IBoK Pharma Sector

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Pharmaceutical Sector Report 2009

Investment Bank of Kozhikode, IIM Kozhikode

S e p t e m

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Junior AnalystsPraneeth Jagarapu

Sushant Chaturvedi

Ravi Rambhatla

P. Chetan Krishna

Senior Analyst

Pallav Chaturvedi





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Table of Contents Executive Summary ....................................................................................................................................... 5

PHARMA INDUSTRY OVERVIEW:‐ ................................................................................................................. 6

REGULATORY ASPECTS OF INDIA .................................................................................................................. 7

Overview ................................................................................................................................................... 7

Importing Drugs In To India .................................................................................................................. 7

Entry through joint venture/subsidiary ................................................................................................ 7

The drugs price control order (DPCO), 1995 ......................................................................................... 7

Pricing Regulations ................................................................................................................................ 7

Post‐2005

Period

...................................................................................................................................

8

Tariff Structure ...................................................................................................................................... 8

Sales Tax ................................................................................................................................................ 8

Emerging Markets: China ............................................................................................................................. 8

Segmentation: ............................................................................................................................................. 10

Market Segmentation ............................................................................................................................. 10

Macro Economic Forces: ............................................................................................................................. 11

Different Economic Population: .............................................................................................................. 11

Rural Vs Urban: ....................................................................................................................................... 11

Male Vs Female: ...................................................................................................................................... 12

GDP & GDP Growth: ................................................................................................................................ 12

Exchange Rate & Inflation: ...................................................................................................................... 13

Consumer Spending On Health: .............................................................................................................. 13

The rise of the middle class ..................................................................................................................... 14

Growth of households by disposable income level: 2005‐2009 ............................................................. 14

Indian pharmaceutical

Market

....................................................................................................................

15

Turnover Years: ....................................................................................................................................... 15

Import/Export ......................................................................................................................................... 15

Exports of Pharmaceutical Products from India (1980‐1981 to 2004‐2005) ...................................... 16

Imports .................................................................................................................................................... 16

Exports .................................................................................................................................................... 17

SWOT Analysis............................................................................................................................................. 19





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Porter’s Five Forces Model ......................................................................................................................... 20

Regulatory Environment in India ................................................................................................................ 22

Pharmaceutical Regulation ..................................................................................................................... 22

National Pharmaceuticals Policy 2006 .................................................................................................... 23

Pharmaceutical Registration ................................................................................................................... 25

Pricing...................................................................................................................................................... 26

IP Regime ................................................................................................................................................ 27

Table: History of the Indian Patent System ........................................................................................ 27

Research and Development .................................................................................................................... 28

New Millennium

Indian

Technology

Leadership

Initiative

.................................................................

30

Indian Council of Medical Research .................................................................................................... 30

Central Research Institute, Kasauli ..................................................................................................... 31

Central Drug Research Institute, Lucknow .......................................................................................... 31

Central Council for Research in Unani Medicine ................................................................................ 31

Central Council for Research in Ayurveda and Siddha ........................................................................ 31

Central Council for Research in Homeopathy ..................................................................................... 31

Traditional Indian Medicines .............................................................................................................. 31

Key Players .................................................................................................................................................. 32

Ranbaxy Laboratory Ltd .......................................................................................................................... 34

Problems ............................................................................................................................................. 35

Cipla ........................................................................................................................................................ 36

Recent Developments ................................................................................................................................. 37

Alliances ................................................................................................................................................ 37

Regulatory Norms ................................................................................................................................ 37

Recovery from Recession ...................................................................................................................

37

M & A ...................................................................................................................................................... 37

New Launch ............................................................................................................................................. 37

Company Performances in Jun 2009: ............................................................................................... 37

Budget Provision .................................................................................................................................. 38

Future Outlook: ....................................................................................................................................... 39





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Executive Summary

The Indian Pharmaceutical Industry with a market value of USD 12 billion is attracting

more foreign capital from abroad than ever before. With India being increasingly seen

as a destination for outsourcing research and development activities, Indian

Pharmaceutical Industry has come a great step forward from being a mere producer of

generics. The importance of the Indian market cannot be more emphasized than the

acquisition of Ranbaxy by the Japanese major Daiichi. The drivers for growth in the

coming years will be contract manufacturing and contract research which are expected

to reach USD 30 billion and USD 10 billion respectively. Some of the cutting edge

research is being conducted in Indian Pharmaceutical Labs the effects of which will be

seen only as time gradually passes by. With a burgeoning domestic population and

increasing healthcare infrastructure put into place by both the Government and private

players the pharmaceutical industry is set to get a big boost.





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PHARMA INDUSTRY OVERVIEW:-

Indian pharmaceutical industry has market value of US $12 billion and growing

annually at a rate of 23% in last 5 years

Source: Industry Data, Insight

Over the last two years the pharmaceutical market value has increased to about

US $ 355 million because of the launch of new products

In 2008 Indian pharmaceutical companies captured around 70% of the domestic

market.

Contract manufacturing is estimated to grow to US $30billion, whereas contract

research is estimated to reach US $6-10 billion.

Approvals given by Foods and Drugs Administration (FDA) and ANDA

(Abbreviated New Drug Application) have played an important role in making

India a cost-effective and high quality product manufacturer. Major concerns for Global Pharmaceutical Industry is translated into opportunity

for IPI

Higher healthcare costs

Competition from generics

Patent expiries of blockbuster drugs

Drying R&D pipelines & increasing R&D costs

‐

2

4

6

8

10

12

14

‐

10

20

30

40

50

60

70

80

2004 2005 2006 2007 2008 2009

O p e r a t i n g P r o f i t I n $ B i l l i o n

R e v e n u e I n $

B i l l i o n

YEAR

Pharmaceutical Industry In India





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REGULATORY ASPECTS OF INDIA

Overview

Over three decades ago, Indian government introduced price controls with the

objective of making medicines affordable.

India is a signatory to GATT and is committed to the implementation of TRIPS.

The country introduced product patents from 2005 onwards.

Introduction of product patents without relaxing price controls will hurt the

competitiveness of the Indian companies in the long term.

FDI limit through automatic route has been raised from 51 per cent to 74 per cent

in March 2000 and further to 100 per cent in May 2001.

A foreign pharmaceutical player can enter Indian market through following ways:

Importing Drugs In To India

Imports constitute only 5 per cent of the total market.

Foreign companies cannot promote subsidiaries for marketing their products in

India.

Entry through joint venture/subsidiary

Foreign company is allowed to invest up to 100 per cent in any new or

existing pharmaceuticals company in India under automatic approval route. In

such cases, RBI needs to be informed only after the capital has been remittedinto India.

The drugs price control order (DPCO), 1995

The order lists price controlled drugs, procedures for determining drug prices,

method of implementing prices fixed by Government and penalties for

contravening provisions among other things.

Now only 74 out of 500 commonly used bulk drugs are under statutory price

control.

Prices excluding local taxes of scheduled bulk drugs are fixed to provide a post-

tax return of 14 per cent on net worth or a 22 percent return on capital employed

Pricing Regulations

Price Approval is given by NPPA.

NPPA fixes the ceiling price of scheduled drugs.

Manufacturer must file a price list of all the prices fixed with the State Drug

Controllers, dealers and Government along with NPPA official price notification

reference.

Packages of formulations (the outer container) must bear the retail price (whether

fixed by NPPA or not).





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Post-2005 Period

January 1, 2000, companies were granted Exclusive Marketing Rights (EMRs)

for their products that have been patented in any other WTO signatory country. Patents of outside companies will be protected through EMR in India. EMR will

not be given for items based on Indian system of medicine (Ayurvedic or Unani)

or if the items are already in the public domain.

Indian residents are permitted to apply for patent abroad without permission of

the Controller.

Tariff Structure

Life-saving drugs are allowed at zero tariffs.

Bulk drug, intermediaries and formulation imports attract a basic customs duty of

25 per cent To encourage research, the excise duty on drugs and materials for clinical trials

has been exempt from excise duty, which had hitherto been levied at 16 per cent.

Basic customs tariff rate now ranges from 0 to 40 per cent plus additional duty of

2 per cent.

Sales Tax

The rate of sales tax is same for both Indian and imported items.

Sales and local taxes vary from 4 to 10 per cent of the price depending on item

and location

Emerging Markets: China

Regulatory Environment in Different Periods:

1979 No compulsion to conduct systematic scientific experiments on new drugs

Easy approval to market a drug from Health Department for Chinese companies

1999 Requires adequate preclinical data to verify the drug’s safety and to justify the

commencement of clinical trials by sponsors of New Drug Applications

Providing 7.5 years of marketing exclusivity for drugs that were under patent

protection from 1986 to 1992 in the United States and other major Western

countries

2001 China gained membership in the World Trade Organization (WTO) on December

11, 2001





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Requirement of premarket testing and approval for new drugs, and prohibits drug

adulteration

New Chemical Entity (NCE) Classification

Class1 NCE NCEs that have not been marketed in the world

Class2 NCE New drugs that have been marketed abroad, but are not part of foreign

pharmacopoeia and have not been imported into China

Class3 NCE New combinations of already approved drugs

Class4 NCE NCEs that have been listed in the foreign pharmacopoeia of developed

countries/regions or have previously been imported

New dosage forms of approved compounds, or New routes of administration for

approved compounds

Class5 NCE New indications for approved NCEs





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Segmentation:

Market Segmentation

Sales of Anti Infective drugs account for 19.5% of the market.

In comparison, sales of alimentary/metabolism pharmaceuticals account for 13.8% of

the market’s revenue.

Source: Insight

Source: Insight

19%

14%

12%

10%6%

39%

Share Of different Categories

Anti Infectives

Alimentary / Metabolism

Cardiovascular

Respiratory

Central Nervous System

55%

18%

11%

8%

8%

Market Share of Counties

Japan

China

Rest Of Asia Specific

South Korea

India



Investm

Macr

Differ

Source: E Rural

Source: E

2,0

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ment Bank o

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Investm

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Investm

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The rise of the middle class

The rapid expansion of the Indian middle class offers great opportunities for

business, particularly those operating in the retail sector.

Consumer behavior is adapting in line with rising income

Spending on entertainment and healthcare will increase significantly

The middle class will become more tech savvy, and as young educated

consumers enter the fray, the use of internet and mobile phones will extend to

many more purposes.

Growth of

households

by

disposable

income

level:

2005

-2009

Source:Euromonitor International from national statistics

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1995 2000 2002 2004 2006 2007

P o p u

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YEAR

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US $ 500 ‐ US $ 1750



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0

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Investm

Source :

of India.

Expor

Impo

000 US

Raw M

Semi –

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Annual Repo

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aterials

finished me

of Kozhikod

rt 2003-04,

maceutic

dicaments

Pha

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ept. of Chem

l Produc

2003

476,727

20,200

mace

hikode

icals and Pet

s from In

2004

458,403

22,771

tical S

Imports

ochemicals,

dia (1980

2005

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26,864

ector

of Pharm India

inistry of Ch

1981 to 2

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.





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Finished medicaments 115,957 175,063 295,667 433,807 481,609

612884 656237 1010208 1271251 1586562

Exports

000 US $ 2003 2004 2005 2006 2007

Raw Materials 528,677 448,144 553,748 679,375 869,100

Semi

–

finished

medicaments

214,783

342,531

207,162

303,273

497,087

Finished medicaments 1,266,994 1,479,315 2,107,372 2,615,766 3,074,888

2,010,454 2,269,990 2,868,282 3,598,414 4,441,075





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‐

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

12,00,000

2003 2004 2005 2006 2007

I n ' 0 0 0 U S $

YEAR

Import

Semi – finished

medicaments

Raw Materials

0

5,00,000

10,00,000

15,00,00020,00,000

25,00,000

30,00,000

35,00,000

40,00,000

45,00,000

50,00,000

2003 2004 2005 2006 2007

I n ' 0

0 0 U S $

YEAR

Exports

Finished medicaments

Semi – finished

medicaments

Raw Materials





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SWOT Analysis

Porters Five Forces

Buyer Power Supplier Power

Porter’s Five Forces

Strength Massive pharma market growth

potential, highly reliant on

modernization and reform

Strong local manufacturing sector

with leading

domestic

players

establishing a notable international

presence

Cheap but skilled English‐speaking

labor force

Long‐established trade patterns with

Western Europe and the US

Swift market approval times

Weakness Among the least‐developed pharma

markets in Asia with extremely low

per capita consumption

Opaque and biased government drug

pricing and reimbursement policy

Underdeveloped healthcare

infrastructure

Vast regional disparities in healthcare

coverage

Lack of comprehensive drug

reimbursement

many multinationals already selling

their products at reduced prices

Opportunity

Robust generic & OTC drugmarket growth

Underdeveloped market forchronic illnesses and diagnostics

The recognition of pharmaceuticalpatents from January 2005

Increasing R &D by domestic firms Global expansion of larger local

companies Increased public funding for

disease eradication program

Political changes in the US topromote use of Indian generics

Threats

Failure to properly enforce WorldTrade Organization (WTO)compliant patent legislation fordrugs

Considerable counterfeit drugindustry

Government failure to revise itsopaque and discriminatory pricingand reimbursement policy

Need for overhaul of healthcaredelivery structures hampering

better access to medicines India’s patent laws threatened by

litigation

Positive Negative



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S e p t e m

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Regulatory Environment in India

Pharmaceutical Regulation

The Indian government began to liberalize the pharmaceutical sector in 1985, since

when the scope of industrial licensing has been reduced and the reservation of certain

drugs for manufacture by the public sector has been abolished, allowing competition

from the private sector, including imports.

The regulatory body responsible for the control of drugs in India is the Drug Standard

Control Administration under the Department of Health. Control is exercised at both

national and state level through various organizations. At national level, the Central

Drugs Standard Control Organization (CDSCO) has the following main functions:

Control the quality of imported drugs

Co-ordinate activities of States/Union Territories Drug Control Authorities and

advise on uniform administration of the Drugs and Cosmetics Act

Approve new drugs

Set out drug regulations and standards

Act as Central License Approving Authority with respect to blood and blood

products, intravenous fluids, sera and vaccines.

Other central organizations under Ministry of Health control include the following:

Central Drugs Laboratory, Calcutta - responsible for testing samples of imported

drugs, acting as designated laboratory under the Drugs and Cosmetics Act, and

Government Analyst for 21 States/UTs and for samples referred by the Central

Drug Inspectors. Also supplies the reference standard of various drugs to

pharmaceutical manufacturers.

Central Indian Pharmacopoeia Laboratory, Ghaziabad - undertakes experimental

work relating to standards of drugs included in the Indian Pharmacopoeia and

functions as government analyst for eight states/UTs.

Central Drug Testing Laboratory, Chennai (Madras) - tests drug samples

received from Drug Inspectors from the Central Drugs Standard Control

Organisation, South Zone.

Central Drug Testing Laboratory, Mumbai (Bombay) - acts as Government

Analyst and assists the CDSCO in the analysis of drug formulations and

substances.





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Drugs Consultative Committee - statutory advisory body under Drugs and

Cosmetics Act. Issues licences to import biologicals and other special products.

Central Licence Approving Authority (CLAA) - Drugs Controller (India) examines

applications for licences with respect to blood banks, sera, vaccine and large

volume parenterals under the Drugs and Cosmetics Act.

Drugs Technical Advisory Board .

National Pharmaceuticals Policy 2006

In 2002, the Government of India formulated a new pharmaceutical policy, which set out

its strategy with respect to industrial licensing, foreign investment, foreign technology

agreements, imports, encouragement of R&D, pricing, quality aspects and

pharmaceutical education and training.

This policy could not, however, be implemented due to litigation and the previous policy

of 1994 remained in operation. Following recent developments, a new draft policy has

been drawn up: The National Pharmaceuticals Policy 2006. Part A of the draft policy

was published for circulation on 28thDecember 2005.

The key objectives of the policy are:

To facilitate higher levels of investment for increased production of good quality

medicines;

To promote research and development through the provision of suitable

incentives;

To enable the domestic industry to become competitive on the international

market by implementing established guidelines such cGMP, GLP and GCP;

To facilitate increased growth in the export of active pharmaceutical ingredients

and formulations by reducing barriers to international trade;

To develop India as the preferred global destination for pharmaceutical research

and development;

To facilitate the implementation of India’s health policy.





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Among the new initiatives of the draft policy in the strengthening of pharmaceutical

regulation, bearing in mind the comprehensive recommendations of the Mashelkar

Committee in 2003 and the government task force which was set up to ‘explore optionsother than price control’ for making life saving drugs available at a ‘reasonable level’. An

independent autonomous body known as the National Drug

Authority would be set up in place of the Central Drugs Standard Control Organization

(CDSCO). In addition, a number of the provisions of the Drugs and Cosmetics Act, 1940

would be amended to increase the penalties for various offences, particularly sub-

standard drugs. A bill has been introduced in parliament to this effect. In the longer

term, the proposal of the Task Force to merge the NPPA and the NDA would be

considered in the form of a National Authority of Drugs and Therapeutics, which would

lead to an integrated regulatory system.

Following the introduction of product patents in 2005, some modernization of India’s

Patent Office has been undertaken and further improvements are proposed, including

training, an increase in the number of patent examiners, full computerization for greater

transparency and convenience, the introduction of electronic filing and the creation of an

intellectual property cell within the Department of Chemical and Petrochemicals.

Other new initiatives outlined in the draft policy concern issues such as1:

Clinical and pre-clinical trials;

A public-private partnership programme to improve the availability of anti-cancerand anti-HIV drugs at reasonable prices;

Mandatory price negotiations for patented drugs introduced after 1st January

2005 before granting marketing approval;

Trade margins, excise duty and maximum retail prices;

A new Drug Price (Control) Order to replace the existing DPCO, 1995;

The enactment of a new Drugs and Therapeutics (Regulation) Act to exercise

more effective pricing monitoring and control;

The strengthening of the National Pharmaceutical Pricing Authority;

A bulk procurement system for the purchase of drugs by governmental agencies

along with lower prices for bulk purchases made by the government for public

health requirements;

The promotion of generic drugs;

The control of pharmaceutical brand names at national level rather than state

level to avoid the potential for incorrect prescribing and/or incorrect dispensing

due to similar brand names for different products;

The full text of the policy is available on the Department of Chemicals and Petrochemicals web site at

http://chemicals.nic.in





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Quality certification of pharmaceuticals;

Consumer awareness campaigns and various schemes to improve access to

medicines for the country’s poor including a new health scheme for families below the

poverty line;

human resources development in pharmaceutical sciences;

Fiscal incentives to encourage pharmaceutical research and development.

Pharmaceutical Registration

The import, manufacture, distribution and sale of drugs are regulated through the Drugs

and Cosmetics Act 1940, and its subsequent amendments. The Act set out the

framework for the operations of the Drugs Consultative Committee, which has members

representing the different states, and which advises central and state governments on

uniform implementation of the Act throughout India. Under the Act, the Drugs and

Cosmetics Rules were initially published in 1945 and have been amended

subsequently. The 1986 amendments to the Act enabled any person or consumer

association to arrange for the re-testing and analysis of a drug and prosecute firms for

the manufacture or sale of substandard drugs. Under the Drug Policy a National Drug

Authority was set up to monitor quality control.

Several amendments to the Drugs and Cosmetics Rules, 1945, were published by the

Ministry of Health and Family Welfare in 2001, including the following:

Drugs and Cosmetics (5th Amendment) Rules, 2001; amendments to Part IV of

the rules, under the new heading Import and Registration which came into force

on 1st January 2003. The amendment includes changes to the form and manner

of application for import licenses and registration certificates, the duration of

registration to a period of three years from the date of issue, the suspension and

cancellation of registration certificates, the standard for certain imported drugs

and rules governing the import of drugs by a government hospital or autonomousmedical institution for the treatment of patients.

Drugs and Cosmetics (8th Amendment) Rules, 2001; substitution of a new

Schedule M, Good Manufacturing Practices and Requirements of Premises,

Plant and Equipment for pharmaceutical Products, bringing GMP up to

international standards.





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Drugs and Cosmetics (9th Amendment) Rules, 2001; relates to applications for

permission to import or manufacture new drugs or undertake clinical trials. The

amended rule states that no new drug may be imported without permission fromthe licensing authority, an application for which attracts a fee of Rs.50,000.

Drugs and Cosmetics (10th Amendment) Rules, 2001; insertion of new

conditions relating to human blood and its components stored for transfusion.

Companies are required to obtain a license to manufacture pharmaceuticals in India, for

either domestic sale or export. Manufacturers with capital investments exceeding Rs.7.5

million must procure a license from the central government. Smaller companies are able

to obtain licenses from the state health authorities where manufacturing facilities are

located.

In order to register a new drug in India, a New Drug Application (NDA) must be

submitted to the regulatory authority (DCGI), to include the following:

Details of the drug’s regulatory status in other countries, such as approved,

marketed, or under Phase III trials, or reasons for withdrawal if applicable;

Restrictions of use in approved countries;

A Free Sale Certificate from the country of origin;

Results of clinical data based on approved protocol; Published data of confirmatory Phase III trials undertaken abroad;

Details of bioavailability and dissolution studies;

A sample of the marketing information, including draft labels and cartons and

inserts;

A sample of the pure drug substance along with testing protocol for analysis at

the Central

Drugs Laboratory (CDL) in Kolkata.

Pricing

The National Pharmaceutical Pricing Authority (NPPA), which was set up under the

administrative control of the Bureau of Industrial Costs and Prices, has limited authority

to fix, revise and rationalize pharmaceutical prices under the Drug Prices Control Order

(DPCO), 1995. The NPPA was expected to begin working in 1996, but was caught up in

a controversy over its precise role. The NPPA has, however, been officially operational

since August 1997.

The price of drugs is strictly controlled in India, although the number of controlled drugs

was reduced under the DPCO. Under the policy, price controls remained on 76 bulk





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drugs, although since then the database has been updated and, consequently, pricing

control remains on around 74 drugs. The profits of pharmaceutical companies were also

limited to 8-13% of pre-tax sales.Price controlled drugs are divided into two categories. Category I drugs are defined as

essential under the national health programme and are subject to more stringent rules

than those in category II. No manufacturers are exempt from price controls for category

I drugs. Category II contains all price controlled drugs which are not in category I.

Manufacturers that conduct in-house bulk drug R&D and develop a new drug delivery

system are exempt from price control for a period of ten years. In addition, new drugs

introduced into India for the first time, either by domestic or foreign firms, are exempt for

a period of five years.

IP Regime

A leading representative of WTO states that India must update its patent laws to

international standards to encourage and reward innovation. The change is virtually

inevitable as the reform will benefit domestic drug makers that are involved in R&D, as

well as foreign players. If changes are not undertaken, investment in the country will fall,

severely hampering economic development.

Table: History of the Indian Patent System

History of Indian Patent System

1856 The Act VI of 1856 on Protection of Inventions based on the British patentlaw of 1852. Certain exclusive privileges granted to inventors of newmanufacturers for a period of 14 years

1859 The Act modified as Act XV; patent monopolies called exclusive privileges(making, selling and using inventions in India and authorizing others to doso for 14 years from date of filing specification)

1872 The Patents & Designs Protection Act1883 The Protection of Inventions Act1888 Consolidated as the Inventions & Designs Act1911 The Indian Patents & Designs Act1972 The Patents Act (Act 39 of 1970) came into force on April 201999 On March 26, Patents (Amendment) Act (1999) came into force from

January 1 19952002 The Patents (Amendment) Act 2002 came into force From May 20 20032005 The Patents (Amendment) Act 2005





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At the heart of the issue is India’s controversial patent law, or Clause 3d. The

legislation is incompatible with Article 27 of the TRIPS agreement, which allows

the patentability of all kinds of inventions, including chemical and pharmaceuticalproducts, stating that ‘patents shall be available for any inventions, whether

products or processes, in all fields of technology patents shall be available and

patent rights enjoyable without discrimination as to the field of technology.’

However, under Clause 3d, ‘Salts, esters, ethers, polymorphs, metabolites, pure

form, particle size, isomers, mixtures of isomers, complexes, combinations and

other derivatives of known substances shall be considered to be the same

substance, unless they differ significantly in properties with regard to efficacy.’

The problem lies in the fact that assessment of ‘efficacy’ is almost impossible to

perform at the time when patent applications are filed, according to the

Association of the British Pharmaceutical Industry (ABPI).Therefore, innovation

through incremental steps, which is the way the vast majority of advances in

medical science have occurred, is stifled. Without protection for ‘tinkered’

compounds, further research will not happen.

Both domestic and overseas companies are campaigning for data protection;

Indian pharmaceutical companies, such as Ranbaxy and Dr Reddy’s, are

increasingly investing in R&D, and would also welcome better patent protection.

The proposal that is currently under review by the government has a number of

conditions, which essentially means that protection will start from the time a new

product is first registered in any country, whereas in other markets, dataprotection starts from the date that a specific country licenses the product. The

three-to-five-year term that is under review compares with five years in the US

and six to 10 years in European Union (EU) member states.

Research and Development

Research and development in India has traditionally differed significantly from that in

developed countries. Indian researchers have had to consider what will make a

difference ‘now’, rather than several years in the future. The immediate healthcare

needs of the people, combined with India’s lack of patent protection for pharmaceutical

products, resulted in R&D mainly being concentrated on new processes for producing

‘copy-cat’ versions of pharmaceutical products.

India is often cited as an attractive base for pharmaceutical R&D for a number of

reasons, not least of which its pool of highly skilled doctors and scientists, comparatively

low costs and large patient base.





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A recent study by the Confederation of Indian Industry (CII) concluded that India is well

placed to develop new drugs at a fraction of the cost of those in the developed world.

The CII study highlights the huge population and the prevalence of a wide range ofdiseases that offer potential for wide ranging clinical trials at around US$25 million,

compared to US$300-US$350 million in the USA.

In the Tenth Plan (2002-2007), the government estimated that Indian industry was

investing around 5% of turnover on R&D but that this may need to be augmented for the

industry to achieve its full potential.

The OPPI estimated industry R&D investment to be around Rs.6.6 billion (US$145

million) in 2003, equivalent to around 2% of sales, with some research-based

manufacturers investing a higher proportion. The major domestic manufacturers are

currently investing between 6% and 10% of turnover in R&D, some of which is on new

chemical entities as they strive to compete in the research-driven global marketplace.

Indian companies are beginning to conduct basic research and the biotech industry is

growing. Between 2002 and 2004, 13 Investigational New Drugs were cleared for

clinical trials. Domestic companies involved in novel drug discovery research include

Ranbaxy, Dr Reddy’s Research Foundation, Lupin, Nicholas Piramal, Orchid,

Wockhardt and Zydus Cadilla. It is still early days, however. As yet there is a shortage

of trained researchers and the facilities for early stage pre-clinical trials are not widely

available. Indian companies involved in novel drug discovery research are currentlyconducting Phase I and II trials abroad.

India’s real R&D strength lies in generics. India has a large pool of chemists

experienced in process R&D with strengths in lead optimization and chemical synthesis

capabilities. These skills, combined with expertise in mathematics and information

technology, and strong data management capabilities at significantly lower cost than in

the USA or EU make India an ideal base for Phase III clinical trials.

India’s large and diverse patient base allows faster recruitment, reducing the possibility

of costly delays. The country also has an established base of international contract

research organizations (CROs) and additional infrastructure resources such as the

central research laboratories.

Multinational companies are already beginning to make use of India’s R&D resources.

GlaxoSmithKline and Novartis have collaborative agreements with Indian

pharmaceutical companies, Ranbaxy and Dr Reddy’s Laboratories, respectively. Others

are using CROs and conducting wide scale clinical trials in India.

Over the next few years, the number of multinationals with major research centres in

India is likely to increase alongside extensive joint research collaborations.





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New Millennium Indian Technology Leadership Initiative

The New Millennium Indian Technology Leadership Initiative (NMITLI) was launched by

the Council of Scientific and Industrial Research (CSIR) in March 2001. The NMITLI

currently has 222 partners, of which 167 are public and 55 private, involved in 33

projects with an outlay of around Rs.2.2 billion(US$47 million). Projects are targeted at

diseases of the poor, traditional Indian medicines and niches based on Indian strengths.

One early success of note was the discovery of a new anti-tuberculosis molecule by

Lupin Laboratories and a team of 12 institutional partners, the first for forty years since

the discovery of rifampicin in 1963.

The discovery was made under the Latent M Tuberculosis: New targets, drug delivery

systems, bio-enhancers and therapeutics project, the objectives of which include the

improvement of the current treatment of tuberculosis, the provision of effective

treatment of latent tuberculosis infection and the improvement of the treatment of

patients with multi-drug resistance.

Indian Council of Medical Research

The Indian Council of Medical Research (ICMR), based in New Delhi, is the centralbody in India for the formulation, coordination and promotion of biomedical research and

is one of the oldest medical research bodies in the world.

In 1911, the Government of India set up the Indian Research Fund Association (IRFA)

to sponsor and coordinate medical research in India. Following independence, the IRFA

was expanded and renamed the Indian Council of Medical Research. The ICMR is

funded through the Ministry of Health & Family Welfare.

The ICMR’s research priorities coincide with the national health priorities: control and

management of communicable diseases, fertility control, maternal and child health,

control of nutritional disorders, developing alternative strategies for healthcare delivery,

containment within safety limits of environmental and occupational health problems;

research on major non-communicable diseases like cancer, cardiovascular diseases,

blindness, diabetes and other metabolic and haematological disorders; mental health

research and drug research (including traditional remedies).

The ICMR undertakes research through 21 permanent research institutes and centres

in various

locations around India and six regional medical research centres located in

Bhubaneswar, Dibrugarh,Port Blair, Jabalput, Jodhpur and Belgaum. In addition, the





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ICMR promotes research through a number of Centres for Advanced Research in

medical colleges, universities and institutes.

Central Research Institute, Kasauli

Established in 1905, the Institute’s principal R&D activities are in immunobiology.

Research into rabies vaccine in particular is conducted due to the need to phase out

sheep brain ARV. Other activities undertaken by the institute include large sale

production of vaccines and sera, quality control of immunobiologicals, and training.

Stability studies are also undertaken on products produced at the Institute and expert

advice is provided on the treatment and management of snake and dog bites.

Central Drug Research Institute, Lucknow

The Central Drug Research Institute has been the base for the government’s Anti-

fertility Research Scheme since 1968. The programme has led to the development of

several contraceptive products, including the world’s first weekly non-steroid oral

contraceptive, Centchroman . This is marketed as Saheli by Hindustan Latex Ltd and as

Centron by Torrent Pharmaceuticals.

Central Council for Research in Unani Medicine

Central Council for Research in Ayurveda and Siddha

Central Council for Research in Homeopathy

Traditional Indian Medicines

Indian Ayurvedic medicine is the oldest herbal medicine system in the world, founded

around 3000 BC,and is claimed to have influenced other major systems in China,

Greece, Egypt and Arabia. Although the oldest and most dominant, Ayurveda is not the

only system currently in use in India, with several systems competing in the same

market including Siddha (Hindu, like Ayurveda), Unani (Islamic) and local systems. The

market for Ayurvedic medicine is estimated to be US$500 million annually, making India

the third largest world market after western herbal markets and traditional Chinese

medicines, and growth is variously estimated between 10% and 30% per annum. In

2000, the government established a National Board for Medicinal Plants under the

auspices of the Ministry of Health and Family Welfare’s Department of Indian Systems

of Medicine (since renamed the Department of AYUSH), with responsibilities for policy

formulation and other relevant issues.





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Key Players

The key players in Indian pharmaceutical industry can be divided depending upon their

turnover and market capital. Though for Ranbaxy there is huge presence in both market

cap and turnover among top Indian companies, it doesn’t infer that it has a better

financial position. This you can see from the financial analysis done on the Ranbaxy for

the year 2008-09.

Source: Industry Data, Insight

Sun

Pharmaceutical

30%

Cipla Ltd.

26%

Dr. Reddy's

Laboratories

Ltd.

16%

Ranbaxy

14%

Glaxo

SmithKline

14%





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Source: Industry Data, Insight The Ranbaxy’s poor financial performance is due to its operating profit margin (OPM)

and net profit margin (NPM) which are 5.39% and -22.45% respectively. These values

are less than the industry average of 20.77% and 14.74% respectively. Also Dr.

Reddy’s labs also faced some loss during the 3-year period. This can be inferred from

the Compound Annual Gross Revenue (CAGR) of -30.96%, though they got profit of

Rs 560.9 Cr in this year.

Source: http://insight.religaretechnova.com/home.htm

Cipla Ltd.

27%

Ranbaxy

Laboratories

Ltd.

24%

Dr. Reddy's

Laboratories

Ltd.

21%

Lupin Ltd.

15%

Jubilant

Organosys Ltd.

13%

Revenues 3- Year PBDIT 3-Year PAT 3-Year

(Rs Cr.) CAGR(% ) (Rs Cr.) CAGR (% ) (Rs Cr.) CAGR (% )

Ranbaxy Labs. 4,652.04 5.68 342.41 -28.1 -1,044.80

Cipla 5,234.29 21.22 1,334.89 22.63 776.81 7.83

Dr. Reddy's Labs 3,999.50 2.82 1,007.70 -20.65 560.9 -30.96

Lupin Ltd. 2,954.70 21.98 577.86 23.99 416.97 17.49

Jubilant Organosys 2,428.53 22.86 565.58 34.33 260.74 6.13

Financial Comparison

Company Name

Company Name OPM(% ) Average 3-Years NPM Average 3-Years

Ranbaxy Labs. 5.39% 9.95% -22.45% 0.35%

Cipla 23.78% 22.37% 14.84% 16.75%

Dr. Reddy's Labs 18.95% 23.81% 14.02% 19.77%

Lupin Ltd. 19.43% 19.07% 14.11% 15.51%

Jubilant Organosys 22.03% 20.63% 10.73% 14.98%





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Ranbaxy Laboratory

Ltd

History

Ranbaxy has grown to become one of the largest pharmaceutical companies in

India.

It is one of the top ten generics companies in the world.

Ranbaxy Laboratories Ltd was established in 1961

It became public company in 1973.

In October 2008, Ranbaxy became a subsidiary of Daiichi Sankyo.

Ranbaxy will, however, continue to operate as an independent and autonomous

company.

Mission

Ranbaxy’s ambition is to be among the world’s top five generic companies by

2012.

Ranbaxy aims to achieve a significant income from proprietary prescription

products by 2012. To become a research based international pharmaceutical company.

Growth strategy

Global presence and constantly improving domestic portfolio

Ranbaxy has a presence in 49 countries

Have subsidiaries in US, UK, Germany, France, Italy, China, Brazil and South

Africa. The company exports its products to over 120 countries worldwide.

Ranbaxy has manufacturing facilities in 11 countries: India, Brazil, China, Ireland,

Japan, Malaysia, Nigeria, Romania, South Africa, the USA and Vietnam.





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Divisions Blue R 250 products branded generics.

Ranbaxy’s Pharma division focuses on the anti-infectives, nutritionals, pain

management, gastrointestinal and anti-allergy markets

Stancare division operates in the anti-bacterial markets, specifically quinolones

and cough preparations. Other divisions in India include

Crosslands (dermatology and orthopaedic products)

Rexcel (antibiotics, antihistamines and coldpreparations)

Solus (CNS)

Rextar (19 products in various therapeutic categories including antibiotics, painmanagement and anti-allergics)

Ranbaxy CV, launched in 2002, (cardiovascular and antidiabetics)and Super

specialty (anti-HIV, nephrology and oncology critical care).

Problems

Though it has huge revenues and market capital and stands among the top Indian

pharmaceutical companies. In the recent financial year 2008-09 it faced huge losses,

because of low OPM and NPM.

The US FDA has banned few drugs due to poor quality.

Year Type Company

2005 50:50 Joint Venture Nippon Chemiphar Co Ltd, Japan

2005 Acquisition Terapai, South Africa2006 Acquisition Mundagen S.p.A

2006 Alliance Zenotech Laboratories Ltd, Hyderabad, India

2006 Collabration Department of Science & Technology (DST), Govt of India

2006 68.4% Joint Venture Sonke PharmAcquisitioneuticAlliances(Proprietary) Ltd

2006 Acquisition Be‐Tabs, South Africa

2007 Acquisitionquired 13 Dermatology Products Bristol Myers Squibb, USA

2007 Collabration Avesthaegen, NDDR

2008 Acquisitionuired 38.4% stake in RANBAXY by Daiichi Sankyo, Japan





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Cipla

Cipla was established in 1935 as the Chemical, Industrial &

Pharmaceutical Laboratories and famously known as CIPLA

The company started exporting its products in 1964 and today, has

presence in about 180 countries across the globe

Exports grew by 30 per cent, exceeding Rs l0, 500 million

The modern company deals with ethical pharmaceuticals, OTCs, bulk

pharmaceuticals, technology (which generates around INR 4bn in annual

revenue) and animal health products.

Financial In 2007, the company posted US$836mn in total income, with net profit reaching

US$152mn. In the previous year, net profit was US$137mn, on total income ofover US$707mn

Financial Summary Y/E Mar Sales

Source: * Consensus broker estimates, Company, ENAM estimates

Sales PAT Consensus EPS Change P/E RoE RoCE EV/EBITDA DPS

Y/E Mar (Rs .mn) (Rs. mn) EPS* (Rs.) (Rs.) YoY (%) (x) (%) (%) (x) (Rs.)

2007 34,383 6,680 8.6 6 25.7 28 2

2008 40,103 7,010 9 5 20.3 20.1 22.1 17.3 2

2009E 49,672 9,058 9.5 11.7 29 15.7 22.5 22.3 13.1 2.2

2010E 58,440 10,689 12.7 13.8 18 13.3 22.7 22.5 11.1 2.4

0

2,000

4,000

6,000

8,000

10,000

12,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2007 2008 2009E 2010E P r o f i t A f t e r T a x ( P

A T ) I n R s M i l l i o n

S a l e s I n R s M i l l i o n

Year





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Recent Developments

Alliances

Aurobindo Pharma and Dr Reddy Laboratories tied strategic alliances with

Multinational players Pfizer and GlaxoSmithKline.

Under the agreement, Indian companies will manufacture generic drugs and

MNC companies would market these drugs in emerging markets.

Regulatory Norms

On flip side, Lupin received warning letter from US FDA on CGMP compliant andSun Pharma US arm Caraco products were seized by US FDA.

Recovery from Recession

According to ORG IMS, the value growth of IPI as per secondary sales for the

month of the June 2009 was higher at 18.3% as compared to 10.1% in month of

May 2009

M & A

Mega merger proposals like Pfizer acquiring Wyeth, Merck & Co –Plough deal

followed by Roche-Genetech deal etc.

New Launch

Biogen launched Insugen, a new generation bio-insulin, which the company

claims is the world's first recombinant human (r-DNA) insulin using a unique

technique, Pichia Expression

Company Performances in Jun 2009:

Sun Pharmaceutical industries, a leading Pharma company reported drastic fall

of 67% in net profits to Rs 163.84 crore on 24% fall in net sales to Rs 787.59crore on consolidated for the quarter ended June'09.

The fall in profits and revenues is due to price erosion of at risk products Protonix

and Ethyol in the current quarter compared to corresponding previous period,

and product recalls. Due to fall in prices, the operating profit margins crashed by

3530 bps to 16.0% led operating profit to decline by 76% to Rs 128.59 crore.

Ranbaxy laboratories posted huge net profit of Rs 675.45 crore in the quarter

under review compared to Rs 23.73 crore in the corresponding previous period





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despite of 15% fall in total income from Operation to Rs 1093.78 crore. The huge

profits are on the back of forex gain of Rs 231.30 crore, and EO income on the

account of gains on fair valuation on derivatives (MTM) of Rs 806.69 crore,respectively.

Dr Reddy's Laboratories came out strong results for the quarter ended June'09.

Income from operation posted moderated growth of 21% to Rs 1820.80 crore on

the back of healthy revenues from authorized generic Sumatriptan. Excluding the

sales from Sumatriptan, the income from operation went up by 7%

GlaxoSmithKline Pharmaceuticals, the biggest MNC Pharmaceutical Company in

India registered marginal growth of 10% in total income from operation to Rs

461.95 crore. Operating profit margins contracted by 70 bps to 36.2% and

restricted growth in operating profit to 8% at Rs 167.44 crore.

Over the global, MNC Pharmaceutical companies are looking increase their

stake in developing markets subsidiaries, especially India. The companies like

Pfizer & Novartis came out with open offer.

MP Laboratories, a majority shareholder of Matrix Laboratories proposed to

acquire the remaining public shareholding in Matrix Laboratories and delist the

equity share from BSE and NSE.

Budget Provision

Excise duty on nine life saving drugs like Abatacept, Daptomycin, Entacevir,

Fondaparinux Sodium, Ixabepilone, Lapatinib, Pegaptanib sodium injection,

Suntinib Malate & Tocilizumab and Influenza Vaccine is totally exempted.

Excise duty on bulk drugs, which are used for manufacture these drugs are also

completely exempted.

Custom duty on these drugs and bulk drugs, which are used to manufacture, are

reduced from 10% to 5%.

Custom duty on two specified life saving devices Artificial Heart (left ventricular

assist device) and Patent Ductus Arteriosus/ Atrial Septal Defect occlusion

devices reduced from 7.5% to 5%.

Excise duty on these devices is totally exempted.

Introduced GST in Pharmaceutical industry will reduce transaction cost.

Extended weighted deduction of 150% on expenditure incurred on in-house R &

D.




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Completely abolished FBT.

Indian Pharmaceuticals industry has received major relief in the Stimulus Packagesannounced between December 2008 and February 2009. As a result of these stimulus

packages, excise duty on formulation was cut from 8% to 4% and on bulk drugs from

14% to 8%.

Future Outlook:

The Indian pharmaceutical market has enormous potential for growth. India has a

growing middle-class of around than 300 million people with disposable income

and increasing healthcare expectations. Around one third of these can afford to pay for good quality private healthcare

and this number is growing.

The number of cases of vaccine preventable diseases has also been greatly

reduced. Along with life expectancy, however, the prevalence of western style

diseases has been increasing.

There are around 700,000 new cases of cancer each year and a total of around

2.5 million cases. Around two thirds of cases are in an advanced stage at the

time of detection. The majority of these are smoking related cancers.

Estimated 40 million people in India with diabetes and in urban areas, the

prevalence is around 9% of the population.

An estimated 500,000 patients are receiving insulin treatment and reports

suggest the Danish company, Novo Nordisk, supplies insulin to just over half of

these. The market for insulin is expected to continue growing for many years.

The compulsory licensing clause in the new patents bill may also prove to be

problematic for foreign companies.

Not only are Indian companies allowed to produce drugs for export under

compulsory license as per the WTO’s Doha Declaration, an additional clause

was added to the Patents (Amendments) Bill 2005 to allow production of drugs

under compulsory license for sale on the domestic market.

IBoK Pharma Sector

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