Drugs and Pharmaceuticals 

Background

The pharmaceutical industry is highly significant for the economy. Its importance owes itself to the fact that pharmaceutical products contribute to improvement in public health (by offering preventive and curative solutions to various diseases), and allow individuals to live longer and more productive lives. The industry holds immense importance for any country. Drugs and medicines also form a substantial portion of out-of-pocket spending on health among households in India. Estimates from the National Sample Survey (NSS) indicate that around 5% of total consumption expenditure of households goes into health spending.

India is virtually self sufficient in the production of bulk drugs and formulations as far as domestic demand is concerned. Besides, it exports to various other countries both in the developed as well as the developing world. The industry is the net foreign exchange earner for the economy.

The main activities of Indian pharmaceutical industry can broadly be classified into production of (i) bulk drugs and (ii) formulations. The bulk drug business is essentially a commodity business, where as the formulation business is primarily a market driven and brand oriented business.

Size

• During FY2006, domestic production was estimated at around Rs. 550 billion (US$12 billion), exports of drugs and pharmaceuticals amounted to Rs. 215 billion (US$4.7 billion).
• During the same year the domestic formulations market was estimated at Rs. 244 billion.
• The Indian Drugs and Pharmaceuticals industry has more than 20,000 players both in the organized as well as small-scale sectors (including unorganized segment) though the number of operational units is estimated at around 8000. In the  organized sector, it has around 300 players.   Investment in the industry has steadily grown over the years from a mere Rs. 5 billion in 1980 to around Rs. 43 billion in 2004.
• Of the above a number close to 1000 units produce bulk drugs, out of which 750 units are in the SME sector. These 750 units constitute the core of the industry and are responsible for more than half of the total drug production and exports.
• The formulation segment has approximately 7,000 small scale units. A large number of these are undertaking contract manufacturing for large units. Geographically, there is a concentration of manufacturing operations in three states of Maharashtra, Gujarat and Andhra Pradesh.
• In terms of employment, the industry is estimated to provide employment (directly and indirectly, through distribution trade and ancillary industry) to around 3 million people.

  Structural Characterstics

• It is a highly fragmented sector due to the combined effect of the Indian Patent Act, DPCO and the various incentives granted to the small sector, such as exemption from payment of excise duty. Particularly, in the formulations market, no player by itself controls more than 7% of the retail market.
• The dominant proportion of production of multinationals (MNCs) is in vitamins, rubs and balms, and cold and cough preparations, while the strength of domestic Indian companies lies in categories such as antibiotics, anti-tuberculosis and antiparasitic, anti-infective and antiseptic preparations. The multinationals concentrate on high-value, low-volume products whereas the Indian companies concentrate on high-volume, low-value products.
• Competence in R&D is very important for pharmaceutical companies. In formulations business, strong brands and a marketing field force with access to a network of doctors too play an important role. Investments in R&D, strong brands and access to marketing and distribution network act as barriers to entry for SME players to a certain extent.
• Indian Industry’s competitive advantages arise from complex synthesis capabilities, increasingly good manufacturing practices (GMP) and low-cost production. This enables them to export drugs and formulations (including the ones covered by patent protection in the developed markets of the US and the Europe) to the countries with relatively weaker patent laws.

Policy

• The pharmaceutical industry is regulated, essentially on three aspects: Patent, Price and Product Quality. In fact, one of the reasons for steady development of the domestic pharmaceutical industry has been the patent laws that recognised only process patents for pharmaceuticals. However, GoI introduced product patents in the country through an ordinance in December 2004.
• Anything that falls within the purview of ‘invention [1]’ will be patentable in India. Introduction of provision for rights of mailbox applicants will be “prospectively operational only” from the date of grant of the patent. The term of the patent incase of international applications field under the Patent Cooperation Treaty designating India, shall be twenty years from the international filing date accorded under the Patent Cooperation Treaty.
• In respect of Compulsory Licensing, a provision has been introduced in the Ordinance that allows compulsory license (CL) to be available for manufacture and export of patented pharmaceutical products to any country having insufficient manufacturing capacity in its pharmaceutical sector for the concerned product was to address public health problems, provided CL has been granted by such country.
• The prices of drugs are also regulated by the Govt. through Drug Price Control Order (DPCO). Currently, the price control coverage is estimated to be around 40% of the domestic market sales. A list of 74 scheduled bulk drugs and formulations thereof were brought under the purview of price control under DPCO 1995. The changes in the criteria for bringing the drugs under the price control under the Pharmaceutical Policy 2002 (which is facing litigation) may allow the price control in the domestic market to come down. The National Pharmaceutical Pricing Authority (NPPA) has the power to control the prices of drugs, if found to be excessive.
• The Drugs and Cosmetics Act, 1940 governs the import, manufacture, distribution and sale of drugs in India. For introducing a new product, necessary approvals need to be taken from Drug Controller General of India (DCGI). Further, there have been amendments to the schedule M of the Drugs and Cosmetics Act, 1940 that require the existing units to comply with the specific manufacturing practices laid down in the schedule by June 30th 2005.

Outlook

• Amongst drug classes, the changing pattern of drug requirements according to the shifting disease profile of India, is resulting in higher production and sales of lifestyle drug categories such as cardiovascular drugs, hormones, nutraceuticals.
• The R&D expenditure in discovery and development of new products (that has higher risks associated) by the Indian players is expected to increase as they increase their focus towards innovative research.
• Though the sectoral growth on the whole has been healthy, earnings of select players in the industry have shown volatility in the recent past. This is on account of their increasing focus on exports to the developed markets and higher R&D expenditure.
• The strong emphasis on formulation exports through increasing share of DMF (Drug Master Filings) and ANDA (Abbreviated New Drug Application) approvals are also expected to result in healthy export growth in the medium term
• As the number of drugs patented post January 1, 1995 that can be reverse engineered would be limited under the product patent regime, the number of new product launches by Indian firms in the domestic market could decline.
• Indian companies are, therefore, looking for alternative markets to make up their loss in the reverse re-engineered drugs segment. A big window of opportunity has opened up in Europe and US with the  $72 billion (2004 sales in US) worth drugs going off patent by 2009.  This development will be further facilitated by growing price differential between branded and generic drugs, and the increasing emphasis by the respective governments on generic drugs.
• The Indian industry is also looking to service large pharmaceutical MNCs (whether research-based or generic) with API, contract manufacturing for already existing drugs or research candidates, clinical outsourcing and research partnerships, leveraging on their large pool of chemists and chemical engineers, and low costs.  

References: ICRA reports

Annual Report 2006-07, Ministry of Chemicals & Fertilisers, Department of Chemicals & Petrochemicals, Government of India