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Executive Summary

India's pharmaceutical industry has been growing at record levels in recent years but now has

unprecedented opportunities to expand in a number of fields. The domestic industries long-

established position as a world leader in the production of high-quality generic medicines is set

to reap significant new benefits as the patents on a number of blockbuster drugs are scheduled to

expire over the next few years. In addition, more and more governments worldwide are seeking

to curb their soaring prescription drug costs through greater use of generics. These opportunities

are presenting themselves not only in India's traditional wealthy client markets such as the U.S.

and European Union nations but also in emerging economies with vast populations such as

Africa, South America, Asia, and Eastern and Central Europe.

In addition, India's long-established position as a preferred manufacturing location for

multinational drug manufacturers is quickly spreading into other areas of outsourcing activities.

Soaring costs of R&D and administration are persuading drug manufacturers to move more and

more of their discovery research and clinical trials activities to the subcontinent or to establish

administrative centers there, capitalizing on India's high levels of scientific expertise as well as

low wages.

Both multinational and local drug manufacturers could eventually benefit from the market

potential of India's population of over one billion. A large market will likely open up as the

result of a projected boom in health insurance, an area in which the country is currently woefully

underdeveloped. New government initiatives seek to enable the majority of the population to

access the life-saving drugs they need, while even greater opportunities may be presented by the

rise of the new Indian consumer. This group-urban, middle class and wealthy-live fast-paced,

Western-style lives and, as a result, they are beginning to suffer from Western, lifestyle-related

illnesses, for which they want, and can afford, innovative drug treatments.

This untapped domestic market is also highly attractive to the pharmaceutical MNCs, which

recently have returned to India in large numbers (many had left when the regime allowing

process patents only was introduced in the early 1970s). Now, MNCs and domestic companies

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are starting to work together, utilizing each other's strengths for their mutual benefit. For the

foreign firms, this includes not only the Indian companies' research and manufacturing

capabilities and their much lower operational cost levels, but also comprehensive marketing and

distribution networks operating throughout India's vast territories.

There are, however, a number of uncertainties, particularly the effects of India's new product

patent system, which was introduced on January 1, 2005. Previously, only process patents were

granted, a situation that led to India's current role as a world leader in the production of high

quality, affordable generics. The new regime may spell the end for the domestic sector's smaller

players, while for others it could represent unprecedented opportunities.

Nevertheless, the domestic industry is still spending far too little on R&D, which must change

quickly if it is even to begin to address these new opportunities and challenges. On the

international front, the industry still has some catching up to do in terms of quality assurance

while, on the local market, pricing remains a problem.

There is a need for regulatory reform in India to encourage leading global players to continue

and accelerate the outsourcing of their R&D activities-beginning with discovery research-to the

subcontinent. This is particularly urgent in the face of the strong competition from China, wherethe government has been particularly proactive in encouraging foreign investments in

pharmaceuticals and biotechnology.

In India, the industry is now awaiting developments following the January draft publication of

the government's National Pharmaceuticals Policy for 2006. The document contains proposals

for far-reaching initiatives aimed at boosting the domestic industry's global competitiveness, as

well as improving the population's access to medicines. Indian government ministers have also

promised MNCs concrete action soon on speeding the patent approval process and other crucial

issues, such as the definition of patentability and compulsory licensing.

Action is required soon, if India wants to be a significant player in the global pharmaceutical

arena.

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The Indian Pharmaceutical Industry

The Indian Pharmaceuticals sector has come a long way, being almost non-existing during 1970,

to a prominent provider of health care products, meeting almost 95% of countrys

pharmaceutical needs. The domestic pharmaceutical output has increased at a compound growth

rate (CAGR) of 13.7% per annum. Currently the Indian pharma industry is valued at

approximately $ 8.0 billion. Globally, the Indian industry ranks 4th in terms of volume and 13th

in terms of value. Indian pharmaceuticals industry has over 20,000 units. Around 260 constitute

the organized sector, while others exist in the small scale sector.

India currently represents just U.S. $6 billion of the $550 billion global pharmaceutical industry

but its share is increasing at 10 percent a year, compared to 7 percent annual growth for the

world market overall.1 Also, while the Indian sector represents just 8 percent of the global

industry total by volume, putting it in fourth place worldwide, it accounts for 13 percent by

value, and its drug exports have been growing 30 percent annually.

The organized sector of India's pharmaceutical industry consists of 250 to 300 companies,

which account for 70 percent of products on the market, with the top 10 firms representing 30

percent. However, the total sector is estimated at nearly 20,000 businesses, some of which are

extremely small. Approximately 75 percent of India's demand for medicines is met by local

manufacturing.

According to the German Chemicals Association, in 2005, India's top 10 pharmaceutical

companies were Ranbaxy, Cipla, Dr. Reddy's Laboratories, Lupin, Nicolas Piramal, Aurobindo

Pharma, Cadila Pharmaceuticals, Sun Pharma, Wockhardt Ltd. and Aventis Pharma.Indian-

owned firms currently account for 70 percent of the domestic market, up from less than 20

percent in 1970. In 2005, nine of the top 10 companies in India were domestically owned,

compared with just four in 1994

India's potential to further boost its already-leading role in global generics production, as well as

an offshore location of choice for multinational drug manufacturers seeking to curb the

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increasing costs of their manufacturing, R&D and other support services, presents an opportunity

worth an estimated $48 billion in 2007.

MARKET SHARE MNCs VS DOMESTIC COMPANIES

Domestic Industry

The domestic industry's long-established position as a world leader in the production of

high-quality generic medicines is set to reap significant new benefits as the patents on a

number of blockbuster drugs are scheduled to expire over the next few years.

This untapped domestic market is also highly attractive to the pharmaceutical MNCs,

which recently have returned to India in large numbers.

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MNCs and domestic companies are starting to work together, utilizing each other's

strengths for their mutual benefit.

The domestic industry is still spending far too little on R&D, which must change quickly

if it is even to begin to address these new opportunities and challenges.

There is a need for regulatory reform in India to encourage leading global players to

continue and accelerate the outsourcing of their R&D activities-beginning with discovery

research-to the subcontinent.

This is particularly urgent in the face of the strong competition from China, where the

government has been particularly proactive in encouraging foreign investments in

pharmaceuticals and biotechnology.

India currently represents just U.S. $6 billion of the $550 billion global pharmaceutical

industry but its share is increasing at 10 percent a year, compared to 7 percent annual

growth for the world market overall.

ADVANTAGE INDIA

Competent workforce: India has a pool of personnel with high managerial and technical

competence as also skilled workforce. It has an educated work force and English is

commonly used. Professional services are easily available.

Cost-effective chemical synthesis: Its track record of development, particularly in the

area of improved cost-beneficial chemical synthesis for various drug molecules isexcellent. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs.

Legal & Financial Framework: India has a 53 year old democracy and hence has a solid

legal framework and strong financial markets. There is already an established

international industry and business community.

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Information & Technology: It has a good network of world-class educational institutions

and established strengths in Information Technology.

Globalization: The country is committed to a free market economy and globalization.

Above all, it has a 70 million middle class market, which is continuously growing.

Consolidation: For the first time in many years, the international pharmaceutical industry

is finding great opportunities in India. The process of consolidation, which has become a

generalized phenomenon in the world pharmaceutical industry, has started taking place in

India.

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POST 2005 SCENARIO

By issuing the patent ordinance, India met a WTO commitment to recognize foreign product

patents from January 1, 2005, the culmination of a 10-year process. In this new scenario, theIndian pharmaceutical manufacturers wont be able to manufacture patented drugs.

To adapt to this new patent regime, the industry is exploring business models, different from the

existing traditional ones.

New Business Models include:

Contract research (drug discovery and clinical trials)

Contract manufacturing

Co-marketing alliances

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The focus of the Indian pharma companies is also shifting from process improvisation to drug

discovery and R&D. the Indian companies are setting up their own R&D setups and are also

collaborating with the research laboratories like CDRI, IICT etc.

Contract Research

In 2002, the industry for clinical trials in India was $ 70 million. This market is growing at a rate

of 20% per annum. According to experts, it will be an industry worth anywhere between $500

million to $1.5 billion by 2010. The global R&D spend is to the tune of $60 billion, of which the

non-clinical segment accounts for $21bn and the clinical segment accounts for $39bn. In terms

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of Indian prices, this translates into $7bn (at 1/3rd of US/EU costs) and $7.8bn (at 1/5th of US/EU

costs) repectively. This constitutes a total potential of $14.8bn for the Indian pharma companies.

Contract manufacturing

Many global pharmaceutical majors are looking to outsource manufacturing from Indian

companies, which enjoy much lower costs (both capital and recurring) than their western

counterparts. Many Indian companies have made their plants cGMP compliant and India is also

having the largest number of USFDA-approved plants outside USA.

The Pharma companies are going for compliance with International regulatory agencies like

USFDA, MCC etc. for their manufacturing facilities.

INDIAS PHARMACEUTICAL INDUSTRY ON COURSE OF

GLOBALIZATION.

BOOMING SALE: India is gaining in importance as a manufacturer of pharmaceuticals.

Between 1996 and 2006, nominal sales of pharmaceuticals were up 9% per annum and thus

expanded much faster than the global pharmaceutical market as a whole (+7% p.a.). Demand in

India is growing markedly due to rising population figures, the increasing number of old people

and the development of incomes. As a production location, the country is benefiting from its

wage cost advantages over western competitors also when it comes to producing medicines.

INDIA HAS DISCOVERED THE WORLD MARKET: Since the end of the 1980s India has

been exporting more pharmaceuticals than it imports. Over the last ten years the export surplus

has widened from EUR 370 m to EUR 2 bn. At 32% in 2006, the export ratio was about twice as

high as in 1996 and will likely rise further in the coming years (Germany: 55% at present).

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NEW PATENT LAWS NECESSITATED REORIENTATION: Legal changes in India in

2005 made it considerably more difficult to produce new generics. Foreign pharmaceuticals,

which enjoy 20 years of patent protection, can no longer be copied by means of alternative

production procedures and sold in the domestic market. Hence, a reorientation was required in

Indias pharmaceutical industry. It now focuses on drugs developed in-house and contract

research or contract production for western drug makers.

CONSIDERABLE IMPACT OF HAMPERING FACTORS: The sectors development is

slowed by major infrastructure problems. These are, above all, qualitative and quantitative

shortcomings in the energy and transport sectors.

STRONG GROWTH CONTINUES: Up until 2015, we expect pharmaceutical sales to rise by

8% p.a. to just under EUR 20 bn, compared with an increase of 6% in the world as a whole and

5% in Germany. But even then, Indias share in the world pharmaceutical market would only

come to slightly over 2% (Germany: 7%). In Asia, India looks set to lose market share, as other

Asian countries are registering even stronger growth.

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India's pharmaceutical industry in the spotlight

In 2001, Indias pharmaceutical industry became the focus of public debate when Cipla, the

country's second-largest pharmaceuticals company, offered an AIDS drug to African countries

for the price of USD 300, while the same preparation cost USD 12,000 in the US. This was

possible because the Indian company produced an all-in one generic pill which contains all three

substances required in the treatment of AIDS. This kind of production is much more difficult in

other countries as the patents are held by three different companies. In the final analysis, the

price slump was a result of India's lax patent legislation. In 2005, patent legislation was

tightened, so Indias pharmaceutical sector had to adjust.

Development of Indias pharmaceutical industry

Up until the 1970s Indias pharmaceuticals market was mainly supplied by large international

corporations. Only cheap bulk drugs were produced domestically by state-owned companies

founded in the 1950s and 60s with the help of the World Health Organization (WHO). These

state-run firms provided the foundation for the sectors growth since the 1970s. Back then,

Indias government aimed to reduce the countrys strong dependence on pharmaceutical importsby flexible patent legislation and to create a self reliant sector. In addition, it introduced high

tariffs and limits on imported medicines and demanded that foreign pharmaceutical companies

reduce their shares in their Indian subsidiaries to two fifths. This made India a less attractive

location for international companies, many of which left the country as a consequence.

Especially India Drugs and Pharmaceutical Ltd. (IDPL) is credited with speeding up the

development of a national pharmaceutical industry. Several IDPL staff has successfully founded

their own firms, which now belong to the top group among Indias pharmaceutical companies. In

the 1980s, however, the decline of state-run companies began among other things because of

increasing central government bureaucracy and insufficient corporate governance. Today, there

are no (entirely) state-owned pharmaceutical companies left. By contrast, the weakening of the

patent system and numerous protectionist measures sped up the development of a major national

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pharmaceutical industry on a private-sector basis, which made it possible to provide the

population with a large number of drugs.

GROWTH RATE COMPARISON OF INDIA WITH OTHER COUNTRIES

EXPORT SCENARIO

After nearly 30 years of focusing inward, Indias pharmaceutical industry has emerged as a

global player satisfying a significant portion of the worlds generic drug needs. Attracted by high

drug prices in the West, Indias pharmaceutical exports grew from $1.9 million in 1999 to $5.2

billion in 2005 (table 14). In the last 5 years, Indias exports more than doubled and account for

approximately 40 percent of total industry production and nearly 30 percent of its revenues.

India also enjoyed a trade surplus that increased from $3.1 billion in 2004 to $3.8 billion in

2005, or by 23 percent. Indias exports should continue to show strong growth through 2010 as

$60 billion worth of patented drugs lose their patent protection in the United States and Western

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Europe. Assocham predicts that Indian companies will capture at least 30 percent of the

replacement market of generic drugs.

According to Assocham, the importance of exports has grown dramatically over the last 5 years

due to declining profit margins and the extremely price-competitive nature of the domestic

Indian pharmaceutical market. Exports have grown to constitute a major revenue source for

Indias major pharmaceutical companies including Ranbaxy, Cipla, and Dr. Reddys.

Collectively, regulated markets accounted for more than 50 percent of their total annual

revenues. In 2005-06, Ranbaxy derived nearly 80 percent of its sales revenues from exports,

while exports and international acquisitions accounted for 66 percent of Dr. Reddysales and 50

percent of Ciplas. The successful penetration of the U.S. and EU markets has encouraged a

growing number of Indian copycat companies to enter these markets. Indias exports to the

regulated Western markets are expected to remain strong in the mid-term, event though Indian

companies will be challenged by declining prices in the U.S. market, declining profit margins,

growing competition from other low-cost countries, parallel launches of authorized generics by

Western innovator companies, and the increasing power of large distributors in the U.S. and

European markets. About $60 billion in blockbuster drugs will open to generic competition

between 2002 and 2010 and Indian companies are expected to vie for a significant percentage of

that business. India exports pharmaceuticals to more than 200 countries and on a country-wisebasis, Indias five largest export markets are the United States (28 percent), Russia (11 percent),

Germany (10 percent), the United Kingdom (8 percent), and China (7 percent) (table 15). All of

Indias major pharmaceutical companies are looking at the global market to accelerate their

growth. They are looking at all markets with potential including the regulated markets of the

United States, Japan, and Europe; the semi regulated markets of BRIC countries; and less

regulated markets of Africa, Middle East, and Southeast Asia. India has also become a very

important source of generic drugs for the developing world and is the leading supplier of AIDs

drugs to the world. Indian companies like Cipla and Ranbaxy have driven the down the annual

cost of anti-retroviral treatment from $15,000 per patient in 1995 to $200 in 2005.57

Other leading exporters include Dr. Reddys, Wockhardt, Sun Pharma, and Lupin Labs.

The vast majority of Indias exports, by value, are destined for the developed economies of the

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West, particularly the United States, Germany, the United Kingdom, and France. Exports to

these countries consist primarily of bulk drugs that account for nearly 60 percent of Indias

pharmaceutical exports. The remainder, mostly formulations, are exported to the countries of the

former Soviet Union (CIS) and developing countries (Southeast Asia, Africa, and Latin

America). India continues to be a leading supplier of less expensive antibiotics, cancer therapy,

and AIDs drugs to the developing world. In 2005, more than 90 percent of Indias exports are of

drugs that are no longer protected by patents. Indias largest single export market continues to be

the United States, which is the worlds largest generic drug market. Exports to the United States

grew from $429 million in 2003 to $589 million in 2005, or by 37 percent. The percentage of

total exports represented by the United States declined slightly from 12 percent in 2003 to 11

percent in 2005. This decline can be attributed to the introduction of authorized generic drugs by

domestic U.S. pharmaceutical giants, lagging profits and declining generic drug prices, and

growing competition from other low-cost countries, particularly Israel, China, Korea, and those

from East Europe. To offset revenue losses from total sales in the United States during 2005- 58

06, Indias leading exporters have been aggressively shifting their attention to Europe and

Africa. Europe, the worlds third largest pharmaceutical market, behind the United States and

Japan, had generic sales of approximately $100 billion primarily in the UK, Germany, and

France. As previously stated, Indian pharmaceutical companies have made a number of

acquisitions in Europe to gain a foothold in its markets. European generics markets considered tobe under served include Spain, Italy, and France, and are expected to be important and growing

markets for Indian exporters in the next 5 years.

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GROWTH IN EXPORTS

GROWTH IN EXPORTS

RANK NAME OF

COMPANY

EXPORT(MAR 06)IN

RS MN1 RANBAXY 27041

2 CIPLA 15136

3 DR. REDDYS 11967

4 AUROBINDO 8163

5 LUPIN 7611

0

500

1000

1500

2000

2500

3000

3500

1

- - - -

1

-

1

- - - -

1

-

1

-

-

- -

$million

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6 ORCHID CHEMICALS

AND

PHRAMACEUTICALS

6210

7 PANACEA BIOTEC LTD. 4146

8 ATUL LTD. 4145

9 IPCA LABORATORIES 4062

10 MATRIX

LABORATORIES

3960

MAJOR EXPORTING DESTINATIONS

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Indian companies seeking overseas markets

and global scale

Aggressive Growth Strategies

For building a global scale Ranbaxy aims to be one of the Top 5

For market entry acquiring local co or setting up subsidiaries

Recent M&A activity size of deals growing

Ranbaxy going after acquisitions in US & Europe

Acquired 3 companies in Europe in March/April 2006

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Terapia (Romania) for US$ 324 million

Raising 1.5 billion to fund further acquisitions

Dr. Reddys

Acquired Betapharm (Germany) for US$ 570 million in March 2006

Matrix (now part of Mylan)

Acquired Docpharma (Belgium) for US$ 263 million in 2005.

Partnership opportunities

Large number of large and mid-sized Indian companies with world-class generic

product development and manufacturing capabilities and facilities

Lot of under-utilized manufacturing capacities

These companies prefer focusing attention & resources on some key markets

(US/EU) and look for partners in other markets

Opportunities for supplementing pipelines, filling pipeline gaps and

reducing/optimizing cost of development and cost of goods:

In-licensing products

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Dossier and API development

Contract Manufacturing

Contract Research pilot & pivotal bio-equivalence studies

Opportunities for out-licensing and supplying products to leading Indian

companies for other markets

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IMPORTSCENARIO

Indias consumption of imported pharmaceuticals accounts for only a tiny portion of the worlds

production. Its imports consist almost entirely of life-saving drugs and new generations of

formulations that are under patent by innovator companies. These include anti-cancer,

cardiovascular, and anti-hypertension drugs imported primarily by major global pharmaceutical

companies for sale in the Indian market. Within these categories, leading imports consisted of

penicillin (13 percent), antibiotics for combating stomach infections (9 percent), and other

medicines for retail sales in dosage form (19 percent). Life saving drugs can be imported into

India duty free, whereas all other pharmaceutical imports faced a base duty rate of 30 percent

and an effective duty rate of 56.8 percent in 2002, compared with zero duty in the United

States. Indias imports of finished pharmaceutical drugs, intermediates, 55 and APIs nearly

tripled in value from $516.1 million in 1999 to more than $1.3 billion in 2005

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Indias top 7 import source countries accounted for approximately 32 percent of the total during

2005, down from 37 percent in 2004 (table 13). Indias leading import suppliers included

Switzerland (8 percent), Germany (6 percent), the United States (7 percent), and France

(3percent). Although Indias pharmaceutical market is relatively small, at least 45 MNC

pharmaceutical companies are serving the market through subsidiaries, other tie-ins, and

imports. Indias imports from Switzerland, the United States, and Germany consisted primarily

of other medicaments in dosage form for retail sales (HTS. Sub heading 3004).

INDIAS LEADING IMPORT SUPPLIERS

SWITZERLAND

GERMANY

US

FRANCE

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IMPORT DATA FROM 1999 TO 2005

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GOVERNMENT INITIATIVES

GENERAL PROVISIONS

Exports and Imports shall be free, except where regulated by FTP; free unless regulated

or any other law in force.

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All imported goods shall also be subject to domestic Laws, Rules, Orders, Regulations,

technical specifications, environmental and safety norms as applicable to domestically

produced goods

Any goods, export or import of which is restricted under ITC(HS) may be exported or

imported only in accordance with an Authorization or in terms of a public notice issued

in this regard.

PROMOTIONAL MEASURES

Central Government aims to encourage manufacturers and exporters and Quality to attain

internationally accepted standards of quality for their products.

Central Government will assist in modernization an up gradation of test houses and

laboratories to bring them at par with international standards.

Exporters are eligible for STATUS CATEGORY

A Status Holder shall be eligible for following facilities:

i) Authorization and Customs clearances for both imports and

exports on self-declaration basis

ii) Fixation of Input-Output norms on priority within 60 days

iii) 100% retention of foreign exchange in EEFC account

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iv)Enhancement in normal repatriation period from 180 days

to 360 days;

EPCG SCHEME

Under this scheme the exporter is allowed to import capital goods use during Pre

production, Production and Post production stage against payment of 5% customs duty

subject to fulfillment of export obligation

The export obligation is 8 times the duty saved

The export obligation is 6 times in case of SSIs and agro units engaged in exports

The period for fulfillment of export obligation is 8 years

The period for fulfillment of export obligation is 12 years when:

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Export of Bonafide trade and technical samples of freely exportable item is allowed

without any limit

The exporter is allowed to replace damaged or defective good free of charge

Exporter is allowed to import damaged goods for repair and later export them back

without any license based clearance

The exporter is allowed to trade goods from another country to a third country without

license (if item is non restricted)

Private bonded Warehouses for Export and Import

Pharmaceutical Export Promotion Council (Pharmaexcil)

Objectives The objectives of the Council (Pharmexcil) are to extend all assistance to the

pharmaceutical industry in India to explore their opportunities.

Services Extended include:

a. Trade Enquiries received from foreign Embassies /Buyers

b. Market Development assistance as provided by Ministry of Commerce for business

tours to foreign countries.

c. Arrange one to one Buyer/Seller Meets in India/Abroad.

d. Arrange Exhibitions in India and Abroad for market promotion.

e. Assist in Regulatory matters with domestic and Foreign Government agencies.

f. Provide financial assistance for Product Registration charges, Research and

Development, Product showcasing etc. as per rules.

g. Arrange Conferences/Seminars in domestic and foreign countries - for market and

technical up-gradation of information