Revolution in Progress

The story of the Indian pharmaceutical industry is one of a surprise birth, slow infancy, explosive teenage years, and ongoing rebirth to reach well-respected adulthood. In the 1970s, India had hardly any noticeable activity that could have accounted for being part of a domestic pharmaceutical industry. Multinationals were dominating 85% of the trade, and the country's industrialization wasn't considering fine chemicals as a priority. With the advent of the import-substitution policy and the implementation of the 1970 Patents Act, the country started building chemical know-how and industrial tools that would be instrumental to the real birth of the Indian pharma sector.

Today, the contrast is sharp, to say the least. India is home to more than 20,000 production units, out of which just short of 300 form the real backbone of the industry, accounting for more than 80% of production. The country also has watched a number of local stars go global to become some of the world's best pharmaceutical performers in terms of delivering growth, market penetration, or cost-efficiency. The likes of Cipla (Mumbai), Dr. Reddy's Laboratories (Hyderabad), and Lupin Limited (Mumbai) are indeed carrying the industry forward and aggressively penetrating the world market, displaying a mix of unabated confidence, know-how, and bold moves. Yet, the success of these players should not hide the many challenges faced by the industry, as their number has never been as high as today.

The most recent and decisive factor of change was the enactment in 2005 of an amendment to the 1970 Patents Act that, in effect, has made copying drugs patented after 1995 illegal. An industry that had been developing and flourishing based on the production of pharmaceutical copies suddenly found itself in need of redefinition and redirection. After years of being shielded from the global market's realities, the industry has had to adapt fast. At the same time, a number of Indian patents were put at risk, and the cost of post-1995 patented drugs grew out of reach for many Indians, in a country where there is no real state health insurance, and where most of the population is unable to afford health coverage.

The entry into force of this new regime has led the Indian pharmaceutical industry to redeploy its efforts toward pre-1995 molecules, as well as to develop and nurture its strengths in innovative directions. The first, most noticeable avenue of growth has been in the export market. From an inward-looking industry enjoying the benefits of a cozy intellectual property regime, India has found itself exposed to the rigors of global competition and has succeeded rather convincingly in the exercise. With a total sales value of $5.3 billion, $3.7 billion (70%) is now drawn from exports. Compare this with the less than $600 million the country was bringing in from exports when India joined the World Trade Organization in 1995.

In just over a decade, Indian manufacturers have mastered the secrets of global trade so well that the country today accounts for more than 20% of the world's generics production. The trend exemplifies how capable and swift-moving the industry is and has been to date. When examining some of the 300 players that account for most of India's pharmaceutical revenue generation, a number of business models appear, building on the industry's traditional strong points, from manufacturing know-how and reverse engineering capabilities to a solid chemical industry base and excellent human resource pools. The fact that India has the largest number of FDA-approved facilities after the United States testifies to the radical transformation of the industry. The actors of change, local manufacturers in particular, are following diverse directions for their businesses, and respond to many different impulses. But it is possible to distinguish the dynamics at work, as outlined below.

Export-driven leaders

Motivated by leading companies in terms of value and volume, a group of export-driven companies is pursuing a very aggressive development scheme that was rendered compulsory during the 2005 legal changes. These players looked outside India for growth indicators and started hitting big when health budgets turned into globally depressing matters. Low-cost Indian generics penetrated the US and European markets and established a presence that continues to grow. Meanwhile, these leaders were reinforcing their backward integration to benefit from one of the Indian pharmaceutical industry's strengths: active pharmaceutical ingredient (API) production. Most of these companies secured supply sources that were, at the time, providing extra lines of revenue because Indian materials were making their way into North American and European storage rooms. To further ensure efficient and long-lasting penetration of the western markets, Indian companies established offices and purchased a number of local players to benefit from approved abbreviated new drug applcations (ANDAs), drug master files, sales networks, local brand names, and experience. This model was replicated by most of the largest Indian players, who have been very busy acquiring European and North American small to mid-sized companies during the past decade.

The clear challenge for this category of players is to sustain growth and investors' confidence. As a result, export-driven leaders have been busy reinventing themselves, developing services alongside their product sales in an effort to explore innovative routes.

API producers turned formulators

This group of players comprises relatively large companies by Indian standards that have been trying to emulate the model of the export-driven leaders. With the onset of globalization, many have felt the sting of competition, as most of their local clients in the formulation field targeted the same unpatented molecules and drove down production material prices. In turn, API producers ended up churning out the same active ingredients, and many ultimately decided to pursue export sales and develop their own finished dosage forms. But the jump hasn't been so easy, and with price erosion, some are finding themselves stuck between a rock and a hard place.

Internal competition—not to mention competition from China—has been unforgiving. API producers have had to expand services, focus more on customer relationships, and increase their scope of production to strengthen their profiles and come out of this transitional period on top.

Contract organizations

The advent and fast development of contract research and contract manufacturing organizations (CROs, CMOs) are direct results of India's changing pharmaceutical environment. Drawing on the industry's know-how in fine chemistry, low production costs (as much as 70% cheaper than in some other countries), and scientific talent, these organizations have developed rather quickly during the past decade. Today, they represent potential growth for India's industry and provide much-needed services to the global pharmaceutical sector.

From pure CROs to the full-fledged hybrids, the opportunities in this sector are wide and can be tailored to suit any need the industry might have. At a time when blockbusters are facing uncertainty, and when Big Pharma is in search of across-the-board cost-cutting opportunities, India is coming into play. Approximately 70% of the cost of getting a drug on the market is incurred during development—any attempt to trim down this phase while ensuring a fast, reliable, and controlled-drug development would certainly be welcomed worldwide. And the market answers rather well to this exciting new array of pharmaceutical services: research and development outsourcing, and contract manufacturing and services are estimated to be worth $32 billion globally, and are expected to grow to a whopping $64 billion by 2010, according to a 2006 Frost & Sullivan report. India alone is set to draw $2.5 billion out of these outsourcing activities by 2010. The country's talents in reverse engineering and clinical trials, along with its lower filing costs, intellecutal property rights, duties, and English-friendly environment are all compelling elements. They allow India to redeploy its efforts and become the outsourcing destination of choice. Only China can expect to rival it on the cost front, but despite India's rising prices, notably on the human resources side, China cannot match India's integrated package.

Machinery makers

Compared with its drugmakers and API producers, India's pharmaceutical machinery makers are relatively small, but are emerging as a group to be reckoned with. From serving local customers with machines copied through reverse engineering, to locally producing equipment for global clients, the learning curve has been steep. Today, Indian pharmaceutical machinery makers are positioning themselves for even faster growth ahead.

Considering the favorable investment environment in India's pharma sector, thanks to manufacturing free zones, general modernization, the current good manufactring practice trend, and the growing demand for global outsourcing, the future is bright at home for Indian industrialists.

Abroad, cost constraints on generics producers and originators, as well as geographical redistribution of manufacturing locations, offer plenty of opportunities to the Indian machine makers to score foreign sales. Designs, services, and efficiency have improved, rendering machines made in India serious competition for those made in Europe or the US. This opens up opportunities for cross-border partnerships, despite a few shortcomings. For example, some Indian technology is a bit outdated (e.g., radio-frequency identification hasn't made it through to Indian labelmakers or labeling machine producers); Indian producers lack the marketing networks necessary to establish a long-term overseas presence; and access to capital is tight. Market leaders are turning over less than $50 million, and despite great potential for spectacular development in the years ahead, are relatively small compared with their western competitors.

Conclusion

All together, these groups do not represent each and every player in the Indian pharmaceutical sector, but they do allow a better understanding of the strategies and actors at work. The industry's dynamism is a striking reality, as exemplified by the number of ANDAs filed by local manufacturers, the highest in the world after the US. Local actors are well aware of their strengths and of the challenges ahead, and have taken to the global stage just as global actors are taking notice. A few high-profile acquisitions such as that of Matrix Laboratories Limited (Secunderabad) by US generic company Mylan Laboratories Inc. (Canonsburg, PA) demonstrate that India is on the minds of the global industry's decision-makers. At a time of risk and opportunity, fast-growing pharmaceutical countries such as India cannot be ignored.