A Report on

Pharmaceutical Industry

Submitted by

GROUP 28

Anmol Shankar PGP16122

Abinash Gupta PGP16123

Piyush Kumar PGP16126

Sourabh Pareek PGP16096

Tushar Gargava PGP16097

Arun Thalapathi PGP16085

 TABLE OF CONTENTS

TABLE OF CONTENTS.......................................................................................................................ii

1. PHARMA INDUSTRY & ITS SUBPARTS......................................................................................1

Domestic formulation industry - highly fragmented...................................................................2

Manufacturing bases concentrated in few states...................................................................2

Low penetration of health insurance in India.........................................................................2

Low capital intensity and gestation periods............................................................................2

1. GROWTH DRIVERS AND INHIBITORS.......................................................................................3

Growth Drivers:.......................................................................................................................3

Growth Inhibitors:...................................................................................................................4

2. SECTOR RISK FACTORS.............................................................................................................5

3. MACROECONOMIC FACTORS AFFECTING INDUSTRY..............................................................7

Research and development.....................................................................................................7

Consumer demand..................................................................................................................8

Government regulation...........................................................................................................8

4. PERFORMANCE METRICS.......................................................................................................11

5. VARIOUS BUSINESS MODELS.................................................................................................14

The Different Business Models......................................................................................................14

.......................................................................................................................................................14

6. RECENT DEVELOPMENTS.......................................................................................................22

Abbott to make India hub of global research and development for branded generics................22

7. PORTER’S FIVE FORCES..........................................................................................................26

8. MAJOR GOVERNMENT POLICIES...........................................................................................27

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 Regulatory environment in India...............................................................................................28

Regulatory environment in the US............................................................................................30

Evolution of laws governing the US pharmaceutical industry...............................................31

9. MAJOR COST HEADS..............................................................................................................35

10. MAJOR PLAYERS..................................................................................................................36

Manufacturing and R&D facilities..........................................................................................42

Business profile......................................................................................................................42

Market position.....................................................................................................................42

Financials...............................................................................................................................42

News & Events.......................................................................................................................43

11. INDUSTRY OUTLOOK...........................................................................................................44

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 1. PHARMA INDUSTRY & ITS SUBPARTS

The domestic pharmaceutical industry is estimated at $39.5 billion (including exports) as of

2015-16. Of this, the formulations market accounts for about $12.7 billion (or ~Rs 776
billion). This is because of lower drug prices and lesser penetration of healthcare, as
compared to developed markets such as US and Europe. India spends only 4.6-5 % of its
total gross domestic product (GDP) on healthcare and hence, ranks amongst the lowest,
globally. In contrast, developed countries spend about 14-17% of their GDP on healthcare.

Bulk drugs or active pharmaceutical ingredients (APIs)

are raw materials used to manufacture formulations, which are ready to use forms of bulk
drugs (including capsules, tablets, syrups and injections) administered to patients. Bulk

Figure 1Pharma Industry at a glance

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drugs are manufactured by combining more than two chemicals or intermediaries. They
directly influence the diagnosis, cure, mitigation, treatment or prevention of a disease.

Domestic formulation industry - highly fragmented

Over 1,00,000 drugs across various therapeutic categories, are produced annually in India.
The domestic formulations industry is highly fragmented in terms of both, number of
manufacturers and products. There are 300-400 organized players and about 15,000
unorganized players.  However, organized players dominate the market, in terms of sales. In
2014-15, the top 10 formulations companies accounted for 44.9 per cent of total sales.
Share of the top seven MNCs has reached close to 19.3 per cent, as of March 2015.

Manufacturing bases concentrated in few states

Indian pharma companies operate largely from Maharashtra, Gujarat and Andhra Pradesh.

However, after the government imposed an MRP-based excise duty system in 2005, many
players have shifted their manufacturing bases to excise-free zones such as Baddi (Himachal
Pradesh), Haridwar (Uttaranchal) and Sikkim.

Low penetration of health insurance in India

Per capita annual healthcare expenditure in India, as per World Bank data (2011-2015), is
very low at $75 as compared to $420 in China and $9,403 in the US. This can be attributed
to the large domestic population and lower share of health expenditure in total government
expenditure.

In India, around 85% of medical spends are out-of-pocket, where the consumer directly pays
for medicines. Unlike the US, India lacks a strong health insurance sector that can share
healthcare costs with patients. In the US, government organisations and managed care
organisations reimburse majority of drug costs to patients.

Low capital intensity and gestation periods

Unlike commodities, capacity expansions in the domestic pharmaceutical industry do not

bunch up due to a low capital-intensity and gestation period. Hence, companies expand
capacities in line with demand patterns. A US FDA-approved API manufacturing facility can
cost up to Rs 300-400 million, as compared to Rs 150-200 million for an unapproved facility.
Cost of compliance with US FDA norms is higher. Setting up a US-FDA approved formulations
manufacturing plant costs about Rs 500-600 million, as compared to Rs 250-300 million for
an unapproved facility.

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In addition, unapproved units have lower gestation periods. The average gestation period
for a US FDA-approved manufacturing facility is 18-24 months, as compared to 6-12 months
for an unapproved facility.

2. GROWTH DRIVERS AND INHIBITORS

Growth Drivers:
Exports

Exports have been the cornerstone of growth of the Indian pharmaceutical industry, with
the global market offering strong opportunities. Healthcare expenditure is spiraling the
world over, with developed markets in the US and Europe seeing the steepest rise. These
markets traditionally contribute the largest share to global medicine sales. Given India's
strengths of cost-competitiveness and advanced process chemistry skills, domestic players
are well placed to tap into this opportunity and increase their presence in the generics
market

Domestic Sales

The gentrification of the Indian healthcare economy is leading to higher demand for
domestic pharma. Approximately 70% of respondents anticipate domestic sales will be the
main driver of growth for Indian pharma in the next three to five years.

Other Factors

 Between 2011 and 2016, patent drugs worth USD 255 Billion are estimated to go off
patent leading to a huge surge in generic product and tremendous opportunities for
companies.
 By 2020, it will grow to USD 11 billion - a CAGR of 18%, with the potential to reach
USD 13 billion - at an aggressive CAGR of 20%.

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  With increasing penetration of chemists, especially in rural India, OTC drugs will be
readily available.
 Pharma companies have increased spending to tap rural markets and develop better
infrastructure. The market share of hospitals is expected to increase from 13.1% in
2009 to 26% in 2020.
 Following the introduction of product patents, several multinational companies are
expected to launch patented drugs in India.
 The purported rise of lifestyle diseases in India is expected to boost industry sales
figures.
 Over USD 200 Billion is to be spent on medical infrastructure in the next decade.
 Rising levels of education are set to increase the acceptability of pharmaceuticals.
 India’s patient pool is expected to increase to over 20% in the next 10 years, mainly
due to the rise in population.

Growth Inhibitors:
Drug price control

• The Indian government increased the number of drugs under price control from 74 to 348
in 2013, thereby adversely affecting retail price of drugs.

• The move is said to have far-reaching implications on branded pharma manufacturers with
patented products rather than generics manufacturers, which are mostly domestic
companies already selling products at relatively low prices.

Growing concern regarding clinical trials

• Clinical trials play a vital role in drug development. India accounts for less than 2% of
global clinical trials.

• Growth in the number of clinical trials in India has been low primarily due to regulatory
uncertainty with regard to the conduct of clinical trials.

• Unethical practices, delay in approvals, corruption, etc., have led pharma companies to
shift their focus from India to other geographies like Malaysia and East European countries
like Poland for clinical trials.

Fragmented supply chain

• The Indian pharma market is highly fragmented in manufacturing as well as distribution.

This has led to several inefficiencies in the sector.

• Fragmented supply chain leads to ineffective inventory management systems, resulting in

high inventory holding costs, thereby increasing operating costs.

• On the distribution front, dominance of small chemists leads to lack of economies of scale
and consumers having to pay high prices.
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 3. SECTOR RISK FACTORS
The Indian Economy has been growing at a phenomenal growth rate of more than 8.5%
during the period 2003-08. Pharmaceutical industry's growth moved in tandem with the
economy's growth rate which has been growing at a Compounded Annual Growth Rate of
7.7% during the last five years and during the year 2005, was $5.1 billion in size in
comparison with the global pharmaceutical market which stood at $ 550 billion in size"
Companies like Ranbaxy Laboratories, Dr.Reddy's Laboratories, Wockhardt Ltd. are eying for
lucrative acquisitions. Leading pharmaceutical companies are pursuing inorganic growth
routes and expanding their operations across the world pursuing their goal of aggressive
growth and diversification. It is observed that there is an exponential growth in the size of
the operations, number of countries to which exports are being made and different
segments of products catering to diseases like AIDS, cardiovascular, gastro enteric,
carcinogenic and lifestyle diseases. The industry is facing many severe challenges,
opportunities and constraints from the government, market forces in the national and
international markets, customers, regulatory bodies and its operations within. Many issues
like cost overruns, quality assurance systems, low margins, researching, developing and
launching new products, phasing out unviable products, diversifying into new lines of
business and the like keep arising in the course of operations of most of the leading
pharmaceutical firms which need to be resolved by the management of the firm. Many of
the leading pharmaceutical companies in India are enlarging their exports to regulated
markets.

In the recent years, global pharma industry has gone through a difficult period where
shareholders, regulators, and the market have created high pressure in order to maintain
sustainable growth. The Indian pharma market, being an exception to this situation is
haunted with a unique and important challenge of delivering affordable health care to
India's billion-plus population. Indian pharma industry at present is not only attempting to
cater the domestic needs but also adopting new transformations in its business model to
make its mark on the global front. Besides the aforementioned resistors, there are several
other challenges that can affect the current trends. Table 4 summarizes the SWOT analysis
of Indian pharma industry.

Considering the ever-increasing public spending on healthcare, the government needs to

increase it's spending on the healthcare from a present low of 1% of total GDP to 3%. The
government should also focus on increasing penetration and access to health insurance. The
government should also execute developmental plans to fulfill basic infrastructure needs,
particularly those related to medical, transportation, and education. There is also a need of
creating and enabling policies and regulatory framework for the launch of innovator
products with the focus on price monitoring rather than price control.

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From the domestic companies viewpoint, it needs to think 'out of the box' by refraining
from its old copycat producer image and establish itself as the innovator of novel drugs with
continuous efforts to develop modern technology in the pharma and healthcare industry.

From the recent court decisions, it is evident that India is a good example of how harsh the
situation can be with regard to IP protection. It is now considered that legal system in India
supports only domestic companies with justification of providing affordable medication to
the Indian population. This support is given even when it goes against existing patent laws
and corresponding rules of the World Trade Organization. Under compulsory licensing laws,
the government allows Indian company to produce a patented product without the consent
of the patent owner on the grounds including non-availability of a patented drug at a
reasonably affordable price. High-cost drugs such as those for oncology and HIV have usually
been targeted in the recent past and in extreme case, patents for these drugs can also be
rejected. The current scenario in India is thus not appealing for foreign companies as far as
enforcement of the IP is concerned and it would take them a while to regain confidence in
India's IP protection laws and eventually invest more on patented drugs in India.

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Accelerated growth rate of other pharma markets is also affecting the future growth of the
Indian pharma industry. In the recent past, China has emerged as one of the biggest
competitor of India. The country is one of the largest bulk drug manufacturers in the world
and has become favorite contract manufacturing and outsourcing destination which it is
offering with the cheap price tag

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 4. MACROECONOMIC FACTORS AFFECTING INDUSTRY

Pharmaceutical companies are known to invest billions of dollars in R&D (research and

development) with the hope of finding cures or treatments that are more effective. The role

of the industry has grown since modern health care is heavily dependent on the companies

for alternative to surgery and maintenance therapy.

Yet, these companies face numerous patent challenges at any giving time which slows it

down and demand has also shifted to emerging markets and generic segments. Some of the

major hurdles faced by the pharmaceutical company include:

 Persistent regulatory hurdles

 Increasing demand from stake holders like pharmacies and providers

 Value chain slumping R&D productivity to supply shortages.

There are several factors that affect the pharmaceutical   industry and some of the key ones

are as highlighted below.

Research and development

New treatments have to be researched and developed yet, this has become more

specialized and complex. According to PhRMA (Pharmaceutical Manufacturers Association)

the leading consortium of pharmaceuticals the expenditures of the industry in R&D totaled

to $67.4 billion in the year 2010. The ability of the companies to recoup on investments and

make profits depends on how many of the developments get through to the approval stage.

Drug companies are required to carry out at least six hundred clinical trials on all new drugs

before they are approved in the market. After this, they only get a couple of year’s patent

protection before their competitors are given the right to manufacture their products at half

of their costs.

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Consumer demand

In the last several decades, demand from consumers for ‘lifestyle’ drugs that enhance

health, wellbeing have risen tremendously, and this has led to growth of the industry as

well. There are blockbuster drugs like Viagra, Lipitor and Claritin, which have been

advertised heavily increasing consumer demand. Patients who are educated have also

driven prescription explosion in the doctor’s office hence driving sales even higher.

Government regulation

The level of regulation carried out by the government on the industry determines its

profitability. Every successive federal government regulates the industry to a certain extent.

Some countries like Germany and Canada are known to have caps or price controls on all

pharmaceuticals that are within their border.

The United Stated government and FDA are also known to exert a high level of control over

the advertising made by pharmaceutical companies. This is especially true in regard to what

the drugs ‘claim’ they can or cannot do.  Complying with the strictures of the regulating

bodies costs pharmaceutical companies millions of dollars every year.

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 5. PERFORMANCE METRICS
India is one of the largest producers of pharmaceutical products and a leading player in the
global generics market, exporting nearly 50% of its production. The turnover of Indian
pharmaceutical industry was estimated at INR 2,04,627.1 crore in FY 2015-16. The Indian
pharmaceutical industry has witnessed a robust growth in recent years growing from INR
177,734 crore in FY 2014-15 to INR 204,627 crore in FY 2015-16, registering a growth of 29%
as compared to the growth of 12% from INR 158,671 crore during FY 2013-14.

In FY 2015-16, the exports of Drugs, Pharmaceuticals and Fine Chemicals was INR 1,06,212.4
crore. In the generics market, India exports 20% of global generics, making it the largest
provider of generic medicines globally.

Policy Initiatives & Investments

FDI Policy:

 100% FDI has been allowed through automatic route for Greenfield pharmaceuticals
projects
 For Brownfield pharmaceuticals projects, FDI has been allowed up to 74% through
automatic route and beyond that through government approval.

Fiscal incentives:

• To promote domestic manufacturing, inverted duty structure in Medical Device

industry has been corrected
• Basic customs duty has been reduced to 2.5% along with full exemption from Special
Additional Duty (SAD) on raw materials, parts and accessories for manufacture of
medical devices, falling under headings 9018 to 9022 w.e.f. January 19, 2016.

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 • Basic customs duty on certain specified medical devices has been increased from
5%to 7.5% to boost domestic manufacturing
• SAD of 4% has been re-imposed for specified medical devices.
• Under the ‘Credit Linked Capital Subsidy Scheme (CLCSS)’ by Ministry of Micro, Small
and Medium Enterprises for technology up-gradation, micro and small
pharmaceutical companies have been provided subsidies.

Major Investments & FDI Inflows:

FDI Inflows: The sector saw FDI equity inflows of USD 2.25 billion from April 2014 to March
2016.

FDI equity inflow from Apr 2016 to Sept 2016 was USD 640.71 million.

Cluster Development Program for Pharma Sector (CDP-PS):

Launched on June 17, 2015, the scheme is being implemented on a Public Private
Partnership format through a one time grant-in-aid, which will be released in phases for
creation of Common Facility Centers (CFC).

Infrastructure Development:

Indian Drugs and Pharmaceuticals Limited (IDPL), a Central Public Sector Enterprise under
Department of Pharmaceuticals, has modernized the tablet manufacturing section of its
Gurgaon Plant, which was commissioned with an investment of INR 3 crore. This has
enabled the PSU to mass manufacture new products in the field of diabetes, oncology,
nephrology and cardiology at affordable prices.

Other Initiatives:

 As on December 15 ,2016, ceiling price of 853 formulations are under price control.
The fixation of ceiling prices has resulted in a total saving of INR 2547 crore since
May 2014.
 683 Jan Aushadi stores are operational , as on December 31, 2016, to provide
generic medicines to masses at cheaper price.

Ease of Doing Business initiatives:

• Pharma Jan Samadhan, a customer grievances redressal system was launched in

March, 2015, to address consumer complaints.

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  Around 820 cases of overcharging involving INR 3992 crore is currently being
processed.
• Pharma Data Bank, an integrated pharmaceutical database management system was
launched on June 25, 2015, to facilitate online filling of mandatory returns as
prescribed in Drugs (Prices Control) Order, 2013. The database also provides a facility
for submitting Form-I application for price approval of ‘new drug’ under DPCO, 2013.
• Pharma Sahi Daam, a mobile application launched in August 2016, provides real-time
information to consumers on prices of Scheduled/Non-scheduled medicines.

Skill Development:

To keep pace with the growing demand for highly skilled R&D professionals the following
skill development initiatives have been undertaken:

Transformation of National Institutes of Pharmaceutical Education & Research (NIPERS) as

Innovation hubs

• Eleven NIPERs were approved till 2015. Three new NIPERs at Chhatisgarh,
Maharashtra and Rajasthan were announced in Budget 2016-17.
• In 2015-16, INR 95.63 crore was disbursed for NIPERs. AICTE issued an Advisory on
honouring NIPER Degrees by all AICTE Institutions.

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 6. VARIOUS BUSINESS MODELS

The Different Business Models

The key social, economic and technological changes currently taking place in the
pharmaceutical and healthcare arena will all necessitate the development of
multinational, multidisciplinary networks drawing on a much wider range of skills
than Pharma alone can provide. The constraints that previously hindered
organisations from collaborating over distance are simultaneously evaporating –
paving the way for the use of new business models (i.e. Emerging collaborative
networks).
Several pharmaceutical firms have already begun to use more collaborative models.
One such instance is Lilly, which is currently transforming itself from a traditional
fully integrated pharmaceutical company into a fully integrated pharmaceutical
network, so that it can draw on a wide range of resources beyond its own walls. Lilly

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hopes that teaming up with other organisations to create virtual R&D programmes
will enable it to get better access to innovation, reduce its costs, manage risks more
effectively and enhance its productivity. For example, the Chorus Project is a virtual
organisation to take molecules quickly to Proof of Concept. Lilly also uses external
networks comprising third parties such as Piramal Life Sciences, Hutchison
MediPharma, Suven Life Sciences for the development of molecules. Swiss
biopharmaceutical development specialist Debiopharm has pioneered a more radical
approach. The company in-licenses promising new candidates from academic
institutes and biotech companies, develops them and then out-licences them to Big
Pharma. Debiopharm’s successes include three products with combined global sales
of more than US$2.6 billion in 2007.
Most of the collaborative models that currently exist are limited to R&D. But it is
easy to envisage various other permutations, including networks focusing on
different therapeutic areas and covering everything from R&D through to sales and
marketing; networks focusing on different enabling technologies, such as genomics,
proteomics and stem cell research; and networks focusing on the management of
outcomes in specific patient segments.
The Federated Model
In the federated approach, a company creates a network of separate entities with a
common supporting infrastructure. These might include universities, hospitals,
clinics, technology suppliers, data analysis firms and lifestyle service providers based
in numerous countries. They might also include business units from within the
company itself, which it places at “arm’s length”. The various participants have a
mutual goal – such as the management of outcomes in a given patient population.
They also share funding, data, access to patients and back-office services, and this
interdependence is the glue that holds them together. They are rewarded for their
efforts using measures like increased life expectancy or quality-adjusted life years.
And each is rewarded in a manner that reflects the evidence base for the
contribution it has made.
The federated model provides a framework for creating integrated packages of
products and services, and thus diversifying beyond a company’s core offering. It
also combines the benefits of nimbleness and size. It would enable each player to

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build a specific area of expertise, establish a competitive advantage as a result of
that expertise and sell its products, knowledge or skills, leaving activities that are
better performed by others to its partners within the federation. More importantly
still, the federated model might encourage greater cross-fertilisation and deliver
bigger improvements in performance, without forfeiting any flexibility. The stronger
members of the network could help the weaker ones to improve – since federations
have an incentive to perform well as a whole – but they could also replace any
participant that persistently underperforms.
In the federated model it may sometimes be hard to measure the value different
participants have created for two reasons. First, the parties in any collaboration
typically value the contributions they have made more highly than those of their
partners. This is a problem that can be solved with watertight contracts, robust
performance indicators, good governance and a proper audit trail.

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The Virtual Variant of Federated Model
In the virtual variant of the federated model most or all of a company’s operations
are outsourced and the company itself acts as a management hub, coordinating the
activities of its partners. Several industries have already adopted some aspects of
this model. The semiconductor industry typically outsources its manufacturing in
order to concentrate on product development, for example, and a number of
companies in the medical devices sector are now following suit. Similarly, strategic
outsourcing of design and manufacture to suppliers has redefined manufacturing
functions within industries such as aerospace, computing and electronics.
Shire Pharmaceuticals is the epitome of a virtual company. It outsources almost
everything, from discovery to medical monitoring to data management to statistics
to medical writing. With the exception of its genetic therapy division, every product
it develops has been purchased from an outside source, via in-licensing or
acquisition.

Source : PricewaterhouseCoopers

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The venture variant of federated model
The venture variant of the federated model entails investing in a portfolio of
companies in return for a share of the intellectual assets and/or capital growth they
generate, rather than outsourcing specific tasks. Special purpose vehicles are
sometimes used to manage such investments, because they offer several advantages
in terms of risk sharing and intellectual property protection. A pharmaceutical
company might choose to concentrate its investments in a particular therapeutic
area or spread them across a number of areas in order to minimise its risk. At the
end of the investment period, it might either claim the intellectual property that has
been generated or out-license it to a third party. Alternatively, the originating
company (or companies) might retain the intellectual property, commercialise it and
pay the sponsoring company a return on its investment.
GlaxoSmithKline has used a version of the venture structure for many years. SR One,
its evergreen fund, was established in 1985 and has now invested more than
US$500m in some 30 private and public biotech companies focusing on drug
discovery, development and delivery. Other Big Pharma companies, such as Novartis
and Pfizer, have also set up corporate venture capital funds and AstraZeneca spun
off part of its gastrointestinal research operation into a new company backed by a
consortium of private equity firms. US investment bank Goldman Sachs has already
dipped a toe in the water with its own venture fund.

The Fully Diversified Model

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The fully diversified model is one in which a company expands from its core business
into the provision of related products and services, such as diagnostics and devices,
generics, nutraceuticals and health management. Johnson & Johnson is Pharma’s
leading exponent of this approach. It is now the world’s largest consumer health
company, following the US$16.6 billion acquisition of Pfizer’s over-the-counter
business in December 2006. It is also the third-largest biologics and sixth largest
pharmaceutical company, has an extensive medical devices and diagnostics
operation, and recently started building a wellness and prevention platform, with
the purchase of HealthMedia, a web-based “health coach”. A number of other
companies are now following suit. Novartis has spent nearly US$25 billion beefing up
its vaccines, generics and eye-care products operations over the past three years, for
example. Roche is drawing on its expertise in molecular diagnostics to develop a
consumer product test for measuring indoor allergens and GlaxoSmithKline has
announced plans to “diversify and de-risk” by focusing more heavily on vaccines,
consumer health and the emerging markets.
The fully diversified model enables companies to reduce their reliance on
blockbuster medicines and spread their risk by moving into other market spaces with
the potential to act as a bulwark against generic competition. Like the federated
model, it also provides a means of moving into outcomes management by offering
combined product-service packages and playing to the growing political emphasis on

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prevention rather than treatment.

The Path to Federation

Clearly, the business model, or models, a company chooses will depend on its
individual circumstances, including the particular challenges it faces, the expertise it
possesses and the markets in which it wants to operate. A company that focuses
exclusively on ethical pharmaceuticals might find it harder to diversify than one that
is already experienced in managing multiple areas of activity, for example.
Moreover, federations typically place greater demands on senior management than
conventional organisational hierarchies.
Disrupting the existing order can have a major impact on a company’s short-term
performance, too. When GlaxoSmithKline established its Centres of Excellence for
Drug Discovery, the upheavals the R&D function was experiencing affected its
pipeline for at least 18 months.
Companies which choose the federated model will therefore adopt a progressive
approach. They will start with opportunistic alliances; use the most successful
alliances as building blocks to create more strategic, longer-lasting coalitions; and,
finally, use the most successful coalitions to create a fully federated network of long-

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 term partners. Taking incremental steps will not only help them to identify the
organisations with which they can work most effectively, but also give them time to
establish the technological infrastructure that is essential to manage the interfaces
between two or more different parties.
Pharma’s fully integrated business model enabled it to profit alone for many years –
and to profit very successfully, as its track record in rewarding shareholders shows.
The top companies saw their market value soar 85-fold between 1985 and 2000. But
this model is now under huge pressure and, by 2020, it will not work. If the industry
is to improve its performance in the lab, reduce its costs, serve the emerging
markets more effectively and make the transition from producing medicines to
managing outcomes – as healthcare payers, providers and patients are increasingly
demanding – it will have to collaborate with other organisations, both inside and
outside the sector.

Source : https://www.pwc.com/gx/en/pharma-life-sciences/pdf/challenge.pdf
1.

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 7. RECENT DEVELOPMENTS

Abbott to make India hub of global research and development for branded generics

At a time when multinational drug companies are scaling down their research and
development investments in India, citing lax patent rules and increasing regulatory
interventions, the US based multinational Abbott is planning to make India its global hub for
innovation and development (I&D), in branded generics products.
Abbott, the second-largest drug company operating in India in terms of domestic market
share, following the acquisition of Piramal Healthcare's formulation division in 2010, is
setting up an Innovation and Design Centre in Mumbai, which will take off next year.
As per Bhaskar Iyer, Vice President, Established Pharmaceuticals Division, Abbott and head
of Indian operations this centre will cater to the needs of 30 plus markets, including India
and will operate as a 'hub and spoke' model for global solids and research and development
platform technologies for established products confirmed.  
In recent years, multinational companies like Daiichi Sankyo and Novartis had scaled down
Indian research and development projects and programmes.

Source : P B Jayakumar , BusinessToday.in

Pfizer Fined Euro 84.2m

The Competition and Markets Authority (CMA) says Pfizer and a small company called Flynn
Pharma both charged “excessive and unfair prices” for the supply of an anti-epilepsy drug in
the UK.

The CMA has hit Pfizer as hard as it is able, partly because the huge American
pharmaceutical company has such large coffers that anything less will not make much of a
dent, and partly to send a message to other drug companies that they should not even think
about trying the same thing. It has also fined Flynn Pharma £5.2m, which is 10% of its
worldwide turnover – the maximum possible fine.

Pfizer has been making phenytoin sodium capsules for so many years – nobody is quite sure
how long – that the price originally agreed with the NHS now looks very low, at £2.83 for a
100mg pack. Pfizer claims it was losing money on it. In September 2012, the company sold
the distribution rights to Flynn Pharma, which debranded the drug. That meant that the
drug, called Epanutin, was no longer sold as a Pfizer drug, and any profits from sales would
no longer count towards the total amount Pfizer is allowed to earn in a year from the NHS,
which is capped under the complicated arrangements of the pharmaceutical price
regulation scheme (PPRS).

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Pfizer rebuts any allegation of wrongdoing and says it acted entirely within the rules. It says
it was making a loss and “the Flynn transaction” was a chance to secure the supply of an
important medicine. It also said it pitched the price to the NHS at 25% to 40% less than that
of an equivalent version of the drug that the NHS had been buying for a long time. In a very
robust statement, Pfizer said it would appeal every aspect of the decision.

The government has realised that it does not have quite the kind of control that it thought it
had over drug prices. There is new legislation under way to ensure that the department of
health can get tough with companies hiking their prices, so even if Pfizer wins on appeal, it
hopes it will be able to block this particular loophole. In the meantime, there are several
other cases being investigated by the CMA. It won’t say which companies or which drugs,
but it is thought they may involve similar situations.

In the past, Big Pharma has been caught looking for ways to hang on to profits from
blockbuster drugs when they approach the end of their patent life. Earlier this
year, GlaxoSmithKline was hammered by the CMA, effectively for paying off generic
companies that wanted to make cheap copies of its best-selling antidepressant, paroxetine
(Seroxat). In 2001, profits from Seroxat were earning GSK £90m, so lobbing a few million to
some generic companies to get them to keep out of the way seemed like good business. But
that meant the NHS continued to have to pay a high price for the drug, and the CMA was
not impressed, fining GSK a total of £37.6m.

Source : Sarah Boseley, The Guardian

High export growth boosts fortunes of Indian players

Exports, which contribute about 45% to the Indian pharmaceutical industry, have been the
key revenue driver for Indian formulation and bulk drug players. Within export markets,
regulated markets offer better realisations, but also require higher investments. Large
players, which garner larger proportion of sales from regulated markets, accordingly enjoy
better profitability and returns.

To understand the strategies, dynamics and performance of domestic pharmaceutical

companies (formulations and bulk drugs players), they have been segregated into large,
medium and small based on their 2014-15 turnover. By this parameter, companies with a
turnover of more than Rs 45 billion can be termed as large, those with a turnover between
Rs 5 billion and Rs 45 billion would be medium-sized, and those with a turnover of less than
Rs 5 billion would be small. Similarly, in case of bulk drug players, those with a turnover
above Rs 10 billion have been termed large players, and those with a turnover of lesser than
Rs 10 billion are medium and small players.

24
A performance analysis on the aforementioned groups reveals following trends:

Focus on regulated markets helps players reap huge benefits

Over the past few years, Indian pharmaceutical players have been increasingly tapping
opportunities in global generics markets, especially the US and Europe. Meanwhile, mid-
sized and small players have targeted semi-regulated markets of Africa, Asia and Latin
America to enhance their distribution network before exporting to regulated markets.

Buoyed by the aforementioned trends, Indian formulation exports by these companies

recorded ~25% CAGR between 2011-12 and 2014-15. The strong double-digit growth is
backed by impressive growth in exports to regulated as well as semi-regulated markets.

For bulk drug manufacturers, a burgeoning generic market and cost-reduction measures by
global pharmaceutical companies present a huge opportunity in regulated markets. Backed
by cost-competitiveness, well-developed process chemistry skills and the largest number of
drug master filings globally, India is well-placed to tap export opportunities in regulated
markets. Accordingly, bulk drug exports for the companies in our set have grown at a CAGR
of 14% between 2011-12 and 2014-15, with exports to regulated markets estimated to be
the prime driver of growth.

Exports drive strong rebound in revenues for formulation and bulk drug players

Large formulation players' overall revenues increased about 27% y-o-y in 2014-15. Their
exports grew 26% y-o-y, driven by the regulated markets and aided by rupee depreciation
during the year.  Mid-sized formulation players' overall revenues grew by 16% y-o-y in 2014-
15. The segment's growth came on account of a 19% y-o-y growth in domestic revenue and
a 10% growth in export revenue in 2014-15 led by players such as Torrent Pharmaceuticals,
IPCA Laboratories and Ajanta Pharmaceuticals in the domestic market and Torrent
Pharmaceuticals and IPCA Laboratories in the export markets.

In the bulk drug segment, turnover as well as export revenue of large players grew at ~14%
CAGR for a four-year period up to 2014-15 due to healthy performance by Granules India
Ltd., Divis Laboratories and Aarti Industries Ltd. For the mid-sized and small bulk drugs
players, overall revenues grew at a CAGR of about 18% over a four-year period up to 2014-
15. Export revenues for the mid-sized and small bulk drug players grew at ~16% CAGR for a
four-year period up to 2014-15.

Large players enjoy better profitability, undertake higher capital investments

Typically, large players (in both formulations and bulk drug segments) have more profitable
business models due to their wide base in regulated markets, which fetch higher
realisations. Presence of strong brands in the domestic market further aids large
formulation players. However, significant presence in international markets exposes these

25
players to risks such as volatility in currency rates, overall market performance and
outsourcing plans of key players in the target destinations, regulatory risk, etc.

In terms of capital expenditure (capex) too, large players score over smaller firms as the
latter have a fewer number of US FDA-approved plants, which significantly reduces their
capex requirements.

Source : Crisil

26
 8. PORTER’S FIVE FORCES

1. Threats of entry posed by new or potential competitor (LOW)

 High entry barriers due to costs associated with research & development of
new drugs.
 Government regulation (i.e. FDA)
 The threat of entry posed by new or potential competitor is a LOW
competitive force due to the above entry barriers & regulatory constraints.
2. Degree of rivalry among existing firms (HIGH)
 High rivalry among main companies in the industry
 The degree of rivalry among existing firms is a HIGH competitive force
3. Bargaining power of buyers (MEDIUM)
 Hospitals & other health care organizations buy in bulk quantities and exert
pressure on pharmaceutical companies to keep prices in check
 Regular patients have lost bargaining power due to price increases in generic
drugs
 The bargaining power of buyers is a MEDIUM competitive force.

4. Bargaining power of suppliers (LOW)

 Sales for the pharmaceutical industry concentrate in a handful of large
players and that has decreased the bargaining power of suppliers.
 The bargaining power of suppliers is a LOW competitive force

5. Closeness of substitute products (HIGH)

 Demand for generic versus brand name drugs has increased because of the
costs
 Generic drug companies do not have the high costs associated with the
research & development of new drugs and that allows them to sell at
cheaper prices
 The closeness of substitute products is a HIGH competitive force


27
 9. MAJOR GOVERNMENT POLICIES

It is very important for players to maintain high standards in the pharmaceutical

industry, as it concerns the lives of people. Regulatory bodies impose regulations to
ensure that drugs meet the safety and quality standards. Regulatory bodies not only
ensure that pharmaceutical companies meet the set quality standards, but also ensure
that the pharmaceutical companies do not charge unreasonable prices from consumers.

Regulatory bodies impose regulations to ensure that drugs meet safety and quality
standards. It is extremely vital that players in the pharmaceutical industry maintain high
standards, considering the number of lives at stake. Regulatory bodies also ensure that
pharmaceutical companies do not charge unreasonable prices from consumers.
The stringency of regulatory procedures varies across countries. On the basis of
established regulations and patent laws, the global pharmaceutical industry can be
broadly classified into regulated and semi-regulated markets.
Regulated markets include the US, EU and Japan that have established systems of patent
laws and sophisticated regulatory systems for controlling drug quality. On the other
hand, semi-regulated markets include countries such as China, India and South Africa,
which have less stringent systems of patent laws and less sophisticated regulatory
systems for drug quality control.
However, there is no single harmonised protocol for drug approval across countries.
Countries have their own regulatory authorities and drug approval mechanisms.

To understand the regulatory framework governing Indian pharmaceutical players, we

have also examined regulations in the US, which is the largest pharmaceutical
market for Indian exporters.

List of regulatory authorities across key countries

28
Regulatory environment in India

Regulatory bodies

Source: CRISIL Research

The Drugs and Cosmetics Act, 1940 (Drugs Act) and Drugs and Cosmetic Rules, 1945 (Drug
rules) regulate the import, manufacture, distribution and sale of drugs in India. Under the
provisions of these Acts, the Centre appoints the Drugs Technical Advisory Board (DTAB) to
advise the central government and the state governments on technical matters.

The responsibility to enforce the Drugs Act is entrusted with both the central government
and the respective state governments. Under the Drugs and Cosmetics Act, state authorities
are responsible for regulating the manufacturing, sale and distribution of drugs, whereas the
central authorities are responsible for approving new drugs and clinical trials, laying down
the standards for drugs, controlling the quality of imported drugs and co-ordinating the
activities of state drug control organisations.

The Drugs Controller General of India (DCGI) is the central body that co-ordinates the
activities of state drug control organisations, formulates policies and ensures uniform
implementation of the Drugs Act throughout India. It is also responsible for approval of
licenses of specified categories of drugs, such as blood and blood products, IV Fluids,
Vaccine and Sera.

Indian pharmaceuticals industry is mainly regulated on the basis of patents, price and
quality

29
Source: CRISIL Research

Patents

Before 2005, the regulatory system in India focused only on process patents. Indian
pharmaceutical companies thrived during the process patent regime. They would re-
engineer products of global innovator companies, which were unavailable in India, and
launch them in the country as generics, as India did not recognise the product patents. In
this manner, Indian companies gained process chemistry skills, but did not focus on R&D for
new drug discovery.

In January 2005, India complied with the World Trade Organisation (WTO) to follow the
product patent regime [sale of re-engineered products (for drugs patented after 1995) is
restricted]. However, enterprises, which had made significant investments and were
producing and marketing the concerned product prior to January 1, 2005 and which
continue to manufacture the product covered by the patent on the date of grant of the
patent, are protected, and the patentee cannot institute infringement suits against them,
but would be entitled to reasonable royalty.

Drug prices

The Drug Price Control Order (DPCO) fixes the ceiling price of some APIs and formulations.
APIs and formulations falling under the purview of the legislation are called scheduled drugs
and scheduled formulations. The National Pharmaceutical Pricing Authority (NPPA) collects
data and studies the pricing structure of APIs and formulations and accordingly makes
recommendations to the Ministry of Chemicals and Fertilisers.

The new Pharmaceutical Policy, notified in 2012, was put out as final price notification in
May 2013, bringing 348 essential drugs in the National List of Essential Medicines (NLEM),
under price control. The scope of drugs included for pricing was further expanded by follow
on pricing notifications during 2014 and early 2015 to bring a total of nearly 539 drugs under
price control. A big change in the current pricing policy is the introduction of cost controls
on final market prices of formulations compared to cost-based controls on Bulk drugs in the
previous pricing policies.

A revision to the NLEM was announced in December, 2015 which has increased total
number of essential medicines to 376. This would add 1-2% to the market size under price
control and bring the total controlled pharmaceutical market to ~18% by value by 2016-17.

30
Under the policy, the ceiling price for each drug under control would be fixed as the simple
average price of brands having more than 1 per cent market share (by value) in the sales
(MAT - Moving Annual Turnover) of that particular molecule. Thus, prices of brands which
are higher than this ceiling will need to be lowered. The ceiling prices will be allowed an
annual increase as per the Wholesale Price Index (WPI). Prices will be recalculated using
MAT only once in five years or when the NLEM is updated.

Price of drugs that were part of the earlier policy, but do not come under the current policy,
would be frozen for a year and, thereafter, allowed a maximum annual increase of 10 per
cent. A 10 per cent increase would also be the limit for prices of drugs outside the
government's price control.

Quality

No drug can be imported, manufactured, stocked, sold or distributed in India unless it meets
the quality standards laid down in the Drugs Act. All companies have to comply with
Schedule M of the Act, which outlines various requirements for manufacturing drugs and
pharmaceuticals by applying cGMP (current Good Manufacturing Practice). cGMP has to be
followed for control and management of manufacturing and quality control testing of drugs.

Ban on fixed dose combination drugs (FDC) 2016

In India The Union Health Ministry banned 344 fixed-dose combination (FDC) drugs,
including several antibiotics and analgesics, following the recommendations of an expert
committee, which found that the combinations lacked "therapeutic justification". According
to the CDSCO Policy guidelines on the approval of FDCs in India, all FDCs that have not yet
been approved in any country - with regulations similar to those in India - will have to go
through clinical trials along with the entire list of clearances for those FDCs to be marketed
in India. However, these guidelines were seldom strictly adhered to and several
pharmaceuticals companies marketed FDCs in India with state-level approvals. As per our
analysis, if the 344 FDC drugs are taken off the market, 3-4% of the Rs 847 billion Indian
domestic pharmaceuticals industry will be impacted. Companies will also most likely have to
book inventory losses over the March 2016 and June 2016 quarters, as they take back stocks
already lying with the trade. However, considering the stay orders on a few of these banned
drugs, the impact could be subdued or delayed.

Regulatory environment in the US

The Department of Health and Human Services regulates the US pharmaceutical market
through the US FDA, which ensures that human and veterinary drugs, biological products
and medical devices are safe and effective. It lays down the procedures for product
approvals (generic and new drugs) and is primarily responsible for enforcing the Federal
Food, Drug and Cosmetic Act - the basic drug and food law in the US.

31
Evolution of laws governing the US pharmaceutical industry

Federal regulation of pharmaceuticals in the US began in 1906, when the Pure Food and
Drug Act was enacted. This law required that drugs meet official standards of strength and
purity and that the ingredients are accurately described on a drug's label. However, these
laws were not strong enough. In 1937, 107 people died after consuming elixir
sulphanilamide - a sulfa drug mixed with diethylene glycol - a drug manufactured by
Massengill, an established pharmaceutical company. This tragedy led to the passage of the
Food, Drug and Cosmetic Act of 1938. This legislation, for the very first time, required
drugmakers to submit evidence of a product's safety. It also required that a drug's label
state its contents, how it should be administered and its possible side effects. The US FDA
was appointed to oversee the law's enforcement.

In 1957, a West German pharmaceutical manufacturer introduced a new sedative,

thalidomide, which alleviated the symptoms of morning sickness in women, during the first
trimester of pregnancy. In 1962, by which time the drug had been sold in 46 countries, it
became clear that thalidomide damaged the foetus, causing stillbirth or, more prevalently,
phocomelia (Greek for "seal limb"). Thousands of newborn babies were found to have
truncated limbs that resembled flippers. This tragedy resulted in the Kefauver-Harris Drug
Amendments of 1962. The Kefauver-Harris Amendments required that manufacturers
demonstrate both the safety and efficacy of new drugs before receiving approval for
commercial sale in the US. In addition, this legislation required that drugs be produced
according to the specified GMP (good manufacturing practices) guidelines and that plants
should be subject to US FDA approval and periodic inspection.

These regulations resulted in long delays in the introduction of new drugs and led to the
enactment of the Modernisation Act of 1997, which incorporated several measures to speed
up the approval of new drugs, especially for the treatment of life-threatening illnesses, and
improve the overall efficiency of the FDA. The new legislation extended the Prescription
Drug User Fee Act (PDUFA), a programme that charges drugmakers a fee for filing new drug
applications with the US FDA. These funds are used to hire new personnel for the US FDA,
and the programme has resulted in a significant reduction in the time taken for new drug
approvals. The new law also enabled seriously ill patients to have easier access to
experimental compounds and provided new initiatives for the development of paediatric
medicines.

In 2012, US FDA introduced the Generic Drug User Fee Amendments (GDUFA), a law that is
designed to speed access to safe and effective generic drugs to the public and reduce costs
to industry. The law requires the industry to pay user fees to supplement the costs of
reviewing generic drug applications and inspecting facilities. Additional resources will enable
the Agency to reduce a current backlog of pending applications, cut the average time
required to review generic drug applications for safety, and increase risk-based inspections.
GDUFA is designed to build on the success of the Prescription Drug User Fee Act (PDUFA).

32
In 2014, US FDA announced a new structure of the GDUFA, which resulted in lowering of the
dossier filing fees by 8-15 per cent and increase in the site registration fee by about 15-22
per cent. Observing the ANDA and DMF filing of Indian pharma companies in the past, we
expect this move to have minimal impact on the net profit of the large pharma companies
exporting to US.

GDUFA User Fee Requirements

ANDA: Abbreviated new drug application

API: Active pharmaceutical ingredient

PAS: Prior approval supplement

DMF: Drug master file

Source: US FDA

Some key concepts in the context of new and generic drugs are discussed below:
Investigational New Drug (IND)

The US FDA's role in the development of a new drug begins when the drug's sponsor
(usually the manufacturer or potential marketer) finishes screening the new molecule for
pharmacological activity and acute toxicity potential in animals and plans to test its
diagnostic or therapeutic potential in humans. Companies obtain approvals for human trials
via the IND.

New Drug Application (NDA)

33
Source: CRISIL Research

Data gathered during animal studies and human clinical trials of an IND are used to file for a
New Drug Application (NDA). The NDA application is the vehicle through which the drug
sponsors formally propose that the US FDA approve a new pharmaceutical for sale and
marketing in the US.

NDA aims to provide sufficient information to permit the US FDA reviewer to make the
following key decisions:

 The drug is safe and effective in its proposed use(s) and its benefits outweigh the
risks
 The proposed labeling of the drug (package insert) is appropriate
 The methods used in manufacturing the drug and the controls used to maintain
quality are adequate to preserve the drug's identity, strength, quality, and purity.

Abbreviated New Drug Application (ANDA)

New drugs, like other new products, are developed under patent protection. The patent
protects investments on the drug's development, by giving the company the sole right to
sell the drug while the patent is in effect. When patents or other periods of exclusivity
expire, other drug manufacturers can apply to the US FDA to sell a copy of the original drug.

Drug companies must submit an ANDA for approval to market a generic (copy of the drug).
The Drug Price Competition and Patent Term Restoration Act of 1984, more commonly
known as the Hatch-Waxmann Act, made ANDAs possible by striking a compromise in the
drug industry. As a result, generic drug companies gained greater access to the market for
prescription drugs and innovator companies gained restoration of patent life of their
products lost during the US FDA's long approval process.

Drug substitution laws further aided generic drugmakers by allowing pharmacists to

substitute branded drugs with generic drugs, unless the doctor specifies, "dispense as

34
written" on the prescription. The ANDA process does not require the drug's sponsor to
repeat costly animal and clinical research on ingredients or dosage forms already approved
for safety and effectiveness.

However, to gain FDA approval, a generic drug must:

 Contain the same active ingredients as the innovator drug (inactive ingredients may
vary)
 Be identical in strength, dosage form, and route of administration
 Have the same indications for usage
 Be bioequivalent to the innovator drug
 Meet the same batch requirements for identity, strength, purity and quality
 Be manufactured under the same strict standards of FDA's GMP regulations that are
required for innovator products.

Drug Master Files

A Drug Master File (DMF) is a submission to the FDA that may be used to provide
confidential and detailed information about facilities, processes, or articles used in
manufacturing, processing, packaging and storing of one or more human-use drugs.
Although the information contained in the DMF may be used to support an IND, an NDA, an
ANDA, another DMF, or an export application, it is not a substitute for any of these. A DMF
is neither approved nor disapproved. Hence, registering of a DMF by the US FDA does not by
itself mean that the drug can be sold in the US. That right is obtained on review of the DMF
in connection with the review of an IND, NDA, ANDA, or an export application, and
consequent approval of manufacturing facilities and processes.

35
 10. MAJOR COST HEADS

The combined total revenue for all 12 companies over 13 years was about $5.35 Trillion.

The two major cost heads in the Pharmaceuticals Industry over the period 2003 -2015 are

1. Marketing Costs
30 % of the total revenue is spent on Marketing as per the reports of the
companies.

2. Research and Development Costs

All 12 pharmaceutical companies spent a total of $887 Billion on research.

Source :

http://truecostofhealthcare.net/the_pharmaceutical_industry/

36
 11. MAJOR PLAYERS

DR. Reddy’s Laboratories Limited

Dr. Reddy's Laboratories (DRL) was founded by Dr. Anji Reddy in 1984. The company is one
of India's largest pharmaceutical companies, in terms of revenues. DRL commenced
operations as a supplier to Indian drug manufacturers and subsequently started exporting
products to semi-regulated markets. By the early 1990s, the company shifted focus towards
acquiring approvals for its formulations and bulk drugs in regulated markets, such as the US
and Europe. Further, the company has actively pursued the acquisition route for growth.

Key acquisitions

Source: Industry, CRISIL Research

Manufacturing facilities and R&D

In India, DRL has seven API manufacturing units, 10 formulation manufacturing units, and
one biologicals manufacturing unit (in Telangana) apart from six R&D centres. The company
also has seven manufacturing facilities abroad in countries such as USA, UK, China and
Mexico. It further has four R&D centres in US, UK and Netherlands.

Business profile

DRL is present across the pharmaceutical value chain. It produces generic formulations,
active pharmaceutical ingredients (APIs), offers pharmaceuticals services and bio-similar
products. At present, it also has a New Chemical Entities (NCEs) programme, which focusses
on the therapeutic areas of neurology, dermatology, pain management and anti-infectives.
In generic formulations, the company manufactures products across the major therapeutic

37
segments of gastrointestinal ailments, cardiovascular diseases, pain management, oncology,
anti-infective, pediatrics and dermatology.

In pharma services, it provides customised services and solutions for starting materials,
intermediates, active ingredients and finished dosage forms. In bio-similars, the company
has products such as Grafeel, Reditux, Cresp and Peg-grafeel. DRL sells its products world-
wide, with the US, UK , Germany, South Africa, Venezuela, Romania, New Zealand, Russia
and CIS and India being its major markets.

Market position

DRL is the 15th largest player in the domestic market, with a 2.41% share, as of June 2016.
The company's top brands are Omez (acute gastritis), Stamlo (cardiovascular) and Nise (pain
management) in the domestic pharmaceutical market. The company mainly derives
revenues through exports and has a strong pipeline of ANDAs (cumulative 233 ANDAs filed
with the US FDA, as of March 2016, of these 154 are approved).

Key developments

 In November, 2015, the company received a warning letter from the US FDA for 3 of
its manufacturing plants in Andhra Pradesh and Telangana. Post this, the company
has indicated that quality improvement activities have been undertaken and 3 status
updates have been sent to USFDA in January, March and May, 2016.
 In June, 2016, the company acquired 8 ANDAs from Teva Pharmaceuticals (being
divested as a precondition to its $40.5 billion acquisition of Allergan Plc’s generic
business) for $350 mn. According to IMS health, the combined annual sales of the
branded versions of the ANDAs in the US is ~$3.5 billion as of April 2016). The
acquisition of these ANDAs is subject to the closing of the Teva/Allegran generics
transaction as well as approval by the US Federal Trade Commission. 
 In March, 2016, Dr. Reddy's Laboratories entered into a license agreement with
XenoPort, Inc., which granted Dr. Reddy’s Laboratories exclusive rights for the
development and commercialization of XenoPort’s clinical stage oral new chemical
entity, XP23829 in the US. The company plans to develop XP23829 as a potential
treatment for moderate-to-severe chronic plaque psoriasis and may potentially
develop XP23829 for relapsing forms of multiple sclerosis (MS).
 In April 2015, Dr. Reddy Labs entered into an agreement to acquire select portfolio
of the Belgian firm UCB in India. The acquisition, for a consideration of Rs 8 billion,
gives DRL access to established UCB brands in Nepal, Sri Lanka, India and Maldives.
Further, it would widen its product base in the high margin and high growth
segments of dermatology, respiratory and paediatrics as well as give access to
leading brands such as Atarax, Nootropil, Zyrtec, Xyzal and Xyzal M.
 Dr. Reddy’s Laboratories, in March 2015, entered into an agreement with Hetero,
under which Dr. Reddy’s has been licensed to distribute and market Sofosbuvir 400

38
 mg tablets, used for the treatment of chronic Hepatitis C, under the brand name
Resof, in India.

Financials

 In 2015-16, DRL's revenues grew by ~5% primarily contributed by North American

and Indian markets
o North America (contributes to 53% of revenue) grew at a pace of 12% aided
by the company’s injectable portfolio and the launch of 3 new drugs
(esomeprazole magnesium capsules, pramiprexole dihydrochloride and
memantine hydrochloride tablets).
o Growth in India (15%) clocked in at 19% which was driven by concentrated
marketing efforts and a successful integration of the brands acquired from
UCB
 The company's operating margins improved marginally by 100 bps due to a
reduction in selling expenses and material costs.
 However, net margins recorded a fall of close to 190 bps due to higher depreciation
and an increase in extraordinary expenses. Extraordinary expenses included loss of
foreign exchange due to currency devaluation and failure to repatriate any amount
at preferential exchange rates from the Venezuela region. The
Venezuela government is in the process of introducing a new exchange rate
mechanism, and this has adversely impacted the revenue of the company for
FY2016.

Key financial
indicators 

 
Source: CRISIL Research

39
Cipla Limited

The late Dr. K A Hamied launched Cipla as Chemical, Industrial & Pharmaceutical
Laboratories in 1935. Its first set of products came out in 1937. Till date, the Hamied family
remains the company's largest shareholder (holding ~36% of overall shares). It
manufactures both active pharmaceutical ingredients (API) and formulations and has
manufacturing plants in eight different locations viz, Bengaluru (Karnataka), Patalganga and
Kurkumbh (Maharashtra), Baddi (Himachal Pradesh), Rangpo (Sikkim), Pithampur (Madhya
Pradesh) and Verna (Goa).

In the past, the company has largely focused on launching of generics drug products as both
single ingredient and fixed dose combinations as well as in new drug delivery systems and
devices. The company has achieved reasonable success in new drug delivery systems
(NDDS), especially in the anti-asthma segment. It manufactures more than 100 million
inhalers annually with many first achievements such as launch of world's first transparent
dry powder inhaler (DP haler). Compared to most other large formulation manufacturers, it
has a higher proportion of income from the domestic market (about 40% as of March 2016).
On account of this, the company's R&D expenses have been lower than peers who are filing
a large number of international dossiers such as ANDAs as well as conducting research on
new molecular entities. However in order to boost the company's ability to target research
into new therapy areas, it has started an investment division called Cipla New Ventures,
which aims to invest in companies that may have promising products within biologicals,
regenerative medicine and consumer health space.

Business profile

Cipla is predominantly a formulations player (formulations contributed about ~94.4% of the

overall revenues in 2015-16) with exports to almost 170 countries in Africa, the Middle East,
Europe, America, and Asia. The company also manufactures a large number of API for
largely captive consumption, hence it has a small presence in the bulk drug export segment.
The key therapeutic categories include respiratory, anti-infectives, anti-retrovirals, anti-
malarials, cardiac, anti-cancer drugs, anti-inflammatory drugs and anti-depressants. Cipla is
one of the largest manufacturers of anti-retrovirals (Anti-HIV) in the world.

The company has a good presence in the international market with exports contributing to
~60% of overall revenue during FY2016. In comparison with its peers, the company had
been a laggard in terms of targeting growth in the US market. However, in the past couple
of years, the company has started actively filing for a large number of ANDAs in the US
market to achieve higher share from this geography. As of March, 2016 the company has
filed a total of 168 ANDAs of which 90 have been approved. The company also
manufactures animal healthcare products.

40
Market position

Cipla is the third largest player in the domestic pharmaceutical industry, with a market share
of ~5% as of June 2016. Cipla dominates the respiratory therapeutic segment and also
occupies a key position in both, the anti-infectives and the cardio vascular (CVS) segments.

Key developments

The company is actively looking for tie-ups for new product launches in key geographies in
order to boost its revenue growth. Some of the key tie-ups during the past few years are:

 In April, 2016, Cipla announced a strategic collaboration with FIND (Foundation for
Innovative New Diagnostics) to improve hepatitis C diagnosis and treatment in India
and other countries. 
 On May 27, 2015 the company announced partnership with Serum Institute of India
to exclusively market flu vaccine Nasovac-S in India. According to this partnership,
Serum Institute of India will produce and manufacture the vaccine in its facility
approved by WHO, whereas Cipla will retain the exclusive right to market the
product in India.

Further, in order to boost the company's topline and R&D pipeline, it is engaging into
investments in acquisitions and R&D ventures:

 The company announced in July, 2016 that it will be investing ~$91 mn in South
Africa to open a biotech plant to manufacture biosimilars. The construction is
expected to commence from early 2017.
 In July, 2016, Cipla acquired a portfolio of 3 products from Teva Pharmaceuticals in
the US markets. Teva Pharmaceuticals divested as a precondition to its $40.5 billion
acquisition of Allergan Plc’s generic business.
 During FY2016, the company completed the acquisition of InvaGen Pharmaceuticals
Inc. and Exelan Pharmaceuticals Inc. The value of the acquisition amounted to $550
mn
 On June 8, 2015, the company announced that its JV with Manipal Group and
Stempeutics Research, has been granted process patent for its novel stem cell based
drug Stempeucel by the Japanese Patent office. The drug has received patent in
China as well. In the European Union, the drug has received the ODD status (Orphan
Drug Designation). This status entitles the drug to 10 years of marketing exclusivity in
the European Union region. In June 2016, stempeucel received approval from the
Indian FDA.

Financials

Cipla's revenues grew by ~20% (y-o-y) in FY2016 primarily due to strong growth in the
export market. The growth drivers can be identified as follows:

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  The export market (contributed to ~60% of overall revenue) grew at a pace of ~36%
y-o-y due to a strong growth in North America (contributes to ~15% of overall sales),
Europe (4%) and South Africa (11.5%).
o North America witnessed accelerated sales with ~117% y-o-y growth which
were driven by the launch of Esomeprizole in FY2016.
o Sun’s 30% growth in the European market was driven by strong performance
in the business to business (B2B) & direct-to-market (DTM) segments
o The South African market’s 25% growth was led by development in
respiratory, CNS and oncology segments
 The domestic business grew at 9% y-o-y due to growth momentum in respiratory,
anti-infectives, and urology and gastro intestinal therapies.

Operating margins declined by 140 bps (y-o-y) due to several onetime-costs incurred under
other expenses such as restructuring and rationalizing in emerging markets, cost related to
non-moving inventory and  changes in legislations such as Payment of Bonus Act.

On the other hand, net margins grew by 90 bps due to an increase in non-operating income
and a marginal reduction in depreciation.

Key financial indicators

Source: CRISIL Research

GSK Pharmaceuticals Limited

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GlaxoSmithKline Pharma Ltd (GSK), a 75% subsidiary of UK-based Glaxo Wellcome, was
formed after the merger of Glaxo India Ltd and SmithKline Beecham Pharmaceuticals India
in January 2001. The company is wholly focused on the domestic formulations market.

Manufacturing and R&D facilities

GSK has a manufacturing unit in India (at Nashik) which produces formulations. The
company has its R&D facilities which have been approved by the Department of Science and
Industrial Research in India at Nashik (Maharashtra) and a clinical development centre at
Bengaluru. The company's R&D activities focus on clinical studies for diseases such as
cancer, depression, schizophrenia and diabetes. Moreover, GSK India also has access to GSK
Plc's (its parent company) product pipeline. In order to enhance its capability. GSK had
begun work for setting up a greenfield manufacturing facility in Karnataka (India) in
September 2015, with an investment of Rs 8.6 billion.

Business profile

The company manufactures, sells and distributes both prescription medicines and vaccines.
In the therapeutic segment, it has analgesics, antibiotics, cardiovascular, endocrine,
gastrointestinal, gynaecological, nutritional, dermatological and respiratory care products. It
caters to the mass markets (acute care) with brands such as Calpol, Zinetac, Neosporin, etc
and mass therapy segments (anti-infectives) with brands such as Augmentin. Following the
successful launch of Tykerb (which is used to treat breast cancer) in the oncology business,
the company further expanded its presence in two new segments - Kidney cancer and
Hematology - with the launch of Votrient and Revolade.

Market position

GSK is the seventh-largest player in the domestic formulations segment with a market share
of 3.5% as of March 2015.

Financials

 GSK's revenues grew by 29% over the past 15 months to stand at Rs 33,622 million in
March 2015 as:
o The previous year's growth figures were weighed down by pricing controls
due to the Drug Price Control Order and some supply constraints
o The revenue for 2015 is backed by operations carried out for 15 months (as
the company adopted the financial year system of reporting), hence the
growth percentage is higher. 
The growth in revenues for 12-month period March-2015 as against previous
reported 12-month period Dec-2014 is 6.6%.
 The operating margins of the company declined by nearly 150 bps during the year,
mainly due to a 35% increase in material consumption costs during the period.

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  Net margins declined by 430 bps during the year. This was primarily on account of
loss from exceptional items relating to actuarial loss on employee benefits and a
charge of Rs. 30.37 crores for the rationalization of capital assets for one dosage
form at the Nashik facility.

Key financial indicators

Note: Consolidated financials being considered

*The company has adopted the financial year system (Apr-Mar)
n.m.: Not meaningful

News & Events

GSK and Novartis entered into a three-part deal in 2014 in a major business restructuring
move. As per this deal, GSK and Novartis agreed to form a joint venture consumer
healthcare business. Further, GSK agreed to acquire Novartis's global vaccine business while
divesting its oncology business to Novartis. GSK had received clearance from the European
Commission in January, 2015 to carry out this deal and the transactions were carried out
successfully in March 2015.

Source : Crisil

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 12. INDUSTRY OUTLOOK

 The Indian pharmaceuticals market increased at a CAGR of 17.46 per cent during
2005-16 with the market increasing from US$ 6 billion in 2005 to US$ 36.7 billion in
2016 and is expected to expand at a CAGR of 15.92 per cent to US$ 55 billion by
2020.The Indian pharma industry, which is expected to grow over 15 per cent per
annum between 2015 and 2020, will outperform the global pharma industry, which
is set to grow at an annual rate of 5 per cent between the same period.
 By 2020, India is likely to be among the top three pharmaceutical markets by
incremental growth and sixth largest market globally in absolute size.

 The market is expected to grow to US$ 55 billion by 2020, thereby emerging as the
sixth largest pharmaceutical market globally by absolute size*. India has also
maintained its lead over China in pharmaceutical exports with a year-on-year growth
of 7.55 per cent to US$ 12.54 billion in 2015, according to data from the Ministry of
Commerce and Industry.
 The Indian pharmaceutical market size is expected to grow to US$ 100 billion by
2025, driven by increasing consumer spending, rapid urbanisation, and raising
healthcare insurance among others.
 With 70 per cent of market share (in terms of revenues), generic drugs form the
largest segment of the Indian pharmaceutical sector.India is the largest provider of
generic drugs globally with the Indian generics accounting for 20 per cent of global
exports.
 India supply 20 per cent of global generic medicines market exports in terms of
volume, making the country the largest provider of generic medicines globally and
expected to expand even further in coming years
 Over the Counter (OTC) medicines and patented drugs constitute 21 per cent and 9
per cent, respectively, of total market revenues of US$ 20 billion.
 Presently over 80 per cent of the antiretroviral drugs used globally to combat AIDS
(Acquired Immuno Deficiency Syndrome) are supplied by Indian pharmaceutical
firms.

OTHER REFERENCES:

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https://www.in.kpmg.com/pdf/Indian%20Pharma%20Outlook.pdf

http://www.ibef.org/industry/pharmaceutical-india.aspx

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