including several important medicines that helps treating
epilepsy, blood pressure and AIDS. Glaxo Wellcome is formed, and with a big portfolio
and leading research in respiratory treatment they become an increasingly important
and powerful corporation in the pharmaceutical industry.
SmithKline’s history goes back a long time and is formed through several mergers
during the years, and especially through Beecham Group’s acquisition of SmithKline
Beckman in 1989. Up until the merger between the two big companies, Beecham had
their research and top medicines in the allergy field. Through the merger a portfolio
containing allergy medicines, skin care treatments and different important vaccines.
After the merger in 1989 the research produced medicines that are still fundaments for 
today’s research and was, through more minor acquisitions, in 1994 the third largest
over-the-counter medicines company in the world. In January 2001 Glaxo Wellcome
and SmithKline Beecham fused into GlaxoSmithKline and is today one of the world’s
leading research-based pharmaceutical and health oriented companies.

5.6 Recent M&A

A review of the recent acquisitions and mergers indicates acceleration of the following
trends:

Table 32: Recent Mergers and Acquisitions

Company Target company $ billion

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 Pfizer Wyeth 68
Roche Genentech 47
Merck Schering Plough 41
Bayer Schering 19.7
J&J Pfizer OTC 16.6
AstraZeneca MedImmune 15.6
Schering Plough Organon 14.5
Takeda Millennium 8.8
Sankyo Daiichi 7.7
Teva Ivax 7.4
Novartis Eon 6.8
Mylan Merck KGA generic 6.7
Nycomed Atlanta 6
UCB Schwartz 5.8
Novartis Hexal 5.3
Daiichi Sankyo Ranbaxy 4.0
Abbott Kos 3.7
GSK Steifel 3.6
Shire New River Pharma 2.6
Sanofi Aventis Zantiva 2.6
Barr Pliva 2.5
Reckitt Benckiser Adams respiratory 2.3
Lilly Icos 2.3
Dainippon Sumitomo 2.1
Watson Andrx 1.9
Watson Arrow 1.75
GSK Reliant Pharma 1.65
King Alpharma 1.6
Toyama Fujifilm, Taisho 1.4
Solvay Fournier 1.4
Richter Gedeon Polypharma 1.3
Shionogi Sciele 1.1
J&J Cougar 1.0

Consolidation in medical device, generic and consumer health segment of the

healthcare industry and consolidation in the European and Japanese pharmaceutical
industry. FDA new drug approvals in 2008 were 21 in comparison to 18 in 2007. With
low R&D productivity and patent expiry of several blockbuster drugs, big
  pharmaceutical companies were diversifying into medical devices (J&J, Roche),
generics (J&J, Novartis, Sanofi Aventis, and Daiichi Sankyo) and diagnosis (Roche).
Biotechnology companies were acquired for monoclonal antibodies, RNAi and stem
cells technology platform and R&D pipeline of oncology projects.
Genentech rejected a $44 billion offer from its majority shareholder Roche for the
remaining shares in 2008 but Roche has not given up and offered only $47 billion due
to uncertain market conditions in early 2009. Pfizer bid of $68 billion for Wyeth and
Merck 41 billion bid for Schering Plough show the push of traditional pharma into
 biologics. These bids have revived the M&A market. Companies like Amgen, BMS and
Lilly need to act fast to grow, to acquire, merge or become a target. Mergers and

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 acquisitions were successful if driven by a blockbuster marketed products like Lipitor 
(Pfizer- Werner Lambert), Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS). New product
derived mergers based on potential blockbuster marketed cancer drugs like Erbitux
(Lilly-ImClone), Velcade (Takeda-Millenium) and Aloxi, Salagen; Hexalen (Eisai-MGI
Pharma) will be successful. Roche potential takeover of Genentech will be a success.
Pfizer takeover of Wyeth and Merck of Schering Plough will not resolve the low
 productivity of combined R&D to produce blockbuster drugs to replace Lipitor, Zocor 
and Fosamax. Analysts have termed it more a cost cutting effort and a shock absorber to
 patent expiry of Lipitor in 2011 as merger will dilute the affect of patent expiry. Wyeth
only brings the best selling vaccine Prevnar and marketing rights to the best selling
  biotechnology (biologic) Enbrel to the combined company and has a week R&D
 pipeline and facing patent expiry of its blockbuster brands like Pfizer.

J&J is one of the most successful acquiring company and with a Warren Buffett like
approach of leaving the company management in place and benefiting from innovation.
Its acquisition of Centocor and monoclonal antibody provided it with Remicade, the
second top selling biologics and best selling monoclonal antibody in 2008. If a
company was acquired for its R&D pipeline and development projects or platform
technology, in majority of cases, the acquiring company failed to derive full benefits
and most of the projects were later discontinued or terminated. Diversified companies
like Roche, J&J, Abbott and Novartis with devices, generics and diagnostic performed
 better as compared to pure pharmaceutical R&D driven company in 2008.

As biologic drugs move into multibillion dollar annual sales, are priced higher with
respect to synthetic products and patent expiry had little effect on sales, and biosimilar 
or follow on biologic, unlike generics, need more time to gain market share.
Pharmaceutical companies’ outright acquisition of biotechnology companies and
licensing of technology/late stage projects in development has increased significantly
despite market downturn and significant loss of market value of many biotechnology
companies. This was evident by Merck acquiring Serono, Astra Zeneca absorbing
MedImmune, Takeda taking over Millenium and Roche making a failed offer of 44
 billion for the remaining shares of Genentech.

There was a strong emphasis on biologics in R&D pipeline of big pharma companies
and partnership and deals with biotechnology companies. Merck announced its entry
into biosimilar biologics and the entry of 6 biosimilar erythropoietin in Europe and
 black box warnings and restrictions in dosage and clinical use resulted in loss of sales
of all blockbuster EPO brands. The market and sales data in 2008 provides once again
strong support for the R&D paradigm shift to biologic and within biologic towards
human monoclonal antibodies, vaccines, erythropoietin, insulin’s and interferon.

Major M & As in 2009

During the first half of 2009 we have seen the continuation of a trend toward
consolidation in the biopharmaceutical industry with a number of significant mergers
and acquisitions involving various combinations of acquirer type and target players.
Among the highest-priced acquisitions, five involve big pharma and highlight their need
to boost their pipelines and/or commercial portfolios.

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Big Pharma Buying a Large Biotech

Roche’s $46.8 billion acquisition of Genentech represents the former’s desire to gain
access to Genentech’s revenues and its pipeline of oncology biologics. Over the past
decade Roche had acquired a 56% stake in Genentech, and the companies worked
closely and harmoniously, with the Swiss pharma giant receiving a lot of credit around
the industry for leaving— at least for the most part—the princess of biotech alone to
develop its oncology treatments. In July 2008, however, Roche made an offer of $89
 per share to acquire the remaining 44% of Genentech’s outstanding shares.

The deal eventually closed in March 2009 for $95 per share. The main motivation
  behind the acquisition for Roche was access to Genentech’s pipeline of marketed
  biologic agents for the treatment of cancer, including multiblockbusters Avastin,
Herceptin, and Rituxan. In terms of merger integration, we expect to see a shift in
R&D, with Genentech focusing on earlier-stage research and taking programs up to
Phase II. Roche with its deeper pockets and longer experience will likely take over once
a program is ready for Phase III testing and run late-stage trials.

Big Pharma Taking Over a Small Biotech

Johnson & Johnson’s (J&J) $893.7 million purchase of Cougar Biotechnology was for 
access to a single drug: abiraterone acetate, a Phase III prostate cancer treatment. In
May J&J announced that it was willing to pay $43 per share in cash, representing a 16%
 premium on the previous day’s close. Abiraterone, also known as CB7630, is an oral
treatment and has shown impressive efficacy and safety results in four Phase II studies.

Should the strong data on PSA responses and tumor shrinkage translate into overall and
 progression-free survival (PFS) advantages in the two pivotal Phase III trials, then J&J
will benefit a lot more than the $893.7 million it paid. Abiraterone could become a
successful drug commercially with the potential to reach multiblockbuster status given
its safety profile, oral administration, and the large market it addresses. This acquisition,
however, is not without risk for J&J: All the data we have seen thus far from the
abiraterone trials are from uncontrolled, open-label, single-arm studies. Additionally,
efficacy results albeit impressive will have to surpass the hurdle of translating into a
survival and PFS benefit.

In another example of a big pharma acquiring a smaller biotech, GlaxoSmithKline

acquired privately held Stiefel Labs for $2.9 billion this April. Stiefel is a dermatology
specialist selling both prescription and OTC products including medications for acne. It
grossed about $900 million in sales during 2008. The main impetus behind GSK’s
acquisition of Stiefel was its desire to increase its presence in the dermatology space,
which resulted in $550 million in sales last year.

This acquisition is viewed as being completely on the other end of the spectrum from
the J&J/Cougar acquisition in many ways. There is limited clinical and commercial risk 
associated with the Stiefel takeover, since its products are already on the market.

Big Pharma Acquiring a Big Pharma Peer

This year has seen two such mergers: Merck & Co. with Schering-Plough and Pfizer 

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with Wyeth. 2009 opened with the $68 billion Pfizer/Wyeth marriage, combining the
most powerful pharma sales and marketing machine with one of the most highly
regarded and most “biotechy” of the U.S. large-cap pharmas. The result is a company
with a combined $71 billion in sales. The $68 billion price tag is nothing to sneeze at,
of course, but we remind investors that in 2000, Pfizer paid $89 billion for Warner 
Lambert.

The impetus behind Pfizer’s desire to acquire Wyeth has a lot to do with the impending
Lipitor patent expiration in 2011. The drug has brought in about a quarter of the
company’s revenues every year. In terms of cost savings, the companies believe they’ll
save approximately $4 billion annually, which partially comes through a 15% reduction
of their combined workforce.

Pfizer is undoubtedly known for its ability to take products it has acquired or in-
licensed and market them extremely effectively. On the other hand, Wyeth has its own
 blockbusters including Enbrel for the treatment of rheumatoid arthritis, which is co-
developed with Amgen, and Prevnar, a pediatric vaccine. Plus it has one of the most
 promising pipelines among U.S. big pharma companies, so the marriage of the two
makes a lot of sense, at least at the high level.

The next big pharma merger came in early March when Merck acquired Schering-
Plough for $41 billion. Merck is losing patent protection for Cozaar, a hypertension
drug, as well as Singulair, which treats allergies and asthma. Schering-Plough, on the
other hand, has relatively few products that are close to patent expiration.

Finally, Schering-Plough has a strong ex-U.S. presence, generating about 70% of its
revenue outside the U.S. The synergies and cost savings could come from the
streamlining and re-focusing of the R&D, sales, and marketing organizations.

All told, these acquisitions total $109 billion. Additionally, having come in such close
succession, they mark a heightened level of interest on big pharma’s part in the biotech
space. The consequences of such major consolidations will not be evident for a while,
and questions remain as to whether we’ll see the bigger biotechs implement a similar 
acquisition strategy. These large biotechnology firms continue to face the need to
replenish their pipelines given the demand for continued revenue and bottom-line
growth and the ever increasing threat from biosimilars.

5.7 Steps involved in Mergers and Acquisitions (M&A):

A company starts with a tender offer to purchase another company. Once the tender 
offer has been made, the target company can resort to one of the options: Accept the
Terms of the Offer and go ahead with the deal; Attempt to Negotiate for a high price;
Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme
can be triggered by a target company when a hostile suitor acquires a predetermined
 percentage of company stock. To execute its defense, the target company grants all
shareholders – except the acquiring company – options to buy additional stock at a huge

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discount. This dilutes the acquiring company’s share and intercepts its control of the
company.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, when
the two biggest telecom companies in the US, AT&T and Sprint, wanted to merge, the
deal had to get the approval of the Federal Communications Commission (FCC). The
FCC would probably regard a merger of the two giants as the creation of a monopoly
or, at the very least, a threat to competition in the industry.
Finally, once the target company agrees to the tender offer and regulatory requirements
are completed, the deal will be executed. An M&A deal can be executed by means of a
cash transaction, stock-for-stock transaction or a combination of both. The completion
of a merger does not necessarily offer advantages to the resulting organisation. After 
merging, the companies hope to benefit from the following: Staff reductions, economies
of scale, acquiring new technology, improved market reach and industry visibility. But,
many mergers or acquisitions sometimes do just the opposite and result in a net loss of 
value due to problems. Correcting problems caused by incompatibility – whether of 
technology, equipment, or corporate culture – diverts resources away from new
investment, and these problems may be exacerbated by inadequate research or by
concealment of losses or liabilities by one of the partners. Overlapping subsidiaries or 
redundant staff may be allowed to continue, creating inefficiency, and conversely, the
new management may cut too many operations or personnel, losing expertise and
affecting employee morale. These problems are similar to
those encountered during takeovers. Regardless of their category or structure, all
mergers and acquisitions have one common goal of creating synergy that makes the
value of the combined companies greater than the sum of the two parts. The success of 
a merger or acquisition depends on whether this synergy is achieved. In other words,
the success of a merger is measured by whether the value of the buyer is enhanced by
the action.

5.8 Reasons for mergers and acquisitions

There are many driving forces for a merger. They can have pure financial motives,
market share motives or as a mean to diversify ones portfolio. Many common reasons
for a typical merger are not necessarily the ones most significant for the M&A’s in the
 pharmaceutical industry. The biggest expenditures within the pharmaceutical industry
are the investments in research and development and the production costs of making the
medicines. There are huge amounts of profits that go back to R&D. With many
corporations trying to develop medicines for the same kind of diseases, it sometimes
makes more sense to merge to gather your forces with another company to maximize
the efficiency to develop new drugs, benefit from economies of scale, utilize each
others manufacturing plants and use each others channels for distribution and finally to
expand into new geographic markets and to lower costs by reducing excess capacities.

Loss of Patent Protection

Big Pharma is expected to experience the loss of patent protection on a substantial
number of drugs between 2010 and 2013. One way that companies might avoid a drop-
off in revenue in the coming years is to use their cash and strong balance sheets to
acquire smaller/weaker rivals. Acquisitions of both small and midsize biotechs and
weaker pharma rivals are expected.

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While acquisitions will continue to be a part of pharma’s strategy, they will likely look 
to other sources of innovation, too. For example, pharma is showing renewed interest in
collaborating with universities for inspiration in basic research. Consequently, licensing
activity between universities and pharma is likely to increase.

Economies of Scale
There is a growing consensus that horizontal mergers between equals often do not result
in efficiencies and savings in the pharma sector. While activities such as
commercialization and distribution are often scalable, R&D efficiency often suffers
during a horizontal merger of two large pharma companies.
There are several examples of horizontal M&A activities that have not resulted in more
efficient organizations. Pfizer’s acquisition of Warner Lambert and the Glaxo
Wellcome and SmithKline Beecham’s merger, both in 2000, are examples of reduced
operational efficiency resulting from integration of equals.
Two other types of acquisitions might benefit pharmaceutical companies in the coming
years. First, big pharma realizes that more efficiency can often be extracted from
multiple, smaller acquisitions instead of a single mega-acquisition. As a result, big
  pharma will increasingly look to acquire small to midsize biotech companies with
strong R&D pipelines.
Second, pharma might benefit from acquisitions of generics manufacturers, which serve
the large-volume, low-margin market. Acquisitions of generics would provide a cash
cow and also allow pharma companies to capitalize on their strengths in distribution
and marketing. However, this type of deal is likely to draw regulatory scrutiny.

Financing
The market valuations of biotech and pharma companies are at historic lows, indicating
that big pharma might be able to acquire companies at deep discounts. At the same
time, pharma companies have a strong balance sheets and solid revenue streams, despite
the financial turmoil, providing the wherewithal to pluck deals based on lower market
caps without highly leveraging the deals.
Both public and private equity markets have experienced a recent decline in access to
capital, as a result of the credit crisis. In 2007, private equity activity was extremely
strong because of access to inexpensive financing. Private equity firms were able to buy
small- to medium-sized biotechs and then quickly sell them to big pharma for a profit.

However, since early 2008, the private equity markets have dried up. Instead, big
 pharma has begun to buy small- and mid-size biotech firms directly. Private equity
investors also started holding onto their investments longer.
There was a substantial amount of activity on the public equity markets in 2007, when a
total of 13 med-tech company IPOs raised around $1.1 billion. IPO activity declined
 precipitously in the first half of 2008, with only two medtech companies, CardioNet and
MAKO Surgical, going public. Now, investors in small- to mid-size, private med-tech
companies are looking at being acquired, instead of an IPO, as their exit strategy.
Recently, there have been several reports of negotiations between biotechs and big
 pharma, but few deals have closed. For example, Roche’s play for Genentech has not
  been completed despite months of negotiations. Biotech firms with strong pipelines,
such as Genentech, often have the upper hand in negotiations, so deal valuations remain
high. As a result, big pharma is often reluctant to commit to the asking price. However,
recent data indicates that the pendulum has shifted towards big pharma having the
upper hand in negotiations.

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 Currency trends
The acquisition of US-based pharmaceutical firms by foreign competitors allows the
foreign firm to establish a presence in the US, particularly a sales presence and a
relationship with the FDA. When the dollar was weak in early 2008, there were many
examples of foreign pharma companies acquiring US rivals. For example, Takeda
Pharmaceuticals acquired Millenium Pharmaceuticals for $8.8 billion in cash, and
AstraZeneca bought MedImmune for $15.6 billion.
Currency trends could continue to influence acquisition activity in the pharma sector.
Since September, the US dollar has risen roughly 15 percent in value relative to the
euro. On the other hand, the Japanese yen has strengthened substantially against both
the euro and the dollar, making foreign acquisitions more attractive to Japanese
companies. If the dollar loses value relative to other currencies in coming months, US
companies will become more attractive for acquisition.
Conclusion
Big pharma will continue to look for acquisition opportunities to increase their product
 pipelines and utilize their core strengths in product development and distribution. At the
same time, companies will become more selective in the acquisitions they pursue, due
to the current economic uncertainty. Thorough due diligence, including assessments of 
IP and technology, are necessary prior to any acquisition to ensure that the acquired
organization is a good fit. By understanding the strengths and weaknesses of the
acquisition target, big pharma will be able to maximize the market potential for the
acquired products/platform technologies and anticipate any challenges that are
 presented after the acquisition.

5.9 Mergers, Acquisitions and Alliances: Why they can Fail

The chances of success are hindered if the corporate cultures of the companies are poles
apart. When a company is acquired, it is typically based on product or market synergies,
 but cultural differences are often ignored. For example, employees at a target company
might be accustomed to easy access to top management, flexible work schedules and a
relaxed dress code. These aspects of a working environment may not seem significant,
 but if the new management removes them, the result can be resentment and shrinking
 productivity.  McKinsey, a global consultancy, has found from its research study that
most mergers or acquisitions fail, because the companies often focus too intently on
cutting costs following mergers, while revenues and profits suffer. Merging companies
focus on integration and cost-cutting so much, that they neglect day-to-day business,
thereby prompting nervous customers to flee. This loss in revenue momentum is one
reason for its failure.
78% of mergers and acquisitions fall apart within three years of their inception. About
70% of alliances fail outright, fall captive to shifting priorities, or achieve only initial
goals, and 55% fall apart within three years of their creation. Internal alignment and
understanding are important for mergers, acquisitions and alliances. Having the
capability to build and maintain internal alignment is defined as having an effective
implementation process for identifying key decisions and issues related to a partnership,
knowing who the relevant stakeholders are, and consulting with stakeholders to keep
the organisation informed and involved throughout the lifespan of a partnership.
Lack of internal alignment and understanding leads to:
• Poor or uninformed decisions about whether to enter into an alliance

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 • Significant risk of sending confusing messages to, or acting inconsistently toward, its
 partners, misleading or confusing them, and jeopardising trust between them
• Internal bickering, non-delivery, and strain on internal resources as people are left
unclear about priorities and focus.

5.10 Indian Pharmaceutical: Ripe For Consolidation

The Indian pharmaceutical industry is characterised by the twin benefit of strong

domestic consumption growth on the one hand and robust export opportunities on the
other. At the same time, the intense competition in a highly fragmented market is
 posing a great challenge too. The stage is set for the next phase of growth accompanied
 by consolidation. This stage will see traction owing to the global meltdown of equity
markets that has brought the valuations at very attractive levels.
With the increasing need of capital for sustaining the growth momentum or even
sustaining in the business due to the highly competitive environment and limitations on
the ability to introduce new drugs due to the new patent regime, a number of Indian
 pharmaceutical companies will find it difficult to pursue the growth path on their own.
Such companies will be ideal candidates to join hands with strong multinational
companies. The acquisition of India’s largest drug-maker Ranbaxy Laboratories by
Daiichi Sankyo Company Limited, one of the largest pharmaceuticals companies of 
Japan last year is an apt example in this context.
The foreign pharma companies already operating in the Indian market are also trying to
increase their stakes in the domestic subsidiaries, which indicates the growing
importance of this market for them. In the last week of March, Swiss firm Novartis
International AG and Pittsburgh-headquartered Mylan Inc announced plans to
significantly hike equity stakes in their Indian subsidiaries. The leading multinational
 pharmaceutical companies are increasing their focus on emerging markets such as India
and China in their growth plans, as pointed out by a global survey of top 15
 pharmaceutical companies conducted by Ernst & Young, one of the largest professional
services firms.

An Active Sector For M&A And Private Equity Deals

Pharmaceutical, Healthcare & Biotechnology was one of the busiest sectors on the deal
street of India in 2008. It was second in terms of total value with $5.57 billion,
marginally below the Telecommunication sector which had total transactions worth
$5.78 billion, according to a report of consulting firm Grant Thornton. In terms of 
volume, the Pharma sector had 57 deals, second to 102 deals in Information
Technology & IT-enabled Services sector. The $4.60 billion acquisition of Ranbaxy
Laboratory, India’s largest drug-maker, by Japanese firm Daiichi Sankyo Co., Ltd was
on the top of the table of India’s largest deals in 2008. Out of the total 57 M&A deals in
the sector, 17 deals were domestic.
Table 33: M & A’s by Indian companies

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5.11 Impact of Mergers and Acquisitions on Performance
Having analysed the nature and structure of mergers and acquisitions in this industry,
the next question arises would be to what extent the consolidation strategies helped
them to improve their position. This is done in a comparative framework of the
  performance of merging and non-merging firms on the one hand and pre and post
merger performance on the other. Mergers and acquisitions are expected to change the
 performance of merging firms in two ways. One is through an increase in the scale
factor, which in turn will reduce the total cost of production of the merging firms,

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which will result in the better performance. It is also likely that mergers and
acquisitions may give monopoly power to the merging firms in the market and this will
give them powers to increase the ‘mark-up’ which again lead to high prices and
ultimately to high profits. Sometimes mergers will reduce the performance of the
merging firms if it acquires loss-making firms and are not able to derive the expected
synergies. Also if the industry is less colluded, the combined market share of the
merging firms could fall, which result in loss of market shares and low profitability.

Merging vs. Non Merging Firms

A merging firm arises only after making the first merger/ acquisition and until that it
would be a non-merging firm. Four measures of profitability such as Gross Profit
Margin (GPM), Net Profit Margin (NPM), Return on Capital Employed (ROCE) and
Return on Net worth (RON) were studied. Interestingly all these ratios have shown that
the merging firms are more profitable compared to the non-merging firms and this
difference is statistically significant at one percent level and both type of firms are
volatile as shown by the CV (Co-efficient of Variation). Likewise the R&D intensity of 
the merging firms are very high (2.3 and 1.35 respectively) compared to the other. The
R&D intensity of the merging firms show high variability as compared to that of non-
merging firms, which indicates that only a few merging firms are able to invest more on
R&D. Besides Research and Development expenditure, another major determinant of 
sustaining market growth is the selling cost, mainly the marketing expenditure rather 
than advertisement expenditure. This is because the companies are approaching the
 prescribing doctors in the case of ethical drugs market rather than patients, which force
them to spend on marketing through sales representatives. The average advertisement
intensity for merging firms remained slightly higher than that of the nonmerging firms
(1.29 and 1.07), which is not a statistically significant difference too. Albeit, the
average value of the marketing intensity of the merging firms is only 3.7 and that of the
non-merging firms are 4.34. Interestingly, the co-efficient of variation for the merging
firms is so low as compared to that of non-merging firms, which shows that even large
firms among the merging firms are not spending more on marketing. Mergers and
acquisitions enabled them to share common marketing outlets, which reduced this
expenditure considerably. Besides, these firms have also gone for many strategic
marketing alliances, which could have helped them to derive marketing synergies along
with this.
Merging firms are also having high export and import intensity. The high import
intensity may be due to their dependence on bulk drug import. The gains from the high
export intensity may be offset by the high import intensity. Even though mergers and
acquisitions are expected to increase the capacity utilization of the merging firms due to
the expansionary reasons, capacity utilisation is lower than that of the non-merging
firms during the post merger period. The ratio for merging firms is 82.57 and for non-
merging firms 87.58. However, since the mid-1990 the ratio for the merging firms
outweighs that of the other.

Figure 32: Performance of Merging and Non-merging Firms

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Thus from the above discussion it is clear that the performance of merging firms during
the post-merger period was far better as compared to the non-merging firms in terms of 
most of the performance indicators (see Figure 32).

Product Diversification through Consolidation

Firms may opt for mergers in order to reduce the risk and uncertainty. If a firm is more
diversified, then there is greater possibility of obtaining stable return. Any losses in one
 particular market can be offset by profit in some other market. Mergers enable firms to
diversify their production by adding new product to more therapeutic categories and
thereby not only reduce risks, but also expand their market size. The synergy effect of 
merger will enable the firms to either deepen or extent product structure.

Table 34: Product Diversification of Merging Firms between 1990 and 2005

Source: Compiled from Monthly Index of Medical Specialities, Various Issues

Similarly, the merger of Tamilnadu Dadha Pharmaceuticals with Sun Pharmaceuticals

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 enabled Sun Pharmaceuticals to add oncology, biotechnology and anesthesiology to its
diverse product portfolio. Further when Glaxo made the first domestic acquisition, by
acquiring 100 percent equity stake in the Biddle Sawyer, Meghdoot Chemicals and
Cryodon Chemical Works in 1997, these three firms had their brands accounting for 
around one percent of the formulation market. They had strength in anti-asthmatics,
orthopaedical gynacology and nephrology products, which added to Glaxo’s product
 portfolio. Thus it becomes very clear that mergers and acquisitions enabled the merging
firms to expand their product portfolio and thus reduce their risk as well as helped them
to derive marketing synergies.

5.12 The challenge

While growth via acquisitions is a sound idea in principle, there are challenges as well,
which relate mainly to the stretched valuations of acquisition targets and the ability to
turn them around within a reasonable period of time. The acquisitions of RPG Aventis
(by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of acquisitions
 proving to be a drain on the company’s profitability and return ratios for several years
 post acquisition. In several other cases acquisitions by Indian generic companies are
small and have been primarily to expand geographical reach while at the same time,
shifting production from the acquired units to their cost effective Indian plants. A few
have been to develop a bouquet of products. Other than Wockhardt’s acquisition of CP
Pharma and Esparma, it has taken at least three years for the other global acquisitions to
see break-even. Most of the acquiring companies have to pay greater attention to post
merger integration as this is a key for success of an acquisition and Indian companies
have to wake up to this fact. Also, with the increasing spate of acquisitions, target
valuations have substantially increased making it harder for Indian companies to fund
the acquisition

5.12.1 Analysis of Wockhardt’s acquisition

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by
leveraging two powerful trends in the world healthcare market - globalization and
 biotechnology.
Acquisition Management
The company has a strong track record in acquisition management, with three
successful acquisitions in the European market and two in the domestic space. The
acquisitions in Europe and the subsequent integration of their operations have
strengthened Wockhardt’s position in the high-potential markets of UK and Germany,
and have expanded the global reach of the organization. The growth drivers for 
Wockhardt’s European business include exports, new product launches, penetration in
the European Union through mutual recognition, and strategic acquisitions.
• Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10 largest
generics companies in UK and the second largest hospital generics supplier.
• The Company has a comprehensive, FDA-approved manufacturing facility for 
injectables that plays a strategic role in driving the company’s growth through
 partnerships in contract manufacturing.
• Wockhardt UK has built up a critical mass in the segments of Retail Generics,
Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care (denture
cleaning tablets, powders and fixative creams).
• The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic entry
 point into Germany, the largest generics market in Europe.

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• Esparma has a strong presence in the high-potential segments of urology,
neurology and diabetology, assisted by a dedicated sales & marketing infrastructure.

The key to Wockhardt’s successful acquisition management is the management’s

ability to turnaround the acquired company in record time and thus create value out of 
the acquisition. The company believes in value buys that would have a tactical fit with
its core competencies and key strategic objectives. The acquisitions are mainly driven
 by market access since Wockhardt has an extensive pipeline of generics and biogenerics
and needs a strategic front-end for the same. The company has plans for further 
acquisitions in the developed markets of Europe and US to further consolidate and
strengthen their positions in these geographies.

5.12.2 Implications of the merger of Ranbaxy and Daiichi

Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy
Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to
operate as Daiichi Sankyo’s subsidiary but was managed independently. The main
 benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing
infrastructure and supply chain strengths. Ranbaxy gained access to Daiichi Sankyo’s
research and development expertise to advance its branded drugs business. Daiichi
Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the
generics segment and both companies acquired a broader product base, therapeutic
focus areas and well distributed risks. Ranbaxy is now functioning as a low-cost
manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a smoother 
access to and a strong foothold in the Japanese drug market. The immediate benefit for 
Ranbaxy was that the deal freed up its debt and imparted more flexibility to its growth
  plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi Sankyo’s
 position from 22 to 15 by market capitalization in the global pharmaceutical market.

Synergies
The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their 
respective presence in the developed and emerging markets. While Ranbaxy’s strengths
in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential
of the generics business, Ranbaxy’s branded drug development initiatives for the
developed markets will be significantly boosted through the relationship. To a large
extent, Daiichi Sankyo will be able to reduce its reliance on only branded drugs and
margin risks in mature markets and benefit from Ranbaxy’s strengths in generics to
introduce generic versions of patent expired drugs, particularly in the Japanese market.
Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and
have profound strength in striking lucrative alliances with other pharmaceutical
companies. Despite these strengths, the companies have a set of pain points that can
 pose a hindrance to the merger being successful or the desired synergies being realized.
With R&D perhaps playing the most important role in the success of these two players,
it is imperative to explore the intellectual property portfolio and the gaps that exist in
greater detail. Ranbaxy has a greater share of the entire set of patents filed by both
companies in the period 1998-2007. While Daiichi Sankyo’s patenting activity has been
rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in its
 patenting activity until 2005. In fact, during 2007, the company’s patenting activity
 plunged by almost 60% as against 2006.

Post-acquisition Objectives

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 In light of the above analysis, we see that Daiichi Sankyo’s focus is to develop new
drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. In a global
  pharmaceutical industry making a shift towards generics and emerging market
opportunities, Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of 
its global counterparts Novartis and local competitors Astellas Pharma, Eesei and
Takeda Pharmaceutical.
Post acquisition challenges included:-
• Managing the different working and business cultures of the two organizations
• Undertaking minimal and essential integration
• Retaining the management independence of Ranbaxy without hampering synergies.

Benefits to Ranbaxy and Daiichi from the merger

• Daiichi Sankyo’s move to acquire Ranbaxy has enabled the company to gain the
 best of both worlds without investing heavily into the generic business.
• Furthermore, Daiichi Sankyo’s portfolio has broadened to include steroids and
other technologies such as sieving methods, and a host of therapeutic segments
such as anti-asthmatics, anti-retroviral, and impotency and anti-malarial drugs.
• Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic
drugs across 17 diverse therapeutic indications.
• Through the deal, Ranbaxy has become part of a Japanese corporate framework,
which is extremely reputed in the corporate world. As a generics player,
Ranbaxy is very well placed in both India and abroad.
• Given Ranbaxy’s intention to become the largest generics company in Japan,
the acquisition provides the company with a strong platform to consolidate its
Japanese generics business. From one of India's leading drug manufacturers,
Ranbaxy can leverage the vast research and development resources of Daiichi
Sankyo to become a strong force to contend with in the global pharmaceutical
sector. A smooth entry into the Japanese market and access to widespread
technologies including, plant, horticulture, veterinary treatment and cosmetic
 products are some things Ranbaxy can look forward as main benefits from the
deal.

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6.0 OBSERVATIONS
Major pharmaceutical companies face a paradox. The potential for medical
 breakthroughs has never been more exciting, yet the operating environment has never 
 been more difficult. Cost-reduction programmes announced in the wake of mergers and
acquisitions will address only some of the challenges facing the industry.
Pharmaceutical companies need to find some new remedies and operating strategies to
restore growth.
Pharmaceuticals used to be a safe investment: shareholders could rely on steady
earnings and a 30% to 40% premium to fair value. However, since 2000, the industry
has consistently disappointed, losing around 40% of market capitalisation between the
end of 2000 and the middle of 2002. Even though it has clawed back half of that fall
since 2002, the sector has destroyed nearly $400 billion of value over the past four 
years. That poor performance is the result of a number of factors. Big pharmaceutical
companies were lulled into complacency by their reliance on a handful of best-selling
“blockbuster” drugs, with at least $1 billion in annual sales, whose patents are now
expiring. Safety concerns have led to the worldwide withdrawal of several drugs,
notably Merck's $2.5bn-a-year painkiller Vioxx, while assertive patients are more
willing to take legal action against “big pharmaceuticals”. The reputation of the “ethical
 pharmaceutical industry” has suffered still further as a result of its own activities. It has
raised prices to the maximum in the USA and Western Europe, used every legal means
at its disposal to defend patents and been reluctant to provide cheaper medicines to
developing countries. From a purely commercial standpoint, these may have been
sensible actions. But, taken together, they have destroyed the public’s regard for 
 pharmaceutical companies. The extent to which pharmaceutical companies bankroll
doctors and hospitals by funding trials, research and conferences is another area where
they are vulnerable to accusations of improper practices. And
 pharmaceutical companies are spending too heavily on marketing: around half of their 
marketing costs are accounted for by free samples handed out to doctors to persuade
them and their patients to use new medicines and most of the remainder is spent on the
salaries and commissions of medical sales representatives.
Moreover, nearly every top-tier drugs company has resorted to acquisition to sustain its
growth. This has created bloated companies carrying too much fat, whilst hiding a crisis
of productivity in innovation. There is overwhelming antipathy to M&A among
researchers and widespread fear among executives about the disruptive effect of 
consolidation on drug discovery. The biggest threat to the industry's profitability is a
slump in output by research departments responsible for creating new medicines. In any
 pharmaceutical company, successful products can probably be traced to a small number 
of brilliant scientists and constant M&A activity muddies the water for these
individuals. They lose control of projects and the ability to spot winners and champion
them through the organisation and on to market. AstraZeneca, for example, now has
50% more drugs in the early stages of development as a result of re-organising Astra
and Zeneca's research units. But that rise comes five years after the merger, which saw
6000 people move jobs. There's a productivity problem at the most basic level and the
industry is not getting output consistent with the increased R&D spending it's
 providing.
Yet, in theory, the industry’s long-term prospects seem attractive. Demand for drugs
should grow steeply for several reasons:

• Economic and demographic changes. Developing nations become richer as life

expectancy rises and are able to increase spending on healthcare. In developed

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 nations, the population is ageing, driving demand for drugs to treat the chronic
diseases of old age, while the younger population is increasingly suffering from
chronic “lifestyle” diseases such as hypertension.
• There is a strong economic case for greater spending on medicines rather than
on more expensive hospital treatments.
• The evolution of medical understanding, including the mapping of human
genome, has raised to prospect of important further advances in treatment
through pharmacology.

It is necessary for pharmaceutical companies to address the complex subject - how to

  provide broader access to their intellectual property. Keeping prices high in poor 
developing countries limits sales and inflict public relations backlash. The matter is
thornier in middle-income countries, where pharmaceutical companies have more at
stake. However, lower prices in these middle-income countries could be used as
 benchmarks by rich countries to negotiate better prices - that would put even more
 pressure on prices. On the other hand, sporadic pickings of relatively small royalties are
less attractive than the tiered pricing since license a patent to rivals under pressure is not
a sensible thing to do. In addition, governments can invoke their rights to “compulsory
license” a medicine when their citizens are threatened by a public health crisis (such as
an avian flu pandemic). And, it is not easy to drive a hard bargain with multiple
governments while many international organisations are watching and giving friendly
 but unwanted advice. The principle of tiered pricing has already been established with
HIV/Aids anti-retroviral. Therefore, this method of pricing to both developing and
developed countries makes business sense.
There is consensus within the pharmaceutical industry that small is beautiful: large size
in research organisations is an impediment to good inter-disciplinary team effort,
especially in discovery and the early stages of development. We also believe that
research strategy for drug discovery and development matters just as much. Companies
must re-assess their mix of biologic and small molecule approaches to known and novel
targets. While small molecule or chemical drugs that target novel mechanisms are much
less successful than those designed to work against known targets (6% success rate for 
novel targets compared with 19% for known), the difference in success rates for 
 biologics is much smaller (21% success rate for novel targets compared with 27% for 
known).
Companies must also re-assess their technology mix in specific disease areas like
cancer. For example, broad-acting cancer therapies are less successful than targeted
therapies (5% compared with 30%), and yet companies continue to invest almost half 
their budget in researching broad-acting therapies. Pharmaceutical companies need to
take a hard look at detailed data on success rates before making investment decisions,
and to manage their portfolio risk more effectively to take account of these figures.
At the same time, companies need to re-evaluate their business strategies. Among the
leading pharmaceutical companies, there is very little consensus about the best way to
compete. For example, as understanding of human genetic variation influences the
choice of drugs, Roche has chosen to focus on specialty medicines and a diagnostic
 business designed to put it at the forefront of “personalised medicine”. Novartis now
operates the world’s largest generic business, after paying €6 billion to merge Hexel
with its Sandoz subsidiary. Johnson & Johnson has placed its faith in decentralising its
various businesses, diversifying into the fast growing market for medical devices as
well as pharmaceuticals. Johnson & Johnson also achieved its target of cutting costs by
$1 billion in 2004, while a fourth consecutive year of flat or falling profits prompted

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 Merck to pledge deep cost reductions across the company, including $300 million of 
savings planned for 2005 and a further 5100 job cuts by end of 2004 on top of 4400 job
cuts which had previously been announced. Yet the $6 billion cost reduction
 programme announced by Pfizer after combining with Pharmacia in 2003 indicates just
how much fat remains in the sector.

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7.0 SUGGESTIONS
The steps required to boost the competitiveness of the pharma industry are:

7.1 Extension of deduction of 150% of R&D expenses. This would encourage more
and more companies to invest in R&D. The government has earmarked 150 crores for 
R&D. This is just not enough. It should be augmented to at least 2000 crores.

7.2 To rationalize Drug Price Control Order (DPCO). The objective of the price
control was to ensure adequate availability of quality medicines at affordable prices. In
this context, a liberalized price control regime becomes more important.

7.3 Income tax exemptions should be given on clinical trials and contract research
done outside the company and abroad. This is because India is seen as emerging as a
major center for outsourcing of clinical trials for the Pharmaceutical MNCs.

7.4 The problem of spurious drugs has to be tackled. Most of the cases relating to
spurious drugs remain undecided for years. Hence there is a strong need for setting up
separate courts for speedy trials of such offences.

7.5 India should exploit its know-how in herbal medicines. Since these medicines do
not come under the purview of the TRIPS regime and the research in new chemical
entities involves millions of dollars of investment, the Indian companies should engage
in R&D in herbal medicine. The companies should try to exploit the Indian traditional
knowledge in ayurveda and herbal cures and file as many patents for herbal medicine as
they can. For this the government should set up R&D laboratories undertaking research
exclusively in the area of herbal medicines and support the companies in their research
and patent filing.

7.6 The government should encourage setting up of USFDA-compliant plants by

providing tax holidays for a specified period; so that the Indian companies can
exploit the opportunity arising out of patented drugs and take up marketing of generics
in the developed countries like USA.

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8.0 CONCLUSION

Big Pharma is heading "off a cliff" and into "a black hole," according to Wall Street.
Analysts are already using such big scary metaphors to describe the challenges facing
the drug industry in five years, when drug makers will face the worst series of patent
expirations ever. Between 2010 and 2011, Big Pharma will lose 28% of their current
sales, according to pharmaceutical analyst James Kelly of Goldman Sachs--who is
calling this period "the patent black hole." Starting in 2008 and going through 2011,
analysts predict annualized sales growth of only 2% for big drug makers.
Analysts believe that the loss of blockbuster products like Pfizer's Lipitor for high
cholesterol, the world's best-selling drug, and Eli Lilly's Zyprexa for schizophrenia, is
shaping decision-making at big drug makers.

After analyzing the industry from the global, Indian, and individual organizations’
 perspective it remains impossible to predict its future due to several reasons such as the
flurry of shape-shifting activities taking place at the global level, uncertainty about the
various roles emerging markets will play in the near future, growing public concern
about the ethicality of the practices of large pharmaceutical companies (usage of the
term ‘blockbuster’ drugs, for instance), intentions of leaders of several developed
nations (Barack Obama, the President of U.S. in particular) to bring down healthcare
costs, and so on.

Understanding the industry from a local as well as global viewpoint has revealed,
among other things, this:
India’s importance in the global drugs and pharmaceutical industry has grown
substantially and continues to grow. Significant advances have taken place in the field
of research and marketing in the past decade. The level of professionalism in the
management of pharmaceutical companies has also risen. A number of Indian players
have entered foreign nations, a large share of them doing so by marketing their drugs
there directly. Indian companies have also purchased companies across the globe, from
the United States to UK, Ireland, Germany, France, Belgium, Italy, Poland, Romania in
Europe, to South Africa and to Japan and Singapore in Asia. Since 2000, there have
  been more than 60 foreign acquisitions by Indian companies. Dr. Reddy’s Labs
acquisition of Betapharm of Germany for US$ 597 million stands fourth amongst the
top ten acquisitions by Indian companies based on deal value. Such acquisitions have
widened the companies’ markets and provided them access to knowledge and
technology that would have otherwise taken years to get a hold of.
Most important about the Indian chapter of the drugs and pharmaceutical industry is
that it is not dependant on foreign aid and neither is it incapable of going beyond where
it stands at present. What remains to be known is whether India will follow the path of 
the I.T. industry and become a outsourcer/low-cost hub or will it do something not
 preceded by any other industry by climbing onto the global innovation map. Although
the latter is far more desirable than the former, the current state of events does not
indicate that the industry is turning in that direction. Regardless of what path is
followed, the availability of skilled labour and world-class manufacturing facilities,
 progress in Research and Development (R&D), the managerial capabilities of Indian
 pharmaceutical majors, favourable industry outlook, etc., multiply to create an enviable
future for the industry, given the plight of other industries the present economic
scenario.

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 At the end of the day, no matter what strategies one adopts, the future of will be
unpredictable. As Dr. Daniel Vasella, Chairman and CEO of Novartis AG rightly said
“We can never read the future. You can put in place all the elements that you believe
are essential: The people, the money, the technical resources, the skills, the continuous
training, alliances with academia and with other partners…but there is no guarantee for 
success. You are constantly dealing with uncertainty. But having said that, you need to
have people who are willing to bet their life that what they are doing is right. That’s
when you have programs that move forward and succeed, but then you also have more
 programs that move forward and don’t succeed. It’s a business with more failures than
successes. It’s just the fact and we have to accept it.”

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