Pharma Focus Asia
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Leader of the Pack

Jim Banks,

Investors are watching the evolution of India\'s pharmaceutical industry with great interest. Rising standards and a developing regulatory infrastructure are creating new opportunities, while the well-established bulk manufacturing market is benefiting from more investment in R&D and clinical trials.

India's pharmaceutical industry is without doubt one of the great success stories of recent years, delivering economic benefits, improvements in quality and significant growth. Driven by the many producers, both large and small, in the bulk drug market, this success has moved India towards a position of self-sufficiency in terms of national healthcare provision.

Currently, around 90 per cent of India's demand for bulk pharmaceuticals is met by domestic production, though the country also creates exports with a value of around Rs.51bn, according to the Bulk Drug Manufacturers Association (BDMA). In the last year, the industry has continued to move away from simple processing towards a more sophisticated model incorporating R&D and manufacturing.

In fact, figures for 2004 show that there was more direct foreign investment in India's pharmaceutical industry - over Rs1500 crore (1 crore = Rs10,000,000) - than in any other sector. It is clear that despite the growing number of countries looking to attract pharmaceutical companies with minimal production costs, India has retained its appeal as a low-cost centre.

While there may be a differential between labour costs in India and those in other countries such as Hungary, the growing sophistication of India's pharma sector has added more strings to its bow. For instance, its capabilities in chemical synthesis and process engineering and its growing compliance with international quality standards give potential foreign investors greater confidence.

'Any discussion of the global pharmaceutical supply chain can now no longer ignore India's relevance,' wrote Utkarsh Palnitkar, Health Sciences Industry Practice leader at Ernst & Young India, in a recent report on India's pharmaceutical sector. 'India is becoming an integral part of the pharma value chain, [with] large global pharma companies [continuing] to increase their sourcing of APIs, offshoring of clinical development, and partnering with domestic companies for new product development and marketing in India. Over the long term, India is bound to have a larger impact on global pharma's tax, regulatory and IT environment, beyond the obvious impact on its innovation and manufacturing.'

Synergies and Incentives

India remains a favoured location for the outsourcing of bulk drug manufacture, but domestic companies have found other sites to meet their requirements.

For example, state subsidies and tax benefits have made Himachal Pradesh a favoured location for a number of formulation companies. The incentives include a seven-year tax holiday and deferment of sales tax, and there are promises of cheaper deals on power, but all of these benefits are only open to firms starting production before the end of Q1 2006.

Firms such as Natco Pharma, which this year launched new anti-migraine and cancer drugs, have already begun to set up operations in Himachal Pradesh. The company is setting up additional production capacity at the new site rather than relocating, and others are expected to follow suit.

Driven by rapid growth and powerful incentives, it is no surprise that India's pharmaceutical market is highly fragmented, and many small companies coexist with larger firms, which are often strong in specific disciplines.

The industry consists of an estimated 12,000 domestic firms, and consolidation is widely expected. Many in the market feel that the merger between Matrix Laboratories of Hyderabad and the Bangalore-based Strides Arcolab Ltd heralds the beginning of a period of rationalisation and reorganisation.

The merger will create India's seventh-largest pharmaceutical company, Matrix Strides Laboratories, which will have revenues in the region of Rs1000 crore. Though a larger entity will be able to realise some economies of scale, the Matrix Strides deal is driven more by the potential for synergy between complementary skillsets.

Matrix specialises in the production of APIs, while Strides' expertise is in the over-the-counter and generics markets. The value is in bringing these two distinct offerings together to deliver more services under the same banner.

Merger Sets the Tone

Domestic pharmaceutical companies will increasingly be looking to consolidate across the value chain by forming partnerships or merging with companies that have complementary strengths. Such is the logic behind the creation of Matrix Strides, which will have a broad portfolio and access to a wide network of partnerships. As drug discovery becomes more expensive, and the costs of administration and regulatory compliance continue to rise, these partnerships will become more central to pharma companies' business proposition.

As Matrix's N Prasad, who will head the new entity, and Arun Kumar of Strides Arcolab noted in a joint statement: 'The coming together of two leading first-generation pharmaceutical companies with similar philosophies and visions will create a significant generics company based in India. Matrix Strides will have significant presence in all the value chains of an integrated life sciences company.'

Following the merger, Matrix Strides will have six API facilities at its disposal, four of which are approved by the US FDA, as well as five intermediates plants and nine formulation units, two of which are FDA approved. Furthermore, it will have operations in over 70 countries, including manufacturing facilities in India, Latin America and the USA. In terms of R&D, the merged company is expected to complete as many as 70 Drug Master File (DMF) submissions and 20 Abbreviated New Drug applications (ANDAs) by the end of 2005.

DMF submissions can be used to provide confidential information about facilities, processes and articles used in the manufacturing, processing, packaging and storage of human drugs. Recent data shows that Indian pharmaceutical companies are particularly aggressive in making such submissions to the FDA. For example, the DMF list for Q1 2005 shows 74 filings by 25 Indian companies, accounting for over one-third of the total number. The data suggests that the market for generic pharmaceuticals will become increasingly competitive and that Indian companies see it as a significant opportunity.

Over the next two years, an estimated $80bn of drugs will go off-patent. However, many Indian companies have realised that to make inroads into these markets they will have to scale up their marketing strengths as well as their production capacity.

Partnerships are an efficient and flexible way to achieve this, and this year has seen many such agreements put in place. For instance, Mumbai-based Lupin Pharmaceuticals has entered into a partnership with Cornerstone BioPharma for the marketing of Suprax. Through this agreement, Lupin will be able to expand its presence in the $1.2bn market for oral suspension anti-infectives.

India's fifth-largest pharma company, Wockhardt, which recently launched a new high-tech formulations plant in Himachal Pradesh, has also embarked on joint ventures in Mexico and South Africa, as well as setting up a subsidiary in Brazil, to broaden its global footprint.

'We have already received nine approvals for our biopharmaceuticals, and we expect another 25 approvals during the year in Russia, the former CIS countries, South America, South East Asia and North Africa,' said Wockhardt chairman Habil Khorakiwala following the announcement.

Looking back at the attempts of Indian companies to break into the US market, the need for synergies and marketing networks is clear. So far in 2005, Indian pharma companies such as Ranbaxy Laboratories have performed relatively poorly on the stock markets, largely due to growth in competition and a failure to penetrate the USA.

The competition for expired patents has become more intense as more global players try to grab a piece of the pie. So far, most attempts by Indian companies to sell copies have met with failure, though Ranbaxy sells around 80 drugs in the USA through patent disputes. 'The partnering theme in Indian pharma is reaching a crescendo,' notes Palnitkar. 'Underlining this trend are some landmark deals struck by Glenmark with Forest Labs in the USA and Teijin Pharma in Japan, [as well as] Torrent and AstraZeneca's R&D tie-up, Novartis and Syngene's contract research deal and Nicholas Piramal's flurry of in-licensing deals with several global biotech majors.'

Global competition for contract manufacturing is certainly intensifying, particularly with the emergence of China. However, India's capacity still gives it the edge, and more multinational pharma companies are expanding operations there. International collaborations may also ease India's transition towards R&D by providing greater access to advanced technologies and tie-ups with global leaders. The emerging trend is for pharma multinationals to increase the level of clinical research they carry out in India, attracted by lower costs, a genetically diverse population, a profusion of service providers and, following the passing of patent laws, a developed regulatory infrastructure. GlaxoSmithKline, for example, has recently hinted that it might look to increase its clinical trials activities in India and that setting up a drug discovery unit might make sense further down the line.

Global Opportunities

While China is emerging as a competitor in the bulk manufacturing sector and its entry into the WTO has affected many of India's export markets, including textiles, it may also prove an important new market for India's pharma industry.

As India's capacity to export grows, significant demand in China makes it a likely destination. In fact, China is now one of India top five export destinations across all sectors, accounting for 5.79 per cent or $4.5bn of the total. Pharmaceuticals and chemicals accounted for just over 12 per cent of India's total exports in 2004.

At a time of greater opportunities and fiercer competition, a lot will depend on the ability of Indian pharma companies to maintain and improve the standards they have achieved. This will be crucial if global partnerships are to be successful in opening up new export markets.

It is for this reason that many companies are openly debating issues such as safety and marketing. Greater regulatory scrutiny, as well as increasing demands for greater disclosure of financial and non-financial data, will present a serious challenge, but it will also be an opportunity for the Indian pharma industry to use standards of integrity and transparency as differentiators in its fight against global competition.

Author Bio

Jim Banks
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