Focus pharma

Utkarsh Palnitkar, Industry Leader, Health Sciences practice of Ernst & Young assesses opportunities and challenges in the Indian pharmaceutical industry.

The pharmaceutical industry continues to experience rising prescription drug sales. However, the rate of growth has slowed and economic negativity has weighed down the industry. Pharma has also been hit hard by significant research failures, falling investor confidence, a crackdown by the FDA in the form of delayed approvals, warning letters and consent decrees, as well as patent expirations and subsequent generic competition. Investors remain wary of the potential for drug stocks due to concerns about pipelines, patent expirations and competition, Medicaid budgets and cost cutting.

According to industry sources, global pharmaceutical sales grew seven percent in 2005 to $602 billion, compared to the 10 percent sales growth in 2003. The rate of market growth has slowed sharply in recent years due to generic competition and governments enforcing price controls in an attempt to reduce healthcare costs. While it has been estimated that big pharma companies need to introduce three new products annually to maintain their historically high growth rates, the current industry average is half of that.

Nearly 47 percent or $266 billion, of all global pharmaceutical sales were in North America, and US prescription drug sales grew 5.4 percent to $251.8 billion in 2005, compared to 11.5 percent growth in 2003. The slowdown in the industry and projected single-digit growth for US companies is largely due to what is referred to as "adverse trends" rather than "one-off issues". Specifically, these trends include delays in approvals, aggressive tactics by generic companies, a stronger over-the-counter market, safety concerns and price moderation. Fewer new products were introduced in 2005, with the FDA only approving 20 new molecular entities (NMEs) during the year, compared to a six-year high of 36 approvals in 2004.

The India story

The Indian pharmaceutical industry is being universally acknowledged as knowledge-driven and globally competitive. The industry has turned a new leaf with the adoption of a globally harmonised patent regime in 2005. The domestic industry has evolved substantially and transformed itself from a reverse engineering led industry focused on the domestic market, to a research driven, export oriented industry with a global presence. The industry has been consistently charting a high growth rate in the 1990s and 2000s. The industry, which was severely controlled by the government in the 1970s and 1980s to ensure that medicines were sold at affordable prices, has gradually been liberalised in the 1990s and 2000s.

The companies have their strategies in place to leverage opportunities and appropriate values existing in formulations, bulk drugs, generics, Novel Drug Delivery Systems, New Chemical Entities and biotechnology. The industry has thrived so far on reverse engineering skills exploiting the lack of process patents in the country. This has resulted in Indian pharmaceutical players offering their products at some of the lowest prices in the world. The quality of the products is reflected in the fact that India has the highest number of manufacturing plants approved by USFDA, which is next only to that in the US. The highly competitive nature of the domestic pharmaceutical market imposes strong low-cost manufacturing discipline, which is a key strength in this industry.

Opportunities for MNCs

India presents major opportunities for multinational pharmaceutical companies in clinical trials, contract research and manufacturing. Licensing opportunities for big pharmaceutical companies as well as the collaborative business models including services, give access to low cost smart intelligent base, indigenous technology and most importantly the large domestic market. The most important advantage India presents is low cost that includes the low development costs, low fixed asset costs, low clinical trial costs and low cost workers.

New health insurance initiatives in India have increased the affordability of the middle class population. There are about half a million people who can afford good quality healthcare expenditure. However, the problem remains as urban areas are the important private sector investment centres and the rural areas still do not have access to good healthcare. Due to India's vast rural population, only one-third of the country's inhabitants have access to medical care. Although the government is investing in healthcare for the underprivileged, around 65 percent of hospitals and 85 percent of hospital beds are in urban areas. This situation is expected to improve in future with access to better medical facility.

The OTC segment is expected to grow with increasing collaborative pharmaceutical industry and government initiatives along with proper regulatory framework, which will enhance the business. Growth opportunities can be seen in the chronic segments such as diabetes, cardiovascular, central nervous system disorders, cancer and other maladies. As second largest population base, India presents significant clinical trial opportunities because of the low cost and large diverse pool of untreated patients. Major pharmaceutical companies such as Aventis, Novartis, GlaxoSmithKline, Eli Lilly, Pfizer and Novo Nordisk have started clinical trials across India especially in Andhra Pradesh and Gujarat.

Uniqueness of IP system

In Developed Countries (DCs) that recognise (i) product patents, (ii) R&D capabilities, (iii) ability to develop; and (iv) launch products and product pipeline, have been the base for competition, especially in the branded drug segment.

The Indian Patents Act (IPA), 1970 was largely responsible for the change in structure in the Indian context. The IPA recognised "process patents" as against "product patents" which is prevalent in the developed world. As a result, for the first time, Indian manufacturers could produce internationally patented drugs within the country. This could have been made possible by developing an alternative process for the drug, after reverse engineering, using relatively cheap and large manpower base of qualified pharmacists and scientists available in the country.

The Indian Patent Act of 1970 amended on March 22, 2005 marks the end of a protected era and signals a new phase in the integration of India into the global pharmaceutical market. The new amendment incorporating product patents seeks to make copying of post-1995 patented drugs illegal. Thus, the new IP regime, on one hand is seen as a confidence building measure while, on the other hand the actual proof lies in its execution in terms of prompt remedial measures adopted for cases involving patent violations.

Opportunities and challenges

Indian companies can offer an attractive option with both strong API cash flows with more than 75 USFDA approved plants. The industry is on the threshold of strong growth, driven by consolidation in the global generics market, untapped potential in the domestic market, if distribution-led reforms take place in the country, says the report highlighting issues and opportunities in Indian pharmaceuticals, biotech and healthcare sectors.

US biopharmaceutical companies prefer India to China for their immediate expansion plans through outsourcing to get a foothold into the market. Though lack of knowledge of the market and the Indian regulatory system are an issue, the US companies are keen to strike alliances with Indian companies. The domestic pharmaceutical sector has the potential to double its existing market size by the year 2010 and thereby become the second major manufacturing base in the world next to China provided it is supported by the right regulatory framework.

With patent protection in place and foreign investors eagerly eyeing India's wealth of human resources, and its massive domestic market, significant growth opportunities abound for Indian companies. The Indian government's decision to allow 100 percent foreign direct investment into the drugs and pharmaceutical industry has steadily aided the growth of contract research in the country. Of course, fearing the dishonouring of patents in the country, technology transfer to 100 percent Indian subsidiaries of MNCs was not done on a comprehensive basis so far; the new regime should aid this. The Indian pharmaceutical industry is also getting increasingly USFDA compliant to harness the growth opportunities in areas of contract manufacturing and research.

Cost advantage: The Ernst & Young 2004 Global Pharma report notes that India has a pool of trained chemists, companies with an excellent track record of innovation and USFDA approved manufacturing facilities with cost savings of up to 30-50 percent. Labour costs in India are typically in the range of 10-15 percent of similar costs in the US. Clinical trials can also cost as little as 50 percent of those conducted in Western countries.

Research infrastructure: India has three to four million scientists, the second largest concentration in the world following the US. A majority of these scientists are English speaking and are willing to work for less than a fifth of the salaries of their Western counterparts.

India boasts having more than 70 FDA approved plants and 200 manufacturing facilities certified ‘good’. These plants use state-of-the-art technology with cost competitiveness ensured during plant development, maintenance and operating including labour, raw materials, sourcing and capital costs. With hospitals treating a wide range of diseases, companies can efficiently access a range of therapeutic areas with a single hospital.

Drawbacks: Much of this is attributed to shortcomings in the current Indian regulatory environment. India still offers no data exclusivity. There is also the issue of domestic drug pricing. In an attempt to develop a world-class pharmaceuticals industry, the Prime Minister's Office (PMO) is working on a policy for the sector.

The new drug policy is an all-encompassing policy framework that is being drafted by an expert committee to provide guidelines to the pharma industry. The main objectives of this policy are: to ensure availability of essential pharma products at reasonable prices; to strengthen the indigenous capability to produce cost-effective and quality products and export pharmaceuticals by reducing barriers to trade in the sector; to strengthen the system of quality control over production and distribution; to encourage R&D in the sector; and to create an incentive framework for the industry which promotes new investment into the industry.

The industry has been long expecting reforms in the numerous policies that govern the sector. One of the most crucial areas that the policy seeks to address is pricing of drugs, which has been a bone of contention between the industry and the authorities ever since the price control was instituted.

The tipping point

The challenges in product patent regime, in the generics business are significant: margin pressure, legal issues, parallel launch of authorised generics, accessing the distribution channels and so on. Margin pressures continue to rise in the regulated international generic markets, because of a host of factors, such as increasing competition from India and other low-cost destinations; more aggressive brand defence by innovator companies (via authorised generics, for instance); and increasing bargaining power of large distributors in these markets.

Further, the attractiveness of the US market has suffered some setback in recent periods, especially for the large generics targeting exclusivity.

The reasons include legal challenges by patent holders delaying and increasing the cost of launch; authorised generics taking away large market share and hence profit from the generic patent challenger during exclusivity periods, amongst others. These factors have severely impacted the exclusivity-related profits that generic players seek from the US market.

All this has necessitated a re-look at existing business models and developing alternative models in preparation for the future.