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Panorama

JULY 2010 ISSUE ONE

•Indian Pharmaceutical
Sector - An Overview
•Real estate market norms
•The curious case of
Microfinance

Indian Pharmaceutical Sector - An Overview


Introduction and Current State of growth over the coming decade. Talking of the The Indian pharmaceutical industry is highly
Industry short run, the Indian pharmaceutical market fragmented with more than 8,000
has shown growth of a little over 20 per cent manufacturers. This has led to intense
In the current global scenario, the emerging for the 12 months ended July, above four times
economies present the most exciting growth the global growth rate of about five per cent.
opportunities in the pharmaceutical industry.
Terms
Economic growth, a burgeoning middle class Captured
that is more educated and health • Active Pharmaceutical
Ingredient
consciousaware, healthcare reforms and We capture below are a few interesting facts (API) – Substance in the
drug that
developments in the legal system have been about the Indian pharmaceutical industry: causes the actual medical
effect
instrumental material in driving global interest
in the pharmaceutical industry in emerging •Indian firms produce more than 60,000 • Generic drug – a dru
g produced
countries in general and India in particular. generic brands and distributed withou
t patent
Second largest by volume and fourteenth
largest by revenues globally, the Indian •India has the highest number (119) of
USFDA approved manufacturing plants competition and cost reduction in various
outside the US s t a g e s o f p ro d u c t d eve l o p m e n t a n d
manufacturing. There are currently nineteen
•Manufacturing costs of USFDA plants Special Economic Zones (SEZs) in various
in India are 65 percent lower than that stages of development in the country. Many of
in the US and 50 percent lower than
these facilities are approved by several
that in Europe international regulatory bodies including but
not limited to those of the US, Canada,
•Clinical trials in India cost one tenth Australia, Germany and South Africa. This
of that in the US; R&D costs in India
gives Indian products access to global markets.
are one eighth of that in the US.
The Indian pharmaceutical industry exported
more than $5 Billion (we can mention over
•Healthcare expenditure grew from
here that exports form how much of the total
4% of average household income in
Indian manufacturers sales worth of
1995 to 7% in 2005 and is projected to
pharmaceutical products in the last fiscal year.
grow to 13% by 2025
Industry Segments
pharmaceutical industry is projected to grow •Indian pharmaceutical market will rank
to $ 20 Billion by 2015 and $30 Billion by amongst the top 10 by 2015, overtaking
The pharmaceutical industry has three key
2020 from the present revenues of….. This Brazil, Mexico, South Korea and Turkey
segments in which the Indian industry has a
implies a close to 10% consistent annual

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significant presence. These are discussed product patent regulations in 2005 continues 5.Growing global demand for generics – Generic
below: to increase foreign firms’ confidence in Indian segment is expected to grow to US $ 140
firms. Some key players in this segment are Billion by 2015, boosted by the going off-
a.Active Pharmaceutical Ingredients Matrix Labs, Nicholas Piramal, Zydus Cadila patent of US $ 150 Billion worth of brands
(API): in the next five years
If we have the data, we can also mention the
An Active Pharmaceutical Ingredient (API) is relative percentage of these segments in the 6.Launch of patented drugs from within the country –
any substance or mixture of substances industry After the advent of product patent regime in
intended to be used in the manufacture of a 2005 that instilled confidence in the
drug product and that becomes an active Exports intellectual property regime, the country has
ingredient of the drug. APIs are intended to seen many patented drug launches in the last
cause pharmacological activity or other direct In the recent years, despite the slowdown three years. Global firms have secured more
effect in the diagnosis, cure, mitigation, witnessed in the global economy, exports from than 300 patents from the Indian Patents
treatment or prevention of disease or to affect the pharmaceutical industry in India have Office and the number is growing at a fast
the structure and function of the body. A shown good buoyancy in growth. Export has rate.
dosage form of a drug is traditionally become an important driving force for growth
composed of two things: the API, which is the in this industry with more than 50 % revenue Government Initiatives
drug itself; and an excipient, which is the coming from the overseas markets. The
substance of the tablet, or the liquid the API is exports of drugs, pharmaceuticals and fine InitiativesWe believe that initiatives from the
suspended in, or other material that is chemicals have increased from US$ 7.24 government to promote the pharmaceutical
pharmaceutically inert. With 500 varieties billion in 2007–08 to US$ 9.35 billion in industry in India have played an extremely
ofdifferent APIs produced in the country, India 2008–09, while the exports for pharmaceutical important role in the growth of this industry in
is the third largest player in this market. The products were recorded at about 5 billion in recent times. More importantly, government
low cost of labour and basic chemicals as well 2008–09. A survey undertaken by FICCI, the initiatives are expected towill remain a major
as the innovative processes employed by Indian oldest industry chamber in India has predicted growth driver for this industry in the future.
manufacturers make most of the APIs from 16% growth in the export of India's We discuss sSome initiatives are discussed
India competitively priced compared to other pharmaceutical growth during 2009-2010. below:
countries. Moreover, gGovernment incentives
have also helped in keeping prices low without Growth Drivers for the Indian 1.Promotion of Indian drug discovery
affecting the profit margins of these Pharmaceutical Industry platforms – With a vision to catapult India
manufacturers. This segment is projected to into one of the top five pharma innovation
grow at a CAGR of more than 15% through We discuss below a few key growth drivers for hubs by 2020, the government has embarked
the next decade. Some of the players in this the Indian pharmaceutical industry on a multi-billion dollar initiative in the form
segment are Dr. Reddy’s, Matrix Labs, Sun of a public private partnership to harness
Pharma. 1.CostEfficiency – Indian manufacturers beat India’s innovation capability.
US and European firms hands down on this
b.Formulations: aspect by being more than 50% cheaper for 2.Tax benefits - Pharmaceutical units are
production of pharmaceuticals. This is eligible for weighted tax reduction at 150%
Pharmaceutical formulation is the process of because of the very high competition that f o r t h e r e s e a rc h a n d d e ve l o p m e n t
manufacturing the final medical product using more than 8000 manufacturers in this expenditure obtained.
one or more than one API, excipient, and any fragmented industry create.
other substance like preservatives or flavours. 3.Research & Development initiatives - Two
The final product of this process is referred to 2.Technical Capabilities – Many plants in India new schemes namely, New Millennium
as a formulation and could be in the form of a are certified by the USFDA and similar Indian Technology Leadership Initiative and
tablet, capsule, liquid, injection, cream, gel, agencies from UK, Canada, Australia, the Drugs and Pharmaceuticals Research
ointment etc. Germany and South Africa. This has Program have been launched by the
significantly contributed to the acceptance of Government.
The Indian pharmaceutical industry has a Indian made pharmaceutical products
significant presence in this industry, verified by throughout the world. 4.Funding new research - The Government is
the production of 60,000 brands across 60 contemplating the creation of SRV or special
therapeutic categories. Some major players in 3.Government Support – The Indian government purpose vehicles with an insurance cover to
this segment are Torrent, Sun Pharma, has actively supported the pharmaceutical be used for funding new drug research
Nicholas Piramal. industry through creation of SEZs, tax
benefits, benefits on R&D, and educational 5.R&D facilities - The Department of
c.C o n t r a c t
Research and initiatives. We discuss these in detail later in Pharmaceuticals is mulling the creation of
Manufacturing Services (CRAMS): the article. drug research facilities which can be used by
private companies for research work on rent
Contract Research and Manufacturing 4.Increasing
expenditure on health – Healthcare
Services (CRAMS) refers to the outsourcing of expenditure in India is expected to 6.Collaborationbetween Industry, Academia
research, development or manufacturing contribute more than 6% to the GDP by and Government - The government is
processes involved in the production of a 2012. promoting collaboration among industry,
pharmaceutical end product. This includes academia and government through various
outsourced manufacturing of APIs and a.National Urban Health Mission to address programs such as New Millennium Indian
intermediates, outsourcing of clinical and pre- healthcare needs of urban slum dwellers Technology Leadership (NMITLI) and
clinical trials and contract research services for Drugs and Pharmaceuticals Research
pre-launch compounds. India is a fast growing b.National Rural Health Mission to address Program (DPRP).
CRAMS destination with a growth rate thrice healthcare needs of people below poverty
the global market rate. There are two key line and lower and middle classes in rural 7.Focus on specialized pharmaceutical
reasons that create a huge opportunity for India. MNCs as well as Indian companies education - The government has set up seven
India in this segment. One is the coming off have increased their focus on rural markets National Institutes of Pharmaceutical
patent of several products in the recent past through initiatives like Arogya (Novartis) and Education and Research (NIPERs) as
and several more expected in the coming a pilot project in Uttar Pradesh by GSK. institutes of ‘national importance’ to achieve
years. Secondly, the modification in India’s excellence in pharmaceutical sciences and
technologies, education and training.
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Challenges constant endeavour to provide a wide basket of 22% in sales and other income over the
generic and innovator products, leveraging the previous year. Cipla’s manufacturing facilities
We close our discussion on the Indian unique Hybrid Business Model with Daiichi are approved by regulatory authorities from
Sankyo. The Company will also increasingly the US, UK, Australia, South Africa, Hungary,
pharmaceutical industry by drawing the
focus in high growth potential segments like Germany, Canada and Brazil and its products
reader’s attention again to the key challenges Vaccines and Biogenerics. These new areas are sold in more than 180 countries.
that the industry faces currently. The future of will add significant depth to the existing
this industry depends largely on how these Nicholas Piramal
product pipeline.
challenges are taken care of by the Nicholas Piramal India Limited (NPIL) has
Dr. Reddy's Laboratories
government and industry together. While a lot emerged among the leaders in Indian pharma
has been done on these parameters, there is Dr. Reddy's Laboratories manufactures and with a unique mix of inorganic and organic
much work required to achieve the stated markets a wide range of pharmaceuticals both growth fuelled through a strategy of
in India and abroad. The company has 60 acquisitions, brand building and focused
vision of the government for this industry. active phar maceutical ing redients to selling, and manufacturing. The company has
manufacture drugs, critical care products, one of the widest product portfolios in India,
1.Regulatory obstacles spanning nine key therapeutic
2.Lack of proper infrastructure areas, including the Cardio-
v a s c u l a r, N e u ro - p s yc h i a t r y,
3.Lack of qualified professionals Oncology, Diabetes Management,
Respirator y, Anti-infectives,
4.Expensive research equipments Gastro-intestinals, Dermatology
5.Lack of academic collaboration and NSAIDS.
6.Underdeveloped molecular discovery The company was formed when
program the Piramal Group acquired
7.Divide between the industry and study Nicholas Laboratories, a small
curriculum formulations company in 1988
from Sara Lee. It has followed a
Important Indian Players in the multi-pronged strategy to integrate
Pharmaceutical Industry and maximize synergies with the
Ranbaxy Laboratories Limited planned acquisitions and develop
and consolidate its major strength
Ranbaxy is the biggest pharmaceutical in marketing to therapeutic niches.
manufacturing company in India. The
company is ranked at the 8th position among
the global generic pharmaceutical companies diagnostic kits and biotechnology products. Zydus Cadila
and has presence in 48 countries including The company has 16 world-class
world class manufacturing facilities in 10 Zydus Cadila is a global healthcare provider
manufacturing facilities of which 9 have a long
countries and serves to customers from over and one of the top five pharma companies in
history of regular USFDA inspections. With an
125 countries. In June 2008, Ranbaxy entered India. The company was founded in 1952 and
annual capacity of nine billion tablets/
into an alliance with one of the largest went on to become the second largest pharma
capsules a year, dedicated to servicing the
Japanese innovator companies, Daiichi Sankyo company in the early 1990’s. In 1995, the
more regulated markets, one of the finished
Company Ltd., to create an innovator and group restructured its operations and now
dosages facilities is among the largest in Asia.
generic pharmaceutical powerhouse. The operates as Cadila Healthcare Ltd., under the
Facilities are designed to respond to a wide
combined entity now ranks among the top 20 aegis of the Zydus group. The company
range of technologies.
pharmaceutical companies, globally. The posted a turnover of over Rs. 3700 crores in
transformational deal will place Ranbaxy in a 2009-10.
Likewise the API facilities offer lean
higher growth trajectory and it will emerge manufacturing, adhere to stringent regulatory The company has proven expertise in
stronger in terms of its global reach and in its guidelines and continually drive cost manufacturing and marketing different dosage
capabilities in drug development and competitiveness. Such manufacturing forms such as solid dosage forms, injectables,
manufacturing. capabilities and an inherent expertise to metered dose inhalers, dry powder inhalers,
Ranbaxy was incorporated in 1961 and went navigate intellectual property road blocks transdermal patches, suppositories and
public in 1973. For the year 2009, the make the firm a preferred partner for some of oncology formulations.
Company recorded Global Sales of US $ 1519 the world’s leading pharmaceutical companies.
The group has a strong presence in the
mnMn. The Company has a balanced mix of Cipla cardiovascular, gastrointestinal, women’s
revenues from emerging and developed healthcare segments, respiratory, pain
markets that contribute 54% and 39% Cipla is an Indian pharmaceutical company management, CNS, anti-infectives, oncology,
respectively. In 2009, North America, the renowned for the manufacture of low cost anti neurosciences, dermatology and nephrology
Company's largest market contributed sales of AIDS drugs. The company's product range segments.
US $ 397 mnMn, followed by Europe comprises of anthelmintics, oncology, anti-
garnering US $ 269 mnMn and Asia clocking bacterials, cardiovascular drugs, antibiotics, The g roup has a globally compliant
sales of around US $ 441 Mn. nutritional supplements, anti-ulcerants, anti- manufacturing infrastructure comprising eight
asthmatics and corticosteroids. Cipla also state-of-the-art facilities which support product
Ranbaxy is focused on increasing the offers other services like quality control, launches not just in India but also in the
momentum in the generics business in its key engineering, project appraisal, plant supply, regulated markets of U.S., Europe and Latin
markets through organic and inorganic growth consulting, commissioning and know-how America. Three of the group’s facilities are
routes. Growth is well spread across transfer, support. For the financial year approved by the USFDA.
geographies with focus on developed and 2008-09 the company registered an increase of
emerging markets. It is the Company’s

Real-estate market norms regulation


Role of FDIs in real estate The high growth curve in the real estate sector residential real estate sectors. It has also
also owes some credit to the liberalized Foreign encouraged several large financial firms and
The real estate industry in India is currently Direct Investments (FDI) regime in the real private equity funds to launch exclusive funds
estimated to be worth approximately US$ 16 estate sector. targeting the Indian real estate sector.
billion with a CAGR of 30%. Growth in this The Government of India in March 2005 In 2003-04, India received total FDI inflow of
sector is driven primarily by IT/ITeS, growing amended existing norms to allow 100 per cent US$ 2.70 billion, of which only 4.5% was
presence of foreign businesses in India, the FDI in the construction business. This committed to real estate sector. However, in
globalization of Indian corporates and rapidly liberalization cleared the path for foreign 2005-06, post the liberalization, this figure
growing (better word? Middle?) class. investment to meet the demand for went up dramatically. While total FDIs in
development of the commercial and India were estimated at US$ 5.46 billion, the

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real estate share in them was around 16%. between residents and non-residents, and the with a cash crunch, low demand and soft
The sector emerged as the recipient of the non-resident wishes to exit the project; or property prices, these developers are today not
highest levels of FDI equity inflows in where the project could not be initiated due to in a position to honour these options. And,
2007-08, with a near five-fold increase over lack of statutory clearances. even if they can cough up the amount, they
FY07. want to avert a large payout.
India attracted FDI equity inflows of US$ Under these circumstances, if the government
Government Decisions
2,214 million in April 2010. The cumulative spells out that the entire investment of the
amount of FDI equity inflows from August foreign investor belocked-in for three years, the
In September, this year, the government
1991 to April 2010 stood at US$ 134,642 foreign investor will not be able to exercise the
announced that foreign investors in the
million, according to the data released by the option immediately. This will give several cash-
country’s real estate sector will have to remain
Department of Industrial Policy and strapped developers time to organise money.
invested for a minimum of three years and
Promotion (DIPP). Better to put numbers in However, it will further dampen the sentiments
rejected industry claims about the policy
billions itself as done above of foreign investors in real estate.
restricting FDI inflows.
India will continue to remain among the top According to Commerce and Industry
five attractive destinations for international
investors during 2010-11, according to United
N a t i o n s C o n f e r e n c e o n Tr a d e a n d
Development (UNCTAD).

Recent Developments
A recent joint report by Ernst and Young has
urged the government to improve the
regulatory environment to facilitate real estate
development in order to stay ahead in the
economic race. Some of the salient proposals
of the report are:
• Creation of a regulatory body for real
estate
The ministry of housing had issued a draft
Model Real Estate Act in September 2009; the
purpose of which was to establish a regulatory
authority for the sector. The report has
suggested that the role of the body should be
purely advisory, and should not serve as a Minister Anand Sharma, foreign investors Future prospects
hurdle to growth. should be willing to stay invested for longer
than three years. The purported purpose of The Indian market has emerged as an
• Infrastructure status to housing attractive destination for foreign investors
Foreign direct investment norms of minimum the move is to limit exposure of the domestic
economy to external risks and fluctuations. In interested in investing in the retail sector. India
area and minimum capitalization should be was ranked as the fifth most attractive
relaxed in case of affordable housing. At fact, Sharma pointed out, India was able to destination for future real estate investments in
present, foreign investors are restricted by a come out of the real estate generated global a list topped by China, according to a latest
minimum capitalisation requirement of $10 financial downturn quickly only because of its report of FCCI and Ernst and Young. In such
million (around Rs 45 crore) for wholly-owned prudent policies in FDI. India’s central bank, a scenario, given the forthcoming
subsidiaries and $5 million (around Rs 22.5
RBI too is highly cautious of allowing opportunities, policy restrictions would not be
crore) for joint ventures with Indian partners;
unrestricted FDI into the real estate sector. the best way to protect traditional retailers.
and a minimum area of 50,000 sq metres.
The government should instead impose
Furthermore, the department of Industrial regulations such as sourcing requirements,
• Greater flexibility to foreign investors Policy and Promotion (DIPP) has clarified that zoning regulations and back-end investment
According to the report, the three-year lock-in the lock-in period of three years will be requirements to protect traditional retailers.
period for Foreign Direct Investment (FDI) in applied from the date of receipt of each Furthermore, it should strive to make
the real estate sector has been dubbed as too instalment/tranche of FDI or from the date of regulations more investment-friendly, like
tough a restriction to allow the smooth flow of completion of minimum capitalisation, boosting the availability of liquid vehicles for
foreign funds. Currently while the original whichever is later. investment such as REMFs and REITs.
money invested cannot be repatriated before a Previously, it was understood that original
The sector assumes an even g reater
period of three years from the completion of investment meant initial investment. DIPP has importance given that real estate is second only
minimum capitalisation, investors can exit clarified it implies total investment. to agriculture in terms of employment
earlier with prior approval of the government
generation and contributes heavily towards the
through the Foreign Investment Promotion
The change could be a boon to at least 30 country’s GDP. In countries such as China, the
Board (FIPB). This approval is very difficult to
Indian real estate groups, large as well as small, retail sector has been a major propellant of
obtain, and cases of investors exiting before
which had sold put options to foreign investors growth and with a more liberal FDI policy, the
three years have been very rare.
to bring in FDI through various deals. These story can be repeated in India
It has also been proposed that greater leeway
put options required the Indian promoter to
be given to foreign investors in cases of dispute
buy out the foreign investor. But grappling

The Curious Case of Microfinance


A boon or a bane? that were already charging usurious interest because of the mode of collection of
rates. repayments which is usually done on a weekly
The recent series of suicides by committed by
basis and the personnel costs. The sum total of
the poor borrowers from Microfinance Let us begin by looking at the cost structure of
these works out to be roughly around 26-30%.
Institution (MFI) in Andhra Pradesh, the state the industry. There are three main cost
where it all began in India, brings the components: cost of capital (11-12% for the In the wake of the spate of suicides, there is a
fundamental question of whether the MFIs are top ones, 1-2% more for others), loan loss call for the interest rates to be capped. But, the
really a boon to the poor that are provisions (2%) and transaction costs (SKS MFIs defend by saying that the interest rates
underserviced by the banking system or merely reported 12.66% for fiscal 2009 in its they charge are probably what the credit card
vultures that are replacing the moneylenders prospectus). The transaction costs are high or a personal loan from a bank would cost,

4
may be even a little lesser than them. (Average organized and federated at the village, mandal
interest rate charged on credit cards in India- (an equivalent of Taluka) and the district
hold your breath, is a whopping 34%). They levels. Further, Society for elimination of rural
argue that though the proposed cap of 24% poverty (SERP) has achieved financial
offers client protection, the needy might find inclusion by linking SHGs with the banks. It
excluded from this institutional credit system holds more than 20,000 crores of outstanding
altogether! The logic is that the start-up MFIs loans on its books. MFIs are merely
and other smaller ones in remote areas will piggybacking on this system by showing them
make losses for many years before breaking as Joint liability groups (JLG) formed by them.
even. This also would mean that MFIs would They are resorting to inducing SHG members
avoid remote areas where process of delivering to join the JLG by wooing the group leaders
loans and collecting repayments is people through freebies. Unlike SHGs MFIs getting
Please send in your suggestions and
intensive and quite expensive. Also, small ticket hyper profits In case of non-payment or comments to
loans might not be issued because of the huge default, coercion and unethical means of
transaction costs involved. Hence, needy recovery ranging from confiscating household teamconsult@iimahd.ernet.in
people cannot be brought into the ambit of articles using goondas, to forcing defaulters to
Microfinance. Thus, it appears as if there is a take further loans for repayment and so on,
trade-off between the availability of which leads to distress and an increasing
institutional finance and the reduction in number of suicides.
interest rates.
They argue that currently there is a regulatory Team Consult
Further, the argument is that as MFIs establish vacuum and the RBI needs to step in with a
their business model in each market and start framework. The AP government itself is in the Amber Maheshwari
competing for customers, capital, employees process of issuing an ordinance to regulate the Agam Khurana
and banking relationships, the economies of activities of the MFIs. Chaithanya Rao
scale kick in and as they adopt new
technologies, they would innovate in products
The regulators must focus on improving MFIs’ Gurveen Bedi
l e n d i n g p r a c t i c e s, m a k e t h e m m o re
and means of delivery/repayment to reduce
transparent, ensure the clients understand the
Kommu Nageen
the transaction costs and hence, the interest
terms of loans and make sure that measures Mohit Garg
rates. Another thing that is used to oppose
interest rate cap is the Raghuram Rajan
are in place to reduce multiple lending to Murali Nair
segments like agricultural labourers for
Committee on financial sector reforms which
personal purposes rather than merely putting a
Simit Batra
says that liberalizing interest rates would allow
the formal sector to lend to the poor and not
cap on the interest rate spread. Utsav Kheria
the interest rate ceilings. In all, it is pretty clear that all is not well with Vamsi Krishna
the way MFIs are conducting themselves in the
The proponents of a need for regulatory
guise of NBFCs. It is definitely not working the
system for MFIs including a cap on the interest
way one leading MFI put its purpose as- Our
rate spread argue that the MFIs are making
purpose is to eradicate poverty. We do that by providing
hyper profits at the expense of the poor
financial services to the poor and by using our channel
robbing them of the meager surplus. Also, they
to provide goods and services that the poor need.
point out various irregularities in the current
However, one positive to emerge out of this
MFI system, which include usurious interest
discussion is that these excesses by MFIs are
rates, lack of transparency, cheating and using
being debated in the public domain is because
coercive mechanisms to recover loans like
of them being in organized space. The faceless
moneylenders.
moneylender who might’ve caused much more
grief to the poor was never in such a spotlight.

They allege MFIs of indulging in multiple


lending without due diligence exercise on the
capacity to repay, purpose for the loan and its
end use which is in direct violation of
prudential norms. This raises the possibility of
large scale defaults leading to a large chunk of
Non Performing Assets (NPAs) which could
have cascading effects on the balance sheets of
the banks. They are also worried about the
lack of transparency on effective interest rates
and explain that because of weekly recoveries,
poor unable to understand the usurious rates
and that they are being taken for a ride by the
MFIs.

The high transaction costs could also be


because of the exorbitant sums of
compensation the CEOs pay themselves in the
large MFIs as pointed in the literature (Sriram,
2010). There is a total lack of transparency in
this regard.

In the case of AP, critics point out that the


state has had a community based SHGs
existing more than 10 million women