Pharmaceuticals and Life Sciences

Global pharma looks to India: Prospects for growth Table of contents

Introduction 03

Background 04 A fast growing economy An expanding pharmaceutical market Government-provided healthcare improving, but private healthcare dominates Domestic market overview 09 Background Consolidation underway, despite challenges Contract manufacturing Vaccines Over the counter market holds significant potential Reaching the untapped rural market Growing Research & Development 15 Overview Clinical trials Biotech and biosimilars on track for growth Other growth areas 20 Bioinformatics Stem cell research Medical devices Global Pharma’s evolving business models and options in India 23 Background Export-oriented business (Contract Research and Manufacturing Services) Licensing Franchising Joint ventures Wholly-owned subsidiaries Practical concerns 27 Infrastructure Tax environment Counterfeiting Intellectual property Conclusion 30 Related reading: Pharma 2020 31 References 32 Acronyms 38 Introduction

The pharmaceutical industry’s main promise, either as places with untapped Indian companies have also started markets are under serious pressure. demand for effective drugs or as entering into the realm of R&D; some of North America, Europe and Japan jointly suitable areas for conducting research the leading local producers have now account for 82% of audited and and development (R&D) and/or clinical started conducting original research. unaudited drug sales; total sales trials. In this paper we shall examine the India has the world’s second biggest reached US$773 billion in 2008, opportunities available in India. pool of English speakers and a strong according to IMS Health. Annual growth system of higher education, so it should in the European Union (EU) has slowed India’s population is growing rapidly, as be well-positioned to serve as a source to 5.8%, and sales are increasing at an is its economy – creating a large middle for research talent. A new patent regime even more sluggish rate in Japan (2.1%) class with the resources to afford provides better protection of intellectual and North America (1.4%).1 Impending Western medicines. Further, India’s property rights, although some issues policy changes, promoting the use of epidemiological profile is changing, so remain. Clinical trials can also be generics in these key markets are demand is likely to increase for drugs conducted here much more cost- expected to further dent the top- and for cardio-vascular problems, disorders effectively than in many developed bottom-line of global pharma majors. of the central nervous system and other nations, and some local companies are The industry is bracing itself for some chronic diseases. Together these factors beginning to develop the required fundamental changes in the mean that India represents a promising expertise. All of these factors add up to marketplace and is looking at newer potential market for global a strong case for partnering with Indian ways to drive growth. pharmaceutical manufacturers. companies around R&D, including clinical testing. Further, higher R&D costs, a relatively More than that, India has a growing dry pipeline for new drugs, increasing pharmaceutical industry of its own. It is Further, healthcare has become one of pressure from payers and providers for likely to become a competitor of global the key priorities of the Indian reduced healthcare costs and a host of pharma in some key areas, and a Government and it has launched new other factors are putting pressure on the potential partner in others. India has policies and programmes to boost global pharmaceutical companies. considerable manufacturing expertise; local access and affordability to Pharma companies are looking for new Indian companies are among the world quality healthcare. ways to boost drug discovery potential, leaders in the production of generics reduce time to market and squeeze and vaccines. As both of these areas Global players in the pharma industry costs along the whole value chain. become more important, Indian cannot afford to ignore India. The producers are likely to take a large role country, many predict, will be the most How can industry leaders best face on the world stage – and potentially populous in the world by 2050. India will these challenges? Analysis by partner with global pharma companies make its mark as a growing market, PricewaterhouseCoopers (PwC) shows to market their wares outside of India. potential competitor or partner in that several regions offer considerable manufacturing and R&D, and as a location for clinical trials.

Global pharma looks to India: Prospects for growth 3 Background

A fast growing economy Figure 1: India is forecast to grow by at least 5% a year for the next 41 years

The Indian economy is worth about US$1,243 billion and rapidly getting bigger.2 Real GDP growth reached 9% in the year to March 2008.3 The rate of increase has since slowed down due to the global financial crisis; in the year to March 2009, growth eased to 6.7%.4 Even so, most forecasters believe that India will continue to show robust growth over the long-term; a survey of professional forecasters performed for the Reserve Bank of India (RBI) anticipates growth improving to 6% in the year ending March 2010,5 and expects robust growth of 7.8% p.a for Source: BRICs and Beyond, Goldman Sachs, November 2007. the next ten years.6 Previous forecasts such as those of Goldman Sachs suggest that India will be the only emerging economy to maintain such an Figure 2: India is shifting from agriculture to services outstanding pace over the longer term, i.e. to 2050 (see Figure 1).7

Two factors underlie this favourable outlook: India’s demographic profile and a robust services sector. India’s population is currently just over 1.1 billion and projected to rise to 1.6 billion by 2050 – a 45.5% increase that will see it outstrip China as the world’s most populous state.8 India has also utilised its strengths in IT to become a major offshore business services provider, in marked contrast with most of Asia, which has relied on manufacturing for its recent growth. As a result, services Source: Reserve Bank of India Annual Reports. now account for 64.5% of India’s GDP (see Figure 2).9 While a strong services sector heralds well for continued economic prosperity, it also suggests why India looks to be important for research and development as well as drug manufacture; the country’s experience delivering on outsourcing opportunities in other knowledge-critical areas such as IT should serve it well in its bid to offer such services in pharma, biotech and related areas.

4 PricewaterhouseCoopers An expanding pharmaceuticals drugs by virtue of the Drugs Price market Control Order (DPCO), supervised by the National Pharmaceutical Pricing India’s pharmaceuticals industry looks Authority (NPPA). The 347 price- The bottom line: set for a solid long-term growth. It controlled drugs included in 1979 were already ranks fourteenth in the global reduced to 143 in 1987.16 At present, 74 Increased buying league table, with sales of almost bulk drugs are covered under the US$19 billion in March 2009.10 However, DPCO.17 The Government’s draft power and PwC estimates that it will rise to pharmaceutical policy in 2006 sought to approximately US$50 billion by 2020 – expand the scope of essential drugs epidemiological a 163% in the space of eleven years.11 and evoked a sharp reaction from the Indeed, in our report, Pharma 2020: industry. They argued that it would changes should The vision, we anticipate that India will adversely affect R&D activities in India, spur dramatic be one of the industry’s top 10 markets as companies would stay away from by 2020. investing in new drugs. To date, no growth in sales further action on the proposed policy This growth will be driven by the changes have been taken and it volumes, but India expanding economy and increasing per currently looks unlikely that the DPCO capita GDP. In 2008, India’s middle will be expanded. remains a price- class constituted 13% of the population, according to the National The Indian Government’s Department of sensitive market. Council of Applied Economic Pharmaceuticals has also initiated Research.12 While this remains a fairly operations for a peoples’ medicines small proportion of the total population, shop, called ‘Jan Aushadhi,’ in various it represents a substantial increase from locations. These shops sell generic a mere 3% in 1995.13 If the economy medicines at much cheaper rates continues to grow faster than those of than the price of corresponding the developed world and the literacy branded medicines.18 rate keeps rising, around a third of the population (34%) is expected to join the Some multinational pharma companies middle class in the near future.14 While are already taking measures to reach a these consumers still earn substantially larger patient population by reducing less than their US or European drug prices and increasing affordability. counterparts, they are rapidly acquiring One example: Merck & Co. has the buying power necessary to afford launched differential pricing through modern healthcare, particularly if Januvia, its anti-diabetic drug, which is purchasing power parity is considered. priced at approximately US$1 per dose One source estimates that at least 60 in India – a fifth of its price in the US.19 million Indians – a market as big as the Indian companies like Biocon have also UK – can already afford to buy Western followed a similar pricing strategy. medicines.15 Aggressive pricing Biocon has launched its monoclonal strategies will be necessary, however, to antibody BIOMAb EGFR at one-fourth make in-roads into India’s price- of its price in the global markets.20 sensitive market. It’s also likely that India will require India’s federal Government currently different types of drugs in the future. mandates price controls on essential Like almost every other emerging drugs, however, these are under review. economy, India is experiencing Price controls are carried out on certain epidemiological changes. Thanks to

Global pharma looks to India: Prospects for growth 5

greater affluence and better hygiene, companies. It currently represents about India’s insulin dependence the population is ageing; by 2028, an 8% of the global drugs market by estimated 199 million Indians will be 60 volume and only around 1% by value,23 The number of Indians with or older, up from about 91 million in but the Indian consumer’s rapidly diabetes is projected to reach 2008.21 Besides that, it has the largest increasing purchasing power and the 73.5 million in 2025. The direct pool of diabetic patients, for example, country’s changing epidemiological and indirect costs of treating with more than 41 million people profile could jointly improve its price/ such patients are currently about suffering from the disease (see sidebar volume mix. US$420 per person per year. If on India’s insulin dependence).22 The these costs remained the same pattern of demand for medicines is In order to get drugs to consumers at as they are now, India’s total bill for diabetes would be about shifting accordingly. In 2001, anti- the right price, though, improvements to US$30 billion by 2025. But as infective and gastrointestinal drugs and local supply chains will need to take its economic wealth grows and vitamins accounted for 50% of the place. One source estimates that standards of care improve, domestic market. By 2012, they are logistics comprise 45-55% of the costs treatment costs are likely to rise. expected to account for just 36%. in the Indian pharmaceutical supply 24 The US spends an average Conversely, drugs for cardio-vascular chain from factory to shelf. India has US$10,844 per year on each problems, disorders of the central historically had a pharma supply chain patient with diabetes. If India’s nervous system and other chronic with a number of stops between the per capita expenditure rose to diseases will account for 64% of initial production and final consumer. just one-tenth of this level, the total sales, up from 50% in 2001 The arrival of Goods and Services Tax total cost of treating all patients (see Figure 3). (GST) may prove to be a strong with diabetes would be US$79.7 incentive for greater streamlining, as billion by 2025. The value of These factors help to explain why India such middle men could potentially add prophylaxis in India alone would thus be substantial; preventing is expected to be among the top substantially to the final cost of 10% of the population from markets for many pharmaceutical medications in a price-sensitive market. developing diabetes would save nearly US$8 billion a year. Figure 3: India’s therapeutic needs are changing

Source: PricewaterhouseCoopers, 100% Pharma 2020: The vision 9% Pain/Analgesics, 20% 21% Gynaeclogical & 10% Dermatology 80% 12% 9% 9% Respiratory

11% 11% 14% Gastrointestinal 60% 9% 8% Vitamins/Minerals

24% 18% 17% Anti-infectives 40%

6% 5% 5% Neuro/CNS 8% 10% 10% Cardiovascular 20% 3% 4% 5% Antidiabetic

15% 13% 13% Others 0% 2001-02 2006-07 2011-12 Source: ORGIMS Data, Crisil Research, Pharmaceuticals: Review Indian formulation market (2008)

6 PricewaterhouseCoopers Further, the consolidation of the pharma workers without access to hospitals or industry and emergence of pharma retail pharmacies (see Table 1).26 Many of chains are likely to lead to more the poor rely exclusively on alternative concentration in the supply chain. The forms of treatment such as Ayurvedic The bottom line: increasing requirements posed by some medicine27, Unani28 and Acupuncture. formulations like biologics, which India’s healthcare require advanced expertise such as the The Indian Government has made the ability to maintain the cold chain and provision of healthcare as one of its system is avoid shocks during the distribution struggling to process, will also play a role. Inventory Table 1: India healthcare facilities reduction and the reduction of order Doctors 60 per 100,000 people29 meet the needs cycle time will be key objectives for 30 companies looking to optimise their Nurses 80 per 100,000 people of its vast supply chains in order to offer their Pharmacies 367,000 (urban), drugs at affordable prices.25 183,000 (rural)31 population, but Hospitals 30,000 (67% public, government 32 Government-provided 23% private) programmes and healthcare improving, but Hospital 1.7 million private healthcare dominates beds (one per 1,000 people)33 reforms in the The Indian Government is currently Health 171,687 (including centers 145,272 sub-centres health insurance in the throes of a much needed with basic facilities)34 programme to reform the health care industry should system. After years of under-funding, Sources: World Health Organisation (2008) most public health facilities provide only Modern Pharmaceuticals (December 2008); Health System in India: Opportunities and improve the basic care. Moreover, three quarters of Challenges for Improvement (July 2005) medical facilities are located in urban Expresspharmaonline.com (2007); and situation. areas, leaving the majority of rural World Health Organisation (2007).

Global pharma looks to India: Prospects for growth 7 key priorities. It launched a new policy 2010-11 also allocated US$ 2,920 who do have some insurance, the to build more hospitals, boost local million under the National Rural Health main provider is the Government-run access to healthcare and improve Mission (NRHM), an increase of 15% General Insurance Company (GIC), the quality of medical training, and over the previous year.40 along with its four subsidiaries, but promised to increase public expenditure private insurance is on the rise. The on healthcare to 2-3% of GDP, up from However, critics suggest that the health insurance market in India has a current low of 1%.35 The 2008-09 authorities are doing too little too undergone liberalisation in recent years. Union Budget highlighted a five year late, and those who can afford it have Further, the Insurance Regulatory tax holiday for setting up hospitals turned to the private sector instead. In and Development Authority (IRDA) anywhere in India, especially in tier-2 2008, fee-charging private companies eliminated tariffs on general insurance and tier-3 towns.36 The Government accounted for 80% of India’s US$48.6 as of January 1, 2007, and sales have further allocated US$51 million for a billion expenditure on healthcare, been going up accordingly. In 2007-08, new health insurance scheme to provide while central and local Government almost US$1.2 billion worth of medical a health cover of US$745 for every accounted for only around 20%. Private insurance policies were sold in India – worker (including his/her family) in the firms are now thought to provide about up from US$160 million in 2001-02.42 unorganised sector falling below 80% of all outpatient care and as much But widespread use of health insurance poverty line (BPL),37 which was as 55% of all in-patient care.41 could take many years, not least increased to US$76 million in 2009-10 because the insurance companies lack budget.38 The recent budget (2010-11) Some costs for care may be covered the data they require to assess health extended the coverage to another 20% by the insurance industry in the future, risks accurately and the only products of the Indian population covered by the although the current lack of general they sell work on an indemnity basis NREGA (National Rural employment coverage remains a challenge. In 2007, – that is, they reimburse the patient Guarantee Act) programme, who have only 11% of the population had any after he or she has paid the healthcare worked for more than 15 days during form of health insurance coverage. provider’s bill, making such policies the preceding financial year.39 Budget For the small percentage of Indians less attractive.

8 PricewaterhouseCoopers Domestic market overview

Background 2005 (see Intellectual Property Rights on page 29), so market strategies are India’s domestic pharmaceutical changing and some generics industry was worth around US$11 billion producers are looking further afield The bottom line: in March 2009 and PwC estimates it for new markets. will rise to approximately US$30 billion 2008 saw M&A by 2020.43 The domestic market is very India’s manufacturing clout has made it in the pharma fragmented; more than 10,000 firms a massive threat to established generics collectively control about 70% of the firms – India now produces more sector in India market.44 Many of the local players than 20% of the world’s generics.46 are generics producers specialising Moreover, around US$70 billion worth more than in anti-infectives. In 1972, the federal of drugs are expected to go off patent Government passed a law allowing local in the US over the next three years, double against producers to manufacture drugs that and India is well-positioned to take were still under patent, as long as they a substantial share of the resulting the previous used different processes.45 The lack new generics markets.47 Indian year, despite of a patent system that conformed to companies today account for 35% of international standards helped spawn the Abbreviated New Drug Application the challenges a domestic industry that excelled in (ANDA) approvals granted by the US reverse engineering novel drugs and Food and Drug Administration (FDA) posed by the launching copycat versions at home and until February 2009.48 India’s generic in other emerging markets. Wholesale houses are now entering into strategic global recession. marketing of generic versions of drugs alliances with global pharma companies patented since 1995 and still under to strengthen their generic portfolio patent has not been permitted since and jointly market these drugs globally,

Global pharma looks to India: Prospects for growth 9 for example Pfizer has entered into largest active pharmaceutical ingredient was second among industry sectors in alliances with Aurobindo and Claris to (API) manufacturers globally. terms of deal value at US$5.57 billion, market their drugs in offshore markets. marginally below the Telecommunication Similarly, GlaxoSmithKline (GSK) has Cipla is another company with sector which had total transactions worth acquired exclusive rights for Dr. Reddy’s revenues of over US$1.1 billion, 56% US$5.78 billion in 2008. In the same year, Laboratories’ (DRL) pipeline of over 100 of which come from outside India.51 India’s largest pharma company, Ranbaxy generics for sale in emerging markets. It is one of the largest manufacturers Laboratories, was acquired by Japan’s In addition to partnering with global of antiretroviral drugs in the World.52 Daiichi Sankyo. This was a landmark pharma, some Indian companies are In 2007, an Avesta-Cipla joint deal in the Indian pharma history, where also setting up their own marketing venture acquired Siegfried Biologics, Ranbaxy’s promoters relinquished subsidiaries abroad. a Switzerland based company, to their entire stake to the acquirers. The manufacture US FDA and European transaction paved the way for other India’s pharmaceutical exports totalled Medicines Agency (EMEA) compliant promoters to consider whether they are around US$8 billion in 2009 and PwC biopharmaceuticals for the global better served growing their businesses estimates they will rise to approximately markets.53 Meanwhile, Lupin is the independently or by realigning with other US$20 billion by 2020.49 Over the biggest producer of Lisinopril, an API partners who may be able to help them past several years companies such used in the treatment of hypertension.54 to take their businesses to the next level as DRL, Cipla and Lupin have grown Lupin’s acquisition of Multicare of growth. internationally in their own right as well. Pharmaceuticals of Philippines has Other Indian pharma companies like propelled it into position as a top In 2008, the world went through a credit Glenmark Pharma, Orchid and Aurobindo generics player in the Phillipines.55 crunch, followed by a prolonged global also have wholly owned subsidiaries in The deal represented Lupin’s sixth economic downturn in the last quarter of different parts of the globe. acquisition since 2008. 2008 and throughout 2009, both of which have also had a negative impact on the DRL has grown from a small firm into Consolidation underway, despite Indian pharma industry. The impact of an international business with annual the downturn, coupled with volatility in challenges sales of more than US$1.4 billion, the Rupee, depleted the financial about 84% of them outside India.50 The position of several Indian pharma company’s acquisition of Germany’s The Indian pharma industry as a whole is companies, especially those which had Betapharm positioned it as one of the moving on a consolidation path. The year substantial foreign borrowings on their 56 largest generics companies in the world; 2008 saw 57 mergers and acquisitions, balance sheets. 57 it is currently one of the largest suppliers a 128% increase over the previous year. of drugs to the US. It is also one of the Total investment in pharmaceutical, Sustaining acquisition heavy structures healthcare and biotechnology sectors became increasingly difficult in 2008.

10 PricewaterhouseCoopers Some Indian companies which made Further, in 2009 another landmark deal significant acquisitions were now finding was announced, with sanofi-aventis it difficult to integrate their foreign acquiring controlling stakes in the acquisitions with the Indian operations leading Indian vaccine manufacturer The bottom line: due to severe pricing pressures. Shanta Biotech. Legislative reforms imposed in 2008 saw M&A acquisitions’ home markets also had an Elsewhere we discuss some of the impact. Further, some companies strategies that Indian companies in the pharma booked losses on foreign currency employed to stay afloat during the crisis, sector in India convertible bonds (FCCBs), negatively including greater focus on leveraging impacting overall profitability. their strengths in newer structures like more than Contract Research & Manufacturing Nonetheless, investor confidence has Services (CRAMS), biotech & clinical double against remained fairly stable and deals continue trials, and increasing penetration in despite challenges. The average deal size rural markets. the previous in 2008 was around US$15.34 million, year, despite 20% higher than US$12.82 million in Contract manufacturing 2007. The pharma sector had 57 deals, the challenges of which 17 deals were domestic. There Contract manufacturing is a strong were a total of 22 pharma private equity segment of the domestic market. Indian posed by the (PE) deals worth US$337.41 million. firms have several advantages over their Private equity players and investment Western rivals. The expertise gained in global recession. funds played an active role in the deal manufacturing generics through reverse- market. Some of the investments were engineering has helped some companies those of Citi Venture and Everest Capital streamline the process for getting of about US$23.6 million in Nectar manufacturing up and running. Costs are 58 Lifesciences. Similarly, Kotak Private very competitive; indeed, they are only Equity Group, an arm of Kotak Mahindra two-fifths of those involved in setting Bank, invested about US$10 million up and running a new manufacturing 59 in Intas Biopharmaceuticals. Gujarat facility in the West.61 They can operate Biotech Venture Fund invested US$12.7 on significantly lower margins, given million in Century Pharmaceuticals and their low development and labour costs. SME Growth Fund invested US$7 million Currently their key area of strength in in Centaur Group.60

Global pharma looks to India: Prospects for growth 11 outsourcing is the manufacture of APIs. expected as patents expire over the next Some Indian pharma companies could five years.65 probably benefit significantly by moving The bottom line: towards specialty APIs in the future. Some Indian manufacturers are also now incorporating Lean Manufacturing and Indian pharma The Indian contract manufacturing Six Sigma principles to help them boost companies have segment was worth around US$605 operational efficiency and further improve million in 2008 and is expected to reach quality, while facilitating compliance.66 solid expertise around US$916 million in 2010.62 The US FDA has already approved over Vaccines 100 manufacturing sites – more than in contract in any country except the US (see Vaccines are another prominent area manufacturing Figure 4).63 Among six offices that the of growth. India is one of the largest US FDA has overseas, two are located vaccine producers in the world, with and recent in India, in Delhi and Mumbai.64 All many new vaccines set to be launched domestic producers are also obliged to scrutiny around in the next five years. The vaccines comply with India’s Good Manufacturing segment was around US$780 million in Practices, under Schedule M of the quality issues is March 2008, growing at a compounded Drugs and Cosmetics Act, 1940. annual growth rate (CAGR) of 15%.67

driving significant India currently exports vaccines to Indian manufacturers are currently facing about 150 countries. It also meets improvement in some scrutiny around quality issues. In around 40-70% of the World Health 2009, the US FDA took action against a Organisation (WHO) demand for the manufacturing few Indian companies after conducting a DPT (diphtheria, pertussis or whooping series of inspections and issuing warning standards. cough, and tetanus) and the BCG letters against these drug makers. (bacille calmette-guérin) vaccine against

tuberculosis, and almost 90% of its While such sanctions clearly pose demand for the measles vaccine.68 significant challenges, some analysts The Serum Institute of India, founded see an opportunity as well. Indian in 1966, is a leading player which companies are aggressively improving produces and supplies low-cost, life- their manufacturing standards in saving vaccines for children and adults. response, and are therefore likely to The Institute is also the world’s largest be better positioned to take advantage producer of measles and DPT vaccines. of the upsurge in generics production

Figure 4: India has more US FDA-approved manufacturing plants than any country except the US

Source: Crisil Research, Bulk drug exports to scale up in the regulated markets (December 2008) for India; ICICI Securities, Indian Pharma Sector: Sector Update (December 2008) for Italy, China, Spain, Taiwan, Israel and Hungary.

12 PricewaterhouseCoopers It has been commissioned by the WHO prescription drugs (or OTC drugs). OTC to develop vaccines against the latest proprietary drugs are also regulated by strain of H1N1. An estimated two out the Drugs and Cosmetics Act and the of every three immunised children in Drugs and Cosmetics Rules. However, The bottom line: the world have received a vaccine as they do not require a drug license manufactured by the Serum Institute.69 they can be sold by non-chemists, so OTC sales As the risk of global pandemics sales channels are more extensive. As are on the grows, so do potential markets for discussed, much of India’s population new vaccines. relies on self-medication, and the increase, offering purchasing power of the middle class OTC market holds significant is growing. These trends should drive opportunities growth in cough and cold formulations, potential gastrointestinals, analgesics, and to achieve high dermatologicals. Only a few OTC Globally, over-the-counter (OTC) drug active ingredients, e.g. acetylsalicylic volumes and sales have been increasing in recent acid and ephedrine and its salts, fall enhance pharma years. This trend is driven in part by under the current DPCO price control. aggressive efforts of global pharma Counterfeits of popular OTC drugs are brands in India. companies to leverage the brand equity however a major issue. that major products have attained during the patent period. Other major Indian consumers are also placing more winners in the OTC category include emphasis on prevention and wellness, products where patients continue to buy which should contribute to continued particular remedies following an initial increases in sales of OTC vitamins doctor’s prescription. and minerals. The market is already growing strongly. Profitable OTC drugs OTC drugs may have even stronger for some of India’s largest pharma potential in India. An increasing number companies include artificial sweeteners, of Indians are already dipping into their emergency contraceptive pills and own pockets to buy OTC drugs. The nutritional supplements. OTC market was worth about US$1.8 billion in 2009 and is expected to grow The popularity of Ayurvedic therapies at 18% a year to reach about US$3 should also contribute to the sales of 70 billion in 2012. The Government is related OTC formulations. Some of now considering plans to expand the the leading OTC brands in India are list of drugs which can be sold outside registered as ‘Ayurvedic Medicines’ pharmacies, since many common because of their plant-based natural household remedies are more difficult active ingredients. There are no price to obtain in India than in other controls on ‘Ayurvedic Medicines’. developing countries. An expansion of the list would substantially increase Some global pharma companies are the potential market opportunity in already launching OTC products in India this segment. or buying OTC products. Novartis India launched Calcium Sandoz as an OTC Although the term ‘OTC’ has no legal supplement in 2000 and has now come recognition, all the drugs that are not out with Otrivin nasal drops in a spray included in the list of ‘prescription form.71 Pfizer has launched Listerine, only drugs’ are considered as non- Benadryl, Caladryl and Benylin in India,

Global pharma looks to India: Prospects for growth 13 which were later sold to Johnson and more lucrative and will continue to Johnson.72 In the future, India may represent a focus for the industry, also serve as a manufacturing location the untapped potential of Indian rural The bottom line: for OTC products destined for other markets is now seen as the next volume markets. In August 2009, US-based driver. Rising income levels leading While urban OTC manufacturer Perrigo announced to more affordability, improving health markets will the purchase of 85% of Indian contract infrastructure, and increasing incidence manufacturer Vedants. The company of lifestyle diseases along with the use remain the focus plans to shift some of its current of health insurance are fuelling the production from facilities in Israel and growth in rural areas. in the near-term, Germany to India by 2011. Indian companies are devising a getting treatment India’s regulatory framework permits number of strategies to increase rural advertising for OTC products, and penetration. For instance, Lupin has out to the 70% consumers can buy them without a a strong brand franchise in the anti- of the population doctor’s prescription. However, a wider infective, pain management, and distribution network will also boost the gastrointestinal segments – these three residing outside growth of such products. Currently areas account for 40% of domestic about half of OTC sales come from formulations sales. The company of these areas chemists, while grocery stores and has a dedicated rural field force of general stores account for over a third more than 300 people and is rapidly represents the of the sales.73 Pharma companies are expanding it. Piramal Healthcare has also targeting post offices to sell OTC also announced a new initiative to target next volume drugs in rural India. This move could the mass market, focused on general driver. substantially increase the access of practitioners, to cater to rural markets. OTC drugs, especially in areas where Piramal plans to employ a field-force of there are no pharmacies. approximately 800 people.

Reaching the untapped rural Companies looking to access rural markets face many hurdles, including market lack of communication, language barriers, high penetration of spurious Although urbanisation continues, drugs, lack of adequate infrastructure, around 70% of India’s population still such as marketing and distribution resides in rural areas. As already noted, channels for niche therapeutic the population residing in villages has segments in particular, poor storage significantly reduced access to quality facilities, and insufficient sales treatment and medicines. Many pharma personnel deployment. Global pharma companies are thinking beyond larger companies eyeing rural markets will cities and targeting rural sectors. need to forge alliances and partnerships While urban markets are currently to overcome these obstacles.

14 PricewaterhouseCoopers Growing Research & Development

Overview However India offers limited capabilities has formed an alliance with Eli Lilly. By in preclinical and complex Biology selling developing and licensing rights PwC estimates that India’s 10 largest research. Preclinical capabilities in for the US, Japan and Western Europe, drug firms spent US$480 million on R&D India are limited to clinical trials in but retaining rights within emerging in 2008. The bulk of this investment rodents and dogs, with almost none markets, some Indian pharmaceutical went towards developing new for primates. The capabilities mostly companies are able to gain immediate formulations, however R&D in the Indian reside with Indian pharmaceutical revenues, while retaining future access pharmaceuticals industry is changing. companies, developed through in- to India’s growing domestic market. The new patent regime means house R&D programmes – Government companies need to be more innovative, involvement in this area is minimal. A number of Indian pharma companies rather than relying solely on reverse- Some Government institutes do offer have spun off their R&D divisions engineering existing formulations. The basic biology services, but the level of into separate units in order to scale reliance on anti-infectives is also likely innovation generated by such facilities up resources and to attract focused to lessen. As already noted, as the is fairly modest. Multinationals will investments. DRL started the trend illnesses of affluence and age increase, need to partly/completely own or in R&D spin-offs in 2005. Piramal Life the demand for many other types of share technology with available Indian Sciences, Piramal Healthcare’s R&D pharmaceuticals will rise, and Indian Contract Research Organisations division, was recently demerged from pharma companies need to begin (CROs) in order to achieve innovative the latter. Sun Pharma Advanced transforming their portfolios accordingly. results. The Indian contract research Research and Ranbaxy Life Science segment was estimated at around Research have also been demerged India has widely acknowledged US$485 million in 2008 and is expected from their parent companies Sun 74 chemistry skills. Several leading to reach around US$1 billion in 2010. Pharma and Ranbaxy respectively. domestic producers have begun to Some spin offs have faced difficulties conduct original research into new Despite Indian pharma companies’ stemming from uncertain resources chemical entities and novel drug growing expertise in later stages of and declining PE interest in research. delivery systems. Amongst others, the R&D process, many of the drug Several companies are now seeking a Ranbaxy has commenced phase-III candidates initially formulated in India collaborative approach towards drug clinical trials for its new anti-malarial are likely to be further developed by discovery, in order to mitigate the combination drug. Other companies are Western drug makers, because few risk associated with failure of a looking to shift to clinical areas with a Indian companies can afford the high drug molecule. growth opportunity, such as diabetes costs and failure rates associated (see sidebar on India’s insulin with pushing a drug right through India’s R&D base is still small, but it has dependence on page 6). Piramal Life the pipeline. Several Indian firms several advantages that should serve Sciences has initiated phase-I trials of have already entered into research it well in the future. Some 70 million 75 a new experimental drug for diabetes- partnerships with multinationals; DRL people speak English – more than in metabolic syndrome in Canada. DRL is and Torrent have joined forces with any other country except the US – and conducting phase–III trials for its Type II Novartis, for example, while Ranbaxy it has an excellent tertiary education diabetes drug. Other areas of innovation has formed alliances with GSK and system; every year, it turns out about are also being explored; Biocon has 7 Schwarz Pharmaceuticals. Glenmark 115,000 scientists with Master’s 76 and Wockhardt has 10 new chemical has formed an alliance with Napo degrees, and 12,000 with PhDs. Many entities in their R&D pipelines. Pharmaceuticals and Piramal Healthcare of these scientists have traditionally

Global pharma looks to India: Prospects for growth 15 gone abroad, but companies like successes in the global software and few India pharma companies for testing Ranbaxy are now actively trying to IT services market. In this respect, new drugs without getting patients’ lure them back with the prospect of India offers one of the very few consent or for violating protocol. opportunities for original research. examples of an emerging economy However, during the past few years Salaries are also very much lower than that has managed to attract Foreign a number of big contract research they are in North America or Western Direct Investment (FDI) in the area organisations have set up businesses Europe. Wage costs within the Indian of high-tech software development, in India, including Quintiles, Omnicare, pharmaceutical industry are about one- while successfully inserting itself as PharmaNet and Pharm-Olam. Most third of those in developed countries.77 a competitive presence in the very of the multinationals, Novo Nordisk, heart of Silicon Valley. Biotech, another sanofi-aventis, Novartis and GSK To achieve its potential and convert knowledge-based sector, is now among them, have likewise started these opportunities into global experiencing a similar boom. Drawing running clinical trials here – and some, success stories, the Indian pharma on the success of IT enterprise parks, such as Pfizer and Eli Lilly, have been industry requires the support and the Government also inaugurated the conducting tests locally for a while. collaboration of all stakeholders, first phase of its first biotech-IT park including the Government, academia – Bangalore Helix in June 2007. The In January 2005, the federal and financial investors. Collaboration project is part of efforts to position Government amended Schedule Y will be essential; but to date only a few India as a global hub for bioinformatics of the Drugs and Cosmetics Act to Indian pharmaceutical companies have and biotech. make the rules on clinical trials more partnered with academic institutes consistent with international practice.79 78 to carry out basic research. Such Clinical Trials The Health Ministry is planning to add cooperations can help accelerate a new Schedule Y-1 to the Drugs and the research process in some areas. Cosmetic Rules 1945 to further improve India’s developing research skills are Partnering with academia can also the situation.80 Early stage testing of matched by its growing involvement in help develop the sophisticated skills molecules discovered outside India is clinical testing. The country historically needed for high-level research. still restricted, but multinationals can lacked the expertise to perform clinical Pharma players who can leverage the now conduct trials where, previously, trials because most companies only research capability of academic and they could only conduct trials in any tested different processes for producing Government institutes, through mutually particular phase after completing the copycat versions of Western products beneficial collaborative models, will gain same phase of testing elsewhere.81 and the rules were quite lenient. Several significant competitive advantage. drug makers have also been caught At present, though, the industry still behaving unethically or even illegally. Amongst emerging economies, India lacks a strong regulatory framework. The Supreme Court and Drug Controller has the unique advantage of its recent Good Laboratory Practices (GLP) General of India (DCGI) have criticised a certification remains a voluntary

16 PricewaterhouseCoopers process, although most Indian pharma to boost the Indian clinical trials market. companies dealing with international Expectations are already high; some clients or exporting to foreign regulated observers expect the market could markets look to attain such certification. reach US$2 billion annually by 2012, up The bottom line: The National Good Laboratory Practice from just US$300 million in 2008.86 Compliance Monitoring Authority was The strong anticipated growth reflects Insufficient established under the Department some of the attractions India holds of Science and Technology in April for this market. According to a study regulatory 2002. While this was undoubtedly a by Rabo India Finance, a subsidiary oversight is step in the right direction, there are of the Netherlands based Rabo Bank, still only about 33 GLP inspectors82 the huge patient population offers vast currently a barrier, and about 12 GLP certified labs in the genetic diversity, making the country country.83 In addition, the ruling on “an ideal site for clinical trials.” Further, however India’s whether a trial design violates ethical many people are “treatment-naïve” and principles is left to individual local ethics relatively easy to access. The United many advantages committees. There is no central register Nations reports that around 30% of the of Ethical Committee decisions. Better population lives in urban areas;87 and - overall costs infrastructure for regulation, ethics over 67 million people live in India’s six are only 50% review and monitoring is required.84 biggest cities alone (see Table 2). of comparable Registration of new clinical trials is now Table 2: Urban India mandatory on the Indian council of US-based medical research's (ICMR) web based Population clinical trials registry. The government (Data in ‘000) programmes plans to make inspection of clinical trial City 2005 2010 - should spur sites an ongoing activity by increasing Bangalore 6,465 7,229 the number of inspectors, training them Kolkata (Calcutta) 14,282 15,577 dramatic growth for site inspection and developing a checklist for audits. Further, the Chennai (Madras) 6,918 7,559 in clinical testing government is also working on a Delhi 15,053 17,015 proposal to register CRO’s in India.85 Hyderabad 6,117 6,761 in the next 2-5 Mumbai (Bombay) 18,202 20,072 This type of more rigorous regulatory years. oversight, together with increasing Source: United Nations, World Urbanization Prospects (2007) interest from foreign firms, should help

Global pharma looks to India: Prospects for growth 17 The ratio of doctors to patients – at service tax. Table 3: India’s top 10 biotech firms 60 per 100,000 people – is also Revenues relatively high, although the quality Biotech and biosimilars on track (US$ million) of medical training is not as good as for growth Company 2008–09 it is in some other emerging nations. The country’s 289 medical colleges Serum Institute of India 242.12 are over subscribed and the emphasis India is home to a small biotechnology Biocon 198.29 is on quantity rather than quality.88 industry, based largely in Karnataka, Panacea Biotec 129.79 with other clusters of activity in West These problems are compounded by Rasi Seeds 81.63 lack of experience. India has only 500 Bengal, Maharashtra, Andhra Pradesh, Nuziveedu Seeds 79.11 to 1,000 investigators in the country Hyderabad, Kerala and Ahmedabad. In as compared to 50,000 in the United 2008-09, the sector generated sales of Novo Nordisk 71.72 93 States, suggesting that most companies US$2.64 billion representing a CAGR Siro Clinpharm 60.86 would need to make a major investment of 26%, but both the federal and state Novozymes South Asia 54.34 89 Governments have been actively in training during study start-ups. Shantha Biotech 53.68 promoting biotech research initiatives Jubilant 52.60 Some Indian pharma companies are and are targeting revenues of US$5 94 Source: Biospectrum – ABLE, 2009 95 already developing a reputation for billion by 2010 -11. The leading a nimble, rapid approach to clinical domestic players include Serum testing that looks to streamline the Institute of India, which focuses on research and development. The clinical trial process and bring new immuno-biologicals and vaccines; DBT has also drafted the National drugs to market faster. For example, Biocon, which concentrates on Biotechnology Regulatory Act in order Glenmark now routinely looks to recombinant DNA technologies, to set up the National Biotechnology incorporate “proof of mechanism” into bioprocesses, fermentation-based Regulatory Authority (NBRA). The NBRA every phase–I study.90 Most pharma small molecules and enzymes; and is expected to be an autonomous body companies save this step for phase–II. Panacea Biotec, which specialises in formed specifically to regulate the novel drug delivery techniques and biotechnology segment and reduce 96 But the most obvious benefit of pharmacogenomics (see Table 3). regulatory overlap. conducting clinical trials in India is the potential for cost savings. Clinical trials Several initiatives have been launched Further funding support from the account for over 40% of the costs of by the Government to give impetus Government will be critical in ensuring developing a new drug.91 In terms of to the thriving biotech industry. The continued growth in the biotech cost efficiency, India offers substantial Biotechnology Industry Partnership industry. The Government can play a advantages – the cost of conducting Programme (BIPP) has been launched vital role in funding incubation and early a trial here is lower by 50% than in the by the Department of Biotechnology stage ventures. United States.92 The federal Government (DBT) to support high-end is alive to the strength of this argument. biotechnology research programmes A growing biotech industry should Drugs and materials imported for clinical capable of generating globally help India to gain a share of the global trials are exempt from customs duties. recognised intellectual property. It opportunity currently emerging around Clinical trials also remain exempt from specifically focuses on transformational biosimilars. The biosimilars market is

18 PricewaterhouseCoopers likely to grow by around US$2 billion glaritus. DRL has already launched by 2014, to reach a total of US$19.4 filgrastim and rituximab in emerging billion, following key patent expiration markets and has a pipeline of 10 for epoetin alpha, filgrastim, interferon biogenerics in various stages.104 The bottom line: beta 1a, interferon alpha, human growth hormone (hGH), and insulin-glargine.97 The challenge for the development of India’s developing This represents a CARG of 89.1% from biosimilars arises from the fact that 2009 to 2014. All told, around US$25 biologics are more complex than small biotech industry billion worth of biologics are expected molecules and chemically synthesised and cost to go off patent by 2016.98 These drugs; therefore their replica are – in patent expirations open the route for contrast to ‘traditional’ small-molecule advantages biosimilars, the equivalent of generics generics – ‘similar’ but not identical to for biologics. the original drug. Consequently, the should drive registration of biosimilars requires more Indian biotech companies are slowly data than is required for generics, and significant building capabilities in development manufacturers have to demonstrate and manufacturing of biosimilars. Intas efficacy and safety in pre-clinical growth in local Biopharmaceuticals is now developing and clinical studies. This makes the development of a biosimilar of a protein used to treat registration of biosimilars a costly and the side effect of cancer therapy, time-consuming process, and lessens biosimilars for the for example.99 Biocon has initiated the chances of a successful launch. registration of its human recombinant Developing biosimilars is costlier than global market. insulin with the European regulatory developing chemical based generics, agency, EMEA and intends to launch it requires a greater capital investment by 2011.100 Reliance Life Sciences has and operating costs of manufacturing launched three biosimilars—ReliPoietin are higher. These factors mean that (Erythropoietin), ReliGrast (GCSF), developing biosimilars represents a and ReliFeron (Interferon Alpha 2b) in higher risk area of R&D. the domestic market in 2008 and is currently conducting clinical studies Pharma companies need to balance for erythropoetin and granulocyte the risks and rewards when considering colony stimulating factor (GCSF) in whether to enter the biosimilars Europe.101 Wockhardt has launched market. The decision to enter the its recombinant erythropoietin, Wepox market should only be made based on and insulin, Wosulin in the domestic a clearly defined long-term biosimilar market102 and is conducting clinical strategy, including development and trials in the US for Wosulin.103 It has built manufacturing capabilities, marketing, capacities in erythropoetin, hepatitis pricing and regulatory expertise. India’s vaccine, recombinant insulin and insulin cost advantages in many of these areas

Global pharma looks to India: Prospects for growth 19 Other growth areas

could help it gain a stronghold globally companies are integrating bioinformatics in this growing market. services into a complete portfolio of Bioinformatics in India research capabilities. The bottom line: India is now actively targeting the India’s existing The modern process for drug discovery bioinformatics market, with the and testing now generates very large construction of its first biotech-IT park quantities of data through computer in Bangalore, at a total cost of about knowledge 106 modeling and simulations, genetic US$87 million. The first phase of the capital in IT sequencing, and other data-intensive park has been completed and a tender for processes. Further, as we noted in Pharma the development for phase–II is expected provides a natural 2020: The vision, pharma companies are soon from the local state Government. under increasing pressure to document Several Indian companies, including the base for the the efficacy of their products; tracking Bangalore based Strand Genomics and development of patient outcomes represents a further Ocimum Biosolutions, have already made source of large quantities of data. In order forays into the bioinformatics industry. bioinformatics to facilitate the storage, management, Recently, Ocimum was granted a patent retrieval and analysis of this large pool for its method and system to manage research and of data, a new subsector of the IT sector and query gene expression data based 107 has emerged – bioinformatics. Tools have on quality. operations. been developed which can help lower cost, improve efficiency, and streamline The Institute of Bioinformatics has also the process of documenting a drug’s developed a comprehensive database efficacy throughout development until of all known human proteins and their launch and beyond. characteristics, and the Centre for DNA Fingerprinting and Diagnostics in India’s strength in the IT sector and its Hyderabad along with Sun Microsystems growing pharmaceutical sector are driving has operationalised a Centre of growth of this emerging area. Revenues Excellence focusing primarily on medical 108 for the Indian bioinformatics industry bioinformatics. Some global pharma were around US$48 million as of March companies are already drawing on the 2009. It is an export driven segment with emerging resources. Tata Consultancy earnings of around US$37 million from Services has signed a deal with GSK overseas. Domestic revenues contribute to set up a support centre in Mumbai around US$11 million.105 Some companies for the company’s global drug provide only specialised bioinformatics development programme. Biocon has services; in other cases, local life sciences taken its tie-up with Bistol-Myers Squibb

20 PricewaterhouseCoopers further by setting up a dedicated the National Centre for Cell Sciences in research facility, through its subsidiary Pune and the National Brain Research Syngene International. Centre near Delhi, are investigating the use of stem cells to regenerate nerve, The bottom line: Stem cell research heart and adult muscle cells, and repair damaged bone tissue. The L.V. Prasad India has made Stem cells are seen by many as a Eye Institute has also treated blindness powerful tool for improving the research using stem cells derived from the eye. considerable and development process in the pharma progress in stem industry. Stem cells are being used to While the Indian Government is strongly develop some types of direct therapeutic promoting biotech generally, concrete cell research applications; they are also becoming Government funding for stem cell increasingly important as a tool to test research in India still lags far behind and is well- potential drug toxicity. that provided in other countries such as the US. There are also no laws positioned to India has already made considerable per se governing stem cell research, progress in this area. India’s entry into although there are specific guidelines leverage growing stem cell research has progressed which classify stem cell use into three capabilities in this from a few institutions to currently categories: permissive, restricted, over 40 institutions and hospitals and prohibited. The Indian Council of area. involved in stem cell research.109 In Medical Research is currently drawing 2008, Stempeutics, a leading stem up plans for a national stem cell cell company, launched its second initiative to promote clinical applications stem cell laboratory on the Manipal of stem cell research in ophthalmology, University campus for advanced stem cardiology and spinal cord repair, cell research in human embryonic stem and build links between scientists cells.110 Further activities followed in and doctors. India’s ex-president Dr. 2009 – one example is a joint venture A.P.J. Abdul Kalam had also identified formed by StemCyte in India with Apollo stem cell research as one of the Hospitals and Cadila Pharmaceuticals areas on which the country should to provide stem cell therapies.111 Several focus its efforts. major research institutes, such as the National Centre for Biological Sciences Given India’s growing presence in in Bangalore, the Centre for Cellular biotech, drug discovery, and clinical and Molecular Biology in Hyderabad, testing, the country may be well

Global pharma looks to India: Prospects for growth 21 positioned to take a leading role in about 50-60%, implantable devices leveraging the potential of stem cell which are around 20-30%, and simple technology throughout the pharma plastic disposables which are The bottom line: value chain. around 20%. Medical devices Medical devices The sector became regulated in 2005 under the Drugs and Cosmetics Act. represent a Many pharmaceutical companies The Ministry of Health and Family such as Bayer Healthcare, Johnson Welfare declared 10 products to be significant and Johnson Medical India (JJMI), classified and listed as drugs under the Roche, and Piramal Healthcare are also Act. The list was expanded in March potential market, looking to medical devices as a path 2009 to include 19 more products. however the to growth. The Indian medical devices Under the Act, import registration and supplies market is at a nascent requires product approval from another sector currently stage and was estimated at US$2.75 country’s regulatory organisation such billion in 2008. This is about 1.25% of as the US FDA or the EU medical 114 lacks the the global medical devices and supplies devices directive. The manufacture market of around US$220 billion in of any new type of a medical device is regulatory and 2008. By 2012, India’s medical devices not covered under the Act and requires market is expected to nearly double to approval from an expert committee put R&D support around US$5 billion.112 Improving health together for the purpose. necessary to infrastructure such as an increasing number of hospitals, clinics and In contrast to other biotech-related achieve its clinical laboratories and telemedicine areas such as stem cell research and services are expected to drive demand. bioinformatics, the medical devices full potential The production of low value medical sector lacks the necessary regulatory supplies and disposables is dominated and R&D support. Institutional support and faces stiff by domestic manufacturers, whereas is also required for testing and validating the high end medical equipment is facilities, as well as human resource competition generally imported.113 The sector from Europe and consists of the large medical-dental- surgical equipment segment which is China.

22 PricewaterhouseCoopers Global Pharma’s evolving business models and options in India

development. In the future the industry boundaries. It aims to get better is expected to face stricter regulation access to innovation, reduce its costs, and competition from Europe as well manage its risks effectively and as China. improve productivity. The bottom line: Global pharma Background This evolution in pharma business models has enormous repercussions players can take The global pharmaceutical industry is for the Indian pharmaceutical sector, changing. In a report by PwC Pharma and related sectors like biotechnology. advantage of a 2020: Challenging business models, Indian companies now have an we describe how the pharmaceutical unprecedented opportunity to variety of options business model is witnessing a partner with global players across paradigm shift from a fully integrated a wide range of activities, from to maximise company structure towards a future contract manufacturing and licensing their investment where companies use a wide range arrangements, to franchising and of outsourcing, partnership initiatives joint venture opportunities. The range in India. As and other contractual and relationship of option spans a wide spectrum arrangements to create networks of of levels of ownership and control, many pharma collaboration and discovery. Eli Lilly, from straightforward outsourcing for example, is currently transforming of manufacturing to licensing companies itself from a traditional fully integrated arrangements to more involved joint pharmaceutical company into a fully ventures and partially or wholly-owned turn to more integrated pharmaceutical network, subsidiaries (see Figure 5). The amount collaborative in order to leverage on a wider range of investment risk varies accordingly. of resources beyond its physical business models, Indian companies Figure 5 : Evolving business models are likely to play an increasingly E.g. Cipla, DRL,Dishman and GVK important

E xport partnering role. Oriented In-licensing - e.g. Into India - e.g. Pfizer, B us ines s- Elder- Enzymotec, GlaxoSmithKline CR AMS Elder - Daiwa; and Novartis Lupin -ItalFarmaco Partially or wholly owned L icens ing subsidiaries Evolving From India - Out-licensing - e.g. e.g. Dishman, Business Models Ethypharm -Solvay; Glenmark,Orchid Glenmark - Forest, and Aurobindo Glenmark- Teijin

Joint Franchising Ventures E.g.Novavax- E.g. Cadila; Novotech Fortis Healthcare, - ETI Klinical Medicine Shoppe

Global pharma looks to India: Prospects for growth 23 Big Pharma is already well aware of Table 4: Only two foreign multinationals rank among the top 10 pharmaceutical India’s importance. Many of them companies in India have been sourcing products from Indian manufacturers for some years, Country sales, Country sales, Growth, 12 months but have now started setting up their 12 months 12 months to Q4 2008/2007, own production facilities. Sandoz, Major pharma to Q4 2008, to Q4 2007, Fixed rate US$(%) the generics arm of Novartis, has two company US($millions) US($millions) manufacturing plants and a research Cipla 510 468 9.0% centre for developing formulations Aurobindo 477 416 14.5% and processes, based in Thane, Sun Pharmaceuticals 449 340 31.9% near Mumbai. Pfizer also operates a Piramal Healthcare 428 354 20.9% manufacturing base in Thane. GSK has facilities based in Mumbai and GSK 399 395 1.2% Nashik; Apotex has a research centre Ranbaxy (Daiichi) 368 385 -4.5% and manufacturing plant in Bangalore; Cadila Healthcare 357 324 10.4% and Teva has an R&D centre in Lupin 286 261 9.2% Greater Noida, having already bought a manufacturing operation in Uttar Dr. Reddy’s 232 218 6.3% Laboratories Pradesh in 2003. Mid-tier global pharma companies are present as well – Watson Glenmark 134 146 -8.5% Pharma, Lonza, Eisai Pharmaceuticals, Source: Annual Reports (2009) & Company Reports115 Ethypharm and Astellas all have manufacturing or research facilities in activities such as APIs and generics, all relevant regulatory frameworks India. While their presence is certainly and India continues to play an important continues to be a challenge when on the increase, only two foreign role in these segments. outsourcing to Indian pharmaceutical multinationals rank in the top 10 Indian In recent years, India’s pharma players, although the situation companies, measured by sales – and companies have also begun to move is improving. even they only have 6.4% of the market up the value chain. Foreign companies between them (see Table 4). are now increasingly tapping India’s Licensing growing research skills in addition to its manufacturing skills. Players such Export-oriented business: Multinationals are also striking licensing as Dishman and GVK-Biosciences CRAMS agreements to get a share of the undertake contract research for western Indian pie. For example, Elder companies. Low costs, availability of Outsourcing has been the traditional Pharmaceuticals has entered into skilled talent and a large patient pool method of doing business with Indian an exclusive in-licensing deal continue to be growth drivers for the companies. Historically, the focus for with Israel’s Enzymotec to sell the CRAM segment in India. Ensuring that the pharmaceutical industry has been latter’s cholesterol-reducing dietary products and research comply with on lower value add manufacturing supplement, CardiaBeat, in India.116

24 PricewaterhouseCoopers Elder has also entered into another deal the master franchisee of US-based development can be productively with Daiwa Pharmaceutical of Japan Medicine Shoppe International has utilised by western pharmaceutical to introduce Daiwa’s nutraceuticals already forayed the market and plans companies coming into India. As noted, into the Indian markets.117 Lupin has to expand 1,000 stores by 2010.122 India is home to more then 100 US FDA in-licensed Lupenox, a cardiovascular Fortis Healthcare plans to open a chain approved plants, so foreign companies drug from ItalFarmaco, an Italian of 1,000 stores by 2012, of which the looking for local partners can access a pharmaceutical company.118 US$200 million has been committed.123 substantial manufacturing base. Franchising arrangements can In recent years, a wide array of out- leverage on purchasing power from the R&D joint ventures are also growing licensing arrangements have also franchisor buying in large quantities and in popularity. Some Indian companies emerged. Ethypharm out-licensed passing down savings to franchisees. are collaborating with overseas players and entered into a supply agreement Continued business support from to enhance their vaccine development for Mesalazine with Solvay Pharma.119 the franchisor such as technology, capabilities, for example. Panacea Glenmark has out-licensing deals with products, training and marketing is Biotech has a joint venture with Chiron Forest, Teijin, Eli Lilly and Merck & an added advantage. However, there for development and marketing of Co.120 Claris sealed a deal with Pfizer are restrictions on how the business vaccines.124 Similarly, Novavax and to license out 15 injectable generic must be managed in order to retain Cadila Pharmaceuticals have a joint medicines for pain, infections and consistency among franchises. All venture for the development and other conditions.121 franchisees are obligated to conform manufacture of vaccines and other accurately to the initial business model. biopharmaceutical products in India.125 Most developmental costs are borne by the licensor in licensing arrangements, Joint Ventures Other joint ventures focus on biotech resulting in the licensee paying a high or new biosimilars technologies. unit cost and having little control over Novavax and Cadila Pharmaceuticals Joint ventures (JVs) are becoming manufacture. However, licensing can be signed an agreement in March 2009 a more prevalent option for effectively used to establish a common to form a joint venture, CPL Biologicals. companies looking to capitalise on platform in order to gain rapid in-market CPL will develop and manufacture the opportunities presented in India. acceptance and create a complete vaccines, biological therapeutics Foreign companies are increasingly therapy range through arrangements and diagnostics in India using looking at local partners to work with such as cross-licensing. technology contributed from Novavax in order to increase their presence and Cadila Pharmaceuticals.126 in India. Domestic partners bring

Franchising together extensive local expertise due Clinical testing also offers opportunities. to their familiarity with the business In 2009 Novotech, an Australia based India’s retailing industry also offers huge environment, knowledge support and clinical research company, entered into opportunities for foreign companies to the networked capabilities of other a strategic venture with ETI Klinical either set up their own retail franchisee local pharmaceutical companies. These to service the growing demand for or enter into collaboration with existing advantages, along with low production clinical research and clinical and data players. Medicine Shoppe India, costs, skilled labor and faster drug

Global pharma looks to India: Prospects for growth 25 management services in India.127 subsidiary Novartis India from 50.9%.129 Requirements of a JV Joint ventures offer many ways for Other companies are using local partners to pool their Intellectual subsidiaries to set up their own sales Foreign companies forming a JV Property (IP) and to share risks and and marketing organisations, either in India can invest directly via rewards equally. These types of organically or through acquisitions. GSK the automatic route i.e. no prior arrangements can be particularly has headquartered its wholly-owned approval of the Government is attractive to biotechnology or national subsidiary SB Asia in India. Novartis has required. Foreign direct investment pharmaceutical companies who wish to two wholly owned companies in India up to 100% is permitted in pharmaceutical sector under the retain some control over development – Novartis Consumer Health Private automatic route. In cases where and to sell the resulting product in Limited and Sandoz India Private the foreign investor has an existing some markets, but who lack the ability Limited. Pharmacia India Private venture or tie-up in India in the to undertake global development and Limited remained as a wholly owned same field as on 12 January commercialisation. However, the profit subsidiary and was not consolidated 2005, prior Foreign Investment and/or sales split may be determined as with Pfizer India during Pfizer’s Promotion Board (FIPB) approval is much by the companies’ relative market acquisition of Pharmacia.130 required. The FIPB generally grants strengths as by the value of their its approval on the basis of a no Unlike in some other sectors, objection certificate (NOC) from the initial IP. existing JV partner. fully owned subsidiaries in the pharmaceutical industry offer little risk Partially or Wholly owned in terms of sharing critical data and subsidiaries competitive advantage, as most are subject to strong control by the parent Some multinational companies have company. Pharmaceutical companies also increased their stake in their Indian willing to have wholly owned operations subsidiaries to take advantage of the in India can gain value from being India opportunity. Pfizer has been able present across the value chain, from to increase its stake in its Indian arm, drug discovery to clinical trials through Pfizer India, from 41.2% to around to manufacturing. Other benefits may 72%.128 Similarly, Novartis AG has include tax advantages. hiked its stake to 76.42% in its Indian

26 PricewaterhouseCoopers Practical concerns

Infrastructure would impose taxes at both federal and state levels and differentiate between Insufficient energy infrastructure and goods and services. The new dual inadequate transport infrastructure GST is designed to aggregate different The bottom line: has historically posed challenges for indirect taxes currently levied, in order India offers companies operating in India. The to simplify and integrate the current situation is definitely improving, as system of indirect taxation. some attractive the Government focuses attention on infrastructure needs. The Indian India already offers a variety of tax tax benefits infrastructure sector continues to be concessions to the pharmaceutical viewed as an investment opportunity, sector, including tax holidays for for pharma despite the global slowdown. industrial operations established in free trade zones or under-developed companies and In early 2009, the Indian Government areas; deduction of profits earned from reductions in was reported to be mulling over a plan exports; liberal depreciation allowances; to use part of its foreign exchange deduction of capital R&D expenditure; customs duties reserves to fund certain forms of and relief on all contributions infrastructure spending. It is also to approved domestic research should also keen to encourage public-private institutions. For pharma manufacturing partnerships (PPPs) in infrastructure units, there is an additional weighted help global development projects. The Union deduction of 200% for expenditures 132 Ministry of Health and Family Welfare, relating to in-house R&D. Further, manufacturers along with the pharmaceutical industry recently, a new provision has been compete in the and airport developers GVK and GMR, added to provide 125% weighted plan to set up dedicated cargo zones to deduction for expenditure incurred price-sensitive handle the import and export of pharma towards outsourcing of R&D activities. products.131 Such initiatives could spur Indian market. substantial improvements in India’s At present, foreign direct investment infrastructure over the medium-term. in manufacture of drugs and pharmaceuticals including those involving use of recombinant DNA Tax environment technology is freely permitted up to 100% under the automatic route, India is expected to implement a new i.e., without obtaining any prior Direct Tax Code, pending approval, regulatory approval. by April 2011, which should simplify the existing tax structure. The new Of particular interest for pharma tax code proposes a reduction in the companies may be the special corporate tax rate from the current 30% economic zones (SEZs). In order to to 25% and an unlimited carry forward incentivise the country’s export sector, of business losses. A dual system the Government has formulated the GST has also been proposed for April SEZ policy, which offers cost and tax 2010. The implementation of the new benefits. On the corporate tax front, GST may face delays. The new system units set up in SEZs enjoy 100%

Global pharma looks to India: Prospects for growth 27 income tax exemption on export profits located in Andhra Pradesh, and four and exempted from CVD and special in the first five years of operation, 50% in Maharashtra, as well as one on the additional duty. Specified inputs of exemption for the next five years, and outskirts of Dehra Dun in Uttarakhand, orthopaedic implants and medical 50% exemption on the reinvested so global pharma companies have a equipment and devices such asassistive export profits in the following five years. range of options. devices, rehabilitation aids, etc. are fully Companies located in SEZ also benefit exempted from import duty.135 The 2009 from various Indirect Tax benefits such At this stage, it may also be pertinent -10 budget reduced the customs duty as exemption from payment of Customs to note that the draft Direct Tax Code on import of influenza vaccine and nine Duty; Excise Duty; Central Sales Tax Bill published by the Government specific life saving drugs and bulk drugs and refund and exemption of presently does not provide for SEZ- used for the manufacture of such drugs Service Tax. related incentive schemes. However, to 5%. This will better enable foreign recent press releases suggest that drug-makers to sell products at a lower Currently, SEZs must adhere to a the Finance Minister has identified price point and better compete in India’s positive net foreign exchange proposed incentive provisions as one of highly price sensitive market. obligation policy (i.e. where the total the areas for detailed examination prior 134 value of exports should be more than to finalisation of the Direct Tax Code. Counterfeiting the total value of imports) under the

Import Export policy, in order to retain Overall, India offers a favourable Counterfeit drugs have been a serious SEZ status. A proposal has been environment as far as taxation policies issue in India. The Organisation of made to exempt pharma SEZs from for pharmaceuticals are concerned. In Pharmaceutical Producers of India this requirement.133 addition to the attractive tax benefits (OPPI) has spearheaded various for companies pursuing innovative initiatives to combat the problem. It has In an effort to attract companies to R&D in India, the recent budget 2010 conducted several seminars and worked SEZs, some of these are located in -11 has provided certain benefits to closely with the Ministry of Health to modern industrial areas. The Jawaharlal pharmaceutical industry. In this budget, develop policies for controlling the Nehru Pharma City, India’s first and a uniform, concessional basic duty production and sale of ‘spurious’ drugs. largest pharma industrial estate, of 5%, countervailing duty (CVD) of It has also published a series of anti- includes a SEZ. The facility is located 4% with full exemption from special counterfeiting guidelines for the industry near Visakhapatnam, in close proximity additional duty has been prescribed on as a whole. Surprisingly, a recent to many chemical manufacturing hubs, all medical equipment, while the parts nationwide survey conducted by the and offers common infrastructure and accessories for manufacture of health ministry, published in December for resident pharma companies. these equipment has been prescribed 2009 finds a much lower incidence There are three other pharma SEZs only the basic custom duty of 5% of spurious drugs in the country than

28 PricewaterhouseCoopers previous industry estimates. It found the which will prolong the period required In December 2008, the Delhi High prevalence of spurious drugs at 0.046% to issue a grant. It permits compulsory Court’s landmark judgment in of all medicines sold to customers, in licensing in some circumstances other favor of Bristol-Myers Squibb, the contrast to results of an earlier survey than national emergencies and public patent holder for the leukemia drug funded by the WHO and undertaken health crises – provisions that could be Dasatinib, restrained Hetero Drugs by the International Pharmaceutical abused for commercial gain. from manufacturing and marketing Federation, which concluded that 3.1% generic versions of the drug. In the past, of drugs in India were counterfeit.136 Further, patent rights for ‘mail box’ marketing approvals were sometimes While such findings are a positive applications filed will only accrue granted by the DCGI independently sign, companies should remain alert to from the date the patent is granted.138 of the patent status of the drug in possible counterfeiting issues. Lengthy delays are common, as the question. The judgment establishes Indian Patent Office lacks sufficient a link between patent and marketing Intellectual Property Rights resources to process applications very approvals granted by the IPR office rapidly. While a ‘mail box’ application and the DCGI.140

is pending, generic manufacturers can The federal Government introduced freely produce the same drug In June 2009, Novartis’ cancer drug product patents for all industrial sectors without fear of incurring any liability Glivec was not awarded a patent under the Patents (Amendment) Act, for damages. for lack of improved efficacy under 2005 – in line with the commitment section 3(d) of the Indian Patent Act India made when it signed up to the Post 2005 India has made several and its high price as ruled by the Trade-Related Aspects of Intellectual amendments to better protect Intellectual Property Appellate Board Property Rights (TRIPS) Accord in 1995. intellectual property rights and enable (IPAB).141 The former justification has This regulation aims to balance the global pharma companies to bring since come under scrutiny. In August interests of domestic and multinational their patented products to India, 2009, the Government accepted the drug makers. It represents a major while protecting the interest of home recommendations of the Mashelkar improvement on the previous rules, but grown companies. The Satwant Reddy committee supporting patenting of some issues remain. Firstly, it does not committee’s report on data protection incremental innovation. The Mashelkar apply to drugs patented before 1995.137 has recommended pro-patent report also pointed that efforts were Copies of drugs patented between amendments and data exclusivity for a required to provide drugs at affordable 1995 and the introduction of the law will period of five years.139 The enforcement prices to the people of India and to probably not be withdrawn. regime is also changing, but the legal prevent the granting of frivolous

system is currently too overburdened patents and evergreening. The Ordinance also allows third parties for these improvements to be to oppose an application for a patent, immediately effective.

Global pharma looks to India: Prospects for growth 29 Conclusion

The Indian market is impossible to India’s pharma market is highly collaboration and discovery. Investing ignore, given its economic prospects. fragmented and remains extremely in India will be a vital component of Foreign companies view India as a price sensitive. Affordable healthcare this networked future. Companies potential significant contributor of continues to pose a challenge, although that will be most successful in doing future sales and are ramping up their there are a number of healthcare business in India will be those that are investments in the country accordingly. initiatives by the Government underway most adept at managing and mixing a India’s domestic market looks promising to improve the situation for India’s vast range of contractual relationships and for global pharma looking to launch population. Indian courts and regulatory partnership strategies. new products. The country’s growing authorities are very sensitive to pricing capabilities in contract manufacturing, issues in making decisions around Some practical issues will need to be R&D and clinical trials also make it a intellectual property. Pharma companies addressed, regardless of the business preferred outsourcing partner for global coming into India may need to consider model selected. Infrastructure deficits pharma at every stage of the value a differential pricing. They will need continue to exist, although some are chain. So what strategy should foreign to evaluate access to medicines, a being addressed. Intellectual property pharmaceutical companies eager volume-based pricing strategy and protection has improved substantially to enter the country or expand their take into account gradually increasing but some holes remain. And while existing operations adopt? per capita incomes to come up with the regulatory environment in India acceptable price levels for their drugs. has improved substantially in recent One approach is to call on India’s Global pharma companies will then years, the industry still faces a number increasing expertise in biotechnology, need to decide how to manufacture of question marks. Finalisation of bioinformatics and clinical testing. their products, and identify and develop Government policies around drug Several overseas companies have strong local partners. price control, access to OTC drugs, outsourced research and clinical trials tax policy, intellectual property to Indian contractors, while others One way to build a presence in India protection and infrastructure spending have entered into collaborative R&D may be through an increased presence is still pending. arrangements to supplement their R&D in the OTC market. Promoting a range productivity. Many foreign companies of OTC products could serve as means Nonetheless, India’s appeal is growing have also already initiated research on of building brand awareness and as a rapidly in a number of respects. It neglected diseases. We believe that source of new revenues. Indigenous has long been a formidable player in many more will do so, as the patent producers dominate the generics pharmaceutical manufacturing, but regime is strengthening. This will enable business, and about 97% of all drugs its socio-economic strengths provide them to capitalise on the cost savings to sold in India are already off patent. The even greater grounds for optimism. If be gained from shifting some research OTC market is, by contrast, relatively the economy outpaces that of every activities to India, without jeopardising undeveloped. Indian consumers already other emerging country for the next their most valuable intellectual property. pay privately for the lion’s share of their half century, as many commentators healthcare, and the Government is too expect, large portions of the population Another approach is to tap into the hampered by budgetary constraints will be able to afford modern medicines. growing domestic market. Foreign to reverse this pattern. In future, then, India’s increasing scientific expertise companies with a product portfolio it seems likely that access to OTC will also equip it to play a significant spanning across different therapeutics medicines will be improved and the role in researching and developing segments can look at bringing newer market will continue to expand. those drugs. It has a large pool of products in India by entering into highly educated, English speaking collaborative networks across the value The pharmaceutical business model scientists who can undertake research chain, from sourcing and manufacturing is witnessing a paradigm shift, moving and conduct trials more cheaply and in to marketing and distribution. These from a fully integrated company some cases faster than their Western companies will have to understand structure towards a future where peers. These are major advantages in how to get their product to market and companies use a wide range of a world where drug development develop a realistic pricing strategy, outsourcing, partnership initiatives costs are soaring and getting to particularly as India is still far away and other contractual and relationship market fast is vital. from a widespread shift to an insured arrangements to create networks of payer model.

30 PricewaterhouseCoopers Related reading

PricewaterhouseCoopers’ providers and patients, and the changes Pharma 2020 series required to create a marketing and sales model that is fit for the 21st century.

Pharma 2020: The vision Pharma 2020: Challenging First in the series, the report highlights business models a number of issues that will have a Fourth in the series, the report explains major bearing on the industry over the why Pharma’s fully integrated business next 11 years. The publication outlines models may not be the best option the changes we believe will best help for the pharma industry in 2020 and pharmaceutical companies realise the why more creative collaboration potential the future holds to enhance models may be more attractive. The the value they provide to shareholders paper also evaluates the advantages and society alike. and disadvantages of the alternative business models and how each Pharma 2020: Virtual R&D stands up against the challenges Second in the series, the report explores facing the industry. opportunities to improve the R&D process. This paper proposes that new Pharma 2020: Taxing times ahead technologies will enable the adoption Fifth in the series, the report discusses of virtual R&D and by operating in the implications changes to the a more connected world, industry, business model and political and in collaboration with researchers, economic trends may have on how the Governments, healthcare payers and pharma industry is taxed. The report providers, can address the changing focuses on the challenges ahead, needs of society more effectively. but also shows how companies can adapt their tax planning to support the Pharma 2020: Marketing the future provision of outcomes-based healthcare Third in the series, the report and remain competitive. discusses the key forces reshaping the pharmaceutical marketplace, including The entire Pharma 2020 series is the growing power of healthcare payers, available for download at www.pwc.com/pharma2020

Global pharma looks to India: Prospects for growth 31 References

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36 PricewaterhouseCoopers 120. Rupali Mukherjee, “Desi pharma companies grow beyond generics”, The Times of India (November 26, 2007). 121. “Claris Life eyes 2-3 bln rupee IPO in 12-18 months”, Reuters India (June 18, 2009). 122. “Pharmacy chains Rx for change” (2007), India Brand Equity Federation 123. “Pharmacy chains Rx for change” (2007) op. cit 124. “India’s health biotech sector at a crossroads”, Nature Biotechnology 25, 403 - 417 (2007). 125. “Cadila Launches Joint Venture With Novavax In India”, Novavax (July 9,2009), accessed July 16, 2009, http://www.novavax.com/download/ releases/CadPR_FO%5B1%5D.pdf 126. “Cadila Pharmaceuticals Launches Joint Venture With Novavax in India”, Reuters India (July 9, 2009). 127. “Novotech Signs Joint Venture with Indian CRO ETI Klinical”, Applied Clinical Trials Online (May 6, 2009), accessed Sptember 7, 2009, http:// appliedclinicaltrials online.findpharma.com/appliedclinicaltrials/article/articleDetail.jsp?id=596897 128. Nina Mehta, “Pfizer increases stake in Indian arm to 72%” , The Economic Times (18 July 2009). 129. “Novartis raises stake in Indian arm to 76.42%”, Business Standard (June 25, 2009). 130. Rumi Dutta, “Pharma multinationals activating Indian arms”, Business Standard (February 01, 2005). 131. “Pharma cargo zones planned at airports”, Business Standard (March 25, 2009). 132. 2010-11 Budget Key Features, accessed March 1, 2010, http://indiabudget.nic.in/ub2010-11/download_index.htm 133. Arun S, “Task force prescribes policy change to help pharma SEZs” (May 07, 2009), Financial Express. 134. “Critical areas on DTC for detailed examination identified: FM” (October 09, 2009), Ministry of Finance. 135. 2010-11 Budget Key Features. op. cit. 136. Radhieka Pandeya, “supply of fake drugs grossly overstated”, The Live Mint Journal (November 26, 2009). 137. The Patents (Amendment) Act, 2005, accessed July 6, 2009, www.patentoffice.nic.in/ipr/patent/patent_2005.pdf 138. The third proviso, Section 11 A Sub-section (7) of The Patents (Amendment) Act, 2005. 139. Department of Chemicals & Petrochemicals, Report on Steps to be taken by Government of India in the context of Data Protection Provisions of Article 39.3 of TRIPS Agreement” (May 31, 2007). 140. Khomba Singh, “Delhi HC debarred Generic durgmakers from marketing”, The Economic Times (January 7, 2009), accessed July 21, 2009, http:// economictimes .indiatimes.com/News/Delhi_HC_debarred_Generic_durgmakers_from_marketing/rssarticleshow/3946637.cms 141. PB Jayakumar, “Novartis loses battle for cancer drug patent”, Business Standard (July 20, 2009); India Glivec Patent Case FAQ, Novartis, accessed July 21, 2009, http://www.novartis.com/downloads /about-novartis/india-glivec-patent-case-faq.pdf

Global pharma looks to India: Prospects for growth 37 Acronyms

ANDA - Abbreviated New Drug Application GSK - GlaxoSmithKline API - Active Pharmaceutical Ingredient GST - Goods and Sales Tax BCG - Bacille Calmette-Guérin hGH - Human Growth Hormone BIPP - Biotechnology Industry Partnership Programme IP - Intellectual Property BPL - Below Poverty Line IPAB - Intellectual Property Appellate Board CAGR - Compounded Annual Growth Rate IRDA - Insurance Regulatory and CRAMS - Contract Research & Manufacturing Services Development Authority CROs - Contract Research Organisations JJMI - Johnson and Johnson Medical India CVD - Countervailing Duty JVs - Joint ventures DBT - Department of Biotechnology NPPA - National Pharmaceutical Pricing Authority DCGI - Drug Controller General of India NREGA - National Rural Employment Guarantee Act DPCO - Drug Price Control Order NRHM - National Rural Health Mission DPT - Diphtheria, Pertussis or Whooping Cough, OPPI - Organisation of Pharmaceutical Producers and Tetanus of India DRL - Dr. Reddy’s Laboratories OTC - Over The Counter EMEA - European Medicines Agency PE - Private Equity EU - European Union PPPs - Public-Private Partnerships FCCBs - Foreign Currency Convertible Bonds PwC - PricewaterhouseCoopers FDA - Food and Drug Administration R&D - Research and Development FDI - Foreign Direct Investment RBI - Reserve Bank of India FIPB - Foreign Investment Promotion Board SEZs - Special Economic Zones GCSF - Granulocyte Colony Stimulating Factor SIA - Secretariat for Industrial Assistance GIC - General Insurance Company TRIPS - Trade Related Aspects of Intellectual Property Rights GLP - Good Laboratory Practices WHO - World Health Organisation

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