Industry Analytics - Indian Pharmaceutical Industry

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This report gives an overview of the Indian Pharmaceutical Industry. It briefly describes the history, current scenario, challenges in this sector and the future prospects of this industry.Indian pharma industries have a come a long way and it has become one of the most important sector in the industry, but then their leadership only in the generic drug market and their lag in the patented drug market is a point of concern.....All this n more in this report.




A Study on Growth and Recent Developments in PHARMACEUTICAL INDUSTRY

Submitted To: Dr. R. Venkatamuni Reddy

Section E Group 10

PGP 2008-10

Submitted by: Atreyee Nandy - 08PG294 Harkirt Kaur - 08PG306 Nalini Sharma - 08PG317 Sanaa Sadique - 08PG341 Santosh Prasad - 08PG342 Vineeth Gangadharan 08PG355

We would like to express our heartfelt gratitude and thankfulness towards our Industry Analytics professors, Dr. R.Venkatamuni Reddy and Dr. Gervasio S.F.L Mendes for giving us an opportunity to work on this project, which has helped us gain an in depth understanding of the Indian Pharmaceutical Industry. The timely advice given by Prof. Reddy and Prof. Mendes went a long way in ensuring that we do not lose focus while working on the project. The constant guidance and meaningful suggestions provided by them also helped in making this project a relevant and a rich source of learning for the students of Industry Analytics. We hope that this project would enable the readers understand the working of Indian Pharmaceutical Industry in detail.


The Indian pharmaceutical industry has come a long way from waiting for imports of bulk drugs from global players for re-processing to becoming an industry which is driving the product development and is breaking new grounds in medical research worldwide. The Indian pharmaceutical industry has a unique amalgamation of two major critical factors that make it so attractive and thereby add impetus to its growth. These are:   The process patent regime Price controls

The implementation of Good Manufacturing Practices has further supplemented the growth of this industry which is now producing bulk drugs for all the major therapy segments, which are now most in demand. In addition to this, the competencies that India has achieved in process re-engineering and organic synthesis have helped derive the most cost-effective solutions which are also compliant with the quality standards. The purpose of this report is to provide an extensive outlook on the pharmaceutical industry. The broad objectives of this report are:  To study the growth and trend of Indian Pharmaceutical Industry and its contribution to Indian economy.  To study the bottlenecks in patenting and suggest suitable measures in the light of the problematic issues in patenting with a focus on TRIPS Agreement.  To track the significance of Mergers and Acquisitions in consolidation of Pharmaceutical Industry. The report provides a complete synopsis on the Indian pharmaceutical market and its present demographics. The reports also presents the future prospects of the industry, which is an indicative of vast potential and growth opportunities, and also the possible challenges that the Indian pharmaceutical industry may face ahead.


Chapter 1: GLOBAL REVIEW    Origins and Evolution Global Scenario Therapeutic Market Segmentation 16 6

Chapter 2: COUNTRY REVIEW       Indian Pharmaceutical Industry Industry Structure Domestic Growth Drivers Domestic Exports Critical Success Factors Pharmaceutical Regulatory Bodies In India

Chapter 3: PATENT- The key facet of the Indian Pharmaceutical Industry     Background of Pharmaceutical Industry with respect to patents Patents Amendment Act (2005) Scenario Post Trips Novartis Case


Chapter 4: PRICING OF DRUGS  Pricing of Drugs-Principle and Laws


Chapter 5: Merger and Acquisitions in the Indian Pharmaceutical Industry 54    Drivers in Mergers and Acquisitions Mergers and Acquisition Trends in India Mergers and Acquisitions-Challenges 66

Chapter 6: Framework of Analysis   Qualitative Analysis Quantitative Analysis

Chapter 7: Outlook    Future Scenario Issues and Challenges Vision-2020







THE PHARMACEUTICAL INDUSTRY-GLOBAL VIEW ORIGINS AND EVOLUTION The modern pharmaceutical industry is a highly competitive non-assembled global industry. Its origins can be traced back to the nascent chemical industry of the late nineteenth century in the Upper Rhine Valley near Basel, Switzerland when dyestuffs were found to have antiseptic properties. A host of modern pharmaceutical companies all started out as Rhine-based family dyestuff and chemical companies e.g. HoffmanLa Roche, Sandoz, Ciba-Geigy (the product of a merger between Ciba and Geigy), Novartis etc. Most are still going strong today. Over time many of these chemical companies moved into the production of pharmaceuticals and other synthetic chemicals and they gradually evolved into global players. The introduction and success of penicillin and other innovative drugs in the early forties institutionalized research and development (R&D) efforts in the industry. The industry expanded rapidly in the sixties, benefiting from new discoveries and a lax regulatory environment. During this period healthcare spending boomed as global economies prospered. The industry witnessed major developments in the seventies with the introduction of tighter regulatory controls, especially with the introduction of regulations governing the manufacture of ‘generics’. The new regulations revoked permanent patents and established fixed periods on patent protection for branded products, a result of which the market for ‘branded generics’ emerged. GLOBAL SCENARIO The global pharmaceutical market can be classified into two categories: regulated and unregulated/semi regulated. The regulated markets are governed by government regulations like intellectual property protection, including product patent recognition. As a result, they have greater stability in both volumes and prices like the United States. The unregulated/semi-regulated markets have lower entry barriers in terms of regulatory requirements and hence, they are highly competitive. The global pharmaceutical companies till 2010 will be closely regulated by emerging issues like patent safety, side effects, adverse action reporting, strengthening harmonization and regulations and stronger clinical evidence. Global pharmaceutical market has 6

increased its focus on novel drugs, good delivery system, and new chemical entities. The other factor which is driving the growth of global pharmaceutical market is speeding up regulation in bio-generic segment. Moreover there will be shift in growth from top ten markets to emerging economies. The global pharmaceutical market will change its shape from primary care driven to specialty care driven that is oncology and biotech. The global pharmaceutical industry will take a shape of virtually integrated pharmaceutical company. There is a widening gap between mature market performance and emerging market performance, which will require many pharmaceutical companies all over the globe to make changes throughout their operations from shifting their sales and market, revising there strategies, changing there business models to fuel there growth.

For the global pharmaceutical industry, 2008 will be a year of softening growth and a widening gap in performance between the increasingly generalized and costconstrained mature markets, as well as the burgeoning ‘pharmerging’ sectors where demand is growing and economies and access to healthcare are expanding at record levels. Marking an important inflection point for the industry, for the first time the world’s seven key markets (US, Japan, UK, Germany, France, Spain and Italy) will drive less than half of the industry’s growth in 2008, while the pharmerging markets will contribute nearly a quarter of growth worldwide (Figure 1). Further divergence will be apparent between primary care-driven and specialist-driven therapy areas, and between therapy classes with major unmet needs and innovations, and those dominated by generics.



pharmaceutical growth will slow to 4-5% in 2008, marking an all-time low for this market. This is due in part to a lessening of the volume growth generated by the Medicare Part D prescription drug benefit. It also reflects the continued high level of genericisation in this market with approximately $15 billion in branded products expected to lose patents in the 2008 timeframe. The US will also continue to feel the impact of heightened safety scrutiny, as the US FDA acquires more power, slowing the introduction of new medicines. A similar level of growth is anticipated in the top five European markets (France, Germany, UK, Italy and Spain), as the industry faces significant generics exposure and governments struggle to manage their aging populations and embrace new treatment innovations (Figure 2). Increasing therapeutic substitution can be expected in these markets, along with an upturn in parallel trade, particularly with specialistdriven products. Cost-saving initiatives are likely to become more aggressive and will include price cuts, contracting and rebating, as well as the expansion of reference pricing schemes in Germany, Italy and Spain. Value growth in these markets will be limited to areas of unmet needs. In Japan, cost-containment drives – including incentives for prescribing generics – will also impact market performance as the 8

country embarks on another year of national health insurance price cuts. Growth of 12% is anticipated, compared with 4-5% in 2007. Notwithstanding this downturn, Japan remains in economic recovery and access to drugs continues to improve for its aging population. A rise in the level of new product launches is expected as the Pharmaceutical and Medical Devices Agency becomes fully staffed and focuses on accelerating approvals. This will be particularly noticeable in areas of unmet needs, such as oncology, where approvals have already been granted for Avastin and Tarceva. ACCELERATING GROWTH IN EMERGING MARKETS By contrast, much stronger growth of 12-13% is expected in the seven pharmerging markets of China, India, Brazil, Russia, Mexico, Turkey and South Korea, driving sales of $85-90 billion in 2008. Although these markets have their own unique characteristics, common to each is a rising GDP and expanding access to both generic and innovative new medicines as primary care improves and extends through rural areas, and private health insurance becomes more commonly available. China will be a particularly strong performer in 2008, reflecting the country’s booming economy 9


greater in This to price enforced and that

government involvement healthcare policy. involvement extends annual cuts, generic prescribing campaign targets promotional activity, product approvals and manufacturing. Overall, the global pharmaceutical market will grow 5-6% to over $735 billion in 2008, down from 6- 7% in 2007 (Figure 3). Key dynamics shaping this growth are the continued wave of genericisation, expanded use of innovative specialty products, increasing reliance on value-based medicine and higher levels of uncertainty around safety issues. an anticorruption





Sales (US$ billion)
Source: IMS Health. Intelligence 360 Global Pharmaceutical Perspective

TOP TEN PHARMACEUTICAL COMPANIES WORLDWIDE BY TOTAL R&D EXPENDITURE Fourteen pharmaceutical companies featured in the top 50 R&D spenders according to European Commission research in 2007-08, including 3 in the top ten: Pfizer, Johnson & Johnson, and GlaxoSmithKline. Other companies to feature were Sanofiaventis, Roche, Novartis, Merck, AstraZeneca, Amgen, Bayer, Eli Lilly, Wyeth and Abbott. • Pharmaceutical companies ranked as the highest sector of R&D investment across the world’s top 1400 companies, spending over €70 million euros. • In 2007, Pfizer spent nearly US$7.6 billion on R&D globally, followed by Johnson & Johnson (US$7.1 billion) and GlaxoSmithKline (US$6.9 billion). • Of the top ten pharmaceutical companies, Amgen spent the largest proportion on R&D with expenditure equalling over 24% of total sales.


THERAPEUTIC MARKET SEGMENTATION Commencing with repackaging and preparation of formulations from imported bulk drugs, the Indian industry has moved on to become a net foreign exchange earner, and has been able to underline its presence in the global pharmaceutical arena as one of the top 35 drug producers worldwide. Currently, there are more than 2,400 registered pharmaceutical producers in India. There are 24,000 licensed pharmaceutical companies. Of the 465 bulk drugs used in India, approximately 425 are manufactured here. India has more drug-manufacturing facilities that have been approved by the U.S. Food and Drug Administration than any country other than the US. Indian generics companies supply 84% of the AIDS drugs that Doctors without Borders uses to treat 60,000 patients in more than 30 countries. However total pharmaceutical market is as follows:


It is very much evident from above figure that chronic therapy area (Gastro Cardiac, Respiratory, Neuro Psychiatry and Ant diabetics) is dominating the market in long run.




INTRODUCTION: INDIAN PHARMACEUTICAL INDUSTRY Pharmaceutical Industry in India is one of the largest and most advanced among the developing countries. It is ranked 4th in volume terms and 11th in value terms globally. It provides employment to millions and ensures that essential drugs at affordable prices are available to the vast population of India. Indian Pharmaceutical Industry has attained wide ranging capabilities in the complex field of drug manufacture and technology. From simple pain killers to sophisticated antibiotics and complex cardiac compounds, almost every type of drug is now made indigenously. Indian Pharmaceutical Industry is playing a key role in promoting and sustaining development in the vital field of medicines. Around 70% of the country's demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and vaccines is met by Indian pharmaceutical industry. A number of Indian pharmaceutical companies adhere to highest quality standards and are approved by regulatory authorities in USA and UK.

The Indian pharmaceutical industry traditionally relied on “reverse engineering” i.e. product copying, through which vast profits were made. In recent years, however, the larger domestic companies have realised the need to undertake original research and / or penetrate into the regulated generics markets in the USA/EU in order to survive in the global market. At the same time, the Indian pharmaceutical industry is renowned for supplying affordable generic versions of patented drugs for illnesses like HIV/AIDS to some of the world’s poorest countries. Some of the strategies that have been followed by Indian pharmaceutical companies for their growth in the global markets have been as follows:  Geographic diversification with few companies focussing on increasing presence in the regulated markets and others exploring the developing/under-developed markets of the world.


As a part of diversification strategy, some of the companies have acquired brands, facilities and businesses overseas. Some companies have even started their local marketing in foreign markets. Partnerships for supply of bulk drugs and formulations with the generic companies as well as innovators. For regulated markets such as the US, there are companies focussing on value added generics, niche segments or patent challenges in the US. Focus on offering research and manufacturing services on a contractual basis(CMOs and CROs)

Apart from these strategies Indian companies have to devise newer strategies continuously to survive in the highly competitive global market in an industry that is characterised by - high capital requirement, high technical requirement, high process skills, high value addition prospects, high export volumes, high market sophistication. Indian companies are following the route of mergers and acquisitions to make inroads in the foreign markets. They need to consolidate further in different parts of the world to become trans-national players. Indian companies will have to rise above the statement of Michael Porter (1990), that most multi-national firms are just national firms with international operations. They shall certainly be at an advantage, as their strong national identities will give them a competitive advantage in the global markets. INDUSTRY STRUCTURE The Pharmaceutical industry in India is fragmented with over 3,000 small/medium sized generic pharmaceutical manufacturers. It has over 20,000 units out of which 300 units are in the organized sector; while others exist in the small scale/unorganised sector. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. There are also 5 Central Public Sector Units that manufacture drugs. These companies are: • • • Indian Drugs & Pharmaceuticals Hindustan Antibiotics Ltd. Bengal Chemical and Pharmaceuticals Ltd. 18

• •

Bengal Immunity Ltd. Smith Stanistreet Pharmaceuticals Ltd.

The Indian pharmaceutical industry consists of manufacturers of bulk drugs and formulations. Bulk drugs include the active pharmaceutical ingredients (APIs) which are used for the manufacture of formulations. According to estimates, the proportion of formulations and bulk drugs is in the order of 75:25. There are over 60,000 formulations manufactured in India in more than 60 therapeutic segments. More than 85% of the formulations produced in the country are sold in the domestic market. India is largely self-sufficient in case of formulations, though some life saving, newgeneration-technology-barrier formulations continue to be imported. The Indian pharmaceutical industry has the highest number of plants approved by the US Food and Drug Administration outside the US. It also has the large number of Drug Master Files (DMFs) filed which gives it access to the high growth generic bulk drugs market. The industry now produces bulk drugs belonging to all major therapeutic groups requiring complicated manufacturing processes and has also developed “good manufacturing practices” (GMP) compliant facilities for the production of different dosage forms. Setting up a plant is 40% cheaper in India compared to developed countries and the cost of bulk drug production is 60-70 percent less. The strength of the industry is in developing cost effective technologies in the shortest possible time for drug intermediates and bulk activities without compromising on quality. In accordance with WTO stipulations, India grants product patent recognition to all New Chemical Entities. TYPES OF DRUG SYSTEM IN INDIA Ancient civilization allowed India to develop various kinds of medical and pharmaceutical systems. In addition to the allopathic system, which is prevalent in the United States, Japan and Europe, the following types of medical and pharmaceutical systems are used by the Indian people: Ayurveda: Ayurveda translates as the “science of life”. It encompasses fundamentals and philosophies about the world and life, diseases and medicines. The knowledge of


Ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative treatment lies in drugs, diet and general mode of life. Siddha: The Siddha system is one of the oldest Indian systems of medicine. Siddha means “achievement”. Siddhas were saintly figures who achieved healing through the practice of yoga. The Siddha system does not look merely at a disease but takes into account a patient’s age, sex, race, habits, environment, diet , physiological constitution and so forth. Siddha medicines have been effective in curing some diseases, and further work is needed to truly understand why this system works. Unani: The Unani system originated in Greece and progressed to India during the medieval period. It involves promotion of positive health and prevention of disease. The system is based on the humoral theory i.e. the presence of blood, phlegm, yellow bile and black bile. A person’s temperament is accordingly expressed as sanguine, phlegmatic, choleric or melancholic. Drugs derived from plant, metal, mineral and animal origins are used in this system. Homeopathy: Homoeopathy is a branch of therapeutics that treats the patient on the principle of “SIMILIA SIMILIBUS CURENTUR” which simply means “Let likes be cured by likes”. Homeopathy seeks to stimulate the body's defense mechanisms and processes so as to prevent or treat illness. Treatment involves giving very small doses of substances called remedies that, according to homeopathy, would produce the same or similar symptoms of illness in healthy people if they were given in larger doses. Treatment in homeopathy is individualized (tailored to each person). Homeopathic practitioners select remedies according to a total picture of the patient, including not only symptoms but lifestyle, emotional and mental states, and other factors. Yoga and Naturopathy: Yoga and Naturopathy are ways of life. In naturopathy one applies simple laws of nature. It advocates proper attention to eating and living habits. It also involves hydrotherapy, mud packs, baths, massage and so forth. Yoga consists of eight components: restraint, observance of austerity, physical postures, breathing exercises, restraining of the sense organs, contemplation, meditation and Samadhi. Increasing interest exists in revisiting these ancient drug systems. INDUSTRY SEGMENTATION 20

Indian pharmaceutical industry can be widely classified into bulk drugs, formulations and contract research. Bulk drugs are the Indian name for Active Pharmaceuticals Ingredients (API). Formulations cover both branded products and generics. Indian pharmaceutical sector is self sufficient in meeting domestic demand and exports successfully to various markets globally. The existence of process patents in India till January 2005 fuelled the growth of domestic pharmaceutical companies and developed them in areas like organic synthesis and process engineering, as a result of which, Indian pharmaceuticals sector is able to meet almost 95 percent of the country’s pharmaceutical needs. India is globally recognized as a low cost, high quality bulk drugs and formulations manufacturer and supplier. Contract Research, a nascent industry in India has witnessed commendable growth in the last few years. As per Yes Bank /OPPI report (2007-08), formulation segment (including domestic formulation and formulation exports) constituted 72%of the total pharmaceutical industry (in terms of sales) while bulk drugs and contract research constituted 25% and 3% of pharmaceutical industry respectively.

Fig: Segment-wise sales

BULK DRUGS Bulk drug industry is the backbone of the Indian pharmaceutical industry. Growth of Indian bulk drug industry in the last five decades has been impressive and highest 21

among developing countries. From a mere processing industry, Indian bulk drug industry has evolved into sophisticated industry today, meeting global standards in production, technology and quality control. Today, India stands among the top five producers of bulk drugs in the world. The market is fragmented with far too many players. About 300 organised companies are involved in the production of bulk drugs in India. Over 70 percent of India’s bulk drug production is exported to more than 50 countries and the balance is sold locally to other formulators. Indian bulk drug industry is mainly concentrated in the following regional belts - Mumbai to Ankleshwar, Hyderabad to Madras and Chandigarh. Around, 18000 bulk drug manufacturers exist in India. Some major producers of bulk drugs in Indian pharmaceutical industry are Ranbaxy Laboratories, Sun Pharma, Cadila, Wockhardt, Aurobindo Pharma, Cipla, Dr. Reddy’s Laboratories, Orchid Pharmaceuticals & Chemicals, Nicholas Piramal, Lupin, Aristo Pharmaceuticals, etc. Most are involved in bulk as well as formulations while a few are solely into bulk drugs. India is the world’s fifth largest producer of bulk drugs. The market size is expected to grow at higher percentages in future years with more and more international companies depending on India to meet their bulk-drug supply needs. Moreover, India is way ahead of competitors in the total number of Drug Master File (DMF) filings. Of the overall DMF filings to US FDA, the portion of filings by Indian players has jumped from around 14% in 2000 to 46% of total filings in 2008( January-June) This growth in proportion speaks volumes about the quality standards followed in Indian manufacturing facilities.


Fig: Increasing share of Indian companies in DMF filings (US FDA) (SOURCE: CRISINFAC, YES BANK/ OPPI) The growing number of DMF filings signifies the increase in number of contracts that Indian players have garnered. While India has recorded 1671 DMF filings, China shows a tally of 520, the second largest number of DMF filings after India. In 2008 (January-June), India’s DMF filings were around 3.5 times that of China -187 from India vis-à-vis 51 from China. The bulk drug segment is a low-margin and volume-driven business. The thrust is on manufacturing. In manufacturing operation, efficiency through better process skills to reduce both manufacturing time and cost is critical. Low cost manufacturing is a distinct advantage gained by Indian companies over a period of time with a steep learning curve. Bulk Drugs exports have grown significantly in the past on account of growth in generic industry, increasing share of Indian companies in DMF filings and contract manufacturing opportunity. Bulk drugs exports grew robustly by 28% CAGR between 2001-02 and 2007-08 to reach an estimated USD4.2 billion.

Fig. India’s Bulk Drug Export (CRISINFAC, YES BANK/ OPPI) As already explained, India has carved a niche for itself by being one of the largest bulk drug suppliers. India offers a number of distinctive advantages in the pharmaceutical industry, as illustrated in the figure below: 23

Fig: Advantage India-API (SOURCE: CRISINFAC, YES BANK/ OPPI) India has many local manufacturing equipment manufacturers. These equipments are of high quality and low cost, thus reducing the cost of capital. According to industry estimates, Indian companies are able to reduce the upfront capital cost of setting up a project by as much as 25-50%due to locally manufactured equipment and high quality technology/engineering skills. Competition in the India’s domestic formulation market has made it inevitable for API suppliers to continuously develop alternative production methods to improve yield or reduce costs. This ensures that India has a significant cost advantage due to process engineering. Apart from availability of a high number of skilled chemists, India also offers scientists with vast experience and unmatched skills. The scientific staff in India though equivalent or better qualified are also available at a fraction of the cost. This makes Indian research firms more competitive than many international firms while being cost competitive. Labour costs are also low in India, being almost 1/7 th of that in many developed countries and offer an obvious cost advantage.


FORMULATIONS Formulations are broadly categorized into patented drugs and generic drugs. A patented drug is an innovative formulation that is patented for a period of time (usually 20 years) from the date of its approval. A generic drug is a copy of an expired patented drug that is similar in dosage, safety, strength, method of consumption, performance and intended use. Formulation Industry can be subdivided into two segments:  Domestic Formulation Industry  Indian Formulation Exports Domestic Formulation Industry Between 2002 and 2007, the domestic formulation industry grew at a CAGR of 14% from around USD4.3 billion in 2002 to USD 8.4 billion in 2007. Demand in India is growing markedly due to rising population, increasing per capita income, increasing access to medicine, especially in the rural areas and an increasing population of over sixty years of age.

Fig: Growth in domestic formulation industry (OPPI, ORGIMS) (SOURCE: CRISINFAC, YES BANK/ OPPI 25

Presently, the growth of a domestic pharmaceutical company is critically dependant on its therapeutic presence. In terms of end-use, the pharmaceutical industry is subdivided into several therapeutic segments. These segments are broadly defined on the basis of therapeutic application. Some of these segments are low-volume, high margin segments, while the others are high-volume with relatively low margins. The new lifestyle categories like Cardiac, Respiratory and Vitamins are expanding at doubledigit growing rates. The long term ailment, chronic therapies is now accounting 24% of the market. The only growth driver for acute therapies is the new product introduction under this segment. Today, anti-infective which used to be the single largest therapeutic segment in Indian pharmaceutical industry is increasing. Antiinfective segment is now 1st in terms of value contribution followed by Gastrointestinal and Cardiac. The key therapeutic segments include:    Anti-infective Cardio vascular Central nervous system drugs

Anti-infective is currently the largest therapeutic segment in India. It accounts for onefifth of total market turnover. Next in line, and accounting for one-tenth each, are cardio-vascular preparations, cold remedies, pain killers and respiratory solutions.

Fig. Therapeutic wise distribution (ORGIMS) (SOURCE: CRISINFAC, YES BANK/ OPPI)


INDIAN FORMULATION EXPORTS Indian formulation exports grew at a CAGR of 23.2% touching around USD 4 billion in 2007-08. The growth has been spurred mainly due to the focus on regulated markets by most Indian companies, thereby increasing revenues.

Fig: Indian Formulation Exports (SOURCE: CRISINFAC, YES BANK/ OPPI) CONTRACT RESEARCH AND MANUFACTURING: Increasing costs of R&D, coupled with low productivity and poor bottom lines, have forced major pharmaceutical companies worldwide to outsource part of their research and manufacturing activities to low-cost countries, thereby saving costs and time in the process. The global pharmaceutical outsourcing market was worth USD57.2 billion in 2007. It is expected to grow at a CAGR of 10% to reach USD76 billion by 2010. Global market for Contract Research and Manufacturing Services (CRAMS) in 2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market, contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract manufacturing was USD38.89 billion accounting for the major share (approximately 68%) of the total global pharmaceutical outsourcing market. India, with more than 80 US FDA-approved manufacturing facilities, is one of the most preferred locations for outsourcing manufacturing services in India by the 27

multinationals and global pharmaceutical companies. The Indian pharmaceutical outsourcing market was valued at USD1.27m in 2007 and is expected to reach USD3.33 billion by 2010, growing at a CAGR of 37.6%. The Indian CRAMS market stood at USD1.21 billion in 2007, and is estimated to reach USD3.16 billion by 2010. India holds the lion's share of the world's contract research business as activity in the pharmaceutical market continues to explode in this region. Over 15 prominent contract research organisations (CROs) are now operating in India attracted by her ability to offer efficient R&D on a low-cost basis. Thirty five per cent of business is in the field of new drug discovery and the rest 65 per cent of business is in the clinical trials arena. India offers a huge cost advantage in the clinical trials domain compared to Western countries. The cost of hiring a chemist in India is one-fifth of the cost of hiring a chemist in the West. DOMESTIC GROWTH DRIVERS: Pharmaceutical sector is one of the most globalized sectors among the Indian industries. The downside is pharmaceutical sector traditionally has been immune to business cycles. The upside of Indian pharmaceutical sector, however, is influenced by a mix of global and local factors. Global factors are important as most Indian companies ship a major portion of their production to overseas markets. Also, multinationals operating in the Indian market follows the central research and global marketing model. Their actions are largely dictated by global trends although local issues are given due importance. The domestic market is critical for both Indian companies and multinationals. For Indian companies, the domestic market lends stability to bottom line and offer means to cope with fluctuations in global demand. The growth drivers for Indian pharmaceutical market are: Growing Population and Improving Incomes: Household incomes are rising in India; the proportion of middleclass in Indian population is also increasing. Statistics show a clear migration of population towards middle and upper classes. Rise in income levels is always accompanied by greater demand for medical facilities and pharmaceutical products. Middle class is already 70 million strong and is expected to grow even fast, accounting for a higher share 28

of total population. Increase in living standards will lead to longer life expectance and higher consumption of drugs and health care services. Changing lifestyles: Rising incomes and improving literacy rates are leading to change in lifestyles. While incomes provide the means to access medical facilities and products, improving literacy boost awareness about diseases and lead to higher consumption of drugs. Changing lifestyles, however, is leading to a change in disease profile especially in urban areas. Hectic lifestyles and high cholesterol diets are resulting growing incidence of diseases such as cardio vascular diseases and cancer. Research and Development: The R&D efforts of Indian companies have been largely focussed on chemical synthesis of molecules and their cost effective production thereof. India has a large pool of technical and scientific personnel with good English language skills. Indian scientists have developed a high degree of chemical synthesis skills while engineers have developed competencies in producing molecules cost effectively. These skills have helped Indian companies tap generic markets abroad successfully in the past and will continue to do so. Healthcare Expenditure: Indian healthcare system is largely run by the govt with private sector playing a small, but important part. The healthcare system in India comprises government hospitals in cities and towns and a network of health centres in rural areas. This is supplemented by a string of private hospitals and clinics in largely urban areas. The public expenditure on health has been growing at a decent rate while private expenditure has been recording marginal growth. Insurance Sector giving a Lift: Indian insurance sector has been thrown open to private sector. Large sections of Indian population are not covered by health insurance schemes. Currently, less than 10% of the Indian population is covered by some form of health insurance.


DOMESTIC EXPORTS Pharmaceutical exports touched a level of Rs. 24942 crores during 2006-07. Exports constitute a substantial part of the total production of pharmaceuticals in India. YEAR 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 EXPORT (Rs. in Crores) 6256.06 7230.16 8757.47 9751.20 12826.10 15213.24 17857.80 22578.98 24942.00

(Source:-Directorate General of Commercial Intelligence and Statistics - DGCIS, Kolkata)

The formulations contribute nearly 55% of the total exports and the rest 45% comes from bulk drugs. Pharmaceutical exports clocked $7.2 billion in 2007-08, accounting for six per cent of the country’s total exports, according to Pharmexcil, the Pharmaceutical Export Promotional Council. CRITICAL SUCCESS FACTORS The rules of pharmaceutical business are changing. Indian pharmaceutical companies can no longer get away with plundering intellectual properties of multinational companies. Pharmaceutical business has become a new ballgame altogether after the introduction of product patents in January 2005.



Pre 2005: New product development efforts of Indian pharmaceutical companies in process patents era were limited to reverse engineering molecules discovered by other companies. Thanks to absence of product patents, Indian companies did not have to go through long winded drug development process. Nor did Indian companies have to expend any effort on research focus. Indian companies simply zeroed in on blockbuster drugs and tried to come up with an alternative process as fast as they could. The focus of the Indian companies was to launch a copy of a blockbuster drug ahead of their rivals in India and abroad. Key areas to focus on R&D for Indian companies: 1. Potential product identification     Complex API Complex finished product Commercial potential of products Out-licensing opportunity to MNCs

2. Novel Drug Delivery System (NDDS) 3. New Drug Development Post 2005: A large number of drugs are going “off patent” in the next few years. According to IMH Health, more than $60 billion worth of drugs are going “off patent” by 2011. Thus, Indian companies will not be short of new products for at least another two years. In the long run, however Indian companies may find it hard to make money from drugs coming off patent. Already competition in generic market is intense and likely to increase further in the future. Hence, new molecules rather than generics will drive revenues and profits in the product patents area. Indian companies need to discover new drugs either through their own efforts or research alliances. Perhaps licensing deals with multinationals could also provide Indian companies access to new drugs. Focus on basic research will come with its own issues. Indian companies will have to acquire the skills of identifying research areas that offer excellent revenue and profit potential. This will entail a closer tracking of disease profiles and related therapies as well as keeping a close tab on the research programmes of rivals. Besides, Indian companies will have to pay more attention to


economics of drug development process. A product patent is granted for a period of 20 years (b) THERAPEUTIC COVERAGE Pre-2005: In the absence of product patents, Indian pharmaceutical companies did not feel the need to focus on specific therapeutic areas. Most Indian pharmaceutical companies eschewed narrow focus and tried to cover as many therapeutic areas as possible. Now the product portfolio of many Indian companies has considerable breadth and depth. Given the price controls in the market, diversification worked to the advantage of companies in the domestic markets. In the export markets, a wider product portfolio gave companies the option of picking and choosing from an array of opportunities. Post 2005: Opinion is divided over the therapeutic strategy that Indian companies should pursue in product patent era. Some companies believe that focus on select therapeutic segment will fetch them greater dividends in terms of new chemical entities and market share. Other companies believe such a strategy is risky given the size of Indian companies and that a big setback in research could sink the company. Instead such companies are pursuing a de-risking strategy of building a wide product portfolio. In the domestic market, such a strategy will result in economies of scale at production and marketing stage, putting the company in a better place to weather competition from multinationals. In the export markets even after the introduction of product patents, products under patent protection will comprise only 15 percent of the market. So a vast chunk of the market will be still open for competition although margins will be wafer thin. EXPORTS Pre-2005: Most Indian companies focused on exports. Exports improve the valuation of companies owing to higher margin in overseas markets. Indian companies built fortunes by making cheaper versions of blockbuster drugs and selling them in domestic and export markets. Indian companies built especially strong position in manufacture of bulk drugs. Out of the total exports, formulations constituted 55 percent and bulk drugs constituted 45 percent. Success in export market allowed some Indian companies to build a strong position in the domestic market organically and through acquisitions of brands and companies. 32

Post 2005: Exports has continued to be a priority for Indian companies. Major blockbuster drugs will come off patent in the near future, creating a big generic opportunity for Indian companies. Also, a growing demand for anti-AIDS drugs in Africa will keep Indian companies busy. Exports have and will continue to provide Indian companies with the strength to withstand the onslaught of multinationals in the domestic market. (d) LOW COST PRODUCTION THROUGH SCALE Pre-2005: Indian pharmaceutical companies have mastered the science of producing drugs cheaply. Thanks to benign patents regime, Indian companies have developed a high level of chemical synthesis skills. The absence of development costs together with efficient production has enabled Indian companies to establish a solid position in bulk drug manufacturing. But scale did not receive as much importance as it should have, because the cost of Indian pharmaceutical companies was already low owing to aforesaid reasons. Many Indian companies did not find the return on investment of world class plants compelling enough. Post 2005: By 2011, drugs worth $60 billion will come off patent, presenting a huge generic opportunity to Indian companies. But the competition in the generic market will be brutal, resulting in thin margins. The cost of production will hold the key to success in the generic market. The production cost in turn depends on scale. Indian pharmaceutical companies need to build global scale to stand a chance in the generics market. PHARMACEUTICAL REGULATORY BODIES IN INDIA National Pharmaceutical Pricing Authority (NPPA)• NPPA is an organization of the Government of India which was established, to fix/ revise the prices of controlled bulk drugs and formulations and to enforce prices and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995. • The organization is also entrusted with the task of recovering amounts overcharged by manufacturers for the controlled drugs from the consumers.


It also monitors the prices of decontrolled drugs in order to keep them at reasonable levels.

Central Drugs Standard and Control Organization (CDSCO) CDSCO lays down standards and regulatory measures of drugs, cosmetics, diagnostics and devices in the country. It regulates clinical trials and market authorization of new drugs. It also publishes the Indian Pharmacopeia. The main functions of the Central Drug Standard Control Organization (CDSCO) include control of the quality of drugs imported into the country, co-ordination of the activities of the State/UT drug control authorities, approval of new drugs proposed to be imported or manufactured in the country, laying down of regulatory measures and standards of drugs and acting as the Central Licensing Approving Authority in respect of whole human blood, blood products, large volume parenterals , sera and vaccines. The CDSCO functions from 4 zonal offices, 3 sub-zonal offices besides 7 port offices. The four Central Drug Laboratories carry out tests of samples of specific classes of drugs. Department of Chemicals & Petrochemicals (DCP) DCP is responsible for the policy, planning, development, and regulation of the chemical, petrochemical, and pharmaceutical industries in India. This department aims: • • • To provide impartial and prompt services to the public in matters relating to chemical, pharmaceutical and petrochemical industries; To take steps to speedily redressal of grievances received; To formulate policies and initiate consultations with Industry associations and to amend them whenever required.




Patent is a legal document granted by the government giving an inventor the exclusive right to make, use and sell an invention for a specified period of time. It is also available for significant improvements on previously invented articles. The underlying idea behind granting patents is to encourage innovators to advance the state of technology. According to the UN definition, a patent is a legally enforceable right granted by country’s government to its inventor. Patent Law represents one branch of a larger legal field known as intellectual property rights. Patent Law centres on the concept of novelty and non-obvious inventions. The invention must me legally useful. The imitators and all independent devisors are prevented from using the invention for duration of patent. BACKGROUND OF PHARMACEUTICAL INDUSTRY WITH RESPECT TO PATENTS: Indian Pharmaceutical industry is undergoing fast paced changes. The Indian Generics market is witnessing rapid growth opening up immense opportunities for firms. This is further triggered by the fact that generics worth over $40 billion are going off patent in the coming few years which is close to 15% of the total prescription market of the US. The Indian pharmaceutical companies have been doing extremely well in developed markets such as US and Europe. The quality and affordability of generic drugs have made India a virtual pharmacy to the world. Nearly 70 percent of generic drugs manufactured in India are exported to other developing countries. The expansion of AIDS treatment over the past few years has been driven by the accessibility and affordability of generic ARVs (anti-retro viral drugs) from India. Pharmaceutical multinationals have maintained a low-key presence in Indian market due to absence of product patents and rigid price controls. In the domestic market, the share of Indian companies has steadily increased from around 20 per cent in 1970 to 70 percent now The industry has thrived so far on reverse engineering skills exploiting the lack of process patent in the country. This has resulted in the Indian pharmaceutical players offering their products at some of the lowest prices in the world. The quality of the


products is reflected in the fact that India has the highest number of manufacturing plants approved by US FDA, which is next only to that in the US. Patents Act 1970 in its original form does not differentiate between Process and Product patents for medicines, food and chemicals. One of the important features of the Act was that it did not provide product patents for the three mentioned industries. These industrial sectors were covered by product patent only. In addition the Drug Price control Order, 1970 put a cap on the maximum price that could be charged and ensured that the life saving drugs are available at reasonable prices. The Act of 1970 safeguards the interests of the inventor and consumer in an even-handed manner. The Act has been promulgated in keeping with the Socialistic Principles outlined in the Directive Principles of State Policy. Therefore with a regulatory system focused only on process patents, helped to establish the foundation of a strong and highly competitive domestic pharmaceutical industry which in the grip of a rigid price control framework transformed into a world supplier of bulk drugs and medicines at affordable prices to common man in India and the developing world. PATENTING' INDEPENDENCE: 1972 The Indian Patents Act of 1972 granted independence to the Indian pharmaceutical industry. There was nothing much that Cipla or any other Indian pharmaceutical company could do before that. The hands of all the Indian pharmaceutical companies were tied by the then patent law that put the interest of foreign monopolies before the health of millions of suffering Indians. April 20, 1972 was a red-letter day for India. It was the day when the Patents Act (Act 39 of 1970) came into force, replacing the Indian Patents and Designs Act of 1911. The new Patents Act abolished product patents and allowed process patents for seven years only. Come to think of it, the rationale behind the patent amendment of 1972 was not very different from the rationale behind the Independence movement. Our freedom-fighters essentially fought for the right to decide what was best for our country rather than be dictated to by foreign powers. The Indian Patents Act of 1972 granted the pharmaceutical sector the right to produce any drugs the country needed. It did away with the shackles imposed by monopoly. It 37

refused to let multinational corporations (MNCs) wear the noble garb of intellectual rights. If IT professionals give a thought to the significance of this old law they can easily imagine what could have been the plight of the Indian IT industry if Microsoft and other software giants were to prevent any Indian from doing any developmental work on their software platforms??? There are no two opinions on the view that the Amendment brought by the Act in 1972, played an important role in avoiding the health care catastrophe. In 1971, MNCs had an over 70 per cent share of the Indian pharmaceutical industry. In 2007, in a reversal of roles, Indian companies commanded 83 per cent. In 1971, Alembic was the only Indian among the top 12 companies in the Indian pharmaceutical market. In 2007, there are only three MNCs in the top-12 list. Pharmaceutical business models are changing. The world is now discovering India as a preferred place for clinical research. In more ways than one, the industry appears set to keep up its growth and progress, but for the 2005 Act. Now we shall see in the next section of the report what exactly does the Patent Act 2005 indicate and suggest. PATENTS AMENDMENT ACT (2005) The Patent Amendment Act 2005 passed by the Parliament in its budget session of 2005 brings the Indian Patent Act in full conformity with the intellectual property system in all respects. The major amendments introduced in Sections 2 and 3 of the India patent Act suggest: An invention in order to be patentable, should: (i) involve an inventive step capable of industrial application; (ii) involve technical advances as compared to the existing knowledge or having economic significance or both; and (iii) not be obvious to a person skilled in art. Section 3 outlines various situations where an invention (properly so called) can yet be not patentable. Section 3(d) of the Patents Act 1970 has been amended under the new Act to prescribe a class of discovery which cannot be subject matter of patent under the following clauses: 38

• • •

Mere discovery of a new form of known substance which does not result in the enhancement of the known efficacy of that substance Mere discovery of any new property or new use for a known substance Mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.

Product Patents have been extended to fields of technology such as drugs, food and chemicals but granting of patents are subject to restrictions as mentioned above (Section 3(d)). This section prevents frivolous inventions from being patented. The amendments introduced in the Patents Act exhibit the essence of patentability in the pharmaceuticals and chemicals is inventive ingenuity, novelty and existence of industrial application or economic significance of the new product or process. SCENARIO POST TRIPS: The amendment of 2005 extends full TRIPS coverage to food, drugs and medicines. It requires patents to be provided to products as well. The other implications for the pharmaceutical sector under the new act are as follows • • The term of a patent protection has been extended to twenty years compared to the seven years which was provided by the act of 1970. If the law of the country provides so, then the use of the subject matter of the patent shall be permitted without the authorization of the patent holder, including use by the government or any other third party authorized by the government. However such use shall be permitted only if prior to such use, the user has made efforts to obtain the authorization of the patent holder and such efforts have not been successful within a reasonable period of time. This requirement can be waived in case of a national emergency after notifying the patent holder. • The onus of proving on a legal complaint that the process used by one enterprise is totally different from that which has been used by another would lie on the defendant. Prior to the amendment the responsibility was on the patent holder to establish patent infringement.









PHARMACEUTICAL INDUSTRY? If 1972 was motivated by national interest, 2005 was prompted by international pressure, by an ill-perceived need to "belong" to the international community. The Patents Act 1972 resurrected a flagging domestic pharmaceutical industry. This Act had a much wider purpose; to help the Indian who had to fight TB, diabetes and a multitude of diseases with affordable medicines. Every country has its own specific need-based patent laws, which are national laws. There is no harmonization in patent laws of different countries. Each country has to decide for itself its own destiny. Today we have a population of over 1,100 million. The diseases that used to worry us the most are still around. There is the additional scourge of HIV/AIDS. Millions of Indians need medicines. Most of them cannot afford to pay high prices. Going by global experience, product patents that are now again enforced, can only lead to monopolies and these, in turn, to high prices. Africa and the AIDS issue of 1990-2000 is a clear example. India needs to build in enough safeguards even in our current patent law. Perhaps in our haste to join WTO, we neglected many important issues. A product patent system will make India dependent on the multinational companies for technology and for permission to produce the patented drug. Exorbitant prices will be charged and the Indian pharmaceutical industry will become subservient to the MNCs. They will lose the position that they had gained in the wake of the Act of 1970. The immediate and the most drastic effect that TRIPS compliance and introduction of the new Act of 2005 will have will be with respect to the health sector in India. The patients are the ultimate beneficiaries of the pharmaceutical research and development. By denying product patents India will be able to encourage bulk generic drug production at cheap prices. However generics are not the only solution to counter the problem of access to medicines. Generic production of drugs will not necessarily result in the innovation of new and more effective drugs and by not acknowledging innovation India will run the risk of not having access to future medicines which will in turn affect public health. 40

The actual problem lies in the fact that the product patents not only increase the cost of the drugs and medicines, but that most of them fail to introduce research and development in the neglected diseases. Hence while on one side the introduction of product patents will help in development of new and more effective drugs, the problem still remains that the research and development undertaken by the drug manufactures evade the neglected diseases and the diseases which are region specific such as medicines for malaria and tuberculosis which are found prevailing in developing countries like India.



Protestors marched in India against Novartis. WHY? Nearly a quarter of a million people from 150 countries voiced concerns over the negative impact of a legal challenge brought by Novartis that could have on access to medicines in developing countries and had asked Novartis to drop the case. Had the challenge been won by Novartis it would have been a major blow to production, domestic use and exports of generics to the world. The drug at issue was a cancer drug (Glivec) which Novartis sold at US$2500 per patient per month while generic versions of Glivec in India only cost about US$175 per patient per month. A court case brought by Swiss drugs giant Novartis in India could define how the industry distributes discount medicine to the developing world while maintaining profits. Novartis moved the court on contesting that India's patent law could leave millions without access to affordable drugs. Opponents accused the Basel-based firm of squeezing the competition. In 2005, the Indian government introduced patent protection for drugs for the first time. But the law only protects completely new compounds that were invented after 1995, a deviation of the industry standard. The Novartis leukaemia drug Gleevec (Glivec in some countries) fell foul of this ruling as it was deemed to be a new form of an existing treatment that was developed before the cut-off date. This opened the door for generic pharmaceutical companies to copy the treatment, which was earlier distributed free to thousands of patients in India, at a fraction of the cost.


"We are deeply convinced that patents save lives. If the patent law is undermined the way it is happening in India, there will be no more investment into the discovery of lifesaving drugs," said Novartis head of corporate research Paul Herrling. The company insisted that it will continue to offer Gleevec free to patients in India who cannot afford it. Watchdog groups such as Médicins sans Frontières, said generic competition has dramatically reduced the cost of drugs. They launched a petition against Novartis while hundreds of activists protested in the streets of the Indian capital, New Delhi. Lot at stake The Geneva-based International Federation of Pharmaceutical Manufacturers and Associations (IFPMA) was "very concerned" about the Indian patent law. Companies need to have assurances that they can obtain adequate patent protection that gives a fixed period of legal monopoly in which they can recoup what they have invested in research so that they can continue their research. Otherwise they would not have a sustainable industry and that will preclude their ability to improve treatments. But the Médicins sans Frontières argued that blocking cheaper generic copies would keep the cost of treatments such as Gleevec artificially high. The consequence of a ruling in favour of Novartis would have led to fewer and fewer drugs in the market. In the long term it would have killed the competition from generic drugs. However it was admitted that even the Indian generic drug companies, although capable of producing Gleevec at a tenth of that charged by Novartis for a monthly dose, were also looking to make a profit. Thus it cannot be said that Novartis are the bad guys of the movie and that the generic.


A POSSIBLE SOLUTION TO THE PRODUCT PATENT ISSUE The most practicable solution to the problem which at the same time allows for TRIPs compliance would be granting of dual licenses. This would mean that the patent would be partly product patent and after a reasonable time being given to the inventor to make a reasonably large profit it would be converted to a process patent whereby the patented drug can be manufactured by competing manufacturers using an alternative process. This would solve the problem of excessive hike in prices and would render the drugs more accessible to the millions suffering. Collaboration with the MNCs on various fronts such as research and development, manufacturing and marketing will help Indian Pharmaceutical companies make profitable breakthroughs. As far as India’s pharmaceutical industry is concerned, various options are possible in the WTO regime. But ultimately, the path currently is followed by international standards for patent protection moves inevitably toward a clash between public health and intellectual property. Stringent intellectual property protection for pharmaceuticals would only retard public health initiatives in the coming years. Given the rapid evolution of the AIDS crisis throughout the world, with more than 35 million cases alone in India, a twentyyear term of market exclusivity for new treatments is not reasonable if we expect to make real progress in containing the disease. It might well be appropriate for a governing body to clearly define a list of essential medicines, such as antiretroviral (ARV) agents, that would be subject to somewhat more relaxed patent protection compared to other drugs.




PRICING OF DRUGS- PRINCIPLES AND LAWS The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to ensure proper market conditions – • • • turnover market monopoly market competition.

Under this, prices of 74 bulk drugs and their formulation are being controlled representing approximately 20% of the pharmaceutical market. Bulk drugs, with a turnover of over Rs40 million, are under the purview of the DPCO, excluding those drugs with sufficient market competition. Sufficient market competition is defined as the presence of at least five bulk producers and 10 formulations, with no producer's market share exceeding 40 per cent. In case a single producer controls about 90 per cent of the market for a drug, which has a turnover in the range of Rs.10-40 million, the drug is considered to be under the purview of the price order (ICRA, 2000). Industrial licensing has been abolished for all drugs, formulations and drug intermediates except for the five drugs which are reserved for public sector. Moreover, price controls have been waived for a period of five years for drugs which have been developed indigenously there is a price controls under DPCO, still a majority of drugs in the market are not regulated and the price rise during this period is still considered to be minimal. In short, while the DPCO has evolved in a step-by-step ad hoc fashion, it has managed to strike a rough balance between regulating prices to ensure adequate access to essential medicines for the rural and urban poor, while allowing the emergence of a globally competitive Indian domestic drug industry. The new research environment has added important new elements to the risk environment of pharmaceutical research as a by-product of the dramatic exploration of entirely new areas of application. Manufacturers that venture into new territory are less certain of what they will find and less confident of what it will be worth when they find it—they face new uncertainties over both supply and demand.




As a developing country, India has much more limited fiscal and economic resources alongside a much larger population of low-wage urban workers and small farmers. As a result, establishing a European-style drug reimbursement scheme, even with a combination of public and private financing, would require a vast expansion of public subsidies by the Indian Government. Although reference pricing is the most common international cost-containment tool, adopting a European drug pricing system and referencing prices to foreign prices also would have serious disadvantages in an Indian context. Even if Indian prices were referenced to, the prices of most advanced drugs would still be prohibitively high and likely well beyond the reach of the common man. While a European-style universal health insurance system and a comprehensive public drug benefit could be used to alleviate the burden on the common man through a public subsidy, it would impose a massive long-term fiscal burden on the Indian Government. According to the OECD, in 2003 per capita drug expenditures averaged $606 in France, $507 in Canada, $393 in Japan, $353 in Australia, $284 in the Czech Republic, and $225 in Poland. Even if these costs were partially subsidized by the Indian Government or the states, the cost would be prohibitive and would likely displace other vital government programmes. On the other hand, if the prices of advanced drugs were referenced to other developing countries, or domestic generic drug prices, such controls would keep drug prices lower, but undermine the global competitiveness of India's world-class pharmaceutical companies, and deter future private sector investments in advanced biopharmaceutical discovery. In such a situation, research by Indian companies and patenting activity of scientists would likely shift offshore, probably to the U.S. or to the U.K. II. WHY PRICES OF PATENTS AND GENERICS DIFFER?

If a government sets the same price for generic and patented medicines, consumers naturally tend to choose the more advanced product, since it provides better value or greater quality assurance. Accordingly, demand for unbranded generics in price controlled markets tends to be artificially reduced. It is universally acknowledged that drug discovery is an extremely expensive process; 47

That for every molecule that finally makes it into a product, there are several that are abandoned on the road to discovery; Thus the patenting system provides an opportunity to recover developmental costs over the patent period. The new research environment has added important new elements to the risk environment of pharmaceutical research as a by-product of the dramatic exploration of entirely new areas of application. Manufacturers that venture into new territory are less certain of what they will find and less confident of what it will be worth when they face new uncertainties over both supply and demand. REASONS FOR THE UNCERTAINTY OVER DEMAND FOR NEW DRUGS Of the numerous factors that create uncertainty over the demand for new drugs, two stand out. First, many new drugs address conditions that have not been systematically treated. Data on the prevalence, health consequences, and social costs are sparse because conditions that are not treated tend not to be studied. Second, even if one does know the number of those suffering from a condition and the health consequences of that condition, we still may have only a vague idea of what people are willing to pay for the drugs that alleviate those conditions. • • Uncertainty over the health benefits from a new drug is therefore one problem, Uncertainty over what consumers are willing to pay for those benefits is another INFEASIBILTY OF PRICE CONTROLS Price controls on pharmaceutical products produce a variety of negative consequences for national health systems and reduce social welfare by depressing the number of new drugs added to the global pharmacopoeia. It can also reduce the availability of some innovative medicines in foreign countries, with the effect of limiting competition and requiring national health system to forgo the benefits of those innovations in reducing health care costs. The economic models also indicate that benefits of lower prices to consumers were less than the benefits to society of new drugs foregone. 48

III. PRICE FIXING AND CONTROLS FOR PRICING – ISSUES AND SUGGESTIONS The new pharmaceuticals pricing policy envisaged that all patented drugs that would be launched in India after 1 January 2005 would be subject to price negotiations before granting them marketing approval, and that the Drugs and Cosmetics Act 1940 would be suitably amended to provide for this. The Department of Chemicals and Petrochemicals in consultation with the Department of Health would lay down necessary guidelines for determining the negotiated prices. Government on 18 January 2007 notified a committee to examine the issue of price negotiations for patented drugs. The committee was to interact with industry and to propose a system of reference pricing/price negotiations/differential prices that could be used for price negotiations of patented drugs and medical devices before their marketing approval in India. The committee submitted its report by mid April 2007.The considerations weighed by the committee were• An approach was one that would determine the price premium enjoyed by the drug in the lowest price market abroad compared with the closest therapeutic equivalent in the same country, and to apply that same premium to the closest therapeutically equivalent prevailing in the domestic market. That is to say, the same premium factor prevailing in the domestic market would become one of the markers. • Another approach under consideration was the principle of purchase parity pricing being used in Europe between member countries. Under this methodology, the price arrived at could be at a substantial discount to the U.S. prices, even less than 50%. • There was a push towards looking at prices charged abroad with a view to determining the lowest of the prices charged overseas. But every one of these approaches was market distorting, and suffered from several shortcomings: The National Pharmaceutical policy therefore suggested that all patented drugs that would be launched in India after 1 January 2005 would be subject to price negotiations before granting them marketing approvals, and for this the Drugs and Cosmetics act was amended and was enacted in 2008. 49

Given the high number of pharmaceutical firms in the informal/unorganized sector, domestic and foreign drug companies in India also run a large risk that their patented drugs will be pirated even with protected product patent system. Price controls benefit health delivery in countries that have a well regulated public health delivery system. Public health expenditures in Indian states continue to be low, with a wide disparity in effectiveness of delivery between states. There is a large private sector and unorganized access to medicines. In these circumstances, price controls would lead to market distortions, excessive regulation and the development of grey markets. High duties and transaction costs impose a heavy burden on the consumer—there are examples where these distort prices enormously, against imported drugs. A mindset that creates negativity towards imported drugs needs to be changed. III. WHY DOES INDIAN DRUG PRICING SYSTEM NEEDS TO BE DIFFERENT FROM EUROPEAN STYLE AND OTHER DEVELOPING COUNTRIES” PRICING SYSTEM The above analysis makes clear that India should develop a new approach that avoids the costs of European-style drug price controls, while also avoiding the inequities of a free market style. The issue of drug availability is to ensure that• • • the latest clinical treatment and drugs must be available these should be accessible to the entire population there should be incentives for development of new drugs through R&D that would require adequate compensation for development costs. India presents a unique situation. Absence of product patents for over three decades, a large indigenous industry, coupled with political economy requirements of a welfare state; require a balance between incentives and control. It is important that the latest drugs and formulations are available, that they can be reached to all, whether in the public health or the private health systems. It is equally important that there be an environment for industry and research to grow, and that global firms are comfortable 50

using the talent pool in India for R&D and drug discovery, assured of reasonable returns. Given wide income disparities, a range of public health and private care systems, and freedom of choice, and the distortions likely to be caused by the price fixing for patented products, it is important to consider creative solutions that would suit a developing country like India. A possible alternative that could be adopted in India for patented drugs is the adoption of a two tier price system. For example, in some states like Tamil Nadu, drug purchases for public hospitals by the government are negotiated with the companies. Each tablet carries a distinctive mark and the strips are separately labelled to indicate that they are not for sale, but part of the public health care system. The same drugs are available in the open market at market prices. Such a twin pricing system has the advantage of delivering drugs at low costs to the public health care system without distorting the market mechanism. In the case of patented drugs it is conceivable that producers may be willing to accept prices that are close to marginal costs of production plus fixed returns, if allowed to access the market for pricing that covers development costs. In this approach, the Department of Petrochemicals would finalize a list of patented drugs that it intends to be used in the public health system. Using this approach, the producing companies would be invited to convey the prices at which these drugs would be made available to government hospitals and dispensaries. These would be distinctively packaged and labelled and supplied to the health departments of the states against invoices raised by them, and accepted terms of payment. Outside this, firms would be free to charge market prices, and enjoy IP protection in full for their products. Such an approach might offer a short term solution to drug access concerns, while longer term structural reforms are explored. In the long-term, any solution to India's drug access problem requires major structural reforms to the health care system. In formulating such reforms, a balance must be struck between the markets for free sales and government supplies. The government cannot supply the entire demand for drugs unless it is prepared to commit to massive public subsidies and drastic price controls. A fresh approach is needed.



CHALLENGES FACED BY THE GOVERNMENT TO DEVELOP A NEW APPROACH TO PHARMACEUTICAL PRICING. • The Government has an overriding responsibility to ensure that the citizens of India – especially the common man -- have access to affordable medicines for treating the most common and important disease conditions. • At the same time, any new policy must maintain a world-class Indian life sciences capability. India is a world leader in the advanced life sciences. The Indian pharmaceutical industry dominates global generics markets and has begun making serious investments in innovative drug discovery. Given adoption of the Product Patents Act and increasing competition from Chinese generic companies in the international generics marketplace, the future of the Indian biopharmaceutical industry rests on its ability to innovate. Thus, any new policy must balance improved access to key medicines for the common man with support for India's continued capability to discover and develop advanced medicines, which represents a long-term national asset.



Such a solution requires a two-track approach. • First, the government should strengthen the public health infrastructure to ensure that rural and urban poor have universal access to treatments for basic medical needs. Such a system should be built around government bulk purchases of low-cost generic medicines. Also, instead of seeking to provide the latest state-of-the-art treatments for the rural and urban poor, the focus should be on the low-cost delivery of high-quality, essential care for all. • While patients in the public health system should be free to purchase more expensive patented or branded drugs, this could be achieved through a "balanced-billing" arrangement in which the government would subsidize only the cost of the basic generic drug, with the remainder being contributed by the patient. Such an approach would avoid the prohibitive cost of have the Central or State governments subsidize state-of-the-art foreign medicines, 52

allowing government funds to be allocated to an expansion of basic care to a larger number of people.

A second way is that the government should aim to facilitate the continued evolution of private health care markets, including private hospitals, private insurance, and high-cost patented drugs. Creating a separate private market would ensure that the cost of such advanced care would be borne by middleincome household. This two-track system would avoid the bureaucratic complications and prohibitive cost of transferring a European-style government health care system to a developing country like India.



The "third way" would address the expanding needs of the Indian middle-class for world-class health care, whilst creating a strong domestic home base for Indian biopharmaceutical companies to launch their new innovative patented products. And it would offer a new and creative third-way drug pricing model for developing countries around the world, which look to India for continued leadership.











PHARMACEUTICAL INDUSTRY The healthcare sector in India has experienced a paradigm a shift due emerging trends in globalization, developing markets, industry dynamics and increasing regulatory and competitive pressures. Companies across the world are reaching out to their counterparts to take mutual advantage of the other’s core competencies in R&D, Manufacturing, Marketing and the niche opportunities offered by the changing global pharmaceutical environment.

The pharmaceutical sector offers an array of growth opportunities. This sector has always been dynamic in nature and the pace of change has never been as rapid as it is now. To adapt to these changing trends, the Indian pharmaceutical and biotechnology companies have evolved distinctive business models to take advantage of their inherent strengths and the "Borderless" nature of this sector. These differentiated business models provide the pharmaceutical and biotechnology companies’ the necessary competitive edge for consolidation and growth. DRIVERS IN MERGERS AND ACQUISITIONS Today, there is a global trend towards consolidation and going forward, as pressures on the pharmaceutical industry increase, this trend will continue. The driving factors for mergers and acquisitions in the global pharmaceutical industry are:• • The lack of research and development (R&D) productivity expiring patents


• •

generic competition high profile product recalls

This sector is unique in the sense that it traverses across geographies, as health has no boundaries, and this very boundary-less nature supports consolidation in this Industry. With the easy availability of capital and increased global interest in the pharmaceutical and biotech industry, the sector has become quite a `mergersand-acquisitions' favourite. Apart from the patented pharmaceutical and biotech companies scouting for newer geographies to launch their patented molecules, the global generics market also has undergone an unprecedented consolidation wave in the past three years. In 2007, Teva acquired US generics major IVAX for $7.4 bn, to become the world’s largest generics company. In 2004, Teva paid $3.4 bn for Sicor of the US. Teva and Sandoz is the generics arm of the Swiss pharmaceutical group. Novartis, has been buying small generics companies to grow in size. Sandoz bought Hexal and Eon Laboratories in Germany, as well as Croatia’s Lek, Canada’s Sabex and Denmark’s Durascan in 2004 and 2005. Deflation in the generic industry would lead to displacement of weaker players leading to consolidation. The trend has gathered momentum with the $1.9bn buyout of Andrx by Watson to create the 3rd largest specialty pharma company There are three levels of integration that are currently being sought in the generics industry
• • •

Back-end manufacturing capability (API/formulation) Product integration (ANDA pipeline) Front-end (marketing and distribution) in the developed world

The US and European generics companies are scouting for alliances/buyouts at the back end of the chain, which would allow them to offset any manufacturing cost advantage held by companies in the developing markets. The Indian companies are looking at the front-end integration as building a front-end distribution set-up from scratch could take significant time. The product side integration is common to both sides, with weaker US/European generics companies looking at anyone that could offer a basket of products. This is because the US/European pipeline is weak while Indian companies are aspiring to grow rapidly, want to achieve critical mass quickly, and are looking for geographic expansion. 56

MERGERS AND ACQUISITIONS TREND IN INDIA Mergers and Acquisitions (M&A) interest in India is currently very high in the pharmaceutical industry. Size and end-to-end connectivity are major detriments in the global markets. To achieve them, Western MNC’s have to look to Indian companies. India’s changing therapeutic requirements and patent laws will provide new opportunities for big pharmaceutical for launching their patented molecules. While, India’s strong manufacturing base will stand global generic companies in good stead as a low-cost development and manufacturing destination. Besides consolidation in the domestic industry and investments by the US and European firms, the spate of mergers and acquisitions by Indian companies has ushered an era of the "Indian Pharmaceutical MNC". After traversing the learning curve through partnerships and alliances with international pharmaceutical firms, Indian pharmaceutical companies have now moved up a step in the value chain and are looking at inorganic route to growth through acquisitions. Many top and mid tier Indian companies have gone on a global "shopping spree" to build up critical mass in International markets. Also, given the easy access to global finance the Indian companies are finding it easier to fund their acquisitions. Incentives for Mergers and Acquisitions by Indian companies

Build critical mass in terms of marketing, manufacturing and research infrastructure Establish front end presence Diversification into new areas: Tap other geographies / therapeutic segments / customers to enhance product life cycle and build synergies for new products Enhance product, technology and intellectual property portfolio Catapulting market share

• •

• •

The Indian companies excel as far as the back end of the pharmaceutical value chain is concerned i.e manufacturing APIs and formulations. Over the past few years the Indian pharmaceutical companies have also stepped up their efforts in product


development for the global generic market and this is visible with the DMF filings at the US FDA. About 30% of the new DMF filings at the US FDA are being filed by Indian companies. What the Indian companies are short of is the front-end distribution and marketing infrastructure in the developed world. The current stress is on bridging this gap through any / or all of the following strategies. The type of tactic employed would depend on the companies’ existing capabilities, available resources, nature and scale of expansion planned and on the targeted geographical market. The following is a table of major mergers and acquisitions involving Indian companies.

Acquisitions are the quickest way to front end access. What is interesting is the fact that apart from market access – i.e marketing and distribution infrastructure, the acquiring company also gets an established customer base as well as some amount of product integration (the acquired entities generally have a basket of products) without the accompanying regulatory hurdles. There are also entry barriers for companies from the developing countries and acquisitions make it easy for these organizations to find a foothold in the developed markets. Over the last two years, several Indian companies have targeted the developed markets in their pursuit of growth, especially via the inorganic route. Companies such as Ranbaxy, Wockhardt, Cadila, Matrix, and Jubilant have made one or more European acquisitions, while others such as Torrent are also scouting for potential targets.


Table: Merger and Acquisition in Recent Years Announ ce data Feb-06 Dec-05 Dec-05 Nov-05 Target Betapharm Bouwer Barlett Able Labs Nihon Pharma Nov-05 Oct-05 Oct-05 Oct-05 Sep-05 Roche’s API Facility Avecia Servycal SA Target Research Explora Labs SA Sep-05 Jul-05 Jun-05 Valeant Mfg Trinity Labs Inc Heumann Pharma Jun-05 Jun-05 Jun-05 Gmbh & Co Doc Pharma NV Generic Prod Portfolio Biopharma Matrix Lab Ranbaxy Strides Front-end in Europe Spanish Generic Market-18 products Entry into new market 263 NA 1 Belgium Spain Latin 59 Dr.Reddy’s Labs Nicholas Piramal Glenmark Jubilant Organosys Matrix Labs Sun Pharma Jubilant Organsys Torrent Acquirer Dr.Reddy’s Labs Glenmark Sun Pharma Ranbaxy Reason Front end line in Germany Front end line in SA Mfg facility in US, Turnaround potential Increasing stake to 50% to take advantage of Japanese Generic Oppurtunity Increasing presence in Contract Mfg Increasing presence in Contract Mfg NA Capitalizing on CRO oppurtunity Explora’s expertise in biocatalyst would help in dev of high potency API’s Controlled substance mfg facility US FDA Facility inUS, pipeline of ANDA’s Entry in German market NA 12.3 NA US US Germany 58.97 17.1 NA 33.5 NA Mexico UK,Canada South Africa NA Switzerland Deal Value 570 NA 23 NA Target Country Germany South Africa US Japan


Uno-Cicle Hormonal Brand Strides Latina

Arcolab Glenmark

Venezuela Establish brand presence in Brazilian market


America Brazil


Strides Arcolab Matrix Lab

Additional 12.5% stake to establish presence in Brazilian market Backward integration, ARV mfg in China




Mchem Pharma Group Rhodia Anathetic Business Psi SupplyNV Trigenesis Therapeutics Espama Gmbh Laboratories Klincer Do RPG Aventis SA Alpharma Saa CP Pharma




Nicholas Piramal Jubilant Organsys Dr.Reddy’s Labs Wockhardt Glenmark Ranbaxy Cadila healthcare Wockhardt

International Product line


Jun-04 May-04 May-04 Apr-04 Dec-03 Jul-03 Jul-03

NA Niche Technology Front end line in Germany Entry in Brazil Front end in France Front end in France Front end and mfg in Europe

NA 11 11 5.2 84 6.2 17.7

Belgium US Germany Brazil France France UK

MERGERS AND ACQUISITIONS- CHALLENGE While growth via acquisitions is a sound idea in principle, there are challenges as well, which relate mainly to the stretched valuations of acquisition targets and the ability to turn them around within a reasonable period of time. The acquisitions of 60

RPG Aventis (by Ranbaxy) and Alpharma (by Cadila) in France are clear examples of acquisitions proving to be a drain on the company’s profitability and return ratios for several years post acquisition. In several other cases acquisitions by Indian generic companies are small and have been primarily to expand geographical reach while at the same time, shifting production from the acquired units to their costeffective Indian plants. A few have been to develop a bouquet of products. Other than Wockhardt’s acquisition of CP Pharma and Esparma, it has taken at least three years for the other global acquisitions to see break-even. Most of the acquiring companies have to pay greater attention to post merger integration as this is a key for success of an acquisition and Indian companies have to wake up to this fact. Also, with the increasing spate of acquisitions, target valuations have substantially increased making it harder for Indian companies to fund the acquisition I. ANALYSIS OF WOCKHARDT’S ACQUISITION

Wockhardt is a global, pharmaceutical and biotechnology company that has grown by leveraging two powerful trends in the world healthcare market - globalization and biotechnology. Acquisition Management The company has a strong track record in acquisition management, with three successful acquisitions in the European market and two in the domestic space.

The acquisitions in Europe and the subsequent integration of their operations have strengthened Wockhardt’s position in the high-potential markets of UK and Germany, and have expanded the global reach of the organization.


The growth drivers for Wockhardt’s European business include exports, new product launches, penetration in the European Union through mutual recognition, and strategic acquisitions.

Wockhardt UK Limited (Erstwhile CP pharmaceuticals) is amongst the 10 largest generics companies in UK and the second largest hospital generics supplier.

The Company has a comprehensive, FDA-approved manufacturing facility for injectables that plays a strategic role in driving the company’s growth through partnerships in contract manufacturing

Wockhardt UK has built up a critical mass in the segments of Retail Generics, Hospital Generics, Private Label GSL / OTC Pharmaceuticals, Dental Care (denture cleaning tablets, powders and fixative creams)

The acquisition of Esparma GmbH in 2004, has given Wockhardt a strategic entry point into Germany, the largest generics market in Europe Esparma has a strong presence in the high-potential segments of urology, neurology and diabetology, assisted by a dedicated sales & marketing infrastructure

The key to Wockhardt’s successful acquisition management is the management’s ability to turnaround the acquired company in record time and thus create value out of the acquisition. The company believes in value buys that would have a tactical fit with its core competencies and key strategic objectives. The acquisitions are mainly driven by market access since Wockhardt has an extensive pipeline of generics and biogenerics and needs a strategic front-end for the same. The company has plans for further acquisitions in the developed markets of Europe and US to further consolidate and strengthen their positions in these geographies. II. IMPLICATIONS OF THE MERGER OF RANBAXY AND DAIICHI

We will study the implications of the merger between Ranbaxy and Daiichi Sankyo, from an intellectual property as well as a market point of view. Why did Ranbaxy go in for a merger with Daichii?


Daiichi Sankyo Co. Ltd. signed an agreement to acquire 34.8% of Ranbaxy Laboratories Ltd. from its promoters. After the acquisition, Ranbaxy continued to operate as Daiichi Sankyo’s subsidiary but was managed independently. The main benefit for Daiichi Sankyo from the merger was Ranbaxy’s low-cost manufacturing infrastructure and supply chain strengths. Ranbaxy gained access to Daiichi Sankyo’s research and development expertise to advance its branded drugs business. Daiichi Sankyo’s strength in proprietary medicine complemented Ranbaxy’s leadership in the generics segment and both companies acquired a broader product base, therapeutic focus areas and well distributed risks. Ranbaxy is now functioning as a low-cost manufacturing base for Daiichi Sankyo. Ranbaxy, for itself, has gained a smoother access to and a strong foothold in the Japanese drug market. The immediate benefit for Ranbaxy was that the deal freed up its debt and imparted more flexibility to its growth plans. Most importantly, Ranbaxy’s addition is said to elevate Daiichi Sankyo’s position from 22 to 15 by market capitalization in the global pharmaceutical market. Synergies The key areas where Daiichi Sankyo and Ranbaxy are synergetic include their respective presence in the developed and emerging markets. While Ranbaxy’s strengths in the 21 emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics business, Ranbaxy’s branded drug development initiatives for the developed markets will be significantly boosted through the relationship. To a large extent, Daiichi Sankyo will be able to reduce its reliance on only branded drugs and margin risks in mature markets and benefit from Ranbaxy’s strengths in generics to introduce generic versions of patent expired drugs, particularly in the Japanese market. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and have profound strength in striking lucrative alliances with other pharmaceutical companies. Despite these strengths, the companies have a set of pain points that can pose a hindrance to the merger being successful or the desired synergies being realized. With R&D perhaps playing the most important role in the success of these two players, it is imperative to explore the intellectual property portfolio and the gaps that exist in greater detail. Ranbaxy has a greater share of the entire set of patents filed by 63

both companies in the period 1998-2007. While Daiichi Sankyo’s patenting activity has been rather mixed, Ranbaxy, on the other hand, has witnessed a steady uptrend in its patenting activity until 2005. In fact, during 2007, the company’s patenting activity plunged by almost 60% as against 2006. Post-acquisition Objectives In light of the above analysis, we see that Daiichi Sankyo’s focus is to develop new drugs to fill the gaps and take advantage of Ranbaxy’s strong areas. In a global pharmaceutical industry making a shift towards generics and emerging market opportunities, Daiichi Sankyo’s acquisition of Ranbaxy signals a move on the lines of its global counterparts Novartis and local competitors Astellas Pharma, Eesei and Takeda Pharmaceutical. Post acquisition challenges included:• • • Managing the different working and business cultures of the two organizations Undertaking minimal and essential integration Retaining the management independence of Ranbaxy without hampering synergies. BENEFITS TO RANBAXY AND DAIICHI FROM THE MERGER • Daiichi Sankyo’s move to acquire Ranbaxy has enabled the company to gain the best of both worlds without investing heavily into the generic business.

Furthermore, Daiichi Sankyo’s portfolio has broadened to include steroids and other technologies such as sieving methods, and a host of therapeutic segments such as anti-asthmatics, anti-retroviral, and impotency and anti-malarial drugs. Daiichi Sankyo now has access to Ranbaxy's entire range of 153 therapeutic drugs across 17 diverse therapeutic indications. Through the deal, Ranbaxy has become part of a Japanese corporate framework, which is extremely reputed in the corporate world. As a generics player, Ranbaxy is very well placed in both India and abroad. Given Ranbaxy’s intention to become the largest generics company in Japan, the acquisition provides the company with a strong platform to consolidate its Japanese generics business. From one of India's leading drug manufacturers, Ranbaxy can leverage the vast research and development resources of Daiichi 64

Sankyo to become a strong force to contend with in the global pharmaceutical sector. A smooth entry into the Japanese market and access to widespread technologies including, plant, horticulture, veterinary treatment and cosmetic products are some things Ranbaxy can look forward as main benefits from the deal.









SWOT ANALYSIS OF INDIAN PHARMACEUTICAL INDUSTRY The SWOT analysis of the industry reveals the position of the Indian pharmaceutical industry in respect to its internal and external environment. STRENGTHS1. India with a population of over a billion is a largely untapped market. In fact the penetration of modern medicine is less than 30% in India. To put things in perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189. 2. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centres. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets. 3. Indian manufacturers are one of the lowest cost producers of drugs in the world. With a scalable labour force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. In some cases, this cost is as low as 90%. 4. The fact that despite the low level of unit labour costs India boasts a highly skilled workforce has enabled the country's pharmaceutical industry at a relatively early stage to offer quality products at competitive prices. Each year, roughly 115,000 chemists graduate from Indian universities with a master’s degree and roughly 12,000 with a PhD.4 The corresponding figures for Germany – just fewer than 3,000 and 1,500, respectively – are considerably lower. After many chemists from India migrated to foreign countries over the last few years, they now consider their chances of employment in India to have improved. As a result, a smaller number is expected to go abroad in the coming years; some may even return. 5. Indian pharmaceutical industry possesses excellent chemistry and process reengineering skills. This adds to the competitive advantage of the Indian


companies. The strength in chemistry skill helps Indian companies to develop processes, which are cost effective.

WEAKNESS1. The Indian pharmaceutical companies are marred by the price regulation. Over a period of time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharmaceutical Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses. 2. Indian pharmaceutical sector has been marred by lack of product patent, which prevents global pharmaceutical companies to introduce new drugs in the country and discourages innovation and drug discovery. But this has provided an upper hand to the Indian pharma companies. 3. Indian pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry. 4. Due to very low barriers to entry, Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. To put things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition, the growth in value terms was 8.2% (prices actually declined by 2.2%)


OPPORTUNITIES1. The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. This migration could result in consolidation as well. Very small players may not be able to cope up with the challenging environment and may succumb to giants. 2. Large number of drugs going off-patent in Europe and in the US between 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world. 3. Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which pharma industry is an integral part. 4. Being the lowest cost producer combined with FDA approved plants; Indian companies can become a global outsourcing hub for pharmaceutical products. THREATS1. There are certain concerns over the patent regime regarding its current structure. It might be possible that the new government may change certain provisions of the patent act formulated by the preceding government. 2. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane. 3. The short-term threat for the pharma industry is the uncertainty regarding the implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry. 70

(a) INDUSTRY COMPETITION Pharmaceutical industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6 %(2006) market share, and the top 5 players together have about 18 %(2006) market share. Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry. Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharmaceutical industry are very low. The fixed cost requirement is low but the need for working capital is high. The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies this ratio is in the range of 3.5-4 times. For smaller companies, it would be even higher. Many small players that are focussed on a particular region have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way. An important fact is that, pharmaceutical is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India). Though volume growth has been consistent over a period of time value growth has not followed in tandem. The product differentiation is one key factor which gives competitive advantage to the firms in any industry. However, in pharmaceutical industry product differentiation is 71

not possible since India has followed process patents till date, with loss favouring imitators. Consequently product differentiation is not a driver, cost competitiveness is. However, companies like Pfizer and Glaxo have created big brands over the years which act as product differentiation tools. Earlier it was easy for Indian pharmaceutical companies to imitate pharmaceutical products discovered by MNCs at a lower cost and make good profit. But today the scene is different with the arrival of the patent regime which has forced Indian companies to rethink its strategies and to invest more on R&D. Also contract research has assumed more importance now. (b) BARGAINING POWER OF BUYERS The unique feature of pharmaceutical industry is that the end user of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. However, when we look at the buyer’s power, we look at the influence they have on the prices of the product. In pharmaceutical industry, the buyers are scattered and they as such do not wield much power in the pricing of the products. However, govt with its policies, plays an important role in regulating pricing through the NPPA (national pharmaceutical pricing authority). (c) BARGAINING POWER OF SUPPLIERS The pharmaceutical industry depends upon several organic chemicals. The chemical industry is again very competitive and fragmented. The chemicals used in the pharmaceutical industry are largely a commodity. The suppliers have very low bargaining power and the companies in the pharmaceutical industry can switch from their suppliers without incurring a very high cost. However, what can happen is that the supplier can go for forward integration to become a pharmaceutical company. Companies like Orchid Chemicals and Sashun Chemicals were basically chemical companies who turned themselves into pharmaceutical companies. (d) BARRIERS TO ENTRY Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur in India. The capital requirement for the industry is very low; creating a regional distribution network is easy, since the point of sales is restricted in this 72

industry in India. However, creating brand awareness and franchisee among doctors is the key for long term survival. Also, quality regulations by the government may put some hindrance for establishing new manufacturing operations. The new patent regime has raised the barriers to entry. But it is unlikely to discourage new entrants, as market for generics will be as huge. (e)THREAT OF SUBSTITUTES This is one of the great advantages of the pharmaceutical industry. Whatever happens, demand for pharmaceutical products continues and the industry thrives. One of the key reasons for high competitiveness in the industry is that as an ongoing concern, pharmaceutical industry seems to have an infinite future. However, in recent times the advances made in thee field of biotechnology, can prove to be a threat to the synthetic pharmaceutical industry.

This model gives a fair idea about the industry in which a company operates and the various external forces that influence it. However, it must be noted that any industry is not static in nature. It’s dynamic and over a period of time the model, which have used to analyse the pharmaceutical industry may itself evolve. Going forward, we foresee increasing competition in the industry but the form of competition will be different. It will be between large players (with economies of scale) and it may be possible that some kind of oligopoly or cartels come into play. This is owing to the fact that the industry will move towards consolidation. The larger players in the industry will survive with their proprietary products and strong franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Smaller fringe players, who have no differentiating strengths, are likely to either be acquired or cease to exist. The barriers to entry will increase going forward. The change in the patent regime has made sure that new proprietary products come up making imitation difficult. The 73

players with huge capacity will be able to influence substantial power on the fringe players by their aggressive pricing thereby creating hindrance for the smaller players. Economies of scale will play an important part too. Besides government will have a bigger role to play.



TOP FIVE COMPANIES We have analyzed the top five companies in the Indian pharmaceutical industry for the purpose of doing the quantitative analysis. Our rationale behind selecting the top five companies has been the –SALES AND PROFIT. We studied the sales and profit figures of the companies operating in this industry and zeroed in on the following companies: • • • • • CIPLA RANBAXY SUN PHARMA PIRAMAL HEALTHCARE Dr. REDDY’S LABORATORIES

BOTTOM THREE COMPANIES On a similar basis, we chose the bottom three companies in the Indian Pharmaceutical industry. These are: • • • MOREPEN LABS SIRIS Ltd. KERBS BIOCHEM

We have analyzed the financial position of these companies using the RATIO ANALYSIS. The first step was to identify the key ratios and study the performance of 75

the companies using these ratios as the base. After this, we made inter- firm comparison of the companies, followed by detailed ratio analysis for the last five years. In the following pages, we will be studying the detailed analysis of all the above mentioned companies.

Dr Reddy's Cipla Labs 20080 YRC Key Ratios Debt-Equity Ratio Long Term DebtEquity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio Aggregate 0.98 0.69 1.58 3 0.1 0.1 2.66 200803 0.09 0 2.37 Piramal Health 200803 0.43 0.28 1.54 Sun Pharma. 200803 0.18 0.18 3.04 Ranbaxy Labs. 200712 1.37 0.92 0.98

1.78 5.02 4.53 5.82

2.05 3.9 3.38 47.45

2.27 6.11 3.53 40.76

1.74 8.34 7.5 5.61

3.62 8.88 3.96 208.94

2.04 4.64 4.72 9.29

ANALYSIS OF THE DEBT EQUITY RATIO Debt equity ratio is an important indicator of the solvency of a firm. This ratio indicates the relationship between the external equities or the outsider’s funds and the internal equities or the shareholder’s funds. A wise mix of debt and equity increases the return on equity because: Debt is generally cheaper than equity



Interest payments tax deductible expenses, where as dividend are paid from taxed profits. A high debt to equity ratio indicates aggressive use of leverage and a high leveraged company is more risky for creditors. A low ratio on the other hand indicates that the company is making little use of leverage and is too conservative.

If we compare the debt equity ratio, then Ranbaxy Lab, with its debt equity ratio of 1.37, establishes itself as the most risk taking company. The ratio is greater than the satisfactory ratio of 1:1 and this indicates that the claims of the outsiders are greater than those of the owners. Dr Reddy’s labs and Cipla with the ratio of 0.09 and 0.1 respectively indicates low debt financing and a higher margin of safety to the creditors at the time of liquidation of the firm. But too low a ratio of these companies also does indicate that they have not been able to use low cost outsiders’ funds to magnify their earnings. ANALYSIS OF LONG TERM DEBT EQUITY RATIO From the long term creditors point of view, a low ratio is considered favourable, which is why , Dr Reddy’s labs with a ratio of zero holds an edge overall others as a high proportion of owner’s funds provide a larger margin of safety for them. Ranbaxy with a ratio of almost equal to 0.92, which is almost equal to 1, may not be able to get credit without paying very high interest and without accepting undue pressures and conditions of the creditors. ANALYSIS OF THE CURRENT RATIO AND INVENTORY TURNOVER RATIO Current ratio evaluates the liquidity of the business. It is a ratio of current assets to current liabilities and is an indicator of a company’s abilities to pay its debts in the short term. Current ratio is expected to be atleast2:1. And if we have a look at the figures, we see that this criterion is met by Sun Pharma, Cipla and Dr.Reddy’s lab. On the other hand the rest of the companies lag behind in their current ratio with Ranbaxy having lowest current ratio of 0.98. But the most important aspect that cannot be ignored is that current ratio is independently, can hardly convey any useful information. Even a high current ratio 77

may not be good news if the proportion of liquid assets in the total assets is far less than the proportion of the stuck inventories. We shall therefore analyze the Quick ratio and Inventory turnover ratio together. The inventory turnover ratio indicates the no. of times the inventory of the company is turned into sales. A high inventory turnover ratio means fast moving inventory and thus a low risk of obsolescence. From the Inventory turnover ratio, we have calculated the operating cycle or the average time in which the inventory gets converted into sales for each company. This is tabulated below: RANBAXY CIPLA DR.REDDY’S LAB 58.9 PIRAMAL SUN PHARMA 40.5




Piramal has a current ratio of 1.54 which is almost half the current ratio Sun Pharma with an average operating cycle of 43.16 days. Ranbaxy has a still lower current ratio of 0.98 with an average operating cycle of inventory of 77.5 days Thus it shows that Ranbaxy has less current assets and those current assets take more time to get converted to sales which indicates less liquid assets’ proportion. Cipla with a current ratio of 2.66, which is almost comparable to Dr Reddy’ s labs ratio of 2.37, portrays a different picture, when it comes to inventory operating cycle. Dr.Reddy’s Lab takes approximately 33 days less than Cipla to convert its inventory to sales. Thus with almost the same amount of fixed assets , Dr Reddy’s labs shows faster moving inventories as compared to Cipla. It shows that Cipla though has a good amount of current assets yet the proportion of liquid assets is less as current assets spend more time as inventory. Sun Pharma tops the chart of current assets with a figure of 3.04 and also has the highest inventory turnover ratio of 8.88. This shows that Sun Pharma has more current assets than any other company, but is still managing its inventory so well average operating cycle is the least i.e. 40.5 days. ANALYSIS OF THE FIXED ASSET TUROVER RATIO Fixed asset turnover ratio measures the efficiency of the firm in utilizing its assets. A fixed asset turnover ratio indicates that the company ids tuning over its fixed assets 78 that its

such that it generates greater sales. A low fixed assets turnover ratio indicates that the company has more fixed assets than it actually needs for its operations. Sun Pharma has the highest fixed asset turnover ratio of 3.62 which indicates that it generates highest sales than any other company. It may also mean that Sun Pharma has fewer amounts of fixed assets than Cipla which has more of fixed assets but falls short on fixed asset management. ANALYSES OF THE DEBTOR TURN OVER RATIO: It is measures the ability of a company to collect credit from its customers in a prompt manner and enhance its liquidity. This ratio measures how efficient is firm’s credit and collection policy and also says about the quality of firm’s debtors. If we look at the figures, we see that Piramal has the highest debtor turnover ratio of 7.50 followed by Ranbaxy and Sun Pharma. Cipla is the poorest performer in this category with a debtor turnover ratio of 3.38. We have calculated the average debt collection period of all these companies, as illustrated below: RANBAXY 76.20 CIPLA 106.5 DR.REDDY’S LAB 101.98 PIRAMAL 48 SUN PHARMA 90.90

The above mentioned figures clearly indicate that Cipla’s portfolio of debtors is comparatively poor with Dr Reddy’s lab also following Cipla’s footsteps. These companies have a debt collection period of more than 3 months and therefore run a risk of debts becoming bad debts. A note must be taken care of that the average debt collection period of a company is in sync with the company’s credit period. If the former lags than the latter, it is an alarming sign. Piramal with an average debt collection period of 48 days shows that debtors have a good credibility. Though Piramal is far behind than any of the companies in management of fixed assets and also does not put up a good show as far as the amount of current assets is concerned, yet its management of its limited resources to the maximum speaks volumes about the company. Thus, no questions that Piramal’s growth, though slow, will be steady and sustainable in the long run. A good portfolio of debtors is essential as granting of credit to customers without taking a note of their credibility was the sole reason which triggered the crash of banks in US.


ANALYSIS OF INTEREST COVER RATIO The Sun pharma’s interest cover ratio is approximately four times more than that of Cipla. This is an interesting fact as the debt equity ratio of Sun pharma is more than that of Cipla. It means that inspite of more outside funds than Cipla it has low interest cover ratio. It can happen only when the profits earned by Sun pharma are more than those of Cipla. Thus, even though Sun pharma is a higher risk taker than Cipla it has better margins of safety to cover up its interest expenses. Ranbaxy’s figure of 9.29 is very low as it also has high debt equity ratio of 1.37. This indicates that inspite of having a larger proportion of outside funds (debts) its profits are not sufficient enough to cover the interest expenses. Following is a comparison of the debt equity ratio & interest cover of Ranbaxy Debt-Equity ratio = 1.37 Interest cover ratio = 9.29 The debt equity ratio is approximately 0.14 times more than the interest cover ratio. In case of Sun pharma, Debt equity ratio = 0.18 Interest cover ratio = 208.94 It is seen that the interest cover ratio is approximately 1160 times more than the debt equity ratio. Thus we can infer that higher the interest cover ratio of a company in comparison to debt equity ratio the more safe is the company to continue its operations in conditions of decreased earnings.



INTER FIRM COMPARISON OF THE BOTTOM THREE COMPANIES: ANALYSIS OF THE DEBT EQUITY RATIO: Debt equity ratio of Kerbs, Siris and Morepen is very less, not even equal to 1 which suggests that these companies are very conservative in their approach i.e. depend only upon their shareholder’s funds. Morepen’s debt equity ratio as well as long term debt equity ratio is zero, signifying that the entire capital is contributed by the shareholders only. In spite of less outside funds, Kerbs fares a bit well than the other two. Ratio for their low debt equity ratio may be that creditors are unsure of getting back their amount and interests on the due dates, which is why they are apprehensive of investing in these companies. ANALYSIS OF CURRENT RATIO: Current ratio of Morepen and Siris exceeds the normally required 2:1 ratio. Only Kerbs fall short of this specification. Current ratio does not portray a healthy and sound position of the companies .We can also see that the debtor turnover ratio is zero for Siris and Morepen which indicates that though the company has debtors( current assets) but those debtors are not turning up with payments on due dates. Thus, the current assets (debtors) are high but it is of no use because of their no chance of getting recovered. ANALYSIS OF FIXED ASSET TURNOVER RATIO: The figures of the zero in case of Siris and Morepen suggest that the return from fixed assets is nil. Also in case of Kerbs, it is minimal. This suggests that these companies 81

have though invested in fixed assets, yet are not gaining anything from those capital expenditure. In short those fixed assets are not operational. ANALYSIS OF INVENTORY TURNOVER RATIO: Siris and Morepen figures suggest that the inventory is not at all getting converted in to sales. This is an indication of permanently stuck inventory- a loss to the company. Though Kerbs does have an inventory ratio figure of 1.17, it is no good as it indicates that the operating cycle for inventory is a around 340 days, which is only slightly than a year. Thus in a year, inventory gets converted into sales only once. ANALYSIS OF DEBTORS TURNOVER RATIO: For Kerbs, the debtor turnover ratio is approximately 2 , which means that the average debt a collection period is somewhere around 180 days. In case of Siris and Morepen , this ratio is zero. This means that the debtors are not at all turning up or we can say that the debts have become bad debts in this year. ANALYSIS OF THE INTEREST COVER RATIO: Morepen has interest cover ratio of 0, which shows that there are no profits at all and it cannot cover up for its interest expenses. There is no margin of safety in case the company has low earnings. In case of the other two companies the negative Interest cover ratio indicates that the company is making losses. Thus we can say that in case of these companies the interest expense are not covered. In addition the companies are not even able to cover up their operating expenses.


• • •

The Company has pushed the frontiers of possibility, both horizontally and vertically, Growth through scientific breakthroughs and strategic initiatives has been achieved. This is more evident after the merger of RANBAXY with DAIICHI. The clear aspiration is to achieve global sales of US $ 5 Bn by 2012 and position itself among the top 5 global generic companies.

ACHIEVEMENTS OF RANBAXY • Ranbaxy achieved Global Sales of US $ 1,619 Mn, a growth of 21%. Emerging markets strengthened their presence in the Company's overall sales mix, and comprised 54% of the total sales (49% in 2006). • Went into merger with Daiichi in June 2008.



DETAILED RATIO ANALYSIS OF RANBAXY: DEBT EQUITY RATIO LONG TERM DEBT EQUITY RATIO CURRENT RATIO FIXED ASSET TURNOVER 2004 0.04 0 1.63 2.95 2005 0.24 0.03 1.21 2.29 4.1 4.6 6.66 2006 0.89 0.5 1.06 2.09 4.44 4.51 8.58 2007 1.37 0.92 0.98 2.04 4.64 4.72 9.29 2008 1.37 0.92 0.98 2.04 4.64 4.72 9.29


 Debt equity ratio and the long term debt equity ratio of the company have increased
from 2004 to 2008, indicating the aggressive strategy adopted by the company to depend more on debt than on equity. The heavy dependence of Ranbaxy on the debt took its toll as the company ran into losses on account of nonpayment of required interests and principal disbursements on time. Because of this Ranbaxy was taken over by Daiichi – a Japanese pharmaceutical company, which offered Ranbaxy, monetary assistance to overcome deep debts. Hence it is clear that playing too much risk without foresight may force liquidation of the company or may result into a forced acquisition or merger!

 Current ratio has decreased between 2004 -2007, indicating that the company went
into a current asset deficit. The current asset from 2005 went even below the mean of the total current assets over 5 years. This current asset ratio figure falls way short of the satisfactory ratio of 2:1.

 A continuous decline in the fixed asset turnover ratio over the 4 years indicates
acquisition of fixed assets. This acquisition of fixed assets does not go in favor of the company as increase in fixed asset will also result in cost of maintenance and for that the company is not showing an increase in the cash in hand.

 Inventory turnover ratio, though reduced by around 13 % in 2005over 2004, but
showed an improvement in the operating cycle of inventory in the successive years. This period was also marked by the amendments in the Patent Act. Amendments in the act must have come as a respite as it checked the inflow of generic drugs in the market. 84

 Debtor turnover ratio of Ranbaxy has increased over the years. Though the company
has bettered its average debt collection period by 4.65%in 2007 over 2006, yet its average debt collection at the end of 2007 showed an increase of 26.48% over the year 2004. (Being 76 days in 2007 and 60 days in 2004).

 Interest coverage ratio decreased considerably in 2005 by about 88.56% thus
reducing the safety margin to cover the interest requirements. It was when Ranbaxy was taken over by Daiichi that Cipla made it to the top position in 2008.

In 2008–09, Dr.Reddy’s lab will complete 25 years of being in business. It is a significant milestone. 85

Between 1999–2000 and 2007–08, the Company has increased its revenues at an exponential trend rate of growth (i.e. trend CAGR) of 27 per cent per year, measured in US dollars. During 2007–08, the Company successfully launched RedituxTM in India; a monoclonal antibody used in the treatment of cancer and thus demonstrated its technological prowess in manufacturing a product in the biologics space

Financial Highlights Consolidated Revenues
• • • • • Consolidated revenues decreased by 23% to Rs. 50,006 million or U.S. $. 1.25 billion in 2007– 08 from Rs. 65,095 million in 2006–07. Operating Income decreased by 70% to Rs. 3,358 million in 2007–08 from Rs. 11,331million in 2006–07. Profit before tax and minority interest decreased by 67% to Rs. 3,438 million in 2007–08 from Rs. 10,500 million in 2006–07. Profit after tax decreased by 50% to Rs. 4,678 million in 2007–08 from Rs. 9,327 million in 2006–07. Fully diluted earnings per share decreased to Rs. 27.73 in 2007–08 from Rs. 58.56 in 2006–07. The company launched 10 new products in the US generics market in 2007–08, including two over-the- counter (OTC) products. The company had filed 122 cumulative Abbreviated New Drug Applications (ANDAs) in 2007-08.


Key Financial Ratios 2004 0.02 0.01 3.73 2.33 6.99 3.97 72.71 2005 0.08 0.01 2.49 1.79 5.79 3.78 3.82 2006 0.28 0.04 1.85 2.05 5.64 4.21 10.39 2007 0.19 0.02 2.21 3.45 8.69 4.94 27.29 2008 0.09 0 2.37 2.27 6.11 3.53 40.76



 The debt equity ratio shows fluctuation with an increase in 2005, followed by
a decrease, again by an increase and then finally by a decrease. In spite of these fluctuations, the range of debt equity ratio is from 0.02 to 0.19. This range shows that the debt equity proportion of the company remained almost constant. Long term debt equity ratio trends Also hardly show any fluctuation as the minimum of it is 0.00 and a maximum of 0.04. This signifies that the company did not rely too much on either the debts or the equity, rather maintained a balance between the two. 87

 Current ratio also shows fluctuations with first an increasing trend till 2006 followed by a decrease and finally an increasing trend in the next two successive years. We can infer that when the economy was hit in 2008 by financial crisis then the company wisely decreased its debts and increased its current assets, thus aiming to minimize the liquidity crunch.  Fixed assets turnover ratio over the five years show a dip in 2008 over the 2007 figures revealing the fact that the company could not generate better revenues from fixed assets in 2008 than in 2007. It can be attributed to a decline in consumer demand in 2008 which led to a decrease in the efficient utilization of the fixed assets.  Inventory turnover ratio increased in 2007 over 2006 by 54% followed by a sharp decline of approx 30%in 2008. Thus, in 2008 the inventory took longer time to convert to sales than in 2007.

 Debtor’s turnover ratio increased consistently till 2007 showing a good trend
in average debt collection period but fell to 3.53 in 2008 showing that debtors failed to turn up quickly as compared to previous years.  Interest cover ratio though increased in 2008 over the last three years is a positive sign inspite of the earnings of the company showing a dip. Hence the company managed to keep a wide safety margin to cover up its interest charges.



CIPLA IS BORN Dr. K Hameed set up in 1935 The Chemical, Industrial & Pharmaceutical Laboratories, which came to be popularly known as Cipla. On August 17, 1935, Cipla was registered as a public limited company with an authorised capital of Rs 6 lakhs. Cipla was officially opened on September 22, 1937 when the first products were ready for the market. ACHIEVEMENTS OF CIPLA  Topped pharma rankings with 5.42% market share, a head of Ranbaxy and GSK.  Cipla Laboratories continues to be the largest pharmaceutical company in the domestic market.  According to an article published in Business Standard on Jan1, 2008 Cipla topped the ORG-IMS rankings for with a market share of 5.42 per cent and sales of Rs 146.32 crore, edging out Ranbaxy which stood at second position with 5.09 per cent market share and Rs 137.49 crore sales.  Cipla overtook Ranbaxy and GlaxoSmithKline India (GSK) to become the largest pharmaceutical company in the domestic market for the first time in May 2008. TEN YEAR TREND IN SALES IN CIPLA



Key Financial Ratio DEBT EQUITY RATIO LONG TERM DEBT EQUITY RATIO CURRENT RATIO FIXED ASSET TURNOVER RATIO INVENTORY TURNOVER RATIO DEBTOR TURNOVER RATIO INTEREST COVERAGE RATIO 2004 0.13 0.11 1.87 3.19 3.14 4.63 30.28 2005 0.14 0.12 1.89 2.73 3.54 4.29 39.73 2006 0.19 0.16 2.06 2.59 3.55 4.13 45.17 2007 0.11 0.1 2.42 2.24 3.65 3.71 73.4 2008 0.1 0.1 2.66 2.05 3.9 3.38 47.45


 The debt equity ratio over the five years is indicative of the fact that there has
not been any significant change in figures. Though this ratio first changed from 2004 to 2006 with marginal increase, it again dropped back in 2007, even below the 2004 figures. The 2008 figures are still lower. It shows that from 2004 to 2006, the company relied more on debts from outside sources than on equity from shareholders. The reason may be that the company decided to restrain from dividend payment as these are taxed profits. In the two successive years, the company’s less reliance on outside funds and more on shareholder’s funds indicates a shift from aggressive to conservative strategy. This move seems a sensible one in the wake of economic slowdown. With drawl from risk debt financing, may though affect the returns on investment, but is a better choice in the present scenario , where the companies are finding it difficult to make interest payments on due days. Hopefully, for a year or so, the companies will continue to rely more on equity.  Long term debt equity ratio also follows the same trend; first an increase till 2006 and then a decrease till 2008, showing less dependency on long term debts. This can be again attributed to 2 reasons • Cipla is apprehensive of whether it’ll meet the interest payment deadlines.


No creditor is interested or rather resource sufficient to lend to the companies because of the liquidity crunch in the market.

 An incessant and a significant increase in the current ratio indicates the company is going strong each year in discharging its current liabilities or short term obligations.  On the other hand fixed asset turnover ratio has shown a consistent fall over these years indicating that the returns from fixed assets have decreased or the company has gone into more acquisition of fixed assets. It can be inferred that the company has gone for expansion.  Inventory turnover ratio’s consistent increase shows the improvement of Cipla in the inventory management. A decrease of 13 % in the average operating inventory cycle within 4 years is a testimony of the inventory getting converted into sales more rapidly.  The continuous decrease in the debtor turnover ratio is one area which needs immediate attention as the average debt collection period has gone up from 2004 to 2008. A rise in this ratio must be checked else the company may fall short of liquidity.

 Interest coverage ratio shows that the company performed well in keeping and
also increasing the margin of safety that it provides to its creditors. But a sharp decline in the 2008 shows that the company’s profits have considerably reduced. This sharp decline cannot be attributed to increased interest expense because the debt equity ratio indicates the decline in the debts of the company in the same year. It can be hence referred that profits are not sufficient to cover the interest requirements, and this can be detrimental for the company, in case the earnings of the company also drop. It is important the management thinks twice before going for massive acquisition of fixed assets.


SUN PHARMACEUTICALS INDUSTRIES LIMITED AN OVERVIEW OF THE COMPANY • Net sales for the year ending 31 March 2008, up 57%. International markets are at 55% sales, further strengthening its presence as an international pharma generic company.

• •

India formulations continue to be a large part of our turnover, accounting for 43% of its business. Ex- US branded generics grew 10% in value terms. Sales of 76% subsidiary in the US, Caraco Pharma

A total of 215 patents have been have been filed so far, of which 59 were granted.


1.92 2.35

3.34 2.23

5.46 2.57

4.62 2.91

3.04 3.62

6.3 6.13 82.22

7.2 6.9 29.2

7.74 7.09 44.52

7.72 5.61 73.79

8.88 3.96 208.94


DETAILED RATIO ANALYSIS OF SUN PHARMA:  Both debt equity ratio and long term debt equity ratio show the similar trend of first increasing from 2004 to 2006 and hen decreasing till 2008. The mean of these two ratios is 0.716 and 0.692 respectively. The figures of the last 2 years show that Sun Pharma has reduced on its debt and increased its equity. Thus the company is playing safe by following a conservative approach.  Current ratio also shows an increasing trend till 2006 before showing decline till 2008. In spite of this decline, the current ratio has shown a net increase of 58.33% in 2008 over the figures in 2004.  Fixed asset turnover ratio has consistently increased from 2004 till 2006, thus showing an increase in revenue from fixed asset over these years. It shows that the capital investment strategy of the company is quite sound because the long term investments made, are generating returns for Sun Pharma.  The continuous increase in the Inventory turnover ratio shows improvement in the inventory management. The inventory operating cycle for 2008 is approx 41 days which is 16 days less than which the company used to take to convert its inventory to sales in 2004.

 Debtor turnover ratio shows a significant drop in 2008. The figure at 3.96 is
approximately 33% less than the mean debtor turnover ratio (5.94). Thus a decrease in both current ratio and debtor turnover ratio indicates towards a decline in cash in hand.  Interest cover ratio has increased manifold from 2004 to 2008, with a net increase of about 2.5 times. It is indicative of an increase in the safety margin for payment of interests from profits. One reason for this increase is the decrease in the debts of the company, which has led to the decrease in the interest payment liability.


PIRAMAL HEALTHCARE The VISION of Piramal is to become the most admired Indian pharmaceutical company with leadership in market share, research and profits by• • • • Building distinctive sales & marketing capabilities Evolving from licensing to globally launching our patented products Inculcating a high performance culture Being the partner of choice for global pharmaceutical companies

MILESTONES ACHIEVED • 2008 marked the 20th year of Piramal group’s foray intothe healthcare space. Since their acquisition of Nicholas labs in 1988, the company has come a long way to stand tall as one the largest healthcare companies in our country. • • • • • (i) (ii) Revenues for the year grew 16.2% to Rs. 28.7 billion. Operating Profit grew 41.3% to Rs. 5.4 billion. Operating Margin increased from 15.5% to 18.9%. Net Profit grew 53.1% to Rs. 3.3 billion. In Healthcare Solutions: Thirty new products & line extensions launched, new products (launched during the last 24 months) form 4.9% of sales. Top-10 brands grew by 8.5% for financial year 2008.


In Allied Businesses:

(i) Piramal Diagnostic Services (Pathlabs & Radiology) business grew by 71.8% to Rs.1.2 billion. (ii) Piramal Diagnostic Services acquired 16 new Laboratories during the year. (iii)New joint-venture formed with ARKRAY Inc. for marketing Diagnostic Products in India.


1.59 2.78

1.2 1.9

1.14 1.83

1.39 1.67

1.54 1.74

7.84 8.34 6.35

5.58 8.27 5.77

6.25 9.53 8.02

7.78 8.42 6.58

8.34 7.5 5.61



 Both debt equity ratio and long term debt equity ratio have decreased over the
years except for a slight increase in 2008, indicating that Piramal has not changed the mix of debt and equity significantly.

 Current ratio of Piramal decreased from 2004 to 2006 followed by an increase
till 2008. The trend of increase and decrease is such that whatever drop is seen in current ratio till 2006 is recovered till 2008. Thus the current ratio at the end of the year 2008 was restored to 1.54, almost equal to 1.59 in 2004.  Fixed asset turnover ratio shows a decreasing trend till 2007 after which, improvement is registered in 2008, thereby indicating greater revenue generation from the amount invested in fixed assets.

 Inventory turnover ratio, apart from a decrease in 2005, shows a continuous
increase over the 5 years with a net decrease of 50% in the inventory operating cycle of 2008 over 2004. From 2004 onwards the inventory operating cycle is 45days, 64 days, 57 days, 46 days, and 43 days respectively for each successive year till 2008.  Debtor turnover ratio decreased by a mere 0.83% in 2005 followed by an increase of 15.23% in 2006. In 2007, again the debt turnover ratio decreased by 13.18% followed by a further decrease of 11%in 2008. Thus we see the average debt collection period varies from approximately 38 days to 48 days, with a mean period of 43days.  Interest coverage ratio also shows the fluctuating trend followed by alternate increase and decrease. It shows that the company needs to manage its interest expenses by keeping a sustained cover that is, margin of safety. This can be achieved by one or all of the following: • • • Decrease in debts Increase in profits Taking debt at low interest rate.




The dream of Indian pharmaceutical companies for marking their presence globally and competing with the pharmaceutical companies from the developed countries like Europe, Japan, and United States is now coming true. The new patent regime has led many multinational pharmaceutical companies to look at India as an attractive destination not only for R&D but also for contract manufacturing, conduct of clinical trials and generic drug research. With market value of about US$ 45billion in 2005, the generic sector is expected to grow to US$ 100billion in the next few years. The Indian companies are using the revenue generated from generic drug sales to promote drug discovery projects and new delivery technologies. Contract research in India is also growing at the rate of 20-25% per year and was valued at US$ 10120million in 2005. India is holding a major share in world's contract research Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118 million per year in India, is estimated to grow to US$ 380 million by 2010, as MNCs are entering the market with ambitious plans. By revising its R&D policies the government is trying to boost R&D in domestic pharmaceutical industry. It is giving tax exemption for a period of ten years and relieving customs and excise duties of all the drugs and material imported or exported for clinical trials to promote innovative R&D. The future of Indian pharmaceutical sector is very bright because of the following factors:

Clinical trials in India cost US$ 25 million each, whereas in US they cost between US$ 300-350 million each. Indian pharmaceutical companies are spending 30-50% less on custom synthesis services as compared to its global costs. In India investigational new drug stage costs around US$ 10-15 million, which is almost 1/10th of its cost in US (US$ 100-150million).


WHAT IS IN STORE FOR THE FUTURE? • • We can expect a significant level of consolidation- a major portion of small players are likely to be wiped out. Many of the existing players are family owned businesses .No one should be surprised if many more deals on the lines of the Ranbaxy-Daiichi deal come through. It is the classic “bird in the hand” principle –if the founders can earn a few billions without too much effort, why should they spend hundreds of millions and ten years or more in trying to develop new drugs. • The present scenario presents an excellent opportunity for multinational enterprises to establish manufacturing bases in India through the take-over route. The availability of talented scientists at a relatively low cost makes India an ideal location for manufacturing quality drugs. A word of caution is necessary though such enterprises may have to follow a dual pricing policy, one for the local market and another for the global market. • The Indian government would do well to take another look at its policies .There is not much incentive for companies to invest in new drugs. The corporations engaged in R&D need tax breaks and innovative incentives. SPECIAL ECONOMIC ZONES - To play an important role in the future of the pharmaceutical industry

Influx of outsourced work from global pharmaceutical companies has given the necessary impetus for the creation of pharmaceutical Special Economic Zones (SEZ),which would be one of the key drivers of outsourced pharmaceutical services growth in the coming future' It was in February 2006, when plans matured and finally the Special Economic Zone Act came into force. The Act brought along many promises of creating an internationally competitive and hassle free environment for exports. Consequently, 100

with the setting up of SEZs, India witnessed a revival of interest amongst many players from the pharmaceutical and biotech sector. SEZs are instrumental in attracting companies to set up manufacturing facilities and rendering a base for services in India. SEZs served as a big boon for the Indian pharmaceutical industry, which has a strong focus on exports, and derives 50 percent of its revenues from exports, With the Act in place, the confidence of investors was reconfirmed. As a result, many big pharmaceutical companies and biotech players like Ranbaxy, Wockhardt, Dr Reddy's, Lupin, Jubilant, Biocon, Divi's Lab, Zydus and Nicholas Piramal joined the camp. SEZs are instrumental in bringing in fast globalisation by establishing close global contacts. SEZs, therefore, offer distinct advantages to export oriented pharmaceutical companies who are present in these zones. These companies, through their SEZ units, can remain in contact with markets globally and add to the growth of globalisation. Besides, unlike those outside SEZs, companies which have located units in an SEZ are able to reflect the advantages they get in terms of tax sops and better technology in the final selling price of their products. The Draft National Pharmaceutical Policy, 2006 has recognized the need and benefits of developing pharmaceutical parks/SEZs in India and proposes a scheme for setting up separate SEZs for bulk and formulations. "It is proposed to set up 25 pharmaceutical parks over five years in India. This kind of a development will strengthen India's competitiveness, develop world class infrastructure for the industry and fuel the growth of pharmaceutical exports considerably," opines Gajaria. Although Indian pharmaceutical companies continue to view SEZs as an opportunity to further facilitate India's integration in the global pharmaceutical industry, it still remains to be seen if these estimates and perceptions stand the test of time.


1. Mergers and Acquisitions Currently, as the generics business is weighed down by stiff competition and declining R&D productivity, alliances and partnerships is the need of the hour for the pharmaceutical industry rather than the preference. In recent times, most of the leading players have inked M&A deals across the globe. In 2006, the domestic pharma sector executed more than 40 deals with 32 cross border transaction worth US$ 2000 mn and it includes deals like Dr Reddy’s acquisition of Betapharm of Germany for Euro 480 mn (Rs 2550 cr) and Ranbaxy Terapia buy in Romania for US$ 324 mn (Rs 1250 cr approx). In 2007, Indian pharma sector witnessed 25 Mergers & acquisition deals, with 15 cross border transaction worth US$ 600-700 mn. Table: Mergers and Acquisition in Recent Years


Thus, mergers and acquisitions have proven tool to seize growth opportunities and is widely resorted to by players by either moving up the value chain or by integrating downstream production. More mergers & acquisitions and consolidation activity in near future is expected which is driven in the medium term by implementation of the new patent regime and generic companies looking to establish a low-cost base out of the country. 2. Attracting and retaining a skilled workforce The pharmaceutical business is knowledge and experience business and people have always been one of the most important resources for any pharmaceutical or biotech company. We can talk about brand but the people in a company, in particular in their behaviour, represent a living brand. We can focus on intellectual property but that is the creation of the people, and people joining or leaving a company will add to or reduce the sustainable intellectual property. We can talk about markets, but to access any market you need people with a good understanding of that market and the culture and values of customers and suppliers. Increasingly we talk about regulation and 103

compliance as thought they are some abstract function of a company. In practice we are describing the collective values and integrity of the individual members of staff, and the way they are motivated to behave in particular situations. So people are key but how any organisation ensure that it can attract, recruit, develop, and motivate those individuals with the competencies that will set that business apart from those of competitors. The first challenge is that there are increasing signs that the labour market is moving in favour of the employee rather than the employer. There is growing demand for skilled people but traditional labour markets are providing fewer new people with the right qualifications and experience; and companies are still trying to recruit people with ever-more-specialised knowledge. It is possible to recruit from new markets, but this is a new competence for many companies. 3. Controlling operating costs It is accepted knowledge that the pressure to control and reduce costs is one of the next major challenges to be faced by the pharmaceutical industry. But how is this done and what is the best approach? Understanding and controlling operating costs is a critical first step to developing or sustaining competitive advantage. Increasing generic competition, imminent patent expiries (revenue can decrease by up to 60% at patent expiry), shorter pipelines and the emergence of China as a low cost manufacturing base all contribute to constantly eroding margins. To maintain or increase margins in the future, leading pharmaceutical companies have to start taking a proactive approach immediately to understanding costs. As the pharmaceutical industry embraces these new challenges, the companies that emerge at the forefront will be those who address the issues now and are able to account for all the costs throughout their organisation. To achieve this advantage, companies have to start recognising and targeting costs today. Research & Development (R&D) costs are spiralling as companies race to discover the next blockbuster, but where is the money to fund this research going to come from? These questions are important as the costs of operations are concerned. • How are costs distributed throughout your company? • Where should you focus your cost reduction efforts for greatest benefit? • How are you going to use to tackle these costs? • Have you identified all the hidden costs? • How do you compare to the best-in-class? 104

• What is your baseline and what can you achieve? • Where are you going to start? Cost is complicated, ranging from back office through manufacturing and quality to sales. To gain real benefits a structured programme of cost identification and improvement has to be in place. 4. Infrastructure Compared with western industrial nations, energy prices are low but companies must expect repeated power cuts and offset fluctuations in the electricity network with the help of emergency power generators. In many areas, the hot and humid climate makes high demands on climate technology at production plants and on the refrigeration of finished products. Insufficient energy supply also leads to a situation where production hours must be handled very flexibly. This shortage can only be eliminated in the medium term and   will   require   maximum   effort.  However, India’s government intends to expand power generation capacities to roughly 240 GW by the end of the 11th five-year plan in 2012. This would mean a more than 100 GW, or nearly 90%, increase on today's total. Moreover, the country’s lacking transport infrastructure is increasingly turning into a major obstacle. The pharmaceuticals industry is especially dependent on road transport. However, the major transport links are chronically congested and many are in a poor state of repair. Of the total road network covering just over 3.3 million kilometres, only about 6% are relatively well built National and State Highways. In many cases, there are no paved surfaces or there is only one lane for all traffic. But the government has launched an extensive investment programme entitled the National Highway Development Programme, to be implemented by the middle of the next decade.

Impact of new patent law

Legal changes in India in 2005 made it considerably more difficult to produce “new” generics. Foreign pharmaceuticals, which enjoy 20 years of patent protection, can no longer be copied by means of alternative production procedures and sold in the domestic market. Hence, a reorientation was required in India’s pharmaceutical industry. It now focuses on drugs developed in-house and contract research or contract


production for western drug makers. Thus this transition phase of reorientation is a challenge for the industry.

The pharmaceutical industry in India is expected to grow from $5.5 billion now to $25 billion by 2010 and $75 billion USD by the year 2020. By 2020, global integration of most sectors in the world economy would be much more pronounced, and the pharmaceutical industry will not be an exception. In fact the Indian pharmaceutical industry, which currently has strong linkages with the global pharmaceutical market, will become even more strongly integrated. Globally the pharmaceutical market is undergoing a transformation led by change in demand patterns, realignment of supply chains, and global regulatory shifts. In order to predict the state of the Indian pharmaceutical market in 2020, it is useful to understand the current global environment of the pharmaceutical market and its key trends and analyse the implications that these factors will have on the global as well as on the domestic


pharmaceutical market. Key trends of global pharmaceutical industry are declining R&D productivity, increasing spread of generics and increasing outsourcing. India is expected to host 30% of the world's contract research within the next 10-15 years, driven by the attractions of low cost and high quality standards, says the India Brand Equity Foundation, IBEF. The IBEF quotes a McKinsey forecast for the value of pharmaceutical clinical trial outsourcing in India at $1.23 billion by 2010. This would represent 7% of the total world market, projected by Biopharm at $18.5 billion in 2010. India offers a huge cost advantage in clinical trials compared with Western countries. A multinational company moving R&D to India could save as much as 30-50%, IBEF says. Indian companies can conduct clinical trials at less than one-tenth of US costs. The US National Institutes of Health trial registry ( lists 272 trials actively recruiting patients in the country, of which 60% are Phase III. There are currently 70 CROs in India, according to Biopharm’s Contract Research Annual Review 2006 - a number that is projected by to increase in the coming years. Several western CROs, including Aptuit (US), Synergy Research Group (Russia) and ethica Clinical Research (Canada) have formed alliances or joint ventures with their Indian counterparts in recent months. Investment has also flowed in the opposite direction, with US CROs Radiant Research and Taractec both being acquired by Indian groups this year. India is likely to be in the league of top 10 pharmaceutical markets by 2020. As per the Government of India's annual report 06-07 the Indian pharma industry is worth about $12 billion (over Rs 55,000 crores) as of now which includes $4.5 billion in exports of drugs, pharma and fine chemicals. The pharma industry needs to focus more on R&D and better productivity to capitalise on the immense existing opportunities. India, with its inherent competitive advantages and cost-effective manufacturing capabilities, has now become one of the most preferred destinations for Contract Research and Manufacturing Services (CRAMS). As per the KPMG report, India holds huge potential to tap the $20 billion CRAMS business, which is expected to reach $ 31 billion by 2010. India with its intrinsic competitive advantages remains as one of the most preferred outsourcing destinations and is now playing a vital role in 107

manufacturing as well as drug development value chain of various innovator companies. The Indian Pharmaceutical Industry is entering an era where the value chain components are reassessed and redesigned to realize optimum value. While the cost of doing business is increasing, the customers are demanding more innovative pharmaceutical products at more competitive prices. The change in patent regime has also become heralded a change in the industry dynamics. On one hand, patents on blockbuster drugs are expiring and on the other hand, there are insufficient drugs in the pipeline. The changing industry dynamics both at the domestic level as well as the international level has forced the pharmaceutical players to rethink their traditional business strategies.

The Indian market has some unique advantages. India has a 60-year-old thriving democracy. It has an educated work force and English is business language. It has a solid legal framework and strong financial markets. More than 9,000 companies are publicly listed. Professional services are easily available. There is already an established international industry and business community. It has a good network of world-class educational institutions and established strengths in information technology. The country is now committed to an open economy and globalisation. Above all, it has about 200 million middle class markets, which is continuously growing. Over time the international pharmaceutical industry has been finding great opportunities in India. The Indian pharmaceutical industry players in the future can continue to look forward 108

with confidence. There are immense opportunities for pharmaceutical players both at the domestic as well as the global level, but along with opportunities are challenges which need to be overcome in order to achieve sustainable growth in the future. The future will be extremely promising with many more milestones to come in the journey of the Indian pharmaceutical industry.

On the basis of the detailed analysis of the Indian pharmaceutical industry, we have been able to link the following research findings with our pre-determined objectives:-

Our first objective was to study the contribution of Indian pharma industry on the Indian economy. It was earlier growing at a rate of 14% annually but like all other industries it is also hit by recession. Because of this presently, the growth of this industry is expected to be at 7%-8% and is expected to rise to 13% of GDP by 2015.

While going about the second objective of the impact of the Patents on Indian pharma industry the following findings were zeroed in on: (i) Indian pharma industry registered a growing trend post 1970 because of the existence of merely process patents and the absence of product patents. 109


Being a member of WTO, India had to amend its patent law in compliance with the TRIPS agreement; thus Product patent became an integral part of Indian patent law in 2005.

(iii) The impact of this amendment gave rise to many controversies as this
amendment on one hand guarantees protection of the rights of drug producers while on the other makes medical facilities expensive.

(iv) One of the major inferences of our research with regard to patent is that
irrespective of the unending debate on product patent inclusion it can be unequivocally said that this amendment is bound to encourage more investments in R&D by the Indian pharmaceutical Companies. Thus we can very well expect that Indian pharma industry will better its position globally which is presently 13th in terms of value. • Our third objective of research analysis was concerned with the study of how mergers and acquisitions will impact the pharmaceutical industry. In the past few years many mergers and acquisition deals have been inked across the globe. Indian pharmaceutical industry itself witnessed over 25 merger and acquisition deals with 15 cross border transaction worth US$ 600-700 million. Mergers like Ranbaxy and Daiichi will help the companies move up the value chain through increased sales, increased patents and better asset management.



Research paper on “Critical Challenges & Issues in Patent Documentation”by Ashutosh Nigam (Asst Professor, Dept of Management Studies,Vaish College of Engineering, Rohtak)

2. Drugs and Pharmaceuticals: International Pharmaceutical Industry-A Snapshot,Jan 2004, ICRA

Presention by Jerry A. Rosenblatt, PhD on“Predicting 2008: Global Pharma Market Forecast” Global Practice Leader, Forecasting & Opportunity Assessment November 14, 2007 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.


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