India enters a new era

Manufacturing Chemist's India correspondent CH Unni Krishnan outlines the factors that make his country a pharma force to be reckoned with

From January 2005, India has been committed to the TRIPS patents regime, (see page 37) and with this the country's vibrant pharmaceutical industry is entering into a new world order.

The Indian drug industry has come a long way: from being almost non-existent before 1970, it has become a prominent provider of healthcare products currently meeting almost 95% of domestic needs as well as having a major presence in the global generic market.

Though the great majority of small and medium enterprises (SMEs) have contributed tremendously to its growth, a few domestic leaders which control more than 30% of the Rs23,000 crore local market, have outshone the once-dominant multinationals in the country. At present, the country produces drug formulations worth US$3.4bn and APIs worth $804m.

foreign investment

With a fast growing export business targeting developing as well as developed markets across the world, the Indian pharma sector is now poised to enjoy a major share in the global generic market and also to become an important player in the service outsourcing segment.

The Indian pharma industry is one of the largest and most advanced among the developing countries, with nearly 20,000 manufacturing units at present. Out of these, 300 units in the organised sector produce more than 350 bulk drugs and the complete range of formulations. One of the fastest growing industrial sectors in the country, the total market capitalisation of the Indian pharmaceutical industry is Rs156,000 crore. Revenue from the drug sector represents approximately 1.3% of global pharmaceutical sales and it stands 5th in the world in volume terms.

Foreign investment has doubled in the last five years and Indian exports have risen five fold. The current annual growth of the pharma market in India is estimated at 8.5-9%.

The Indian Patents Law in 1970, which introduced the process patent in place of product patent in the drug industry, opened the floodgates for local entrepreneurs to venture into the area of pharmaceuticals. Process patent and the then vast unmet therapeutic demand created huge opportunities for domestic companies to enter the industry in a big way, while the fast set-up of manufacturing capabilities ensured rapid growth of the sector.

Reverse engineering of patented molecules with low cost manufacturing enabled companies to sell their products at just 8-15% of the price of the patented drug. In addition, government incentives for small-scale industry (SSI) units resulted in an upsurge in the number of registered units for drug manufacturing.

Similarly, the introduction of Drug Price Control Order (DPCO) in India in the early 1970s reduced the competitiveness of multinationals and in turn helped Indian companies to expand their market share significantly. In the next two decades, the market share of multinational companies (MNCs) had fallen to 35% from a high of 75% in 1971 while the share of Indian companies increased from 20% to nearly 65%.

More importantly, the Indian drug industry also built a base in discovery capabilities, although poor financial back-up limited the intellectual capabilities of Indian companies and prevented them from reaping the benefit in real terms.

Witnessing the rapid growth of India in the global pharma arena of low cost process research and manufacturing, the MNCs have now started to explore the economy of outsourcing business to India. Now, global giants such as Pfizer, GlaxoSmithKline, Bristol-Myers Squibb and Novartis tap India's research and manufacturing prowess to cut costs and speed development of new pharmaceuticals.

outsourcing growth

Alll of this has completely changed the outlook of India. Though the multinational drug companies have long shunned the country because of its lack of patent protection and blatant copying of drugs, the Indian government's new Patent Bill brings intellectual-property protection in the country in line with international norms. Similarly, the country's changing regulatory environment is also coinciding with the pharma majors' increasing need to trim costs and boost productivity by exploring the manufacturing and research advantages of India.

The outsourcing market, which currently amounts to just $470m, is expected to grow by 30% a year to reach $800m by 2005, with a host of Indian companies now undertaking projects to manufacture products on behalf of US companies.

According to industry experts, it makes sense for global pharma companies to look to India on the research front as well, since Indian scientists are well trained yet earn two-thirds less than their Western counterparts.

India has more pharmaceutical facilities approved by the US FDA than any foreign country. And many of the 122,000 chemists and chemical engineers that graduate in India every year have traditionally found jobs in reverse-engineering patented drugs.

competitive growth

As India tightens its patent laws, its pharma companies will be looking for ways to keep both researchers and manufacturing plants busy.

US firms are apparently keen to enter into new outsourcing deals and are working with firms that had previously challenged western patents. Novartis has hired Hyderabad-based Dr Reddy's to research a diabetes molecule, despite an ongoing lawsuit over a generic version of Novartis' antifungal cream Lamisil. AstraZeneca, meanwhile, has established a $10m r&d facility in Bangalore that will focus on developing cures for tuberculosis.

While expansion in India represents just a fraction of these companies' global business, the share is growing fast as India becomes competitive in yet another knowledge industry. It is expected that global initiatives such as the drastic price reductions for HIV/AIDS and other tropical disease treatments, and the development of safer, more effective drugs, will work in its favour.

Post 2005, the core competencies of Indian pharma companies will play an important role in determining the industry's future. One of the key strategies of the industry now is to upgrade manufacturing facilities to meet international quality specifications to compete for global manufacturing projects. Similarly, consolidation by mergers and acquisitions or entering into joint ventures with local companies for the manufacture or marketing of off-patent generic drugs in international markets by filing DMFs and ANDAs is another major focus of Indian companies, especially in the small and medium sector.

However, resourceful companies in India are concentrating on investing in r&d to explore the possibilities of new drug delivery mechanisms and alternative use of existing drugs. Collaborating with universities and multinational companies on clinical trials and custom synthesis is another key focus of the industry in the area of service outsourcing. At the same time, attaining the right product mix for sustained future growth and diversification into bioinformatics and biotechnology have also been much sought-after strategies for pharmaceutical companies in the post WTO regime.

Indian companies are now increasingly looking at m&a options, which will help companies mainly in the small and medium segment to improve their r&d efforts and their distribution to penetrate markets.

Due to the changing therapeutic profile, companies are also divesting products from their portfolios to narrow their focus or acquiring brands from other companies to increase strengths in a specific therapeutic area. For instance, cardiovascular and anti-diabetic therapies are gaining market share while older therapeutic areas like anti-infectives are experiencing negative growth. Similarly, older antibiotics like ampicillin/amoxycillin are losing market share to the new cephalosporins and quinolones.

Industry analysts are of the view that to stay competitive in the future, companies need to raise r&d spending to at least 5% of total sales. Rising r&d costs imply that only giant corporations with formidable r&d, marketing and financial capabilities will be able to afford extensive new drug development and commercialisation programmes, and this is another driver behind the growing number of mergers.

The research-orientated companies and r&d institutions have started developing combinatorial chemistry, new synthetic molecules (NCEs) and plant-derived candidate drugs. Companies are also trying to capitalise on reverse engineering expertise to develop new processes, which can then be sold/licensed out to the original drug manufacturer, who will need process patents to discourage generic manufacture once the drug comes off patent. One example of success is partial PPAR (Peroxisome Proliferation Activated Receptors) gamma agonist Glitazones, now called Balaglitazone, developed by Hyderabad-based Dr Reddy's Laboratories. This molecule has been licensed to Novo Nordisk.

Foreign Direct Investment (FDI) in the field of research and development has grown steadily since 2000, and thanks to a highly conducive investment atmosphere for pharma r&d and related services, is now set to reach $1.5bn in the three years from 2005 to 2008.

shifting r&d

Although the country needs further improvements in its r&d infrastructure and in government policies in the areas of animal studies, clinical trials and labour laws, industry experts are hopeful of an FDI flow into the country. This is mainly due to the emerging product patent regime and government initiatives for regulatory reforms.

The current r&d investment in India is estimated at $100-150m annually - which is relatively small compared with the global r&d spend of $60bn ($21bn in non-clinical research and $39bn in clinical research). The expectation is based on the hypothesis that if a portion of this work currently spread across the globe were shifted to India, total global spending could be reduced to just $15bn, considering the cost effectiveness and other service advantages of the country.

Relocating at least 10% of this business to India seems an achievable target by 2008, provided the infrastructure and laws are set in place, say industry analysts. Of this, about 25% of investment is expected to be for clinical research and the balance for drug discovery research activities.

A number of multinationals prefer to run clinical trials in India because the cost is 40-60% lower than in developed markets; there is easy availability; and because of the speed with which heterogeneous gene pool patients can be recruited and tested. Worldwide, this segment is likely to reach $18bn, and if Indian companies can capture this unique opportunity, it will make the country a leading centre for clinical trials. The tie-ups with MNCs are mainly done under licensing agreements or milestone payments.

Indian biotech research is concentrated in the areas of vaccines, diagnostics, molecular biology, cell culture, fermentation and hybridoma technology. Smaller discovery and genomics-based biotechnology companies are expected to move out of the laboratory and into the clinic as they realise that developing and making their own drugs is far more profitable.

Recombinant vaccines, HIV diagnostic test kits and gene probe tests for TB are some of the important areas where SMEs are expected to contribute. US drug companies are interested in sending banks of genomics and proteomics data for analysis to India.

India now produces vaccines, including DPT & MMR, attenuated oral as well as Vi antigen-based injectables, and typhoid and diarrhoea vaccines that are required in large quantities. Apart from HIV/AIDS vaccine trials, biotechnology companies are also concentrating on a polysaccharide quadrivalent meningococcal meningitis vaccine that has export potential to African countries.

The Indian government recently granted marketing licences for 25 recombinant protein therapeutics, including insulin, a-interferon, hepatitis B surface antigen based vaccine, GM-CSF, G-CSF, blood clotting factor VIII, streptokinase, HGH and FSH. Of these, most of the products are imported. Recombinant insulin, HGH, interferon and hepatitis B vaccines enjoy larger market share. h-R3, a humanised anti EGFR (Epidermal Growth Factor Receptors) targeting MAB for head & neck, brain, Non-Small Cell Lung cancers, recombinant GCSF (granulocyte stimulating factor), erythropoietin, and medical proteins such as relaxin, rennin, interleukins and tumor necrosis factor also offer market opportunities.

expanding horizons

Though most of the large and medium pharma companies have manufacturing facilities conforming to international manufacturing standards, the currently imposed mandatory requirement of current Good Manufacturing Practice and a move to standardise production to international levels, would affect many small scale units (SSIs) in India. However, the government is looking at providing certain supporting systems and incentives for quality compliance.

India's pharmaceutical exports have reached $1.41bn, with the US and European markets accounting for nearly 75%. Since the market is growing because of inclusion of South American and Eastern European countries, Indian companies are setting their eyes on these areas using the Roche-Bolar provision in the US HatchWaxman Act, which created a favourable situation for India due to its capability in reverse engineering at lowest cost.

While the industry can sustain its growth, the future of the pharma market is unpredictable. Growing competition from China, escalating regulations, pricing pressures, rapidly evolving innovations, TRIPS and related changes in IP law are some impeding factors.

The industry will have to develop new sources of revenues to ensure its survival in the Indian and international markets in the absence of reverse engineering. But the biggest challenge for the industry in 2005 is how to cure the sick and run a profitable business. n