The Hindu Business Line : Pharma: Glowing with growth

India is emerging as the global hub for contract research and manufacturing services due to a combination of low-cost and world-class quality standards.

India is emerging the global hub for contract manufacture.

The Indian pharmaceutical industry is passing through a transformation and players are organising themselves to tap the immense opportunities that have opened up globally. The key drivers behind this impressive growth are the increasing orientation towards R&D, expanding presence in regulated markets and rise in new product launches, according to Mr Suresh G. Kare, Chairman and Managing Director of Indoco Remedies Ltd.

Indoco manufactures and markets finished dosage forms and active pharmaceutical ingredients in India and has a strong presence in developing international markets.

In an e-mailed response to Business Line on the industry, its strengths, the opportunities and the road ahead, Mr Kare said that according to current indicators, the sector is set to report impressive growth.

Boost to outsourcing

"The global pharmaceutical industry is increasingly facing cost pressures on various fronts and the R&D productivity of these players has gone down significantly in recent years, under rising manpower costs and higher regulatory risk."

Mr Suresh G. Kare, CMD, Indoco Remedies.

The process of getting approval for new products in regulated markets requires strict compliance with quality norms, which are stringent and subject to high legal risk.

"This factor is forcing MNCs to outsource part of their R&D and manufacturing activities to low-cost destinations such as India and China."

According to Mr Kare, India is emerging as the global hub for Contract Research And Manufacturing Services (CRAMs) due to a combination of low-cost and world-class quality standards. He sees the business touching $30 billion by 2010.

"The introduction of product patents in India has brought about some fundamental changes in the strategies of pharmaceutical companies, with the focus shifting more towards R&D. It has led to their exploring new avenues of drug development, which would require higher capital investment in R&D, and greater thrust on innovation."

New launches

After the introduction of product patents in India, the domestic industry has witnessed a fresh spell of new product launches. New products launched since 2005 have accounted for 12 per cent of overall market growth.

"The industry has thrived so far on reverse engineering skills, exploiting the lack of process patent in the country. This has resulted in our players offering their products at some of the lowest prices in the world."

But the high quality standards are maintained, as India has the highest number of manufacturing plants approved by the US FDA, in fact second only to the US.

Widening export base

From being a traditional exporter to low-value, low-regulation markets such as Sri Lanka, Nepal and the Gulf nations, India is now expanding presence in the regulated markets.

"Over the years, India has shown better regulatory awareness and superior technical skills, enabling Indian companies to penetrate high-value markets such as the US and the EU."

However, he added, with competition getting stiffer in the regulated markets and the resultant pressure on margins, Indian players are expanding their geographical reach to high-growth regions such as the CIS and South American countries.

According to Mr Kare, the Indian pharmaceutical industry is estimated to be worth $4.5 billion, growing at 8-9 per cent annually.

"We rank very high in the Third World, in terms of technology, quality and range of medicines manufactured.

However, a cause for concern is the highly fragmented nature of the industry.

"There are large, medium and small-scale operators. Some 300 companies together account for nearly 90 per cent of the domestic market, while the rest is in the hands of nearly 9,000 units."

With the tightening of quality control, many small manufacturers are closing down their facilities and opting to get their products manufactured on loan licence basis from units in tax-exempted areas such as Himachal Pradesh, Uttarakhand and the North-East.

"Because of the tax advantages, most of the large manufacturers have set up plants in the tax-exempted areas, where you find modern plants complying with the latest international quality standards." Mr Kare also pointed to the increasing consolidation in the industry, with many local players building a global outlook and growing inorganically through mergers and acquisitions. Besides, the changing market dynamics are forcing larger companies to concentrate on the Europe and US markets.

And they have been doing extremely well on this front. "They have their strategies in place to leverage opportunities and appropriate values existing in formulations, bulk drugs, generics, novel drug delivery systems and new chemical entities."

New patent law

The change in market dynamics was a result of changes in patent law, which meant that after December 2004, the Indian pharma industry could not market the latest products patented by MNCs elsewhere in the world.

"Some companies were quickly marketing the new patented products which helped them grow rapidly in the last 20 years. These companies are bound to suffer to a great extent because of the closure of that route."

Additionally, the large players who depended heavily on the newer patented products in India now have to depend on me-too products, which affects the SMEs, who will lose substantial market share to the larger operators.

Worldwide, the pharmaceutical industry has been among the fastest growing in recent times. The global market was estimated to be worth over $600 billion in 2005, growing at approximately 11 per cent in the last five years.

The Asia-Pacific and South American markets are also expected to grow significantly in five to ten years and increase their presence in the global pharmaceutical landscape.

Mergers and acquisitions among the leading companies are likely to continue to be driven by the economic realities of the high costs of R&D, shortening product life cycles and large marketing field forces, and by the increasing difficulty of generating blockbuster drugs.

Boom to continue

Mr Kare sees the industry as one set to boom further in the coming years, given the fast-changing global intellectual property rights scenario and with Governments facilitating laws for the industry.

In his view, the many favourable regulatory frameworks promoting generics prescription are likely to be the primary drivers of change in the global pharmaceutical market.

"This is expected to considerably expand the existing generics market in the US and Europe. Generic drugs are becoming more important as large-selling prescription drugs come out of patent protection and governments around the world seek to contain medical costs. Countries are competing actively to attract investment in both R&D and manufacturing."

He pointed out that Ireland and Singapore, in particular, offer generous tax arrangements to attract manufacturing plants.

"Global pharmaceutical players are emphasising on a networked model, which means keeping the intellectual capital in-house and outsourcing the rest through contracts and strategic alliances."

Looking at the road ahead, he said exports would continue to remain strong and a growth enabler.

"Indian companies have already proved their ability to compete. An increasing number of products getting off-patent and recognition of generic drugs by some developed countries will expand opportunities for India in the generics market."

The generics industry is estimated to grow by more than 20 per cent annually till 2008 and the total size is estimated to be $80 billion by 2008. In the US, generic drugs account for 55 per cent of prescriptions written.

Mr Kare also sees opportunity in the launch of new molecules by MNCs, which will increase contract manufacturing and in-licensing opportunities for Indian players, including SMEs.

Mr Kare has more than six decades' experience in the industry. He is the immediate past President of the Indian Drug Manufacturers' Association (IDMA) and an active member of the Indian Pharmaceutical Association (IPA), which represents the indigenous manufacturers of pharmaceuticals.

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