High on bulk drugs

While the overall pharmaceutical sector is expected to grow, small and medium units will find it more difficult to get a firm footing without investing in scale

he Indian pharmaceutical industry "� with $4.5 billion in domestic sales and over $3.8 billion in exports "� continues to show satisfactory growth in terms of infrastructure development, technology base and product use. The global pharma market (2005) was estimated to be about $534 billion, of which the Indian pharma market is said account for $4.5 billion. While the former is estimated to touch $767 billion by 2010, India is likely to grow up to $25 billion by that time.

Experts say it is currently registering a nine per cent growth compared to global sales growth of seven per cent besides consistently increasing its exports to key overseas markets such as North America, Europe and Japan "� which account for about 87 per cent of the total global pharma sales.

The Indian pharma industry currently ranks fourth in volume-and 13th in value term. Estimates suggest that about eight per cent of the world's drugs are manufactured in India. The Indian pharmaceutical industry is already all set to overtake Italy as the world's second largest manufacturer of active pharmaceutical ingredients (API).

The Indian API (Active Pharmaceutical Ingredients) manufacturing industry is currently the third largest in the world and is expected to grow at an average yearly rate of 19.3 per cent, according to a study conducted by Italy's Chemical Pharmaceutical Generic Association. India has also become the second largest market for pharmaceutical products and ingredient exports from China, next to the US "� registering a big leap of 172.44 per cent growth during the year 2005, in comparison to the previous year.

The country has over 300 large and medium scale pharma companies and about 10,000 small companies. Nearly 80 per cent of the production is met by top 100 large companies. The country's pharma industry manufactures about 400 bulk drugs.

However, when it comes to small and medium enterprises in this segment, the story plays a different tune. "The prescription for a level-two ailment is no more preventive care but an emergency cure." This was the reaction of a senior industry analyst when asked where do the Indian small and medium companies figure in the pharmaceutical space. The statement also holds true while looking at the current growth rate of the pharmaceutical sector.

The hitherto buoyant pharmaceutical industry of the country "� and the small and medium enterprise (SME) segment in particular "� is now going down the value chain as various external as well as internal factors have already clipped its wings. An imminent therapy for the crisis-ridden drug SME sector is not certainly a few Budget sops or some snail pace government incentives, but only a consolidated effort to build up the capability together and to fight out the odds, say experts who do not wish to be named.

For instance, Indian pharma and biotechnology sector "� the two knowledge-based industries "� though growing rapidly in the global arena, are struggling hard to grab even a one per cent share in the world healthcare market. Even though competition from multinational giants and discrete pressures building upon the third world countries by global forces are two crucial factors affecting this industry, internal competition and the attitudinal lacunae have often posed stumbling blocks to the growth of this sector.

As the resource crunch and a very long gestation period has absolutely narrowed down the scope of innovation and new product development among the domestic pharma industry, the post-patent era in India has already pressed the alarm bells for the sector in general.

But small and medium companies, who have never attempted a serious move towards sustaining growth by the innovation route, have now been left with only one option "� to come down the value chain and become a commodity player depending on the clientele-based product outsourcing business.

However, this new avenue is also limited to few who can develop in-house capabilities to handle the clients' requirements such as product registrations in the global markets and manufacturing facilities in compliance with regulated market norms like the instances of long term product development, manufacturing and supply tie-ups like JB Chemicals and Taro Pharma, Unichem and Pliva and Lilly and Jubilant Organosys amongst others.

Even as Indian pharma majors like Dr Reddy's Laboratories, Nicholas Piramal, Zydus Cadila and many more are aggressively looking at contract research and manufacturing services (CRAMS) as alternatives to sustain growth in the latest scenario despite their own attempts to get into global generic markets with branded generics, SME companies which do not posses the capabilities to compete in the world pharma space are bound to consolidate sooner, thanks to the already abysmal growth rate, which nearing nil, said a senior consultant in a leading global consultancy company which has an active interest in domestic pharma sector.

India fundamentally strong

However, the country has its own merits to be utilised for exploring the emerging opportunities. If the resources and capabilities are utilised in totality, the country would soon position itself in the global pharma map as one of the preferred destinations for foreign investments.

Despite the pricing pressure felt in the generic markets of the developed countries including US and Europe, the strong fundamentals drive the generics industry remain healthy. For instance, the US and European markets which are the main targets of the big Indian generic companies, provides better opportunities as their aged population as a percentage of total population is on the rise and is expected to rise further by 2025. This patient segment, which is not fully covered by insurance companies, offers a wide white space for the Indian generic companies.

As per a recent statistics, the ageing population of Europe (as a percentage of regional population) is expected to rise from the current 20 per cent to around 26 per cent by 2025. Similarly that of the US is expected to rise from the current 16 per cent to around 25 per cent by 2025. The governments in these countries are also under pressure to reduce healthcare costs, which can be achieved through relatively cheaper generics. Similarly, the concept contract research apart from contract manufacturing is also gaining momentum. Given the low cost high talent advantages, Indian companies are poised to benefit from contract research business.

As far as contract research and manufacturing services (CRAMS) are concerned, global pharma giants such as Pfizer, AstraZeneca, GlaxoSmithKline, Bayer among others are finding it extremely profitable. In order to utilise these opportunities, many large and even medium companies in the country are aggressively becoming compliant to quality certifications like the US FDA, UK MHRA and TGA.

As a result, India carries another credit as the country which has the highest number of USFDA compliant manufacturing facilities outside US. The country has around 79 pharmaceutical manufacturing units with successful USFDA audits.

Similarly, despite the price war, the domestic pharma industry "� mainly controlled by the top 25 companies "� continues to show decent growth rates, led by the chronic therapeutic (lifestyle) segment like anti-diabetic, cardiovascular and central nervous system. Higher awareness, exposure to newer therapies and aggressive introduction of new drugs at a reasonable price has been the key driver of growth in the lifestyle segment. The trend is likely to continue going forward as far as the large scale pharma companies are concerned.

The other positive shift happened in the domestic pharma sector is the increased focus and investments in the R&D, thanks to the onset of patent regime. Though it will take very long to reflect this added focus in the research into the real revenue stream, in longer term this will lead to strong bottomline. However, with the concept of CRAMS, the companies have been increasingly stepping up their R&D expenditure in a bid to be recognised as research and discovery oriented companies globally.

This has also resulted in the emergence of a third front into the pharma space. The venture capitalists and private equity companies are now showing keen interest in funding fundamentally strong pharma companies in their endeavors as far as the research initiatives and market enhancement through acquisitions and mergers, are concerned.

Concerns

Though the new patent regime is set to usher in a promising phase for the industry in India, it is not likely to help smaller players in the industry. Besides, the introduction of this law will gradually lead to a slowdown of new generic product launches from domestic pharma majors in the local markets. At the same time, it gives phenomenal advantage to MNC pharma companies to step up product launches from their parent's product stable thereby providing competition to their domestic peers.

The cost advantage has made the country a preferred location for product outsourcing for global companies. But, client-based manufacturing business is the lower end of the pharma value chain. Since the new business would not encourage facilities and resources to develop innovative and discovery research and new product development, the local companies will have to fully depend on their international peers to sustain. The cut throat competition has become the become the order of the day for the domestic pharma industry. This has literally limited the value term growth of domestic pharma market. Because of the highly fragmented structure of the market, the pricing power of players has been drastically reduced. The Indian markets have traditionally been and continue to remain price sensitive.

Competition in the developed markets like US and Europe has intensified in the past year. While the product flow is set to increase in the coming couple of years, pricing pressure is expected to continue. Generic players also have to contend with a host of other challenges such as increased difficulty in securing market exclusivity in the regulated generic space, presence of authorised generics among others.

As far as the industry is concerned, the government control on drug prices with Drug Price Control Order, continues to remain a sword hanging on its head.

What the government can do

The post patent regime has intensified the need of research and development among the local pharmaceutical industry. Hence, the already announced pharma research fund (PRF), could be increased from the current allocation of Rs 150 crore a year, which is too low compared to even the individual spend of certain companies in the country, could be raised to a meaningful level. The small and medium units in this knowledge-based sector should also be provided with equity support through appropriate growth funds.

The exemption date for weighted deduction of 150 per cent of in-house R&D facilities of pharmaceutical companies could be extended beyond the currently set deadline of 2007.

Also, the exemption for 100 per cent deduction of profits of companies carrying on scientific R&D, which is approved by the Department of Scientific and Industrial Research could also be extended for longer period.The recent decision to cut customs duty for nine specified pharma and biotechnology machinery to five per cent was a relief to the R&D oriented companies at the current level. However, a total exemption of customs duty would be desirable.

The penetration of health insurance is abysmally low in the country. The entry of private and public players would not only bring in quantum leap in the health insurance business but also increase capital inflows into this sector. It would also bring in the concept of managed healthcare in the country. This would finally lead to overall increase in per-capita usage of drugs.

Industry discipline

It is time for the domestic pharma industry to keep a strict industry discipline to avoid a total perish. The unhealthy competition within the domestic sector, while reaching out to both local as well as overseas markets, in the new world order will rather kill the common interests instead of expected individual benefits. At the same a time, professional competition among each other would help move in a positive direction. As far as the small and medium sector is concerned, the cluster development programme, which was recently adopted by the SSIs in Gujarat state, is a classic example of industry discipline for commonly beneficial technology and management upgradation.

Focusing on core competency and self identification of strategic product fit and market geography, instead of a me-too attitude would also help achieving better results. The finance is no more a hurdle for companies those who have better technology and asset management skills today. With an active presence of private equity and venture capital funds in the country has ensured availability of adequate resources for promising companies in terms of technology and products to move forward.

Pharma sector rides high on low costs

* The Indian pharmaceutical industry, with $ 4.5 billion in domestic sales and over $ 3.8 billion in exports is on a satisfactory growth path in terms of infrastructure development, technology base and product use.

* It has the highest number of plants approved by the US Food and Drug Administration (FDA) outside the US. It also has the largest number of Drug Master Files (DMFs) filed which gives it access to the high growth generic bulk drugs market. The industry now produces bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing processes and has also developed excellent 'good manufacturing practices' (GMP) compliant facilities for the production of different dosage forms.

* The Indian government has announced exemptions from import licences to foreign pharmaceutical units setting up their manufacturing units in Special Economic Zones.

* Setting up a plant is 40 per cent cheaper in India compared to developed countries and the cost of bulk drug production is 60-70 per cent less.

* In accordance with WTO stipulations, India grants product patent recognition to all New Chemical Entities.

* The focus under the R&D effort is to encourage development of new molecules. A provision of $ 33 million has been made under the Pharmaceutical Research & Development Support Fund.

* India has a cost advantage which makes it an attractive destination for outsourcing. Global pharma is experiencing increased cost of drug development in the last one decade compared to previous years. For instance, the drug development cost was estimated to be about $ 231 million in 1987 and it increased to $ 1.4 billion by 2003.

* Low-cost countries such as China and Israel pose tough competition to India and restrictions on animal testing is still a hindrance.

SME consolidation is imminent

Headquartered in Mumbai, Lupin is a leading pharmaceutical company with a strong research focus. It has a programme for developing New Chemical Entities. The company has a state of the art R&D center in Pune. It is a leading global player in Anti-TB, Cephalosporins (anti-infectives) and cardiovascular drugs (prils and statins) and has a notable presence in the areas of diabetology, NSAIDS and Asthma. During the financial year 2005-06 the company's revenues and PAT were Rs 16786.1 million and Rs 1827.2 million respectively. D B Gupta, chairman, Lupin Ltd., shares his views on this industry.

"The post TRIPS era has seen Indian pharmaceutical players investing heavily on research and development to create new and exclusive product portfolio through either innovative route or basic discovery. This is to sustain long term growth in a period where reverse engineering is ended and the competition even in the generics business is getting tougher day by day.

"Since the new regime demands better capabilities, resources and quality, only such players can survive in the industry. Thus it will become really difficult for the large majority of small and medium (SME) companies to follow this route for survival. So, a consolidation is imminent in the Indian pharmaceutical industry, in which over 18,000 companies exist.

"The quality norms are also getting more stringent worldwide. Though there are new generics markets opening up for Indian companies to make a foray, product registrations and facility approvals with specific quality compatibility are another area of big concern.

"So, only companies who can afford to meet the new demands of the world market can only ultimately survive in the industry over a period of time."

SMEs will need external funding

Chrys Capital manages $1 billion across four funds and aspires to build the leading investment firm focused on India. Sanjiv D Kaul, Managing Director, ChrysCapital and former Managing Director, Ranbaxy China, speaks about investment that can help the SME segment.

"Private equity players will have greater role to play in the current pharma industry scenario in India. The companies, especially in the SME segment, will look forward to external funding as the need of broadening their financial base will become more intense for recurring capital expenditure including capability enhancement and to capture growth opportunities through acquisitions and mergers.

"Venture capital companies and private equity funds are more aggressive now in India than ever before as most of the sectors including pharma and healthcare offer new investment opportunities.

"There two key reasons for the relevance of private equity players in the country's pharma sector. First being the necessity of additional investments to sustain growth in the highly competitive market scenario and secondly the strategies to grab newer market opportunities in the world generic space."

"In the developed markets, the concept of private equity players has even matured to the level of majority holder currently. It will evolve in the same manner here as well considering the exposure that the funds are receiving in the country."

"Private equity players are only concerned about the amount of professionalism in the clients' senior management team, the fundamentals and the technology platform of the company. If the Funds are satisfied with the profile of the company, which is conducive for working together for the next five years, the investment size is no more an issue."