India Pharmaceutical Industry: Export Scenario

Sumeet Shekhar Neeraj

Registration No. 1226110122
Date: 15-12-2010
Abstract

India has emerged as a preferable manufacturing destination for global pharma majors (Viz.
Roche, Eli Lilly, Johnson & Johnson etc. the world leaders who have already planted themselves
deep into the Indian market) savouring high quality, cost effective production capabilities of
India for their export needs to the world. The industry has grown from a humble $333.33 Mn
turnover in 1980 to approximately $22.33 Bn by Sep 2009 and the country now ranks 3rd in
terms of volume of production (10 per cent of global share) and 14th by value. Exports ($12 Bn)
of pharmaceuticals have consistently outstripped imports ($6.5 Bn). India currently exports drug
intermediates, active pharmaceutical ingredients (APIs), finished dosage formulations, bio–
pharmaceuticals and clinical services. The top five destinations of Indian pharmaceutical
products are the USA, Germany, Russia, the UK and China. The sooner India manages to close
the infrastructure gap (Central major infrastructure projects 55% delayed, 2009 data), the
financial gap (huge costs and time for international approvals and registration processes) the
faster the growth will be in Indian pharmaceutical industry (Economic Survey of India 2010).
The focus markets of Indian pharmaceutical exports industry needs of R&D spending, financial
aids, policy in action, mergers and acquisitions to be improved, reviewed and critically
identified, modulated and studied respectively to grab the largest pie of the export market
plethora for the future growth.
INTRODUCTION

India's pharmaceutical sector is currently undergoing unprecedented changes and has seen a
remarkable growth in its exports (pharmaceutical exports occupy a share of 4.4% to 5.2% of
India's total exports over the last 5 years [2]) and exports grew at a compounded annual growth
rate of 21.98% during the five year period of 2004-05 to 2008-09.

India‟s growth story vindicates its potential, it had a humble $333.33 Mn turnover in 1980 to
approximately $22.33 Bn by 2009-10 and a number of the country's largest pharmaceutical
companies are attaining global-player status (Viz. Cipla, Ranbaxy, Dr. Reddy‟s Labs, Lupin,
Sun Pharma, Cadila etc) as existing markets expand (less regulated markets Viz. Thailand,
Cambodia, Malaysia, Pakistan, Vietnam, Ukraine, Belarus and Moldova, third largest in
Azerbaijan and Kyrgyzstan), and new ones open up (Iran, Saudi Arabia, China, Georgia , South
Africa etc), for high quality, affordable generic drugs in the highly lucrative markets.

The aforesaid companies have boosted their capacities, as demand continues to grow for the
innovative products offered the fields of antiretroviral therapy (Cipla), oncology generics (Cipla
and Dr. Reddys), antibiotic therapy (Micro Labs, Santha Biotech), insulins and vaccines
(Biocon, Serum Institute of India) and other hormonal drugs being offered; India manufactures
more than 96 generic group drugs offered to the global market.
 A 100% foreign direct investment, liberalisation of rules related to foreign technology
agreements as well as of the import regime, the introduction of Schedule-M, Schedule-T and
revision of Schedule-Y (to permit conduct of phase II-IV clinical trials in India) of The Drugs
and Cosmetics Act, 1940 had put upon a great impulse to the industry. The creation of
PHARMEXCIL as well as a National Pharmaceuticals Policy with the objective of, among other
things, rendering India as a preferred global destination for pharmaceutical R&D and
manufacturing followed by exporting the drugs has proved successful [5]. The recent creation of a
separate Department of Pharmaceuticals is only a manifestation of the importance government
of India has accorded to the sector.

CURRENT SCENARIO

The industry has grown from a humble $333.33 Mn turnover in 1980 to approximately $22.33
Bn by Sep 2009 and the country now ranks 3rd in terms of volume of production (10 per cent of
global share) and 14th by value. Exports ($12 Bn) of pharmaceuticals have consistently
outstripped imports ($6.5 Bn) [Economic Survey of India, 2010].

Currently India exports full basket of pharmaceutical products comprising intermediates, APIs,
Finished Dosage Combinations (FDCs), biopharmaceuticals, vaccines, clinical services, etc., to
various parts of the world. India is among the top 20 pharmaceutical exporters world-wide and
with the largest number of US FDA inspected plants (119 plants), outside the USA. Various
other agencies like MHRA (Medicines & Healthcare Regulatory Agency) UK, MCC (Medicines
Control Council) South Africa, TGA (Therapeutic Goods Administration) Australia, HPB
(Health Promotion Board) Canada have approved scores of plants in India [2]. Notably the global
pharmaceutical markets are estimated at $773.1 Bn (2008) growing at 4.8% over the previous
years.

Broadly, Asia is the largest importing region from India with a share of 30% of India's
pharmaceutical exports followed by Europe (24%) and North America (21%). During 2008-09
United States of America had been the top export destination with a share of approx 18% in
India's pharmaceutical exports valued at $1.55Bn. followed by Russia‟s valued at $0.33 Bn. with
a share of 3.84%, Germany ($0.31Bn. and 3.65%), Austria ($0.31 Bn and 3.58%) and UK
($0.27 Bn and 3.12%). In the year 2008-09, 58% of India's pharmaceutical exports comprised
formulations valued at $5.03 Bn followed by Bulk Drugs (48%) valued at $3.6 Bn and herbals
exports 3% valued at $251 Mn [2].

According to the CII (Confederation of Indian Industries), there are around 80,000 small-scale
units engaged in the areas of pharmaceutical formulations and bulk drugs. The present decade
has opened up newer opportunities for the SMEs (Small- to Medium-Sized Enterprise) in the
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field of CRAMS (Contract Research and Manufacturing Services), Clinical trials etc. A number
 of them have received approvals from international regulatory authorities mentioned below for
facilities and expertise; they can avail opportunities in CRAMs (e.g. Macleods Pharmaceuticals,
Micro Labs, Alkem Ltd, Hetero Drugs, Ankur Drugs etc). The product launches may help SMEs
to secure manufacturing contracts and opportunities to supply Active Pharmaceutical Ingredients
(APIs) and allied chemicals. The German Technical Cooperation has entered into a
memorandum of understanding (MoU) with the Drugs & Pharmaceuticals Manufacturers
Association (DPMA) of India to help pharma-SMEs that need interventions to brave the intense
competition. India government has been making every attempt to support SMEs through several
incentives. One such effort is the development of SMEs clusters in various parts of the country
(e.g. Indore- SEZ, Baddi- Export Promotion Industrial Park- EPIP).

The uncertainty in the pricing policy (governed by the National Pharmaceutical Pricing
Committee and the Drug Price Control Order 1995) of drugs imposed by the Indian government
at various levels of the industry on a number of essential drugs despite an increase in the price of
raw material has taken a toll on the bottom lines of manufacturing companies, thereby
hampering its R&D initiatives. A significant boost in certain critical areas such as manufacturing
regulatory infrastructure (The Drugs and Cosmetics Act 1940 recent amendments in Schedule
M, guiding the Good Manufacturing Practices have come in line with the standards of USFDA
regulations) and new drug discovery programme (Schedule Y of the act), the improvised Indian
Pharmacopoeial Compendia (in quasi equal standards to the United States Pharmacopoeia and
the British Pharmacopoeia) can place India among the top pharmaceutical industries in the
world.

CRITICAL ANALYSIS OF THE INDUSTRY (EXPORT TERMS)

Potential and Opportunity:

Post liberalization, the pharmaceutical export industry has had to reorganize itself to keep pace
with the economic reforms that were taken on by India, the abolition of industrial licensing as
well as the international export commitments mainly the bilaterals and agreements and/or pacts
signed e.g. India-Ghana, India-Peru, India-Russia, India-Kenya, India-South Africa, India-
Singapore, India-Mongolia, India-Japan EPA, other comprehensive treaties and joint workings
with almost all of the developing economies of the world for pharmaceuticals trade and
businesses, now has begun exploring the greener pastures of countries like African countries
(Nigeria, Kenya and various others etc), India-Japan EPA (Economic Partnership Agreement,
September 2010) would boost the industry as Japan is one of the global leaders in per capita
drug consumption i.e. more than $412 followed by Germany- $222 and USA- $191). India
exported $1.38 Bn worth drugs & Pharmaceutical to Asia (approx 19% of India‟s total pharma
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exports) and ASEAN countries accounted for $497.73 Mn (approx 36%) [6].
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 Aforesaid facts clearly imply that export opportunities are presenting themselves not only in
India's traditional wealthy client markets such as the U.S. and European Union nations but also
in emerging economies with vast populations such as Africa, South America, Asia, and Eastern
and Central Europe.

The country has achieved the distinction of providing healthcare at very low cost while
maintaining profitability. India has skilled scientists/technicians/management personnel at
affordable cost leading, as studied by BLS (Bureau of Labour Statistics) Hourly labour
compensation costs in India are among the lowest when compared with the 36 countries. In
2005, India‟s average hourly compensation cost for all employees in manufacturing ($0.91) was
approximately 3.1% of the level seen in the United States ($29.74) when measured in U.S.
[2]
Comparison of Cost Advantage in India (%)
Costs in the Western Countries (Taking) 100.0%
Production costs 50.0%
R&D Costs 12.5%
Clinical Trials Cost 10.0%
Source: Pharmexcil Research

The major factors driving the aforesaid growth include: huge cost advantages for the Western
pharmaceutical companies of up to 60-70%, favourable local regulatory conditions to promote
drug discovery, improved IP (Intellectual Property) protection after the introduction of TRIPS
(Trade-Related Aspects of Intellectual Property Rights) and compulsory licensing (such licenses
provide generics companies with restricted access to intellectual property in order to
manufacture generic versions of patented medicines in good faith of the country‟s health)[10],
skilled workforce and Western-equivalent research infrastructure owned by the Indian MNCs
(Multi National Companies) Viz Lupin, Cipla, Ranbaxy, Dr. Reddys Labs etc with well
equipped R&D labs with advanced imported technologies such as Nuclear magnetic resonance
(NMR), advanced Chromatography (HPLC- High Performance Liquid Chromatography, Gas
Chromatography etc) based equipments, Infra Red (IR) Spectroscopes etc, Clinical Research
facilities and tie-ups with major clinical services providers Viz. Clingene (Biocon), Quintiles,
and various other Clinical Research Organizations (CROs) for their outsourced researches and
clinical trials.

Low cost of innovation, cheaper costs of remunerations compared to other countries and quality
knowledge dissemination by institutions like Council of Scientific and Industrial Research
(CSIR), National Research Development Corporation, Central Drug Standard Control
Organization (CDSCO), Indian Council of Medical Research (ICMR), Indian Drug
Manufacturers Association (IDMA) and various others, during the last few years there has been
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phenomenal growth in the number of institutions imparting pharmaceutical education and

 combined admission capacity of the courses is about 61,000 seats scored through 500 plus
colleges (teaching 2 years Diploma, 4 years Graduation, 2 years Post Graduation and 5 Plus
years in PhD etc regulated jointly by Pharmacy Council of India and All India Council of
Technical Education).

Expertise from institutions Viz. CDRI (Central Drug Research Institute), IISc (Indian Institute of
Science), NIPER (National Institute of Pharmaceutical Education and Research), NRDC
(National Research Development Corporation) and various others, R&D capabilities, Science-
Technology infrastructure and industry during the last five decades have also selectively
developed to extraordinary levels as compared to that in most developing nations impelling
greatly to the exports sector of the industry.

Reduced pro-manufacturing, CAPEX costs by duty exemption upto zero percent by EPCG
scheme of Foreign Trade Policy) and expenditure to run cGMP compliance facilities and high
quality documentation and process understanding is grossly being supported by the Government
(DGFT & Deptt. Of Commerce) by the promotional policies Viz. EPCG (Export Promotion
Capital Goods), DEPB (Duty Entitlement Pass Book), MAI (Market Access Initiative, financial
assistance is also provided for contesting litigation(s) in the foreign country concerning
restrictions/anti dumping duties etc. on particular product(s) of Indian origin), MDA (Marketing
Development Assistance) DGFT (Directorate General of Foreign Trade) has been supportive to
the exporters by leveraging the zero duty benefits and schemes of the Foreign Trade Policy
2009-2014, revised 2010.

To promote pharmaceutical exports PHARMEXCIL-Hyderabad (works closely with the

Department of Commerce and the Export Promotion Cell in the Department of Chemicals and
Petrochemicals to undertake activities such as promoting exports, preparing country-profiles,
assessing export potential across the countries and to have greater degree of interaction
internationally), EXIM Bank (indulged in leveraging cheaper loans to the exporters and also
does contract rating of importers), the creation of Pharma Parks, SEZs‟ (Special Economic
Zones) and EPZs‟ (Export Processing Zones) dedicated to pharmaceutical manufacturers, export
dedicated SEZs‟ e.g. Indore EPZ, Pune SEZ, Vizag Pharma City (largest) etc have helped
promoting the exports. The tax environment of India in SEZ‟s the corporate tax front, units set
up in SEZs enjoy 100% income tax exemption on export profits in the first five years of
operation, 50% exemption for the next five years, and 50% exemption on the reinvested export
profits in the following five years. Companies located in SEZ also benefit from various Indirect
Tax benefits such as exemption from payment of Customs Duty; Excise Duty; Central Sales Tax
and refund and exemption of Service Tax. The bottom line is that India Govt. and EPCs (Export
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Promotion Council) offer attractive tax benefits and reimbursements for pharma companies and
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 reductions in customs duties which also help global manufacturers compete in the price-
sensitive environment.

The market size globally available for Indian exporter companies Viz. of USA is estimated at
$295-305 Bn (with an estimated growth rate of 4-5%) followed by „Top 5 European countries‟
(EU-5) with an estimated market size of $135-145 Bn (growing at 4-5%), emerging markets
Viz., Brazil, China, Mexico, Russia, South Korea and Turkey with an estimated market size of
$85-90 Bn. (growing at 12-13%) and Japan with an estimated market size of $64-68 Bn
(growing at 1-2%). The pharmaceutical market size of the rest of the world (ROW) is estimated
at $125-135 Bn which is estimated to grow at 7-8% in the coming years. Approximately $123
Bn of generic products are at risk (subject to patent renewal approvals by regulators) of losing
patents by 2012. Even at a conservative estimate of 15% opportunity this translates into $18.4
Bn opportunity for India [2]. However the figures need to be appropriately deflated since Indian
opportunity will lie in generics equivalent of branded drugs, which would be cheaper.

Protected patent regime after the TRIPS (commitments taken by India under the WTO
Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) forced a change in
The Patents Act regime in 2005, bringing to the fore a major challenge for the country‟s
pharmaceutical industry to comply with the TRIPS guidelines, the Product patent was
reintroduced after 35 years again) provided a safe platform on which pharmaceutical exporters
has helped them grow in India and also meet the need for increased production rather than
relying on imports, which was once critical for the infant Indian national economy [7]. Fact of the
matter per se is that the Indian manufacturers are still not bale to encash the opportunity due to
the lack of investments and government promotion in the Pharmaceuticals research (only a
handful of government research promotion and development institutions exist as mentioned
above).

Ageing populations of the US, China & European economies leading to the more and more
expenditure on medicines and appreciation in the per capita consumption value of the drug
products with cheaper rates, which is India forte (an astounding e.g.: In India, 100 tablets of
Zinetac, a drug used in common peptic ulcers cost $2 while, in Chile, same costs as much as $
196).

Challenges:

Low investments by Indian drug makers (e.g. Ranbaxy maximum 12.6%) in innovative R&D
compared to the Global players investing upto 20% (Eli Lilly maximum 20%) of their sales
revenue continue to be a major weakness of Indian pharmaceutical exporters lacking capacities
for filing more and more ANDA‟s and penetrating into the generic markets globally only and
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not in the Novel Drug Delivery Systems.

 The diffused nature of the Indian pharmaceutical industry has also been a concern that only
about 20 to 30 companies (Viz. Ranbaxy, Cipla, Dr Reddy's Labs, Lupin, Sun Pharmaceuticals,
Nicholas Piramal, Zydus Cadila, Biocon, Glenmark Pharmaceuticals, Wockhardt Ltd, Torrent,
[2]
Biocon, Matrix Labs etc. are large enough to bear the transactions costs associated with
sustained exports to and compliance with entry regulations of the developed markets which
scores to crores.

Non Tariff Measures by countries have been one of the bothering concerns, e.g. insistence on
completing long process (e.g. average 3-4 years for a ANDA Stability Batch, for generics, till
the Product‟s launch after approval, Novel Drug Delivery Systems call for average 10-12 years
for a drug development till launch after NDA filing and approvals) for registration to the
international (country specific) quality auditing agencies such as the USFDA (USA), MHRA
(EU), TGA (Australia), EMEA (EU), MOH- Thailand, China SFDA (State Food Drug
Administration), GCC (Gulf Cooperation Council), MCC (South Africa), Canada FDA, MOH
(Ministry of Health)- Mexico, etc. and the mandates on allowing imports of only those drugs
which are registered in some developed countries etc. The multiplicity of drug approval agencies
in various countries has raised drug registration costs and site inspections costs. These
regulatory agencies insist on pharmaceutical standards & quality procedures of their country,
which often varies from country to country and ask for discrete quality audits to be conducted by
their agencies independently.

Majority of Indian SMEs lack the ability to compete with MNCs for New Drug Discovery,
research and commercialization of molecules on a worldwide basis due to lack of monetary
resources compared to the risk associated (research costs, patent litigations post-discovery,
registration costs etc).

Indian manufacturers are prevented from bidding for government contracts as US permits
bidders only from countries that are signatories to WTO Agreement on Government
Procurement [2]. The have to submit separate state level applications for marketing drugs in the
United States as there is no nation-wide system of application even where FDA approval has
been received

Indian firms have often been accused of making counterfeit drugs by drug makers in the US and
European markets unanimously cited to be allegations used to erect non-tariff measures for
restricting competition from Indian companies who sell their low-cost drugs in the developed
markets. As per a health ministry study, about 0.3% of drugs in with „Made in India‟ tag are
spurious, while about 5% are counterfeit and not actually „Made in India‟. The Supply of
spurious drugs, fake drugs with “Made in India” claims e.g. cases of such exports from China
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containing Indian Manufactured tags being caught in Nigeria.

 In 2006, the USA placed India on the Special 301 Priority Watch List for not granting monopoly
rights for clinical trial data (data exclusivity) that would give the patent holder five years of
marketing exclusivity. Some pharmaceutical companies also pressured the Indian government.
This occurred even though India‟s current law is TRIPS compliant. It allows the Indian drug
regulatory authority to use the patent holder‟s clinical data to approve generic medicines rapidly.
Implementing data exclusivity would reduce generic competition and devastate the ability of
poor Indians to access affordable medicines [10].

FUTURE TRENDS

All in all Indian drug sales are expected to rise by an annual 8% to nearly $26.59 Bn between
2006 and 2015[3]. To be sure, this growth rate is higher than that seen for Germany (+5% p.a.)
and the entire world (+6%). Nonetheless, India‟s share in world pharmaceutical sales will rise
only marginally to a good 2%.

It is likely that many of the Indian small companies will merge or disappear from the market
altogether. The Commerce Ministry is mulling to formulate a policy on mergers and acquisitions
by multinationals in the pharma sector e.g. Ranbaxy by Daichi Sankyo Japan, Dabur Pharma by
Fresenius Kabi AG Germany Piramal Healthcare by Abbott Labs USA.

In the coming years, opening up of US generics market and antiretroviral therapy of AIDS
market in Africa will boost exports since in the absence of a medical support. Each day, 6,000
Africans die from AIDS. Each day, an additional 11,000 are infected as per “World Watch Issue
Alert”, 31 October 2000.

The Pharma market in Thailand is fastest growing in Asia-Pacific region. It has a strong pharma
Industry producing mostly generics. It depends on imports for patented drugs. The market is
expected to be worth US $1 .82 billion by 2012 [6].

Contributions from unconventional markets in Latin America, Australia and the emerging
markets in the Middle East and African Region and increased Abbreviated New Drug
Applications (ANDAs) approvals in the US would lead the industry to shine in the upcoming
days [4], SMEs will benefit from boosted contract production for western firms as gradually they
would learn to comply the standards of the developed nations e.g. Dishman and GVK-
Biosciences undertake contract research for western companies, Sun pharma manufacturing for
Eli Lilly. Acquisition of foreign companies will lead to a strong increase in foreign production
by Indian manufacturers, which will have a dampening effect on exports.

SUMMARY

The global state of affairs direct us to the fact that tackles the non tariff measures [1], the strict
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quality regulations to exports of pharma products in various countries need to be addressed

 through consistent efforts and greater interaction with the concerned agencies of the choicest
markets for the exporters. The Indian companies are putting their act together to tap the generic
drugs markets in the regulated high margin markets of the developed countries. The US market
remains to be the most lucrative market for the Indian companies led by its market size and the
intensity of blockbuster drugs going off patent [4].

Based on the retrospective data USA, Germany, Russia, UK, China, Brazil, Canada, South
Africa, Nigeria, Netherlands, Spain, Turkey, Ukraine, Viet Nam, Israel, Italy, Mexico, UAE,
Singapore, Iran had been potential importers of Indian Drugs. Countries like South Africa,
Israel, Turkey, Kenya, Singapore, UK, China, Russia, Italy and Vietnam etc have been identified
to be potential prospective markets with high growth rates of imports from India [2& 3]. Africa,
Latin America, ASEAN and CIS countries with huge demands deem them to be put in the
category of focus countries as these are the emerging markets and have a huge potential with
day in day out incremental growth rates of per capita drugs consumptions supported by treaties
like SAFTA (with SAARC), treaties with GCC, EU, Japan, Korea etc.

If India is able to take a 10% slice in the emerging market in developed countries it will open an
opportunity of around $50 Bn at current prices of patented and branded drugs and shall be able
to surpass the major exporters of the world.

REFERENCES

1) Non Tariff Measures:

(http://www.commerce.nic.in/trade/international_ntm.asp?id=4&trade=i)
2) Report of the Task Force on Pharmaceuticals 25 February 2009:
(http://commerce.nic.in/WhatsNew/whatsnew_detail.asp?id=17)
3) Mc Kinsey Report on Indian Pharma Industry 2015:
(http://bw.businessworld.in/PDF_upload/Indian_Pharma.pdf)
4) Overview of Indian Pharma Industry:
(http://www.cci.in/pdf/surveys_reports/indias_pharmaceutical_industry.pdf)
5) The introduction of Pharmaceutical patents in India- NBER Working Paper:
(http://www.nber.org/papers/w6366)
6) Pharmaceuticals Secretary: Third round up of Developments in Pharmaceuticals Sector,
July 2009:
(http://pharmaceuticals.gov.in/Round%20Up-Pharma-310709-NIC.pdf)
7) TRIPS: India - Patent Protection for Pharmaceuticals:
(http://www.pharmainfo.net/reviews/trips-india-patent-protection-pharmaceuticals)
8) Oxfam India Comments on DIPP Paper on Compulsory Licensing- September 30th, 2010:
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(www.dipp.nic.in/ipr.../Feedback_OxfamIndia_30September2010.pdf)